port reform toolkit: the evolution of ports in a competitive world

THE EVOLUTION OF PORTSIN A COMPETITIVE WORLD

M O D U L E 2

PORT REFORMTOOLKITSECOND EDITION

THE WORLD BANK

© 2007 The International Bank for Reconstruction and Development / The World Bank

All rights reserved.

The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of Public-Private Infrastructure Advisory Facility (PPIAF) or the Board of Executive Directors of the World Bank or the governments they represent.

Neither PPIAF nor the World Bank guarantees the accuracy of the data included in this work. The boundaries, colors,denominations, and other information shown on any map in this work do not imply any judgment on the part of PPIAF or theWorld Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

The material in this work is copyrighted. Copyright is held by the World Bank on behalf of both the World Bank and PPIAF.No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including copying,recording, or inclusion in any information storage and retrieval system, without the prior written permission of the World Bank.The World Bank encourages dissemination of its work and will normally grant permission promptly.

For all other queries on rights and licenses, including subsidiary rights, please contact the Office of the Publisher, World Bank,1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail [email protected].

ISBN-10: 0-8213-6607-6ISBN-13: 978-0-8213-6607-3eISBN: 0-8213-6608-4eISBN-13: 978-0-8213-6608-0DOI: 10.1596/978-0-8213-6607-3

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MODULE TWO CONTENTS1. Overview of the Competitive Landscape 21

1.2. Rivalry among Existing Competitors 231.2.1. Hinterland Market Access 241.2.2. Ability to Service Transshipment Trade 241.2.3. Regional Port Capacity and Demand 241.2.4. Ability to Create Competition within the Port 241.2.5. Stakes at Risk 251.2.6. Ability to Absorb Losses 251.2.7. Ability to Control Operations 251.2.8. Limits on Rivalry within Ports 251.2.9. Government Willingness to Subsidize Operations 26

1.3. Threat of New Competitors 281.3.1. Capital Expenditure for New Port Facilities 281.3.2. New Distribution Patterns 281.3.3. Provisions in Operating Agreements 281.3.4. Natural Barriers 291.3.5. Magnitude of Switching Costs 291.3.6. Cost Advantages and Customer Loyalties 29

1.4. Potential for Global Substitutes 291.4.1. Other Global Sources for Products Moving through the Port 291.4.2. Substitute Products for Exports and Imports 301.4.3. Magnitude of Switching Costs for Substitution 301.4.4. Demand Elasticity of Exports and Imports 301.4.5. Importance of Port Costs in Total Delivered Price 30

1.5. Bargaining Power of Port Users 321.5.1. Concentration of Port User Power 321.5.2. Impact of Changing Business Relationships 321.5.3. Presence of Large Value-Adding Tenants 331.5.4. Importance of Port to the Economy 331.5.5. Ability to Replicate Port Services 331.5.6. Facility Investments by Port Users 33

1.6. Bargaining Power of Service Providers 341.6.1. Experience and Capabilities of Service Providers 341.6.2. Participation in Facility Financing 351.6.3. Choke Points in the Port 351.6.4. Ability to Absorb Downtime 351.6.5. Interrelationships between Providers and Port Users 351.6.6. Rights and Obligations Conveyed by Contractual Agreements 35

1.7. The Bottom Line 362. Port Dynamics in the 21st Century 36

2.1. Globalization of Production 362.1.1. Vertical Specialization 362.1.2. Focused Manufacturing 372.1.3. Expanded Logistics Reach 372.1.4. Increased Sourcing Alternatives 372.1.5. Impact of Globalization on Ports 37

2.2. Changing Technology 37

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2.2.1. Containerization of World Trade 392.2.2. Future Containership Designs 402.2.3. Impact on Port Operations 412.2.4. Need for Container Port Productivity Improvements 412.2.5. Growing Role of Information Technology 422.2.6. Port Requirements for Large Cruise Ships 422.2.7. Other Technology Affecting Port Services 44

2.3. Shifting Bargaining Power 442.3.1. Consolidation among Ocean Carriers 452.3.2. Emergence of Global Logistics Service Providers 51

2.4. Changing Distribution Patterns 522.4.1. Becoming a Hub 522.4.2. Benefits of Hub Status 542.4.3. Hub Problems 542.4.4. Inland Container Terminals Shifting Activities from the Port 56

2.5. Environmental and Safety Concerns 562.5.1. Growing Environmental Concerns 562.5.2. Recent Environmental Article 562.5.3. Issue of Substandard Ships 56

2.6. Impact of Changing Dynamics on Ports 593. Challenges and Opportunities 59

3.1. Transferring Port Operations to the Private Sector 593.1.1. The Need for Change 593.1.2. Impact of Privatizing Operations 593.1.3. Lessons Learned from Past Privatizations 603.1.4. Contingency Plan 61

3.2. Opportunities for the Private Sector 613.2.1. Terminal Operations 613.2.2. Towage Services 613.2.3. Maintenance Dredging 633.2.4. Information Technology 633.2.5. Environmental Facilities and Ship Safety 633.2.6. Other Port Services 63

References 67

BOXESBox 1: The Competitive Landscape 22Box 2: Checklist of Key Questions for Positioning in the Global Port Market 23Box 3: Load Centers Competing for the Gulf Market 26Box 4: Intraport Competition in the European Union 27Box 5: Reebok Logistics Center in the Maasvlakte Distripark 31Box 6: Enlarging Venezuelan Export Markets of Coal and Crude Oil 32Box 7: Suppliers to Container Terminal 34Box 8: Evolution of Containerized Shipping 38Box 9: Development of Container Vessel Sizes as a Percentage of the Global Fleet 39Box 10: Ships on Order as of September 2005 40Box 11: Evolution of Cellular Fleet 40Box 12: Future Containerships Require Increasingly Larger Cranes 41

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Box 13: Impact on Port Productivity of Unit Voyage Cost of Large Containerships 43Box 14: Ceres Paragon Terminal in Amsterdam, the Netherlands 44Box 15: Port User Information Network 45Box 16: Felixstowe Cargo Processing System (FCPS) 46Box 17: Physical Requirements to Accept Cruise Ships 47Box 18: Podded Electric Drive Impact on Requirements for Ship Assist in Port 47Box 19: Top 10 Container Carriers as of June 2006 48Box 20: Worldwide Container Traffic 49Box 21: Global Terminal Operators 2005 Throughput League Table 49Box 22: Key Milestones of Hutchison Port Holdings in the 1990s 50Box 23: Hub and Spoke Container Distribution 53Box 24: Hub Options on the Asia–Europe Route 55Box 25: Duisburg Inland Container Terminals 57Box 26: How a Major Transshipment Terminal and Pretty Bay Beach Coexist 58Box 27: The Green Award Initiative 59Box 28: Estimated Available Market in the Port Sector 61Box 29: The Port of Hong Kong—Why is it so Successful? 62Box 30: Ballast Water Treatment Plant in the Port of Portland 63Box 31: Middle East Navigation Aids Service 64Box 32: Checklist for Negotiating a Terminal Privatization 65

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AcknowledgmentsThis Second Edition of the Port Reform Toolkit has been produced with the financial assistance of a grant fromTRISP, a partnership between the U.K. Department for International Development and the World Bank, for learningand sharing of knowledge in the fields of transport and rural infrastructure services.

Financial assistance was also provided through a grant from The Netherlands Transport and Infrastructure TrustFund (Netherlands Ministry of Transport, Public Works, and Water Management) for the enhancement of theToolkit’s content, for which consultants of the Rotterdam Maritime Group (RMG) were contracted.

We wish to give special thanks to Christiaan van Krimpen, John Koppies, and Simme Veldman of the RotterdamMaritime Group, Kees Marges formerly of ITF, and Marios Meletiou of the ILO for their contributions to this work.

The First Edition of the Port Reform Toolkit was prepared and elaborated thanks to the financing and technicalcontributions 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 qualityof their infrastructure 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

International Maritime Associates (USA)

Mainport Holding Rotterdam Consultancy (formerly known as TEMPO), Rotterdam Municipal PortManagement (The Netherlands)

The Rotterdam Maritime Group (The Netherlands)

Holland and Knight LLP (USA)

ISTED (France)

Nathan Associates (USA)

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

PA Consulting (USA)

The preparation and publishing of the Port Reform Toolkit was performed under the management of Marc Juhel,Ronald Kopicki, Cornelis “Bert” Kruk, and Bradley Julian of the World Bank Transport Division.

Comments are welcome.Please send them to the World Bank Transport Help Desk.Fax: 1.202.522.3223. Internet: [email protected]

21

How times have changed! Most ports today arecompeting with one another on a global scaleand, with the tremendous gains in productivityin ocean transport achieved over the past severaldecades, ports are now perceived to be theremaining controllable component in improvingthe efficiency of ocean transport logistics. Thishas generated the drive today to improve portefficiency, lower cargo handling costs, andintegrate port services with other componentsof the global distribution network. Because ofthe capital intensity of such efficiency improve-ments, these have also generated the drive tounbind ports from the bureaucratic controlof public entities and encourage privatesector operation of a wide range of port-relatedactivities.

1. OVERVIEW OF THECOMPETITIVE LANDSCAPE In the 21st century, five forces will interact toshape the competitive landscape facing portauthorities and port service providers:

1) The rivalry among existing competitors.

2) The threat of new competitors.

3) The potential for global substitutes.

4) The bargaining power of port users.

5) The bargaining power of port serviceproviders (see Box 1).

These forces will impact ports of all sizes, driv-ing requirements for port expansion, service

2The Evolution of Ports in a Competitive WorldSECOND EDITION

The port sector has radically changed over the past two centuries.During the 19th century and first half of the 20th century, portstended to be instruments of state or colonial powers and port access

and egress was regarded as a means to control markets. Competitionbetween ports was minimal and port-related costs were relatively insignifi-cant in comparison to the high cost of ocean transport and inland trans-port. As a result, there was little incentive to improve port efficiency.

MODULE

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The Evolution of Ports in a Competitive World

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Box

1: T

he C

ompe

titiv

e La

ndsc

ape

DE

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INA

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R

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and

uniq

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ovid

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o w

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ser

vice

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rtic

ipat

es in

fina

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g th

e ac

tivity

•

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ce o

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poin

ts"

in th

e po

rtth

at fa

cilit

ate

slow

dow

ns o

r st

oppa

ges

in p

ort o

pera

tions

•

Abi

lity

of s

ervi

ce p

rovi

ders

vs.

por

tm

anag

emen

t to

abso

rb d

ownt

ime

•

Inte

rrel

atio

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ps a

mon

g se

rvic

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ovid

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and

port

use

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l rig

hts

conv

eyed

in le

ases

and

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e ag

reem

ents

•

DE

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RM

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TH

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AT

OF

NE

W P

OR

T E

NT

RA

NT

S

Cap

ital i

nten

sific

atio

n in

por

ts a

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rmin

als

that

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ates

bar

riers

by

rais

ing

cost

of e

ntry

•

Cha

nges

in r

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nal d

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ibut

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patte

rns

and

abili

ty o

f car

riers

tout

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load

cen

ters

in p

lace

of d

irect

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ice

•

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ons

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ases

and

oth

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prov

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s fr

om n

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ntra

nts

in th

epo

rt

•

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ural

bar

riers

to e

xpan

sion

•M

agni

tude

of s

witc

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cos

ts to

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ilize

oth

er p

orts

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serv

ice

prov

ider

s w

ithin

the

port

Cos

t adv

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ges

of e

xist

ing

serv

ice

•pr

ovid

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and

cust

omer

loya

lties

THR

EA

T O

F N

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EN

TRA

NTS

New

por

t fac

ilitie

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the

regi

on•

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rt u

p of

reg

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s•

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ser

vice

pro

vide

rs in

the

port

•

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of d

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d an

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pply

for

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san

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ies

in th

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the

port

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petit

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amon

g se

rvic

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•

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kes

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isk

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eser

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exi

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sine

ss

•

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lity

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bsor

b lo

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and/

orcr

oss-

subs

idiz

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erat

ions

•

Num

ber

of c

ompe

ting

port

s ab

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econ

omic

ally

acc

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the

sam

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mar

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•

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olef

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ort

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ticul

arly

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clea

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•

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riter

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•

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ge v

alue

-add

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tena

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the

port

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ts to

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in

•

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f the

por

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the

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•

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RIV

ALR

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EX

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MP

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Inte

nsity

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ry w

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improvement, pricing decisions, and other manage-ment actions. Winners and losers will emerge inthe global port sector, largely dependent on howport managers strategically position themselves inthe evolving competitive landscape (see Box 2).

1.2. Rivalry among ExistingCompetitors The intensity of rivalry within the port andbetween ports is the first of five forces shaping

the competitive landscape. In some ports, therewill be little if any rivalry given the location ofthe port, the type of services being provided, therules on number of companies able to operatewithin the port, and other factors. In other situ-ations, rivalry among competitors will beintense and often result in pricing that strips thesuppliers of profits. There are several factors,discussed in the following sections, that deter-mine the intensity of port rivalry.


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Here are some key questions that portmanagers and port service providersshould ask when developing long-term

strategy for market positioning.

Rivalry among Existing Competitors

Which other ports have access to my hinter-land market?

• Is future supply and demand for port servic-es in the region expected to be in balance?

• Are competing ports able to absorb lossesthrough cross-subsidizing services?

• Who has the greatest stakes at risk in main-taining and growing traffic volume?

• Where do we have a comparative advantageover our competitors?

• What actions can we take to attract and lockin customers?

Threat of New Competitors

Are new ports being planned in the region thatpotentially access my market?

• What is the status of these plans and thelikelihood the project will proceed?

• Will changes in distribution patterns create anew form of competitor?

• What actions can we take to minimize theimpact on our existing market base?

• Which other companies are potential servicecompetitors in the port?

• Can switching costs and other barriers becreated to prevent market entry?

Potential for Global Substitutes

Are there other sources for products beingexported through our port?

• Have ultimate users of cargo through ourport the ability to use substitute products?

• Can manufacturers and assemblers shippingthrough the port shift to other sites?

• Are there potential developments that couldimpact the ability to substitute globally?

• How significant is port cost in determiningmarket competitiveness of port customers?

• What barriers or incentives can prevent portcustomers from switching products or sites?

Bargaining Power of Port Users

To what degree do individual port users controltraffic through the port?

• What is the potential for business realignmentsor alliances among customers in our port?

• How would these realignments or allianceschange their bargaining power?

• To what extent can the services provided byour port be replicated elsewhere?

• What are the bargaining strengths andweaknesses of the port and port users?

• How can the port’s bargaining strength beimproved?

Bargaining Power of Service Providers

Which service providers are potential chokepoints in the port?

• What options are available to the port if nego-tiations with specific service providers fail?

• Has the service provider or port the greatercapability to absorb port downtime?

• Does the service provider bring financingcapability to negotiations with the port?

• Are there interrelationships between serviceproviders and port users?

• What legal rights have been conveyed to theservice provider by the port?

Source: Author.

Box 2: Checklist of Key Questions for Positioning in the Global Port Market

1.2.1. Hinterland Market Access

In some situations, only one port can logicallyprovide access to hinterland markets. This mayresult from geographical features, lack of ade-quate transport infrastructure from all but oneport, political issues, or other factors. The portof Djibouti currently has a virtual monopoly onaccess to the Ethiopian market as a result of theconflict between Ethiopia and Eritrea and thelack of transport infrastructure from neighbor-ing Somalia. Dar es Salaam is the major entrypoint to Tanzania, as well as the neighboringlandlocked countries of Zambia, Burundi,Rwanda, and Malawi. Little general cargo entersMadagascar without passing throughToamasina. There is obviously little, if any, rivalrybetween ports in such circumstances. In othersituations, many ports may be able to provideaccess to a common hinterland, creating intenserivalry for market share. Numerous ports on theU.S. East, Gulf, and West Coasts compete fortraffic to and from the Midwest. Likewise, anumber of large ports in Northern Europe andthe Mediterranean compete for the Europeanhinterland. In Asia, Hong Kong, Shekou,Yantian, Fuzhou, and other ports compete foraccess to the Southern China market and numer-ous ports in Northern Asia are available to serv-ice the Japanese and Korean markets.

1.2.2. Ability to Service Transshipment Trade

While rivalry for hinterland market access cansometimes be limited, rivalry for transshipmentbusiness is intense, even for ports that haveestablished leading positions as load centers.Singapore established its role as the world’slargest transshipment center as a result of anadvantageous location on the Asia–Europe traderoute and proximity to regional origin and desti-nation centers in Southeast Asia. Algeciras,Malta Freeport and Gioia Tauro establishedtheir positions in the Mediterranean transship-ment market as a result of their location on theAsia–Europe trade route and proximity to theSouthern Europe and Northern Africa markets.Colombo and Dubai have established themselvesas regional hubs for traffic to and from the Gulf

market and the Indian subcontinent. However,the strategic location of these ports has not pre-cluded rivalry for business. Singapore is in anincreasing rivalry with Port Klang, and morerecently with Tanjung Pelepas. Several ports inthe Mediterranean, such as Port Said East,Tangier, and Damieta, are increasingly compet-ing with Algeciras, Malta Freeport and GioiaTauro for regional transshipment trade. Salalahand Aden are now serious rivals to Colomboand Dubai for the Gulf and Indian subcontinenttransshipment markets. These rivalries are oftenintense and create substantial pressure on trans-shipment pricing.

1.2.3. Regional Port Capacity and Demand

An imbalance of port capacity within a regionwill influence the level of rivalry between ports.Excess capacity will cause rival ports to aggres-sively compete for market share. Sometimes thiscan lead to destructive pricing. For example, therapid growth in load center capacity in theEastern Mediterranean has produced intensecompetition between hubs, and as a result portssuch as Limassol and Damietta have been forcedto aggressively compete to retain customers bypricing services so low that they may not becovering costs. Likewise, the inability within aregion to generate sufficient traffic will increaserivalry for available business. The small hinter-land of ports in the Caribbean constrains themarket available to each port, creating the needto compete for all types of cargo rather thanspecialize in types of traffic for which the portmight have comparative advantage.

1.2.4. Ability to Create Competition withinthe Port

The ability to segment operations in the port tocreate competition among service providers willoften determine whether rivalry can exist withinthe port itself. Sometimes it is difficult orimpossible to divide facilities in a way thatenables more than one contractor to providecertain types of services within the port, partic-ularly container terminal handling services,giving the contractor monopoly status. Muchdepends on the geographical layout of the port,


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the available traffic, and the minimum capacityadditions (taking into account the lumpiness ofport investments).

