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3/5/2019 10:01:00 AM ID:971214078878
A Review on the Economic Activities of Ports and Terminals

A Review on the Economic Activities of Ports and Terminals

In the past fifty years, global economy has been underpinned on International trade. International trade facilitates the focus of production systems on relative advantage of economies, augments the global flow of work, capitals and goods and hence boosts the reduction of costs. It also provides the access of producers to global markets, and brings more diversity and competition to the markets to favor the global customers.
 By : Mehdi Rastegary
Head of Research and Development Sina Ports and Marine Services Co
Between 2001 and 2017, in line with the 5.67% annual growth rate in the world GDP, the merchandise export experienced 6.81% growth in the global level. Likewise, the global services export has grown 6.34% on average basis in the past 12 years. International trade relies heavily on transportation services. Transportation is the principal means for mobility of merchandises and the people around the world. The mobility of these resources is a key element to develop the needed efficiency, agility, and access to the global markets: transportation provides the cost-and-time-efficient delivery of resources (e.g. raw materials, semi-finished goods, equipment, labor force, etc.) for establishment of production systems throughout the world. Moreover, it also provides the access of billions of customers and consumers to the goods and services provided by multitude of suppliers in the global markets. This renders transportation to a very essential element in the global economy. Within the past decade, transportation services have constituted the average shares of 18.61% and 23.26% in the global export and import of all services, respectively. Between all the transport modes, Maritime transport has the largest share in facilitating the mobility for international trade. As oceans and seas cover 71% of the planet, maritime transport is practically seen as the best means of access to overseas markets. Moreover, in comparison to the other modes of transport, the maritime transport merits significant advantages in terms of economy of scale, less pollution, less consumption of renewable resources, less land use, and less need to infrastructural investments. On this basis, nearly all supply chains in our world have essential maritime transport legs within them. The global economy totally depends on the maritime transport; almost 90 % of the global trade is transported by sea and as D.Mitropolous once said, without maritime transport half of the world will freeze and the other half will starve.
Maritime transport and the roles of the ports 
Maritime transport actually works in terms of the interaction of merchant shipping and commercial ports. Considering the international trade as the blood in the body of the state’s economy, so the merchant shipping acts as the arteries that bring and carry it in high amounts to the ports (i.e. the heart). The other modes of transport also act as blood veins that carry the blood between the heart and the organs of the body. Nearly all of the international trade of a state runs through its ports and is circulated in the embodiment of its economy by different modes of transport. A state without ports can resemble a body without a heart that shall rely on an external pump to induce the blood circulation in it. This is most evidently seen in terms of the landlocked states: For instance Limao,N. and Venables A.J. (2000) in their study indicated that being located in a landlocked state is equivalent to a 1000-kilometer additional distance from the origins of trade. In this sense, access to sea is a great geo-economic advantage to any nation.
 The port acts as the vital hub for concentration of the hinterland societies’ supply chains. In this sense, those societies (that encompass households, firms, and the government) depend on the port for the delivery of the imported goods to them, as well as the delivery of their exported goods to the targeted overseas markets. Any defects or stoppages in the performance of ports will affect the performance of these supply chains and their interested parties in the hinterland and foreland. A certain impact of such poor performance will be an increase in the costs of maritime transport to that port. This will have detrimental effects on trade facilitation; for instance Limao,N. and Venables A.J. (2000) argue that a 10% increase in maritime transport costs will reduce the trade volumes by more than 20%. The findings of Radelet,S. and Sachs,J. (1998) also indicate that a raise in shipping costs will lead to reductions in the growth rates of manufactured exports and GDP per capita. They argue: “… doubling the shipping cost (e.g. from an 8% to 16% CIF band) is associated with slower annual growth of slightly more than-half of one percentage point.“ The most catastrophic impacts appear when these supply chains are totally disrupted by the shutdown of port for any possible reason. One clear instance was the Tianjin port explosions and the temporary shutdown of this port in August 2015 which according to Eventwatch annual report (2016) incurred a 9-billion USD loss in its depending supply chains throughout the world.
The ports shall primarily facilitate the exchange of goods between the maritime transport and inland transport modes. Whereas port development is a high-stake, timeconsuming, and expensive process, the limited number of ports with higher capacity and productivity often act as magnets of trade. Furthermore, as the shipping industry has focused on ship size growth as one of the main sources of economy of scale in sea, it is increasingly encountering diseconomy of scale in ports. The best instances can be seen in the container shipping segment: the ultimate container ship capacity grew %1200 larger between 1956 and 2015. Respectively, the shipping lines have been exceedingly demanding for higher quality port facilities and services in the past five decades. For instance, in 2011 the CEO of Maersk demanded for 6000 moves in 24 hours per ship. Such standards are still very hard to achieve even in the most developed ports of the world. Hence, the selective preferences and agreements in the shipping industry has led to emergence of hierarchical regional hub-and-spokes networks in the port markets throughout the world that focus on delivering the container trade in terms of transshipment. In this hierarchy, the hub ports attract more cargo traffic and shipping services, which not only comprises the gateway traffic for their hinterland societies, but also includes the traffic that should be delivered to the lower level ports in the hierarchy (i.e. the pivot and minor ports). In this sense, the transportation costs for the direct hinterland of higher-level ports always enjoy lower transportation costs, more speed in delivery of goods, and higher attraction of international trade and its value chains. In these structures, the top-most level ports (i.e. the regional hubs) also make enormous revenues at the price of higher transportation costs in lower level ports while extending their strategic influence on the supply chains of the hinterland  markets of these ports ( and their foreland markets). These conditions lead to development of a very risky and costly intraregional competition between the ports: every port is striving to ascend in the regional hierarchy and many of them are struggling to position themselves as the regional hub. This requires great investments in infrastructure and capital goods.
 
