Labor Toolkit

The Evolution of Ports in a Competitive World

Port Dynamics in the 21st Century

The 21st century will see radical changes in the business base underlying port operations. Increasingly, intense global competition will force changes in the way all players in the international logistics chain, including ports, conduct business in the future. Innovative systems and new technology will radically change requirements for port infrastructure and increase the degree of specialization, raising the financial stakes of port investments and the need for a highly specialized workforce. Realignments and consolidations among port users and port service providers will continue, creating a fluid base of players with whom ports do business. Changes in distribution patterns and in the structure of the maritime geography will increasingly create a hierarchy of ports and some historical port-related activities will be shifted to inland sites. Environmental, safety, and security concerns will force ports to impose regulations and provide facilities that may have no commercial return on investment.

Globalization of Production

The world economies are becoming increasingly interrelated as a result of increasing trade and the growing trend toward globalization of production. Over the past half century, most countries have seen an increase in exports as a share of gross domestic product (GDP) and there has been an increase in vertical specialization of world trade. In addition, sourcing of raw materials and finished products has become increasingly globalized, and producers in various, often distant areas of the world are increasingly forced to compete with one another for the same markets. The basic forces that have triggered the greater interrelation and interdependency of the world economies remain active. Thus, there is no reason to think that these trends will not continue.

Vertical Specialization

The increasing vertical specialization of world trade has had significant impact on the global logistics system of many manufacturers. It has added links to global supply chains and increased the transport intensity of production processes. Firms have been increasingly concentrating on exploiting their core competencies and subcontracting out a number of noncore manufacturing and assembly activities to contractors. Tasks traditionally performed at the start or the end of the production line are increasingly moving away from the main plant to be performed by manufacturing subcontractors or distribution centers. Preassembly and sequencing of parts for on-line production chains are activities increasingly outsourced to specialist logistics providers. Customization of products, which can range from labeling or repackaging of goods to reconfiguration of items, is one of the fastest growing areas of logistics outsourcing.

Focused Manufacturing

Manufacturers have been concentrating production capacity in fewer locations, replacing the traditional system of nationally based production with “focused manufacturing.” Instead of a factory manufacturing a broad range of products for a local market, the entire production of a particular product for a continent or, in some cases the world market, is focused at a single location. While this has enabled companies to maximize economies of scale in the production operation, it has often made their logistical system more transport-intensive and transportdependent.

Expanded Logistics Reach

Companies have steadily expanded the geographical scale, or “logistics reach” of their sourcing and distribution operations. Extension of this reach on a global scale has been one of the dominant trends in international business and logistics over the past 30 years. The emergence of a new generation of high-value manufactured products, particularly in the electronics industry, and a general reduction in the density of consumer products (that is, lesser but better known brands) has contributed to an increase in logistics reach. Hewlett-Packard, for example, estimates that the various parts in a computer workstation in a New York office were moved a total of 96,000 kilometers from their points of production in places such as Singapore, Japan, France, and the Western United States.

Increased Sourcing Alternatives

Producers in one area of the world are increasingly competing with producers in other areas for the same international markets. This is true across the spectrum of primary and intermediate products. Examples of sourcing alternatives are virtually endless. Wholesalers of fruit and juice in Europe can source from Latin America, Southeast Asia, Australasia, Eastern Mediterranean, Southeast United States, and Africa. Textile manufacturers can source in China, Southeast Asia, the Indian subcontinent, Africa, Eastern Europe, and a wide variety of other locations. The sourcing decision ultimately is determined by total delivered cost and quality, which in turn can be greatly dependent on the logistics cost to acquire primary and intermediate products and deliver the finished products to market.

Impact of Globalization on Ports

While ports have always been important nodes in the logistics system, globalization of production has sharpened the need for ports to be value adders, not value subtractors, in the supply chain, and has given ports a unique opportunity to become value-adding entities. A port is the interface between intercontinental transport and a place in the hinterland being considered for production, assembly, or final distribution. Port capability and efficiency can greatly influence the decision for locating a plant or distribution center, and often determine whether a local producer can compete globally or regionally with other producers. The challenge is for ports to relate to the needs of their customers and assist them in improving their competitive positions by providing low-cost, efficient port services.

