The Blackwell Companion to Maritime Economics (Blackwell Companions to Contemporary Economics)

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Author: Wayne K. Talley

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THE BLACKWELL COMPANION TO MARITIME ECONOMICS

Blackwell Companions to Contemporary Economics The Blackwell Companions to Contemporary Economics are reference volumes accessible to serious students and yet also containing up-to-date material from recognized experts in their particular ﬁelds. These volumes focus on basic bread-and-butter issues in economics as well as popular contemporary topics often not covered in textbooks. Coverage avoids the overly technical, is concise, clear, and comprehensive. Each Companion features introductions by the editors, extensive bibliographical reference sections, and an index. A Companion to Theoretical Econometrics edited by Badi H. Baltagi A Companion to Economic Forecasting edited by Michael P. Clements and David F. Hendry A Companion to the History of Economic Thought edited by Warren J. Samuels, Jeff E. Biddle, and John B. Davis A Companion to Urban Economics edited by Richard J. Arnott and Daniel P. McMillen The Blackwell Companion to the Economics of Housing: The Housing Wealth of Nations edited by Susan J. Smith and Beverley A. Searle The Blackwell Companion to Maritime Economics edited by Wayne K. Talley

The Blackwell Companion to Maritime Economics Edited by Wayne K. Talley

A John Wiley & Sons, Ltd., Publication

This edition ﬁrst published 2012 © 2012 Blackwell Publishing Ltd. Blackwell Publishing was acquired by John Wiley & Sons in February 2007. Blackwell’s publishing program has been merged with Wiley’s global Scientiﬁc, Technical, and Medical business to form Wiley-Blackwell. Registered Ofﬁce John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, UK Editorial Ofﬁces 350 Main Street, Malden, MA 02148-5020, USA 9600 Garsington Road, Oxford, OX4 2DQ, UK The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, UK For details of our global editorial ofﬁces, for customer services, and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com/ wiley-blackwell. The right of Wayne K. Talley to be identiﬁed as the author of the editorial material in this work has been asserted in accordance with the UK Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. Library of Congress cataloguing-in-publication-data The Blackwell companion to maritime economics / edited by Wayne K. Talley. p. cm. – (Blackwell companions to contemporary economics) Includes bibliographical references and index. ISBN 978-1-4443-3024-3 (hardback : alk. paper) 1. Shipping–Economic aspects. 2. Merchant marine. I. Talley, Wayne Kenneth. HE582.B56 2012 387–dc23 2011045993 A catalogue record for this book is available from the British Library. Set in 11/13 pt Dante by Toppan Best-set Premedia Limited

1

2012

To my wife, Dorothy (Dolly) Cordle Talley

Contents

List of Figures List of Tables Notes on Contributors Preface PART I

INTRODUCTION

x xv xix xxviii 1

1

General Introduction Wayne K. Talley

2

The Evolution of Maritime Economics Trevor D. Heaver

16

3

The Business of Shipping: An Historical Perspective Ingo Heidbrink

34

4

International Seaborne Trade Michael Tamvakis

52

PART II

MARITIME CARRIERS AND MARKETS

3

87

5

Maritime Carriers in Theory Wayne K. Talley

89

6

Maritime Freight Markets Siri Pettersen Strandenes

107

7

Intermodalism and New Trade Flows Lixian Fan, Mohan M. Koehler and Wesley W. Wilson

121

8

Cruise Lines and Passengers Simon Véronneau and Jacques Roy

138

9

Ferry Passenger Markets Tor Wergeland

161

viii

CONTENTS

PART III

SHIPPING ECONOMICS

185

10

Dry Bulk Shipping George A. Gratsos, Helen A. Thanopoulou and Albert W. Veenstra

187

11

Liquid Bulk Shipping Dimitrios V. Lyridis and Panayotis Zacharioudakis

205

12

Container Shipping Theo Notteboom

230

13

New Business Models and Strategies in Shipping Peter Lorange and Øystein D. Fjeldstad

263

14 Shipping Regulatory Institutions and Regulations Paul G. Wright

281

15

Shipping Taxation Peter Marlow and Kyriaki Mitroussi

304

16

Seafarers and Seafaring Heather Leggate McLaughlin

321

17

Safety in Shipping Di Jin, Hauke Kite-Powell and Wayne K. Talley

333

18

Piracy in Shipping Maximo Q. Mejia, Jr., Pierre Cariou and François-Charles Wolff

346

PART IV 19

SHIP ECONOMICS

The Economics of Ships Harilaos N. Psaraftis, Dimitrios V. Lyridis and Christos A. Kontovas

371 373

20 Ship Finance: US Public Equity Markets Costas Th. Grammenos and Nikos C. Papapostolou

392

21 Ship Finance: US High Yield Bond Market Costas Th. Grammenos and Nikos C. Papapostolou

417

22 Ship Finance: Hedging Ship Price Risk using Freight Derivatives Amir H. Alizadeh and Nikos K. Nomikos

433

23

452

Marine Insurance Stanley Mutenga and Christopher Parsons

PART V 24

PORT ECONOMICS

Ports in Theory Wayne K. Talley

471 473

CONTENTS

ix

25

Port Governance Mary R. Brooks and Athanasios A. Pallis

491

26

Port Labor Peter Turnbull

517

27

Port Competition and Competitiveness Theo Notteboom and Wei Yim Yap

549

28

Container Terminal Efﬁciency and Private Sector Participation Baris Demirel, Kevin Cullinane and Hercules Haralambides

571

29 Determinants of Users’ Port Choice Photis Panayides and Dong-Wook Song

599

30

Port Investment and Finance Sander Dekker and Robert J. Verhaeghe

623

31

Ports as Clusters of Economic Activity Peter W. de Langen and Elvira Haezendonck

638

32

Port State Control Inspection Deﬁciencies Pierre Cariou, François-Charles Wolff and Maximo Q. Mejia, Jr

656

33

Port Security: The ISPS Code Adolf K. Y. Ng and George K. Vaggelas

674

34

Port Security and the Quality of Port Interchange Service Wayne K. Talley and Venus Y. H. Lun

701

Index

717

List of Figures

4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 5.1 5.2 6.1 6.2 7.1 7.2 7.3 7.4 8.1 8.2 8.3

World seaborne trade shares, in billion ton-miles World seaborne trade development by major commodity, in million tons World seaborne trade development, in million tons, and average haul Crude oil import development, 2001–2009 Crude oil export development, 2001–2009 Oil product export development, 2001–2009 Oil product import development, 2001–2009 The choice between gas pipeline and LNG Natural gas trade development, 2001–2009 Hard coal trade development, 1980–2009 Seaborne iron ore trade development, 1975–2008 Steel products trade development, 1975–2008 Seaborne grain trade development, 1975–2008 World merchandise trade by major commodity groups, 2008 Volume and value of seaborne trade by cargo type, 2006 Containerized trade volumes, 2009 (estimates) Shipper demand for maritime freight transportation service at full prices Passenger demand for maritime passenger transportation service at full prices Volatility in Baltic Exchange freight indexes Time charter rates for container vessels, 2000–2009, in US$/day Average quantity over time (million kilo) Surviving and failing new ﬂows – linear Surviving and failing new ﬂows – log Probability of exit, entry size and containerized North American passenger market Average annual passenger trafﬁc growths (%) – North America (1999–2008) Mexican and Central American market

53 54 54 57 58 60 61 63 63 68 72 73 77 82 83 84 102 103 109 112 128 130 130 133 147 148 149

LIST OF FIGURES

8.4 8.5 8.6 8.7 8.8 8.9 8.10 9.1 9.2 9.3 9.4 9.5 9.6 10.1 10.2 10.3 10.4 10.5 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 11.9 11.10 11.11 11.12 11.13 11.14 11.15 11.16 11.17 11.18

Average annual passenger trafﬁc growths (%) – Mexico and Central America (1999–2008) Caribbean ports passenger market Average annual passenger trafﬁc growths (%) – Caribbean (1999–2008) European passenger market Average annual passenger trafﬁc growths (%) – Europe (1999–2008) Far East and Oceania passenger market Average annual passenger trafﬁc growths (%) – Far East and Oceania (1999–2008) Overlaps in the ferry market Hierarchy of ferry demands The diversity of the top ﬁve ferry operators, 2008 Number of trailer-decks on ferries delivered 1965–2010 Strategic types of shipping markets Positioning of the ferry shipping segment Bulk cargoes, 1970–2008 Tanker and bulk carrier capacity in million dwt, 1970–2009 Fixture counts per contract type per month, 2001:1 to 2009:12 (in percentage share) Fixture counts by month, 2001–2009; loading iron ore at West Australian ports Contracts duration and average period rate, Capesize vessels The shipping cycle stages Ras Tanura–Rotterdam 280K tons VLCC Worldscale rate time series VLCC vessel capacity supply time series in million tons DWT Oil tanker capacity demand time series Laid-up tonnage for oil tankers 150,000 tons DWT oil tankers in slow steaming mode OBO ships, Capesize >160,000 tons DWT supply time series O&P Aframax Tankers order book time series in tons DWT Future market for Capesize Bulker in tons DWT Newbuilding prices for a VLCC of 315,000–320,000 tons DWT VLCC in US$ million Price in US$ million for a ﬁve-year-old double-hull 310,000 tons DWT VLCC Scrap prices in US$ million for VLCC oil tankers time series Interaction between shipping market variables in the time ﬁeld Cross-correlation between supply for transport services and freight rates Cross-correlation between freight rates and demand for sea transportation services Oil production of OPEC countries versus VLCC oil freight rates Freight rate generation mechanism Effects of external factors on freight rates

xi

150 151 152 153 154 155 156 162 168 171 174 177 178 191 194 199 200 201 212 215 216 217 217 218 218 219 219 220 220 221 221 222 223 226 226 227

xii

11.19 12.1 12.2 12.3

12.4 13.1 13.2 14.1 14.2 15.1 15.2 18.1 18.2 18.3 18.4 18.5 18.6 18.7 18.8 18.9 18.10 18.11 20.1 20.2 21.1 22.1 22.2 22.3

LIST OF FIGURES

Schematic approach of the freight rates generation mechanism Container trade on the main routes, in TEU (full containers) Trafﬁc imbalances on the main routes, based on volumes in TEU (full containers) Container rates (including BAF and CAF) from a North European container port to a series of overseas destinations, in October 2009, in US$ Evolution in strategic alliance conﬁguration in liner shipping Portfolio: owning steel – Seaspan example (container ﬂeet owner) Portfolio: using steel – Clarkson offshore hedge fund example Structure of the IMO Timber load line mark and lines to be used with this mark The EU maritime cluster Comparison of ﬁscal regimes Number of reported acts of piracy and armed robbery against ships (1996–2008), by year Number of reported acts of piracy and armed robbery against ships (1996–2008), by location Number of reported acts of piracy and armed robbery against ships (1996–2008), by type Number of reported acts of piracy and armed robbery against ships (1996–2008), by status of ship when attacked Number of reported acts of piracy and armed robbery against ships (1996–2008), by type of vessel Relationship between number of attacks and GDP per capita, 1996–2008 Real GDP per capita (in 2005 US$) and location of attacks, 1996–2008 Number of reported acts of piracy and armed robbery against ships and socio-political indicators in Indonesia (1996–2008) Number of reported acts of piracy and armed robbery against ships and socio-political indicators in Bangladesh (1996–2008) Number of reported acts of piracy and armed robbery against ships and socio-political indicators in Nigeria (1996–2008) Number of reported acts of piracy and armed robbery against ships and socio-political indicators in Somalia (1996–2008) US shipping IPOs and secondary offerings 1987–2010 (as of March 2010) Average number of analyst coverage per share US shipping high-yield bonds 1992–2010 (as of March 2010) Plot of second-hand ship values and Cal2 4TC FFA in the Capesize sector Plot of second-hand ship values and Cal2 4TC FFA in the Panamax sector Plot of second-hand ship values and Cal2 6TC FFA in the Supramax sector

227 232 247

250 252 270 272 286 292 306 312 354 356 357 358 361 362 363 364 365 366 367 401 406 420 440 440 440

LIST OF FIGURES

24.1 24.2 24.3 24.4 25.1 25.2 25.3 27.1

Shipper demand for port freight interchange service at full prices Passenger demand for port passenger interchange service at full prices Maritime-carrier demand for port vessel interchange service at full prices Surface-carrier demand for port vehicle interchange service at full prices A broader view of governance The multi-modal governance vision The local infrastructure or transportation governance structure Framework for analyzing inter-container port relationships for the case of two ports 27.2 Analysis of changes in container shipping services for the case of two ports 27.3 Evolution of market share and average annual growth based on annual throughput in TEU 27.4(a) Development of ASC which called at Port Klang, Singapore and Tanjung Pelepas 27.4(b) Development in share of ASC connected to the selected ports 27.5 Evolution of market share and average annual growth based on annual throughput in TEU 27.6(a) Development of total ASC which called at Hong Kong and Shenzhen (in TEU) 27.6(b) Development in share of ASC connected to the selected ports 27.7 Evolution of market share and average annual growth based on annual throughput in TEU 27.8(a) Development of ASC that called at the selected ports in Northwest Europe (in TEU) 27.8(b) Development in share of ASC connected to the selected ports 28.1 Relationship between efﬁciency (DEA-CCR) and scale (throughput) 28.2 Relationship between efﬁciency (DEA-BCC) and scale (throughput) 30.1 Decision making on port investment and ﬁnance strategies 30.2 Interdependent stages in the port cargo transfer process 30.3 Schematization of a port from a national welfare perspective 30.4 Efﬁciency gains due to economies of scale in port exploitation 31.1 A “decision tree” for a cluster manager 31.2 The ownership structure of CMP 31.3 Evolution of CMP market share in Sweden and Denmark (1998–2008) 31.4 Dynamic port portfolio analysis of CMP and eight relevant competing ports 32.1 Mean number of deﬁciencies (bar) and detention rates (line) over time, by type of vessel and year 32.2 Type of deﬁciency detected by port state control authority, vessel age at inspection and ﬂag of registry 32.3 Change in number of deﬁciencies detected between two successive inspections, by type of vessel

xiii

486 486 487 487 503 503 503 555 556 557 559 559 560 562 562 564 566 566 590 590 626 627 634 634 643 648 649 650 660 662 667

xiv

32.4 33.1 33.2 33.3 33.4 33.5 33.6

LIST OF FIGURES

Change in number of deﬁciencies detected between two successive inspections, by type of deﬁciency Port security administration structure in Hong Kong Port security administration structure in Greece The three-tiered security levels adopted by the port of Hong Kong Information on the current security level in Greece Procedures for the approval of PFSAs and PFSPs in the port of Hong Kong Procedures for the approval of PFSAs and PFSPs in the port of Piraeus