 As mentioned, the magnitude of cargo flows transported by ships is largely different with those delivered (or picked) by inland transport modes. The port shall be capable to handle the cargoes arriving (and leaving) by any of these transport modes and provide a buffer capacity to facilitate the interim storage of them in the port. In response to the ever-increasing demands of the shipping industry, the port should continually endeavor to improve its productivity or to construct new facilities. Both of these processes are technology-driven, capital-intensive, time-consuming with many constraints in terms of current operations, availability of land, time, finance, and many more factors. The port construction projects costs range from several millions to billions of Dollars and bring a great boom to the construction sector. Indeed, the port is the most significant infrastructural facility in the maritime transport. Yet, it is essential to consider that investment in port facilities mainly ends in sunk costs which can only be recovered from the revenues ( and other achievements) of the port. This is a very risky decision due to immovability of assets, entry barriers to the market, volatility of cargo flows, revenue troughs, relations with shipping lines, etc. These constraints bound the limits of the port and its terminal sizes; According to Rodrigue J.P.(2011): ”A too large single facility would represent an undue risk of capital investment as they can take a long time to amortize and reach profitable traffic levels. It is thus more likely that the existing model aiming towards clusters of terminals owned by different operators within the same port or in ports in proximity will endure as it conveys flexibility and competitive pressures within port facilities. Hence the right-sizing of port and its terminals is a critical and complicated decision in terms of policymaking in transportation systems. Ports are most characterized by the terminals industry as it represents the core business in them. The terminals industry is a semi-manufacturing industry that in spite of supplying terminal services is heavily reliant on port facilities, large terminal equipment fleets, and a huge pool of human resources. In order to avoid congestion, the terminal can only utilize 60 to 70 percent of its costly resources at best. This means that the terminals shall always carry the heavy burden of idleness of 30 to 40 percent of their afforded valuable resources at all times (in the best-perceived conditions). As a matter of this, the terminals industry is always concerned with optimal mobilization of its resources, maintaining highest possible levels of productivity, reducing costs, eliminating wastes, and maximizing the revenue streams. Although there is an almost permanent conflict between the economic interests of the shipping lines and the terminals, the terminal generally follow the demands of the shipping lines to keep them interested in the port. By emergence of Ultra Large Container Vessels, the waste and idleness of the terminal resources is also exacerbated. Among the instances for this, we can point to wastage of berths, heightening of the peaks and troughs in the workloads of terminal operations, worsening of schedule reliability issues, increase of the risk and the needed time in marine operations, and so on. In this context, the shipping lines generally always demand for better services with lower costs. In the microeconomic level, satisfying such demands is a constant challenge for the terminal operators throughout the world.
 
