THE EVOLUTION OF PORTSIN A COMPETITIVE WORLD

M O D U L E 2

WORLD BANKPORT REFORMTOOL KIT

The Port Reform Toolkit could be elaborated thanks to the financing contributions of the following organizations:

The Public-Private Infrastructure Advisory Facility (PPIAF) PPIAF is a multi-donor technical assistance facility aimed at helping developing countries improve the quality of theirinfrastructure through private sector involvement.For more information on the facility see the web site:www.ppiaf.org.

The Netherlands Consultant Trust Fund

The French Ministry of Foreign Affairs

The World Bank

The Port Reform Toolkit Modules have been prepared with the contributions of the following organizations,under the management of the World Bank Transport Division:

International Maritime Associates (USA)

Mainport Holding Rotterdam Consultancy (formerly known as TEMPO),Rotterdam Municipal Port Management

(The Netherlands)

The Rotterdam Maritime Group (The Netherlands)

Holland and Knight LLP (USA)

ISTED (France)

AXELCIUM – Ingenierie et Regulation Financiere (France)

Nathan Associates (USA)

United Nations Economic Commission for Latin America and the Caribbean (Chile)

PA Consulting (USA)

Comments are welcome. Please send them to the World Bank Transport Help Desk. Fax:1 202 522 32 23.Internet:Transport@worldbank.org

COMPETITIVE SCAN MODULE

The port sector has radically changedover the past two centuries. During the19th century and first half of the 20th cen-tury ports tended to be instruments ofstate or colonial powers and port accessand egress was regarded as a means tocontrol markets. Competition betweenports was minimal and port-related costswere relatively insignificant in compari-son to the high cost of ocean transportand inland transport. As a result, therewas little incentive to improve port effi-ciency.

How times have changed! Most portstoday are competing with one another ona global scale and, with the tremendousgains in productivity in ocean transport

achieved over the past several decades,ports are now perceived to be the remain-ing controllable component in improvingthe efficiency of ocean transport logistics.This has generated the drive today toimprove port efficiency, lower cargo han-dling costs and integrate port serviceswith other components of the global dis-tribution network. Because of the capitalintensity of such efficiency improvements,these have also generated the drive tounbind ports from bureaucratic control ofpublic entities and encourage private sec-tor operation of a wide range of port-related activities.

OVERVIEW OF THE COMPETITIVE LANDSCAPE

In the 21st century, five forces will inter-act to shape the competitive landscape

1

THE EVOLUTION OFPORTS IN ACOMPETITIVEWORLD

M O D U L E 2

2

DET

ERM

INA

NTS

OF

SERV

ICE

PRO

VID

ER B

ARG

AIN

ING

PO

WER

• Ex

per

ienc

e an

d un

ique

cap

abili

ties

that

the

serv

ice

pro

vide

r brin

gs to

the

por

t

• Ex

tent

to w

hich

ser

vice

pro

vide

r p

artic

ipat

es in

fina

ncin

g th

e ac

tivit

y

• Ex

iste

nce

of "c

hoke

poi

nts"

in th

e p

ort

that

faci

litat

e sl

owdo

wns

or s

top

pag

es

in p

ort o

per

atio

ns

• A

bili

ty o

f ser

vice

pro

vide

rs v

s. p

ort

man

agem

ent t

o ab

sorb

dow

ntim

e

• In

ter-

rela

tions

hip

s am

ong

serv

ice

pro

vide

rs a

nd p

ort u

sers

• L

egal

righ

ts c

onve

yed

in le

ases

and

ot

her u

se a

gree

men

ts

DET

ERM

INA

NTS

OF

THE

THRE

AT O

F N

EW P

ORT

EN

TRA

NTS

• C

apita

l int

ensi

ficat

ion

in p

orts

and

te

rmin

als

that

cre

ates

bar

riers

by

rais

ing

cost

of e

ntry

• C

hang

es in

regi

onal

dis

trib

utio

n p

atte

rns

and

abili

ty o

f car

riers

to

utili

ze lo

ad c

ente

rs in

pla

ce o

f dire

ct

serv

ice

• Pr

ovis

ions

in le

ases

and

oth

er

agre

emen

ts p

rote

ctin

g se

rvic

e p

rovi

ders

from

new

ent

rant

s in

the

por

t•

Nat

ural

bar

riers

to e

xpan

sion

• M

agni

tude

of s

witc

hing

cos

ts to

ut

ilize

oth

er p

orts

or s

ervi

ce

pro

vide

rs w

ithin

the

por

t•

Cost

adv

anta

ges

of e

xist

ing

serv

ice

pro

vide

rs a

nd c

usto

mer

loya

lties

THR

EAT

OF

NEW

TH

REA

T O

F N

EW

ENTR

AN

TSEN

TRA

NTS

• N

ew p

ort f

acili

ties

in th

e re

gion

• St

art u

p o

f reg

iona

l loa

d ce

nter

s•

New

ser

vice

pro

vide

rs in

the

por

t

• Ba

lanc

e of

dem

and

and

sup

ply

for p

ort s

ervi

ces

and

faci

litie

s in

the

regi

on•

Ab

ility

to s

egm

ent

oper

atio

ns in

the

por

t to

crea

te c

omp

etiti

on

amon

g se

rvic

e p

rovi

ders

• St

akes

at r

isk

in

pre

serv

ing

exis

ting

bus

ines

s•

Ab

ility

to a

bso

rb lo

sses

an

d/or

cros

s-su

bsi

dize

op

erat

ions

• N

umb

er o

f com

pet

ing

por

ts a

ble

to

econ

omic

ally

acc

ess

the

sam

e hi

nter

land

mar

kets

• A

bili

ty to

con

trol

ef

ficie

ncy

of p

ort

serv

ices

, par

ticul

arly

C

usto

ms

clea

ranc

e p

roce

dure

s•

Rule

s an

d p

olic

ies

on

num

ber

of c

omp

etito

rs

and/

or c

riter

ia fo

r op

erat

ing

with

in th

e p

ort

Pote

ntia

l of n

ew p

orts

or

serv

ice

prov

ider

s

DET

ERM

INA

NTS

OF

BARG

AIN

ING

PO

WER

OF

PORT

USE

RS

• D

egre

e to

whi

ch in

divi

dual

por

t us

ers

cont

rol a

larg

e p

erce

ntag

e of

traf

fic in

the

por

t•

Busi

ness

real

ignm

ents

and

al

lianc

es a

mon

g p

ort u

sers

that

re

sult

in m

ore

pow

erfu

l pla

yers

• Ex

iste

nce

of la

rge

valu

e ad

ding

te

nant

s th

at th

e p

ort w

ants

to

reta

in•

Imp

orta

nce

of th

e p

ort t

o th

e lo

cal e

cono

my

• Th

e se

rvic

es p

rovi

ded

by th

e p

ort

can

be

rep

licat

ed e

lsew

here

• Co

st o

f sw

itchi

ng to

oth

er p

orts

or

ser

vice

pro

vide

rs

RIV

ALR

Y A

MO

NG

EX

ISTI

NG

R

IVA

LRY

AM

ON

G E

XIS

TIN

G

COM

PET

ITO

RS

COM

PET

ITO

RS

Inte

nsit

y of

riva

lry

with

in a

nd

bet

wee

n p

orts

BA

RG

AIN

ING

PO

WER

OF

BA

RG

AIN

ING

PO

WER

OF

SER

VIC

E P

RO

VID

ERS

SER

VIC

E P

RO

VID

ERS

• Co

ntra

ctor

s•

Conc

essi

ons

• La

bor

BA

RG

AIN

ING

PO

WER

OF

BA

RG

AIN

ING

PO

WER

OF

PO

RT

USE

RS

PO

RT

USE

RS

•

Car

riers

•

Ship

per

s

• Te

nant

s

Abili

ty to

con

trol

neg

otia

tions

by

the

thre

at o

f cur

taili

ng o

r can

celin

g se

rvic

esSi

ze a

nd im

port

ance

of t

he

port

use

r to

the

port

Abili

ty to

util

ize

othe

r por

ts o

r ot

her s

ourc

es o

f sup

ply

PO

TEN

TIA

L FO

R

PO

TEN

TIA

L FO

R

GLO

BA

L SU

BST

ITU

TEG

LOB

AL

SUB

STIT

UTE

• O

ther

sou

rces

of s

upp

ly•

Sub

stitu

te p

rodu

cts

• O

ther

ass

emb

ly s

ites

DET

ERM

INA

NTS

OF

THE

INTE

NSI

TY O

F PO

RT R

IVA

LRY

BO

X 1

THE

CO

MP

ETIT

IVE

LAN

DSC

AP

E

facing port authorities and port serviceproviders: 1) rivalry among existingcompetitors; 2) threat of new competi-tors; 3) potential for global substitutes;4) bargaining power of port users; and5) bargaining power of port serviceproviders (see Box 1). These forces willimpact ports of all sizes, driving require-ments for port expansion, serviceimprovement, pricing decisions andother management actions. Winnersand losers will emerge in the global portsector, largely dependent on how portmanagers strategically position them-selves in the evolving competitive land-scape (see Box 2)

Rivalry Among Existing Competitors

The intensity of rivalry within the portand between ports is the first of fiveforces shaping the competitive land-scape. In some ports there will be little,if any, rivalry, given the location of theport, type of service being provided,rules on number of companies able tooperate within the port, etc. In other sit-uations, rivalry among competitors willbe intense and often result in pricingthat strips the suppliers of profits. Thereare several factors that determine theintensity of port rivalry.

Hinterland market access — In some sit-uations, only one port can logically pro-vide access to hinterland markets. Thismay result from geographical features,lack of adequate transport infrastructurefrom all but one port, political issues orother factors. The port of Djibouti cur-rently has a virtual monopoly on accessto the Ethiopian market as a result of theconflict between Ethiopia and Eritreaand lack of transport infrastructure from

neighboring Somalia. Dar es Salaam isthe major entry point to Tanzania, aswell as the neighboring landlockedcountries of Zambia, Burundi, Rwandaand Malawi. Little general cargo entersMadagascar without passing throughToamasina. There is obviously little, ifany, rivalry between ports in such cir-cumstances. In other situations, manyports may be able to provide access to acommon hinterland, creating intenserivalry for market share. Numerousports on the U.S. East, Gulf and WestCoasts compete for traffic to and fromthe Midwest. Likewise, a number oflarge ports in Northern Europe and theMediterranean compete for theEuropean hinterland. In Asia, HongKong, Shekou, Yantian, Fuzhou andother ports compete for access to theSouthern China market and numerousports in Northern Asia are available toservice the Japanese and Korean mar-kets.

Ability to service transshipmenttrade — While rivalry for hinterlandmarket access can sometimes be limited,rivalry for transshipment business isintense, even for ports that have estab-lished leading positions as load centers.Singapore established its role as theworld’s largest transshipment center asa result of an advantageous location onthe Asia/Europe trade route and prox-imity to regional origin and destinationcenters in Southeast Asia. MaltaFreeport and Gioia Tauro establishedtheir positions in the Mediterraneantransshipment market as a result of theirlocation on the Asia/Europe trade routeand proximity to the Southern Europeand Northern Africa markets. Colombo

3

and Dubai have established themselvesas regional hubs for traffic to and fromthe Arabian Sea market and the IndianSub-Continent. However, the strategic

location of these ports has not precludedrivalry for business. Singapore is in anincreasing rivalry with Port Klang andmore recently with Tanjung Pelapas.

4

Checklist of Key Questions for Positioning in the Global Port Market

Here are some key questions that port managers and port service providers should ask when develop-ing long term strategy for market positioning.

Rivalry Among Existing CompetitorsWhich other ports have access to my hinterland market?

Is future supply and demand for port services in the region expected to be in balance? Are competing ports able to absorb losses through cross-subsidizing services?Who has the greatest stakes at risk in maintaining and growing traffic volume?Where do we have a comparative advantage over our competitors?What actions can we take to attract and lock-in customers?

Threat of New CompetitorsAre new ports being planned in the region that potentially access my market?What is the status of these plans and likelihood the project will proceed?Will changes in distribution patterns create a new form of competitor?What actions can we take to minimize the impact on our existing market base?Which other companies are potential service competitors in the port?Can switching costs and other barriers be created to prevent market entry?

Potential for Global SubstitutesAre there other sources for products being exported through our port?Have ultimate users of cargo through our port the ability to use substitute products?Can manufacturers and assemblers shipping through the port shift to other sites?Are there potential developments that could impact the ability to substitute globally?How significant is port cost in determining market competitiveness of port customers?What barriers or incentives can prevent port customers from switching products or sites?

Bargaining Power of Port UsersTo what degree do individual port users control traffic through the port?What is the potential for business realignments or alliances among customers in our port?How would these realignments or alliances change their bargaining power?To what extent can the services provided by our port be replicated elsewhere?What are the bargaining strengths and weaknesses of the port and port users?How can the port’s bargaining strength be improved?

Bargaining Power of Service ProvidersWhich service providers are potential choke points in the port?What options are available to the port if negotiations with specific service providers fail?Has the service provider or port the greater capability to absorb port downtime?Does the service provider bring financing capability to negotiations with the port?Are there interrelationships between service providers and port users?What legal rights have been conveyed to the service provider by the port?√

√√√√√

√√√√√√

√√√√√√

√√√√√√

√√√√√

BOX 2

Other ports in the Mediterranean areincreasingly competing with MaltaFreeport and Gioia Tauro for the region-al transshipment trade. Salalah andAden are now serious rivals to Colomboand Dubai for the Arabian Sea andIndian Sub-Continent transshipmentmarkets. These rivalries are oftenintense and create substantial pressureon transshipment pricing.

Regional port capacity and demand —An imbalance of port capacity within aregion will influence the level of rivalrybetween ports. Excess capacity willcause rival ports to aggressively com-pete for market share. Sometimes thiscan lead to destructive pricing. Forexample, the rapid growth in load cen-ter capacity in the EasternMediterranean has produced intensecompetition between hubs, with theresult that ports such as Limassol andDamietta have been forced to aggres-sively compete to retain customersthrough pricing of services that may notbe covering costs. Likewise, inabilitywithin a region to generate sufficienttraffic will increase rivalry for availablebusiness. The small hinterland of portsin the Caribbean constrains the marketavailable to each port, creating the needto compete for all types of cargo ratherthan specialize in types of traffic forwhich the port might have comparativeadvantage.

Ability to create competition within the port — The ability to segment opera-tions in the port to create competitionamong service providers will oftendetermine whether rivalry can existwithin the port itself. Sometimes it isdifficult or impossible to divide facilities

in a way that enables more than onecontractor to provide certain types ofservices within the port, particularlycontainer terminal handling services,giving the contractor monopoly status.Much depends on the geographical lay-out of the port, the available traffic andthe minimum capacity additions (takinginto account the lumpiness of portinvestments). In Beirut, a 20-year con-cession for handling containers in theport has been given to one contractor, asthe layout of the port was considered topreclude more than one container termi-nal operator. In other situations, such asJeddah, it was possible to segment con-tainer terminal facilities in a way thatenabled the port to award long termcontainer handling concessions to twocontractors, each operating in a separatelocation within the port. Even morecompetition has been created amongservice providers in Hong Kong, wherethree container terminal operators com-pete with each other and a variety ofother service providers compete forbusiness within the port. In BuenosAires, the geographical layout of theport and available traffic volumes ulti-mately enables not more than three ter-minal operators to compete.

Stakes at risk — Rivalry will be influ-enced by the stakes at risk in preservingmarket share of regional traffic. Thegreater the stakes at risk, the moreintense the rivalry to preserve marketshare. This takes on particular signifi-cance in modern container ports, consid-ering the investment required to estab-lish a new container terminal can easilyexceed $100 million. Whoever assumesthe risk for this investment will clearly

5

have a big financial stake in ensuringthat the new terminal captures and pre-serves market share. Maersk Sealandhas invested heavily in a new containerterminal in Salalah and clearly has astake in ensuring that the facility is effi-ciently used as their regional transship-ment hub (see Box 3). Stakes at risk also

stem from the importance of the port tothe local economy. The Port ofRotterdam, for example, is a major con-tributor to the local economy and pre-serving market share in regional trafficflows is of vital importance to the localand regional government. This hasresulted in an intense rivalry with other

6

Box 3

Load Centers Competing for theArabian Peninsula Market

Several major ports are positioning to be points of entry and exit for containers moving to and from the Arabianpeninsula. It is producing a fierce competition for load center status. The outcome ofthis competition could significantly change the way ocean carriers service the ArabianPeninsula market.

Dubai — The port has established itself as a world-class transshipment hub serving as aload center for markets in the Arabian Gulf. Dubai now handles about 2.8 million TEUannually, about a quarter of which is transshipment traffic within the Gulf, with SaudiArabia, Kuwait and Iran the major destinations. The port authority clearly plans to retainits role in current transshipment markets, as well as position as the load center for con-tainers to and from Iraq once trade resumes. As part of its strategy to control marketposition, the port has been acquiring management contracts for other ports in theregion, effectively gaining control over regional logistics networks.

Salalah/Aden — These two new transshipment hubs on the Arabian Sea clearly havedesigns on being load centers for the region. Their major advantage is proximity to theEurope/Asia trunk line route. Both require little diversion by line haul ships, allowing aquick pit stop to pick up and drop off containers for the Arabian peninsula andIndia/Pakistan markets. Already, the two new ports have drawn transshipment trafficthat had previously been captive to Dubai and Colombo – and have drawn some RedSea transshipment traffic from Jeddah. The terminal operators have made major invest-ment in these facilities and obviously intend to promote their presence in the region.