In Beirut, a 20-year concession for handlingcontainers in the port has been given to onecontractor, as the layout of the port wasconsidered to preclude more than one containerterminal operator. In other situations, such asJeddah, it was possible to segment containerterminal facilities in a way that enabled the portto award long-term container handling conces-sions to two contractors, each operating in aseparate location within the port. Even morecompetition has been created among serviceproviders in Hong Kong, where three containerterminal operators compete with each other anda variety of other service providers also competefor business within the port. In Buenos Aires,the geographical layout of the port and avail-able traffic volumes ultimately enable not morethan four terminal operators to compete.

1.2.5. Stakes at Risk

Rivalry will be influenced by the stakes at riskin preserving the market share of regional traf-fic. The greater the stakes, the more intense therivalry to preserve market share. This takes onparticular significance in modern containerports, considering the investment required toestablish a new container terminal can easilyexceed $100 million. Whoever assumes the riskfor this investment will clearly have a big finan-cial stake in ensuring that the new terminal cap-tures and preserves market share. APMTerminals, with sister company Maersk Line,has invested heavily in a new container terminalin Salalah and clearly has a stake in ensuringthat the facility is efficiently used as theirregional transshipment hub (see Box 3). Stakesat risk also stem from the importance of theport to the local economy. The Port ofRotterdam, for example, is a major contributorto the local economy and preserving marketshare in regional traffic flows is of vital impor-tance to the local and regional government.This has resulted in an intense rivalry withother Northern European ports and underpins

the plan to invest more than $2 billion in a newdeepwater container terminal and a new rail-way connection to Germany to maintain posi-tion in the future market.

1.2.6. Ability to Absorb Losses

The ability to absorb losses and cross-subsidizeoperations within the port impacts the balanceand intensity of rivalry. Global terminal opera-tors with strong financial balance sheets andmultiple operations worldwide may be willingto absorb losses in a particular region, at leastfor a limited period of time, to eliminate com-petition. Ports with multifaceted operations maybe able and willing to cross-subsidize services tolower charges on port activities where there isgreater rivalry for business. Likewise, portauthorities involved in non–seaport-relatedactivities, such as the Port of New York andNew Jersey, may be able and willing to cross-subsidize port-related services through highercharges on non–port-related services.

1.2.7. Ability to Control Operations

Rivalry is also impacted by the ability of portauthorities and port service providers to controlthe efficiency of port services. There are situa-tions where entities operating in the port areoutside the control of the port manager or serviceprovider, effectively limiting the ability of theport to compete with other ports for marketshare. In particular, procedures and require-ments imposed by customs frequently constrainthe port’s ability to compete for market share.In Jeddah, for example, clearance procedureshave been the primary culprit, limiting theport’s ability to grow as a load center for theRed Sea and Middle East markets. In the WestAfrican Port of Cotonou, customs processesbecame such a hindrance that long dwell timesfor containers were suffocating the port.

1.2.8. Limits on Rivalry within Ports

Limits that ports set on the number of eligibleservice providers impact the degree of rivalry.Many port authorities have policies limiting thenumber of stevedores, tug companies, and so


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forth that can operate in the port. Sometimesthese limits are set by entry criteria that effec-tively limit the number of competitors. In somesituations, these limits are not due to port poli-cy, but result from historical precedent limitingcompetition. Such a situation is difficult tochange. Japanese ports, for example, are largelycontrolled by a number of small- and medium-sized stevedoring companies that have existedfor many decades. Entry of new stevedores hasbeen difficult, if not impossible, and theJapanese Minister of Transportation attributesthis lack of rivalry to Japan’s ports inability tocompete with its Asian rivals.

1.2.9. Government Willingness to SubsidizeOperations

Rivalry between ports is sometimes influenced bythe availability of public funds to offset losses,blurring the role of commercial forces.Governments sometimes subsidize ports on thebasis that they are vehicles for economic growth.European ports have for many years been willingto subsidize port access and quays to achieve larg-er economic goals. At present, the EuropeanCommission is taking steps to improve the situationof port competition (see Box 4). The objective ofthese subsidies is to create artificial forces that


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Several major ports are positioning to beentry and exit points for containers mov-ing to and from the Gulf. It is producing

a fierce competition for load center status. Theoutcome of this competition could significantlychange the way ocean carriers service theArabian Peninsula market.

Dubai

The port has established itself as a world-classtransshipment hub serving as a load center formarkets in the Gulf. Dubai handled about 6.3million TEU in 2004, about a quarter of whichwas transshipment traffic within the Gulf, withSaudi Arabia, Kuwait, and Iran as the major des-tinations. The port authority clearly plans to retainits role in current transshipment markets, as wellas position as the load center for containers toand from Iraq once trade resumes. As part of itsstrategy to control market position, the port hasbeen acquiring management contracts for otherports and terminals in the region (next to interna-tional projects), effectively gaining control overregional logistics networks.

Salalah

The new transshipment hub on the Gulf is clearlydesigned as a load center for the region. Themajor advantage is its proximity to theEurope–Asia trade route. Main line ships have tomake only a small deviation from their main navi-gation course, allowing a quick pit stop to pickup and drop containers for the Gulf, East African,and India–Pakistan markets. Six years after itsstart in 1998, it handled 2.2 million TEU, mainly atthe cost of Dubai and Colombo.

Jeddah

This port now largely services the Saudi marketand only 22 percent of the containers throughthe port are for transshipment. However, theproposed rail land bridge to Dammam couldenable the port to function as a load center forthe Gulf market. The investment in infrastruc-ture is substantial and major hurdles are in theway, particularly establishing a process forallowing transit containers to move freelyacross the country without regard to contents.But if the rail investment is realized and thehurdles resolved, Jeddah could be a majorcontender for traffic to and from the Gulf. In2005, a tender for a build-operate-transfer(BOT) concession of the railway line was beingsolicited, which could bring the railway projectcloser to fruition.

Beirut

Then there is the new container terminal inBeirut that started operations in the beginningof 2005 with a capacity of 700,000 TEU. Thisterminal has the potential to become the majorload center for containers moving between theGulf and Europe/North America. Cross-borderissues are hurdles that must be resolved. Butthe use of Beirut as a load center will avoidpassage through the Suez Canal and save3,400 miles of sea voyage to the western Gulf.The line haul route could be served usingtwo fewer ships in the weekly string, theeconomics of which could be very attractiveto owners.

Source: Author.

Box 3: Load Centers Competing for the Gulf Market


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Port competition is high on the agenda ofthe European Union (EU). One of the con-clusions of the Meeting of the European

Council in Lisbon March 28, 2000, was thattransport is among the areas where theCommission, the Council, and the memberstates were asked to speed up liberalization. OnFebruary 13, 2001, the commission adopted acommunication to the European Parliament andto the Council, “Reinforcing Quality Service inSeaports: A Key for European Transport” (thePorts Package). The cornerstone of this com-munication was a proposal for a directive of theEuropean Parliament and the Council on“Market Access to Port Services.” Of the 25member countries, 21 have seaports throughwhich in 2002, 1.2 billion tons of cargo weretraded with non-EU member countries with atotal value of 773 billion.

It is envisaged that the cost of handlingthese cargoes in ports can be reduced throughliberalization of port services. The Directive onMarket Access to Port Services aims toincrease of intraport competition for cargo andship handling services. The directive includesmeasures for self-handling of cargo and pas-senger operations and mandatory authoriza-tions for all service providers. Self-handlingmeans that an undertaking, which normallycould buy port services, provides for itselfusing its ship and land-based personnel andown equipment. Also a wider use of the pilotexemption certificate is envisaged.

The proposals are drawing a great amountof opposition from stakeholders. Port laborunions see their position weakened by thearrival of land-based personnel of the shippingcompanies. Pilots see their position weakenedby a greater use of pilot exemption certificates.Many companies presently in monopoly situa-tions will require an authorization for theiractivities with a duration corresponding withthe economic lifetime of their investments.Generally they find these periods much tooshort, the compensatory measures with termi-nation of contracts too poorly defined, and seeonly more bureaucracy coming.

The public-private roles of the ports of EUmember states differ greatly for the Hanseaticports of Northwest Europe with their landlordtype model, the Mediterranean ports with thegreat influence of the central governments, theUnited Kingdom’s (UK) private ports, the ports

in the formerly centrally planned states ofEastern Europe, and the ports of the othercountries. The impact of the directive thereforewill differ strongly too. At one end are the UKprivate ports arguing that they already haveprivatized everything and that the measuresconcerning authorization of port services are astep back, increasing bureaucracy, and at theother end are the ports of some Mediterraneancountries where liberalization is still in its initialstages.

The proposal is leading to an extensive debateboth within the interinstitutional legislative processand also with and between stakeholders. Afterthree years of discussion, however, theEuropean Parliament in a plenary sessionrejected the proposal in 2005 something thatseldom occurs in the European parliamentarypractice. In 2005, the European Commission(EC) was anxiously studying compromises thatwould be acceptable for both the parliamentand the EC.

Interport Competition in the European Union

The amount paid by different European sea-ports for maritime access, coastal defense,quays, port basins and jetties, and the degreeat which such costs are recovered from theports users vary greatly. For many ports it isnot possible to obtain sufficient insight fromthe official published sources, so it remainsunclear to what extent countries are subsidiz-ing their ports. There are also different opin-ions about the nature of some costs; for exam-ple, the provision of maritime access shouldbe considered as a public good, so the relatedcosts don’t need to be recovered from specificusers.

The EC therefore issued a Directive ofFinancial Transparency that should apply to allports covered by its legislative proposal andwhich are subsequently subject to the StateAid Guidelines (an exclusive EC competence)on the financing of port infrastructure. At pres-ent, the issue is highly relevant for the ongoingcontainer port expansion programs, such as theDeurganck Dock of Antwerp in Belgium;the Port 2000 Project of Le Havre in France;the expansion projects of Bremerhaven,Wilhelmshaven, and Hamburg in Germany; andthe second Maasvlakte project of Rotterdam inthe Netherlands.

Source: Author.

Box 4: Intraport Competition in the European Union

influence the chance of rivals’ success. There areindications that government subsidies in theMediterranean may be affecting the ability oftransshipment centers to compete for business.

1.3. Threat of New Competitors The second of five forces shaping port reform isthe possibility of new port facilities or serviceproviders within the port. This would includecreation of new regional load centers thatchange the way cargo to and from a country’shinterland is distributed. The significance of thisthreat will vary from port to port depending ona number of factors.

1.3.1. Capital Expenditure for New PortFacilities

The capital cost required to build a new portfacility frequently provides a barrier to newcompetitors. Large up-front expenditures areoften required for dredging, quay construction,access roads, and port superstructure. Thesestart-up costs provide an entrance barrier thatcan often deter all but the most aggressive play-ers. But there are instances where new entrantswill take the risk of major investments in newports when they see an opportunity for marketpositioning. An example of new entrants takinga large risk occurred at the Port of TanjungPelepas on the southwest tip of Malaysia, wherealmost $745 million was invested to build adedicated container port. The developers sawthe opportunity to tap into the large and lucra-tive container market, which until then hadbeen largely dominated by Singapore and to asmaller extent by Port Klang. Throughputincreased from 0.4 million TEU (twenty-footequivalent unit) in 2000 to 4 million TEU in2004, and is expected to increase further.

1.3.2. New Distribution Patterns

Changes in distribution patterns can create newport competitors. This is particularly the case incontainerized trades, where a newly createdregional load center can siphon traffic fromtraditional ports in the region. In the Gulf, forexample, the newly created load center in

Salalah siphoned a substantial part of the fastgrowing transshipment business of the Gulffrom ports such as Jeddah, the UAE ports, andColombo. Since its start in 1998, the through-put increased to 2.2 million TEU in 2004.Based on this success, the investors haveambitious plans for further development ofcontainer, general cargo, and bulk handlingfacilities and also in free trade zone (FTZ) activ-ities. Similar plans started also for the port ofAden. Another example includes the increase inAll Water Express Services between Asia andthe U.S. East Coast via the Panama Canal. Ascongestion in the U.S. West Coast ports increaseswith the strong growth in the Pacific Rimtrades, shippers are adjusting supply chains toaccount for the longer transit time, but realizingthe benefits of less delays and lower total costs.The result is creating pressure to developalternative gateways to the U.S. hinterlandmarket that may open opportunities for neigh-boring Canada and Mexico. There are alsoinstances where a new port can provide accessto a hinterland via overland transit, providingcompetition to a port more locally sited. Thenew Port of Ain Sukhna in Egypt at the north-western end of the Red Sea became operationalin 2002, and became, with a throughputvolume of 238,000 TEU in 2004, a strong com-petitor to Egyptian ports in the Mediterranean.

1.3.3. Provisions in Operating Agreements

Provisions in leases, concessions, and other agree-ments, particularly those involving investment bythe operator, will often provide some degree ofprotection from new competitors starting upbusiness in the port. In other situations, however,the port service provider can be threatened withnew entrants. Nowhere is this better evidencedthan in Northern Europe, with the success of theDutch tug company Kotug in expanding its tugassist business in this region’s ports, which havetraditionally been the realm of long establishedplayers. Since Kotug started its towage services inthe Port of Rotterdam in 1988, a price war wastriggered with prices of towage services beingreduced about 25 percent. In 1996, Kotugexpanded its services to the Port of Hamburg,


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and in 1999 to Bremerhaven. Concurrently, oneof the players in Hamburg started operations in1998 in the Port of Rotterdam.

1.3.4. Natural Barriers

Natural barriers that constrain port capacity canlimit the threat of new port entrants, particularlythose requiring land or fixed facilities to operatewithin the port. In many ports there simply isn’tspace for additional berthing, storage, and otherfixed facilities, providing some insulation from theentry of new competitors. However, these barrierscan easily be overstated. In the long term, many ofthese barriers can be overcome by building in adja-cent locations or extending out into the sea. Therecan also be new methods of operation introducedthat do not require presence in the port. For exam-ple, an inland container depot could substitute forstorage and other operations now performed in theport. The Italian port of La Spezia has a chroniclack of space and has constructed the IntermodalCenter of San Stefano Magra for this purpose. InWestern Europe, intermodal container depots situ-ated along inland waterways are playing an increas-ing role to relieve congested ports and roads.

1.3.5. Magnitude of Switching Costs

Existence of switching costs will often deter-mine the ability of new entrants to start upcompeting operations, either within a port orbetween ports. Switching costs can come in sev-eral forms. They could be the capital expendi-ture required to switch from one port facility toanother. In some cases, this can be a very smallcost, especially for carriers that have little fixedinvestment in a facility. A pure transshipmentfacility for containers, such as Kingston,Jamaica, can be particularly vulnerable toswitching as the carriers using the facility mayincur little switching cost in shifting to a com-peting facility. In other cases, this cost can besubstantial. Carriers can have a considerableamount of equipment positioned in a port thatwould need to be shifted to another port if theywere to switch operations. Also, some carriershave heavily invested in port and terminal infra-structure. In instances where major bulk han-dling facilities have been created, switching is

almost impossible. Another form of switchingcost is the need to establish a service network inthe new port, which could entail a considerableamount of learning and experience costs. Thenthere’s the switching cost incurred by the dis-ruption in service during the transition period.Ports, and service providers within a port, canoften protect their market position by ensuringthat these switching costs are maximized.

1.3.6. Cost Advantages and CustomerLoyalties

Cost advantages of existing service providersand customer loyalties will affect the threat ofnew entrants. There may be economies of scaleor experience that enable established players toretain the position of cost leaders if new entrantswere to start up business in the port. This couldresult from a variety of factors, including havingthe better location in the port, having sunkinvestment in facilities and equipment, oremploying experienced personnel. Whilecustomer loyalties can be ephemeral, quality ofservice (for example, responsiveness to customerneeds, handling rates, clearance time, and soforth) can differentiate the service provider andlimit the threat of new entrants. Sometimes thesecustomer loyalties can result from the threat ofreprisal should the customer shift to anotherservice provider or another port.

1.4. Potential for Global SubstitutesThe third force shaping the competitive land-scape of port reform is the potential of port usersto shift to other global sources, impacting thelevel of activity in the port. This force takes ongreater importance as world trade is opened tocompetition, sourcing of supply becomes increas-ingly global, and vertical specialization becomesan increasingly important factor in global logis-tics chains. Several factors will determine theimportance of this force on specific ports.

1.4.1. Other Global Sources for ProductsMoving through the Port

The extent to which there are other globalsources available to customers now shippingthrough the port will determine the ability to


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source elsewhere. Various types of fruits andvegetables provide good examples of substituteglobal sources. Bananas, for example, can besourced from West Africa, Central and SouthAmerica, the Caribbean, or Asia. Manufactureof clothing is also globally footloose, with manypotential source locations. The efficiency ofport facilities in each of the export locationswill impact the success of the product in theexport market, which ultimately affects the levelof activity moving through the port.

1.4.2. Substitute Products for Exports andImports

Foreign buyers may be able to substitute otherproducts for the product they are now shippingthrough the port. For example, a power plantutilizing imported coal as feed may be able toswitch to oil or gas as feed if the economics shiftin favor of the latter. Port costs to handle coalare one of the factors that impact the economicsof utilizing coal as feed, and exports of coalthrough the port could certainly be affected ifthe foreign buyer shifts to gas or oil as feed.

1.4.3. Magnitude of Switching Costs forSubstitution

There may be significant cost in switching toother sources, products, or assembly sites thatwill impact the ability of port users to substituteglobally. The greater this cost, the greater theport’s bargaining power. Ability to shift to otherglobal sources can be limited by the port users’reliance on value-adding services in or near theport, involving integration of imported interme-diate goods with domestic produce for final saleto the domestic or export market. These value-adding services can be costly to replicate else-where and affect the ability to shift to otherglobal sources. For example, the large free zonein Jebel Ali enables tenants to import andassemble intermediate products into finalproducts, utilizing a large pool of inexpensiveexpatriate labor for the assembly process. Whilemany of the value-adding activities performedin Jebel Ali can be performed elsewhere, thealternatives may involve significantly higherlabor cost and a less friendly government

environment. It may also entail walking awayfrom a high sunk cost. Reebok, for example,has established a large final assembly and distri-bution center in the Port of Rotterdam to serv-ice the European market. While this value-adding activity could be shifted to another loca-tion, there is a sizable sunk cost associated withthe existing facility (see Box 5).

1.4.4. Demand Elasticity of Exports andImports

Another factor determining the potential forglobal substitutes is the elasticity of demand forthe country’s exports and imports. The greaterthe elasticity, the greater the possibility thatbuyers can do without the product. Doing with-out the product is a form of substitution by thebuyer that will impact the volume of traffic forthat product in the port.