Changing Technology

Major technology changes are taking place in the ocean shipping sector that affect requirements for port infrastructure and services. The most obvious is the increasing containerization of global trade, a trend that is widely expected to continue into the future. Containerization of seaborne trade is some 50 years old, and deep-sea containerization some 40 years old. Yet it has dramatically changed requirements for cargo handling and port facilities, raised the financial stakes of investing in these facilities, and radically affected manpower and labor skills required to handle cargo, creating serious labor redundancy issues and retraining needs in many ports. In addition, the ocean transport industry is employing increasingly sophisticated information technology (IT) to manage logistics; and ports, if they are to remain competitive, must be key players in future IT logistics networks.

Containerization of World Trade

More than 60 percent of the world general cargo trade moved by sea is carried in containers. On trades between highly industrialized countries the percentage approaches more than 90 percent (of the containerizable cargo). This is a remarkable market penetration for a technology that dates only from the mid 1950s, when the first converted ship carrying 58 containers made its initial voyage between New York and Houston. Since then there has been a continual increase in both number and average size of containerships (see Boxes 8a and 8b and Box 9).

In the beginning of 2005, the world fleet of cellular containerships consisted of 3,362 units with a capacity of 8.3 million TEU. Given the then existing orderbook, the fleet will increase to 4,252 units with a capacity of 10.7 million TEU in 2008. With a resulting rate of 10.7 percent more than the period 1998–2008, the growth is higher than the 9.9 percent as experienced over the previous decade (see Box 10 and Box 11).

The growth was accompanied with a large increase in the size of ships. The share of ships in excess of 5,000 TEU increased from 1 percent in 1996 to 30 percent in 2006. The share of postpanamax vessels (ships with a beam larger than 32.2 meters) will have increased over the same period from 15.4 percent to 47.1 percent.

In September 2005, the total fleet on order reached 4.3 million TEU. Maersk Line tops the list with a share in the total of 11 percent in terms of TEU and 8 percent in terms of number of vessels. The 10 largest operators together have a share of 48 percent and 31 percent respectively.

Future Containership Designs

There are no technical reasons preventing containerships from getting larger, so economic and strategic considerations will be the source of any barrier. There is a continuing increase in size of ships being ordered, but owners appear to be reluctant to take large steps. The 10,000 TEU mark has not yet been clearly passed, as was expected some years ago. The largest ships are most effective on the Europe–Far East trade route for which seven to nine ships are needed to operate a weekly schedule. Investment in a service deploying 10,000-TEU ships would therefore require a capacity addition of 80,000 TEU; this is a large capacity addition. The increase in the size of the total market and the increase in the size of the global operators show that there are parties that have a market allowing them to deploy bigger ships effectively.

Impact on Port Operations

The contrast between container and earlier breakbulk operations is startling. Most significantly, it has greatly reduced the ship’s time in port and at berth. Containerization has dramatically reduced personnel requirements for cargo handling, raised berth productivity, and increased the capital intensity of port operations. Prior to containerization, about 200 men, working simultaneously in four gangs, were typically required to load and unload a large general cargo ship, a process that could take a week to 10 days in port. Containerships require only 50 to 60 men to load and unload cargo. Assuming a four gantry crane operation, a containership requires some 30 workers directly allocated to the vessel. This figure, moreover, depends on the type of terminal operation that is used, for example, more for straddle carrier operation, less for rubber-tire gantry (RTG). A typical general cargo berth can handle roughly 130,000 to 150,000 tons per year of 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 threequarters of the containers are full and the average full load is 10 tons per TEU, the throughput of this berth is some 4 million tons annually. The largest postpanamax container crane with some 57 meters outreach will cost about $8 million. Four to five of these cranes are needed to efficiently handle the largest postpanamax containerships (see Box 12). Overall, the infrastructure improvements and superstructure (cranes, straddle carriers or RTGs, tractors, and trailers, and so forth) needed for a modern two-berth container terminal will easily cost $150 million. In contrast, a typical 3–6 ton quay crane used for general cargo handling in the 1950s would have cost, at today’s prices, about $1 million.