Jeddah — This port now largely services the Saudi market and only 20 percent of thecontainers through the port are for transshipment. However, the proposed rail landbridge to Dammam could enable the port to function as a load center for the ArabianGulf market. The investment in infrastructure is substantial and major hurdles are in theway, particularly establishing a process for allowing transit containers to move freelyacross the country without regard to contents. But if the rail investment is made andthe hurdles resolved, Jeddah could be a major contender for traffic to and from the AG.

Beirut — Then there’s the new container terminal in Beirut that will begin operating inlate 2000. This terminal has the potential to become the major load center for contain-ers moving between the Arabian peninsula and Europe/North America. Cross-borderissues are hurdles that must be resolved. But use of Beirut as a load center will avoidpassage through the Suez Canal and save 3,400 miles sea voyage to the westernArabian Gulf. The line haul route could be served using two fewer ships in the weekly

View from Dubai

View from Salalah/Aden

View from Jeddah

View from Beirut

Northern European ports and underpinsthe plan to invest US$ 2 billion in a newdeepwater container terminal and a newrailway connection to Germany to main-tain position in the future market.

Ability to absorb losses — The ability toabsorb losses and/or cross-subsidizeoperations within the port impacts thebalance and intensity of rivalry. Globalterminal operators with strong financialbalance sheets and multiple operationsworldwide may be willing to absorblosses in a particular region, at least fora limited period of time, in order toeliminate competition. Ports with multi-faceted operations may be able and will-ing to cross-subsidize services in orderto lower charges on port activities wherethere is greater rivalry for business. InDjibouti, the port authority has beencross-subsidizing transit traffic toEthiopia through higher charges onexport/import traffic and has also beencross-subsidizing general cargo activitiesin the port through high charges on han-dling containers. Likewise, port author-ities involved in non-seaport relatedactivities, such as the Port of New Yorkand New Jersey, may be able and will-ing to cross-subsidize port related serv-ices through higher charges on non-portrelated services.

Ability to control operations — Rivalryis also impacted by the ability of portauthorities and port service providers tocontrol the efficiency of port services.There are situations where entities oper-ating in the port are outside the controlof the port manager or service provider,effectively limiting the ability of the portto compete with other ports for marketshare. In particular, procedures and

requirements imposed by Customs in aport frequently impose constraints onthe port’s ability to compete with rivalports for market share. In Jeddah, forexample, clearance procedures havebeen the primary culprit limiting theport’s ability to grow as a load center forthe Red Sea and Middle East markets.In the West African port of Cotonou,Customs processes have become such ahindrance that container long dwelltimes are suffocating the port.

Limits on rivalry within ports — Limitsthat ports set on the number of eligibleservice providers impact the degree ofrivalry. Many port authorities havepolicies limiting the number of steve-dores, tug companies, etc. that can oper-ate in the port. Sometimes these limitsare set by entry criteria that effectivelylimit the number of competitors. Insome situations these limits are not theresult of port policy, but result from his-torical precedent limiting competition.Such a situation is difficult to change.Japanese ports, for example, are largelycontrolled by a number of small andmedium sized stevedoring companiesthat have existed for many decades.Entry of new stevedores has been diffi-cult, if not impossible, and the JapaneseMOT attributes Japan’s ports beingnon-competitive with Asian rivals tothis lack of competition.

Government willingness to subsidizeoperations — Rivalry between ports issometimes influenced by the availabilityof public funds to offset losses, blurringthe role of commercial forces.Governments sometimes subsidize portson the basis that they are vehicles for

7

economic growth. European ports havefor many years been willing to subsidizeport access and quays to achieve largereconomic goals. The effect of these sub-sidies is to create artificial forces thatinfluence the chance of rivals’ success.There are indications that governmentsubsidies in the Mediterranean may beimpacting the ability of transshipmentcenters to compete for business.

Threat of New Competitors

The second of five forces is the potentialentrance of new port facilities or serviceproviders within the port. This wouldinclude creation of new regional loadcenters that change the way cargo toand from a country’s hinterland is dis-tributed. The significance of this threatwill vary from port to port dependingon a number of factors.

Capital expenditure for new portfacilities — The capital cost required tobuild a new port facility frequently pro-vides a barrier to new competitors.Large up-front expenditures are oftenrequired for dredging, quay construc-tion, access roads and port superstruc-ture. These start-up costs provide anentrance barrier that can often deter allbut the most aggressive players. Butthere are instances where new entrantswill take the risk of major investmentsin new ports where they see opportunityfor market positioning. A good exampleis Pelabuhan Tanjung Pelapas, on thesouthwest tip of peninsula Malaysia,where almost $750 million is being ear-marked to build a dedicated containerport. The developers see the opportuni-ty to tap into the large and lucrativecontainer market, which until now has

been largely dominated by Singaporeand to a smaller extent by Port Klang.Another example is the new containerterminal in Port Qasim in Pakistan,which came into being to provide com-petition to container terminal facilities inthe port of Karachi, which usersbelieved were costly and inefficient.

New distribution patterns — Changesin distribution patterns can create newport competitors. This is particularlythe case in containerized trades, where anewly created regional load center cansiphon traffic from traditional ports inthe region. In the Red Sea, for example,the newly created load centers in Adenand Salalah threaten to siphon a sub-stantial portion of the transshipmentbusiness to Africa now moving throughthe port of Jeddah. These new load cen-ters are also siphoning business from theport of Colombo, as well as taking busi-ness from Dubai and other ports in theUAE. Another example is the $240 mil-lion load center being built by PSACorporation in Sines, which will drawtraffic from Lisbon, Leixoes and otherports in the region. There are alsoinstances where a new port can provideaccess to a hinterland via overland tran-sit, providing competition to a portmore locally sited. The new containerterminal in Beirut, for example, providesaccess to markets via overland transportthat are now serviced through the portof Aqaba (see Box 3). The new port of ElSukhna at the western end of the RedSea will be a strong competitor toEgyptian ports in the Mediterranean forthe Egyptian market.

Provisions in operating agreements —Provisions in leases, concessions and

8

other agreements, particularly thoseinvolving investment by the operator,will often provide some degree of pro-tection from new competitors startingup business in the port. For example,the terminal operator who has beengiven the 20-year concession to operatethe container handling facility in theport of Beirut has exclusive rights tohandle containers in the port during theperiod of the concession. In other situa-tions, however, the port service providercan be threatened with new entrants.Nowhere is this better evidenced than inNorthern Europe with the recent successof the Dutch tug company Kotug inexpanding its tug assist business in thisregion’s ports, which have traditionallybeen the realm of long established play-ers. In Bremerhaven, Kotug’s entry hasresulted in layoffs and cutbacks in thethree tug companies that had been oper-ating in a pool arrangement.

Natural barriers — Natural barriers thatconstrain port capacity can limit thethreat of new port entrants, particularlythose requiring land or fixed facilities tooperate within the port. In many portsthere simply isn’t space for additionalberthing, storage and other fixed facili-ties, providing some insulation fromentry of new competitors. However,these barriers can easily be overstated.In the long term many of these barrierscan be overcome by building in adjacentlocations, extending out into the sea, etc.There can also be new methods of oper-ation introduced that do not requirepresence in the port. For example, aninland container depot could substitutefor storage and other operations nowperformed in the port. The Italian port

of La Spezia has a chronic lack of spaceand has constructed the IntermodalCenter of S. Stefano Magra for this pur-pose.

Magnitude of switching costs —Existence of switching costs will oftendetermine the ability of new entrants tostart up competing operations, eitherwithin a port or between ports.Switching costs can come in severalforms. They could be the capital expen-diture required to switch from one portfacility to another. In some cases thiscan be a very small cost, especially forcarriers that have little fixed investmentin a facility. A pure transshipment facili-ty for containers, such as KingstonJamaica, can be particularly vulnerableto switching as the carriers using thefacility may incur little switching cost inshifting to a competing facility. In othercases this cost can be substantial.Carriers can have a considerable amountof equipment positioned in a port thatwould need to be shifted to another portif they were to switch operations. Also,some carriers have heavily invested inport and terminal infrastructure. Ininstances where major bulk handlingfacilities have been created, switching isalmost impossible. Another form ofswitching cost is the need to establish aservice network in the new port, whichcould entail a considerable amount oflearning and experience costs. Thenthere’s a form of switching cost resultingfrom disruption in service during thetransition period. Ports, and serviceproviders within a port, can often pro-tect their market position by ensuringthat these switching costs are maxi-mized.

9

Cost advantages and customerloyalties — Cost advantages of existingservice providers and customer loyaltieswill impact the threat of new entrants.There may be economies of scale and/orexperience that enable established play-ers to retain the position of cost leadersif new entrants were to start up businessin the port. This could result from avariety of factors, including having thebetter location in the port, having sunkinvestment in facilities and equipment,employing experienced personnel, etc.While customer loyalties can beephemeral, quality of service (e.g.,responsiveness to customer needs, han-dling rates, clearance time, etc.) can dif-ferentiate the service provider and limitthe threat of new entrants. Sometimesthese customer loyalties can result fromthe threat of reprisal should the cus-tomer shift to another service provideror another port.

Potential for Global Substitutes

The third force shaping the competitivelandscape is the potential of port usersto shift to other global sources, impact-ing the level of activity in the port. Thisforce takes on greater importance asworld trade is opened to competition,sourcing of supply becomes increasinglyglobal and vertical specializationbecomes an increasingly important fac-tor in global logistics chains. Severalfactors will determine the importance ofthis force on specific ports.

Other global sources for products mov-ing through the port — The extent towhich there are other global sourcesavailable to customers now shippingthrough the port will determine the abil-

ity to source elsewhere. Various types offruits and vegetables provide goodexamples of substitute global sources.Bananas, for example, can be sourcedfrom West Africa, Latin and SouthAmerica, the Caribbean or Asia.Manufacture of clothing is also globallyfootloose, with many potential locationsto source product. The efficiency of portfacilities in each of the export locationswill impact the success of the product inthe export market, which ultimatelyimpacts the level of activity movingthrough the port.

Substitute products for exports andimports — Foreign buyers may be ableto substitute other products for theproduct they are now shipping throughthe port. For example, a power plantutilizing imported coal as feed may beable to switch to oil or gas as feed if theeconomics shift in favor of the latter.Port costs to handle coal are one of thefactors that impact the economics of uti-lizing coal as feed and exports of coalthrough the port could certainly beimpacted if the foreign buyer shifts togas or oil as feed.

Magnitude of switching costs for substi-tution — There may be significant costin switching to other sources, productsor assembly sites that will impact theability of port users to substitute global-ly. The greater this cost, the greater theport’s bargaining power. Ability to shiftto other global sources can be limited bythe port users’ reliance on value addingservices in or near the port involvingintegration of imported intermediategoods with domestic produce for finalsale to the domestic or export market.These value adding services can be cost-

10

ly to replicate elsewhere and impact theability to shift to other global sources.For example, the large free zone in JebelAli enables tenants to import andassemble intermediate products intofinal products, utilizing a large pool ofinexpensive expatriate labor for theassembly process. While many of thevalue adding activities performed inJebel Ali can be performed elsewhere,the alternatives may involve significant-ly higher labor cost and a less friendlygovernment environment. It may alsoentail walking away from a high sunkcost. Reebok, for example, has estab-lished a large final assembly and distri-bution center in the port of Rotterdam toservice the European market. While thisvalue adding activity could be shifted toanother location, there is a sizable sunkcost associated with the existing facility(see Box 4).

Demand elasticity of exports andimports — Another factor determiningthe potential for global substitutes is theelasticity of demand for the country’sexports and imports. The greater theelasticity, the greater the potential thatbuyers can do without the product.Doing without the product is a form ofsubstitution by the buyer that willimpact the volume of traffic in thatproduct for the port.

Importance of port costs in totaldelivered price — Cutting through all ofthe above is the issue of how significantport related costs are as a percentage oftotal delivered price. Many shippersconsider port costs to be among themore controllable expenditures in thelogistics chain. In general, the higher

the percentage that port costs are of totaldelivered price, the more impact portcosts will have on buyer behavior. Forhigh value commodities such as elec-tronics, port costs can be less than 1 per-cent of the delivered market value. Forlow value commodities such as baggedrice, port costs can be more than 15 per-cent of the delivered market value.Shippers of electronics may be less influ-enced by port costs in selecting portsthan shippers of rice. However, smallcost penalties may not be acceptableeven when port costs are a small per-centage of the total delivered price.These penalties may represent the differ-ence between profit and loss in the mar-ketplace and, depending on whether theport user has the option to ship throughanother port, not buy the product orfind another market, influence the selec-tion of port.

Bargaining Power of Port Users

Carriers, shippers and tenants utilizingthe port have varying degrees of bar-gaining power and control over portmanagement actions. This is the fourthforce shaping the competitive landscapein a port. Bargaining power of portusers is determined by a number of fac-tors.

Concentration of port user power — Themore an individual port user controls alarge percentage of traffic in the port,the more bargaining power the user hasin negotiations with port managementand port service providers. In some sit-uations, the port user can be so power-ful that the port literally can not affordto lose its business. Even the largestports must contend with extremely

11

12

Box 4

Reebok Logistics Center in the Maasvlakte Distripark

Value adding activities have been created in many ports to enhance trade and generate employment for the localarea. The key ingredients are efficient port operation, availability of good transport services and attractive pricesfor land, labor and energy. The newly opened Reebok state-of–the-art logistics center in Rotterdam illustrateshow one port helped create a value-adding service that generates employment for 300 personnel and con-tributes $6 million in direct income to the local community.

Reebok Product Line and Logistics

Reebok has two product lines, footwear and apparel. In 1998, footwear accounted for 57 percent of internationalsales, apparel 43 percent. Reebok products are actively marketed in 170 countries or territories. The U.K. is thelargest market for Reebok products in Europe, representing 30 percent of total European sales. Spain is anotherbig market for Reebok products. Almost all footwear is supplied from plants in the Far East. Most apparel is sup-plied from plants in southern Europe. Footwear moves in containers from the Far East. Apparel moves by truckand container from plants in Portugal, Greece, Turkey, etc.

Restructuring of Logistics Activities

As part of a global restructuring of logistics activities, Reebok in 1995 decided that warehousing and distributionactivities in Europe should be consolidated. In place of having warehousing facilities in each market, a bulk logis-tics facility would be established in mainland Europe to supply pick-and-pack warehouses in the U.K. and Spain, aswell as directly supply other markets in Europe. Except for some very large accounts (which are serviced direct)and apparel for Southern Europe (which is warehoused in Spain), all product flow to the European market wouldpass through this logistics center. France, Belgium and the Netherlands were considered as potential locations.Following assessment of each of these locations, Reebok decided to locate the logistics center in the Netherlands.The site chosen is in the newly created Distripark 3 in Maasvlakte at the ocean edge of the port property. InNovember 1998 the facility began receiving product.

Why the Port of Rotterdam was Selected

Reebok had a variety of reasons for choosing this site. It is close to the new deepwater terminal in the port ofRotterdam, a container handling facility that is generally regarded as one of the most advanced and capable ter-minals in Europe. The location is on the coast, which provides easy access to short sea transport to the U.K. mar-ket. There is a good supply of warehousing labor in the Rotterdam area, despite the fact that the general labormarket is tight. Most people in the Netherlands understand English, which was considered by Reebok to beimportant. Customs in the Netherlands is considered to be efficient and business friendly. While not an advan-tage, labor costs and regulations concerning labor practices were considered to be similar to those of other coun-tries in Europe. But most importantly, space was available and the port wanted to have a launching customer inthe new Distripark. So the port, in combination with the municipal government, proactively pursued Reebok andprovided strong incentives to locate the facility in Maasvlakte. Based on a six-year operating lease with a five-yearrenewal option and substantial residual value guarantees by Reebok, the port funded construction of the state-of-the-art 700,000 sq. ft. logistics facility. The port also created the necessary infrastructure to connect the facility tothe adjacent container terminal, facilitated creation of bus service fitted to the plant shift system and provided acontact person to deal with problems and issues. Reebok describes its relationship as "a partnership with theport."

powerful carriers that have the option totake their business elsewhere. Recently,a major container carrier wielded itspower to get concessions from the Portof New York and New Jersey as a condi-tion of utilizing the port as a load centeron the U.S. East Coast. The port didn’twant to lose a carrier that represented 20percent of the port’s container volume.Given this control over a large port, con-sider the bargaining power that the car-rier has in dealing with a small or mid-size port where there are options forusing other facilities. In the Caribbean,large cruise lines such as Carnival, RoyalCaribbean and P&O have great bargain-ing power with the cruise ports thatthey serve. These three companies con-trol more than 50 percent of industrycapacity and their decisions on whichports to call can have major impact on alocal economy. Recently, Carnivaldecided to reduce or eliminate cruiseship visits to Grenada as a protest to theimposition of cruise taxes by the govern-ment, an action that stands to seriouslyimpact the economy of the small nation.

Impact of changing business relation-ships — Business realignments andagreements among port users can resultin powerful players that port managersand port service providers must contendwith in contract negotiations. These cantake the form of conferences, slot shar-ing arrangements, strategic alliances,mergers, etc. The result in each case canbe greater concentration of port businessamong a smaller number of port users.When representatives of the GrandAlliance sit down with a port to negoti-ate future contract terms, the port isdealing with a formidable alliance of

carriers that previously had been indi-vidual customers. Acquisitions canchange the negotiating picture as well.P&O Nedlloyd’s recent acquisition ofHarrison Line has resulted in the carrierhaving a considerable increase in marketshare in the East Africa trades. Portssuch as Mombasa, Tanga and Dar esSalaam are now facing a more powerfulport user, whose market share in theEurope/East Africa trades has increasedfrom 9 percent to 12 percent

Presence of large value addingtenants — Bargaining power will beinfluenced by the existence of largevalue adding tenants that the port wantsto attract and retain. A major tenantemploying a large number of personneland substantially contributing to thelocal economy is in a position to extractconcessions from the port that wouldnot necessarily be available to smallerplayers. The port authority in Portland,Oregon has targeted auto imports as astrategic business sector that it wants toretain and grow. Three car manufactur-ers (Hyundai, Honda and Toyota) nowlease several terminals from the portauthority to process and accessorizeimported cars. Keeping these three automanufacturers in the port is a high pri-ority objective and the port authorityprovides favorable terms to these largeusers that may not be available to small-er tenants.