668 682 684 685 686 688 689

List of Tables

2.1 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 7.1 7.2 7.3 7.4 7.5 7.6 7.7 8.1 8.2 8.3 8.4 8.5 8.6 8.7 9.1 9.2 9.3 9.4

Segmentation proﬁle of research Oil trade matrix (2009) Oil and reﬁned products trade ﬂows (2009) LNG trade matrix (2009) Coal trade ﬂows (2008) Iron ore trade ﬂows (2008) Steel trade ﬂows (2008) Wheat and coarse grains trade ﬂows (2007) Soybeans and rice trade ﬂows (2007) The twenty leading service operators of container ships at the beginning of 2009 Degree of containerization in a selection of European mainland ports New trade ﬂows by year Coefﬁcient estimates for equation (1) Coefﬁcient estimates for equations (1) and (2) with a natural log dependent variable Failure proportions by containerization Coefﬁcient estimates of failure probability Revenues for three major cruise lines in 2009 Aggregate revenues for three major cruise lines between 2005 and 2009 Operating expenses for three major cruise lines for 2009 Aggregated operating expenses for three major cruise lines in 2007, 2008 and 2009 Operating and net income for three major cruise lines in 2009 North American market ships European market ships Fleet for four segments 2008, including ships on order Distribution of world ferry trafﬁc volumes, 2008 Number of routes and competitors in selected ferry regions, 2006 European ferry routes with three or more competitors

26 59 62 66 69 72 74 78 80 123 124 128 129 131 132 132 143 143 144 145 145 157 158 163 165 166 166

xvi

LIST OF TABLES

9.5 9.6 9.7 9.8 9.9

Ferry trafﬁc in the Greek archipelago in 2005 Selected large non-European ferry operators, 2008 Ranking of European ferry operators by passenger capacity of ships, 2008 Market shares of top twenty ferry operators The route basis of the top ten operators, with the percentage of their passenger capacity Possible ranking of technologies regarding various route aspects Development of market shares on the Dover–Calais route (%) Ferry industry attractiveness, from a route perspective World population and large dry-bulk cargoes in million metric tons, 1960–2009 Major iron ore importers, mid-1980s and 2008 Dry-bulk vessel sizes, mid-1980s and mid-2000s Share of vessels > 200,000 dwt in total bulk carriers within age bands Share of the leading dry-bulk carrier ﬂeets in the world dry-bulk tonnage by ﬂag, 1989 and 2009 Top six dry-bulk carrier ﬂeets controlled by nationals, January 2009 Top 15 crude oil producers and consumers Top 15 crude oil importers and exporters Estimated productivity of tankers, bulk carriers and the residual ﬂeet, selected years Cross-correlation tests between oil production of OPEC countries and demand for oil tanker transport service Cross-correlation between oil production of OPEC countries and VLCC oil freight rates World container port throughput and its components for selected years Top twenty container ports based on throughput in million TEU (1975–2009) The ranking of major container handling regions in the world (in million TEU) Composition of the world cellular container ship ﬂeet in October 2009 Composition of the cellular container ship ﬂeet for selected dates Changes in ﬂeet operations, TEU-mile supply Financial results for a number of major container shipping lines Breakdown of transport costs Shanghai–Brussels for a 40-foot container with a cargo load value of 85,000 euro (market prices of February 2007) Slot capacities of the ﬂeets operated by the top twenty container lines (in TEU) Shipping business model archetypes Calculation of the effective rate of tax Net present value per £1 m invested Tonnage tax in different ﬂags in 2009

9.10 9.11 9.12 10.1 10.2 10.3 10.4 10.5 10.6 11.1 11.2 11.3 11.4 11.5 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8

12.9 13.1 15.1 15.2 15.3

167 169 169 171 172 175 179 181 191 192 193 193 196 197 206 207 207 225 225 231 234 236 238 240 242 246

249 254 269 308 311 314

15.4 16.1 16.2 16.3 17.1 17.2 17.3 18.1 20.1 20.2 20.3 20.4 20.5 21.1 21.2 21.3 21.4 21.5 22.1 22.2 22.3 22.4 22.5 25.1 25.2 25.3 25.4 25.5 25.6 25.7 25.8 26.1 27.1 27.2 27.3 27.4 27.5

LIST OF TABLES

xvii

UK tonnage tax rates Estimated supply of seafarers 2005 Estimates of numbers of seafarers for top ten supplying countries Estimated demand for seafarers 2005 Variable deﬁnitions and descriptive statistics Cargo vessel accident damage severity equation estimates Marginal cargo vessel accident damage severity probabilities Characteristics of 3,957 reported acts of piracy and armed robbery against ships (1996–2008), by location of attack (%) US Initial Public Offerings and Secondary Offerings statistics 1987–2010 (as of March 2010) Total world ﬂeet (DWT million), March 2010 Total world orderbook (DWT million), March 2010 Institutional ownership per sector (as of March 2010) Deadweight and average age of US public shipping companies Characteristics of shipping companies that defaulted in 1999 Shipping high-yield bond offerings according to year of issuance as of March 2010) Brief description of rating standards Shipping high-yield bond offerings according to Standard & Poor’s credit rating classiﬁcation, 1992–2010 Descriptive statistics for shipping high-yield bonds ratings Baltic FFA and Sale and Purchase assessments Descriptive statistics of vessel values and 2nd nearest calendar FFA prices Result of Johansen’s reduced-rank cointegration test of log-prices (p) and log calendar TC FFA (f) Result of VECM for three sizes of dry bulk carrier Estimates of OLS hedge ratios for three sizes of dry bulk carriers Responses and other sources Current governance structure US Port governance and management deﬁnitions US public seaports governance and responsibilities Entities operating container terminals in non-UK European seaports Entities operating container terminals in North America Board structure Board composition Dock labor schemes in Europe, North America and Australasia Service attributes of the EU1 service of the Grand Alliance ASC affected by inter-port competition in the Malacca Strait ASC affected by inter-port competition in the Pearl River Delta Comparison of container shipping statistics between Hong Kong and Shenzhen (2006) ASC affected by inter-port competition in the Antwerp–Hamburg range

315 322 322 323 338 341 343 352 395 402 402 407 408 419 421 424 425 427 438 441 444 445 447 496 497 499 499 506 507 508 509 523 555 558 563 563 567

xviii

LIST OF TABLES

28.1 Summary statistics of variables for efﬁciency analysis 28.2 Efﬁciency estimates of the container terminals in the sample 28.3 Summary statistics for efﬁciency estimates 28.4 Average efﬁciency estimates for each country in the sample 28.5 Average efﬁciency estimates for each year in the sample 28.6 Summary statistics of variables for Tobit regression analysis 28.7 Summary output for Tobit regression analysis 28.8 Average technical efﬁciency in the Eastern Mediterranean region 28.9 Port governance and average efﬁciencies 28.10 Average technical efﬁciency in Turkey 28.11 Scale efﬁciency estimates of the container terminals in the sample 29.1 Shipping line port choice studies 29.2 Port selection criteria measures 29.3 The ranking of port selection criteria 31.1 Key characteristics of both port perspectives 31.2 Activities included in a port cluster 31.3 Cluster investments of PAs 31.4 Key total trafﬁc ﬁgures of CMP (2001–2009) 32.1 Characteristics of vessels inspected (2002–2009) 32.2 Type of deﬁciency by year of inspection 32.3 Probability of detecting a deﬁciency: marginal effects 32.4 Probability of transition in deﬁciencies from t-1 to t: marginal effects 33.1 The composition of PASAC in 2009 33.2 The composition of the MSC and the PSA 34.1 An empirical analysis of port interchange versus port security service operating option responses

580 582 582 583 583 585 585 587 588 589 592 605 613 616 640 641 644 649 659 661 663 670 682 685 709

Notes on Contributors

Amir H. Alizadeh is a Reader in Shipping Economics and Finance at Cass Business School, City University London, and a visiting professor at Copenhagen Business School and the University of Geneva. He has published in the areas of freight market models, markets for ships, and derivatives and risk management in ﬁnancial and commodity markets. He has delivered Baltic Exchange courses in “Freight Derivatives and Shipping Risk Management” and “Advanced Freight Modeling and Trading” in maritime centers worldwide. Mary R. Brooks is the William A. Black Chair of Commerce at Dalhousie University, Halifax, Canada. She has been actively engaged in the work of the US Transportation Research Board since 1993 and is a member of the Marine Board of the US National Academy of Sciences. She is the founder and chair of the Port Performance Research Network of more than 50 scholars interested in port governance and port performance issues. Pierre Cariou is an Associate Professor at Euromed Management, Marseilles Business School, France. He held the French Chair in Maritime Affairs at the World Maritime

University, Sweden from 2004 to 2009, where he was also in charge of the Shipping and Port Management MSc. From 2001 to 2004, he was Associate Professor in Economics at Nantes, France. He completed his PhD in 2000 on liner shipping strategies. His main research interests are in maritime economics, safety and security. Kevin Cullinane is Director of the Transport Research Institute at Edinburgh Napier University. He is a Fellow of the Chartered Institute of Logistics and Transport, a Visiting Professor at the University of Gothenburg and an Honorary Professor at the University of Hong Kong. He has been a logistics advisor to the World Bank and a transport advisor to the governments of Scotland, Ireland, Hong Kong, Egypt, Chile, Korea and the UK. Sander Dekker is presently a senior consultant of Ports and Waterways at Grontmij N.V. in the Netherlands. He is involved in port development projects in the Netherlands and elsewhere, and specializes in feasibility studies and asset management. He graduated from Delft University of Technology (MSc, PhD) in the ﬁeld of Strategic Port

xx

NOTES ON CONTRIBUTORS

Planning. Since graduation (2005), he has worked as a consultant. Baris Demirel is a senior customs expert at the Turkish Customs Administration. He received his BS in Business Administration in 2001 from the Middle East Technical University (in Ankara, Turkey), and his MS in Maritime Economics and Logistics (MEL) in 2009 from Erasmus University Rotterdam as a government scholar. His dissertation on the impact of private involvement on port efﬁciency won the MAERSK Line Best Thesis Award at the MEL Center of Erasmus University in 2009. Lixian Fan is currently a PhD student in the Department of Logistics and Maritime Studies at the Hong Kong Polytechnic University. She received her Bachelors and Masters degrees in Statistics from universities in mainland China. Her research interests include shipping economics and policy, ship investment and marine logistics. Øystein D. Fjeldstad is the Telenor Professor of International Strategy and Management at BI-Norwegian School of Management. He holds a PhD in Business Administration and a Master of Science in Management Information Systems from the University of Arizona, and the Siviløkonom degree from the Norwegian School of Economics and Business Administration. His research interests include strategy, innovation and organizational design, with empirical contexts in telecommunications, ﬁnancial services, shipping and technology. Costas Th. Grammenos is Professor of Shipping, Trade and Finance at City University London. In 1977, he introduced

a bank shipping ﬁnance credit analysis and policy that is utilized by most international banks. He has drawn the attention of the shipping world to equity and debt markets. He was awarded a DSc for creating the new academic discipline “Shipping Finance” and appointed OBE (Hon) and CBE (Hon) by HM Queen Elizabeth for “services to teaching and research.” George A. Gratsos is the President of the Hellenic Chamber of Shipping, Vice President of HELMEPA and a board member of the Union of Greek Shipowners. He is a naval architect with a degree from the Massachusetts Institute of Technology and a PhD in Shipping Markets from the University of the Aegean. He holds and has held various national and international shipping industry positions and is the President of Standard Bulk Transport Corp., which manages bulk carriers. Elvira Haezendonck is an Associate Professor at the University of Brussels (VUB) and Visiting Professor at the University of Antwerp, Erasmus University Rotterdam and Euromed Marseille. Her research covers (environmental) strategy, competition analysis, corporate social responsibility (CSR), and stakeholder management applied to ports. She has been involved in over 30 national and EU research projects, for example long-term strategy analyses, strategic projects, multinational strategies and impact assessments. Since 2010 she has held a research chair in Public–Private Partnerships at VUB. Hercules Haralambides is Professor of Maritime Economics at the Erasmus School of Economics and Director of the Erasmus Center for Maritime Economics and Logis-