Need for Container Port Productivity Improvements

A study concludes that “the economics of containership operation are critically dependent on port productivity . . . (and) continued general worldwide improvements in port productivity will so fundamentally alter the container shipping cost environment that, in the absence of any technological constraint, ship size optimums for all routes will continue to increase as they have done in the past” (see Boxes 13a and 13b andBox 14). A typical container terminal today has a static capacity of 40–200 TEU per hectare (depending on the yard stacking system in use), crane productivity of 25–30 gross moves per gantry-crane hour, average container dwell time of five to six days, and truck turnaround time of one hour. But future terminal requirements will be considerably more demanding. To accommodate the mega containerships coming into service, new terminals will require a static capacity density of 400–800 TEU per hectare, crane productivity of 200 moves per ship-hour at berth, maximum three days average dwell time, and truck turnaround of less than 30 minutes. Water depth at the future terminal will need to be at least 15 to 16 meters and increasingly larger cranes will be required to accommodate ships with a deck stack of up to 23 rows across.

Growing Role of Information Technology

Equally important in the future is the need for ports to expand the use of IT to support port user requirements, particularly relating to containerized traffic, although not exclusively. IT is increasingly employed throughout the ocean transport sector and has revolutionized the way intermodal traffic is handled. IT systems electronically link port administration, terminal operators, truckers, customs, freight forwarders, carriers, ship agents, and other members of the port community (see Box 15). The technology provides port users with real time data on the status of cargo, paperwork, and availability of port facilities, and enables ships and terminals to be part of an integrated office infrastructure. IT reduces time for delivering cargo; provides more accurate transfer and recording of information; reduces manpower for port operation paperwork; offers advance information on ship, barge, truck, wagon, container, and cargo movements; and improves planning and coordination of berths, handling equipment, and storage facilities (see Box 16). Ports unable or unwilling to keep pace with information technology will be left behind in the competitive ocean transport market.

Port Requirements for Large Cruise Ships

The cruise industry is producing requirements for more ports and enhanced facilities in existing ports to accommodate the growing number and size of cruise ships. During the decade before the attack of September 11, 2001, the industry had tremendous growth. Particularly significant was the growth in number of mega cruise ships, that is those more than 70,000 and up to 150,000 gross tons that carry 2,000–3,000 passengers or more. Since 2004, the market has recovered, new ships are being ordered and the share of mega cruise ships is increasing again.

With the growth in numbers of ships, the cruise lines need more ports to vary their itinerary. In selecting a cruise port, cruise ship operators look at:

1) Location of the port and cruising distance relative to other ports on a particular itinerary.
2) “Marquee” value and activities available for passengers.
3) Visitor safety and comfort.
4) Existence of head taxes.
5) Physical capabilities of the port to accept cruise ships (see Box 17).

Ports wanting to be cruise destinations must develop a strategy jointly with tourism officials to maintain tourism product quality and maximize visitor spending. For ports able to satisfy cruise operator needs, the operator may be willing to establish long-term agreements to bring its ships to the port on a regular basis for periods of up to 25 years. Such an agreement could be the basis for arranging financing by a developer to acquire the physical facilities and services in the port needed to accommodate cruise ships. The key issue here remains what guarantees a port has if the cruise operator stops port calls before the end of the agreed-on period.

Other Technology Affecting Port Services

Introducing podded drive propulsion systems can potentially reduce requirements for harbor tug services in port. These high power azimuthing systems significantly improve ship maneuverability, possibly eliminating the need for tug assist services for berthing. While podded drive to date has largely been limited to cruise ship and ferry propulsion, there are indications that use of the technology may spread to other types of ships, particularly where maneuverability is especially important (see Box 18).

Another new technology, self-unloading bulk carriers, is popular on the U.S. Great Lakes, and their use is spreading to other trades. These bulk carriers have the capability to discharge without the use of shore-based equipment, reducing the need for special facilities to unload bulk cargo.

Shifting Bargaining Power

Bargaining power results from the relative strength of the parties involved in a negotiation. The stronger the bargaining power, the more likely the party will get the greater gain in a transaction. In the port sector, the major parties to a negotiation are port users and port service providers. Current events are reshaping the relative strength of each of these parties; on the one hand, consolidation occurring among ocean carriers is producing increasingly stronger, more formidable customers that port authorities, terminal operators, and other port service providers must contend with in pricing and service negotiations. On the other hand, a relatively small number of companies have been acquiring terminals in ports in all areas of the world, creating terminal operators with global coverage that have the financial depth and negotiating strength to withstand demands of terminal users. Adding to this situation is the growing role of global logistics service providers who have considerable strength in dealing with both shipping companies and terminal operators. Finally, there is the unmistakable trend of carriers wanting to own and manage their own port and inland terminals. These changes are creating a shifting playing field for negotiations among port users and port service providers.