Importance of port to the economy —The more important the port to thenational economy, the more pressurethere will be on port managers to attractand retain valuable customers. Someports can be extremely valuable playersin the national economy and the loss of

13

major customers could have a big rippleeffect on employment and local income.For example, the port of Rotterdam is akey element in the Dutch economy anddevelopment projects undertaken by theport over the past six years have created45,000 man-years in temporary employ-ment and 17,500 man-years in perma-nent employment in the Netherlands.Current and prospective port users canemploy the importance of the port to thelocal economy as a bargaining chip innegotiations over tariffs, service, facili-ties, etc. The larger the contribution ofthe port user to the local economy, thegreater the user's bargaining power withthe port.

Ability to replicate port services — Portusers will have strong bargaining powerif the services provided by the port canbe replicated elsewhere. Essentially thiscomes down to whether there are alter-native facilities available to the portuser. The more opportunity there is toutilize other facilities, the less bargain-ing power the facility owner has overthe user. Nowhere is this better illus-trated than in Northern Europe, where anumber of large container handlingports are available for entry and exit inthe European market. Carriers can reactto tariff increases, efficiency issues,problems, etc. by shifting or threateningto shift to other ports. Recently, theGrand Alliance decided to temporarilyshift one of its five Europe/Asia servicesfrom Rotterdam to Antwerp on the basisthat it was experiencing delays inRotterdam. This decision shifted, on anannual basis, some 125,000 TEU fromRotterdam to Antwerp, until the delaysin Rotterdam were corrected. In the

mid-Mediterranean, Malta Freeport andGioia Tauro are equally situated to pro-vide transshipment service to carriers.Each port must consider the potentialactions of the others when negotiatingwith current or prospective customers,as the customer has the ability to takehis business to the other port.

Facility investments by port users — Acarrier, shipper or tenant who has amajor investment in facilities in the port,or has structured its operations in a waythat precludes easy transfer of opera-tions to another facility, faces switchingcosts that limit bargaining power. Forexample, a joint venture of Saudi andU.S. interests began operating a rice pro-cessing plant in the port of Jeddah inOctober 1995. It is the largest rice han-dling facility of its type in the MiddleEast and the investment in the facilitycreates an exit barrier should the opera-tor become dissatisfied with the servicereceived from the port. Another exam-ple is the container load center inSalalah, where Maersk Sealand is amajor investor in the terminal alongwith the Government of Oman. It’s dif-ficult to pack up and leave this facility ifthere is unhappiness with port policies.At the same time, sunk costs in facilitiesdon’t preclude leaving when things gettoo bad. ICTSI decided to pull out ofthe port of Rosario after having invested$27 million in a failed effort to operatethe container terminal. ECT left Triesteafter a 11/2-year effort to operate theMolo VII container terminal. Both con-tractors decided that future losseswould be greater than the cost of pullingout.

14

Bargaining Power of Service Providers

The final force shaping the competitivelandscape is the bargaining power ofport service providers. A variety ofoperators and groups within the portoften have the ability to exercise controlover the port by threatening to curtail orcancel services. Particularly importantis the increasing role of a handful of portservice developers who have accountedfor more than 50 percent of all new portdevelopment utilizing private capitalover the past two years. These largeplayers can tilt the scale in negotiationswith small and midsize ports, some-times even large ports. The extent ofservice provider bargaining power isdetermined by a number of factors.

Experience and capabilities of serviceprovider — Experience and uniquecapabilities that the service providerbrings to the port is a factor determiningits bargaining position. The greaterthese capabilities, the more power theservice provider has in dealing with theport. A contractor that has operated in aport for many years, has established acadre of very experienced personnel andhas accumulated a large inventory ofequipment needed to perform the job,would more likely be able to extractfavorable terms from the port than astart-up company. Likewise, a contrac-tor with unique skills such as handlinghazardous cargo and/or chemicals is ina good bargaining position. Large glob-al terminal operators are also in a goodbargaining position, as they are oftenperceived as bringing experience andunique capabilities based on their opera-tions elsewhere, loyalties of a customerbase, networking possibilities and accessto financing. A concession to the DubaiPorts Authority (DPA) to manage the

port of Djibouti was largely based onthe perception that DPA could transferexperience in port operations in Dubaiand increase regional market access toDjibouti.

Participation in facility financing — Aservice provider that participates in thefinancing of an activity is clearly in abetter bargaining position than one whodoes not. Many port services that areprivately operated as concessionsinvolve some degree of financing by theoperator and, in many cases, the con-tractor offering the best financing termsis in position to get the concession. Thedeveloper of the new container terminalin Aden chose PSA Corporation as theoperator, partially because PSA waswilling to participate in financing the$200+ million infrastructure develop-ment.

Choke points in the port — Existence ofchoke points in the port that facilitateslowdowns or stoppages of port opera-tions provides a power that is oftenemployed to extract concessions fromport management. Sometimes the chokepoint can be an activity in the port,without which the port cannot functioneffectively. Tug service is an example. Iftugs are not available for ship assist, theport may continue to function but notnecessarily at the normal level of effi-ciency. Sometimes the choke points canbe personnel in the port. A labor stop-page in cargo handling or other strategicservices can shut port operations down.And sometimes the choke point can betrucking to and from the port, ware-housing operations and other services,where a slowdown for whatever reasoncan quickly choke operations in the port.

15

Service providers in these types of activ-ities have considerable bargainingpower in dealing with port manage-ment.

Ability to absorb downtime — The abil-ity of service providers vs. port manage-ment to absorb downtime is a factor thatimpacts the balance of bargainingpower. Service providers with deeppockets may be willing to take a loss ofrevenue for a substantial period to getwhat they want from the port.Meanwhile, the port can be under sub-stantial government and commercialpressure to resolve the conflict and getthe port back into operation. The recentstrike in the Israeli ports of Ashdod,Haifa and Eilat created a backup of ves-sels in the ports and generated callsfrom many sides to reach resolution assoon as possible.

Interrelationships between providersand port users — The existence of inter-relationships between service providersand port users can influence the powerstructure in the port. These interrela-tionships can impact decisions regardingport operations, leases, berthing rights,etc. Uniglory, for example, is the feeder-ship subsidiary of Evergreen, which inturn is one of the major linehaul con-tainer carriers. A port that wants toattract linehaul calls by Evergreen couldbe willing to extend berthing terms toUniglory that are more favorable thanwould be given to a feedership operatorwho is independent. P&O Ports is a sis-ter organization to P&O Nedlloyd. Theformer can utilize this relationship tostrengthen its bargaining position innegotiating terminal concessions.

Rights and obligations conveyed bycontractual agreements — Lease agree-ments and other contracts to utilize portfacilities include provisions that conveylegal rights and obligations to the portservice provider. These contract termswill set boundaries on the port serviceprovider and port in future negotiations.The rights can be extensive, giving theprovider exclusive rights to operate inthe port for 20+ years with little if anycontrol by port management. Or theycan be very limited, giving the port theright to exercise a great deal of controlover the performance of the serviceprovider, including provisions in thecontract specifying an investment pro-gram that must be fulfilled by the con-tractor. As the contract between the portand service provider will set the bound-aries for future bargaining position, theneed for a well planned negotiation todevelop the contract can’t be overstated.

The Bottom Line

Ports no longer operate in an insulatedenvironment. They face the same com-petitive forces that companies in otherindustries experience. There is rivalryamong existing competitors, continuingthreat of new entrants, potential forglobal substitutes, presence of powerfulcustomers and powerful suppliers.Dealing with these forces is a continuingchallenge for the port manager. Itrequires that the port manager be keenlyaware of port user requirements, knowtheir constraints in the global marketand have a strategy for making the porta partner in business development.

16

SECTION 2

PORT DYNAMICS IN THE 21ST CENTURY

The 21st century will see radical changesin the business base underlying portoperations. Increasingly, intense globalcompetition will force changes in theway all players in the internationallogistics chain, including ports, do busi-ness in the future. Innovative systemsand new technology will radicallychange requirements for port infrastruc-ture and increase the degree of special-ization, raising the financial stakes ofport investments and the need for ahighly specialized workforce.Realignments and consolidations amongport users and port service providerswill continue, creating a fluid base ofplayers with whom ports do business.Changes in distribution patterns and inthe structure of the maritime geographywill increasingly create a hierarchy ofports and some historical port relatedactivities will be shifted to inland sites.Environmental and safety concerns willforce on ports the requirement to imposeregulations and provide facilities thatmay have no commercial return oninvestment.

Globalization of Production

The world economies are becomingincreasingly interrelated as a result ofincreasing trade and the growing trendtoward globalization of production.Over the past half-century, most coun-tries have seen an increase in exports asa share of GDP and there has been anincrease in vertical specialization ofworld trade (see Box 5). In addition,

sourcing of raw materials and finishedproducts has become increasingly glob-alized and producers in various, oftendistant, areas of the world are increas-ingly forced to compete with one anoth-er for the same markets. The basic forcesthat have triggered the greater interrela-tion and interdependency of the worldeconomies remain active. Thus, there isno reason to think that the observedtrends will not continue.

Vertical specialization — The increas-ing vertical specialization of world tradehas had significant impact on the globallogistics system of many manufacturers.It has added links to global supplychains and increased the transport inten-sity of production processes. Firms havebeen increasingly concentrating onexploiting their core competencies andsubcontracting a number of non-coremanufacturing and assembly activitiesto outside contractors. Tasks traditional-ly performed at the start or the end ofthe production line are increasinglymoving away from the main plant to becarried out by manufacturing subcon-tractors or distribution centers. Pre-assembly and sequencing of parts foron-line production chains are activitiesincreasingly outsourced to specialistlogistics providers Customization ofproduct, which can range from labelingor re-packaging of goods to re-configu-ration of items, is one of the fastestgrowing areas of logistics outsourcing.

Focused manufacturing —Manufacturers have been concentratingproduction capacity in fewer locations,replacing the traditional system ofnationally based production with

17

Increasing Vertical Specialization of World Trade

A recent study published in the Economic Policy Review of the Federal Reserve Board of New York traces theimpact of vertical specialization of world trade over the past 30 to 40 years. The authors point out that a majorfeature of globalization has been the enormous increase in international flows of goods and services and coun-tries are now trading much more with each other — and an increasing amount of this trade is due to verticalspecialization.

Increasing Trade FlowsUsing IMF data, the authors show that the export share of GDP in most countries has increased since 1962.Reproduced right is a chart from their study. Each dot in the chart represents a different country. Dots that lieabove the 45° line indicate that the country’s export share of GDP in 1995 was higher than that in 1962. Theauthors point out that export shares have been increasing for all types of countries, and countries as distinct asBangladesh, the Congo, Germany, Ireland, Korea, Malaysia and the U.S. all lie above the 45° line.

Increase in Vertical SpecializationIn the study, the authors assess the role that vertical specialization is playing in these increased flows. Verticalspecialization occurs when a country uses imported intermediate parts to create a good it later exports — i.e.,the country links sequentially with other countries to produce a final good. For example, country 1 suppliesintermediate parts to country 2, which in turn combines these intermediate parts with domestic and otherimport parts to produce a finished or semi-finished product, which is then shipped to country 3.

1995

Exp

ort

Sh

ares

1962 Export Shares

= Country

0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6

1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0

18

Exports Shares of GDP in 1962 and 1995

Source: D. Hummels, D. Rapoport and K. Yi, "Vertical Specialization and the Changing Nature of World Trade," FRBNY Economic Policy Review, June 1998, p. 80

Box 5

19

Increasing Vertical Specialization of World Trade

Drawing information from four case studies as well as OECD input-output tables, the authors find that verticalspecialization has accounted for a large and increasing share of international trade over the last several decades.For most of the countries sampled, growth in vertical trade accounted for 25 percent or more of the growth inoverall trade. As shown below, the percentage of change in export share of gross output attributable toincreased vertical trade for the sampled time period has varied from 47.4 percent in the Netherlands to 3.2 per-cent in Japan.

Contribution of Vertical and Horizontal Trade to Change in Export Share of Gross Output Over Sample Time Periods

Change in Percentage Due to Time Period Export Share of of Change Increase In

Country Sampled Gross Output Vertical Trade Horizontal TradeAustralia 1968/89 0.06 13.4 86.6Canada 1971/90 0.08 43.7 56.3Denmark 1972/90 0.17 27.3 72.7France 1972/90 0.11 28.4 71.6Germany 1978/90 0.09 19.4 80.6Japan 1970/90 0.03 3.2 96.8Netherlands 1972/86 0.10 47.4 52.6United Kingdom 1968/90 0.15 29.6 70.4United States 1972/90 0.07 11.9 88.1

Source: D. Hummels, D. Rapoport and K. Yi, "Vertical Specialization and the Changing Nature of World Trade," FRBNY Economic Policy Review, June 1998, p. 92 Future Growth in Vertical Trade

The authors conclude "the nature of trade has changed to the point where countries increasingly specialize inproducing particular stages of a good, rather than making a complete good from start to finish. This verticaltrade is also what links heightened international trade to greater international production. In all likelihood, theforces that have led to increased vertical trade — lower trade barriers and improvements in transportation andcommunications technologies — will continue. Thus, we can expect the importance of vertical trade to grow asthe world economy heads into the 21st century."

Box 5 (continued)

"focused manufacturing." Instead of afactory manufacturing a broad range ofproducts for a local market, the entireproduction of a particular product for acontinent or, in some cases the worldmarket, is focused at a single location.While this has enabled companies tomaximize economies of scale in the pro-duction operation, it has often madetheir logistical system more transport-intensive and transport-dependent.

Expanded logistics reach — Companieshave steadily expanded the geographi-cal scale, or "logistics reach" of theirsourcing and distribution operations.Extension of this reach on a global scalehas been one of the dominant trends ininternational business and logistics overthe past 30 years. The emergence of anew generation of high value manufac-tured products, particularly in the elec-tronics industry, and a general reductionin the density of consumer products(i.e., lesser but better known brands)have contributed to an increase in logis-tics reach. Hewlett-Packard, for exam-ple, estimates that the various parts in acomputer workstation in a New Yorkoffice were moved a total of 96,000 kilo-meters from their points of productionin places such as Singapore, Japan,France and the Western United States.

Increased sourcing alternatives —Producers in one area of the world areincreasingly competing with producersin other areas for the same internationalmarkets. This is true across the spec-trum of primary and intermediate prod-ucts. Examples of sourcing alternativesare virtually endless. Wholesalers offruit and juice in Europe can sourcefrom Latin America, Southeast Asia,

Australasia, Eastern Mediterranean,Southeast U.S. and Africa. Textile man-ufacturers can source in Southeast Asia,the Indian sub-continent, Africa, EastEurope and a wide variety of other loca-tions. The sourcing decision ultimatelyis determined by total delivered cost,which in turn can be greatly dependenton the logistics cost to acquire primaryand intermediate products and deliverthe finished products to market.

Impact of globalization on ports —While ports have always been importantnodes in the logistics system, globaliza-tion of production has sharpened theneed for ports to be value adders, notvalue subtractors in the supply chainand has given ports a unique opportuni-ty to become value-adding entities. Aport is the interface between interconti-nental transport and a place in the hin-terland being considered for production,assembly or final distribution. Its capa-bility and efficiency can greatly influ-ence the decision for locating a plant ordistribution center, and often determinewhether a local producer can competeglobally or regionally with other pro-ducers. The challenge is for ports torelate to the needs of their customersand assist them in improving their com-petitive positions by providing low cost,efficient port services.

Changing Technology

Major technology changes are takingplace in the ocean shipping sector whichimpact requirements for port infrastruc-ture and services. The most obvious isthe increasing containerization of globaltrade, a trend that is widely expected tocontinue into the future.

20

Containerization of seaborne trade isless than 50 years old and deep-sea con-tainerization is only 35 years old. Yet ithas dramatically changed requirementsfor cargo handling and port facilities,raised the financial stakes of investing inthese facilities and radically impactedmanpower and labor skills required tohandle cargo, creating serious laborredundancy issues and retraining needsin many ports. In addition, the oceantransport industry is employing increas-ingly sophisticated information technol-ogy to manage logistics; and ports, ifthey are to remain competitive, must bekey players in future IT logistics net-works.

Containerization of world trade —More than 60 percent of world generalcargo trade moved by sea is carried incontainers. On trades between highlyindustrialized countries the percentageapproaches over 80 percent. This is aremarkable market penetration for atechnology that dates only from themid-1950s, when the first converted shipcarrying 58 containers made its initialvoyage between New York andHouston. Since then there has been acontinual increase in both number andaverage size of containerships (see Box6). There is now a world capacity ofmore than 6 million TEU in operationand about 1 million TEU on order. Evenmore significant is that there are about130 post-Panamax containerships nowin operation. These ships have a capaci-ty exceeding 4,000 TEU and, with alength in excess of 295 meters and abeam of over 32.3 meters, they are toobig to transit the Panama Canal.

The trend toward bigger and bigger con-

tainerships is continuing. At the begin-ning of 2001, 130 post-Panamax contain-erships were on order, including 63ships with capacity exceeding 6,000TEU. Among the ships on order is anew class of 10,000 TEU capacity con-tainership for Maersk (see Box 7 andBox 8).