NOTES ON CONTRIBUTORS

tics (MEL). He is the founder and editor-inchief of the quarterly Maritime Economics and Logistics, the founder of the Special Interest Group on Maritime Transport and Ports of the World Conference of Transport Research (WCTR), and one of the three founders (1990) of the International Association of Maritime Economists. Trevor Heaver is Professor Emeritus, University of British Columbia. In recent years, he has been Visiting Professor at the Universities of Antwerp, Sydney and Stellenbosch. He is a founding member and a past president of the International Association of Maritime Economists and a past chairman of the World Conference on Transport Research. He has published widely on transportation, logistics and transportation policy and has consulted for corporations and governments internationally. Ingo Heidbrink is a German maritime historian currently working as a Professor of History at Old Dominion University in Norfolk, Virginia. His research interests are methodology of maritime history, ﬁsheries history and interdisciplinary projects in the context of maritime history. He is Secretary General of the International Commission of Maritime History and CoPresident of the North Atlantic Fisheries History Association. Di Jin is a Senior Scientist at the Marine Policy Center of the Woods Hole Oceanographic Institution. He holds a PhD in Economics–Marine Resources from the University of Rhode Island. He specializes in the economics of marine resources management and marine industries and has substantial research experience in the com-

xxi

mercial ﬁshing and aquaculture industries, the offshore oil and gas industry, the marine transportation industry and coastal management problems. Hauke L. Kite-Powell is a Research Specialist at the Marine Policy Center of the Woods Hole Oceanographic Institution. He received his PhD in ocean systems management and a degree in naval architecture, technology and policy from the Massachusetts Institute of Technology. His research focuses on public and private sector management issues for marine resources and the economic activities that depend on them, and on the integration of economic and physical/biological models. Mohan Koehler graduated magna cum laude from the University of Oregon with majors in Finance and Economics with departmental honors in economics. His research has focused on intermodal transportation and the dollar–euro spot exchange rate. He served on the Duck Store’s board of directors as Chairman and Treasurer from 2008 to 2010. Christos A. Kontovas holds a diploma in Naval Architecture and Marine Engineering from the National Technical of Athens (NTUA) (2005). He is currently a doctoral researcher at the Laboratory for Maritime Transport of the NTUA. His PhD studies focus on quantitative methods for risk assessment and decision making that can be used in investigating threats to human life, property and the environment (oilspills and air emissions). Peter W. de Langen works at the Port of Rotterdam Authority, Department of Corporate Strategy, as senior advisor and is

xxii

NOTES ON CONTRIBUTORS

involved in various strategic renewal projects. He also holds a part-time position as Professor of Cargo Transport and Logistics at Eindhoven University of Technology. He publishes articles on port selection, port policy, and international transport and logistics chains in academic journals and codirects a dissemination platform for port studies at www.porteconomics.eu. Peter Lorange holds a DBA degree from Harvard University. He is a former President of the Lorange Institute of Business Zurich and of the Norwegian School of Management. He has taught at the Wharton School, University of Pennsylvania, and the MIT Sloan School of Management. He holds numerous honorary doctorates, and has published 18 books and 120 articles. His areas of special interest are strategic management, strategic planning and entrepreneurship for growth. Venus Y. H. Lun is a Lecturer in Shipping Logistics in the Department of Logistics and Maritime Studies, Hong Kong Polytechnic University. She is the founding editor of the International Journal of Shipping and Transport Logistics. Her research papers appear in such journals as Expert Systems with Applications, the International Journal of Production Economics, the International Journal of Production Research, Resources, Conservation and Recycling and Transport Reviews. She has also published ﬁve books. Dimitrios V. Lyridis is an Assistant Professor of Maritime Transport in the School of Naval Architecture and Marine Engineering (NA&ME) at the National Technical University of Athens (NTUA). His scientiﬁc interests include shipping ﬁnance, maritime transport and logistics, safety, security, and

environmental protection. He has a diploma in NA&ME, an MS in Marine Systems Management, an MSE in Industrial and Operations Engineering, and a PhD (from the University of Michigan) in NA&ME. Peter Marlow is Professor of Maritime Economics and Logistics at Cardiff University. He has more than thirty years’ experience in academia and research work and is the author of more than one hundred published works. He is President Emeritus of the International Association of Maritime Economists and Visiting Professor at Dalian Maritime University. His research interests include the ﬁscal treatment of shipping and the choice of ﬂag in international shipping. Heather Leggate McLaughlin has published widely in both industrial and academic journals. She was a Specialist Advisor on Maritime Affairs to the House of Commons Select Committee for Transport, and more recently has been engaged in European Commission projects to promote water freight transport. She is editor of the international journal Maritime Policy and Management and is currently a member of the Faculty of Business and Management at Canterbury Christ Church University. Maximo Q. Mejia, Jr. is Associate Professor of Maritime Law and Policy at the World Maritime University (WMU), Malmö, Sweden. Before joining WMU, he saw duty on board various navy and coastguard vessels and in shore-based facilities in the Philippines. He teaches and writes on maritime policy, law, human factors, safety, and security issues. He is Associate Editor of the WMU Journal of Maritime Affairs.

NOTES ON CONTRIBUTORS

Kyriaki Mitroussi is a Senior Lecturer at the Cardiff Business School, Cardiff University. Before her current post she served as a Lecturer at the University of Piraeus, Department of Maritime Studies. She has worked with shipping companies and has also been involved in consultancy services. Her broad research interests include shipping management, third-party ship management, safety and quality in shipping, and shipping policy. She is a member of the International Association of Maritime Economists. Stanley Mutenga is Director of Starz Risk Solutions, Senior Lecturer at Cass Business School, Visiting Lecturer at the Copenhagen Business School and the University of Oslo, a chief examiner for the Institute of Financial Services (IFS) School of Finance and the Chartered Insurance Institute (CII), and an exemptions advisory board member for the Institute of Risk Management (IRM). His research has won him awards. He has served on a number of UK boards and holds a PhD in risk and insurance from City University London. Adolf K. Y. Ng is an Assistant Professor in the Department of Logistics and Maritime Studies, The Hong Kong Polytechnic University. His doctorate is from Oxford University, UK and his research interests include port management, transport geography, maritime security and education. He has published a book on port competition and over 60 articles in leading maritime, transport and geography books, journals and conference proceedings. He is currently serving as a Council Member of the International Association of Maritime

xxiii

Economists (IAME), and is a Chartered Member of the Chartered Institute of Logistics and Transport (CMILT). Nikos Nomikos is Professor of Shipping Risk Management and Director of the MSc degree in Shipping, Trade and Finance at Cass Business School, City University London. Before joining Cass he was a Senior Analyst at the Baltic Exchange in charge of the freight indices and risk management divisions. He has published numerous papers, articles and book chapters, and a leading book on Shipping Derivatives and Risk Management. Theo Notteboom is a Professor at the University of Antwerp, President of ITMMA (Institute of Transport and Maritime Management Antwerp) and parttime Professor at the Antwerp Maritime Academy. He has published widely on port and maritime economics. He is President of the International Association of Maritime Economists (IAME) and President of the Belgian Institute of Transport Organizers (BITO). He is a fellow of the Belgian Royal Academy of Overseas Sciences and on the editorial boards of several journals. Athanasios A. Pallis is Assistant Professor ( Jean Monnet in European Port Policy) in the Department of Shipping, Trade and Transport, University of the Aegean. He has held visiting positions at the Center for Energy, Marine Transportation and Public Policy, Columbia University, New York, the Centre for International Trade and Transportation, Dalhousie University, Canada, and the Institute of Transport and Maritime Management, University of Antwerp,

xxiv

NOTES ON CONTRIBUTORS

Belgium. He is a regular contributor to UNCTAD, OECD and European Sea Ports Organisation (ESPO) discussions on port governance, economics and policy. Photis Panayides is an Associate Professor in Shipping Economics at the Cyprus University of Technology. He holds a PhD in shipping economics/management. He has authored three books and over 30 scientiﬁc journal papers in the ﬁelds of shipping economics and transportation. He serves on the editorial boards of Maritime Policy and Management and the Journal of Business Logistics and is also a member of the Board of Directors of the Cyprus Ports Authority. Nikos C. Papapostolou has worked at the Costas Grammenos International Centre for Shipping, Trade and Finance at Cass Business School since 2002. He holds a BSc in Money, Banking and Finance from the University of Birmingham, and an MSc in Shipping, Trade and Finance and a PhD in ﬁnance, both from Cass Business School. His research interests include the utilization of capital markets as a source of ﬁnance for shipping companies, shipping syndicated loans, and technical analysis. Christopher Parsons is Professor of Insurance at Cass Business School, London, and recipient of the Chartered Insurance Institute Morgan Owen Medal and Prize for the best research paper by a CII member. He has published two books on insurance law, contributes regularly to insurance and legal journals and lectures widely in the UK and elsewhere. In 2010 he received (with Stanley Mutenga) the International Association for the Study of Insurance Economics/International Insurance Society Research Awards Prize.

Harilaos N. Psaraftis is Professor of Maritime Transport at the School of Naval Architecture and Marine Engineering at the National Technical University of Athens. He holds a PhD from the Massachusetts Institute of Technology (MIT), where he taught from 1979 to 1989. He has published two books and over 80 refereed articles. He is the former CEO of the Piraeus Port Authority and a current member of the Greek delegation to the International Maritime Organization. Jacques Roy is a Professor of Logistics and Operations Management at HEC Montreal where he is also Director of the Carrefour Logistique, a university–industry forum on Supply Chain Management, and Director of the research group Chaine, which conducts research activities in the ﬁeld of supply chain management. He has served for many years as a management consultant with several large Canadian corporations and governmental organizations. Dong-Wook Song is a Reader in Maritime Logistics at the Logistics Research Centre, Heriot-Watt University, Edinburgh. His recent visiting positions include the Bordeaux Management School, France, and Nanyang Technological University, Singapore. He is a co-editor of the International Journal of Logistics and was recently invited to become an Associate Editor of Maritime Policy and Management. His more than one hundred refereed publications are a product of his interest in managerial and strategic aspects of global maritime logistics. Siri Pettersen Strandenes is a professor in the Department of Economics, Norwegian School of Economics and Business Admini-

NOTES ON CONTRIBUTORS

stration (NHH), and honorary visiting professor in the Costas Grammenos International Centre for Shipping, Trade and Finance at Cass Business School, London. She has published in international research journals and is a member of the editorial board of Maritime Economics and Logistics. Also, she is member of the IAME council, and has been a board member for several companies and institutions. Wayne K. Talley is the Frederick W. Beazley Professor of Economics, Eminent Scholar and Executive Director of the Maritime Institute at Old Dominion University, Norfolk, Virginia, U.S.A. He is an internationally recognized transportation economist, holding honorary visiting professorships at City University (London, U.K.), National Chiao Tung University (Taiwan) and Shanghai Maritime University (China). He has published numerous academic books and papers and serves as Editor-in-Chief of Transportation Research Part E and Deputy Editor-in-Chief of the Asian Journal of Shipping and Logistics. His 2009 book, Port Economics, is the ﬁrst textbook in the area. Michael Tamvakis is a Professor of Commodity Economics and Finance at Cass Business School, City University London. He teaches economic and ﬁnancial aspects of all main commodity groups (energy, metals and agriculture) as well as in shipping economics. His research interests are in the areas of commodity economics and ﬁnance in general and energy derivatives markets in particular. Helen A. Thanopoulou is an Associate Professor in Operations Management of Shipping Companies. She has studied Economics (University of Athens) and

xxv

Development Economics (Paris 1 Panthéon– Sorbonne). She holds a doctorate in maritime studies from the University of Piraeus where she taught brieﬂy. In 1995 she joined Cardiff University. She returned to Greece in 2004 to join the University of the Aegean, in the Department of Shipping, Trade and Transport on Chios Island where she lives. Peter Turnbull is Professor of Human Resource Management and Labour Relations at Cardiff Business School, Cardiff University. He has published widely in leading international journals on labor relations in the port transport industry. He is currently working with the European Commission and the ILO on social dialogue in ports and is the author of the ILO’s Guidelines on Training in the Ports Sector. George K. Vaggelas is an advisor to the President and CEO of Thessaloniki Port Authority SA and a Research Fellow at the Jean Monnet program in European Port Policy at the University of the Aegean (UoA). He received a PhD in port economics and management from the Department of Shipping, Trade and Transport (UoA). He has authored or co-authored several journal and conference papers on port and maritime economics and management and has participated in several EU projects. Albert W. Veenstra is a senior research scientist at the Dutch research organization TNO and an assistant professor at the Rotterdam School of Management. His research interests are shipping, port development and operations, and global logistics. He has published papers and book chapters about topics in maritime economics and has lectured around the world on logistics, shipping and ports.

xxvi

NOTES ON CONTRIBUTORS

Robert J. Verhaeghe is an Associate Professor in the Civil Engineering Department at Delft University of Technology (DUT). He is involved in teaching and research in the ﬁeld of infrastructure development. He graduated from MIT (MSc, PhD) in the ﬁeld of civil engineering systems (transport, water). After graduation (1977) he joined Delft Hydraulics and worked for 18 years as a consultant in the ﬁeld of water resources development. He joined DUT in 1994.

uoregon.edu/∼wwilson). He is a former president of the Transportation and Public Utilities Group (TPUG) of the American Economic Association and holds a variety of positions in organizations, editorial boards, etc. Over the last decade, he has been actively involved in assessing waterway investment beneﬁts for the Army Corps (www.corpsnets.us), and in estimating shipment-speciﬁc costs for the Surface Transportation Board.