 Development of terminals and logistics facilities in ports requires a great amount of land. According to Rodrigue,J.P (2017), the need for land in ports is markedly growing in response to the need to serve larger ships in ports: while the area of container terminals in the past decade were normally around 30 hectares, the new container terminals area in the regional hubs is around 80 hectares. The port area needs heavy construction and maintenance. Moreover, the port area surroundings is usually occupied by many logistics and freight distribution centers that are also heavy consumers of land. Yet it is important to notice that port development also adds to the value of the land considerably. The lands inside the port perimeter are usually rented to port concessionaires (e.g. terminal operators) and other businesses for commercial use. The value of the land also rises in the neighborhood of the port area as businesses and industries locate themselves in the adjacency to benefit the advantages provided. This also brings population centers to the vicinity of the port and all these facts contribute towards adding to the value of land as a consequence of port development. Good instances can be sought in the added value of lands in mega port like Jebel Ali port (a former fishing village) and Singapore port (islands formerly characterized by wetlands). Ports also provide services that generate added value in the trade flows. These include:

•Receiving goods, breaking shipments, preparing for shipment, returning empty packaging

• Simple storage, distribution, order picking

• customizing, adding parts and manuals

• Assembly, repair, reverse logistics

• Quality control, testing of products

• Installing and instruction

• Product training on customer’s premises

The Value Added Logistics services not only provide the ports with extra revenue streams and employment opportunities, but they also attract more trade by integration of further links in the value chain to the port. The formation of value-added logistics clusters in ports not only supports and boosts the trade facilitation level in ports, but also provides the port with flourishing revenues and employment. The instances can be seen in Singapore, Jebel Ali, and the Korean and Japanese ports. In some parts of the world, the port also allows the manufacturing industries to enter into port areas. These industries locate themselves in the port area (or its adjacency) to benefit the advantages of the port. These may include speedy and cost-effective delivery of imports and exports (e.g. goods, raw materials, supplies, machinery, etc.), enjoying the value added logistics services, utilization of natural resources (e.g. water supplies), financial incentives, legal exemptions, and so on. These industries bring more resources, capabilities, trade, revenue, employment and population to the port. Instances of this are best seen in ports like Antwerp, Rotterdam, Shanghai, Kaohsiung, and many others.
The Role of Ports in Economic Development
Apparently according to our discussions, beside the essential contribution of ports to trade facilitation in the national and regional levels, they also act as significant contributors to local and national economy by employment, business development, revenue making, tax payments, and enhancement of welfare. There are several models to explain and assess the contributions to the national economy. The contributions are usually considered in form of employment, personal income, revenue, investments, turn over, facilitation of export, value added, and tax. The following exhibit indicates a scheme of the economic model acknowledged by the American Association of Ports and Harbors (AAPH).
 
 
In this model, the economic contributions of the port come from business revenues, jobs, personal income, and tax. In this sense, we will review the reported figures for UK, and US ports at each pace. The reports have been published by AAPH in United States and Centre for Economics and Business Research (CEBR) in United Kingdom. The author would like to notice that the methodologies of assessment and reporting the economic impacts of ports in these countries have some discrepancies, and the figures are only given to provide the reader with a rough sense of the magnitude of such impacts. The reporting has been done based on the performance of US ports and UK ports in 2014 and 2015 respectively.
 
 
The firms in the port businesses are organized to serve the freight flows that enter the port (from either sea or land). They gain their business revenues by supplying such demanded services in the port. The services may vary from port to port, but they mostly fall under the following table’s categorization. The list can be elaborated to several other kinds of charges and dues by referring to the tariff books of other ports. These charges and dues provide great stable revenue streams for ports. The terminal industry usually provide above 20% profitability, which is quite remarkable in the transportation sector.  
 