1.4.5. Importance of Port Costs in TotalDelivered Price

Cutting through all of the above is the issue of howsignificant port-related costs are as a percentage oftotal delivered price. Many shippers consider portcosts to be among the more controllable expendi-tures in the logistics chain. In general, the higherthe percentage that port costs are of total deliveredprice, the more impact port costs will have onbuyer behavior. For high value commodities, suchas electronics, port costs can be less than 1 percentof the delivered market value. For low value com-modities, such as bagged rice, port costs can bemore than 15 percent of the delivered marketvalue. Shippers of electronics may be less influ-enced by port costs in selecting ports than shippersof rice. However, small cost penalties may not beacceptable even when port costs are a smallpercentage of the total delivered price. Thesepenalties may represent the difference betweenprofit and loss in the marketplace and influence theselection of the port, depending on whether theport user has the option to ship through anotherport, not buy the product, or find another market.

Maritime transport costs have an important sharein the landed price of bulk commodities such ascoal, cement, and crude oil. An increase of the


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available draft enables the deployment of largerships, the realization of economies of ship size,and a better access to world markets. The region-al government of the state of Zulia in Venezuelahas plans to deepen the Port of Maracaiboby shifting to a location nearer to the sea

(see Box 6). As a result, shipments of coal andcrude oil presently carried in consignments ofabout 60,000 tons can be shipped in consign-ments two to three times bigger, reducing ship-ping costs up to $3 per ton for exports of coal toWestern Europe.


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Value-adding activities have been created inmany ports to enhance trade and generateemployment for the local area. The key

ingredients are efficient port operation, availabilityof good transport services, and attractive pricesfor land, labor, and energy. The Reebok state-of-the-art logistics center in Rotterdam illustrateshow one port helped create a value-addingservice that generates employment for 300personnel and contributes $6 million in directincome to the local community.

Reebok Product Lines and Logistics

Reebok has two product lines, footwear andapparel. In 1998, footwear accounted for 57percent of international sales, apparel 43percent. Reebok products are actively marketedin 170 countries and territories. The UnitedKingdom (UK) is the largest market for Reebokproducts in Europe, representing 30 percent oftotal European sales. Spain is another bigmarket for Reebok products. Almost allfootwear is supplied from plants in the FarEast and is transported in containers. Mostapparel is supplied from plants in southernEurope, and moved by truck and containerfrom plants in Portugal, Greece, and Turkey.

Restructuring of Logistics Activities

In 1995, as part of a global restructuring oflogistics activities, Reebok decided that ware-housing and distribution activities in Europeshould be consolidated. Instead of havingwarehousing facilities in each market, a bulklogistics facility would be established in main-land Europe to supply pick-and-pack ware-houses in the UK and Spain, as well as directlysupply other markets in Europe. Except forsome very large accounts (which are serviceddirect) and apparel for Southern Europe (whichis warehoused in Spain), all product flow to theEuropean market would pass through thislogistics center. France, Belgium, and theNetherlands were considered as potential loca-tions. Following assessment of each of these

locations, Reebok decided to locate the logis-tics center in the Netherlands. The site chosenis in the Distripark 3 in Maasvlakte, at the seaedge of the port property. In November 1998,the facility began receiving product.

Why the Port of Rotterdam Was Selected

Reebok had a variety of reasons for choosingthis site. It is close to the new deepwatercontainer terminal in the Port of Rotterdam, afacility that is generally regarded as one of themost advanced and capable terminals inEurope. The location is on the coast, whichprovides easy access to short sea transport tothe UK market. There is a good supply ofwarehousing labor in the Rotterdam area,despite the fact that the general labor marketis tight. Most people in the Netherlands under-stand English, which was considered impor-tant by Reebok. Customs in the Netherlandsis considered to be efficient and businessfriendly. While not an advantage, labor costsand regulations concerning labor practiceswere considered to be similar to those of othercountries in Europe. But most importantly,space was available and the port wanted tohave a launching customer in the newDistripark. So the port, in combination with themunicipal government, proactively pursuedReebok and provided strong incentives tolocate the facility in Maasvlakte. Based on asix-year operating lease with a five-yearrenewal option and substantial residual valueguarantees by Reebok, the port funded con-struction of the state-of-the-art 700,000 squarefoot logistics facility. The port also created thenecessary infrastructure to connect the facilityto the adjacent container terminal, facilitatedcreation of a bus service fitted to the plantshift system, and provided a contact person todeal with problems and issues. Reebokdescribes its relationship as “a partnershipwith the port.”

Source: Author.

Box 5: Reebok Logistics Center in the Maasvlakte Distripark

1.5. Bargaining Power of Port Users The bargaining power and control over portmanagement exercised by carriers, shippers, andtenants in varying degrees are also significantforces shaping the competitive landscape of portreform. Bargaining power of port users is deter-mined by a number of factors, which are out-lined below.

1.5.1. Concentration of Port User Power

The larger percentage of traffic in the portcontrolled by an individual user, the more bar-gaining power that user has in negotiationswith port management and service providers.In some situations, the port user can be sopowerful that the port literally cannot affordto lose its business. Even the largest ports mustcontend with extremely powerful carriers thathave the option to take their business else-where. A major container carrier leveraged itssize and market share to get concessions fromthe Port of New York and New Jersey as acondition of using the port as a load center onthe U.S. East Coast. The port did not want tolose a carrier that commanded 20 percent ofthe port’s container volume. Given this controlover a large port, consider the bargainingpower that the carrier has in dealing with a

small or midsize port where there are optionsfor using other facilities.

In the Caribbean, large cruise lines such asCarnival, Royal Caribbean, and P&O have greatbargaining power with the cruise ports that theyserve. These three companies control more than50 percent of industry capacity and their deci-sions on which ports to call can have majorimpact on a local economy. Some years ago,Carnival decided to reduce cruise ship visits toGrenada as a protest to the imposition of cruisetaxes by the government, an action that seriouslyaffected the economy of the small nation.

1.5.2. Impact of Changing BusinessRelationships

Business realignments and agreements amongport users can result in powerful players thatport managers and port service providers mustcontend with in contract negotiations. Thesecan take the form of conferences, slot sharingarrangements, strategic alliances, mergers, andothers. The result in each case can be greaterconcentration of port business among a smallernumber of port users. When representatives ofthe Grand Alliance (comprising P&O,Nedlloyd, NYK, OOCL, and MISC) sit downwith a port to negotiate future contract terms,the port is dealing with a formidable alliance ofcarriers that previously had been individualcustomers. Maersk’s acquisition of Royal P&ONedlloyd in 2005 gave Maersk control of 18percent of the total world container vesselcapacity, which is not excessive in itself. Themarket share, however, varies per trade routeand is around 22 percent on the Europe–FarEast, 14 percent on the transpacific, and 19percent on the transatlantic trade routes. Onsome North–South trade routes the marketshares are higher, such as 26 percent on theEurope–India route and 28 percent on theEurope–East Coast South America trade routes.On the Europe–South Africa andEurope–Australia–New Zealand trade routes,however, the market shares became considerablyhigher and resulted in mandatory downsizing inthese trades.


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Box 6: Enlarging Venezuelan Export Marketsof Coal and Crude Oil

The entrance channel of the Port ofMaracaibo has a draft limitation ranging from37–39 feet. This limits the size of the con-signments carried by tankers and dry bulkcarriers leaving the port. In practice, vesselsof more than 100,000 dwt (dead weight ton-nage) are calling in partly loaded condition,with consignments of about 60,000 tons.Plans are being considered to enable theport to accommodate ships with a draft ofup to 54 feet. This will lead to a reduction inshipping costs of up to $3 per ton forexports to West Europe. As a result,Venezuelan coal and crude oil can beshipped cheaper to its present customers,particularly those in North America andWestern Europe.

1.5.3. Presence of Large Value-AddingTenants

Bargaining power will be influenced by the exis-tence of large value-adding tenants that the portwants to attract and retain. A major port tenantemploying a large number of personnel and sub-stantially contributing to the local economy is ina position to extract concessions that would notnecessarily be available to smaller players. ThePort Authority in Portland, Oregon, has targetedauto imports as a strategic business sector that itwants to retain and grow. Three car manufactur-ers (Hyundai, Honda, and Toyota) now leaseseveral terminals from the port authority toprocess and accessorize imported cars. Keepingthese three auto manufacturers in the port is ahigh priority objective, and the port authorityprovides favorable terms to these large usersthat may not be available to smaller tenants.

1.5.4. Importance of Port to the Economy

The more important the port to the nationaleconomy, the more pressure there will be on portmanagers to attract and retain valuable cus-tomers. Some ports can be extremely valuableplayers in the national economy and the loss ofmajor customers could have a big ripple effect onemployment and local income (see Box 7). Forexample, the Port of Rotterdam is a key elementin the Dutch economy and development projectsundertaken by the port over the past decade havecreated more than 45,000 man-years in tempo-rary employment and 17,500 man-years in per-manent employment in the Netherlands.

Current and prospective port users can employthe importance of the port to the local economyas a bargaining chip in negotiations over tariffs,service, or facilities. The larger the contributionof the port user to the local economy, thegreater the user’s bargaining power with theport.

1.5.5. Ability to Replicate Port Services

Port users will have strong bargaining power ifthe services provided by the port can be repli-cated elsewhere. Essentially this comes down to

whether there are alternative facilities availableto the port user. The more opportunity there isto use other facilities, the less bargaining powerthe facility owner has over the user. Nowhere isthis better illustrated than in Northern Europe,where a number of large container handlingports are available for entry and exit in theEuropean market. Carriers can react to tariffincreases, efficiency issues, or problems by shift-ing or threatening to shift to other ports. Someyears ago, the Grand Alliance decided to tem-porarily shift one of its five Europe–Asia servicesfrom Rotterdam to Antwerp on the basis that itwas experiencing delays in Rotterdam. Thisdecision shifted, on an annual basis, some125,000 TEU from Rotterdam to Antwerp,until the delays in Rotterdam were corrected. Inthe mid Mediterranean, Malta Freeport andGioia Tauro are equally situated to providetransshipment service to carriers. Each portmust consider the potential actions of the otherswhen negotiating with current or prospectivecustomers because customers have the ability totake their business to the other port.

1.5.6. Facility Investments by Port Users

A carrier, shipper, or tenant who has a majorinvestment in facilities in the port, or has struc-tured its operations in a way that prevents easytransfer of operations to another facility, facesswitching costs that limit bargaining power. Forexample, a joint venture of Saudi and U.S.interests began operating a rice processing plantin the port of Jeddah in October 1995. It is thelargest rice handling facility of its type in theMiddle East and the investment in the facilitycreates an exit barrier should the operatorbecome dissatisfied with the service receivedfrom the port. Another example is the containerload center in Salalah, where Maersk Line is amajor investor in the terminal along with thegovernment of Oman. It’s difficult to pack upand leave this facility if there is unhappinesswith port policies. At the same time, sunk costsin facilities do not preclude leaving when thingsget too bad. International Container TerminalServices, Inc. (ICTSI) of the Philippines decidedto pull out of the Port of Rosario in Brazil after


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having invested $27 million in a failed effort tooperate the container terminal. EuropeContainer Terminals (ECT) left Trieste after aone-and-a-half-year effort to operate the MoloVII container terminal. Both contractors decidedthat future losses would be greater than the costof pulling out. State-owned, Singapore-basedoperator, PSA International (PSA), met difficul-ties with its Aden terminal in 2002, and was,according to the contract, bought out byYemenInvest.

1.6. Bargaining Power of ServiceProviders The final force shaping the competitive land-scape of port reform is the bargaining power ofport service providers. A variety of operatorsand groups often have the ability to exercisecontrol over the port by threatening to curtailor cancel services. At present, more than halfthe world’s container terminal capacity is man-aged by a small number of companies, approxi-mately 15, defined as global terminal operators.

These companies have operations in more thanone region in the world and handled an estimated206 million TEU in 2004. It is expected thatthe market share of these companies willincrease to 55–60 percent by 2010. These largeplayers can tilt the scale in negotiations withport authorities. The extent of service providerbargaining power is determined by a number ofissues.

1.6.1. Experience and Capabilities ofService Providers

Experience and the unique capabilities that theservice provider brings to the port are a factordetermining its bargaining position. The greaterthese capabilities, the more power the serviceprovider has in dealing with the port. A contrac-tor that has operated in a port for many years,has established a cadre of very experiencedpersonnel, and has accumulated a large inventoryof equipment needed to perform the job wouldmore likely be able to extract favorable termsfrom the port than a start-up company.

Box 7: Suppliers to Container Terminal

Since opening in 2000, the terminal in Tanjung Pelepas, Malaysia, created businesses for 710 com-panies that did not exist before the terminal went into operation.


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Warehousing 9 Bunkering and lubricant 11

Manufacturing 2 Port development contractors 15

Parts distribution hub 1 Duty-free shop 1

Vehicle storage 1 Insurance services 1

Haulage/trucking 28 Pest control 1

Container maintenance 1 Health clinic 1

Forwarding agent 12 Cleaning services 3

Freight forwarding 28 Landscaping 1

Logistics 32 Canteen operators 5

Lashing contractors 2 Convenience Store 5

Prime mover contractor 2 Fixed assets supplier 2

Waste collection 2 Sundry suppliers 532

Ship Chandelling 7

Types of services No. companies Types of services No. companies

Suppliers to Tanjung Pelepas Container Terminal

Terminals in Bremerhaven, Germany and Salalah, Oman have more than 350 and 400 suppliers respectively.

Source: APM Terminals International B.V.

Likewise, a contractor with unique skills, suchas handling hazardous cargo or chemicals, is ina good bargaining position. Large global termi-nal operators are also in a good bargainingposition because they are often perceived asbringing experience and unique capabilitiesbased on their operations elsewhere, loyalties ofa customer base, networking possibilities, andaccess to financing. The contract for DubaiPorts World (DPW) to manage the Port ofDjibouti was largely based on the perceptionthat DPW could transfer experience in portoperations in Dubai and increase regional mar-ket access to Djibouti.

1.6.2. Participation in Facility Financing

A service provider that participates in thefinancing of an activity is clearly in a betterbargaining position than one who does not.Many port services that are privately operatedas concessions involve some degree of financing bythe operator and, in many cases, the contractoroffering the best financing terms is in positionto get the concession. The developer of the newcontainer terminal in Aden chose PSACorporation as the operator partially becausePSA was willing to participate in financing the$200+ million infrastructure development.

1.6.3. Choke Points in the Port

Existence of choke points in the port that facili-tate slowdowns or stoppages of port operationsprovides a power that is often employed toextract concessions from port management.Sometimes the choke point can be an activity inthe port, without which the port cannot functioneffectively. Tug service is an example; if tugs arenot available for ship assist, the port may contin-ue to function, but not necessarily at the normallevel of efficiency. Sometimes the choke pointscan be personnel in the port; a labor stoppage incargo handling or other strategic services canshut port operations down. The choke point canalso be trucking to and from the port, warehous-ing operations, or other services where a slow-down for whatever reason can quickly stall oper-ations in the port. Service providers in these

types of activities have considerable bargainingpower in dealing with port management.

1.6.4. Ability to Absorb Downtime

The ability of service providers compared toport management to absorb downtime alsoaffects the balance of bargaining power. Serviceproviders with deep pockets may be willing totake a loss of revenue for a substantial periodto get what they want from the port.Meanwhile, the port can be under substantialgovernment and commercial pressure to resolvethe conflict and get the port back into opera-tion. Strikes in the Israeli ports of Ashdod,Haifa, and Eilat in 2005 created a backup of ves-sels in the ports and generated calls from manysides to reach a resolution as soon as possible. Inaddition, the management lock-outs in October2002 during the labor contract negotiations(Pacific Maritime Association versus theInternational Longshore and Warehouse Union)caused havoc in the U.S. West Coast ports,taking months to process the backlog of vessels.

1.6.5. Interrelationships between Providersand Port Users

The existence of interrelationships betweenservice providers and port users can influencethe power structure in the port. These interrela-tionships can affect decisions regarding portoperations, leases, berthing rights, and otherissues. Uniglory, for example, is the feeder shipsubsidiary of Evergreen, which in turn is one ofthe major line haul container carriers. A portthat wants to attract line haul calls byEvergreen could be willing to extend berthingterms to Uniglory that are more favorable thanwould be given to a feeder ship operator who isindependent. Uniglory can exploit this relation-ship to strengthen its bargaining position innegotiating terminal concessions.

1.6.6. Rights and Obligations Conveyed byContractual Agreements

Lease agreements and other contracts to useport facilities include provisions that conveylegal rights and obligations to the port service


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provider. These contract terms will set bound-aries on the port service provider and port infuture negotiations. The rights can be extensive,giving the provider exclusive rights to operatein the port for 20 plus years with little if anycontrol by port management. Or they can bevery limited, giving the port the right to exercisea great deal of control over the performance ofthe service provider, including provisions in thecontract specifying a minimum investment pro-gram that must be fulfilled by the contractor. Asthe contract between the port and serviceprovider will set the boundaries for future bar-gaining, the need for a well-planned, carefulnegotiation to develop the contract can’t beoveremphasized.

1.7. The Bottom Line Ports no longer operate in an insulated environ-ment. They face the same competitive forcesthat companies in other industries experience.There is rivalry among existing competitors, thecontinuing threat of new entrants, potential forglobal substitutes, and the presence of powerfulcustomers and powerful suppliers. Dealing withthese forces is a continuing challenge for theport manager. It requires that the port managerbe keenly aware of port user requirements,know their constraints in the global market,and have a strategy for making the port a part-ner in business development.

2. PORT DYNAMICS IN THE21st CENTURY The 21st century will see radical changes in thebusiness base underlying port operations.Increasingly, intense global competition willforce changes in the way all players in the inter-national logistics chain, including ports, con-duct business in the future. Innovative systemsand new technology will radically changerequirements for port infrastructure andincrease the degree of specialization, raising thefinancial stakes of port investments and theneed for a highly specialized workforce.Realignments and consolidations among portusers and port service providers will continue,creating a fluid base of players with whom ports

do business. Changes in distribution patterns andin the structure of the maritime geography willincreasingly create a hierarchy of ports andsome historical port-related activities will beshifted to inland sites. Environmental, safety,and security concerns will force ports to imposeregulations and provide facilities that may haveno commercial return on investment.