Simon Véronneau is an Assistant Professor of Operations Management at Quinnipiac University and an Associate Researcher both in the Supply Chain Research Group at HEC Montreal and at the CIRRELT. He holds a PhD in operations management from HEC Montreal. His research focuses on global supply chains, transport management, and real-time critical operations management. He is a licensed senior navigation ofﬁcer with work experience in the Canadian Coast Guard and on cruise ships and merchant ships.

François-Charles Wolff is Professor of Economics at the University of Nantes. He is also an associate researcher at the Institut National des Études Démographiques. He received a PhD in economics from the University of Nantes in 1998. He received the Jacques Tymen Prize in 1999 and the Novatlante Prize in 2000. He is author or co-author of more than 70 peer-reviewed papers.

Tor Wergeland is an independent consultant and senior advisor to MARINTEK, Trondheim. For more than 20 years, he was a Professor of Shipping Economics at the Norwegian School of Economics and Business Administration. He has been a professor at Copenhagen Business School, where in 2001 he started an MBA in Shipping and Logistics. He has also been involved in a Maritime MBA at Euromed Management, Marseille. He is co-author of two MBAtargeted textbooks – Shipping (1997) and Shipping Innovation (2008). Wesley Wilson is a Professor of Economics at the University of Oregon (darkwing.

Paul G. Wright has been involved in international shipping for many years, having experience at sea on a variety of ship types before embarking on an academic career at the Plymouth University, UK. Before taking up his present position as Associate Director of the Marine Institute, he was Head of the International Shipping and Logistics Group at the University of Plymouth. His key interests lie in ship and port operations, including their legislative environment. Wei Yim Yap is a former head of research and strategic planning for the Maritime and Port Authority of Singapore. On the academic side, he has publications in international refereed journals and vast experience in lecturing on BSc and executive training

NOTES ON CONTRIBUTORS

courses in maritime and port economics. He has worked closely with industry and government agencies to complete numerous projects to the beneﬁt of both industry and academia. Panayotis Zacharioudakis is the co-founder and R&D Director of Ocean Finance and a Senior Researcher in the School of Naval Architecture and Marine Engineering at the

xxvii

National Technical University of Athens (NTUA). His scientiﬁc and professional areas of interest are risk assessment and management, market modeling and forecast, operational research, and logistics. He holds an Engineering Diploma (NTUA), an MSc in Marine Science and Technology (NTUA), an MSc in Shipping, Trade and Transportation (University of the Aegean), and a PhD (NTUA).

Preface

Maritime economics is the economics of maritime transportation, i.e., an economic analysis of its users (shippers and passengers), primary service providers (transportation carriers and ports), secondary service providers (e.g., ship pilots and towage, ship agents, stevedores and freight forwarders) and resources (e.g., labor, infrastructure and mobile capital such as ships). As a ﬁeld of study, maritime economics consists of shipping economics, ship economics and port economics. Shipping economics is concerned with the economics of transporting freight by ships. Ship economics is concerned with the economics of ships that are used in maritime transportation. Port economics is concerned with the economics of ports, i.e., the provision of port services and the users of these services. This book has beneﬁted from my numerous maritime- and transportation-related activities over the years: presentations and

discussions with colleagues at conferences, in particular the annual conferences of the International Association of Maritime Economists; visiting positions at the University of Oxford (England), University of Sydney (Australia), University of Antwerp (Belgium), City University London (England) and the University of Wollongong (Australia); Senior Research Fellow at the Marine Policy Center, Woods Hole Oceanographic Institution; Editor-in-Chief, Transportation Research Part E: Logistics and Transportation Review; and Executive Director, Maritime Institute, Old Dominion University. The outline of the chapters of this book greatly beneﬁted from discussions with Amir Alizadeh, Faculty of Finance, Cass Business School, City University London, while he was a Visiting Professor of Maritime and Supply Chain Management during the 2008–9 academic year at Old Dominion University. WAYNE K. TALLEY Norfolk, Virginia

I

Introduction

1

General Introduction Wayne K. Talley

This chapter provides a general introduction to the contents of the book. Speciﬁcally, a two-paragraph synopsis of each of the chapters, 2 through 34, is provided. In Chapter 2 the evolution of maritime economics as a ﬁeld of study is discussed. Maritime economics as an explicit ﬁeld of study is less than ﬁfty years old. Before 1960 there were publications on the subject, but they did not have a separate identity. The ﬁeld has evolved from the study of the history of shipping, e.g., trade-offs among alternate ship designs, contractual arrangements for shipping and trade, and managing port infrastructure and services to efﬁciently serve the needs of trade. Research in maritime economics has become more complex and its quantity and quality are higher than ever. Improved availability of data, methods to analyze these data and theories have contributed to this growth. University programs in maritime studies worldwide have been established and a greater number of journals are publishing research in maritime economics.

An historical perspective of shipping – evolving worldwide from primitive to developed societies – is presented in Chapter 3. The ancient cultures of Egypt, Greece, Mesopotamia and Rome were involved in the early stages of the development of shipping. Shipping is the oldest mode of transportation for moving large quantities of cargo. The business of shipping has been impacted over time by a number of factors: (1) geopolitical factors that affect the demand for transportation, (2) development of maritime technology, (3) development of ship types to transport certain types of cargoes, e.g., such bulk cargoes as oil, ore and grains, and (4) intra-modal (among shipping companies) competition and intermodal (e.g., from land routes to and from ports by railways and trucks) competition. Without shipping the development of the modern industrialized world would have been impossible. Chapter 4 considers commodity trade ﬂows in shipping. The commodity-trade

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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WAYNE K. TALLEY

classiﬁcation system of the United Nations includes one hundred major categories of commodities, each containing several subcategories. Given this granularity of information, the chapter restricts itself to providing an overview of the major worldwide commodity trade ﬂows – the main export and import ﬂows in recent years, in the context of the underlying factors driving each commodity. The chapter is divided into two main sections – major bulk commodities, and general cargo and containerized trade ﬂows. A slowdown in world trade followed the ﬁnancial crisis in 2008. The majority of trade ﬂows are still growing, but at a slower pace; other ﬂows have contracted. What does the future hold? Will the rate of worldwide oil depletion result in prohibitive energy prices for shipping, thus leading to a further slowdown? Will natural gas sufﬁce as a bridge fuel? Chapter 5 describes a maritime carrier from a microeconomic theory perspective. A maritime carrier is a ﬁrm that provides for-hire transportation service by transporting goods and/or individuals in vessels over a waterway from one location to another. Maritime carriers are described by the type of vessel utilized – for example, ferry and cruise lines use ferry and cruise vessels respectively – and by the type of cargo transported – for example, LNG and container carriers transport liqueﬁed natural gas and containers respectively. If the amount of transportation service provided by a maritime carrier is the maximum amount that can be provided given the resources at the carrier’s disposal and the amounts of cargo (numbers of passengers) provided by shippers (individuals) to be transported, then the relationship may be described as the maritime carrier’s pro-

duction function in the provision of transportation service. If so, the maritime carrier is technically efﬁcient. A maritime carrier’s operating options are the means by which it can vary the quality of its service. A maritime carrier is cost-efﬁcient if it minimizes cost in provision of its technically efﬁcient services. The demand by passengers and shippers for maritime transportation services is a derived demand. Maritime freight markets in which cargo is transported by water are discussed in Chapter 6. These markets tend to be cyclical in nature because of the volatility in both the demand for and the supply of world shipping services. Variations in service demand reﬂect world economic activity and global trade and tend to be short-term in nature, while variations in service supply tend to be long-term in nature. Beyond vessel speed adjustments and lay-ups, adjustments in service supply tend to take longer. When shipbuilding capacity is scarce, it may take three to four years after a contract is signed for a new vessel to be built. Thus, prices for shipping services may ﬂuctuate greatly because of adjustments to differences in demand and supply for these services, which results in volatile maritime freight markets. Maritime freight markets are dominated by east–west trade ﬂows. This dominance has been strengthened by the importance of Asia and the increasing importance of interregional Asian trades. The fragmentation of geographical production processes has added intermediary products to these trade ﬂows, especially since many of the production processes are outsourced to emerging markets in Asia and transition economies in Eastern Europe. Chapter 7 discusses intermodalism and new trade ﬂows. Intermodalism is the trans-

GENERAL INTRODUCTION

portation of freight in an intermodal container or vehicle, using two or more modes of transportation. Before the 1950s, freight was packed in boxes, barrels and bags for transport by two or more modes from origin to destination. In the 1950s the introduction of containers provided for a more efﬁcient intermodal transportation system, which, in turn, stimulated a signiﬁcant growth in world trade – because of the lower rates and reduction in delivery times that ocean container transportation brought. Intermodal container transportation has also impacted trade routes; for example, rather than seaborne trade from Asia arriving at the US East Coast via the Panama Canal, an alternative land route to this all-water route came into being in April 1984, when container ships began calling at ports along the US West Coast to unload their containers for placement on doublestack trains for transport to the East Coast (a landbridge service). Data for new trade (cargo) ﬂows into the US from foreign ports without a history of ﬂows to the US are also analyzed. The analysis suggests that new trade ﬂows are greater for exporting foreign countries which have relatively large amounts of hinterland transport infrastructure and whose foreign ports handle container cargoes. Further, the more developed a foreign port is from an intermodal perspective in providing new trade ﬂows to the US, the greater the likelihood that it will grow and the smaller the likelihood that it will fail. Chapter 8 discusses the evolution of the cruise industry – water carriers that provide transportation, leisure and tourism services. In the early days of the industry it was often stated that passengers aboard cruise vessels were either just married or nearly dead. However, this is no longer true. Cruise pas-

5

sengers now are of all ages. Cruise lines seek to tailor their services to accommodate the wishes of their customers. Some old markets of cruise lines have reached saturation, e.g., the Alaska market. New markets in the Far East, the Middle East and Australia are experiencing explosive growth in new cruise business. Expedition tourism, targeting the afﬂuent passenger, will continue to gain popularity. Remote destinations unspoiled by mass tourism that feature secluded and out-ofthe-way places, such as Antarctica and the many historic islands dotting the Paciﬁc Ocean, are drawing cruise passengers. The inland-waterway cruise market in Europe is another growing market and is expected to experience double-digit growth in coming years. Small river-cruise vessels offer amenities far surpassing those of the average hotel and restaurant associated with typical bus tours. Chapter 9 describes the world’s ferry passenger markets and identiﬁes the main characteristics of these markets. The world’s ferry industry transports almost as many passengers each year as the world’s airline industry. The services demanded by ferry passengers range from pure transportation to entertainment and sightseeing. From a supply perspective, ferry operators have a wide range of technologies from which to choose. There are a few ferry companies that provide ferry services far outside of their home region, but no ferry company provides global ferry services. The establishment of new ferry routes tends to be difﬁcult, since access to marine terminals at the end points of these routes must be obtained. Ferry routes face limited intramodal competition, something which is evident from the fact that only a very few

6

WAYNE K. TALLEY

ferry routes in the world have more than two competitors. The majority of ferry routes are served by only one ferry company. In addition to passengers, ferries worldwide transport millions of cars and trailers each year. Chapter 10 discusses the world dry bulk shipping industry. In 2009 its ﬂeet of ships had the largest carrying capacity of any shipping industry ﬂeet, surpassing the tanker industry ﬂeet. The dry bulk shipping market has experienced volatility over time. Sources of the volatility include external inﬂuences (such as changes in the economic geography of bulk trades and in the state of the world economy) and inherent dynamics (such as inter-ﬁrm competition and changes in the distribution of maritime activity among countries). The volatility in the market had reached new heights by late 2008. The magnitude of the decline in the market was historic. The chapter also focuses on the changing dynamics of the dry bulk shipping industry over time and the adaptation of the industry to globalized conditions. Shifts in geographical patterns, ﬂeet characteristics and market traits are discussed. In the twentyﬁrst century, the market transformation of the dry bulk shipping industry will be affected by economic geography and the mechanics of shipping markets. Chapter 11 presents a discussion of the world liquid bulk shipping industry. Liquid bulk cargo is bulk cargo that is transported in tanks, into and out of which the cargo is pumped. The largest amounts of liquid bulk cargoes shipped are crude oil and oil products. Other categories of liquid bulk cargoes, for which the amounts shipped are much smaller, include: liqueﬁed gas (LNG and LPG), vegetable oil and liquid chemicals. The liquid bulk shipping industry is vital for

the transportation of oil and its products from a limited number of oil-producing countries to the rest of the world. Liquid bulk cargoes represent one-third of the total volume of maritime cargoes. Although oil is transported over land by vast pipeline, specialized truck and specialized rail networks, the amount transported is small in relation to the amount transported by tanker vessels. The liquid bulk shipping industry has drawn worldwide attention for its vessel oil spills and potential spills. In order to reduce oil spills from tanker vessel accidents, many countries in the world are now requiring that by 2012 or 2015 tanker vessels must be double-hulled in order to enter their waters. Chapter 12 provides a comprehensive overview of current issues in the container shipping industry. Topics include market growth, the changing geography in container shipments, capacity management, the pricing problem in the container shipping industry, the search for scale and scope operations by container shipping lines, and evolving networks over which container shipping lines operate. Container ships transport a limited range of standardized containers: the twenty-foot equivalent unit (TEU) and the forty-foot equivalent unit (FEU). Slightly diverging container units include 45-foot containers, high-cube containers, and tank and opentop containers. The advantages and cost savings from container shipping include faster vessel turnaround times in ports, a reduction in cargo damages and the associated insurance fees, and integration with inland transportation modes, e.g., truck, barge and rail. With the advent of container shipping, globalization of intermodal transportation was established. Container shipping has been