Consolidation among Ocean Carriers

Over the past decade there has been substantial consolidation in the ocean shipping sector (see Box 19). While this has been occurring in all sectors of the industry, it is most apparent in container shipping where it is estimated that in 2005, 25 carriers out of more than 400 now control more than 80 percent of container fleet capacity. This sector has witnessed a significant number of major mergers and acquisitions over the past 10 years, a trend that appears to have room to run.

The consolidation movement in the container shipping sector began with slot sharing arrangements, where carriers purchased slots in other carriers’ ships to provide service flexibility and more extensive geographical coverage. This expanded into multitrade alliances among carriers that focused on achieving efficiencies and better service by sharing vessels, utilizing common terminals, joint feeder service, and joint purchase of containers. The current activity in mergers and acquisitions is a third step in this pattern of cooperation. It simply takes the alliance concept to its ultimate stage—full ownership and control under one corporate umbrella.

The three largest container carriers illustrate the patterns of growth in the container shipping sector. Maersk Line, the largest player in container shipping with more than 500 ships and 1.5 million TEU capacity at mid 2005 with the completion of the Royal P&O Nedlloyd acquisition, illustrates a progression from global alliance to single corporate ownership. Until 1990, both Maersk and SeaLand operated as separate entities, each a major player in its own right. In 1991, they formed a global alliance to improve service and generate operating efficiencies.

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

The combined Maersk Line company is almost than twice the size of its nearest competitor, Mediterranean Shipping Company (MSC), a Geneva-based company that traces its origins to 1970, and more than three times the size of Evergreen, a Taiwan-based company that traces its origins to 1968. MSC has more than 290 ships with a capacity of close to 900,000 TEU, and showed a spectacular growth through acquisition of second-hand, new, and chartered tonnage rather than through acquisition or merger. Evergreen has more than 190 ships with a total capacity of 5,300,000 TEU, and acquired most of its capacity through internal expansion (although the company did acquire Lloyd Triestino).

A report by Drewry Shipping Consultants Ltd. (2006) includes a comprehensive analysis of the capacities, roles, and market shares of the global terminal operators. A group of more than 20 companies is analyzed, including global stevedores, global carriers primarily involved in liner shipping operations, and global hybrids (business units under global carriers). In 2005, these companies together controlled 178 million TEU or 44.5 percent of the world’s estimated container port throughput of approximately 400 million TEU (see Box 20 and Box 21). The remainder is practically equally divided over state-owned and private operators.

The league table is led by Hutchison Port Holdings (HPH) controlling 33.2 million TEU, 8.3 percent of the world’s port throughput capacity. In 2005, the five largest operators, HPH, PSA, APM Terminals, P&O Ports and DP World, controlled 112.7 million TEU, that is, 28 percent of the world’s port throughput. When considering the top 10 operators, these figures become 168 million TEU and 36 percent respectively. The top 10 global terminal operators are discussed in more detail below.

Hutchison Port Holdings launched its global expansion in 1991, using the experience and capabilities it developed operating container terminals in Hong Kong. Early in 2004, it operated container terminals in more than 30 ports, with a reported throughput of 33.2 million TEU in 2005 (see Box 22).

PSA Corporation embarked on a similar major effort to enlarge its global presence in container terminal operations in the mid 1990s, drawing on its experience in Singapore. The company reported a throughput of 28.7 million TEU in 2003 and 32.4 million TEU in 2005, of which more than 10 million were realized at its terminal operations outside Singapore. These terminals were also the main driver for PSA’s growth, as its home terminal continues to feel the strong competitive pressure from the cheaper Malaysian ports.

APM Terminals is still strongly linked to Maersk Line, especially in the provision of transshipment hubs such as Tanjung Pelepas, Algeciras, and Salalah, which accounted for 35 percent of its total throughput in 2003. The company, however, has shown a commitment toward serving the common user market, and Maersk Line’s share of the company’s total volume has declined from 75 percent in 2002 to less than 70 percent in 2004. APM Terminals has a strong presence on all U.S. coasts, a heritage from the SeaLand acquisition. In 2005, its throughput was 24.1 million TEU, a share of 6.0 of global throughput. Projections show a strong growth of nearly 12 percent per annum on average in capacity for the rest of the decade.