Future containership designs — Shipswith 10,000 to 12,000 TEU capacity arewidely expected to make their appear-ance within the next five years. Theyare expected to be deployed on theEurope-Far East route. At the Asianend, the ports of Singapore, Hong Kong,Yantian, Shanghai and Yokohama areseriously planning for ships of this size.At the European end, the port ofRotterdam is planning the Maasvlakte IIexpansion in order to be ready for thesemega containerships, while the port ofAlgeciras can receive these vessels now.

Looking further out, containerships withcapacity of 15,000 TEU or greater are areal possibility. The industry is abuzzwith rumors that orders for ships of thissize are just a matter of time. A newterm, Malacca-Max, has even beencoined for the largest of these vessels.This ship would be capable of carrying18,000 TEU. It would be 400 meterslong, 60 meters wide and have a draft of21 meters, which would be the maxi-mum depth for transiting the MalaccaStraits, making it effectively the maxi-mum sized container ship that theoreti-cally can be envisaged.Also under consideration is introductionof containerships capable of consider-ably faster service speeds than shipsnow in service. One carrier, Norasia, iscontemplating orders for 2,000 TEU

21

22

Box 6

Evolution of Containerized Shipping

Container shipping got its start in April 1956 when the tanker Ideal X owned by SeaLand (then known as Pan AtlanticSteamship) made its initial voyage between New York and Houston carrying 58 trailers on deck. The trailers weredetached from their chassis and lifted aboard the ship with a dockside gantry crane. This initial voyage was rapidly fol-lowed by plans to convert six dry cargo ships to full containerships fitted with onboard cranes. The first of these beganoperating in October 1957, and had capacity to carry 226 35 ft. containers, equivalent to about 480 TEU. By 1963, thecompany was employing converted tankers between the U.S. East and West Coasts able to carry 476 containers (about830 TEU). Meanwhile, in 1960 Matson began containerized service between the West Coast and Hawaii, utilizing cargoships able to carry 436 24 ft. containers on deck (about 520 TEU). There was also an unsuccessful attempt by Grace Line in1960 to introduce container service between the U.S. and Central/South America. International service using container-ized vessels began in 1966 with the introduction of SeaLand’s weekly container service between the U.S. East Coast andEurope.

First purpose-built containerships — Ships built prior to 1969 were converted from breakbulk ships or tankers. Theygenerally had capacity in the 750 to 1000 TEU range, draft of about 9 meters, service speeds of 18 to 21 knots and werefitted with shipboard cranes to handle containers. In 1969 the first ship specifically designed for containership servicewas built. This began a new generation of larger and faster containerships with capacity in the 1000 to 1500 TEU rangeand service speeds of 20 to 23 knots — and some ships could achieve higher speeds to 27 knots. These ships weredesigned to utilize dockside rather than shipboard cranes. Removing the cranes both increased cargo-handling produc-tivity and allowed more containers to be stowed on deck.

Containerships get to Panamax dimensions — Ships built in the early 1970s had capacity in the 1000 to 2500 TEUrange, draft up to 10 meters and service speed of 22 to 26 knots. Built during this period were the first Panamax-size con-tainerships, with dimensions narrow enough to pass through the Panama Canal, which limits ships to 289.5 meterslength, 32.3 meters beam. This generation included a containership design that moved the technology goalpost on serv-ice speed. In 1972/73, SeaLand took delivery of eight 33-knot Panamax-size containerships capable of carrying 1900 TEU.To make this speed, the ships had 120,000 bhp installed power. They turned out to be an economic failure when fuelprices went skyward as a result of OPEC action in the mid-1970s. To date, the speed of these SeaLand ships has not beenexceeded by subsequent designs. The late 1970s/early 1980s saw further increase in containership size, with capacitymoving into the 1500 to 3000 TEU range, including a number of Panamax design ships. However, the abrupt rise in fuelcost brought about a slower generation of containerships during this period. The design emphasis was on achieving fuelefficiency and service speed generally fell into the 20 to 24 knot range. Drafts deepened to 10.5 meters.

During the second half of the 1980s, capacity of Panamax containerships grew to more than 4000 TEU through designimprovements. Included among Panamax ships built during this period were 12 4400 TEU "econoships" designed by U.S.Lines to operate on a round-the-world service. These were relatively slow 19-knot ships with a small power plantdesigned to maximize fuel efficiency. While these ships were too slow for the intended service, they initiated the conceptof a round-the-world service that Evergreen and other carriers continue today.

Post-Panamax ships enter service — Even more important during the second half of the 1990s was the introduction ofthe first post-Panamax ships by American President Lines, who ordered five 273 meter long, 39 meter wide ships withcapacity of 4400 TEU for use in transpacific service. These were the first containerships unable to transit the canal andpaved the way for increasingly larger post-Panamax ships over the next decade. According to APL, the principal advan-tage of the post-Panamax ship is virtually unlimited container capacity. Other advantages include the fact that a largePanamax ship must carry as much as 12,500 tons of water ballast and an equivalent size, but wider post-Panamax shiprequires little or no ballast and consumes less fuel. Also, for the same TEU capacity, the post-Panamax ship is 5 percentcheaper to build, as length is the most expensive dimension.

In the 1990s, post-Panamax containerships were ordered by most of the major linehaul carriers, including Maersk, OOCL,Hanjin, Evergreen, Hyundai, Cosco, NYK, MOL and NOL. The most notable orders were those of Maersk and P&O, who tookdelivery of a string of ships with capacity of more than 6000 TEU, designed for service speed of 25 knots at maximumdraft of 13.5 meters. Additionally, through design changes the capacity of Panamax size containerships increased to 4800TEU. In the late 1990s, Hapag Lloyd ordered seven 4800 TEU containerships with service speed of 25 knots and draft of13.5 meters, yet designed within the size limits of the Panama Canal.

23

0

500,000

1,000,000

1,500,000

2,000,000

<2000 TEU 2000-4000 TEU >4000 TEU

1980

Vessel Capacity

TEU

's in

Ser

vice

1990 1998

TEU Capacity in Service by Containership Size Class

Box 7

Box 8

Post Panamax Ships on Order as of February 2001

Company No. of Ships on Order TEU Capacity Total TEU % of Total

Cosco 17 5,250-5,618 92,323 12%CMA/CGM 12 6,250-6,500 77,000 10%K Line 12 5,500-5,608 66,216 9%MSC 10 6,408-6,700 66,416 9%NYK 11 6,200 68,200 9%NOL 10 5,500 55,000 7%Hapag Lloyd 6 4,805-7,200 38,495 5%Costamare 5 4,890-6,252 29,898 4%CP Ships 6 4,800 28,800 4%Evergreen 5 6,000 30,000 4%Hyundai 5 6,500 32,500 4%Mitsui OSK 5 6,000 30,000 4%OOCL 5 5,468-7,400 31,250 4%P&O 4 6,788 27,152 4%Yangming 6 5,500-5,551 33,202 4%Nord Deutsche 4 5,551 22,204 3%Conti 2 5,600 11,200 1%Lloyd Triestino 2 5,364 10,728 1%Maersk 1 9,146 9,146 1%Undisclosed 2 5,750 11,500 1%Total 130 771,230 100%

Source: Fairplay Newbuildings, January 2001

ships capable of 32 knot service speedand has been exploring concept designsfor ships capable of 40 knots. Anothercarrier, FastShip, plans to order four1,430 TEU vessels capable of a 38 knotservice speed, with specially designedterminal facilities at both ends of theroute capable of discharging and load-ing the ship in four hours (see Box 9).

Impact on port operations — The con-trast between container and earlierbreakbulk operations is startling. Mostsignificantly, it has much reduced theship’s time in port and at berth.Containerization has dramaticallyreduced personnel requirements forcargo handling, raised berth productivi-ty and increased the capital intensity ofport operations. Prior to containeriza-tion, about 200 men, working simultane-ously in four gangs, were typically

required to load and unload a large gen-eral cargo ship, a process that could takea week to ten days in port.Containerships require only 50 to 60men to load and unload cargo.Assuming a four gantry crane operation,a container ship requires some 30 work-ers directly allocated to the vessel. Thisfigure, moreover, depends on the type ofterminal operation that is used; e.g.,more for straddle carrier operation, lessfor rubber-tire gantry (RTG). A typicalgeneral cargo berth can handle roughly130,000 to 150,000 tons per year of cargothroughput. A modern container berth,equipped with four ship-to-shore gantrycranes, will handle 400,000 containermoves annually (typically 600,000 mil-lion TEU). Assuming three-quarters ofthe containers are full and the averagefull load is 10 tons per TEU, thethroughput of this berth is some 4.0 mil-

24

FastShip Container Terminal

FastShip plans to start a containerized service between Europe and the U.S. East Coast in 2002 designed for high value,time sensitive cargo. Four 1423 TEU vessels capable of 38 knot service speed would make the 3266 mile ocean crossingin less than four days, with the goal of providing seven day door-to-door service between major destinations in Europeand the U.S. To provide this service, the developer plans a new type of highly automated terminal designed to mini-mize turnaround time.

Assuming the project proceeds, new terminals would be built in Cherbourg and Philadelphia specifically for theFastShip service. A proposed concept by TTS Handling Systems is a novel approach to achieving fast port turnaround. In the TTS concept, each terminal would be designed to accommodate container pallet trains that wouldbe preloaded with double stack containers. These trains would carry the platforms on and off the ship via a speciallydesigned link span. Prior to the ship arriving in port,rows of container platforms would be loaded withoutgoing containers. These platforms would bepositioned on 24 lanes of rail track in the mar-shalling area. When the ship arrives, a train wouldpull a lane of container pallets from the ship andanother train would pull a lane of platforms fromthe marshalling area into the ship. This sequence ofactivity would continue until 24 lanes of inboundcontainers aboard the ship are unloaded andreplaced with 24 lanes of outbound containers.

Box 9

lion tons annually. A super post-Panamax container crane with 57 metersoutreach will cost about $ 6.0 million.Four to five of these cranes are neededto efficiently handle the largest post-Panamax containership now cominginto service (see Box 10). Overall, theinfrastructure improvements and super-structure (cranes, straddle carriers orRTGs, tractors and trailers, etc.) neededfor a modern two-berth container termi-nal will easily cost $100 million. In con-trast, a typical 3 to 6 ton shoreside craneused for general cargo handling in the1950s would have cost, at today’s prices,about $1 million.

Need for container port productivityimprovements — A recent study con-cludes that "the economics of container-ship operation are critically dependenton port productivity . . . (and) continuedgeneral worldwide improvements inport productivity will so fundamentallyalter the container shipping cost envi-ronment that, in the absence of any tech-nological constraint, ship size optimumsfor all routes will continue to increase asthey have done in the past (see Box 11).A typical container terminal today has adensity of 100 to 500 TEU per acre(depending on the yard stacking systemin use), crane productivity of 25-30 grossmoves per gantry crane hour, averagecontainer dwell time of five to six daysand truck turnaround of one hour. Butfuture terminal requirements will beconsiderably more demanding. In orderto accommodate the mega container-ships coming into service, new terminalswill require a density of 1000 to 2000TEU per acre, crane productivity of 200moves per ship-hour at berth, maximum

three days average dwell time and truckturnaround of less than 30 minutes.Water depth at the future terminal willneed to be at least 15 to 16 meters andincreasingly larger cranes will berequired to accommodate ships with adeck stack of up to 28 rows across.

Growing role of informationtechnology — Equally important in thefuture is the need for ports to expandthe use of information technology (IT) tosupport port user requirements, particu-larly relating to containerized traffic,although not exclusively. IT is beingincreasingly employed throughout theocean transport sector and has revolu-tionized the way intermodal traffic ishandled. IT systems electronically linkport administration, terminal operators,truckers, customs, freight forwarders,ship agents and other members of theport community (see Box 12). The tech-nology provides port users with realtime data on the status of cargo, paper-work and availability of port facilities,and enables ships and terminals to bepart of an integrated office infrastruc-ture. IT reduces time for deliveringcargo, provides more accurate transferand recording of information, reducesmanpower to prepare paperworkinvolving port use and operation, offersadvance information on ship, barge,truck, wagon, container and cargomovements, improves planning andcoordination of berths, handling equip-ment, storage facilities, etc. (see Box 13).Ports unable or unwilling to keep pacewith information technology will be leftbehind in the competitive ocean trans-port market.

25

26

Future Containerships Will Require Increasingly Larger Container Cranes

Panamax — A typical Panamax containership isabout 290 meters long and has 13 meters draft.The ship is limited in breadth to 32.2 meters toallow passage through the Panama Canal. Thisbreadth limitation constrains the number ofrows to 13 containers. Up to 4800 TEU can becarried in these vessels. The outreach of thecrane must be capable of spanning 13 rows ofcontainers stacked 14 to 15 high.

Post-Panamax — These ships are too wide totransit the Panama Canal. The first post-Panamaxships delivered in the late 1980s carried 4300TEU. Recent ships entering service for Maerskand P&O are designed to carry 6000 to 7000 TEU.The new post-Panamax vessels are almost 43meters wide and are capable of handling 16 to17 rows of containers on deck. Draft is 13.5 to 14meters. The container crane must be capable ofspanning 17 rows of containers stacked 15 to 16high.

Super post-Panamax — Designs are availablefor containerships able to carry 9000 TEU and itis widely expected that orders for such vesselswill be placed in the near future. The width ofthese vessels will be 44 to 46 meters and thedraft will be about 14 meters. They will accom-modate 18 rows of containers on deck, 16 belowdeck. The crane required to handle the contain-ers on this vessel will be a massive structurecapable of spanning 18 rows stacked 16 to 17high.

Mega-containerships — There are conceptdesigns for containerships able to handle 15000TEU (or greater). The massive vessels would beabout 400 meters long and almost 70 meterswide. These dimensions are substantially greaterthan the largest crude carriers now being built,which till now have defined the limits of com-mercial vessel size. Some concepts call foraccommodating 28 rows of containers on deck.To handle the containers, it will likely be neces-sary to utilize a different type of container craneand special berthing basin for the vessel.

Box 10

27

Impact of Port Productivity of Unit Voyage Cost of Large Containerships

A recent study of economies of scale in large containerships gives an indication of the unit cost benefits that can beobtained by use of increasingly larger containerships — and the benefits that can be achieved by increased cargo han-dling productivity that reduces port time. The study prepared by K. Cullinane and M. Khanna and published in theJournal of Transport Economics and Policy models the impact of using containerships with nominal capacity to 8000TEU, assuming current cargo handling rates and rates that would be 100 percent higher.

Declining Unit Cost With Larger Ships

To the right is a chart taken from the studythat shows the relationship between voy-age cost per TEU, ship capacity and routedistance on three major linehaul routes.Unit cost declines at a decreasing rate asship capacity increases. In deriving theseunit costs, the authors assume that porttime for various size ships reflects currentcargo handling productivity, which in turnis a function of the number of cranesassigned to a ship and the handling rateper crane. Based on a questionnaire by theauthors, current practice is to typicallyemploy one to two cranes on ships under1000 TEU capacity, three to four cranes onships 3000 to 4000 TEU capacity and fivecranes on ships of 6000 TEU capacity.Crane productivity under current practicesis assumed to average about 22 moves perhour. On this basis, five cranes working a6000 TEU containership can load and dis-charge 2000 20 ft. boxes and 2000 40 ft.boxes at a rate of 110 moves per hour, andthe ship can be fully discharged and loadedin 72 hours.

Increasing Port Productivity

The authors then examine the sensitivity ofreducing port time through increasedcargo handling rates. They show that acargo handling rate double that of the cur-rent rate will significantly reduce the unitcost, as the ship will be able to carry morecontainers in a given time period. Forexample, doubling the cargo handling ratewill reduce the unit cost of a 6000 TEU shipfrom $114 to $91 per TEU on a trans-Atlantic voyage. The unit cost of a similarship on a trans-Pacific voyage would dropfrom $182 to $159 per TEU and on aEurope-Far East voyage from $242 to $218.

Box 11

0

200

400

600

800

1,000

1,200

1000 2000 3000 4000 5000 6000 7000 8000

Source: K. Cullinane and M. Khanna, "Economies of Scale in Large Containerships," Journal of Transport Economics and Policy, Vol. 33, p. 201

Europe–Far East -- 11,500 miles

Trans Pacific -- 8,000 miles

Trans Atlantic -- 4,000 miles

Capacity in TEU

Total Voyage Cost Per TEU as a Functionof Ship Capacity and Route Distance

(assuming current cargo handling productivity)

Voya

ge

Co

sts

Per T

EU in

$U

S

0

50

100

150

200

250

300

4,000 TEU Ship 6,000 TEU Ship 8,000 TEU Ship

TA TP E-ATA TP E-A TA TP E-A

121

100

201

180

270

250

114

91

182

159

242

218

113

87

174

148

227

201

Cost per TEU at CurrentPort Productivity Cost per TEU Assuming Port

Productivity Doubles

Source: K. Cullinane and M. Khanna, "Economies of Scale in Large Containerships," Journal of Transport Economics and Policy, Vol. 33, p. 202

Impact of Increasing Port Productivityon Voyage Cost Per TEU

Voya

ge C

ost P

er T

EU in

$U

S

Port requirements for large cruiseships — The cruise industry is produc-ing requirements for more ports andenhanced facilities in existing ports toaccommodate the growing number andsize of cruise ships. This industry hashad tremendous growth over the pastten years. Particularly significant is thegrowth in number of mega-cruise ships,i.e., those over 70,000 and up to 140,000gross tons that carry 2,000 to 3,000 pas-sengers or more. Prior to 1988, there

was only one ship of that size. Todaythere are 32 mega-ships serving theCaribbean and Mexican Riviera marketand there are at least 22 more on order.These ships are typically 260 to 280meters long, some as long as 310 meters,and require infrastructure and port serv-ices capable of receiving large numbersof tourists.