GENERAL INTRODUCTION

instrumental in reshaping global supply chains, allowing multinationals to reshape their global sourcing strategies and develop global production networks. New supply chain practices, in turn, have placed stricter requirements on container shipping lines with respect to frequency, reliability and global coverage of service. Before 2009, container shipping lines operated in a market characterized by moderate to strong growth. Asian economies represent an ever-increasing share of global container volumes. Chapter 13 discusses business models and strategies for shipping. The shipping industry market is complex, dynamic and risky, which is attributable to its being ﬁxedasset-intensive, having assets with long lifetimes and being exposed to volatile global ﬂows in cargo and energy prices. Recent events, such as the signiﬁcant decline in world trade, the dramatic decline in ship prices and the lack of available capital for the purchase of new ships, have accentuated the complex, dynamic and risky aspects of the shipping industry market. Emergent business models and strategies that may be beneﬁcial to the shipping industry are presented in this chapter. The chapter reviews industry forces that are forcing changes in the business models and strategies of the shipping industry. Shipping business models and their relationships to shipping strategies are discussed. Four shipping industry business model archetypes that, taken together, capture the shipping industry are presented, as are competitive and cooperative strategies within these business model archetypes. The way changes in business models shape the transformation of the shipping industry and, in turn, shipping industry strategies is analyzed. Shipping industry strategies are tied

7

to the broader strategic management literature. Chapter 14 provides an overview of the primary international institutions and regulations for ensuring safe, clean and levelcompeting operating environments for international shipping. The concept of the freedom of the seas dates from the seventeenth century, when national shipping rights were restricted to a stated number of miles from a country’s coast. This freedom was established by the United Nations at the end of World War II via its Conference on the Law of the Sea. There have been three signiﬁcant international conferences since the end of World War II that have shaped legal concerns associated with the sea. The 1982 United Nations Convention on the Law of the Sea established internal, territorial and archipelagic water limits, deﬁned contiguous and exclusive economic zones, and described the legal regime governing the international navigation of the high seas. Areas of importance to international shipping are the right of innocent passage in territorial seas, criminal and civil jurisdiction on board ships and in relation to ships in territorial seas, rights of passage through straits used for international navigation, and freedom of the high seas. International shipping regulations have primarily been developed under the aegis of the United Nations International Maritime Organization (IMO). The responsibility of a ﬂag state is to ensure that ships ﬂying its ﬂag are surveyed by a qualiﬁed surveyor and have on board appropriate charts and navigation equipment, and qualiﬁed masters and ofﬁcers. The shipping industry has been subject over the last thirty years to various forms of corporate tax systems imposed by international governments. Chapter 15 analyzes

8

WAYNE K. TALLEY

the economic justiﬁcation for a shipping corporate tax and its implications for the liquidity of the industry and its future investment decisions. The type of shipping corporate tax that has increasingly been adopted by countries (and more recently by European countries) is the tonnage tax. The consensus is that ﬁscal policies such as a shipping corporate tax that are directed at the shipping industry should consider their opportunity cost to the countries imposing the policies and to the shipping industry itself. The shipping industry has some unique features: (1) ships are mobile assets; (2) ships may be registered anywhere in the world; (3) the shipowner (or the shipowner’s representative) is free to choose among available registers, so that the level of ship taxation has become a determinant of register choice; and (4) a ship may be registered under a national ﬂag or a ﬂag of convenience (or an open register). Chapter 16 explores the market for seafarers and its speciﬁc characteristics. The chapter’s primary focus is on the supply of seafarers – their number, recruitment, retention, mobility and migration. Seafarers play a vital role in the water transportation of international trade. Numerous seafarer skills are required. Seafaring is one of the world’s oldest professions. It is undergoing considerable change from a technological perspective. The international seafaring labor force is segmented according to speciﬁc skills and educational levels, which provides an opportunity for seafarer labor discrimination. Speciﬁcally, this means that shipowners can segment seafarers by wage and working conditions. However, such discrimination has been tempered by the regulation of seafarer working conditions and by such organizations as the International Labour

Organization (ILO) and the International Transport Workers’ Federation (ITF). The efforts of these organizations have resulted in signiﬁcant improvements in the working conditions of seafarers. Chapter 17 discusses vessel accidents – unintended happenings that may or may not result in damage to the vessel. The likelihood of a vessel sustaining damage in an accident is the product of two probabilities: (1) the probability of involvement in an accident (event probability) and (2) the probability of vessel damage given that an accident has occurred (damage conditional probability). The severity of vessel accidents varies from the loss of the vessel to an absence of vessel damage. This chapter also uses data from a US Coast Guard vessel accident database for 2001–8 to analyze the determinants of vessel damage severity in individual cargo vessels. Four types of vessel (freight barge, freight ship, tank barge and tanker) are considered in the investigation. The empirical results suggest that freight barge accidents have the highest probability of incurring vessel damage and total losses. Freight ships are expected to incur less vessel accident damage than freight barges, tank barges and tankers. Accidents at nighttime and involving older vessels are associated with greater vessel damage. Accidents involving larger vessels, occurring in spring or involving vessels with steel hulls are expected to result in less vessel damage than their alternatives. The policy implications of the results are that relevant vessel safety regulations should be modiﬁed or designed to improve the safety of freight barges, older vessels and nighttime navigation. Chapter 18 discusses the historical and geographical development of piracy in shipping. Contentious issues in deﬁning piracy,

GENERAL INTRODUCTION

recent changes in the geography and modi operandi of piracy, and how poverty and political instability have been root causes of piracy are also discussed. Piracy is a landbased economic and socio-political problem that manifests itself at sea. Ship piracy has posed a threat to trade and shipping for millennia. Ancient accounts show piracy ﬂourishing in the Eastern Mediterranean as early as four thousand years ago. In the 1970s, less than a century after its apparent demise, a number of attacks ushered in modern piracy. In 2009, a total of 406 piracy and armed robbery incidents were reported worldwide, a 40 percent increase on 2008. Within the last twelve years the sophistication and organization of attacks have increased and patterns and trends in location and armed robbery against ships worldwide have shifted. Today, piracy attacks against ships in the waters off Somalia, followed by demands for ransoms of millions of US dollars, have become common. In 2009 piracy attacks off Somalia represented 53 percent of all such attacks reported worldwide. Chapter 19 discusses the economics of ships – a broad subject area that encompasses, for example, ship design, shipping network design, ship markets, ship safety, ship security, and impacts of ships on the environment. The chapter focuses on selected aspects of the economics of ships and highlights a few related issues that are important today. Two important criteria governing the economics of ships are concerned with how to (1) optimize the economic performance of a ship and (2) incorporate risk into decision making in respect of the economics of ships. Incorporating risk into decision-making models should be of signiﬁcant beneﬁt

9

to shipowners in their decision-making practices. Ship costs may be categorized as capital costs, crew expenses, vessel expenses, cargo expenses, terminal handling charges, port charges and administrative expenses. An important decision variable in optimizing ship economic performance is ship speed. Ship speed is important in that it is the main determinant of fuel costs, a signiﬁcant component of vessel expenses. Given the high degree of uncertainty in ship economic performance, ship risk management has become an important dimension of the economics of ships. Ship risk management addresses events that can inﬂuence expected ship cash ﬂows. A discussion of the US equity capital markets as a source of ﬁnance for shipping companies – that is, for ﬁnancing the acquisition of newly built vessels and the sale and purchase of second-hand vessels – is found in Chapter 20. The shipping industry is one of the world’s most capital-intensive industries, utilizing a wide array of capital sources for its ﬁnance. In addition to equity ﬁnance, shipping companies use mezzanine ﬁnance and debt ﬁnance. Sources of equity ﬁnance include the owner’s private equity, the company’s retained earnings, and public and private equity offerings. The main types of mezzanine ﬁnance include preference shares, warrants and convertibles. The types of debt ﬁnance utilized by shipping companies include bank loans, export ﬁnance, bond issues, public or private placements, and leasing. The chapter presents an overview of the US equity capital markets for shipping, possible reasons for public listing by shipping companies, and the advantages and disadvantages of such a decision. Also, an overview of trends in the issuance of shipping

10

WAYNE K. TALLEY

stocks in the US for the period 1987–2010 is provided. In addition, factors that may affect the pricing and long-run performance of shipping and key issues for investors and shipping companies in the US equity capital markets are discussed. Chapter 21 highlights the US high-yield bond market as a source of debt ﬁnance for shipping companies. The anatomy of the US shipping high-yield bond market and the market’s advantages and disadvantages are discussed. Further, the importance of credit ratings, the pricing of shipping high-yield bonds and the probability of their default are presented. The US high-yield bond market commenced in 1992 and in 1998/99 a number of shipping companies defaulted on their bonds, resulting in a sharp decline in volume activity for the next couple of years. However, the re-emergence of the US high-yield bond market that began in 2009 continues today. This market has become important to shipping companies as an alternative source of ﬁnance. Some of the advantages of the US high-yield market include a longer repayment horizon and the less strict covenants that a high-yield bond issue may entail. Investment banks have played an important role in the recent issuance of high-yield shipping bonds. While the 2009 statistics for syndicated bank ﬁnance show a substantial decrease in the overall annual volume of shipping syndicated loans, bank ﬁnance is expected to remain a major source of capital for shipping companies. In Chapter 22 the volatility in the prices of ships is discussed. Such volatility has long been a concern for shipping companies, shipyards and banks, because short-run ﬂuctuations in ship prices have a signiﬁcant impact on the proﬁtability and viability of

these enterprises. Also, a reduction in the value of a ship may affect the shipowner’s creditworthiness and thus his ability to service the debt obligations of the ship. This chapter also examines the possibility of hedging ship price risk using forward freight agreements (FFAs). Speciﬁcally, a data set of dry bulk ship values and forward freight agreements for the same type of vessel is used to investigate the effectiveness of FFAs in hedging ship values. The results indicate that FFAs are indeed very effective for hedging ship price risk. For the Capesize ship market, the results indicate that hedging 85 percent of the value of a ship using FFA contracts would reduce the variability of one’s hedging position by as much as 86.5 percent. Chapter 23 discusses marine insurance – an efﬁcient means of protecting investments in ships and their cargoes. A form of marine insurance that is used today was well established in Europe by the fourteenth century, the earliest known policy being issued in Genoa in 1347. Relatively sophisticated insurance markets – places where one could ﬁnd many insurance underwriters and supporting services – were found in a number of North European cities (including Antwerp, Amsterdam, Hamburg and London) in the seventeenth century. Ship- and cargo owners (or their advisors) should read the clauses of marine insurance policies carefully in order to understand what is covered or excluded under these policies. Some policies are more comprehensive than others. When selecting an insurance policy, the insured should also have a good understanding of the insurance laws in the jurisdiction of the underwriting association. However, the major clauses of marine insurance policies have been converging, and the differences in insurance

GENERAL INTRODUCTION

coverage have become more subtle over time. Marine insurance may eventually become uniform worldwide, offering universally accepted coverage for both hull and cargo insurance. Chapter 24 presents a microeconomic theory of the port. A port is a place where cargoes and passengers are transferred to and from vessels and to and from shores and waterways. Ports are also nodes in transportation networks and thus are used by transportation carriers in the provision of transportation services. A port provides interchange services: for example, received cargoes and passengers are passed through to departing vessels and vehicles. The users of port services include shippers, passengers and transportation carriers, i.e., maritime and surface carriers (railroad and truck). The primary port service provider is the port (or terminal) operator. Port production functions relate the maximum amounts of interchange services that ports can provide, given the amounts of resources utilized and the amounts of cargo and the numbers of passengers, vessels and vehicles received by the port. A port’s operating options are the means by which it can differentiate the quality of its interchange services. A port’s resource function for a given resource relates the minimum amount of the resource to be employed by the port to the levels of its operating options and the amounts of cargo and numbers of passengers, vessels and vehicles received. The long-run total cost function for a multi-service port relates the minimum costs incurred by the port over the long run to the resource prices paid by the port, the levels of freight, passenger, vessel and vehicle interchange services provided by the port, and the amounts of cargo and numbers of passengers, vessels and

11

vehicles received by the port. Shippers, passengers and carriers incur two prices for port interchange service: shippers and passengers incur a money price that is charged by the port for the service and a time price related to their cargoes and themselves while in port. Chapter 25 discusses recent developments in port governance. The globalization of production and distribution, changing forms of cargo transportation and technological breakthroughs ended a long period of stable, state-controlled (government) port governance in most countries. Although government ownership of ports remains ﬁrmly entrenched in many countries, private management in the provision of port services has also been widely adopted. Port corporatization continues to be an acceptable governance option. Under port reform, ports have incurred difﬁculty in addressing issues with their hinterlands, such as congestion and infrastructure investment beyond the traditional boundaries of the port. In some cases, this has spurred interest in broader and more community-based governance models. A study of major international ports reveals the involvement of private interests in port terminal operations, a movement toward more effective and efﬁcient management of ports, a trend for port authorities to go beyond their traditional functions, and recognition of the economic inﬂuences on ports. Chapter 26 focuses on the socioeconomics of port labor and the regulation of the port labor market that has been contested in ports worldwide. Conﬂicts on the waterfront have shaped the historical development of the port labor workforce. It is no coincidence that ports with the most effective forms of labor market regulation also