2.1. Globalization of Production The world economies are becoming increasinglyinterrelated as a result of increasing trade andthe growing trend toward globalization of pro-duction. Over the past half century, most coun-tries have seen an increase in exports as a shareof gross domestic product (GDP) and there hasbeen an increase in vertical specialization ofworld trade. In addition, sourcing of raw mate-rials and finished products has become increas-ingly globalized, and producers in various, oftendistant areas of the world are increasinglyforced to compete with one another for thesame markets. The basic forces that have trig-gered the greater interrelation and interdepend-ency of the world economies remain active.Thus, there is no reason to think that thesetrends will not continue.

2.1.1. Vertical Specialization

The increasing vertical specialization of worldtrade has had significant impact on the globallogistics system of many manufacturers. It hasadded links to global supply chains andincreased the transport intensity of productionprocesses. Firms have been increasingly concen-trating on exploiting their core competenciesand subcontracting out a number of noncoremanufacturing and assembly activities to con-tractors. Tasks traditionally performed at thestart or the end of the production line areincreasingly moving away from the main plantto be performed by manufacturing subcontrac-tors or distribution centers. Preassembly andsequencing of parts for on-line productionchains are activities increasingly outsourced tospecialist logistics providers. Customization ofproducts, which can range from labeling orrepackaging of goods to reconfiguration of


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items, is one of the fastest growing areas oflogistics outsourcing.

2.1.2. Focused Manufacturing

Manufacturers have been concentrating produc-tion capacity in fewer locations, replacing thetraditional system of nationally based produc-tion with “focused manufacturing.” Instead of afactory manufacturing a broad range of prod-ucts for a local market, the entire production ofa particular product for a continent or, in somecases the world market, is focused at a singlelocation. While this has enabled companies tomaximize economies of scale in the productionoperation, it has often made their logistical sys-tem more transport-intensive and transport-dependent.

2.1.3. Expanded Logistics Reach

Companies have steadily expanded the geo-graphical scale, or “logistics reach” of theirsourcing and distribution operations. Extensionof this reach on a global scale has been one ofthe dominant trends in international businessand logistics over the past 30 years. The emer-gence of a new generation of high-value manu-factured products, particularly in the electronicsindustry, and a general reduction in the densityof consumer products (that is, lesser but betterknown brands) has contributed to an increasein logistics reach. Hewlett-Packard, for exam-ple, estimates that the various parts in a com-puter workstation in a New York office weremoved a total of 96,000 kilometers from theirpoints of production in places such asSingapore, Japan, France, and the WesternUnited States.

2.1.4. Increased Sourcing Alternatives

Producers in one area of the world are increas-ingly competing with producers in other areasfor the same international markets. This is trueacross the spectrum of primary and intermedi-ate products. Examples of sourcing alternativesare virtually endless. Wholesalers of fruit andjuice in Europe can source from Latin America,Southeast Asia, Australasia, EasternMediterranean, Southeast United States, and

Africa. Textile manufacturers can source inChina, Southeast Asia, the Indian subcontinent,Africa, Eastern Europe, and a wide variety ofother locations. The sourcing decision ultimatelyis determined by total delivered cost and quality,which in turn can be greatly dependent on thelogistics cost to acquire primary and intermediateproducts and deliver the finished products tomarket.

2.1.5. Impact of Globalization on Ports

While ports have always been important nodesin the logistics system, globalization of produc-tion has sharpened the need for ports to bevalue adders, not value subtractors, in the sup-ply chain, and has given ports a unique oppor-tunity to become value-adding entities. A port isthe interface between intercontinental transportand a place in the hinterland being consideredfor production, assembly, or final distribution.Port capability and efficiency can greatly influ-ence the decision for locating a plant or distri-bution center, and often determine whether alocal producer can compete globally or region-ally with other producers. The challenge is forports to relate to the needs of their customersand assist them in improving their competitivepositions by providing low-cost, efficient portservices.

2.2. Changing Technology Major technology changes are taking place in theocean shipping sector that affect requirements forport infrastructure and services. The most obvi-ous is the increasing containerization of globaltrade, a trend that is widely expected to continueinto the future. Containerization of seabornetrade is some 50 years old, and deep-sea con-tainerization some 40 years old. Yet it has dra-matically changed requirements for cargo han-dling and port facilities, raised the financialstakes of investing in these facilities, and radicallyaffected manpower and labor skills required tohandle cargo, creating serious labor redundancyissues and retraining needs in many ports. Inaddition, the ocean transport industry is employ-ing increasingly sophisticated information tech-nology (IT) to manage logistics; and ports, if they


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Container shipping got its start in April1956 when the tanker Ideal X owned bySeaLand (then known as Pan Atlantic

Steamship) made its initial voyage betweenNew York and Houston carrying 58 trailers ondeck. The trailers were detached from theirchassis and lifted aboard the ship with a dock-side gantry crane. This initial voyage was rap-idly followed by plans to convert six dry cargoships to full containerships fitted with onboardcranes. The first of these began operating inOctober 1957, and had capacity to carry 22635-foot containers, equivalent to about 480TEU. By 1963, the company was employingconverted tankers between the U.S. East andWest Coasts that were able to carry 476containers (about 830 TEU). Meanwhile in1960, Matson began containerized servicebetween the West Coast and Hawaii, utilizingcargo ships able to carry 436 24-foot containerson deck (about 520 TEU). There was also anunsuccessful attempt by Grace Line in 1960 tointroduce container service between theUnited States and Central and South America.International service using containerizedvessels began in 1966 with the introduction ofSeaLand’s weekly container service betweenthe U.S. East Coast and Europe.

First Purpose-Built Containerships

Ships built prior to 1969 were converted break-bulk ships or tankers. They generally hadcapacities in the 750–1,000 TEU range, a draftof about 9 meters, service speeds of 18–21knots, and were fitted with shipboard cranes tohandle containers. In 1969, the first ship specif-ically designed for containership service wasbuilt. This began a new generation of larger andfaster containerships with capacities in the1,000–1,500 TEU range and service speeds of20–23 knots, and some ships could achievespeeds up to 27 knots. These ships weredesigned to use quay cranes rather than ship-board cranes. Removing the cranes bothincreased the cargo handling productivity andallowed more containers to be stowed on deck.

Containerships Reach Panamax Dimensions

Ships built in the early 1970s had capacitiesin the 1,000–2,500 TEU range, a draft up to10 meters, and service speeds of 22–26knots. Built during this period were the firstpanamax-size containerships, with dimen-sions just enough to pass through the locksof the Panama Canal, which limits ships to

289.5 meters length and 32.3 meters beam.This generation included a containershipdesign that moved the technology goalposton service speed. In 1972–73, SeaLand tookdelivery of eight 33-knot, panamax-size con-tainerships capable of carrying 1,900 TEU. Tomake this speed, the ships had 120,000 bhp(brake horsepower) installed power. Theyturned out to be an economic failure whenfuel prices went skyward as a result of theOrganization of Petroleum ExportingCountries (OPEC) action in the mid 1970s. Todate, the speed of these SeaLand ships hasnot been exceeded. The late 1970s and early1980s saw further increase in containershipsize, with capacity moving into the1,500–3,000 TEU range, including a numberof panamax-designed ships. However, theabrupt rise in fuel cost brought about a slow-er generation of containerships during thisperiod. The design emphasis was on achiev-ing fuel efficiency, and service speed general-ly fell into the 20–24 knot range and draftsdeepened to 10.5 meters.

During the second half of the 1980s, thecapacity of panamax containerships grew tomore than 4,000 TEU through design improve-ments. Included among the panamax shipsbuilt during this period were 12 4,400 TEU“econoships” designed by U.S. lines to oper-ate on a round-the-world service. These wererelatively slow (19 knots) ships with a smallpower plant designed to maximize fuel effi-ciency. While these ships were too slow for theintended service, they initiated the concept ofa round-the-world service that Evergreen andother carriers followed later.

Postpanamax Ships Enter Service

Even more important during the second half ofthe 1990s was the introduction of the firstpostpanamax ships by American PresidentLines (APL), which ordered five ships at 273meters long, 39 meters wide, with 4,400 TEUcapacity for use in transpacific service. Thesewere the first containerships unable to transitthe Panama Canal and paved the way forincreasingly larger postpanamax ships over thenext decades. According to APL, the principaladvantage of the postpanamax ship is virtuallyunlimited container capacity. Other advantagesinclude the fact that a large panamax shipmust carry as much as 12,500 tons of waterballast, whereas an equivalent size, but wider,

Box 8: Evolution of Containerized Shipping

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are to remain competitive, must be key players infuture IT logistics networks.

2.2.1. Containerization of World Trade

More than 60 percent of the world generalcargo trade moved by sea is carried in contain-ers. On trades between highly industrializedcountries the percentage approaches more than90 percent (of the containerizable cargo). Thisis a remarkable market penetration for a tech-nology that dates only from the mid 1950s,when the first converted ship carrying 58 con-tainers made its initial voyage between NewYork and Houston. Since then there has been acontinual increase in both number and averagesize of containerships (see Box 8 and 9).

In the beginning of 2005, the world fleet ofcellular containerships consisted of 3,362 unitswith a capacity of 8.3 million TEU. Given the

then existing orderbook, the fleet will increase to4,252 units with a capacity of 10.7 million TEUin 2008. With a resulting rate of 10.7 percentmore than the period 1998–2008, the growth ishigher than the 9.9 percent as experienced overthe previous decade (see Box 10 and 11).

The growth was accompanied with a largeincrease in the size of ships. The share of shipsin excess of 5,000 TEU increased from 1 percentin 1996 to 30 percent in 2006. The share ofpostpanamax vessels (ships with a beam largerthan 32.2 meters) will have increased over thesame period from 15.4 percent to 47.1 percent.

In September 2005, the total fleet on orderreached 4.3 million TEU. Maersk Line tops thelist with a share in the total of 11 percent interms of TEU and 8 percent in terms of numberof vessels. The 10 largest operators together havea share of 48 percent and 31 percent respectively.


39

postpanamax ship requires little or no ballastand consumes less fuel. Also, for the sameTEU capacity, the postpanamax ship is 5 per-cent cheaper to build because length is themost expensive dimension.

In the 1990s, postpanamax containershipswere ordered by most of the major line haulcarriers, including Maersk, OOCL, Hanjin,Evergreen, Hyundai, COSCO, NYK, MOL, andNOL. The most notable orders were those ofMaersk and P&O, who took delivery of a string

of ships with a capacity of more than 6,000TEU, designed for a service speed of 25 knotsat maximum draft of 13.5 meters. In addition,through design changes, the capacity of pana-max-sized containerships increased to 4,800TEU. In the late 1990s, Hapag-Lloyd orderedseven 4,800-TEU containerships with a servicespeed of 25 knots and draft of 13.5 meters,yet designed within the size limits of thePanama Canal.

Source: Ecorys (2005).

Box 8: Evolution of Containerized Shipping (Continued )

Box 9: Development of Container Vessel Sizes as a Percentage of the Global Fleet

Source: Author.

0

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<2000 TEU

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2.2.2. Future Containership Designs

There are no technical reasons preventing con-tainerships from getting larger, so economic andstrategic considerations will be the source ofany barrier. There is a continuing increase insize of ships being ordered, but owners appearto be reluctant to take large steps. The 10,000TEU mark has not yet been clearly passed, as

was expected some years ago. The largest shipsare most effective on the Europe–Far East traderoute for which seven to nine ships are neededto operate a weekly schedule. Investment in aservice deploying 10,000-TEU ships wouldtherefore require a capacity addition of 80,000TEU; this is a large capacity addition. Theincrease in the size of the total market and theincrease in the size of the global operators show


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Box 10: Ships on Order as of September 2005

Maersk Line 1 463.961 91 8

Mediterranean Shipping Co. SA 2 293.824 39 3

P&O Nedlloyd Ltd. 3 179.483 29 2

CMA CGM SA 4 356.350 66 6

Evergreen Marine Croporation (Taiwan) Ltd. 5 36.616 6 1

APL Ltd. 6 111.106 30 3

China Shipping Container Lines Co. Ltd. 7 209.413 34 3

COSCO Container Lines Ltd. 8 223.285 27 2

Hanjin Shipping Co. Ltd. 9 74.365 11 1

NYK Line 10 137.300 23 2

World Fleet 4,348,664 1,161 100

Source: Containerisation International.

Company Rank On Order TEU On Order Ships % of Total

Box 11: Evolution of Cellular Fleet

Note: Figures are given at 1 January each year. Figures for 2006–2008 are derived from orderbook of 1st 2005, assuming that noships are deleted.

Source: BRS Alphaliner.

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that there are parties that have a market allow-ing them to deploy bigger ships effectively.

2.2.3. Impact on Port Operations

The contrast between container and earlierbreakbulk operations is startling. Most signifi-cantly, it has greatly reduced the ship’s time inport and at berth. Containerization has dramati-cally reduced personnel requirements for cargohandling, raised berth productivity, and increasedthe capital intensity of port operations. Prior tocontainerization, about 200 men, working simul-taneously in four gangs, were typically requiredto load and unload a large general cargo ship, aprocess that could take a week to 10 days inport. Containerships require only 50 to 60 mento load and unload cargo. Assuming a fourgantry crane operation, a containership requiressome 30 workers directly allocated to the vessel.This figure, moreover, depends on the type of ter-minal operation that is used, for example, morefor straddle carrier operation, less for rubber-tiregantry (RTG). A typical general cargo berth canhandle roughly 130,000 to 150,000 tons per yearof cargo throughput. A modern container berth,equipped with four ship-to-shore gantry cranes,will handle 400,000 container moves annually(typically 600,000 million TEU). Assuming three-quarters of the containers are full and the aver-age full load is 10 tons per TEU, the throughputof this berth is some 4 million tons annually. Thelargest postpanamax container crane with some57 meters outreach will cost about $8 million.Four to five of these cranes are needed to effi-ciently handle the largest postpanamax contain-erships (see Box 12). Overall, the infrastructureimprovements and superstructure (cranes, strad-dle carriers or RTGs, tractors, and trailers, andso forth) needed for a modern two-berth contain-er terminal will easily cost $150 million. In con-trast, a typical 3–6 ton quay crane used for gen-eral cargo handling in the 1950s would havecost, at today’s prices, about $1 million.

2.2.4. Need for Container Port ProductivityImprovements

A study concludes that “the economics of con-tainership operation are critically dependent on


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Box 12: Future Containerships RequireIncreasingly Larger Cranes

Panamax—A typical panamax container-ship is about 290 meters long and has13 meters draft. The ship is limited in

width to 32.2 meters to allow passagethrough the Panama Canal locks. This widthlimitation constrains the number of rows to 13containers. Up to 4,800 TEU can be carriedin these vessels. The outreach of the cranemust be capable of spanning 13 rows ofcontainers.

Postpanamax—These ships are too wide totransit the Panama Canal. The first postpana-max ships delivered in the late 1980s carried4,400 TEU. More recent ships entering servicefor Maersk and P&O were designed to carry6,000–7,000 TEU. The vessels are almost 43meters wide and are capable of handling 16 to17 rows of containers on deck. Draft is 13.5 to14 meters. The container crane must be capa-ble of spanning 17 rows of containers. Sincethe containers are stacked up to six high ondeck, and an increasing percentage of con-tainers are so-called High Cubes (9 feet, 6inches high), the air draught of containergantry cranes had to increase considerably aswell.

Recent designs are able to carry more than9,000 TEU, and it is widely expected thatorders for 10,000-TEU vessels will be placedin the near future. The width of these vesselswill be 44–46 meters and the draft will rangefrom 14–15 meters. They will accommodate18 to maybe 23 rows of containers on deck.The crane required to handle the containerson this vessel will be a massive structurecapable of spanning 18 to 23 rows and higherstacks.

Future Designs

Gustav de Monie launched his concept of themega containerships. The concept design is acontainership able to handle 15,000 TEU. Themassive vessels would be between 380–450meters long, 70–78 meters wide, and have adraft of about 14 meters. Nico Wijnolstlaunched his design of the Malacca-Maxdesign: 18,000 TEU, 400 meters long, 60meters wide, and a draft of 21 meters (maxi-mum draft to pass the Strait of Malacca). Tohandle the containers, it will likely be neces-sary to use a different type of container craneand special berthing basin for the vessel.

Source: Author.

port productivity . . . (and) continued generalworldwide improvements in port productivitywill so fundamentally alter the container ship-ping cost environment that, in the absence ofany technological constraint, ship size optimumsfor all routes will continue to increase as theyhave done in the past” (see Box 13 and 14). Atypical container terminal today has a staticcapacity of 40–200 TEU per hectare (dependingon the yard stacking system in use), crane pro-ductivity of 25–30 gross moves per gantry-cranehour, average container dwell time of five to sixdays, and truck turnaround time of one hour.But future terminal requirements will be consid-erably more demanding. To accommodate themega containerships coming into service, newterminals will require a static capacity densityof 400–800 TEU per hectare, crane productivityof 200 moves per ship-hour at berth, maximumthree days average dwell time, and truck turn-around of less than 30 minutes. Water depth atthe future terminal will need to be at least 15 to16 meters and increasingly larger cranes will berequired to accommodate ships with a deckstack of up to 23 rows across.

2.2.5. Growing Role of InformationTechnology

Equally important in the future is the need forports to expand the use of IT to support portuser requirements, particularly relating to con-tainerized traffic, although not exclusively. IT isincreasingly employed throughout the oceantransport sector and has revolutionized the wayintermodal traffic is handled. IT systems elec-tronically link port administration, terminaloperators, truckers, customs, freight forwarders,carriers, ship agents, and other members of theport community (see Box 15). The technologyprovides port users with real time data on thestatus of cargo, paperwork, and availability ofport facilities, and enables ships and terminals tobe part of an integrated office infrastructure. ITreduces time for delivering cargo; provides moreaccurate transfer and recording of information;reduces manpower for port operation paper-work; offers advance information on ship, barge,truck, wagon, container, and cargo movements;

and improves planning and coordination ofberths, handling equipment, and storage facilities(see Box 16). Ports unable or unwilling to keeppace with information technology will be leftbehind in the competitive ocean transport market.

2.2.6. Port Requirements for Large CruiseShips

The cruise industry is producing requirementsfor more ports and enhanced facilities in existingports to accommodate the growing number andsize of cruise ships. During the decade before theattack of September 11, 2001, the industry hadtremendous growth. Particularly significant wasthe growth in number of mega cruise ships, thatis those more than 70,000 and up to 150,000gross tons that carry 2,000–3,000 passengers ormore. Since 2004, the market has recovered,new ships are being ordered and the share ofmega cruise ships is increasing again.