P&O Ports’ throughput amounted to 13.1 million TEU in 2005, pushing the United Kingdom-based company’s global share from to 3.3 percent. This growth was realized by a combination of new developments that became operational and autonomous growth at existing facilities.

Dubai Ports World (DPW) is a relatively new player in the international global terminal race, but has quite an aggressive growth and acquisition strategy. In 2005, its combined throughput was 9.9 million TEU compared to 6.5 million TEU for 2003. Much of this throughput was realized at its home base terminals in Jebel Ali and Port Rashid. From its successes at its home base, DPA (Dubai Port Authority), through its international vehicle DPW (formerly Dubai Ports International), started its expansion in and around the Middle East with terminals in Jeddah and Djibouti. It then had some successes in India (Visakhapatnam, Cochin, and Gangavaram), and in December 2004 took over CSX World Terminals (CSXWT), causing its total capacity to rise to 14.6 million TEU. DPW subsequently purchased P&O Ports in 2006 in a bidding war with PSA. The combined volumes of DPW and P&O Ports puts DPA/DPW in hot pursuit of the top three global terminal operators.

Evergreen’s terminal throughput was up 6.6 million TEU in 2005. The Taiwanese company’s strategy originally aimed at operating terminals in support of its liner operations, but increasingly the company is looking to attract third-party business.

Eurogate, originating from Bremen, has the narrowest geographic spread of the top 10 container terminal operators because it is only active in Europe, mainly in Germany and Italy. Its throughput in 2005 was 6.3 million TEU with its global share decreasing slightly as international operators expand their portfolios. The company is looking for growth from intermodal transport and feeder traffic, the latter mainly through increased transshipment at its German hub ports and investment in terminal development in Russia.

China Ocean Shipping Company (COSCO) operates its terminals through COSCO Pacific and COSCO Container Lines Company, both wholly owned subsidiaries of COSCO. The company’s shown enormous growth between 2002 and 2004. In 2005, there were even higher increases, up to 5.9 million TEU, mainly caused by the strong growth in the Chinese market, and to a lesser extent also by the COSCO’s willingness to enter into partnerships with other major global operators.

SSA Marine, based in Seattle, USA, traditionally has a strong presence on the U.S. East and West Coasts. It also has established a number of successful overseas operations, mainly in Central and South America, and more recently sought to invest in South East Asia. Its throughput in 2005 was 5.4 million TEU.

Mediterranean Shipping Company (MSC) has also significantly increased its presence in the terminal operation market with a strategy mainly focused on securing capacity for the carrier in home markets and transshipment facilities to support the carrier’s network. MSC’s terminal holdings are usually on a joint venture basis where the company is often partnering with local or regional operators and taking an equal or minority ownership.

With global container volumes still on the rise, partly due to the boost in Chinese volumes, virtually all global port operators show impressive growth rates. Moreover, many of them realized a great deal of their expansion by developing new terminals in China, and there is more capacity being planned to become available in the coming years. Global terminal operators that spawned from stevedores (as opposed to those owned by major container carriers) saw throughput at their homeports becoming increasingly less important as their overseas activities grew.

The top 25 of global terminal operators remains relatively volatile, with more consolidation through merger and acquisition yet to be expected. The larger players are in a race to develop new capacity and buy existing capacity, where the smaller players are prey. APM Terminals is expected to close in on PSA during the coming years. DPA/DPW, with its recent acquisition of CSXWT and P&O Ports, is now also knocking at the entrance of the top three with a very aggressive expansion strategy. COSCO showed quite an impressive growth, largely due to the Chinese market. Outside the top 10, MSC has steamed up the ranks moving it to 14th place in 2005. This growth has mainly been achieved by forming partnerships at its key Northern European ports to ensure longterm access to scarce capacity.