With the growth in numbers of ships,the cruise lines need more ports in orderto vary their itinerary. In selecting a

28

Information

Control

Planning

• Terminal access• Port entry & exit• Equipment usage reports• Equipment location• Vessel quality assurance

Control• Ship arrivals• Berth occupancy• Tug & pilot requirements• Water & utilities• Bunkering service

• Carrier inquiry• Booking confirmation• Bill of lading

• Advance manifest & loading list• Customs documentation• Entry approval• Crew health certification• Ship records

• Electronic delivery orders• Equipment availability• Cargo tracing• Invoicing for pickup/delivery

• Traffic statistics• Port tariff• Notices to port users• Port regulations• Points of contact

• Capital projects pipeline• Facility maintenance• Project status/variance

reports

Engineering Cargo Bookings

Cargo Bookings

• M&R requirements• Equipment records

Security

• Perimeter control• Area access authorization

Intermodal

• Channel & harbor operations• Hazardous cargo handling• Pollution monitoring• Fire monitoring & response• Aids to navigation monitoring

• Invoicing for port services• Electronic transfer of payments• Employee records• Direct salary deposit• Financial reports

PORT USERINFORMATION

NETWORK

Administration

Scheduling

Safety

Box 12

cruise port, cruise ship operators look at:1) location of the port and cruising dis-tance relative to other ports on a partic-ular itinerary; 2) "marquee" value andactivities available for passengers; 3) visitor safety and comfort;

4) existence of head taxes; and 5) physi-cal capabilities of the port to accept theirships (see Box 14). The challenge forports wanting to be cruise destinationsis to develop a strategy jointly withtourism officials to maintain tourism

29

Box 13

Felixstowe Cargo Processing System

The port of Felixstowe handles container throughput of more than 2.5 million TEU and has installed a sophisticatedinformation technology system to electronically link members of the port community. The system, managed byMaritime Cargo Processing, covers more than 70 percent of containers passing through British ports and over the pastyear handled 32.5 million transactions and 22.5 million electronic data interchange messages. It is an interactiveMicrosoft-based system with more than 700 uses.

The system provides electronically:

• manifests and associated amendments

• Customs release notes

• bonded removal documents

• ship’s out-turn/discharge reports and amendments

• local transshipment documentation

• lines’ commercial release

• acceptance of rent/storage charges

• delivery instructions to transport operators(road/rail)

• export delivery advice

• export arrivals

• export loadlist

• loading reports

• export Customs declarations

• Customs examination/sealing requirements

• port health, Customs preventive and other govern-ment departments’ activities

• requests to out-turn in sheds/warehouses

• shed/warehouse out-turn reports and amendments

Customs declarations for exports

• ship planning notifications and amendments

• hazardous goods reporting

Port operator benefits include:

• information for pre-planning physical operations

• single gateway via FCPS to port users’ systems

• automatic writing-off of manifest/Customs’ entries

• paperless releasing of import cargo

• paperless notification of Customs’ status

• paperless transshipment notification/approval

• paperless export load lists

• enhanced facilities for late runners

• EDI DG notifications

• EDI status messages to customers

• local messaging facility

• full audit facilities

According to the system operator, plans call for expand-ing FCPS within five years to a global internet based realtime system.

product quality and maximize visitorspending. For ports able to satisfycruise operator needs, there is a possibil-ity that the operator may be willing toestablish long-term agreements to bringits ships to the port on a regular basisfor periods up to 25 years. The key issue

here remains what guarantees a port hasif the cruise operator stops his callsbefore the end of the agreed period.Such an agreement could be the basisfor arranging financing by a developerto acquire the physical facilities andservices in the port needed to accommo-date cruise ships.

Other technology impacting portservices — Introduction of podded drivepropulsion systems has the potential toreduce requirements for harbor tug serv-ices in port. These high powerazimuthing systems significantlyimprove maneuverability of a ship,potentially eliminating the need for tugassist services for berthing. While pod-ded drive to date has largely been limit-ed to cruise ship and ferry propulsion,there are indications that use of the tech-nology may spread to other types ofships, particularly where maneuverabili-ty is especially important (see Box 15).Self-unloading bulk carriers have beenvery popular on the U.S. Great Lakesand their use is spreading to othertrades. These bulk carriers have thecapability to discharge without use ofshoreside equipment, reducing the needfor special facilities to unload bulkcargo. The need to have large land areasto store the bulk cargoes will remain.

Shifting Bargaining Power

Bargaining power results from the rela-tive strength of the parties involved in anegotiation. The stronger the bargain-ing power, the more likely the party willget the greater gain in a transaction. Inthe port sector, the major parties to anegotiation are port users and port serv-ice providers. Events taking place are

30

Box 14

Physical Requirements to AcceptCruise Ships

The handling of massive cruise ships with large num-bers of passengers in a very short turnaround time is ahuge logistics problem. The newer cruise ships enter-ing the market today are vessels with capacities of2,000 to 3,500 passengers. Cruise ships spend an aver-age of 7 to 9 hours in port, during which passengersdebark and embark and various services are providedto the vessel. The combination of large ships anddemand for quick turnaround places significant strainon port facilities and services. According to Gee &Jenson, a designer of cruise facilities, to accept mod-ern cruise ships a port must be able to provide:

• minimum 500 ft. entrance channel width, 34 ft.navigational depth, 32 ft. berth depth, 500 ft.service apron length, 50 ft. apron width, 50 to 100ton design load range for bollards, cleats and dol-phins, and 1300-1500 ft. minimum turning basindiameter

• protected passageway between ship and termi-nal capable of embarking all passengers within 2-3 hours, disembarking all passengers within 1-2hours and ability to stay connected to the cruiseship over the full tidal range

• staging area for three to five 40 ft. containers,adequate bus and taxi queues to support passen-ger embarkation/debarkation, facilities to collectand dispose of waste, potable water and otherservices to support the ship in port

Cruise ships are a $300 to 500 million capital invest-ment. Their successful operation is highly dependenton maintaining a tight schedule with no disruptions.A standard in the industry is that cruise ships cannever be denied or have access delayed to and from aberth. This is a very real challenge that ports wantingto be cruise ship destinations must have as an objec-tive.

reshaping the relative strength of each ofthese parties. On the one hand, consoli-dation now occurring among ocean car-riers is producing increasingly stronger,more formidable customers that portauthorities, terminal operators and otherport service providers must contendwith in pricing and service negotiations.On the other hand, a relatively smallnumber of companies have been acquir-ing terminals in ports in all areas of theworld, creating terminal operators withglobal coverage that have financialdepth and negotiating strength to with-stand demands of terminal users.

Adding to this situation is the growingrole of global logistics service providerswho have considerable strength in deal-ing with both shipping companies andterminal operators. Finally, there is theunmistakable trend for carriers to wishto own and manage their own port andinland terminals. These changes are cre-ating a shifting playing field on whichnegotiations will take place among portusers and port service providers.

Consolidation among ocean carriers —Over the past decade there has beensubstantial consolidation in the oceanshipping sector (see Box 16 and Box 17).While this has been occurring in all sec-tors of the industry, it is most apparentin container shipping where it is esti-mated that 25 carriers now control 60percent of container fleet capacity. Thissector has witnessed a significant num-ber of major mergers and acquisitionsover the past ten years, a trend thatappears to have room to run.

The consolidation movement in the con-tainer shipping sector began with slotsharing arrangements, where carrierspurchased slots in other carriers’ shipsto provide service flexibility and moreextensive geographical coverage. Thisexpanded into multi-trade alliancesamong carriers that focused on achiev-ing efficiencies and better service bysharing vessels, utilizing common termi-nals, joint feeder service, joint purchaseof containers, etc. The current activity inmergers and acquisitions is a third stepin this pattern of cooperation. It simplytakes the alliance concept to its ultimatestage — full ownership and controlunder one corporate umbrella.

31

Podded Electric Drive Can ImpactRequirements for Ship Assist in Port

Podded electric drive is a recent technology that uti-lizes a sealed "pod" encapsulating an electric motordirectly coupled to a propeller. Electricity from theship’s power plant to the fully submerged watertightpod is provided via cable. The pod is steerable andprovides side as well as fore and aft thrust. Use of thepod eliminates the requirement for a rudder, shaft andstern thruster — and frees up space inside the shipthat would be otherwise occupied by a conventionalpropulsion engine.

Currently, the technology is largely limited to cruiseship and large ferry propulsion. However, a recent sur-vey of shipowners and shipbuilders indicated that pod-ded electric drive has potential use in a variety of shiptypes. Generally, the results indicate that the technolo-gy has greatest possibility on ships where (1) maneu-verability is especially important, (2) space and/orweight savings have substantial value, and/or (3) cur-rent propulsion systems interfere with efficient layout.

Impact of Podded Electric Drive on Port Services andInfrastructure –Because the ship is more maneuver-able, tug assist in harbors may not be necessary, whichcould impact future requirements for harbor tug serv-ices. In addition, the sideways thrust of podded drivecould affect the underwater structure of piers duringvessel docking and undocking, and accepting vesselswith this propulsion device may require some beefingup of the berth.

Box 15

The three largest container carriers illus-trate the patterns of growth in the con-tainer shipping sector. Maersk Sealand,by far the largest player in containershipping with almost 250 ships and550,000 TEU capacity at the end of 1999,illustrates a progression from globalalliance to single corporate ownership.Until 1990 both Maersk and SeaLandoperated as separate entities, each amajor player in its own right. In 1991they formed a global alliance to improveservice and generate operating efficien-cies. Continuing the progression, inmid-1999 Maersk purchased the oceantransport assets of SeaLand for $800 mil-lion. The combined company is almosttwice the size of its nearest competitor.

Evergreen, a Taiwan-based companythat traces its origins to 1968, illustratesgrowth primarily through internalexpansion (although the company didacquire Lloyd Triestino). Evergreen isnow the second largest player in thecontainer shipping sector, with morethan 130 ships and 310,000 TEU capaci-ty. The third largest player, P&ONedlloyd, results from a 1996 mergerbetween P&O Containers and Nedlloyd.The company operates about 120 shipswith about 270,000 TEU capacity.Interestingly, the combined company isnot a natural progression from analliance. Prior to the merger the twocompanies were members of differentalliances, with P&O a member of the

32

Maersk Sealand

Evergreen

P&O Nedlloyd

MSC

Hanjin

NOL/APL

Cosco

NYK

Mitsui

Zim Israel

CP

CMA/CGM

Hyundai

Yangming

OOCL

K Line

Hapag Lloyd

UASC

China Shipping

Sud Americana

No. of Ships

250 200 150 100 50 0 100 200 300 400 500 600

TEU in Thousands

Box 16

Source: Containerization International, November 1999.

Top 20 Container Carriers(as of September 1999)

33

Box 17

PacMan in the Ocean Shipping Sector

A substantial number of mergers and acquisitions among ocean carriers have taken place over the past several years,realigning the competitive landscape. Some of the more important recent consolidations are summarized below.

Container Carriers

At least a half dozen major mergers or acquisitions have taken place among ocean container carriers since the mid-1990s, concentrating control of capacity in the container sector among fewer and fewer companies.

• Maersk/SeaLand — In mid-1999 Maersk announced it was acquiring the ocean shipping division of SeaLand. This$800 million purchase was a natural progression of an alliance between the two companies that began in 1991. Theconsolidated group now operates about 250 ships on 35 liner services, covering virtually every corner of the globe.In terms of container fleet capacity, it is almost twice the size of Evergreen, its nearest rival. This was the secondacquisition by Maersk in 1999. Earlier in the year, Maersk acquired Safmarine for $240 million to expand its presencein the north/south trades.

• P&O/Nedlloyd — In September 1996 P&O Containers announced its merger with Nedlloyd to form one of thelargest container lines in the world. The combined company would operate 112 containerships and have a com-bined turnover of nearly US$4 billion. Subsequently, in February 1998 P&O Nedlloyd purchased Blue Star Line for$100 million to strengthen its position in the Australian trade. The company is the third largest container carrier(after Evergreen) in terms of TEU capacity.

• Hanjin/DSR-Senator — In early 1997 Hanjin Shipping bought a controlling stake in DSR-Senator, creating a com-bined company with 80 ships totaling 200,000 TEU capacity. This company is now the fifth largest container carrierin terms of TEU capacity, following fourth place Mediterranean shipping. The consolidation was a logical progres-sion to a global alliance that the two companies participated in since 1996.

• NOL/APL — In late 1997 Neptune Orient Lines announced its acquisition of American President Lines for $825 mil-lion, creating a merged company with 76 containerships with a capacity of 200,000 TEU. NOL/APL is now the sixthlargest container carrier.

• CP Ships — Over the past five years the company has acquired five companies to raise its presence in the containersector to 11th position in terms of TEU capacity. Until 1995 CP Ships was a niche player on the St. LawrenceSeaway/Northern Europe trade route. CP’s role began to expand in March 1995 when the company acquired CAST,a competitor on this route. Then in 1997 CP acquired both Lykes Line and Contship Container Lines, and in 1999created a joint venture with TMM to gain more powerful presence in the Latin American trades. The company nowcontrols about 133,000 TEU capacity.

• CMA/CGM — In 1996, the French containership carrier CMA acquired the state owned CGM, creating a companythat now is the 12th largest container carrier with capacity of 127,000 TEU.

Other Shipping Segments

While a pattern of consolidation has been most obvious in the containerized segment, M&A activity has been occurringin all segments of the business. For example,

• Car carriers — In 1999, two major players in this specialist trade, Wallenius and Wilhelmsen, created a joint venturecompany to assume control of their complement of car carriers and ro/ro ships. The resulting company controls 80ships and has $1.4 billion in annual sales. In another deal, Leif Hoegh has recently taken full control HUAL, the sixthlargest car carrier, by purchasing the 50 percent share owned by Ugland.

• Cruise shipping — This sector has been consolidating over the past decade and four companies now control morethan 60 percent of the world cruise shipping capacity. The largest player in this sector, Carnival Corporation, hasacquired five cruise companies since 1989.

• Tanker and bulk shipping — A number of mergers have recently occurred in this sector. One of the largest is themerger in 1999 between MOL and Navix, creating the world’s largest shipping company with a mixed complementof 422 ships. Another merger in 1999 was the $450 million acquisition of Bona Shipholding by Teekay Shipping, cre-ating a company that operates 81 Aframax tankers.

Grand Alliance, Nedlloyd part of theGlobal Alliance. Their merger effective-ly resulted in a complete re-modeling ofboth the Grand Alliance and the GlobalAlliance.

Looking forward, many expect consoli-dation among ocean shipping compa-nies to continue. There certainly appearto be more economies of scale and scopeto be realized in the container shippingsector and further consolidation amongcontainer carriers can be expected.Consolidation will also likely occur inother sectors of the shipping industry,continuing a trend that has been obvi-ous over the past several years. Theresult will be more powerful companieswith whom ports and port serviceproviders must contend.

Emergence of global terminaloperators — The past decade has seenthe emergence of terminal operatorswho have established regional or world-wide presence. Like companies in othersectors, they see business opportunitiesin a period of globalization and havebeen capitalizing on the trend towardprivatizing port facilities. According toa database maintained by the WorldBank, 62 transactions involving privati-zation of container terminals took placebetween 1990 and 1998. Many of thesetransactions involved a relatively smallnumber of players.

Among the principal international ter-minal operators are Hutchison PortHoldings, Maersk Sealand, P&O Ports,Sea-Land Terminals, ICTSI, PSA

34

0

4

8

12

16

1991 Acquires Port of

Felixstowe

1992 JV s for 2 River and a Coastal

Container Terminal in

China1993

JVs for Container

Terminals in Yantian and

Shanghai

1994 Acquires

Midstream Holdings

in HK1995 JV for

Freeport Container

Port

1996 Concession to Operate

Terminals in Cristobal and

Balboa

1997 JV to Develop

Container Terminal in

Jakarta

1998 Acquires

Thamesport Containerport and Harwich

Int'l Port1999

Acquires 35% Interest in

ECT

1991 1992 1993 1994 1995 1996 1997 1998 1999

HPH

Com

bin

ed T

hrou

ghp

ut (m

illio

n TE

U)

Box 18

Key Milestones of Hutchison Port Holdings in the 1990s

Corporation, Dubai Ports Authority,Stevedoring Services of America andBLG-Eurokai. These terminal operatorsnow account for about 40 percent of theworld’s annual container liftings.

• Hutchison Port Holdings launchedits global expansion in 1991, utilizingthe experience and capabilities itdeveloped operating container termi-nals in Hong Kong. It now operatescontainer terminals in more than 17ports and handles more than 14 mil-lion TEU annually (see Box 18).

• Maersk Sealand now manages 32 ter-minals worldwide and is involved in36 other terminals, most of whichconveyed with the acquisition ofSeaLand. Algeciras is generally seenas the prototype of a modern MaerskSealand terminal that has beendesigned to play the role of a globalor at least a regional hub. One of thecompany’s most impressive invest-ments has been the new transship-ment terminal in Salalah, which is ajoint venture with the government ofOman.

• P&O Ports, based in Australia, man-ages more than 20 ports worldwideand handles about 6 million TEUannually. The company recentlyacquired International TerminalOperating Company, giving it anextensive terminal operating pres-ence on the U.S. Atlantic and GulfCoasts.

• Sea-Land Terminals remains a majorplayer in container terminal opera-tion, despite the transfer of shippingand terminal operations to Maersk as

part of the merger transaction. Thecompany continues to operate termi-nals in the U.S., Hong Kong, China,Australia, Russia, Finland and theDominican Republic.