 
 By reliance on their revenues, the port firms employ people, provide the dividends to stockholders, make investments in their businesses, lessen their liabilities, and procure the needed goods and services to maintain their business activities. This revenue stream and the employment, personal income, and tax provided by it, establish the direct impact of port to national economy. Table 3 gives the estimated direct economic impacts of UK and US ports as reported by CBER and AAPH.
 
 The port firms spend a significant amount of their revenue to purchase the goods and services needed to maintain their business activities. These spends provide the grounds for development of many other depending businesses that in turn contribute to the economy by their own employments, investments, personal incomes, and tax payments. The economic impacts in these second-tier firms that are dependent on port firms constitute the indirect impacts of ports on national economy. The estimates for indirect economic impacts of ports in UK and US have been reported as below.
 
The employees in the port firms and those from the port-dependent firms spend most of their income in the state’s markets to provide the livelihood of their households. Moreover the relying firms on the port (e.g. the forwarders, the manufacturers, the haulers, the railway companies) make many purchases in the local and national markets. These spendings support the revenue streams, employment, personal income flows, and tax payments in a third tier of firms throughout the local and national markets and engender a third level of economic contribution that is acknowledged as induced economic impacts of the port. Table 4 contains the estimates of CBER and AAPH for the induced economic impacts of the UK and US port. 
 
The AAPH report goes one step further and estimates abovementioned quantities for the American exporters and importers who use US ports. Although one might argue that the sustenance and survival of these businesses and their supply chains depends on the functions of the port, others may find it exaggerating in some ways. The estimated figures for economic impact of these parties in US ports are given in table 6.  
 
By combination of the direct, indirect and induced impacts, one can achieve an aggregate measure of port’s economic impact in each contribution category. Table 7 gives the calculated multiplier for each impact category in UK ports. These multiplier coefficients can represent the proliferating contribution of the production factors to the entirety of national economy. For instance the data in table 8 implies that by creating each one job in the UK ports, more than 3 indirect jobs has been created among the suppliers of goods and services to the port firms, and this has further supported the generation of near to 3 other induced jobs in the society. In result, one can say that each employment opportunity in the port will support around 6 employment opportunities outside the port. 
 
The resultant economic impacts of the ports in national level can be estimated by incorporating the direct, indirect, and induced impact in each category in a lumpsum aggregate figure. AAPH also assimilates the exporters/importers impacts in each category. Table 7 presents the aggregate economic impacts of US and UK ports as reported by AAPH and CBER.  
 
By incorporating the estimates of exporters and importers into the aggregate economic impact constructs, the results astoundingly increase by 1267% in terms of employment, 686% in terms of personal income, 1931% in terms of GDP contribution, and 683% in terms of taxes.  
Nearly in all parts of the world, the studies concerning the economic impacts of ports signify the enormous size of such impacts on the entirety of the national economies. For instance, the CEBR report indicates that the UK ports has supported 2.21% of national employment and generated a volume of 224.4 Billion USD of Gross Value Added that is equivalent to 7.84% of GDP in the national level in 2015. Similarly the AAPH report suggests that in 2014 the economic output of cargo flow through the US ports has provided a value of 4.6 Trillion Dollars to the national economy (equivalent to 26.2% of United States’ GDP in the same year) and supported 15.64% of employment in the national level. 
 These interpretations strongly explicate that the economic role of ports is not restricted to trade facilitation, and the port itself acts as an engine that boosts the economic growth. By reviewing our discussions, we can say that the port is a dynamic, complex, and inevitable part of the transportation system that has determining effects on the economic life of the nations. Yet, the people, the policymakers, and even the port firms are less aware of the economic roles, capacities, and impacts of the ports. Developing and enriching this kind of understanding is the requisite condition to augment the needed mindset for transforming into a maritime nation. If not, the nation will not be able to develop her needed maritime advantages and will lose several precious development opportunities in a fast-paced globalized world.
 
 

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