12

WAYNE K. TALLEY

have the lowest strike incidence. The transition from port casualism to containerization to commercialization has been marked by port labor conﬂict and dissension among port management, labor, government and third parties (e.g. local communities, direct customers and wider business interests) affected by port activities. The chapter describes how employment agreements negotiated under port technological advancements of containerization have transformed the casual system of port labor employment. Some ports have adapted their labor market far more effectively than others to the challenges of containerization and the modern-day demands of the port customer. However, conﬂicts between port labor (and its trade unions) and port management still remain. Port management seeks to minimize labor conﬂicts in order to avoid disruption to shipping and to various value-added services that it provides to its customers. Chapter 27 discusses competition among and the competitiveness of container ports. Deﬁnitions of and approaches to the analysis of container port competition and competitiveness are presented. Container ports are in a better position to compete with neighboring container ports if they have modern infrastructures supported by competitive and reliable transportation services and serve as collection and distribution points for hinterlands that extend far beyond their traditional boundaries. Ports that lose ship calls will experience a decline in connectivity, choice of service providers and container throughput. The negative impact will also affect other ports that have complementary services with the port. A methodology is presented for analyzing inter-container port competition and competitiveness of container ports along

the Malacca Strait, the Pearl River Delta and the Antwerp–Hamburg range. It is demonstrated that the conﬁguration of container shipping line services has a direct effect on inter-container port competition. The decision by a container shipping line to switch port calls from one port to another can lead to signiﬁcant economic and commercial ramiﬁcations for both ports. Container ports that are less ﬂexible in accommodating the needs of shipping lines may be circumvented, while ports that are able to accommodate, complement and add value to the port calls of container shipping lines will be preferred. Chapter 28 discusses port performance. Signiﬁcant gains in productivity by ocean transportation over recent decades have left ports as the last remaining component for improving the efﬁciency of maritime logistics chains. Since improvements in the efﬁciency of a country’s ports are likely to reduce its export cargo prices, thereby making the country’s export products more competitive in global markets, governments are increasingly recognizing the importance of improving the efﬁciency of their ports for the economic well-being of their countries. In many parts of the world, governments have taken action, either direct or indirect, to improve port performance, for example by installing labor-saving cargohandling equipment, promoting improvements in port labor productivity, simplifying customs procedures, promoting greater use of information technology and commercializing port management. The literature suggests that private sector participation in port operations enhances port performance and thus port productivity. This chapter extends the literature by investigating the impact of private sector participation on the operations of ports in

GENERAL INTRODUCTION

the Eastern Mediterranean region, with particular emphasis on the ports of Turkey. Turkey has recently adopted a policy of partial port devolution, including some privatization. The results of the investigation suggest that Turkey’s private container port sector is outperforming its public container port sector in terms of efﬁciency in the provision of services to customers, thereby providing some justiﬁcation for Turkey seeking to apply port privatization to its remaining public container ports. Chapter 29 discusses port choice by shipping lines and shippers as well as the effects of logistics and supply chain management decisions on port choice. Port choice by shipping lines is critical to determining whether shipping lines can realize their operational, service and ﬁnancial performance goals. A key issue is how the different structural characteristics of shipping lines affect their port choice decisions. For the ports themselves, their selection by shipping lines and shippers directly impacts their performance and viability. Where intense port competition exists and in order to have sustainable port competitiveness, it is important for port mangers to have a thorough understanding of the factors that inﬂuence the selection of their ports by shipping lines and shippers. Ports play an important role in facilitating the logistics and supply chain management objectives of their shipping line and shipper users. In order to do so, ports must evolve beyond their traditional functions of moving cargo to and from ships, trucks and railcars to become links in global logistics chains. Some shipping lines are more logistics- and supply chain management-oriented than others, for example those that have invested in their own port terminals, thereby requiring knowledge of how ports play a

13

nodal role in supply chain management. With the gradual abolition of the conference system, shipping lines have come to realize that their competitiveness largely depends on creating customer value, and port choice has become critical in this respect. Chapter 30 presents a framework for making port investment and ﬁnance decisions. The most effective port investment option requires a port’s cargo transfer process to be considered as a set of interdependent links. An efﬁciency improvement in each link is then considered, and hence the efﬁciency of the total transfer process is enhanced. Furthermore, all links should be modiﬁed to obtain a chain of mutually balanced link capacities so that problems related to port capacity bottlenecks are minimized. The selected investment option may address capacity expansion, improved services, and demand management measures leading to an improved utilization of existing facilities (or combinations of these). A distinction should be made between public and private interests in making port investment decisions. Evaluating port investment from a public perspective requires that all related costs and beneﬁts (direct and indirect) be considered in determining the optimum port investment decision. In contrast, the private perspective focuses on port competition and port hinterland connectivity in making port investment decisions. Chapter 31 discusses port clusters. A port cluster is a spatially concentrated group of ﬁrms of related industries for which one ﬁrm is a port; these ﬁrms are linked through vertical and horizontal relationships. The chapter discusses the relevance of applying the cluster concept to ports, as well as the port cluster concept as a tool for analyzing

14

WAYNE K. TALLEY

the impact of port cooperation and changing port governance structures on ports located in geographical proximity. Central to the port cluster concept is the recognition that interdependent ﬁrms cluster together in port regions for purposes of coordination and resource sharing. The port cluster concept has been applied by the Chinese government in port planning and the Korean Maritime Institute in developing logistics clusters. Analyzing ports from the perspective of port clusters provides (1) new insights into determinants of port competitiveness, (2) additional measures of port performance, (3) insights into the role of the port in promoting activities among interdependent ﬁrms in its region, and (4) an alternative framework to that of port governance for describing the role of port authorities. A dominant ﬁrm such as a port authority may have a strong inﬂuence on the performance of a cluster. In many port clusters, the port authority or a terminal operator plays a crucial role in the success of the port cluster. Chapter 32 presents a discussion of port state control (PSC) – a regime of unannounced safety inspections on board foreign ships in ports or marine terminals by designated PSC authorities for the purpose of verifying the adherence of ships to international regulations related to ship manning, equipment, maintenance and operations. These regulations are found in the 1974 International Convention for the Safety of Life at Sea, the 1978 International Convention on Standards of Training, Certiﬁcation and Watch Keeping for Seafarers, the 1973 International Convention for the Prevention of Pollution from Ships, the 1966 International Convention on Load Lines, the 1969 International Convention on Tonnage Measurement of Ships, the 1972 Conven-

tion on the International Regulations for Preventing Collisions at Sea and the 1976 Merchant Shipping Convention. PSC inspections provide information about factors such as vessel age, vessel type, classiﬁcation society and vessel ﬂag, which may predict the likelihood that a vessel will be found to be substandard. These factors are reﬂected in the target factors used by PSC regional memoranda of understanding (MoUs). This chapter describes these target factors and how vessel deﬁciencies detected during PSC inspections are corrected or recur over time. A data set of 42,071 vessels/ inspections carried out from 2002 to 2009 by 18 state members of the Indian Ocean MoU (IO-MoU) is used to determine factors that increase the likelihood of detecting vessel deﬁciencies in PSC inspections and the persistence of vessel deﬁciencies in subsequent PSC inspections over time. Chapter 33 is concerned with port security and counter-terrorism activities within the port’s domain that protect port facilities and coordinate security activities between the port and its users. It discusses the International Maritime Organization’s International Ship and Port Facility Security (ISPS) Code, the major international port security regulatory code, and examines the challenges faced by ports in the implementation of this Code. For the latter, cases studies of port security at Hong Kong in Asia and Piraeus in Europe are used. In Hong Kong, port security is not widely regarded as an important port issue, as revealed by the fact that port security managers hold junior positions. The core rationale of port security compliance by major stakeholders of the Port of Hong Kong appears to be one of avoiding potential economic consequences from non-compliance (e.g., losing US trade). In contrast, the Port

GENERAL INTRODUCTION

of Piraeus has a strong security culture. It has implemented a stricter form of the ISPS Code, and cooperates with other ports on port security know-how and good practice. Chapter 34 addresses the effects of port security activities on the quality of port interchange services. Speciﬁcally, it addresses the question: Can improvements in the quality of port security service increase the quality of port interchange services? Although it is generally agreed that improvements in the quality of port security service such as one-hundred percent scanning can have a negative effect on the quality of port interchange services (for example by increasing port congestion), the question of a positive effect has not been investigated heretofore in the literature. Data for investigating whether improvements in the quality of port security

15

service can improve the quality of port interchange services were obtained from an e-questionnaire that was e-mailed to a database of container port operators. In the questionnaire, respondents were asked whether increases (or improvements) in container port security service would have a positive effect on the quality of container port interchange services. The results of the empirical analysis suggest that increases in the quality of port security service, via increases in the amount of throughput that is inspected and more frequent security inspection of entrance gates, departure gates and storage yards, will result in an improvement (i.e., a decrease) in port cargo theft. These results provide evidence that improvements in the quality of container port security service can result in improvements in the quality of container port interchange service.

2

The Evolution of Maritime Economics Trevor D. Heaver

2.1

Introduction

The history of ships, trade and related businesses is global, long and fascinating. It is important to note the relationship of this chapter to that history. First, the context here is dominantly European and reliant on English-language materials. Second, the time period studied is very short in relation to the history of ocean shipping but long in relation to the brief existence of maritime economics as a ﬁeld. It is long because the history of the ﬁeld reveals the distinctive characteristics of maritime industries which provide the general framework for studies of maritime economics.

2.2

The Foundations

Maritime economics as an explicit ﬁeld of study is less than ﬁfty years old. Goss (2002) notes that before 1960 there was “very little maritime economics” and Grammenos (2002a) notes that in the late 1960s there were only a few publications on maritime

economics. Yet the roots of the subject lie in the special challenges and risks of seaborne trade that go back to time immemorial. Three aspects of the special challenges and risks are evident in the history of shipping. They are: ﬁrst, the technical or engineering, and therefore the pecuniary, challenges created by the need to make trade-offs among alternate ship designs; second, the difﬁculty of reaching contractual arrangements for shipping and trade that give rise to specialized market structures; and, third, the difﬁculty of managing the infrastructure and services provided at ports to serve the needs of trade efﬁciently. The challenges of travel by the seas and the oceans have given rise to many specializations in human endeavor. Some of the challenges have ceased to be major matters; such is the case with navigation, because of technologies from chronometers in the eighteenth century to global positioning systems today. However, the development of more specialized, more sophisticated and larger ships has increased challenges for

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

THE EVOLUTION OF MARITIME ECONOMICS

private and public decision makers and contributed to the development of maritime economics. Building safe and efﬁcient ships has remained a major challenge even though the engineering of ship design and shipbuilding has made great advances. The initial accumulation of knowledge and expertise in shipyards led to the development of naval architecture and marine engineering, especially with the advent of iron ships and the use of steam power. Reﬂecting this, the Royal Institution of Naval Architects (RINA) was formed in London in 1860 to “advance the art and science of ship design.”1 The Society of Naval Architects and Marine Engineers (SNAME) was formed in the US in 1893. The National Maritime Research Institute of Japan has its origin in 1916 and the Maritime Research Institute Netherlands was founded in 1926. The focus of these organizations was on technology. It was not until after World War II that the application of formal economic analysis to the selection of ships was encouraged. The reasons for this development are explored later. The second aspect of the marine challenge is the complexity and risks inherent in entering into contractual relationships for the conduct of trade and shipping businesses, which led to the development of specialized professionals. Ships and their cargoes are exposed to high and shared risks on the high seas while the parties entering into contractual arrangements are often far apart and from different cultures. Consequently, the roots of marine insurance and ship brokerage go back to the conduct of business in the coffee houses of London in the late seventeenth century. Lloyds of London for insurance and the Baltic Exchange for ship brokerage are now exam-

17

ples of institutions around the world to facilitate global business. Various international organizations promote the development and acceptance of standard contracts. For example, the Baltic and International Maritime Council headquartered in Copenhagen has played a role in the acceptance of a number of standard charter parties and the International Chamber of Commerce based in Paris has issued the widely used Incoterms.2 Matters dealing with the insurance of ships and cargoes have stayed dominantly within the purview of insurance professionals and lawyers. They have not been subjects of study by maritime economists, although Goss (2003) argues that more attention from economists would have been beneﬁcial. However, maritime economists have undertaken many studies of the businesses involving shipping ﬁnance and brokerage. The interests of economists in market behavior came to be reﬂected in studies of the near-perfectly competitive charter markets and of the cartelized liner markets. Developments in ships and the growth of trade have posed challenges for societies to provide suitable port facilities for the protection of ships, the handling of cargo and the movement of cargo to and from vessel berths. The challenges have magniﬁed greatly over the last one hundred years, and especially over the last ﬁfty years as ports have had to provide a wide array of specialized facilities and services for rapidly growing trade moving to and from greatly expanded hinterlands. The challenges have resulted in the development of new businesses, new port management structures and new approaches to logistics management to serve global supply chains.

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TREVOR D. HEAVER

The special challenges have been approached differently by analysts as scientiﬁc methods and conditions of trade have evolved. A full appreciation of the development of maritime economics requires a brief review of developments up to World War II. This forms Section 2.3. After the war, there was a period of transition during which studies that warrant recognition as maritime economics were published but maritime economics was still not recognized as a deﬁned ﬁeld of study. This period of transition is the subject of Section 2.4. The selection of a date for the recognition of maritime economics as a ﬁeld of study is somewhat arbitrary, as many events and studies over more than a decade contributed to its evolution, but we can settle on 1973, the ﬁrst year of publication of the journal Maritime Studies and Management, changed in 1976 to Maritime Policy and Management (MPM) to reﬂect the public and private sector readership. The publication of the journal is indicative of a wide interest in the study of maritime issues. The chapter concludes with a review of the development of maritime economics since 1973. As a result of the various themes to be considered during the periods, developments are not always presented in chronological order.