With the growth in numbers of ships, the cruiselines need more ports to vary their itinerary. Inselecting a cruise port, cruise ship operatorslook at:

1) Location of the port and cruising distancerelative to other ports on a particularitinerary.

2) “Marquee” value and activities availablefor passengers.

3) Visitor safety and comfort.

4) Existence of head taxes.

5) Physical capabilities of the port to acceptcruise ships (see Box 17).

Ports wanting to be cruise destinations mustdevelop a strategy jointly with tourism officialsto maintain tourism product quality and maxi-mize visitor spending. For ports able to satisfycruise operator needs, the operator may be will-ing to establish long-term agreements to bring itsships to the port on a regular basis for periods ofup to 25 years. Such an agreement could be thebasis for arranging financing by a developer toacquire the physical facilities and services in theport needed to accommodate cruise ships. The


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Box 13: Impact on Port Productivity of Unit Voyage Cost of Large Containerships

Astudy of economies of scale in large containerships gives an indication of the unit cost benefitsthat can be obtained by the use of increasingly larger containerships—and the benefits that canbe achieved by increased cargo handling productivity that reduces port time. The study prepared

by Cullinane and Khannaand published in the Journalof Transport Economics andPolicy models the impact ofusing containerships withnominal capacity to 8,000TEU, assuming currentcargo handling rates andrates that would be 100 per-cent higher.

Declining Unit Cost withLarger Ships

Box Figure 13.1 is from theCullinane and Khanna studyand shows the relationshipbetween voyage cost perTEU, ship capacity, androute distance on threemajor line haul routes. Unitcost declines as shipcapacity increases. In deriv-ing these unit costs, theauthors assume that porttime for various size shipsreflects current cargo han-dling productivity, which inturn is a function of thenumber of cranes assignedto a ship and the handlingrate per crane. Based on aquestionnaire by theauthors, current practice isto typically employ one totwo cranes on ships under1,000 TEU capacity, three tofour cranes on ships3,000–4,000 TEU capacity,and five cranes on ships of6,000 TEU capacity. Craneproductivity under currentpractices is assumed toaverage about 22 movesper hour. On this basis, fivecranes working a 6,000 TEUcontainership can load anddischarge 2,000 20-footboxes and 2,000 40-footboxes at a rate of 110moves per hour, and theship can be fully dischargedand loaded in 72 hours.

0

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Capacity in TEU

voya

ge

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s p

er T

EU

in $

(Box continues on the following page.)

Total voyage cost per TEU as a Function of Ship Capacity and Route Distance

(assuming current cargo handling productivity)

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

0

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

121001

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072052

41119

281951

242812

31178

471841

722102

Cost per TEU at CurrentPort Productivity Cost per TEU Assuming

Port Productivity Doubles

Voy

age

Cos

t per

TE

U in

$

Impact of Increasing Port Productivity on Voyage Cost Per TEU

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

key issue here remains what guarantees a porthas if the cruise operator stops port calls beforethe end of the agreed-on period.

2.2.7. Other Technology Affecting PortServices

Introducing podded drive propulsion systemscan potentially reduce requirements for harbortug services in port. These high powerazimuthing systems significantly improve ship

maneuverability, possibly eliminating the needfor tug assist services for berthing. While pod-ded drive to date has largely been limited tocruise ship and ferry propulsion, there are indi-cations that use of the technology may spread toother types of ships, particularly where maneu-verability is especially important (see Box 18).

Another new technology, self-unloading bulkcarriers, is popular on the U.S. Great Lakes, andtheir use is spreading to other trades. These bulkcarriers have the capability to discharge withoutthe use of shore-based equipment, reducing theneed for special facilities to unload bulk cargo.

2.3. Shifting Bargaining Power Bargaining power results from the relativestrength of the parties involved in a negotiation.The stronger the bargaining power, the morelikely the party will get the greater gain in atransaction. In the port sector, the major partiesto a negotiation are port users and port serviceproviders. Current events are reshaping the rela-tive strength of each of these parties; on the onehand, consolidation occurring among oceancarriers is producing increasingly stronger, moreformidable customers that port authorities, ter-minal operators, and other port serviceproviders must contend with in pricing andservice negotiations. On the other hand, a rela-tively small number of companies have beenacquiring terminals in ports in all areas of theworld, creating terminal operators with globalcoverage that have the financial depth andnegotiating strength to withstand demands ofterminal users. Adding to this situation is thegrowing role of global logistics service providerswho have considerable strength in dealing withboth shipping companies and terminal opera-tors. Finally, there is the unmistakable trend ofcarriers wanting to own and manage their ownport and inland terminals. These changes arecreating a shifting playing field for negotiationsamong port users and port service providers.

2.3.1. Consolidation among Ocean Carriers

Over the past decade there has been substan-tial consolidation in the ocean shipping sector


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Box 13: Impact on Port Productivity of UnitVoyage Cost of Large Containerships(Contined)Increasing Port Productivity

The authors then examine the sensitivity ofreducing port time through increased cargohandling rates. They show that a cargo han-dling rate double that of the current rate willsignificantly reduce the unit cost, as the shipwill be able to carry more containers in a giventime period. For example, doubling the cargohandling rate will reduce the unit cost of a6,000 TEU ship from $114 to $91 per TEU ona transatlantic voyage. The unit cost of a simi-lar ship on a transpacific voyage would dropfrom $182 to $159 per TEU, and on aEurope–Far East voyage from $242 to $218.

Box 14: Ceres Paragon Terminal inAmsterdam, the Netherlands

The Ceres Paragon Terminal inAmsterdam is the first container terminalin the world capable of loading and

unloading containers from both sides of theship, and has a capacity to handle some600,000 containers annually. In 2002, the portbecame operational and remained quiet (106million investment).

It proved difficult to start a new terminallocated behind a lock, lacking tested multi-modal hinterland connections with rail andinland waterway. In 2005, things appeared tochange; NYK bought a 50 percent share of theterminal and was planning to have two stringsof the Grand Alliance Europe–Far East traderoute calling at the terminal.

Source: Author.

(see Box 19). While this has been occurring inall sectors of the industry, it is most apparentin container shipping where it is estimated thatin 2005, 25 carriers out of more than 400 nowcontrol more than 80 percent of container fleetcapacity. This sector has witnessed a signifi-cant number of major mergers and acquisi-tions over the past 10 years, a trend thatappears to have room to run.

The consolidation movement in the containershipping sector began with slot sharingarrangements, where carriers purchased slots inother carriers’ ships to provide service flexibili-ty and more extensive geographical coverage.This expanded into multitrade alliances amongcarriers that focused on achieving efficienciesand better service by sharing vessels, utilizingcommon terminals, joint feeder service, and

joint purchase of containers. The current activi-ty in mergers and acquisitions is a third step inthis pattern of cooperation. It simply takes thealliance concept to its ultimate stage—full own-ership and control under one corporateumbrella.

The three largest container carriers illustrate thepatterns of growth in the container shippingsector. Maersk Line, the largest player in con-tainer shipping with more than 500 ships and1.5 million TEU capacity at mid 2005 with thecompletion of the Royal P&O Nedlloyd acquisi-tion, illustrates a progression from global allianceto single corporate ownership. Until 1990, bothMaersk and SeaLand operated as separate enti-ties, each a major player in its own right. In1991, they formed a global alliance to improveservice and generate operating efficiencies.


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Box 15: Port User Information Network

Source: Author.

Information

Control

Planning

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

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

• Carrier inquiry• Booking confirmation• Bill of lading

• 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• 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

Administration

Scheduling

Safety

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

PORT USERINFORMATION

NETWORK

Continuing the progression, in mid 1999Maersk purchased the ocean transport assets ofSeaLand for $800 million.

The combined Maersk Line company is almostthan twice the size of its nearest competitor,Mediterranean Shipping Company (MSC), aGeneva-based company that traces its origins to1970, and more than three times the size ofEvergreen, a Taiwan-based company that tracesits origins to 1968. MSC has more than 290ships with a capacity of close to 900,000 TEU,and showed a spectacular growth throughacquisition of second-hand, new, and charteredtonnage rather than through acquisition ormerger. Evergreen has more than 190 ships

with a total capacity of 5,300,000 TEU, andacquired most of its capacity through internalexpansion (although the company did acquireLloyd Triestino).

A report by Drewry Shipping Consultants Ltd.(2006) includes a comprehensive analysis of thecapacities, roles, and market shares of the globalterminal operators. A group of more than 20companies is analyzed, including global steve-dores, global carriers primarily involved in linershipping operations, and global hybrids (busi-ness units under global carriers). In 2005, thesecompanies together controlled 178 million TEUor 44.5 percent of the world’s estimated con-tainer port throughput of approximately 400


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The Port of Felixstowe handled containerthroughput of more than 2.5 million TEUin 2003 and has installed a sophisticated

information technology system to electronicallylink members of the port community. The sys-tem, managed by Maritime Cargo Processing,covers more than 70 percent of containerspassing through British ports, supporting 630corporate organizations with more than 2,500users in more than 18 geographical locationswithin the United Kingdom. It is an interactiveMicrosoft-based system and over the pastyear handled 32.5 million transactions and22.5 million electronic data interchange (EDI)messages.

The system electronically provides:

• Manifests and associated amendments.

• Customs release notes.

• Bonded removal documents.

• Ship’s out-turn and discharge reports andamendments.

• Local transshipment documentation.

• Lines’ commercial release.

• Acceptance of rent and storage charges.

• Delivery instructions to transport operators(road and rail).

• Export delivery advice.

• Export arrivals.

• Export loadlist.

• Loading reports.

• Export customs declarations.

• Customs examination and sealingrequirements.

• Port health, customs preventive and othergovernment departments’ activities.

• Requests to out-turn in sheds and warehouses.

• Shed and warehouse out-turn reports andamendments.

• Customs declarations for exports.

• Ship planning notifications and amendments.

• Hazardous goods reporting.

Port operator benefits include:

• Information for preplanning physical operations.

• Single gateway via FCPS to port users’ systems.

• Automatic writing off of manifest and cus-toms entries.

• Paperless releasing of import cargo.

• Paperless notification of customs status.

• Paperless transshipment notification andapproval.

• Paperless export load lists.

• Enhanced facilities for late runners.

• EDI Dangerous Goods notifications.

• EDI status messages to customers.

• Local messaging facility.

• Full audit facilities.

According to the system operator, plans callfor expanding FCPS to a global Internet-basedreal time system within five years.

Source: Author.

Box 16: Felixstowe Cargo Processing System (FCPS)

million TEU (see Box 20 and 21). The remainderis practically equally divided over state-ownedand private operators.

The league table is led by Hutchison PortHoldings (HPH) controlling 33.2 million TEU,8.3 percent of the world’s port throughputcapacity. In 2005, the five largest operators,HPH, PSA, APM Terminals, P&O Ports andDP World, controlled 112.7 million TEU, that

is, 28 percent of the world’s port throughput.When considering the top 10 operators, thesefigures become 168 million TEU and 36percent respectively. The top 10 globalterminal operators are discussed in more detailbelow.

Hutchison Port Holdings launched its globalexpansion in 1991, using the experience andcapabilities it developed operating container


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The handling of large cruise ships withlarge numbers of passengers in a veryshort turnaround time is a huge logistics

problem. The newer cruise ships entering themarket today are vessels with capacities of2,000–3,500 passengers. Cruise ships spendan average of 7–9 hours in port, during whichpassengers debark and embark and variousservices are provided to the vessel. The com-bination of large ships and demand for quickturnaround places significant strain on portfacilities and services. According to Gee &Jenson, a designer of cruise facilities, toaccept modern cruise ships a port must beable to provide:

• A minimum 500-foot entrance channel width;34-foot navigational depth; 32-foot berth depth;500-foot service apron length; 50-foot apronwidth; 50–100-ton design load range for bol-lards, cleats, and dolphins; and 1,300–1,500-foot minimum turning basin diameter.

• Protected passageway between ship andterminal capable of embarking all passen-gers within 2–3 hours, disembarking all pas-sengers within 1–2 hours, and ability to stayconnected to the cruise ship over the fulltidal range.

• Staging area for three to five 40-foot con-tainers; adequate bus and taxi queues tosupport passenger embarkation anddebarkation; facilities to collect and disposeof waste; potable water; and other servicesto support the ship in port.

Cruise ships are a $300–$500 million capitalinvestment. Their successful operation is highlydependent on maintaining a tight schedule withno disruptions. A standard in the industry isthat cruise ships can never be denied or haveaccess delayed to and from a berth. This is avery real challenge that ports wanting to becruise ship destinations must be able to meet.

Source: Author.

Box 17: Physical Requirements to Accept Cruise Ships

Podded electric drive technology uses asealed “pod” encapsulating an electricmotor directly coupled to a propeller.

Electricity from the ship’s power plant to thefully submerged watertight pod is provided viacable. The pod is steerable and provides sideas well as fore and aft thrust. Use of the podeliminates the requirement for a rudder, shaft,and stern thruster and frees up space insidethe ship that would be otherwise occupied bya conventional propulsion engine.

Currently, the technology is largely limitedto cruise ship and large ferry propulsion.However, a survey of shipowners and ship-builders indicated that podded electric drivehas potential use in a variety of ship types.

Generally, the results indicate that the tech-nology has greatest possibility on ships wheremaneuverability is particularly important, spaceand weight savings have substantial value, orcurrent propulsion systems interfere with effi-cient layout.

Because the ship is more maneuverable, tugassist in harbors may not be necessary, whichcould affect future requirements for harbor tugservices. In addition, the sideways thrust ofpodded drive could affect the underwaterstructure of piers during vessel docking andundocking, and accepting vessels with thispropulsion device may require some beefing upof the berth.

Source: Author.

Box 18: Podded Electric Drive Impact on Requirements for Ship Assist in Port

terminals in Hong Kong. Early in 2004, itoperated container terminals in more than 30ports, with a reported throughput of 33.2million TEU in 2005 (see Box 22).

PSA Corporation embarked on a similarmajor effort to enlarge its global presence incontainer terminal operations in the mid1990s, drawing on its experience in Singapore.The company reported a throughput of28.7 million TEU in 2003 and 32.4 millionTEU in 2005, of which more than 10 millionwere realized at its terminal operationsoutside Singapore. These terminals were alsothe main driver for PSA’s growth, as its hometerminal continues to feel the strong competi-tive pressure from the cheaper Malaysianports.

APM Terminals is still strongly linked toMaersk Line, especially in the provision of

transshipment hubs such as Tanjung Pelepas,Algeciras, and Salalah, which accounted for35 percent of its total throughput in 2003.The company, however, has shown acommitment toward serving the common usermarket, and Maersk Line’s share of thecompany’s total volume has declined from75 percent in 2002 to less than 70 percentin 2004. APM Terminals has a strong presenceon all U.S. coasts, a heritage from theSeaLand acquisition. In 2005, its throughputwas 24.1 million TEU, a share of 6.0 ofglobal throughput. Projections show astrong growth of nearly 12 percent per annumon average in capacity for the rest of thedecade.

P&O Ports’ throughput amounted to 13.1 millionTEU in 2005, pushing the United Kingdom-basedcompany’s global share from to 3.3 percent. Thisgrowth was realized by a combination of new


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Box 19: Top 10 Container Carriers as of June 2006

Source: Author.

Rank Carrier Current TEU % of Global Current Operating Vessels UnderCapacity Fleet Vessels Construction/Contract

1 Maersk Line 1,566,352 14.9 519 1022 Mediterranean Shipping Co SA 892,548 8.5 297 243 Evergreen Marine Corp (Taiwan) Ltd 530,172 5.0 193 244 CMA CGM SA 486,453 4.6 189 565 Hapag-Lloyd Container Linie GmbH 437,954 4.2 136 106 Cosco Container Lines Ltd 369,531 3.5 128 207 China Shipping Container Lines Co Ltd 328,245 3.1 95 198 APL Ltd 325,919 3.1 104 279 NYK Line 315,865 3.0 117 25

10 Hanjin Shipping Co Ltd 313,698 3.0 78 17Other 4,980,735 47.2Total Global Fleet 10,547,472 8,024 1,108

Share of Global Fleet(by TEU capacity)

14.9%

8.5%

5.0%

4.6%

4.2%3.5%

3.1%3.1%3.0%

3.0%

47.2%

Maersk Line

Mediterranean Shipping Co SA

Evergreen Marine Corp (Taiwan) Ltd

CMA CGM SA

Hapag-Lloyd Container Linie GmbH

Cosco Container Lines Ltd

China Shipping Container Lines Co Ltd

APL Ltd

NYK Line

Hanjin Shipping Co Ltd

Other


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Box 20: Worldwide Container Traffic

1990 879 16 18.2% 287

1995 1,451 10.5% 323 22.3% 46 9.9%

2000 2,356 10.2% 622 26.4% 683 8.2%

2003 317 10.4% 865 27.3% 909 10.0%

Regional Share of Transshipment Container Traffic

North America 6.5 7.3 7.5 7.5

West Europe 27.2 28.9

North Europe 21.3 24.7 22.7 23.8

South Europe 25.5 28.5 34.5 36.5

Far East 19.0 24.2 25.1 25.6

South East Asia 40.3 44.8 47.6 47.0

Middle East 27.3 33.0 41.4 43.8

Latin America 22.7 26.2

Caribbean/Central America 6.9 16.0 32.9 40.1

South America 0.0 2.4 9.9 9.9

Oceania 1.9 2.4 2.9 3.7

South Asia 23.1 21.9 21.6 20.7

Africa 8.4 26.4 22.7 21.9

Eastern Europe 0.0 0.0 0.0 0.0

World 18.5 22.3 26.4 27.3

Source: Various Drewry Shipping Consultants Reports.

Source: Author.

1990 (%) 1995 (%) 2000 (%) 2003 (%)

World Port Throughput Transshipment Container Traffic

Mil TEU Annual Growth Mil TEU Share (%) Mil TEU Growth (%)

Box 21: Global Terminal Operators 2005 Throughput League Table

1 Hutchison Port Holdings (HPH) 33.2 8.3

2 PSA - Singapore Port Authority 32.4 8.1

3 APM Terminals 24.1 6.0

4 P&O Ports 21.9 3.3

5 DP World 13.3 2.5

6 Evergreen 11.5 1.7

7 Eurogate 11.4 1.6

8 Cosco 8.1 1.5

9 SSA Marine 6.7 1.4

10 HHLA 5.7 1.3

Source: Drewry Shipping Consultants, Annual Review of Global Terminal Operators, 2006

Ranking Operator Million TEU (%) Share

developments that became operational andautonomous growth at existing facilities.