• ICTSI, based in Manila, operates ter-minals in the Philippines, Pakistan,Argentina, Saudi Arabia and Mexico.Recently it entered a joint venture tomanage a terminal in Thailand andsigned a concession contract to man-age and operate the Dar-es-Salaamcontainer terminal. In 1999 the com-pany handled about 2.2 million TEU.

• PSA Corporation in the mid-1990sembarked on a major effort to devel-op international presence in portoperations, utilizing its experience inSingapore. PSA now operates termi-nals in Singapore, Yemen, Portugal,China, Italy, India and Brunei. In1999 PSA handled about 18 millionTEU, 2 million of which was fromforeign ventures. The Corporation’smission statement explicitly men-tions that PSA over the next tenyears aims to operate a string ofports overseas, handling some 10million TEUs and managing up to athird of its port, logistics and relatedbusiness overseas.

• Dubai Ports Authority has joined theglobal container terminal race andhas recently set up a new companyto seek out overseas port operatingcontracts. DPA now operates termi-nals in Beirut, Jeddah and Djibouti,as well as its base facilities in JebelAli and Port Rashid.

• SSA, based in Seattle, has for more

35

than 50 years been involved in cargohandling in U.S. ports. Building onthis experience, the company hasexpanded globally and now operatesterminals in Panama, Vietnam, SouthAfrica, India, Indonesia and Mexicoand plans new ones in Egypt andBangladesh.

• BLG-Eurokai, a German stevedoringcompany handling about 3 millionTEU annually, has gained interna-tional presence by acquiring stakesin terminals in Portugal and Italy,including the Medcenter ContainerTerminal at Gioia Tauro, and pro-vides technical support for a newcontainer terminal in Sepetiba(Brazil).

In addition, other shipping companieshave developed container terminals invarious parts of the world to supporttheir shipping operations. Evergreenoperates terminals in Taiwan, Panama,U.S., Italy and Vietnam. Cosco operatesterminals in Hong Kong (in JV withHPH), China and Italy. NOL/APL hasterminals in the U.S., Pakistan, Vietnamand Japan.

There are many indications that thetrend toward global terminal operation,like the trend toward consolidation inthe shipping sector, has much room torun. This activity appears to be quiteprofitable. In 1998 Hutchison PortHoldings generated an operating profitof HK$3.9 billion on turnover of HK$9.4billion, an operating margin of 41 per-cent. Ports and related services account-ed for 18 percent of total HutchisonWhampoa turnover, but 30 percent ofthe parent organization operating profit

in 1998. With this type of profit poten-tial, further expansion of current playerscan be expected and it should be no sur-prise to see some new players come intothe sector. But the market is maturingand some caution is required. The oper-ating margins are becoming slimmer asgovernments look for greater financialreturns; many of the attractive terminalshave already been privatized; and, final-ly, there are more parties competing forprivatization projects such as carriersand global terminal operators in addi-tion to local operators.

Some consolidation is already occurringamong the players now in the terminaloperating business. As a result of theMaersk Sealand merger, the terminals ofeach company have been placed underthe combined company. P&O Ports hasrecently acquired International TerminalOperating Co., one of the largest steve-doring companies on the U.S. Atlanticand Gulf Coasts. Bremerhaven basedBLG has recently merged with Hamburgbased Eurokai to form BLG-Eurokai. Itwould not be surprising to see furthermergers in this sector, perhaps involvingsome of the largest players.

Potential emergence of other global portservice suppliers — While much interna-tional activity has been taking placeinvolving container terminal conces-sions, global players could emerge as amajor force in providing other port serv-ices as well. Harbor tug services havealready attracted global players andother areas that could attract global orregional players are pilotage service,provision and maintenance of port infor-mation networks, maintenance dredg-ing, etc.

36

Emergence of global logistics serviceproviders — Contributing to the realign-ment in bargaining power is the emer-gence of companies who offer full serv-ice logistics solutions to major shippers.These logistics service providers havesubstantial strength in dealing withshipping companies, terminal operatorsand other port service suppliers, addingto the growing complexity in achievinga balance in port service negotiations.They make decisions that impact all par-ties involved in the supply chain,including port service providers.Logistics service providers manage thecombined logistics requirements ofmany large shippers they represent, giv-ing them considerable strength in deal-ing with shipping companies, terminaloperators and others in the logisticschannel. In response to market demand,some substantial players have targetedthis activity, including Federal Express,who recently announced that it wouldenter the global logistics market forocean freight (see Box 19).

These developments are changing theway port services are bought andsold — Alliances and consolidationamong carriers result in their havingmore business volume on the negotiat-ing table, placing ports and terminaloperators in an increasingly awkwardposition when it comes to negotiatingstrength. In some situations, the stakesare so high that the port and/or termi-nal can hardly afford to lose the carrier’sbusiness. This can often result in theport having to make concessions toretain the traffic (see Box 20). Recently,for example, the Grand Alliance (P&ONedlloyd, Hapag Lloyd, NYK, OOCL

and MISC) notified the port ofRotterdam that for operational reasons itwas temporarily switching one of itsfive Europe/Asia services to the rivalport of Antwerp. This service represent-ed 125,000 TEU per year to the port. Itmay only be coincidental, but a monthlater the Rotterdam municipal councildecided not to increase harbor dues forthe year 2000, citing growing competi-tion between ports in general and tariffdevelopments in directly competingports in particular.

At the same time, the emergence ofglobal terminal operators can result inpricing schemes that may not alwaysfavor the small volume or regional carri-er. These global terminal operators maybe willing to offer incentives to high vol-ume customers and there is at least thepossibility that the terminal operatorcould cross-subsidize international oper-ations as necessary to compete for amajor carrier’s business. Another possi-bility is that a truly global terminaloperator could offer a package deal to a

37

Ten Largest Global Logistics Service Providers

Company Revenue 1998 EmployeesUS$ Billion

GEODIS 10.500 23.000Schenker 10.500 16.000TNT Post Group 7.350 30.000Deutsche Bahn Cargo 7.080 46.000NFC/Exel 6.900 32.000Kühne & Nagel 6.250 12.000Danzas 5.900 16.000Maersk Moeller 5.800 N.A.Panalpina 5.090 10.500Deutsche Post Fracht 4.800 30.000

Box 19

carrier that would provide a lower priceor give concessions if the carrier usesonly its terminals wherever available inthe world.

Changing Distribution Patterns

As containerization has spread in oceanshipping, distribution patterns haveincreasingly evolved into hub and spokenetwork. Facilities for devanning, clear-

ing, staging and storing containers areincreasingly shifting inland, therebybecoming more de-centralized. Thesedevelopments are creating a hierarchy ofports and changing traditional portoperations.

Hub and spoke distribution — Oceancarriers have been increasingly utilizingregional hubs for transshipment of con-tainers. This is a worldwide trend that

38

Box 20

How a Major Port User Obtained $600 Million in Concessions from the Port of New York and New Jersey

In 1998-99 the Maersk-SeaLand alliance (now a single company) had a highly publicized negotiation with major NorthAmerican ports to determine which port would become the future U.S. East Coast hub for the shipping alliance.

The Threat to Take Their Business Elsewhere

The Maersk-SeaLand alliance in 1998 gave notice to the Port Authority of New York and New Jersey that it was consid-ering leaving the port when its lease expired in 2000. Seven ports on the East Coast, including New York, were long list-ed as prospective super hubs for the alliance’s future linehaul traffic. By December 1998 this list was reduced to threefinalists (New York/New Jersey, Baltimore and Halifax).

High Stakes Competition

This was a very high stakes competition that New York/New Jersey needed to win. Losing the alliance’s business wouldhave major implications for the port and local community in New York and New Jersey. The Maersk-SeaLand alliancerepresented 20 percent of the container volume moving through New York/New Jersey and it was estimated that futuretraffic generated by the alliance through the hub would provide as many as 3,000 permanent jobs. Political action inboth states to win this competition was intensive.

The Final Deal

Ultimately, the alliance selected the port of New York/New Jersey as its future hub. But winning the competition was avery expensive proposition. The two states offered to make $450 million in improvements in the port — and then NewJersey sweetened the deal by offering an additional $100 million to pay for dredging costs and another $20 million forinfrastructure improvements.

Implications for Future Port/Carrier Negotiations

This deal has implications for other ports in future negotiations with large shipping companies. At a speech before aport industry group, an official of the Port Authority of New York/New Jersey said the Maersk Sealand negotiation was"the quintessential example of the application of the increased power available to a consolidation of liner companies."The executive director of the port of Baltimore observed that "as we move forward, the big carriers are getting biggerand even the small are getting bigger through vessel sharing agreements (and) it’s very troubling for all the ports. Anindustry consultant observed that this was "a classic case of port negotiation 101 (and) they have shown the shippingindustry what to do to get the best deal from port authorities."

is accelerating as larger containershipscome into service and the advantages ofhub and spoke operation become moreapparent. The hub and spoke concept isintended to maximize utilization oflarge containerships while providingmarket coverage to a maximum numberof ports. This is accomplished via a net-work of regional and sub-regional hubswith onward service to outlying loca-tions. Large linehaul ships, often with4000+ TEU capacity, provide servicebetween regional hubs. Progressivelysmaller ships are used to pick up anddistribute containers within the region(see Box 21).

Becoming a hub — The most importantattribute carriers look for is the strategiclocation of the hub relative to primaryorigins and final destinations of contain-er traffic. Beyond location, other attrib-utes include the ability to safely acceptlarge ships, extent of terminal facilities,efficiency of container handling opera-tions, availability of frequent feederservices with an appropriate geographi-cal coverage and attractive cargo-han-dling charges. Most carriers believe 15meters depth is adequate to accept thelargest containerships in service in theforeseeable future, although some carri-ers have recently specified 16 metersdepth for entrance channels.Containership draft has not beenincreasing in proportion to the growthof TEU capacity, with most of the capac-ity growth in post-Panamax ships theresult of increasing the width of theship. A depth of 15 meters shouldaccommodate all but the largest contain-erships now in the concept stage. It isnevertheless indicated for potential hub

ports to reckon with depths in excess of16 meters in the not unlikely event con-tainer vessels in excess of 10,000 TEUwould be ordered in future.

A transshipment hub should have termi-nal facilities that enable quick ship turn-arounds. This includes adequate num-bers of cranes, sufficient container han-dling/storage areas and first rate com-puter system to run the entire terminal.As discussed in an earlier section, con-tainer cranes capable of spanning atleast 18 rows and 6 tiers of containers ondeck will be required to handle the8,000+ TEU ships now being built.There is already a demand from carriersto install ship-to-shore container craneswith a capability to handle 22 rows ofcontainers across. Capability should beprovided to berth one or more feeder-ships front or rear of the mother shipalong the same quay — requiring quaylengths of typically some 1,000 metersfor a terminal designed to receive twomain-line vessels and their feeder ves-sels — and container yard depth behindthe quay should be not less than 400 to500 meters. The latter factor muchdepends on the container dwell time,the selected stacking and recovery sys-tem, and the stacking rules among manyothers.

Container handling productivity is ofobvious importance to a carrier in select-ing the transshipment hub. Carriersmeasure productivity in terms of howlong it takes to turn around the ship —i.e., enter port, discharge containers,load containers, leave port. Much ofthis is dependent on the availability ofadequate facilities and suitable systemsand the absence of administrative

39

barriers. However, the capability to pro-vide trained personnel on a seven-dayweek, 24 hour per day basis to operatecranes, position containers, handle doc-umen-tation, etc. has a major influenceover the productivity of the terminal.And, ultimately productivity determinesthe cost of utilizing the hub.

It is essential to have adequate feederservices to and from the transshipment

hub. This in turn requires a flow of traf-fic that will make it attractive for com-mon carriers to serve the hub. In effect,there is a chicken and egg situation. Forthe hub to be attractive to linehaul carri-ers there must be an established net-work of common feeder service that canbe utilized to pick up and distributecontainers. For feeder service compa-nies to call regularly at the hub, theremust be at least one and preferably sev-

40

Hub and Spoke Container Distribution

Global distribution of containers is increasingly accomplished via a network of regional and local hubs with onwardservice to outlying locations. Utilizing a transshipment hub, a carrier can (1) service marginal markets that do not justi-fy direct call with large linehaul ships, (2) interchange containers between liner strings at strategic crossing points and(3) realize economies from improved port asset utilization. All of these advantages ultimately result in greater profit tothe ocean carrier.

Hierarchy of Ports to Maximize System Efficiency

The hub and spoke network involves a hierarchy of ports, some of which serve as regional or local hubs connected byfeeder loops to outlying ports. Large linehaul ships, often with 4000+ TEU capacity, are utilized to provide servicebetween regional hubs and progressively smaller ships (or barges) are used to pick up and distribute containers withinthe region.

Mega-Containerships Drive Need for Regional Hubs

Linehaul ships of 4000+ TEU are now common, 6000+ TEU ships have already been introduced on major routes, 8000+TEU ships are being built and 10,000+ TEU ships are under consideration. The bigger the ship, the more time neededin port for loading and discharge. Assuming a handling rate of 165 TEU per hour, each capacity increment of 1000 TEUrequires an additional half day in port to load and discharge containers on the round trip voyage. To offset this addi-tional port time, the operator has the choice of (1) increasing the service speed of the ship, (2) adding another ship tothe service string, (3) offering less frequent service, or (4) reducing the number of port calls.Mega-containerships are now being designed with service speeds of 24 to 26 knots; higher speeds for the largest sizeships are economically impractical. The capital cost of an additional containership is $80 to 100 million, which makesadding a ship to the string an expensive proposition. Customers now expect same day of the week sailing, ruling outreduced service frequency. This leaves minimizing the number of port calls as the viable option, which then creates theneed for regional hubs and feeder loops. Essentially, the operator offsets the additional time to load and unload con-tainers by reducing the number of ports the ship enters and leaves.

Future Role of Multi-porting

While hub and spoke networks are producing a hierarchy of ports with associated mainline and feeder service, there isa countervailing development of increasing multi-port routes with direct port-to-port connections. For example, theincreasing use of load centers in the Mediterranean has led to an increase in the number of routes having theMediterranean as an end region, rather than a region connected by passing routes. A next step that can be expected isthat these new routes will lead to more ports of call in the Mediterranean.

Box 21

eral major linehaul carriers whose con-tainers need to be picked up and distrib-uted.

Benefits of hub status — The most obvi-ous benefit is the income generated fromoperations of a transshipment hubbecause of the double-handling of con-tainers. Consequently, containerthroughput in hub ports can be greatlyboosted particularly when expressed inTEUs. More importantly, transshipmenthubs provide local importers andexporters direct access to linehaul serv-ice, reducing transportation time (andpossibly freight rates) to and from over-seas markets. Reduced transport timedirectly impacts the competitiveness ofexporters and the cost of imports, inturn creating jobs and income through-out the economy. Many developingcountries have created free trade zonesin combination with the hub port asengines for economic growth. Jebel Aliillustrates how a hub port in conjunctionwith an associated free trade zone cancreate significant economic activity. Theport, which began operating in 1979,now has 67 berths and is serviced by 100shipping lines. About 1,450 companiesfrom 85 countries have been attracted tostart up operations in the free tradezone.

Problems hubs face — Hubs compete ina highly competitive market segmentwhere customers have options to useother facilities and pricing. An issueconfronting the developer of a trans-shipment hub is how to prevent “hubhopping” in a situation where the num-ber of competing hub facilities is grow-ing rapidly and carriers have the abilityto take their business elsewhere (see Box

22). In such a situation, a carrier whorepresents a significant portion of theterminal’s business can assert consider-able pressure on the terminal ownerand/or port to increase the service leveloffered and at the same time reducecharges and make concessions by threat-ening to vacate the hub. The owner ofthe facility would be faced with thedilemma of a $100 to 200 million invest-ment lying idle if the customer departs.This pressure could force the handlingrates below the full cost of providing thetransshipment facility. A long-termcommitment from a carrier to utilize thefacility before making major investmentwould be one way to minimize the pos-sibility of hub hopping, although thisdoes not constitute a solid guarantee.Another and possibly better way toretain hub traffic is to involve one orseveral carriers in the equity structure ofthe new facility.

Another consideration is that there arefewer terminal services on which toimpose charges on transshipment trafficthan on local traffic and, in general, thelarger the percentage that transshipmenttraffic is to total volume, the smaller theadditional revenue potential of the ter-minal. Additionally, ports with a mix-ture of local and transshipment trafficfrequently set transshipment chargeslow to attract “motherships” to the portin order to improve throughput levels,achieve economies of scale and lowerhandling cost. Service forimport/export traffic can thereby beimproved. A port highly specialized intransshipment business is at a distinctdisadvantage competing with ports thathave a mix of local and transshipment

41

42

Hub Options on the Asia/Europe Route

More than two dozen transshipment hubs liealong the linehaul route between Asia andEurope. About half are east of Suez, half westof Suez. This large number of hubs providesplenty of opportunity for “hub hopping.”

Northern Europe — Major container terminalfacilities in Northern Europe are located inRotterdam, Hamburg, Felixstowe, Antwerpand LeHavre. All five ports are involved inboth transshipment and local container traf-fic. Rotterdam is the largest port in Europe,handling about 6.4 million TEU in 1999, andboasts regular connections with more than1,000 ports worldwide. Hamburg, the sec-ond largest port, handles about two-thirdsthe number of containers that Rotterdamhandles. Antwerp and Felixstowe are smallerin throughput.