Emergence of Global Logistics Service Providers

Contributing to the realignment in bargaining power is the emergence of companies that offer full service logistics solutions to major shippers. These logistics service providers have substantial strength in dealing with shipping companies, terminal operators, and other port service suppliers, adding to the growing complexity in achieving a balance in port service negotiations. They make decisions that affect all parties involved in the supply chain, including port service providers. Logistics service providers manage the combined logistics requirements of the many large shippers they represent, giving them considerable strength in dealing with shipping companies, terminal operators, and others in the logistics channel. In response to market demand, some substantial players have targeted this activity, including Federal Express, which recently announced that it would enter the global logistics market for ocean freight.

These developments are changing the way port services are bought and sold. Alliances and consolidation among carriers result in the carriers having more business volume on the negotiating table, placing ports and terminal operators in an increasingly awkward position when it comes to negotiating strength. In some situations, the stakes are so high that the port or terminal can hardly afford to lose the carrier’s business. This can often result in the port having to make concessions to retain the traffic. For example, the Grand Alliance notified the Port of Rotterdam that for operational reasons it was temporarily switching one of its five Europe–Asia services to the rival Port of Antwerp. This service represented 125,000 TEU per year to the port. It may only be coincidental, but a month after the announcement, the Rotterdam Municipal Council decided not to increase harbor dues for the year 2000, citing growing competition between ports in general and tariff developments in directly competing ports in particular.

At the same time, the emergence of global terminal operators can result in pricing schemes that may not always favor the small volume or regional carrier. These global terminal operators may offer incentives to high volume customers and there is at least the possibility that the terminal operator could cross-subsidize international operations as necessary to compete for a major carrier’s business. Another possibility is that a truly global terminal operator could offer a package deal to a carrier that would provide a lower price or give concessions if the carrier uses only its terminals wherever available in the world.

Changing Distribution Patterns

As containerization has spread in ocean shipping, distribution patterns have increasingly evolved into a hub and spoke network. Facilities for devanning, clearing, staging, and storing containers are increasingly shifting inland, thereby becoming more decentralized. These developments are creating a hierarchy of ports and changing traditional port operations.

Ocean carriers have been increasingly using regional hubs for transshipment of containers. This is a worldwide trend that is accelerating as larger containerships come into service and the advantages of hub and spoke operations become more apparent. The hub and spoke concept is intended to maximize use of large containerships while providing market coverage to a maximum number of ports. This is accomplished via a network of regional and subregional hubs with onward service to outlying locations. Large line haul ships provide service between regional hubs. Progressively smaller ships are used to pick up and distribute containers within the region (see Box 23a and 23b).

Becoming a Hub

The most important attribute carriers look for is the strategic location of the hub relative to the primary origins and final destinations of container traffic. Beyond location, other attributes include the ability to safely accept large ships, extent of terminal facilities, efficiency of container handling operations, availability of frequent feeder services with an appropriate geographical coverage, and attractive cargo handling charges. Most carriers believe 15 meters depth is adequate to accept the largest containerships in service in the foreseeable future, although some carriers have recently specified 16 meters depth for entrance channels. Containership draft has not been increasing in proportion to the growth of TEU capacity, with most of the capacity growth in postpanamax ships the result of increasing the beam of the ship. A depth of 15 meters should accommodate all but the largest containerships now in service. It is nevertheless possible that potential hub ports will need depths in excess of 16 meters in the likely event that container vessels in excess of 10,000 TEU are ordered in future.

A transshipment hub should have terminal facilities that enable quick ship turnarounds. This includes adequate numbers of cranes, sufficient container handling and storage areas, and a first-rate computer system to run the entire terminal. As discussed in an earlier section, container cranes capable of spanning at least 18 rows and 6 tiers of containers on deck will be required to handle the 8,000+ TEU ships now in service. There is already a demand from carriers to install ship-to-shore container cranes with a capability of handling 22, and even 23, rows of containers across. Capability should be provided to berth one or more feeder ships in front of or behind the mother ship along the same quay—requiring quay lengths of typically 1,000 meters for a terminal designed to receive two main line vessels and their feeder vessels, and container yard depth behind the quay should be not less than 400–500 meters, and preferably deeper. The latter factor much depends on the container dwell time, the selected stacking and retrieval system, and the stacking rules, among many others.