Dubai Ports World (DPW) is a relatively newplayer in the international global terminal race,but has quite an aggressive growth and acquisitionstrategy. In 2005, its combined throughput was9.9 million TEU compared to 6.5 million TEU for2003. Much of this throughput was realized at itshome base terminals in Jebel Ali and Port Rashid.From its successes at its home base, DPA (DubaiPort Authority), through its international vehicleDPW (formerly Dubai Ports International), startedits expansion in and around the Middle East withterminals in Jeddah and Djibouti. It then hadsome successes in India (Visakhapatnam, Cochin,and Gangavaram), and in December 2004 tookover CSX World Terminals (CSXWT), causing itstotal capacity to rise to 14.6 million TEU. DPWsubsequently purchased P&O Ports in 2006 in abidding war with PSA. The combined volumes ofDPW and P&O Ports puts DPA/DPW in hot pur-suit of the top three global terminal operators.

Evergreen’s terminal throughput was up 6.6 mil-lion TEU in 2005. The Taiwanese company’s

strategy originally aimed at operating terminals insupport of its liner operations, but increasingly thecompany is looking to attract third-party business.

Eurogate, originating from Bremen, has the nar-rowest geographic spread of the top 10 contain-er terminal operators because it is only active inEurope, mainly in Germany and Italy. Itsthroughput in 2005 was 6.3 million TEU withits global share decreasing slightly as interna-tional operators expand their portfolios. The com-pany is looking for growth from intermodal trans-port and feeder traffic, the latter mainly throughincreased transshipment at its German hub portsand investment in terminal development inRussia.

China Ocean Shipping Company (COSCO)operates its terminals through COSCO Pacificand COSCO Container Lines Company, bothwholly owned subsidiaries of COSCO. Thecompany’s shown enormous growth between2002 and 2004. In 2005, there were even higherincreases, up to 5.9 million TEU, mainly causedby the strong growth in the Chinese market,and to a lesser extent also by the COSCO’s


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Box 22: Key Milestones of Hutchison Port Holdings in the 1990s

Source: Hutchison Port Holdings Web site.

1991

0

HP

H C

om

bin

ed T

hro

ug

hp

ut

(mill

ion

TE

U)

4

1991acquiresport of

Felixstowe

1993JVs for

containerterminals inYantian andShanghai

1995JV for

Freeportcontainer

port

1997JV to develop

containerterminal in

Jakarta

1999Acquires 35%

interest inECT

1998acquires

Thamesportcontainerportand Harwich

int’l port1996

concessionto operate

terminals inCristobal and

Balboa1994

acquiresmidstreamholdings

in HK

1992JVs for 2 river

containerterminal in

China

8

12

16

1992 1993 1994 1995 1996 1997 1998 1999

willingness to enter into partnerships with othermajor global operators.

SSA Marine, based in Seattle, USA, traditionallyhas a strong presence on the U.S. East and WestCoasts. It also has established a number ofsuccessful overseas operations, mainly inCentral and South America, and more recentlysought to invest in South East Asia. Its through-put in 2005 was 5.4 million TEU.

Mediterranean Shipping Company (MSC) has alsosignificantly increased its presence in the terminaloperation market with a strategy mainly focusedon securing capacity for the carrier in home mar-kets and transshipment facilities to support thecarrier’s network. MSC’s terminal holdings areusually on a joint venture basis where the compa-ny is often partnering with local or regional opera-tors and taking an equal or minority ownership.

With global container volumes still on the rise,partly due to the boost in Chinese volumes, vir-tually all global port operators show impressivegrowth rates. Moreover, many of them realized agreat deal of their expansion by developing newterminals in China, and there is more capacitybeing planned to become available in the comingyears. Global terminal operators that spawnedfrom stevedores (as opposed to those owned bymajor container carriers) saw throughput at theirhomeports becoming increasingly less importantas their overseas activities grew.

The top 25 of global terminal operatorsremains relatively volatile, with more consoli-dation through merger and acquisition yet tobe expected. The larger players are in a race todevelop new capacity and buy existing capaci-ty, where the smaller players are prey. APMTerminals is expected to close in on PSA duringthe coming years. DPA/DPW, with its recentacquisition of CSXWT and P&O Ports, is nowalso knocking at the entrance of the top threewith a very aggressive expansion strategy.COSCO showed quite an impressive growth,largely due to the Chinese market. Outside thetop 10, MSC has steamed up the ranks movingit to 14th place in 2005. This growth has mainlybeen achieved by forming partnerships at its

key Northern European ports to ensure long-term access to scarce capacity.

2.3.2. Emergence of Global LogisticsService Providers

Contributing to the realignment in bargainingpower is the emergence of companies that offerfull service logistics solutions to major shippers.These logistics service providers have substan-tial strength in dealing with shipping compa-nies, terminal operators, and other port servicesuppliers, adding to the growing complexity inachieving a balance in port service negotiations.They make decisions that affect all partiesinvolved in the supply chain, including portservice providers. Logistics service providersmanage the combined logistics requirements ofthe many large shippers they represent, givingthem considerable strength in dealing with ship-ping companies, terminal operators, and othersin the logistics channel. In response to marketdemand, some substantial players have targetedthis activity, including Federal Express, whichrecently announced that it would enter theglobal logistics market for ocean freight.

These developments are changing the way portservices are bought and sold. Alliances and con-solidation among carriers result in the carriershaving more business volume on the negotiatingtable, placing ports and terminal operators in anincreasingly awkward position when it comes tonegotiating strength. In some situations, thestakes are so high that the port or terminal canhardly afford to lose the carrier’s business. Thiscan often result in the port having to make con-cessions to retain the traffic. For example, theGrand Alliance notified the Port of Rotterdamthat for operational reasons it was temporarilyswitching one of its five Europe–Asia services tothe rival Port of Antwerp. This service represent-ed 125,000 TEU per year to the port. It mayonly be coincidental, but a month after theannouncement, the Rotterdam MunicipalCouncil decided not to increase harbor dues forthe year 2000, citing growing competitionbetween ports in general and tariff developmentsin directly competing ports in particular.


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At the same time, the emergence of global termi-nal operators can result in pricing schemes thatmay not always favor the small volume or region-al carrier. These global terminal operators mayoffer incentives to high volume customers andthere is at least the possibility that the terminaloperator could cross-subsidize international oper-ations as necessary to compete for a major carri-er’s business. Another possibility is that a trulyglobal terminal operator could offer a packagedeal to a carrier that would provide a lower priceor give concessions if the carrier uses only its ter-minals wherever available in the world.

2.4. Changing Distribution Patterns As containerization has spread in ocean ship-ping, distribution patterns have increasinglyevolved into a hub and spoke network.Facilities for devanning, clearing, staging, andstoring containers are increasingly shiftinginland, thereby becoming more decentralized.These developments are creating a hierarchy ofports and changing traditional port operations.

Ocean carriers have been increasingly usingregional hubs for transshipment of containers.This is a worldwide trend that is accelerating aslarger containerships come into service and theadvantages of hub and spoke operationsbecome more apparent. The hub and spokeconcept is intended to maximize use of largecontainerships while providing market coverageto a maximum number of ports. This is accom-plished via a network of regional and subre-gional hubs with onward service to outlyinglocations. Large line haul ships provide servicebetween regional hubs. Progressively smallerships are used to pick up and distribute contain-ers within the region (see Box 23).

2.4.1. Becoming a Hub

The most important attribute carriers look foris the strategic location of the hub relative tothe primary origins and final destinations ofcontainer traffic. Beyond location, other attrib-utes include the ability to safely accept largeships, extent of terminal facilities, efficiency ofcontainer handling operations, availability of

frequent feeder services with an appropriategeographical coverage, and attractive cargohandling charges. Most carriers believe 15meters depth is adequate to accept the largestcontainerships in service in the foreseeablefuture, although some carriers have recentlyspecified 16 meters depth for entrance channels.Containership draft has not been increasing inproportion to the growth of TEU capacity, withmost of the capacity growth in postpanamaxships the result of increasing the beam of theship. A depth of 15 meters should accommo-date all but the largest containerships now inservice. It is nevertheless possible that potentialhub ports will need depths in excess of 16meters in the likely event that container vesselsin excess of 10,000 TEU are ordered in future.

A transshipment hub should have terminal facil-ities that enable quick ship turnarounds. Thisincludes adequate numbers of cranes, sufficientcontainer handling and storage areas, and afirst-rate computer system to run the entire ter-minal. As discussed in an earlier section, con-tainer cranes capable of spanning at least 18rows and 6 tiers of containers on deck will berequired to handle the 8,000+ TEU ships nowin service. There is already a demand from car-riers to install ship-to-shore container craneswith a capability of handling 22, and even 23,rows of containers across. Capability should beprovided to berth one or more feeder ships infront of or behind the mother ship along thesame quay—requiring quay lengths of typically1,000 meters for a terminal designed to receivetwo main line vessels and their feeder vessels,and container yard depth behind the quayshould be not less than 400–500 meters, andpreferably deeper. The latter factor muchdepends on the container dwell time, the select-ed stacking and retrieval system, and the stack-ing rules, among many others.

Container handling productivity is of obviousimportance to a carrier in selecting the trans-shipment hub. Carriers measure productivity interms of how long it takes to turn around theship, that is, enter port, discharge containers,load containers, and leave the port. Much of


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Global distribution of containers isincreasingly accomplished via a networkof regional and local hubs with onward

service to outlying locations. Using a transship-ment hub, a carrier can service marginal mar-kets that do not justify a direct call with largeline haul ships, interchange containers betweenliner strings at strategic crossing points, andrealize economies from improved port assetutilization. All of these advantages ultimatelyresult in greater profit to the ocean carrier.

Hierarchy of Ports to Maximize SystemEfficiency

The hub and spoke network involves a hierar-chy of ports, some of which serve as regionalor local hubs connected by feeder loops tooutlying ports. Large line haul ships, often with4,000+ TEU capacity, provide service betweenregional hubs and progressively smaller ships(or barges) are used to pick up and distributecontainers within the region.

Very Large Containerships Drive Need forRegional Hubs

Line haul ships of 6,000+ TEU are now com-mon, 8,000+ TEU ships have already beenintroduced on major routes, 9,000+ TEU shipsare being built, and 10,000+ TEU ships areunder consideration. The bigger the ship, themore time required in port for loading and dis-charge. Assuming a handling rate of 165 TEUper hour, each capacity increment of 1,000TEU requires an additional half day in port toload and discharge containers on the roundtrip voyage. To offset this additional port time,the operator has the choice of increasing theservice speed of the ship, adding another shipto the service string, offering less frequentservice, or reducing the number of port calls.

The large containerships are now beingdesigned with service speeds of 24–26 knots;higher speeds for the largest size ships areeconomically impractical. The capital cost ofan additional containership is $80–120 million,which makes adding a ship to the string anexpensive proposition. Customers now expectsame day of the week sailing, ruling outreduced service frequency. This leaves mini-mizing the number of port calls as the viableoption, which then creates the need for region-al hubs and feeder loops. Essentially, the oper-ator offsets the additional time to load andunload containers by reducing the number ofports the ship enters and leaves.

Future Role of Multiporting

Hub and spoke operations have a clear advan-tage if they include hub ports located close tothe main navigation course of main liners, ifthese ports can accommodate main liners effec-tively, and if the ports that have to be feedereddo not have these advantages. If they have ahinterland with captive cargoes, this will furtherstrengthen their position. Examples of hub portswith clear location advantages are Kingston andthe Panamanian ports in the Caribbean,Marsaxlokk and Gioia Tauro in theMediterranean, Salalah and Colombo in the Gulfarea, and Tanjung Pelepas in Southeast Asia. Ifthe hub ports have, on top of the locationadvantage, a strong home base of captivecargo, their position can be enormous.Examples are, for instance, the ports of HongKong, Singapore, and Rotterdam. A stronghome base to some extent may even compen-sate for location disadvantages. See for instancethe ports of the United Arab Emirates, such asJebel Ali, where ships on the Europe–Far Eastroute have to make a deviation of some 1,300nautical miles against 163 nautical miles forSalalah, 34 for Colombo, and 7 for Aden.

In practice, the distinction between hub andspoke and multiporting operations is a gradualone, where some main lines make more callsthan the other, so that they apply more multi-porting and have to feeder less cargo than theother. As main lines cannot call at all ports in aregion, they practically always have to transshipcargoes to and from other ports. As to futuredevelopments, one can state in general that:

1. The further increase in ship size, say to12,000 TEU and larger, will lead to moretransshipment.

2. The increase in container trade will lead tomore routes or strings per trade route andthereby to more direct port-to-port connec-tions and thereby to less transshipment.

3. The increase in trade per port will lead toport development, which will increase theability to accommodate larger ships and thepossibility for calls by main line ships, andlead to less transshipment.

4. The increase in trade per maritime region willmake the region more attractive for end-to-end routes, increase the number calls bymain lines, and lead to less transshipment.Examples of such regions are theMediterranean and the Gulf areas,

Box 23: Hub and Spoke Container Distribution

this is dependent on the availability of adequatefacilities and suitable systems and the absenceof administrative barriers. However, the capa-bility to provide trained personnel on a 7-day-week, 24-hour-per-day basis to operate cranes,position containers, and handle documentationhas a major influence over the productivity ofthe terminal. And ultimately, productivity deter-mines the cost of using the hub.

It is essential to have adequate feeder services toand from the transshipment hub. This in turnrequires a flow of traffic that will make itattractive for common carriers to serve the hub.In effect, there is a chicken and egg situation.For the hub to be attractive to line haul carri-ers, there must be an established network ofcommon feeder service that can be used to pickup and distribute containers. For feeder servicecompanies to call regularly at the hub, theremust be at least one, and preferably several,major line haul carriers whose containers needto be picked up and distributed.

2.4.2. Benefits of Hub Status

The most obvious benefit is the income generat-ed from operations of a transshipment hubbecause of the double handling of containers.Consequently, container throughput in hubports can be greatly boosted, particularly whenexpressed in TEUs. More importantly, trans-shipment hubs provide local importers andexporters direct access to line haul service,

reducing transportation time (and possiblyfreight rates) to and from overseas markets.Reduced transport time directly affects the com-petitiveness of exporters and the cost ofimports, in turn creating jobs and incomethroughout the economy. Many developingcountries have created free trade zones incombination with the hub port as engines foreconomic growth. Jebel Ali illustrates how ahub port in conjunction with an associated freetrade zone can create significant economicactivity. The port, which began operating in1979, now has 72 berths and is serviced bymore than 100 shipping lines. About 1,125companies from 72 countries have been attractedto start up operations in the free trade zone.

2.4.3. Hub Problems

Hubs compete in a highly competitive marketsegment where customers have options to useother facilities and pricing. An issue confrontingthe developer of a transshipment hub is how toprevent “hub hopping,” a situation where thenumber of competing hub facilities is growingrapidly and carriers have the ability to take theirbusiness elsewhere (see Box 24). In such a situa-tion, a carrier that represents a significant por-tion of the terminal’s business can assert consid-erable pressure on the terminal owner or port toincrease the service level offered and at the sametime reduce charges and make concessions bythreatening to vacate the hub. The owner of thefacility would be faced with the dilemma of a$100–$200 million investment lying idle if thecustomer departs. This pressure could force thehandling rates below the full cost of providingthe transshipment facility. A long-term commit-ment from a carrier to use the facility beforemaking major investment would be one way tominimize the possibility of hub hopping,although this does not constitute a solid guaran-tee. Another and possibly better way to retainhub traffic is to involve one or several carriers inthe equity structure of the new facility.

Another consideration is that there are fewerterminal services on which to impose charges ontransshipment traffic than on local traffic and, in


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Box 23: Hub and Spoke ContainerDistribution (Continued)which in the past were only served by passingroutes calling at a few way ports. For theseregions, end-to-end routes are on the rise,leading to a reduction in transshipment.

It may be clear that it is difficult to predict theincrease of transshipment. The data in Box 20seem to suggest that for most parts of theworld some saturation has been reached. Ifno further increases in ship size are to beexpected, one may even expect a decrease inrelative terms for some regions.

Source: Author.

general, the larger the percentage that transship-ment traffic is to total volume, the smaller theadditional revenue potential of the terminal. Inaddition, ports with a mixture of local andtransshipment traffic frequently set transship-ment charges low to attract mother ships to theport to improve throughput levels, achieveeconomies of scale, and lower handling cost.

Service for import and export traffic can therebybe improved. A port highly specialized in trans-shipment business is at a distinct disadvantagecompeting with ports that have a mix of localand transshipment business, where revenue fromthe former is frequently used to cross-subsidizethe latter. This is only acceptable because trans-shipment generates additional economic value.


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More than two dozen transshipment hubslie along the line haul route betweenAsia and Europe, about half are east of

Suez. This large number of hubs provides plentyof opportunity for “hub hopping.”

Northern Europe: Major container terminalfacilities in Northern Europe are located inRotterdam, Hamburg, Felixstowe, Antwerp, andLe Havre. All five ports are involved in bothtransshipment and local container traffic.Rotterdam is the largest port in Europe, handlingabout 8.2 million TEU in 2004, and boastingregular connections with more than 1,000 portsworldwide. Hamburg, the second largest port,handles about two-thirds of the number ofcontainers that Rotterdam handles. Antwerpand Felixstowe are smaller in throughput.

Mediterranean: There are a number oftransshipment hubs in the Mediterranean andseveral more under development. Algecirasserves as a transshipment hub for the WesternMediterranean, West Africa, and NorthernEurope; it handled about 2.9 million TEU in2004. Gioia Tauro, Marsaxlokk, and Cagliariare transshipment hubs in the midMediterranean and Damietta, Limassol,Piraeus, and Port Said (East and West) serveas hubs in the Eastern Mediterranean. Othertransshipment hubs are being built or planned,including new container terminals in Tangier,Sines, and Ashod.

Gulf: UAE ports in Dubai, Khor Fakkan, andFujairah have developed a strong presence incontainer transshipment. These three portshandled about 8 million TEU in 2004, most ofwhich was transshipment traffic. Containerspassing through Dubai mainly originate orterminate in the Gulf. Containers through KhorFakkan and Fujairah are mostly transshippedto and from Pakistan, Western India, the Gulf,and East Africa. A three-day diversion from theEast–West line haul route is required to call atports in the UAE, which has placed them at a

disadvantage to the new transshipment hubsin Oman and Yemen.