2.3 Approaches to Maritime Issues to World War II The approaches taken to maritime issues are considered in the light of the scientiﬁc methods and the characteristics of the shipping and trade conditions of the time. The limited role of economics is considered ﬁrst. During the development of economics in the nineteenth century scant attention was

given to the role of transport. Although J. H. von Thünen had recognized the effect of transport costs on land values in his treatise The Isolated State of 1826 (Thünen 1966), economists generally ignored the spatial costs. This is in spite of the importance of changes in transport technology to the economy, as noted by Alfred Marshall: “The striking economic factor of our age is the revolution – not in production – but in transport” (quoted in Strømme Svendsen 1958). The revolution in transport was based on new technologies; canals, the railways with their steam power and, later, the iron steampowered ships. The new technologies were associated with great attention to engineering studies including comparisons among alternate designs needed for commercial decisions.3 Among those writing on choices among engineering designs, A. M. Wellington stands out and is regarded as the father of engineering economy, now also known as engineering economics. His The Economic Theory of Railway Location, ﬁrst published in 1887, had its ﬁnal printing in 1914. Nevertheless, the focus of engineers remained on the physical properties as reﬂected in the statement of Eugene Grant, a twentiethcentury leader in engineering economy, who said about his undergraduate education in engineering completed in 1917, “The amazing thing to me was that in all my undergraduate days, nobody had ever mentioned to me that it made any difference how much anything cost.”4 Technological innovation resulted in a decrease in ocean transport costs and an increased reliability in transit times. Reduced tariff barriers further enhanced opportunities for trade (Irwin 2002; Lundgren 1996). Concomitant with these changes, communications cables, ﬁrst across the Atlantic in

THE EVOLUTION OF MARITIME ECONOMICS

1866, followed by a link between England and India in 1870, made it possible for business information to be exchanged quickly. Increase in the volume of trade and the greater complexity and sophistication of the associated businesses led to the establishment of the ﬁrst true shipping bourse: the Baltic Mercantile and Shipping Exchange Ltd. established as a public company in 1900 (Cuﬂey 1972).5 Developments required in ports were either considered as private commercial decisions, as in the London docks, or undertaken by public enterprises for the public good, as was the case for North Sea ports (Palmer 1990, 1993). In both situations, general expectations about the prospects of trade were the main guides to port development. The literature on shipping matters expanded greatly as a result of commercial and public interests. The weekly trade magazine for the maritime industry, Fairplay International Shipping Weekly, has been published continuously since 1883. The need for current data on shipping freight rates was provided by the publications of brokerage ﬁrms such as the annual of Angier Bros. and by the Daily Freight Register distributed to subscribers from 1893 (Isserlis 1938).6 Public interest in the shipping industry also increased as trade became more important.7 The contributions of shipping to the national balance of payments were of particular interest. In liner shipping, companies formed themselves into the cartels known as conferences whose practices became the subject of periodic investigations, starting with the British 1909 Royal Commission on Shipping Rings, and still not completely over. The early investigations into the case for and against anti-competitive practices of liner

19

companies were dominated by the solicitation of views from shippers, shipping companies and others. Interest in the study of liner conferences by economists did not emerge until later. The ﬁrst thorough analysis of the shipping markets was by Isserlis (1938), the statistician at the British Chamber of Shipping from 1920 to 1942. His analysis of rates from 1869 to 1936 was based on a carefully constructed rate index. In particular, Isserlis documented the volatility of rates in the tramp shipping market. His conclusion on the predictability of rates remains true today and for more than the shipping industry: “The fact remains that it is comparatively easy to ﬁnd explanations for the various stages of a trade cycle that is past, and that it is impossible to predict correctly the occurrence of the successive phases of a cycle which is in progress, and still more so in the case of a cycle that has yet to commence.” Interest in economic cycles led Jan Tinbergen, whose early career was in mathematics and physics, to conduct empirical work on shipping markets: an examination of shipbuilding cycles in 1933 and an analysis to explain the course of freight rates in 1934. (The papers were originally in Dutch; they are available in English in Klaassen, Koyck and Witteveen 1959.) Koopmans (1939), also a mathematician and physicist, studied mathematical economics under Tinbergen, which may account for his analysis of the relationship between tanker rates and the level of tanker buildings.8 Koopmans’s Nobel prize was for his contributions to the theory of optimum allocation of resources. In part, this grew out of his work during World War II for the British Merchant Shipping Mission based in the US. His work involved allocating shipments

20

TREVOR D. HEAVER

between sources and destinations so that total cost would be minimized. The result was the development of the transportation problem as a special case of linear programming. Although the methodology has been invaluable to analysts, he did not make other contributions to maritime economics. However, his work illustrates the leap that could be made in scientiﬁc methods after World War II. The expansion of trade and shipping businesses gave rise to a greatly enlarged market for information on shipping. This resulted in books offering descriptions of trade and shipping practices. Writing in 1914 in England, Owen notes that segments of the maritime industry have long been “the subject of important treatises” but “the whole, collectively, have apparently never been dealt with at all” (Owen 1914: v). Owen primarily intended his book to be instructive to naval and military ofﬁcers because of the importance of sea transport in wartime. Books with similar broad coverage appeared in the US, for example those by Hough (1924), based on materials prepared for LaSalle Extension University in 1914, Berglund (1931) and Bryan (1939), a book intended as a text for college students. Berglund notes the changes in shipping, which he characterizes as having “up-to-date business technique . . . with an outlook distinctly archaic” (1931: 2). In particular, liner shipping companies have been secretive. The development of specialized institutions is an important part of the development of ﬁelds of study. They reﬂect the importance of the related activities in society and they contribute to the development of bodies of knowledge. The establishment of RINA and SNAME was noted previously. The Chamber of Shipping in

London was established in 1878 when more than thirty regional shipowners’ associations came together. The Norwegian Shipowners’ Association was founded in 1909; the Association and its members were to play an important part in the encouragement of maritime studies. In the US, the American Association of Port Authorities (AAPA) was formed in 1912 when nationwide issues associated with port administration were emerging.

2.4 The Period of Transition, 1945–1973 The post-war years commenced the third, dramatic period of technological change in shipping and the unprecedented growth of world trade (Lundgren 1996). They also soon witnessed the further growth of institutions related to maritime matters and the much wider application of economics to transport issues. Evidence of these developments is presented before contributions to the maritime literature are reviewed. The increased volume of trade and the increased size of ships ushered in the era of much greater public attention to shipping. Concerns about ship safety led to an international conference in Geneva in 1948 and the formation of the Inter-Governmental Maritime Consultative Organization (IMCO), renamed the International Maritime Organization (IMO) in 1982. In 1964, the UN Conference on Trade and Development (UNCTAD) was established to promote the development-friendly integration of developing countries into the world economy. For a number of years, UNCTAD’s Committee on Shipping had a number of well-known economists on staff, including S. G. Sturmey, formerly of the

THE EVOLUTION OF MARITIME ECONOMICS

University of Lancaster. The 1969 publication on freight markets (UNCTAD Secretariat 1969) was a welcome economic description of freight markets and their rates. UNCTAD has published an annual Review of Maritime Transport since 1968, now under the authorship of the Trade Logistics Branch of the Division of Technology and Logistics. The World Bank was also interested in the inﬂuence of shipping on economic development, as reﬂected in the books of Bennathan and Walters (1969, 1979). The expansion of trade and the increase in the size of ships resulted in congestion and related issues in ports. The growth of issues for ports is reﬂected in the founding of the not-for-proﬁt International Cargo Handling Co-ordination Association (ICHCA) in 1952. The International Association of Ports and Harbours (IAPH) was founded in 1955. The attention of economists was drawn increasingly to challenges in transport such as costing and pricing in light of the competition between road and rail transport. W. Arthur Lewis dealt with this in the ﬁrst essay in his Overhead Costs (1949). Chapter 4 in that book is an insightful but little-known essay on the interrelations of shipping freights, including a framework for the analysis of inbound and outbound rates that has had surprisingly little recognition. Meyer, Peck, Stenason and Zwick (1959) was a response to issues raised by competition in land transport. Issues associated with needed investments in infrastructure led to applications of project appraisal to transport, for example Mohring and Harwitz (1962), and Foster and Beesley (1963). The interest also led to the formation of the US Transportation Research Forum in 1958 and the Canadian

21

Transportation Research Forum in 1965. These fostered the international conference organized by the College of Europe, in Bruges in 1972, which laid the foundation for the triennial World Conference on Transport Research, which became a Society in 1986 in Vancouver, Canada. The increased interest in transport issues reﬂected by these developments supported the launching of the Journal of Transport Economics and Policy in 1967. The great growth and change in shipping and trade is reﬂected in the books by practitioners and academics. First, a number of books were written by those working or formerly working in the industry, for example, King (1956) on tankers, Bes (1963, 1965) on tanker shipping and on bulk carriers and Cuﬂey (1962) on ship chartering. A notable text with contributions from many practitioners is McDowell and Gibbs (1954), which served a need arising from university courses developing in the US. The books from academic writers reﬂect the emerging academic interest in maritime matters shown by the establishment a number of teaching and research programs on transport (Metaxas 1983). Marx (1953) is an excellent study of the liner shipping conferences. Strømme Svendsen’s Sea Transport and Shipping Economics (1958) was important as the ﬁrst economicsoriented text. A translation of lecture notes at the Norwegian School of Economics and Business Administration (NHH), Bergen, it approaches shipping economics as simply the application to sea transport of the same methods and analytic means that are used in the general study of economics. The book describes and sets out algebraically the relationships of various inputs with outputs for shipping and for ports. The book does not have data for numeric examples.

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Strømme Svendsen and NHH have continued as important contributors to maritime economics. The need for texts is evidenced by the publication of Branch (1964) and O’Loughlin (1967). Research was active at universities, and publications from theses made important contributions to the literature. Thorburn (1960) examines pricing for sectors of the shipping and port services markets under different demand and supply conditions. His aim was to assess the inﬂuence of distance by clarifying the effects of the characteristics of ships and ports on the supply of and demand for water transport. Thorburn’s book was the ﬁrst, and arguably remains, the most comprehensive theoretical treatment of maritime economics. However, the author’s and the book’s inﬂuence on the ﬁeld have been restricted by the book’s limited circulation and the fact that Thorburn, unlike Strømme Svendsen, did not work subsequently in maritime economics. Zannetos worked on his thesis at the Massachusetts Institute of Technology between 1956 and 1959 and reworked the material for publication in 1966. He sought to build on Koopmans’s work and to contribute to the development of a theory of oil tankship rates. Veenstra and De La Fosse (2006) demonstrate that Zannetos’s work has provided a foundation on which many others have built. The post-war importance of the maritime industries and the changing conditions of these industries in the UK and the US led to a number of industry studies. The industry studies reﬂect a growing interest in the economic efﬁciency of maritime industries and the factors contributing to it. The industries studied are the British shipbuilding industry (Parkinson 1960), the United States

merchant marine (Ferguson, Lerner, McGee et al. 1961), and British shipping (Sturmey 1962). Also reﬂecting the concern with the status of maritime affairs was the UK Committee of Inquiry into Shipping (Rochdale 1970), for which the economic advisor was Richard Goss. Journal publications in maritime economics related to the economics of ships, of shipping markets and of ports also became more common. The topics are dealt with in turn. The application of economics to the selection of ship design was the result of general advances in the application of engineering economy, as reﬂected in Grant and Ireson (1960) (Thuesen 2005). The application to ships was advanced signiﬁcantly by Benford through papers on general and speciﬁc applications of engineering economy (Benford 1957, 1963, 1967). Goss (1965) notes that, before Benford, studies of alternate ship designs, as in the transactions of associations such as RINA and SNAME, lacked explicit criteria for comparing ship designs. Goss and Benford recommended similar economic methods. Continuing increases in the size of bulk ships led to greater interest in the differences in ship costs with size, in part because ports were being called upon to invest in new facilities for larger ships. The general absence of published cost information led to studies of actual bulk ship costs (Heaver 1968, 1970). A similar study was completed by Goss and Jones (1970) for the Board of Trade. The development of container shipping following the establishment of international standards for containers in 1966 initiated decades of major changes in liner shipping. The changes and challenges associated with container shipping have been major sub-

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jects of studies by maritime economists after 1973, for example, Gilman (1975) on vessel size, and Gilman and Williams (1976) on network structure in container shipping. Consistent with increased interest in the application of cost–beneﬁt analysis to public investments, Goss presented the methodology for ports and the likely results in two papers (1967a, 1967b). The importance of ship time and costs in port was reﬂected in a United Nations study (1967) and in a study of the conditions affecting the actual time that bulk ships spent in port (Heaver and Studer 1972). Recognition of the important effects of the changes in shipping on ports is evident in two books. Bird (1971), one of a number of geographers who have made contributions to port economics, showed how the competitive relationships among ports and their relationships with hinterlands were being changed by developments in shipping and freight handling. The theme of integrated logistics systems through specialized terminals was given even more prominence by Johnson and Garnett (1971). They considered the effects of containerization in advancing door-to-door transport services and changing port competition. This period does not see much advance in the study of freight markets. The dominance of liner markets by conferences led to a number of papers examining the economic rationale and apparent effects of conferences, for example Abrahamsson (1968). Heaver (1972, 1973) examines empirically the effects of various factors on rates on selected routes to and from North America. The proceedings of a seminar in Bergen (Lorange and Norman 1973) contain papers designed to shed light on decision-making processes in shipping management for bulk

23

and tank ships. They reﬂect the approaches of the time, with chapters on market and cost structure, including one by Zannetos, on uncertainty and risk, and on planning models. The papers are all conceptual. While this is consistent with the purpose of the seminar, it is also a reﬂection of the limitations on data availability and computing capability at the time. Drewry Shipping Consultants, founded in 1970, was one of the ﬁrst ﬁrms to appreciate that the changes in the maritime industry were associated with value in shipping market data and economic analyses. Many shipbrokers that previously had made data available freely began to charge for their reports. A market for maritime data and intelligence existed and is well developed today.