Container handling productivity is of obvious importance to a carrier in selecting the transshipment hub. Carriers measure productivity in terms of how long it takes to turn around the ship, that is, enter port, discharge containers, load containers, and leave the port. Much of this is dependent on the availability of adequate facilities and suitable systems and the absence of administrative barriers. However, the capability to provide trained personnel on a 7-dayweek, 24-hour-per-day basis to operate cranes, position containers, and handle documentation has a major influence over the productivity of the terminal. And ultimately, productivity determines the cost of using the hub.

It is essential to have adequate feeder services to and from the transshipment hub. This in turn requires a flow of traffic that will make it attractive 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 carriers, there must be an established network of common feeder service that can be used to pick up and distribute containers. For feeder service companies to call regularly at the hub, there must be at least one, and preferably several, major line haul carriers whose containers need to be picked up and distributed.

Benefits of Hub Status

The most obvious benefit is the income generated from operations of a transshipment hub because of the double handling of containers. Consequently, container throughput in hub ports can be greatly boosted, particularly when expressed in TEUs. More importantly, transshipment hubs provide local importers and exporters direct access to line haul service, reducing transportation time (and possibly freight rates) to and from overseas markets. Reduced transport time directly affects the competitiveness of exporters and the cost of imports, in turn creating jobs and income throughout the economy. Many developing countries have created free trade zones in combination with the hub port as engines for economic growth. Jebel Ali illustrates how a hub port in conjunction with an associated free trade zone can create significant economic activity. The port, which began operating in 1979, now has 72 berths and is serviced by more than 100 shipping lines. About 1,125 companies from 72 countries have been attracted to start up operations in the free trade zone.

Hub Problems

Hubs compete in a highly competitive market segment where customers have options to use other facilities and pricing. An issue confronting the developer of a transshipment hub is how to prevent “hub hopping,” a situation where the number of competing hub facilities is growing rapidly and carriers have the ability to take their business elsewhere (see Box 24). In such a situation, a carrier that represents a significant portion of the terminal’s business can assert considerable pressure on the terminal owner or port to increase the service level offered and at the same time reduce charges and make concessions by threatening to vacate the hub. The owner of the facility would be faced with the dilemma of a $100–$200 million investment lying idle if the customer departs. This pressure could force the handling rates below the full cost of providing the transshipment facility. A long-term commitment from a carrier to use the facility before making major investment would be one way to minimize the possibility of hub hopping, although this does not constitute a solid guarantee. Another and possibly better way to retain hub traffic is to involve one or several carriers in the equity structure of the new facility.

Another consideration is that there are fewer terminal services on which to impose charges on transshipment traffic than on local traffic and, in general, the larger the percentage that transshipment traffic is to total volume, the smaller the additional revenue potential of the terminal. In addition, ports with a mixture of local and transshipment traffic frequently set transshipment charges low to attract mother ships to the port to improve throughput levels, achieve economies of scale, and lower handling cost. Service for import and export traffic can thereby be improved. A port highly specialized in transshipment business is at a distinct disadvantage competing with ports that have a mix of local and transshipment business, where revenue from the former is frequently used to cross-subsidize the latter. This is only acceptable because transshipment generates additional economic value.

Inland Container Terminals Shifting Activities from the Port

To maximize intermodal efficiency and free up valuable real estate in the port area, inland container terminals are increasingly displacing activity traditionally performed in the port. While there are many advantages to inland container terminals, from a port’s viewpoint there can be serious drawbacks as they divert economic activity away from the local area and open the possibility of competition from other ports (see Box 25).

Environmental and Safety Concerns

Given the growing concerns about protecting the environment, ports are now faced with the need to implement regulations that will affect the freedom of port users and must make a significant investment in environmental and safety facilities as well. These investments will have limited commercial value and often produce only indirect social payback. How to implement these regulations and finance related facilities is an important issue.

Growing Environmental Concerns

Eliminating oily ballast water discharge from ships is a major environmental concern. This issue is well recognized internationally and provision of adequate reception facilities in port is required under the International Maritime Organisation (IMO) International Convention for the Prevention of Pollution from Ships (MARPOL) Convention 1973/78. Regulation 10/7 and 12 of the pollution convention require each state to ensure that sufficient oily ballast water reception facilities are available at oil-loading terminals, ports with ship repair facilities, and in those ports in which ships have oily residues to discharge to shore. To meet these requirements, states need to offer reception facilities for tank washings (slops), contaminated ballast water, oily water from engine room bilges, and for residues from fuel oil purification, particularly heavy fuel oil. Providing such a reception facility entails a significant capital expense that produces little, if any, financial return. How to pay for this facility is a major issue confronting port authorities.