Indian Ocean and the Red Sea: Centrallylocated along the East–West line haul route areColombo, Jeddah, Salalah, and Aden. Callscan be made at any of these ports with virtuallyno diversion from the line haul route. Colombois a major transshipment hub for Southern Indiaand handled 2 million TEU in 2004. Jeddah isprincipally an import and export channel forSaudi Arabia, but about 10 percent of trafficthrough Jeddah has traditionally been trans-shipped to other points in the Red Sea. BothSalalah and Aden are new facilities that havebegun operating within the past two years.These new hubs had a combined throughput ofabout 2.2 million TEU in 2004 and plans call forsignificant future growth in transshipment traf-fic, much of which will be attracted from theUAE ports Colombo and Jeddah.

Asia: At the eastern end of the route areHong Kong, Singapore, Shanghai, Shenzhen,Busan, Kaoshung, and Yokohama. Hong Konglays claim to having the world’s largest overallcontainer volume (22.4 million TEU in 2005),the majority of which originates in or is des-tined for China. Singapore, which has theworld’s second largest container volume (22.3million TEU in 2005), is the major transship-ment hub for Southeast Asia and the IndianOcean, which competes with Pelepas,Malaysia (4.1 million TEU in 2005). Busan is atransshipment hub for containers into and outof Northern China (11.8 million TEU in 2008),and Kaohsiung is a transshipment center forCentral Asia. Japanese ports such asYokohama, Kobe, Tokyo, and Nagoya aremajor centers for container activity, but themajority of containers are distributed inland byrail or highway. A variety of other ports such asManila, Port Klang, and Vung Tau function aslocal hubs for their respective areas.

Source: Author.

Box 24: Hub Options on the Asia–Europe Route

2.4.4. Inland Container Terminals ShiftingActivities from the Port

To maximize intermodal efficiency and free upvaluable real estate in the port area, inland con-tainer terminals are increasingly displacing activi-ty traditionally performed in the port. While thereare many advantages to inland container termi-nals, from a port’s viewpoint there can be seriousdrawbacks as they divert economic activity awayfrom the local area and open the possibility ofcompetition from other ports (see Box 25).

2.5. Environmental and SafetyConcerns Given the growing concerns about protecting theenvironment, ports are now faced with the need toimplement regulations that will affect the freedomof port users and must make a significant invest-ment in environmental and safety facilities as well.These investments will have limited commercialvalue and often produce only indirect social pay-back. How to implement these regulations andfinance related facilities is an important issue.

2.5.1. Growing Environmental Concerns

Eliminating oily ballast water discharge fromships is a major environmental concern. Thisissue is well recognized internationally and provi-sion of adequate reception facilities in port isrequired under the International MaritimeOrganisation (IMO) International Convention forthe Prevention of Pollution from Ships (MAR-POL) Convention 1973/78. Regulation 10/7 and12 of the pollution convention require each stateto ensure that sufficient oily ballast water recep-tion facilities are available at oil-loading termi-nals, ports with ship repair facilities, and in thoseports in which ships have oily residues to dis-charge to shore. To meet these requirements,states need to offer reception facilities for tankwashings (slops), contaminated ballast water, oilywater from engine room bilges, and for residuesfrom fuel oil purification, particularly heavy fueloil. Providing such a reception facility entails asignificant capital expense that produces little, ifany, financial return. How to pay for this facilityis a major issue confronting port authorities.

But environmental concerns relating to shipsin port go beyond the issue of oily waterdischarge. They involve the entire range ofenvironmental issues from water pollution, airpollution, aesthetics, noise, transfer of foreignmarine species and more. Ports will need to findsuitable solutions for disposing of dredgedmaterials and implement regulations and oper-ating procedures for terminals and anchoragesto address these types of issues (see Box 26).

2.5.2. Recent Environmental Article

LA-Long Beach Cuts Emissions JoC Online Wednesday, August 24, 2005

A program that calls for ships to reduce theirspeed to 12 knots or less within a 20-mileradius of the ports of Los Angeles and LongBeach saved 100 tons of harmful emissions inthe first quarter of the year.

The Vessel Speed Reduction Program translatesinto an average daily savings of 1.1 tons ofnitrogen oxide (NOx), according to Port of LosAngeles.

“We are very pleased with the amount of NOxbeing eliminated with the Vessel Speed ReductionProgram,” said Port Interim Executive DirectorBruce E. Seaton. “But we can do better. We wantthe compliance zone increased to 40 nauticalmiles, which is the influence area used by theSouthern California Air Quality ManagementDistrict to determine basin emissions.”

LA-Long Beach implemented the voluntaryantipollution program in 2001 as a measurecontributing to the ozone reduction goals in the2003 State Implementation Plan for MarineVessel Emissions Control Strategies. Currently,nearly 70 percent of shipping lines calling at theports participate in the voluntary program.

Reported by Stephanie Nall, Pacific Shipper, inSeattle

2.5.3. Issue of Substandard Ships

Despite the fact that many ships have validcertificates issued by their flag states and


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classification societies, a number of ships donot comply with international standards forsafety, pollution prevention, and shipboard liv-

ing and working conditions recognized in inter-national conventions. Political and social pres-sures have been placed on governments to


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The first inland container terminals (ICTs)appeared along the Rhine during the late1960s. The Rhine, which is the main

inland waterway connection in Western Europe,has the largest container traffic in Europe and isfor a significant part navigable with containersstacked up to five high. The Port of Duisburg,which is situated along the Rhine, is the largestinland port of Europe. It serves as a maininland hub for all larger ports from Antwerp toHamburg. The larger volume, however, goesthrough the Port of Rotterdam. Main terminalfacilities in Duisburg at this moment are theDeCeTe (Duisburg Container Terminal) terminalsand the Rhein-Ruhr Terminal. Currently EuropeContainer Terminals (ECT) is building a trimodalterminal in Duisburg.

As do most of the European river containerterminals, Duisburg offers trimodal facilities,including direct access to rail transport andcontainer stuffing and stripping facilities on theterminal. Rail plays a very important role, espe-cially in the further distribution of cargo fromDuisburg to destinations deeper inland inGermany and Eastern and Southeastern Europe.

Currently Duisburg offers a wide range ofintermodal services. These include:

• Services to and from most of the barge ter-minals along the Rhine, including those inthe Port of Rotterdam.

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

• Services to several destinations in Germanyby rail (for example, Germersheim,Donauwörth, Nürnberg, Augsburg, andMünchen).

• Services to several destinations in Easternand Southeastern Europe by rail (for exam-ple, Northern Italy, Switzerland, Austria,Hungary, the Czech Republic, the SlovakRepublic, Poland, and Russia).

The presence of an ICT at Duisburg is charac-teristic of a partial shift of the collection anddistribution function away from the seaports. Inaddition, these terminals help to relieve theseaport areas of potential congestion as theywill function as satellites for these seaports.

Within Europe, the Rhine plays a centralrole in this context. The Rhine area presentlyconsists of some 35 barge terminals forhandling boxes. Most of these ICTs offertrimodal facilities because direct access torail transport and container stuffing and strip-ping facilities improve their competitiveness.An important issue in this context is the keyrole ICTs play in the emerging door-to-doorservices of a large number of containerbarge operators desirous of extending theirlogistics services.

From a seaport’s point of view, ICTs attracteconomic activity away from the port area.Other ports might profit by competing to bethe point of entry and exit for the ICTs. Smallerports may benefit from the tendency of emerg-ing ICTs by effectively competing with the larg-er ports. This may lead to a certain degree ofdeconcentration.

In the recent past, container transport byinland waterway has increased strongly andseveral new ports have been established ateven less than 50 kilometers from the mainports of Rotterdam and Antwerp. In 2004, theterminal of Duisburg had a container through-put of 610,000 TEU, making it the biggestinland port, followed by Wörth andGermersheim with about 300,000 TEU each,and Strasbourg in France with 156,000 TEU.

The impact of inland terminal networkdevelopment on the concentration patternand competitive advantages of seaport areasremains uncertain. The actual tendency (con-centration or deconcentration) will primarily bedetermined by the success of the port authori-ties and port companies in developing strongfunctional ties with the nodes in the hinterlandnetwork. Also, the ability to attract and retainsome of the mega carriers that are active indoor-to-door transport logistics will be animportant factor. A final important factor is theextent to which the load centers are able tobenefit from public-private involvement in deci-sion making on and the financing of port infra-structure projects and cross-border hinterlandnetwork connections.

Source: Author.

Box 25: Duisburg Inland Container Terminals

implement policies to reduce the amount ofsubstandard shipping in their waters. At aninternational level, the Paris Memorandum ofUnderstanding (MOU) on Port State Control,which came into effect in 1982 and includes 18signatory countries, requires each maritimeauthority to inspect a total of 25 percent of theindividual foreign merchant ships entering theport state during a year. If ships do not meet aset of standard criteria, port states may detainthe ships until proper measures are taken bythe shipowner. The Paris MOU has led to morethan 18,681 inspections of ships in memberstates in 2001 which resulted in 1,699 deten-tions. In 2000, the number of inspections wasonly 11,358 with a detention rate of 1,764.Since inception the number of detentions havedecreased, suggesting either a positive impactof the measures or less rigorous inspection

norms (possibly illustrated by the “Erika”disaster).

While enforcement of policies to eliminate sub-standard ships has a commendable objective, theenforcement practice can affect the competitiveposition of individual ports. For example, if asituation exists where the strictness or accuracyof inspections varies among port states, substan-dard ships may alter their routes and choosemore accessible ports of call in a same range.Ports with lax inspection procedures wouldtherefore have an unfair competitive advantage.One approach to offset this negative competitiveimpact is to focus on rewarding good behavior,rather than penalizing bad behavior. An exampleof an innovative approach that rewards goodbehavior is the Green Award, initiated by thePort of Rotterdam (see Box 27).


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Malta Freeport illustrates how a contain-er terminal can live in harmony with itsneighbors. The terminal is one of the

largest transshipment facilities in theMediterranean, receiving more than 1,700 shipcalls annually. It is situated in the southeastcorner of the island, in Marsaxlokk Bay. Thisarea is one of the tourist spots in Malta, andmaintaining the integrity of the environmentwas a great concern to the terminal developer.

In the 1990s, a decision was made to dredgethe bay to accommodate deep draft ships call-ing at the terminal. This entailed removal ofabout 250,000 cubic meters (m3) of silt from thebay to deepen the channel, turning basin, andwater depth along the quays. Six valleys draininto Marsaxlokk Bay and vibrocore testingrevealed 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 thebay where the turning basin was to be created.It was decided that some of the dredged materi-al could be used to improve and expand thebeach called Pretty Bay near the terminal sitethat had eroded due to wave action on theretaining wall of the coastal road. Expanding thebeach would prevent waves from hitting theretaining wall, minimizing further erosion, andprovide a considerably larger beach area.

To create the beach, about 20,000 m3 ofsand dredged from the turning basin waspumped to shore and sprayed. This saved 10percent in the contract dredging costs, asthe alternative was to transport the sand fivekilometers outside the harbor to a disposalsite. More importantly, the new beach hasattracted economic development in theneighboring village of Birzebbuga. Newholiday flats have sprung up, a newrestaurant has opened and there has been ageneral increase in tourist activity. Thedeeper beach also allowed the coastal roadto be widened, reducing congestion in thepeak tourist periods.

Recognizing its role as a good neighbor,the terminal has instituted strict standards onships calling at the terminal. The first sign ofunsanitary discharge from any ship at theterminal will cause immediate stoppage ofcargo handling on the offending ship, fol-lowed by investigation of the cause of theincident. Contributing to harmony of beachand terminal is the natural flushing thatoccurs in the bay, which is self-cleansing asa result of circulation and has remainedconsistent even after the terminal and break-water developments.Source: Author.

Box 26: How a Major Transshipment Terminal and Pretty Bay Beach Coexist

2.6. Impact of Changing Dynamicson PortsDevelopments taking place in international logis-tics, shipping technology, industry consolidation,and environmental regulations are driving majorchanges in the way ports will operate in the 21stcentury. As the world economies become moreintertwined, ports are being increasingly cast aspartners in assisting customers to compete forbusiness share in the global market. Technologyin the shipping sector, particularly relating to con-tainerization and information exchange, is chang-ing at a rapid rate, creating the need for majorfinancial commitments to stay ahead of the tech-nology wave. Mergers and acquisitions in theshipping sector, along with the growth of a rela-tively small number of global terminal operators,are creating a small number of powerful playersthat change the way port services are bought andsold. Distribution patterns are increasingly evolv-ing into hub and spoke networks, creating win-ners and losers among ports that achieve hub sta-tus. All through this is the increasing concernabout the environment and safety, which affectsthe way ports deal with their customer bases.

3. CHALLENGES ANDOPPORTUNITIES Changes taking place in the port sector presentdifficult challenges to port administrators, ter-

minal operators, and other port serviceproviders. But these changes also present oppor-tunities for new ways of doing business andopen the door to entry of new players through-out the range of port activities. In short, it’s abrand new era for everyone involved in the portsector and the opportunities, as well as the chal-lenges, are substantial.

3.1. Transferring Port Operationsto the Private Sector The traditional closed fraternity of entrenchedplayers with widespread involvement of publicentities in the ownership and ports operation isno longer acceptable. Port authorities world-wide are under increasing pressure to turn overoperations in the port to the private sector.They are being forced by competitive pressuresto step into a landlord and regulatory role,focusing on administrative activities that publicentities do best.

3.1.1. The Need for Change

Traditional ways of doing business in ports arebeing challenged worldwide by demands forgains in port efficiency, increased customerresponsiveness, and lower costs to move cargothrough the port. It has been widely demon-strated that use of private sector companiesthroughout the range of port operations pro-vides an opportunity to eliminate traditional,bureaucratic operating procedures and controlsand modernize facilities and equipment throughnew financing channels. It is also widely accept-ed that service providers with operating andadministrative experience in other ports cantransfer this experience and bring to a port bestpractices and appropriate modern technologiesemployed elsewhere. But even more important,by passing the reins of port operations from thepublic to the private sector, port reform offersthe ability to shift the financial burden of portexpansion and development to the beneficiariesof the expenditures.

3.1.2. Impact of Privatizing Operations

There are numerous success stories where portauthorities have transferred to the private


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Box 27: The Green Award Initiative

The Green Award initiated by the Port ofRotterdam has the objective of stimulat-ing good behavior rather than punishing

bad behavior, by offering discounts on port tar-iffs for extra clean and extra safe ships. Shipsand crews meeting standards above therequired minimum can apply for a Green Awardcertificate provided by the Bureau GreenAward. Certified ships and crews can apply fortariff reductions by port service providers,including the major ports in the Netherlands,Portugal, South Africa, Spain, and Sullom Voein the United Kingdom, as well as providers oftowage and pilot services. The reductionsamount to up to 7.5 percent of port fees.

Source: Author.

sector operations previously performed bypublic employees. A classic example is BuenosAires, where the award of terminal conces-sions to four competing companies in 1994has brought down handling charges signifi-cantly through improved labor productivity.In another example, after transferring majorport facilities to the private sector between1995 and 1998, Panama attracted more than$380 million in investments for modernizationand expansion. When management of theKipevu container terminal in Mombasa wastransferred to a commercial terminal operator,outdated equipment was temporarily replaced,bureaucratic procedures streamlined, and pro-ductivity of the terminal improved. In the bigpicture, 220 privatizations from 1992 to 2004have generated private investments exceeding$21 billion to rehabilitate terminals andrenew superstructure in the ports that wereprivatized.

This is not to say that port privatizations havebeen without problems. There have been a num-ber of cases of privatizations involving ports thathave not worked out. In Indonesia, the Koja con-tainer terminal under private management raninto difficulties and the public port companytook back the facilities. The City of Rostock(Germany) demanded return of the terminal itcontracted to a private group for operation, cit-ing lack of compliance with the original contract.Following a dispute with the Port Authority ofTrieste (Italy), the commercial terminal operator(Europe Combined Terminals, ECT) selected tooperate the container terminal in the port undera 30-year contract withdrew from the contractafter 18 months. The terminal operator awardedthe concession to operate the container terminalin the Port of Rosario (Brazil) is reported to havelost more than $40 million under the contract asa result of work disputes and has cancelled thecontract. And unfortunately, the success story inKipevu (Kenya) was reversed when the commer-cial terminal operator terminated its contractwith the port as a result of breakdown of equip-ment that the government failed to refurbish orreplace.

3.1.3. Lessons Learned from PastPrivatizations

A major lesson learned in port privatizations isthe need for transparency and open competitionthrough a structured international tenderingprocess. Many examples can be given of attempt-ed port privatizations that have bogged downdue to legal challenges to the selection of thecompany to be awarded a concession contract.Montevideo is a prominent example of howthings can go wrong in a privatization process.Attempts at privatizing services in the port hadfailed four times due to court challenges before asuccessful round was completed. At a later stage,the government announced plans to auction offthe terminal on the stock market.

Conflicts and legal challenges can be minimizedby clearly presenting the bidding rules and selec-tion process in the bid documents. Criteria to beused for selecting the successful bidder should bestated and a pro forma contract provided withthe bid documents so that everyone is competingfor the same contract. The role of the portadministration after the privatization and anylimits on the contractor’s ability to operateshould be stated in the bid package. Biddersshould be requested to provide a business planthat will become part of the final contract. Inthe plan, bidders should state how they willaddress labor issues that may arise as a result ofany downsizing of port operating personnel orchanges in work practice rules. They should beasked to give references of how these issues weredealt with at other ports in which they operate.The bidders should be requested to state quan-tifiable targets for productivity gains and marketdevelopment. This business plan should beaccorded significant weighting in the selectionprocess. Incentives and penalties should be pro-vided in the contract should there be a signifi-cant deviation from targets in the business plan.

It is important to develop beforehand a well-rea-soned plan for transitioning to private operationand have a clear understanding of how the portwill function after the various port services are pri-vatized. A number of important questions should


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be addressed: What changes in laws and regula-tions are needed to allow the private sector opera-tion in the port? How much management andoperational autonomy will be granted to the pri-vate operators? What will be the role of the portauthority in regulating the rates and practices ofprivate operators in the port? Who will beresponsible for common area maintenance andupgrades, and how will the cost of these activitiesbe recovered from port users? Will the port con-tinue to have a marketing and planning functionafter privatization, or will this be left to the indi-vidual service providers? What resources will berequired to carry out the functions that remainwith the port authority? What type of retrainingprogram and severance package will be created toaddress the issue of redundant personnel?