Mediterranean — There are a number oftransshipment hubs in the Mediterraneanand several more under development.Algeciras serves as a transshipment hub forthe Western Mediterranean, West Africa and Northern Europe. It handled about 1.8 million TEU in 1998. Gioia Tauro,Marsaxlokk and Cagliari are trans-shipment hubs in the mid-Mediterranean and Damietta, Limassol, Piraeus and PortSaid serve as hubs in the Eastern Mediterranean. Other transshipment hubs are being built or planned, including newcontainer terminals in Sines, Beirut, Ashdod and East Port Said

Arabian Sea/Gulf — UAE ports in Dubai, Khor Fakkan and Fujairah have developed a strong presence in containertransshipment. These three ports handled about 3.5 million TEU in 1999, most of which was transshipment traffic.Containers passing through Dubai principally originate or terminate in the Arabian Gulf. Containers through KhorFakkan and Fujairah are mostly transshipped to/from Pakistan, Western India, Arabian Gulf and East Africa. A three-daydiversion from the east/west linehaul route is required to call at ports in the UAE, which has placed them at a disadvan-tage to the new transshipment hubs in Oman and Yemen.

Indian Ocean/Red Sea — Centrally located along the east/west linehaul route are Colombo, Jeddah, Salalah and Aden.Calls can be made at any of these ports with virtually no diversion from the linehaul route. Colombo is a major trans-shipment hub for Southern India and handled 1.7 million TEU in 1999. Jeddah is principally an import/export channelfor Saudi Arabia, but about ten percent of traffic through Jeddah has traditionally been transshipped to other points inthe Red Sea. Both Salalah and Aden are new facilities that have begun operating within the past two years. These newhubs had a combined throughput of about 1.2 million TEU in 1999 and plans call for significant future growth in trans-shipment traffic, much of which will be attracted from the UAE ports, Colombo and Jeddah.

Asia — At the eastern end of the route are Singapore, Hong Kong, Kaohsiung, Busan, Kobe and Yokohama. Hong Konglays claim to having the world’s largest overall container volume (16 million TEU in 1999), the majority of which origi-nates in or is destined for China. Singapore, which has the world’s second largest container volume (15.9 million TEU in1999), is the major transshipment hub for Southeast Asia and the Indian Ocean. Busan is a transshipment hub for con-tainers into and out of Northern China, and Kaohsiung is a transshipment center for Central Asia. Japanese ports suchas Yokohama, Kobe, Tokyo and Nagoya are major centers for container activity, but the majority of containers are dis-tributed inland by rail or highway. A variety of other ports such as Manila, Port Klang and Vung Tau function as localhubs for their respective areas.

Box 22

TokyoYokohamaKobeHakata

Busan

KaohsiungHong Kong

Port KlangSingapore

ColumboAden

Jeddah

Dubai

Salalah

FujairahKhor Fakkan

DamiettaLimassol

GioiaTauro

HamburgRotterdam

Antwerp

Le Havre

Algeciras

Cagliari

Piraeus

Marsaxlokk

Felixstowe

business, where revenue from the for-mer is frequently used to cross-subsidizethe latter. This is only acceptable in asfar as transshipment generates addition-al economic value.

Inland container terminals are shiftingactivities away from the port — Tomaximize intermodal efficiency and freeup valuable real estate in the port area,inland container terminals are increas-ingly displacing activity traditionallyperformed in the port. While there aremany advantages to inland containerterminals, from a port’s viewpoint therecan be serious drawbacks as they diverteconomic activity away from the localarea and open the possibility of competi-tion from other ports (see Box 23)

Environmental and Safety Concerns

Given the growing concern about pro-tecting the environment, ports areincreasingly faced with the need toimplement regulations that impact thefreedom of port users and to make sig-nificant investment in environmentaland safety facilities. These have limitedcommercial value and often produceonly indirect social payback. How toimplement these regulations and/orfinance related facilities is an importantissue. Growing environmental concerns —Eliminating oily ballast water dischargefrom ships is a major environmentalconcern. This issue is well recognizedinternationally and provision of ade-quate reception facilities in port isrequired under the IMO MARPOLConvention 1973/78. Regulation 10/7and 12 of the pollution conventionrequires each state to ensure that suffi-

cient oily ballast water reception facili-ties are available at oil loading termi-nals, ports with ship repair facilities andin those ports in which ships have oilyresidues to discharge to shore. To be inposition to ratify this convention, statesneed to offer reception facilities for tankwashings (slops), contaminated ballastwater, oily water from engine roombilges and for residues from fuel oilpurification, particularly heavy fuel oil.Providing such a reception facilityentails a significant capital expense thatproduces little, if any, financial return.How to pay for this facility is a majorissue confronting port authorities.

But environmental concerns relating toships in port go beyond the issue of oilywater discharge. They involve the entirerange of environmental issues fromwater pollution, air pollution, aesthetics,noise, etc. Ports increasingly will befaced with the need to find suitablesolutions for disposing of dredged mate-rials and implement regulations andoperating procedures for terminals andanchorages to address these types ofissues (see Box 24).

Issue of sub-standard ships — Despitethe fact that many ships have valid cer-tificates issued by their flag states andclassification societies, a number ofships do not comply with internationalstandards for safety, pollution preven-tion and shipboard living and workingconditions recognized in internationalconventions. Political and social pres-sures have been placed on governmentsto implement policies to reduce theamount of sub-standard shipping intheir waters. At an international level,the Paris Memorandum of

43

44

Box 23

Duisburg Inland Container Terminals

The first Inland Container Terminals (ICT) appeared along the Rhine during late 1960s. The Rhine, which is the maininland waterway connection in Western Europe, has the largest container traffic in Europe and is for a significant partnavigable with containers stacked up to 5 high. The port of Duisburg, which is situated along the Rhine, is thelargest inland port of Europe. It serves as a main inland hub for all larger ports from Antwerp to Hamburg. The larg-er volume, however, goes through the port of Rotterdam. Main terminal facilities in Duisburg at this moment are theDeCeTe (Duisburg Container Terminal) terminals and the Rhein-Ruhr terminal. Currently ECT is building a tri-modalterminal in Duisburg.

As do most of the European river container terminals, Duisburg offers tri-modal facilities, including direct access torail transport and container stuffing and stripping facilities on the terminal. Rail plays a very important role, especial-ly in the further distribution of cargo from Duisburg to destinations deeper inland in Germany, Eastern and SouthEastern Europe.

Currently Duisburg offers a wide range of intermodal services. These include:

• Services to and from most of the barge terminals along the Rhine, including those in the port of Rotterdam;

• Services to and from the ports of Hamburg, Bremen, Rotterdam and Antwerp by rail;

• Services to several destinations in Germany by rail (e.g. Germersheim, Donauwörth, Nürnberg, Augsburg, andMünchen); and

• Services to several destinations in Eastern and southeastern Europe by rail (e.g. Northern Italy, Switzerland,Austria, Hungary, the Czech Republic, and the Slovak Republic, Poland, Russia)

The presence of ICT at Duisburg is characteristic of a partial shift of the collection and distribution function awayfrom the seaports. Besides, these terminals help to relieve the seaport areas of potential congestion as they willfunction as satellites for these seaports.

Within Europe, the Rhine plays a central role in this context. The Rhine area presently consists of some 35 barge ter-minals for handling boxes. Most of these inland container terminals offer tri-modal facilities. Direct access to railtransport and container stuffing and stripping facilities improve the competitiveness of these ICTs. An importantissue in this context is the key role ICTs play in the emerging door-to-door services of a large number of containerbarge operators desirous of extending their logistics services.

From a seaport’s point of view, inland container terminals attract economic activity away from the port area. Otherports might profit by competing to be the point of entry and exit for the ICTs. Smaller ports may benefit from thetendency of emerging ICTs by effectively competing with the larger ports. This may lead to a certain degree ofdeconcentration.At present, the container throughput of these river terminals is rather modest, with about 100,000 TEUs for Duisburgand Strasbourg and about 200,000 TEUs for Germersheim, the three largest terminals.

The impact of inland terminal network development on the concentration pattern in and competitive advantages ofseaport areas remains uncertain. The actual tendency (concentration or deconcentration) will primarily be deter-mined by the success of the port authorities and port companies in developing strong functional ties with the nodesin the hinterland network. Also the ability to attract and retain some of the mega-carriers that are active in door-to-door transport logistics will be an important factor. A final important factor is the extent to which the load centresare able to benefit from public-private involvement in decision making on and financing of port infrastructure proj-ects and cross-border hinterland network connections.

Understanding (MOU) on Port StateControl, which came into effect in 1982and includes 18 signatory countries,requires each maritime authority toinspect a total of 25 percent of the indi-vidual foreign merchant ships enteringthe port state during a year. If ships donot meet a set of standard criteria, portstates may detain the ships until propermeasures are taken by the shipowner.The Paris MOU has led to more than17,000 inspections in ports worldwide.In 1998 the number of inspectionsreached 26.5 percent, slightly more thanthe agreed rate. Since 1995 the numberof detentions is showing a decreasingtendency suggesting either a positiveimpact of the measures or less rigorous

inspection norms (as possibly illustratedby the recent ‘Erika’ disaster).

While enforcement of policies to elimi-nate sub-standard ships has a com-mendable objective, the enforcementpractice can impact the competitiveposition of individual ports. For exam-ple, if a situation exists where the strict-ness or accuracy of inspections variesamong port states, sub-standard shipsmay alter their routes and choose moreaccessible ports of call in a same range.Ports with lax inspection procedureswould therefore have an unfair competi-tive advantage. One approach to offsetthis negative competitive impact is tofocus on rewarding good behavior,

45

Box 24

How a Major Transshipment Terminal and Pretty Bay Beach Coexist

Malta Freeport illustrates how a container terminal can live in harmony with its neighbors. The terminal is one of thethree largest transshipment facilities in the Mediterranean, receiving more than 1,700 ship calls annually. It is situatedin the southeast corner of the island, in Marsaxlokk Bay. This area is one of the tourist spots in Malta and maintainingthe integrity of environment was a great concern to the terminal developer.

Ten years ago a decision was made to dredge the bay to accommodate deep draft ships calling at the terminal. Thisentailed removal of about 250,000 m3 of silt from the bay to deepen the channel, turning basin and water depth alongthe quays. Six valleys drain into Marsaxlokk Bay and vibrocore testing revealed that a few bottom layers contained dis-crete sand that could be used to create a beach. These layers were located in the middle of the bay where the turningbasin was to be created. It was decided that some of the dredged material could be used to improve and expand thebeach called Pretty Bay near the terminal site that had eroded due to wave action on the retaining wall of the coastalroad. Expanding the beach would prevent waves from hitting the retaining wall, minimizing further erosion, and pro-vide a considerably larger beach area.

To create the beach, about 20,000 m3 of sand dredged from the turning basin was pumped to shore and sprayed. Thissaved 10 percent in the contract dredging costs, as the alternative was to transport the sand five kilometers outside theharbor to a disposal site. More importantly, the new beach has attracted economic development in the neighboringvillage of Birzebbuga. New holiday flats have sprung up, a new restaurant has opened and there has been a generalincrease in tourist activity. The deeper beach also allowed the coastal road to be widened, reducing congestion in thepeak tourist periods.

Recognizing its role as a good neighbor, the terminal has instituted strict standards on ships calling at the terminal.The first sign of unsanitary discharge from any ship at the terminal will cause immediate stoppage of cargo handlingon the offending ship, followed by investigation of the cause of the incident. Contributing to harmony of beach andterminal is the natural flushing that occurs in the bay, which is self-cleansing as a result of circulation and has remainedconsistent even after the terminal and breakwater developments.

rather than penalizing bad behavior. Anexample of an innovative approach thatrewards good behavior is the GreenAward, initiated by the port ofRotterdam (see Box 25).

Impact on Port Operations andManagement

Developments taking place in interna-tional logistics, shipping technology,industry consolidation and environmen-tal regulations are driving majorchanges in the way ports will operate inthe 21st century. As the worldeconomies become more intertwined,ports are being increasingly cast as part-ners in assisting customers to competefor business share in the global market.Technology in the shipping sector, par-ticularly relating to containerization andinformation exchange, is changing at arapid rate, creating the need for majorfinancial commitments to stay ahead ofthe technology wave. Mergers andacquisitions in the shipping sector, alongwith the growth of a relatively small

number of global terminal operators, iscreating a small number of powerfulplayers that change the way port servic-es are bought and sold. Distributionpatterns are increasingly evolving intohub and spoke networks, creating win-ners and losers among ports thatachieve hub status. All through this isthe increasing concern about the envi-ronment and safety, which impacts theway ports deal with their customer base.

SECTION 3

CHALLENGES AND OPPORTUNITIES

Changes taking place in the port sectorpresent difficult challenges to portadministrators, terminal operators andother port service providers. But thesechanges also present opportunities fornew ways of doing business and openthe door to entry of new playersthroughout the range of port activities.In short, it’s a brand new era for every-one involved in the port sector and theopportunities as well as the challengesare substantial.

Transferring Port Operations to thePrivate Sector

The traditional closed fraternity ofentrenched players with widespreadinvolvement of public entities in owner-ship and operation of ports is no longeracceptable. Port authorities worldwideare under increasing pressure to turnover operations in the port to the privatesector. They are being forced by com-petitive pressures to step into a landlordand regulatory role, focusing on admin-istrative activities that public entities dobest.

46

Box 25

The Green Award Initiative

The Green Award initiated by the Port of Rotterdamhas the objective of stimulating good behaviorrather than punishing bad behavior, by offering dis-counts on port tariffs for extra clean and extra safeships. Ships and crews meeting standards abovethe required minimum can apply for a Green Awardcertificate provided by the Bureau Green Award.Certified ships and crews can apply for tariff reduc-tions by port service providers. These include themajor ports in the Netherlands, Portugal, SouthAfrica and Spain and Sullom Voe in the UnitedKingdom and providers of towage and pilot servic-es. The reductions amount to up to 7.5 percent ofport fees. At present the Green Award is limited totankers and is being expanded to dry bulk carriers.

The need for change — Traditional waysof doing business in ports are beingchallenged worldwide by demands forgains in port efficiency, increased cus-tomer responsiveness and lower costs tomove cargo through the port. It hasbeen widely demonstrated that use ofprivate sector companies throughout therange of port operations provides anopportunity to eliminate traditional,bureaucratic operating procedures andcontrols, and modernize facilities andequipment through new financing chan-nels. It is also widely accepted thatservice providers with operating andadministrative experience in other portshave the opportunity to transfer thisexperience and bring to a port best prac-tices and appropriate modern technolo-gies employed elsewhere. But evenmore important, by passing the reins ofport operations from the public to theprivate sector, privatization offers theability to shift the financial burden ofport expansion and development to thebeneficiaries of the expenditures.

Impact of privatizing operations —There are numerous success storieswhere port authorities have transferredto the private sector operations previ-ously performed by public employees.In Buenos Aires, for example, the awardof terminal concessions to four compet-ing companies in 1994 has broughtdown handling charges significantlythrough improved labor productivity.After transferring major port facilities tothe private sector between 1995 and1998, Panama attracted more than $380million in investments for moderniza-tion and expansion. When managementof the Kipevu container terminal in

Mombasa was transferred to a commer-cial terminal operator, outdated equip-ment was temporarily replaced, bureau-cratic procedures streamlined and pro-ductivity of the terminal improved.More generally, 112 privatizations since1990 involving ports, have generatedprivate investments exceeding $9 billionto rehabilitate terminals and renewsuperstructure in the ports that wereprivatized.

This is not to say that port privatizationshave been without problems. Therehave been a number of incidents of pri-vatizations involving ports that have notworked out. In Indonesia, the Koja con-tainer terminal under private manage-ment ran into difficulties and the publicport company took back the facilities.The city of Rostock has demandedreturn of the terminal it contracted to aprivate group for operation, citing lackof compliance with the original contract.Following a dispute with the PortAuthority of Trieste, the commercial ter-minal operator (Europe CombinedTerminals - ECT) selected to operate thecontainer terminal in the port under a30-year contract withdrew from the con-tract after eighteen months. The termi-nal operator awarded the concession tooperate the container terminal in theport of Rosario is reported to have lostmore than $40 million under the con-tract as a result of work disputes andhas cancelled the contract. . And unfor-tunately, the success story in Kipevuwas reversed when the commercial ter-minal operator terminated its contractwith the port as a result of breakdownof equipment that the government failedto refurbish or replace.

47

Lessons learned from pastprivatizations — A major lessonlearned in port privatizations is the needfor transparency and open competitionthrough a structured international ten-dering process. Many examples can begiven of attempted port privatizationsthat have bogged down due to legalchallenges to the selection of the compa-ny to be awarded a concession contract.Montevideo is a recent prominent exam-ple of how things can go wrong in a pri-vatization process. Attempts at privatiz-ing services in the port have failed fourtimes due to court challenges and theprivatization has yet to take place. TheGovernment has now announced plansto auction off the terminal on the stockmarket.

Conflicts and legal challenges can beminimized by clearly presenting the bid-ding rules and selection process in thebid documents. Criteria to be used forselecting the successful bidder should bestated and a pro-forma contract provid-ed with the bid documents so thateveryone is competing for the same con-tract. The role of the port administra-tion after the privatization and any lim-its on the contractor’s ability to operateshould be stated in the bid package.Bidders should be requested to providea business plan that will become part ofthe final contract. In the plan, biddersshould state how they will address laborissues that may arise as a result of anydownsizing of port operating personneland/or changes in work practice rules.They should be asked to give referencesof how these issues were dealt with inother ports in which they operate. Thebidders should be requested to state

quantifiable targets for productivitygains and market development. Thisbusiness plan should be accorded signif-icant weighting in the selection process.Incentives and penalties should be pro-vided in the contract should there be asignificant deviation from targets in thebusiness plan.