But environmental concerns relating to ships in port go beyond the issue of oily water discharge. They involve the entire range of environmental issues from water pollution, air pollution, aesthetics, noise, transfer of foreign marine species and more. Ports will need to find suitable solutions for disposing of dredged materials and implement regulations and operating procedures for terminals and anchorages to address these types of issues (see Box 26).

Recent Environmental Article

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

A program that calls for ships to reduce their speed to 12 knots or less within a 20-mile radius of the ports of Los Angeles and Long Beach saved 100 tons of harmful emissions in the first quarter of the year.

The Vessel Speed Reduction Program translates into an average daily savings of 1.1 tons of nitrogen oxide (NOx), according to Port of Los Angeles.

“We are very pleased with the amount of NOx being eliminated with the Vessel Speed Reduction Program,” said Port Interim Executive Director Bruce E. Seaton. “But we can do better. We want the compliance zone increased to 40 nautical miles, which is the influence area used by the Southern California Air Quality Management District to determine basin emissions.”

LA-Long Beach implemented the voluntary antipollution program in 2001 as a measure contributing to the ozone reduction goals in the 2003 State Implementation Plan for Marine Vessel Emissions Control Strategies. Currently, nearly 70 percent of shipping lines calling at the ports participate in the voluntary program.

Reported by Stephanie Nall, Pacific Shipper, in Seattle

Issue of Substandard Ships

Despite the fact that many ships have valid certificates issued by their flag states and classification societies, a number of ships do not comply with international standards for safety, pollution prevention, and shipboard living and working conditions recognized in international conventions. Political and social pressures have been placed on governments to implement policies to reduce the amount of substandard shipping in their waters. At an international level, the Paris Memorandum of Understanding (MOU) on Port State Control, which came into effect in 1982 and includes 18 signatory countries, requires each maritime authority to inspect a total of 25 percent of the individual foreign merchant ships entering the port state during a year. If ships do not meet a set of standard criteria, port states may detain the ships until proper measures are taken by the shipowner. The Paris MOU has led to more than 18,681 inspections of ships in member states in 2001 which resulted in 1,699 detentions. In 2000, the number of inspections was only 11,358 with a detention rate of 1,764. Since inception the number of detentions have decreased, suggesting either a positive impact of the measures or less rigorous inspection norms (possibly illustrated by the “Erika” disaster).

While enforcement of policies to eliminate substandard ships has a commendable objective, the enforcement practice can affect the competitive position of individual ports. For example, if a situation exists where the strictness or accuracy of inspections varies among port states, substandard ships may alter their routes and choose more accessible ports of call in a same range. Ports with lax inspection procedures would therefore have an unfair competitive advantage. One approach to offset this negative competitive impact is to focus on rewarding good behavior, rather than penalizing bad behavior. An example of an innovative approach that rewards good behavior is the Green Award, initiated by the Port of Rotterdam (see Box 27).

Impact of Changing Dynamics on Ports

Developments taking place in international logistics, shipping technology, industry consolidation, and environmental regulations are driving major changes in the way ports will operate in the 21st century. As the world economies become more intertwined, ports are being increasingly cast as partners in assisting customers to compete for business share in the global market. Technology in the shipping sector, particularly relating to containerization and information exchange, is changing at a rapid rate, creating the need for major financial commitments to stay ahead of the technology wave. Mergers and acquisitions in the shipping sector, along with the growth of a relatively small number of global terminal operators, are creating a small number of powerful players that change the way port services are bought and sold. Distribution patterns are increasingly evolving into hub and spoke networks, creating winners and losers among ports that achieve hub status. All through this is the increasing concern about the environment and safety, which affects the way ports deal with their customer bases.


How To Use The Toolkit


Framework for Port Reform

The Evolution of Ports in a Competitive World

Overview of the Competitive Landscape

Port Dynamics in the 21st Century

Challenges and Oppurtunities

Alternative Port Management Structures and Ownership Models

Legal Tools for Port Reform

Financial Implications of Port Reform

Port Regulation:
Overseeing the Economic Public Interest in Ports

Labor Reform and Related Social Issues

Implementing Port Reform


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