3.1.4. Contingency Plan

The best and tightest contract will still not ensurethat there will be no problems in the operationof port services under a private contractor. Thereshould be a contingency plan for default by portservice contractors to prevent work stoppage thatcould affect port operations. This plan shouldinclude defined penalties to compensate the portor government when resources made available bythe operator are inadequate.

3.2. Opportunities for the PrivateSector The worldwide market for port services is esti-mated to generate available revenues of $50–55billion annually. While these numbers are veryrough, they indicate the size of the availablemarket to companies active in the port sector.This is a large available market that should beof interest to a wide variety of global, regional,and local port service providers (see Box 28).See Box 29, which illustrates the use of privatesector capital for expansion to cope with grow-ing demand at the Port of Hong Kong, current-ly the world’s largest port.

3.2.1. Terminal Operations

This area is the most advanced in terms of pri-vate operation of port services. Of the 220 portprivatizations captured in the World Bank

Private Participation in Infrastructure (PPI)database, 124 have been concessions or man-agement contracts involving existing terminaloperations. But there are many more opportuni-ties. There are more than 2,800 ports world-wide, many of which still have publicly operat-ed terminals that are candidates for privatetakeover involvement in management and oper-ations under concession agreements or manage-ment contracts. We roughly estimate that theavailable revenue from container terminal oper-ation is on the order of $38–40 billion annually.

3.2.2. Towage Services

Port authorities often own and operate the harbortugs used for ship assistance. This activity is ripefor privatization and is relatively easy for the pri-vate sector to provide. It has, for instance, attract-ed the attention of Smit Internationale of theNetherlands, which has been actively pursuingthis market internationally and now operates tugservices in the Netherlands, Belgium, Germany,Panama, Nigeria, Mexico, Argentina, RepúblicaBolivariana de Venezuela, Gabon, Singapore,Malaysia, Indonesia, Netherlands Antilles, andThe Bahamas. Other global, regional, or local tugoperators are certainly also finding this marketinteresting, if they can break the existing publicor private monopolies. A rough estimate is thatthe harbor tug service market represents availablerevenues of up to $3 billion annually.


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Box 28: Estimated Available Market in thePort Sector

Container Terminal Operations 30 to 40

Tug Assist Services 4 to 5

Maintenance Dredging 4 to 5

Information Technology 2 to 3

Environmental and

Ship Safety Services 1 to 2

Other Port Services 4 to 5

Source: Author.

Estimated AnnualRevenues

(billions of $)


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By any standard, Hong Kong has estab-lished an enviable presence in the worldport sector. The port annually receives

about 42,000 seagoing vessels and 190,000river trade vessels. In 1999, Hong Kong han-dled more than 16.1 million TEU, making it thelargest port in the world in terms of containerthroughput. To accommodate traffic throughthe port, there are eight major container termi-nals, with a ninth now under construction andtwo more planned. Looking outward, containertraffic is projected to grow to 24 million TEU in2006 and 33 million TEU in 2016. The port hasthe ability to provide shippers with a full net-work of competitive services and frequent sail-ings to all areas of the world. Hong Kong’scargo handling productivity ranks among theworld’s highest. One of the container terminalsin Kwai Chung handles more than 1 millionTEU annually at a single berth—more thantwice the world standard. This terminal iscapable of loading and discharging 1,200TEUs in 10 hours with three gantries that aver-age 40 moves per hour. The success of HongKong is based on a number of factors, includ-ing the port’s location relative to major mar-kets, a natural harbor and, perhaps more thananything else, a business-friendly environmentwith heavy reliance on the private sector.

Reliance on the Private Sector

Virtually all activities in the port are performedby the private sector. Three private firms oper-ate the eight container terminals in KwaiChung container port. HIT, the largest of thesecompanies, controls four of the terminals andhandles 60 percent of the containers passingthrough Kwai Chung. The remaining traffic isshared among Modern Container Terminalsand SeaLand Orient Terminals. Four privateoperators provide mid-stream operations andmore than 100 private operators offer ware-housing services. Three firms provide tugservice in the port, the largest of which isHong Kong Salvage and Towage. Seven com-panies provide stevedoring services and sixcompanies provide ship repair. Hong KongPilots Association Ltd., which is owned by themember pilots, provides pilot service in theport.

The government’s operational function inthe port is limited to collecting refuse, pre-venting and cleaning up oil discharge, provid-ing vessel traffic services, managing a ferry

terminal, maintaining 61 harbor moorings, andcoordinating search and rescue in the SouthChina Sea. The Marine Department performsthese functions as part of its responsibility tofacilitate safe and expeditious movement ofships, cargoes, and passengers within HongKong waters. A Port and Maritime Board hasbeen established to set overall policy for themaritime sector in Hong Kong, but this boarddoes not generally become involved in over-sight of commercial operations in the port.Overall, the government has a hands-offapproach to port operations, relying on com-petition within the private sector to shape andcontrol activities.

Expansion and improvement of facilities inthe port is entirely funded through the privatesector. While the government develops long-term strategic land use plans for the port, itrelies on the private sector to finance, build,own, and operate new facilities in response tomarket demand. For example, since 1972 theprivate sector has built eight modern containerterminals in the port and a ninth is now underconstruction. In awarding such terminal con-tracts, the government earmarks an area ofwater to be put out for tender, defines theresponsibilities of the developer, and selectsthe bidder who offers the highest price for thedevelopment site. Once awarded, the contrac-tor is responsible for making the entire invest-ment in infrastructure and superstructure onthe site. The government’s role is limited toproviding the agreed water depth in theapproach channel to the terminal.

Implications for Other Ports

A general reliance on the private sector to pro-vide the necessary port services and infra-structure, with the government providing theminimum oversight needed to protect the pub-lic interest, has obviously worked very well inHong Kong. While other factors have con-tributed to the success of the port, a business-friendly environment, reliance on marketforces, and the government’s hands-offapproach to managing port services havegreatly contributed to Hong Kong’s leadingposition as an international shipping center.This model is worth considering, particularly inports that have sufficient traffic volume toenable competition among service providers tothrive.

Source: Author.

Box 29: The Port of Hong Kong—Why is it so Successful?

3.2.3. Maintenance Dredging

This activity has traditionally been performed bycommercial dredging contractors under contractto port authorities or by port authority personnelusing publicly owned dredgers. It is estimatedthat maintenance dredging is a $4–5 billionavailable annual market that can be completelyturned over to the private sector. Port authoritiesthat own and operate their own dredging equip-ment could corporatize the dredging functionand sell the business along with its assets to theprivate sector. But more innovative concepts forprivatizing maintenance dredging might be con-sidered. For example, maintenance dredgingcould be outsourced on a concession basis simi-lar to the concession awarded for channel dredg-ing and maintenance in the Rio Parana, where aportion of the project revenues will come fromdirect charges by the concessionaire to futurechannel users and the port authority receives aconcession fee. A more radical concept could bea contract between a dredging company and acontainer shipping company or consortium ofcompanies to maintain specified water depths atthe carrier’s terminals on a worldwide basis.Much depends, however, on the volumes to bedredged and the timing of the dredging.

3.2.4. Information Technology

Increasingly sophisticated IT is spreadingthroughout the port sector as users demand moretimely information to support their logistics sys-tems. This is producing a variety of opportunitiesto design, install, and operate IT systems in portsthroughout the world. IT services can be totallyoutsourced by port authorities and terminal oper-ators and the market is estimated to represent$2–3 billion in annual available revenues. Amongoptions that can be considered for structuring IT

service contracts are joint ventures between theport authority and the IT provider, an armslength concession for IT services, or a concessionbased on in-kind service compensation.

3.2.5. Environmental Facilities and ShipSafety

This is an area ripe for innovative privatizationconcepts, as many of these functions can be per-formed by the private sector. For example, a pri-vate company could be given the concession tooperate a ballast water treatment plant in theport, with revenues derived from receivingcharges and resale of recovered oil (see Box 30).A private company could install and operate thevessel management system in the port under aconcession agreement. The functions of port statecontrol could be contracted under a managementagreement to a competent inspection company orclassification society, assuming the latter properlyapply the inspection rules. A company could becontracted to maintain and operate aids to navi-gation on a local or regional basis, such as nowperformed by the Middle East Navigation AidsService (MENAS) in the Gulf area (see Box 31).Altogether, it is estimated that the availablemarket from environmental and ship safetyactivities is $1 to 2 billion annually.

3.2.6. Other Port Services

Warehousing and storage, container freight sta-tion operation, port security, pilotage, andequipment maintenance are all activities that canbe operated by the private sector. It is estimatedthat worldwide these activities represent anavailable market of some $4–5 billion annually.

See Box 32, which can be used as a generalchecklist when planning a terminal privatizationor reform process.


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In the late 1970s, the Port of Portland(Oregon) made a major investment in a shiprepair facility designed primarily to accom-

modate large tankers operating in the Alaskantrade. Included in the project was construction

of a water treatment facility to receive oily bal-last tanker wash water. The plant is availableto ships loading or discharging cargo in theport, as well as ships entering the shipyard forrepair.

Box 30: Ballast Water Treatment Plant in the Port of Portland


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The Plant

The complete system includes eight connec-tion stations, receiving lines, holding tanks, aheating plant, decant tanks, separators,processed water storage, oil storage, and awater quality testing laboratory. Storage capa-bility is provided for 157,000 barrels of slops,11,500 barrels of recyclable oil, and 30,000barrels of disposable water. Ballast water canbe received from a ship at the rate of 3,000barrels per hour. Most of the recovery processis achieved through tank settling over time.Received ballast is typically kept in the tank for30 days and skimmed each day. After 30 days,the tank is heated with internal steam coils tofinish the separation process. Recovered oil issold and disposable water is either pumpedthrough the city sewer system or directly intothe river depending on the water quality. Theport sets standards for acceptability of waste-water.

Economics of the Facility

The facility cost $5.2 million to construct inthe late 1970s. Revenues are generated by

the facility from a charge against the ship forreceiving ballast water ($4–5 per barrel) andsale of recovered oil on the open market.Recovered oil is sold to remarketers forblending and resale for use as boiler fuel. Theselling price of the oil has typically been$1.50–2.00 per barrel, but prices as high as$20 per barrel have been realized in periodsof extreme demand. Up to 400,000 barrels ofrecovered oil have been generated by theplant in a year.

Potential to Employ Elsewhere

This type of plant could be considered foruse in other ports, but there are factors thataffect the attractiveness of the concept.Supplying steam to the plant is the principaloperating cost and it would greatly help theeconomics to have access to a cheapsource of steam. It is important to haveproximity to a market that can use therecovered oil, which is not suitable for allapplications.

Source: Author.

Box 30: Ballast Water Treatment Plant in the Port of Portland (Continued)

The Middle East Navigation Aids Service(MENAS), a registered nonprofit organiza-tion based in London, maintains the light-

houses, light buoys, racons (maritime radarbeacons) and other navigation aids in the Gulfthat are outside port limits. More than 500navigation aids are installed and maintained inthis area. MENAS extends from Kuwait downthe side of the Gulf to Didamar Island in theStrait of Hormuz, and then south to MasirahIsland and Channel in the western Gulf off thecoast of Oman.

MENAS operates the lighthouse tender andbuoy lifting vessel Relume to provide themaintenance services required for the lightsand buoys in the Gulf, and receives its incomefrom charges (light dues) levied on vesselsentering the Gulf. These charges, at £l.70 per100 net registered tonnage (NRT) for each visita vessel makes, have remained constant for10 years. Income has risen from the increas-ing numbers of vessels entering the Gulf inrecent years, particularly from the higher

numbers of containerships calling at Dubaiand Jebel Ali.

In addition to fixed navigation aids, MENASbroadcasts navigational information to ship-ping in the Gulf area as NAVTEX (primarymeans for transmitting coastal urgent marinesafety information to ships worldwide) warn-ings. These are also copied to Muscat Radioin Oman, which retransmits them as NAVTEXwarnings, and to the Area IX office, wherethey are included in the Area IX weeklyNotices to Mariners. Permanent changes tochannels and pipelines and other alterationsare then notified to mariners via a printedMENAS Notice to Mariners, distributed free ofcharge to vessels by all shipping agents in theGulf area. The MENAS warnings are with-drawn after the British Admiralty publishes itsNotices to Mariners covering the samechanges.

Source: Author.

Box 31: Middle East Navigation Aids Service


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1. The Proposed Transaction

• What are the government’s primary and sec-ondary objectives in privatizing the terminal:generating proceeds to the government fromthe transaction, increasing efficiency of portservices, attracting foreign investment toimprove port infrastructure, rationalizing thepublic labor force, reducing the govern-ment’s fiscal burden, or some other goal?

• What area and specific activities in the portare to be privatized in the transaction—andwhat is not included in the transaction?

• What modality is best suited to the transac-tion—outright sale of assets and land, long-term lease of the facility under concessionarrangement, management agreement tooperate the facility, or a different model?

• How will the negotiations with the proposedcontractor be conducted and who will beassigned to the government’s negotiatingteam to complete the transaction?

• Who will prepare the term sheet to be pre-sented to the proposed contractor and whatschedule will be set for completing thetransaction?

2. Structure of Payment to the Government

• How is the compensation to be structured—is there an initial cash payment to the gov-ernment, or is the proposed compensationto the government based on some form ofrent, revenue sharing, royalty, or otherdeferred payment arrangement?

• Is a portion of the initial payment for the ter-minal rights noncash compensation based onproviding equipment and services? If so, howdoes the contractor propose to establish thefair value of the equipment and services?

• What is the discounted present value of theinitial payment and flow of deferred pay-ments from the proposed contract?

• How does this discounted present valuecompare with the discounted present valueof the projected profits or surpluses of theterminal as currently operated?

3. Risk Being Assumed by the Government

• In the event of losses being incurred by thecontractor under the proposed agreement,will in any circumstances the government beliable for these losses?

• Under what circumstances can the pro-posed contractor hold the port authority or

government responsible for terminal disrup-tions, missed performance targets, unex-pected operating costs, or other event?

• Is there any possibility that the governmentcould directly incur losses under the agreement?

4. Performance Targets

• What throughput does the proposed con-tractor project for the terminal over the next10 years from local traffic, transit traffic, andtransshipment traffic?

• How does the proposed contractor plan toreach these throughput projections?

• Does the proposal state targets for increas-ing minimum productivity standards (forexample, minimum average crane moves perhour) in the terminal?

• How does the proposed contractor plan toreach these minimum productivity targets?

• Is there a provision for penalties and incen-tives in the proposal for meeting the plannedthroughput and productivity targets?

• What assumptions has the proposed con-tractor made, or conditions has it set, for therole of the port authority and government inachieving these targets?

5. Operational Issues

• What services are to be provided by the portauthority to the terminal after takeover bythe proposed contractor, and how will theseservices be paid for?

• Who will be responsible for maintaining thecivil structures and water depth alongsidethe quay?

• Will the proposed contractor provide newmanagement and senior operating person-nel? If so, who will they be and what will betheir qualifications?

• How many personnel does the proposedcontractor plan to employ in the terminal?

• Will existing personnel in the terminal havepriority for future job positions in the terminalafter takeover by the proposed contractor?

• Will the proposed contractor use the salarylevel and structure currently in effect for per-sonnel employed in the container terminal?If not, what will be the changes?

• What interaction does the proposed con-tractor foresee with other service providersoperating in the port, and how does it planto cooperate with the other providers?

Box 32: Checklist for Negotiating a Terminal Privatization


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• Under a concession or management agree-ment, will the port authority have full andunfettered rights at all times to enter andinspect the terminal after transfer to thecontractor?

• Will the proposed contractor carry all-risk andliability insurance on the container terminal? Ifso, what specific risks will be covered, whatwill be the limits on liability coverage, and willinsurance cover the actual cost of equipmentreplacement?

6. Terminal Handling Charges

• What structure and level of terminal handlingcharges does the proposed contractor planto impose on containers and other cargothrough the terminal?

• How much profit is built into these charges?

• Are these charges competitive with otherports in the region?

• What role will the government have inreviewing and approving any changes in thestructure or level of container handlingcharges?

• If the contract provides for revenue sharing,what portion of terminal handling revenue isto be paid to the government?

• What process is to be employed to ensurethat the government receives all of the com-pensation it is due?

7. Potential Contractual Conflicts

• What is the provision for dispute resolution,that is, the process, venue, applicable rules,and laws?

• What language will be paramount in event ofany ambiguity in the contract?

• Will the proposed contractor agree to besubject to all prevailing local laws?

• Are there provisions for terminating the con-tract with the proposed contractor shouldterminal throughput or productivity targetsnot be met? If so, what is the process forterminating the contract?

• Is the terminology in the force majeureprovision acceptable to the government?If not, what changes are required to makeit acceptable?

• What provisions has the proposed contractorincluded in the proposal concerning its obliga-tion for payment of taxes to the government?

• Will the proposed contractor provide a bankguarantee as security from the time the gov-ernment accepts its proposal until the hand-over is complete?

• What performance guarantee will the con-tractor provide as security for complyingwith the obligations taken on in the pro-posed contract?

8. Hand-Over of the Terminal

• What is the proposed timing of the hand-over of the terminal to the proposed con-tractor?

• What specific steps will be taken by thecontractor to plan for and implement thehand-over?

• Will the proposed contractor have transitionpersonnel in the terminal for a time periodpreceding the hand-over to organize theprocess, and how will these personnel inter-act with the current staff?

• What is the role of the port authority in thehand-over process?

• What responsibilities will the port authorityand government continue to have after thetransaction?

9. Terminal Development

• What commitments are being made by theproposed contractor to improve and expandthe terminal?

• What type of training program will be providedby the proposed contractor for terminal per-sonnel?

• Will the proposed contractor install a first-rate computerized information system, andin what other ports is this system now used?

• When will this system be installed?

• Will provision be made to connect this com-puter system to the current or future com-puter system operated by the port authority,and to what extent will the port authorityhave access to data in the terminal system?

• What role does the proposed contractorenvisage for the port in competing for trans-shipment business with other ports in theregion, and are there any potential conflictsof interest as a result of the proposed con-tractor operating terminals in one or severalof these other ports?

Source: Author.

Box 32: Checklist for Negotiating a Terminal Privatization (Continued)

REFERENCESDrewry Shipping Consultants. 2005. Annual Review

of Global Container Terminal Operators-2005.

Hummels, D., D. Rapoport, and K. Yi. 1998.“Vertical Specialization and the Changing Natureof World Trade.” FRBNY Economic PolicyReview June: 92.

Cullinane and Khanna. Journal of TransportEconomics and Policy.


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port reform toolkit: the evolution of ports in a competitive world

Government & Nonprofit