It is important to develop beforehand awell-reasoned plan for transitioning toprivate operation and have a clearunderstanding of how the port willfunction after the various port servicesare privatized. A number of importantquestions should be addressed. Whatchanges in laws and regulations areneeded to allow private sector operationin the port? How much managementand operational autonomy will be grant-ed to the private operators? What willbe the role of the port authority in regu-lating rates and practices of privateoperators in the port? Who will beresponsible for common area mainte-nance and upgrade, and how will thecost of these activities be recovered fromport users? Will the port continue tohave a marketing and planning functionafter privatization, or will this be left tothe individual service providers? Whatresources will be required to carry outthe functions that remain with the portauthority? What type of re-training pro-gram and severance package will haveto be structured to address the issue ofredundant personnel?

Contingency plan — The best and tight-est contract will still not assure therewon’t be problems in operation of portservices under a private contractor.There should be a contingency plan fordefault by port service contractors

48

where work stoppage could impact thefunctioning of the port or where inade-quate resources are made available bythe operator.

Opportunities for the Private Sector

The worldwide market for port servicesis estimated to generate available rev-enues of $45 to 60 billion annually.While these numbers are very rough,they indicate the size of the availablemarket to companies active in the portsector. This is a large available marketthat should be of interest to a wide vari-ety of global, regional and local portservice providers (see Box 26).

Terminal operations — This area is themost advanced in terms of private oper-ation of port services. Of the 112 portprivatizations captured in the WorldBank PPI database, 62 have been conces-sions or management contracts involv-ing terminal operation. But there aremany more opportunities. There aremore than 2,800 ports worldwide, manyof which still have publicly operated ter-minals that are candidates for privatetakeover involvement in managementand operations under concession agree-ments or management contracts. Weroughly estimate that the available rev-enue from container terminal operationis on the order of $30 to 40 billion annu-ally.

Tug assist services — Port authorities inmany ports own and operate the harbortugs used for ship assist. This activity isripe for privatization and is relativelyeasy for the private sector to provide. Ithas already attracted the attention ofSmit, who has been actively pursuing

this market internationally and nowoperates tug services in the Netherlands,Belgium, Germany, Panama, Nigeria,Mexico, Argentina, Venezuela, Gabon,Singapore, Malaysia, Indonesia,Netherlands Antilles and the Bahamas.Other global, regional or local tug oper-ators could certainly find this marketinteresting if they can break the existingpublic or private monopolies. Weroughly estimate that the harbor tugservice market represents available rev-enues of $4 to 5 billion annually.

Maintenance dredging — This activityhas traditionally been performed bycommercial dredging contractors undercontract to port authorities or by portauthority personnel using publiclyowned dredges. It is estimated thatmaintenance dredging is a $4 to 5 billionavailable annual market and this activitycan be completely turned over to theprivate sector. Port authorities that ownand operate their own dredging equip-ment could corporatize the dredgingfunction and sell the business alongwith its assets to the private sector. Butmore innovative concepts for privatizing

49

Estimated Available Market inthe Port Sector

Estimated Annual Revenues

(billions of $)

Container Terminal Operations 30 to 40Tug Assist Services 4 to 5Maintenance Dredging 4 to 5Information Technology 2 to 3Environmental and Ship Safety Services 1 to 2Other Port Services 4 to 5

Box 26

maintenance dredging might be consid-ered. For example, maintenance dredg-ing could be outsourced on a concessionbasis similar to the recent concessionawarded for channel dredging andmaintenance in the Rio Paraná, where aportion of the project revenues willcome from direct charges by the conces-sionaire to future channel users and theAuthority receives a concession fee. Amore radical concept could be a contractbetween a dredging company and con-tainer shipping company to maintainspecified water depths at the carrier’sterminals on a worldwide basis. Muchdepends, however, on the volumes to bedredged and the timing of the dredging.

Information technology — Increasinglysophisticated information technology isspreading throughout the port sector asport users demand more timely infor-mation to support their logistics sys-tems. This is producing a variety ofopportunities to design, install andoperate IT systems in ports throughoutthe world. IT services can be totally out-sourced by port authorities and terminaloperators and the market is estimated torepresent $2 to 3 billion in annual avail-able revenues. Among options that canbe considered for structuring IT servicecontracts are joint ventures between theport authority and the IT provider, anarms length concession for IT services ora concession based on in-kind servicecompensation.

Environmental facilities and ship safety— This is an area ripe for innovative pri-vatization concepts, as many of thesefunctions can be performed by the pri-vate sector. For example, a private com-pany could be given the concession to

operate a ballast water treatment plantin the port, with revenues derived fromreceiving charges and resale of recov-ered oil (see Box 27). A private compa-ny could install and operate the vesselmanagement system in the port under aconcession agreement. The functions ofport state control could be contractedunder a management agreement to acompetent inspection company or classi-fication society, assuming the latterproperly apply the inspection rules. Acompany could be contracted to main-tain and operate aids to navigation on alocal or regional basis, such as now per-formed by MENAS in the Arabian Gulfarea (see Box 28). Altogether, it is esti-mated that the available market fromenvironmental and ship safety activitiesis $1 to 2 billion annually.

Other port services — Warehousing andstorage, container freight station opera-tion, port security, pilotage, equipmentmaintenance, etc. are all activities thatcan be operated by the private sector. Itis estimated that worldwide these activi-ties represent an available market ofsome $4 to 5 billion annually.

50

51

Box 28

Middle East Navigation Aids Service

The Middle East Navigation Aids Service (MENAS), aregistered non-profit organization based in London,maintains the lighthouses, light buoys, RACON bea-cons and other aids to navigation in the ArabianGulf that are outside port limits. Over 500 naviga-tion aids are installed and maintained in this area.MENAS’ services extend from Kuwait down theArabian side of the Gulf to Didamar Island in theStrait of Hormuz and then south to Masirah Islandand channel in the western Arabian Sea off the coastof Oman.

MENAS operates the lighthouse tender and buoylifting vessel Relume to provide the maintenanceservices required for the lights and buoys in the Gulf,and obtains its income from charges (light dues)levied on vessels entering the Gulf. These charges, at£l.70 per 100 NRT for each visit a vessel makes, haveremained constant for ten years. Income has risenfrom the increasing numbers of vessels entering theGulf in recent years, particularly from the highernumbers of containerships calling at Dubai andJebel Ali.

In addition to fixed navigation aids, MENAS broad-casts navigational information to shipping in theGulf area as NAVTEX warnings. These are also copiedto Muscat Radio in Oman, which re-transmits themas NAVTEX warnings, and to the Area IX office, wherethey are included in the Area IX weekly Notices toMariners. Permanent changes to channels, pipelinesetc. are then notified to mariners via a printedMENAS Notice to Mariners, distributed free of chargeto vessels by all shipping agents in the Gulf area.The MENAS warnings are withdrawn after the BritishAdmiralty publishes its Notices to Mariners coveringthe same changes.

Ballast Water Treatment Plant in the Port of Portland

In the late 1970s, the Port of Portland (Oregon) madea major investment in a ship repair facility designedprimarily to accommodate large tankers operating inthe Alaskan trade. Included in the project was con-struction of a water treatment facility to receive oilyballast tanker wash water. The plant is available toships loading or discharging cargo in the port, aswell as ships entering the shipyard for repair.

The Plant

The complete system includes eight connection sta-tions, receiving lines, holding tanks, a heating plant,decant tanks, separators, processed water storage, oilstorage and water quality testing laboratory.Storage capability is provided for 157,000 barrels ofslops, 11,500 barrels of recyclable oil and 30,000 bar-rels of disposable water. Ballast water can bereceived from a ship at the rate of 3,000 barrels perhour. Most of the recovery process is achievedthrough tank settling over time. Received ballast istypically kept in the tank for 30 days and skimmedeach day. After 30 days the tank is heated with inter-nal steam coils to finish the separation process.Recovered oil is sold and disposable water is eitherpumped through the city sewer system or directlyinto the river depending on the water quality. Theport sets standards for acceptability of wastewater.

Economics of the Facility

The facility cost $5.2 million to construct in the late1970s. Revenues are generated by the facility from acharge against the ship for receiving ballast water($4 to 5 per barrel) and sale of recovered oil on theopen market. Recovered oil is sold to remarketersfor blending and resale for use as boiler fuel. Theselling price of the oil has typically been $1.50 to2.00 per barrel, but prices as high as $20 per barrelhave been realized in periods of extreme demand.Up to 400,000 barrels of recovered oil have beengenerated by the plant in a year.

Potential to Employ Elsewhere

This type of plant could be considered for use inother ports. But there are factors that impact theattractiveness of the concept. Supplying steam tothe plant is the principal operating cost and it wouldgreatly help the economics to have access to acheap source of steam. It would be important tohave proximity to a market that can use the recov-ered oil, which is not usable for all applications.

Box 27

52

Box 29

The Port of Hong Kong — Why is it so Successful?

A Success Story

By any standard, Hong Kong has established an enviable presence in the world port sector. The port annually receivesabout 42,000 seagoing vessels and 190,000 river trade vessels. In 1999, Hong Kong handled more than 16.1 million TEU,making it the largest port in the world in terms of container throughput. To accommodate traffic through the port,there are eight major container terminals, with a ninth now under construction and two more planned. Looking out-ward, container traffic is pro-jected to grow to 24 million TEU in 2006, 33 million TEU in 2016. The port has the ability toprovide shippers with a full network of competitive services and frequent sailings to all areas of the world. Hong Kong’scargo handling productivity ranks among the world’s highest. One of the container terminals in Kwai Chung handlesmore than 1 million TEU annually at a single berth — more than twice the world standard. This terminal is capable ofloading/discharging 1200 TEUs in ten hours with three gantries that average 40 moves per hour. The success of HongKong is based on a number of factors, including the port’s location relative to major markets, a natural harbor and, per-haps more than anything else, a business friendly environment with heavy reliance on the private sector.

Reliance on the Private Sector

Virtually all activities in the port are performed by the private sector. Three private firms operate the eight container ter-minals in Kwai Chung container port. HIT, the largest of these companies, controls four of the terminals and handles 60percent of the containers passing through Kwai Chung. The remaining traffic is shared among Modern ContainerTerminals and SeaLand Orient Terminals. Four private operators provide mid-stream operations and more than 100 pri-vate operators offer warehousing services. Three firms provide tug service in the port, the largest of which is Hong KongSalvage and Towage. Seven companies provide stevedoring services, six companies provide ship repair. Hong KongPilots Association Ltd., which is owned by the member pilots, provides pilot service in the port.

The government’s operational function in the port is limited to collecting refuse, preventing and cleaning up oil dis-charge, providing vessel traffic services, managing a ferry terminal, maintaining 61 harbor moorings and coordinatingsearch and rescue in the South China Sea. The Marine Department performs these functions as part of its responsibilityto facilitate safe and expeditious movement of ships, cargoes and passengers within Hong Kong waters. A Port andMaritime Board has been established to set overall policy for the maritime sector in Hong Kong, but this Board does notgenerally become involved in oversight of commercial operations in the port. Overall, the government has a hands-offapproach to port operations, relying on competition within the private sector to shape and control activities.

Expansion and improvement of facilities in the port is entirely funded through the private sector. While the governmentdevelops long term strategic land use plans for the port, it relies on the private sector to finance, build, own and operatenew facilities in response to market demand. For example, since 1972 the private sector has built eight modern contain-er terminals in the port and a ninth is now under construction. In awarding such terminal contracts, the governmentearmarks an area of water to be put out for tender, defines the responsibilities the developer is to undertake and selectsthe bidder who offers the highest price for the development site. Once awarded, the contractor is responsible for mak-ing the entire investment in infrastructure and superstructure on the site. The government’s role is limited to providingthe agreed water depth in the approach channel to the terminal.

Implications for Other Ports

A general reliance on the private sector to provide the necessary port services and infrastructure, with the govern-mentproviding minimum oversight needed to protect the public interest has obviously worked very well in Hong Kong.While other factors have contributed to the success of the port, a business friendly environment, reliance on marketforces and the government’s hands-off approach to managing port services have greatly contributed to Hong Kong’sleading position as an international shipping center. This model is worth considering, particularly in ports that have suf-ficient traffic volume to enable competition among service providers to thrive.

53

Checklist for Negotiating a Terminal Privatization

1. The Proposed Transaction

What are the government’s primary and secondary objectives in privatizing the terminal — generate pro-ceeds to the government from the transaction, increase efficiency of port services, attract foreign invest-ment to improve port infrastructure, rationalize the public labor force, reduce the government’s fiscal bur-den, etc.?

What area and specific activities in the port are to be privatized in the transaction — and what is not includ-ed in the transaction?

What modality is best suited to the transaction — outright sale of assets and land, long-term lease of thefacility under concession arrangement, management agreement to operate the facility, other?

How will the negotiations with the proposed contractor be conducted and who will be assigned to the gov-ernment’s negotiating team to complete the transaction?

Who will prepare the term sheet to be presented to the proposed contractor and what schedule will be setfor completing the transaction?

2. Structure of Payment to the Government

How is the compensation to be structured — is there an initial cash payment to the government or is theproposed compensation to the government based on some form of rent, revenue sharing, royalty or otherdeferred payment arrangement?

Is a portion of the initial payment for the terminal rights non-cash compensation based on providing equip-ment and services — if so, how does the contractor propose to establish the fair value of the equipmentand services?

What is the discounted present value of the initial payment and flow of deferred payments from the pro-posed contract?

How does this discounted present value compare with the discounted present value of the projected prof-its or surpluses of the terminal as currently operated?

3. Risk Being Assumed by the Government

In the event of losses being incurred by the contractor under the proposed agreement, will in any circumstancesthe government be liable for these losses?

Under what circumstances can the proposed contractor hold the port authority or government responsiblefor terminal disruptions, missed performance targets, unexpected operating costs, etc.?

Is there any possibility that the government could directly incur losses under the agreement?

4. Performance Targets

What throughput does the proposed contractor project for the terminal over the next ten years from localtraffic, transit traffic and transshipment traffic?

How does the proposed contractor plan to reach these throughput projections?

Does the proposal state targets for increasing minimum productivity standards (e.g., minimum averagecrane moves per hour) in the terminal?

How does the proposed contractor plan to reach these minimum productivity targets?

Is there a provision for penalties and incentives in the proposal for meeting the planned throughput andproductivity targets?

What assumptions has the proposed contractor made, or conditions has it set, as to the role of the portauthority and/or government in achieving these targets?

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

√

Box 30

54

5. Operational Issues

What services are to be provided by the port authority to the terminal after takeover by the proposed con-

tractor — and how will these services be paid for?

Who will be responsible for maintaining the civil structures and water depth alongside the quay?

Will the proposed contractor provide new management and senior operating personnel — if so, who will they

be and what will be their qualifications?

How many personnel does the proposed contractor plan to employ in the terminal?

Will existing personnel in the terminal have priority for future job positions in the terminal after take over by

the proposed contractor?

Will the proposed contractor utilize the salary level and structure currently in effect for personnel employed in

the container terminal — if not, what will be the changes?

What interaction does the proposed contractor foresee with other service providers operating in the port —

and how does it plan to cooperate with the other providers?

If a concession or management agreement, will the port authority have full and unfettered rights at all times

to enter and inspect the terminal after transfer to the contractor?

Will the proposed contractor carry all-risk and liability insurance on the container terminal, what specific risks

will be covered, what will be the limits on liability coverage and will insurance cover the actual cost of replace-

ment of the equipment?

6. Terminal Handling Charges

What structure and level of terminal handling charges does the proposed contractor plan to impose on con-

tainers and other cargo through the terminal?

How much profit is built into these charges?

Are these charges competitive with other ports in the region?

What role will the government have in reviewing and approving any changes in the structure or level of con-

tainer handling charges?

If the contract provides for revenue sharing, what portion of terminal handling revenue is to be paid to the

government?

What process is to be employed to ensure that the government receives all of the compensation it is due?

7. Potential Contractual Conflicts

What is the provision for disputes resolution — i.e., the process, venue, applicable rules and laws?

What language will be paramount in event of any ambiguity in the contract?

Will the proposed contractor agree to be subject to all prevailing local laws?

Are there provisions for terminating the contract with the proposed contractor should terminal throughput

and/or productivity targets not be met — if so, what is the process for terminating the contract?

Is the terminology in the force majeure provision acceptable to the government — if not, what changes are

required to make it acceptable?

What provisions has the proposed contractor included in the proposal concerning its obligation for payment

of taxes to the government?

Will the proposed contractor provide a bank guarantee as security from the time the government accepts its

proposal until the handover is complete?

What performance guarantee will the contractor provide as security for complying with the obligations taken

on in the proposed contract?

√

√

√

√

√√√√

√

√

√√√

√

√

√

√

√

√√

√√

√

Box 30 (continued)

55

8. Handover of the Terminal

What is the proposed timing of the handover of the terminal to the proposed contractor?

What specific steps will be taken by the contractor to plan for and implement the handover?

Will the proposed contractor have transition personnel in the terminal for a time period preceding the han-dover to organize the process — and how will these personnel interact with the current staff?

What is the role of the port authority in the handover process?

What responsibilities will the port authority and government continue to have after the transaction?

9. Terminal Development

What commitments are being made by the proposed contractor to improve and expand the terminal?

What type of training program will be provided by the proposed contractor for terminal personnel?

Will the proposed contractor install a world class computerized information system — and in what otherports is this system now used?

When will this system be installed?

Will provision be made to connect this computer system to the current or future computer system operatedby the port authority — and to what extent will the port authority have access to data in the terminal system?

What role does the proposed contractor envisage for the port in competing for transshipment business withother ports in the region — and are there any potential conflicts of interest as a result of the proposed con-tractor operating terminals in one or several of these other ports?

√

√

√

√

√

√

√

√

√

√

√

Box 30 (continued)