2.5 Maritime Economics since 1973 Developments evident in the maritime industry during the period of transition have continued and have reshaped maritime economics. The same issues of ships, port connections and market behavior exist as in former periods, but in more complex environments, as reﬂected in widely diverse paper topics. The consequences of these developments are captured in the following three trends. First, the analysis of alternate ship designs has demanded increased attention not just to the string of vessels to be used in a particular service but to the role of new vessels in the context of ﬂeets often parts of global route networks. Increased specialization has also occurred in ships to serve particular trades more efﬁciently. The results are more complex choices among more alternatives

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and a greater number of markets to which economic studies may be directed. Second, the importance of port and inland transport economics, as espoused by Thorburn (1960), has come to the fore as the design of vessels, ports and inland transport as systems with compatible handling features has become essential to achieving the required capacity and cost capabilities. The importance of the effective coordination of logistics systems, ﬁrst evident in bulk systems with their specialized terminals and unit trains or pipelines, has extended to manufactured goods through containerization. Third, market structures have changed signiﬁcantly, raising new issues. A new industry sector has evolved as a result of the privatization of many port functions, leading to the growth of terminal operating companies, some as parts of shipping companies. Also, the span of control of shipping companies has changed as mergers, acquisitions and internal growth have resulted in global shipping ﬁrms with signiﬁcant logistics service capabilities within the corporate group. In addition, the economics of container shipping markets has been changed by the slow demise of shipping conferences under the pressure of increasingly competitive markets and in response to greater legislative restrictions.9 The characteristics of the industry result in many types of economic studies being conducted. Heaver (1993) grouped papers in journals into eleven topics. Pallis, Vitsounis and De Langen (2010), in a much more sophisticated content analysis of published research in port economics, policy and management, break papers into categories, for example terminal studies and port governance, and the categories into themes; for example, terminal studies

includes the themes of terminal efﬁciency and strategies of terminal operating companies. As this chapter deals with maritime economics as a whole, studies are ﬁrst grouped by “segment,” for example studies related to the liner market as distinct from the bulk shipping market. Within the segments, “categories” and “themes” could be recognized, but this is not done systematically here. For the period from 1960 to 1987, Heaver (1993) identiﬁed 69 articles on maritime economic topics that had appeared in eight of 42 economics journals. This excluded articles that appeared from 1973 to 1987 in MPM, a total of 309 articles. The review by Pallis, Vitsounis and De Langen (2010) of 51 economic and non-economic journals for the period 1997–2008 found 395 articles related just to ports. It may be safely inferred that the amount of research and writing on maritime economics has increased signiﬁcantly. It has been sufﬁcient to support publication of a second specialized journal since 1999: the International Journal of Maritime Economics became Maritime Economics and Logistics (MEL) in 2003. While the addition of a second specialized journal would itself induce more research to be published, a number of other factors have resulted in an increase in maritime economics research. Five factors warrant recognition. First, the growth of shipping has continued as the expansion of international trade has outstripped national economic growth. A major contributor has been the development of containerization, which has reshaped the structure of liner shipping and reduced logistics costs. Containerization has contributed signiﬁcantly to the wide recognition of globalization as a major force in the world economy.10 Second, there

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has been an increase in the number of universities offering maritime studies, especially for graduate students, which has more than compensated for the reduced visibility of maritime courses in some existing programs now structured around logistics or supply chain management studies. The growth of a literature base for such programs in texts and their equivalent (of which this book is now one) is the third important factor in the growth of maritime economics studies. Fourth, the data, tools and concepts available for the study of issues in maritime economics and in other ﬁelds have contributed to the greater quantity and sophistication of research. Fifth, the progress of maritime economics has been improved immeasurably by the formation of the International Association of Maritime Economists (IAME) in 1992. The importance of IAME warrants a brief review of its formation, as it was a process that took several years.11 In 1976, Strømme Svendsen noted that one purpose of the ﬁrst International Maritime Economists Conference in Piraeus was to consider “a more formal way of organizing maritime economists in the world” (Goulielmos 1976: 167). A committee was established to help organize an international maritime economists group, but meetings continued to be ad hoc and dominantly involved economists from Europe with representatives from national institutions such as the Japan Maritime Research Institute ( JAMRI). After 1986, the World Conference on Transport Research Society (WCTRS) encouraged a maritime special interest group. Following a 1991 conference in Rotterdam which concluded that shipping “justiﬁed the recognition of a special, albeit catholic, academic and intellectual focus” (Gwilliam 1993), IAME held

25

its inaugural meeting in 1992 as a part of that year’s WCTRS meeting. Subsequently, IAME has contributed greatly to the ﬁeld of maritime economics by facilitating communication through its annual meetings and distribution of its associated journals, MPM and MEL. It is appropriate here to examine the broad nature of the changes in publications and in the orientation of research, without delving into details that may be included in later chapters. Papers appearing in MPM and MEL 2000–9 are examined. The 458 papers are placed into one of 13 segments plus an “other” segment (Table 2.1). A formal comparison with the “topics” identiﬁed in Heaver (1993) is not attempted because of qualitative differences. However, differences between the new and old groupings are noted. The most obvious change is the presence of new segments on the environment, safety and security, short-sea shipping, and intermodal and logistics. Surprisingly few papers (nine, or 2%) relate to environmental issues associated with maritime activities. Papers on safety and security are more numerous (37, or 8.1%). They include papers that examine the effects of measures to improve safety and security, for example the US Maritime Transportation Security Act, and papers that examine the causes of casualties and methods by which they might be reduced. The third added segment is on short-sea shipping. The public interest in the use of short-sea shipping accounts for a number of papers to support recognition as a segment (18, or 3.9%). The ﬁnal added segment, on intermodal transport and logistics (40, or 8.7%), warrants a brief review. Although it can be argued, as Thorburn (1960) did, that shippers have always been

26

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Table 2.1 Segmentation proﬁle of research 1982–1991a

Segment Number Environment Safety and security Short-sea shipping Intermodal and logistics Port Liner market Dry and tanker market Finance Policy Management Labor Passenger and ferry Shipbuilding Other Total a b

– – – – 68 28 6 5 25 10 13 4 15 27 201

2000–2009b

Percentage

Number

Percentage

33.8 13.9 3.0 2.5 12.4 5.0 6.5 2.0 7.5 13.4 100

9 37 18 40 125 44 35 16 43 41 20 8 8 14 458

2.0 8.1 3.9 8.7 27.3 9.6 7.6 3.5 9.4 9.0 4.4 1.7 1.7 3.1 100.0

Data from Maritime Policy and Management, 1982–91, in Heaver (1993). Data from Maritime Policy and Management and Maritime Economics and Logistics, 2000–9.

concerned with the total cost and service of moving goods between origins and destinations, critical attention to the design and operation of international transport services to achieve a well-coordinated service is a phenomenon only of the last forty years. It has evolved with the development of new international trades in commodities such as coal and with the growth of containerization. It has had implications for freight forwarders, inland carriers, port enterprises, shipping lines and, of course, shippers. The attention to better coordination of services in logistics means that research may relate to one or more of the other segments of research, such as ports or liner economics. Pallis, Vitsounis and De Langen (2010) identify 56 papers in the category of “ports in transport and supply chains.” However, for this examination of all maritime economics

research, intermodal and logistics papers are recognized as a separate segment of maritime economics research. Two conclusions of Pallis, Vitsounis and De Langen (2010) on the papers they reviewed are appropriate here. First, the papers relate to container ﬂows in general without differentiation by commodities. The point can also be made that studies have ignored bulk commodity ﬂows, perhaps because coordination has been achieved effectively except where congestion affects operations. Second, the papers have a strong descriptive element, which led Panayides (2006a) to advance the shift evident in research methodology to test empirically the effectiveness of selected attributes in measuring the level of integration in supply chains. These conclusions have relevance for other segments.

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The port segment has papers that reﬂect the need for greater coordination among port activities and the increase of competition among logistics chains and, therefore, among ports. There are four results from this. First, the port segment is by far the largest segment of papers (125, or 27.3%). Second, a theme of several papers is assessment of port attributes that affect the attractiveness of their services to shippers and shipping lines (Nir, Lin and Liang 2003). These studies use data collected through stated and revealed preference methods and apply various analytic methods to examine the data. Third, the studies apply to a wide array of ports beyond Europe and North America, for example Saeed (2009) for Pakistan, Wu, Yan and Liu (2009) for Asian ports, and Lirn, Thanopoulou, Beynon and Beresford (2004) on a global scale. Fourth, the interest in competitiveness has been associated with assessments of port efﬁciency and performance, increasingly using quantitative methods, for example Park and De’s (2004) analysis of Korean ports. The port papers also reﬂect the radical shift in port policies to greater reliance on market forces, with private ﬁnancing and operation of terminals. Research into governance models is reﬂected in Brooks and Pallis (2008), while tendering and concession agreements are prominent in Pallis, Notteboom and De Langen (2008) and Brooks and Cullinane (2007). Port pricing continues to attract periodic research, in part because prices generally deviate signiﬁcantly from an efﬁcient level according to economic theory (Heggie 1974; Haralambides 2002). The literature on liner shipping (44, or 9.6%) is still a distinct segment of the literature, but it has undergone some signiﬁcant changes. The slow demise of the confer-

27

ence system has meant that conference pricing (Shneerson 1976) has given way to reliance on conﬁdential contracts (Gardner, Marlow and Nair 2002). The new pricing regime has not yet attracted much research, although Sánchez, Hoffmann, Micco et al. (2003) and Wilmsmeier and Hoffmann (2008) examine the effects of route attributes on rates. The fundamental issues of liner service optimization for ship size and network structure ( Jansson and Shneerson 1987) remain, although ships are now larger and networks more extensive (Gilman 1975, 1999). The importance of service levels now commands more attention (Notteboom 2006) and greater attention is given to network methodologies (Song, Zhang, Carter et al. 2005). A growing feature of liner shipping since 1970 has been the extension of ownership by lines into logistics and port operations, which has raised issues for the strategies of the lines and others in the supply chain (Heaver, Meersman, Moglia and Van de Voorde 2000; Panayides 2006b; Song and Panyides 2008). The papers on the dry bulk and tanker markets (35, or 7.6%) are placed in a single segment even though the substitutability of ships between the markets has diminished. The number of papers in these journals is signiﬁcant but not substantial. It belies the importance of the area because of many publications in other journals and in business journals and consulting reports. The segment appears to be more prominent today than previously. The research provides a better understanding of the market dynamics, including the changing relationship among market segments. A feature of the research is the greater use of modeling, as reﬂected in Glen (2006). There has been continuity from earlier works (Veenstra and De La Fosse 2006), with

28

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notable contributions in books – Shimojo 1979 and Beenstock and Vergottis 1993, the latter based on four articles. Also of note is the continuity of modeling-based research for charter markets at NHH in Norway (Norman and Wergeland 1981; Strandenes 1986, 1999). Research into the charter markets is closely related to research on ﬁnancial issues in shipping, in part because ﬁnancial risks are closely tied to market volatility. There has been an increase in ﬁnance-related research (16, or 3.5%) but, again, papers are found in a wide array of journals. The research has contributed to and beneﬁted from the increased interest of banks in ﬁnancing ships and the improved range of hedging strategies available. The leader in this research, through his own work and through encouraging others, is Costas Grammenos (2002b). The development of instruments for hedging in shipping and the increase in the number of public shipping companies is reﬂected in the research of, for example, Merikas, Gounopoulos and Nounis (2009) and Kavussanos and Visvikisz (2006). The policy papers (43, or 9.4%) include works on shipping and ports. The appearance of a number of papers on port policy reﬂects issues associated with privatization and the harmonization of policies among governments, particularly in the EU (Verhoeven 2009). Issues concerning the effects of government policies on the competitiveness of ports and ﬂag shipping remain the dominant theme. The remaining segments of the research make important but eclectic contributions. The largest of the segments is management and corporate organization (41, or 9.0%); the papers deal with research related to shipping, ports and logistics topics. The

labor segment is also signiﬁcant (20, or 4.4%), with the role of crewing and management in safety and security contributing to the number of papers. The segment on passenger and ferry services (8, or 1.7%) is also diverse; it includes papers on the cruise industry and ferries. The papers on ferries relate to an aspect of short-sea services, but with an emphasis on passengers, not freight. The shipbuilding segment also includes a variety of subjects, some papers, for example Dikos (2004), relating shipbuilding cycles to those of charter markets. It is appropriate to conclude this characterization of the segments of maritime research with two observations. First, the research of maritime economists remains diverse. Second, subdivisions of the ﬁeld can be useful, because of the need to reﬂect the purpose for which they are made, but, at the margin, the classiﬁcation of work in one compartment or another is arbitrary.

2.6

Summary

The current state of maritime economics is far removed from its historic roots. The maritime industries have become more complex and sophisticated, supported by commercial and consulting businesses that bear little resemblance to their forebears. Yet, the core of the ﬁeld remains the choice of ships, the analysis of shipping markets and the interconnections of shipping through ports with supply chains. The quantity and quality of research is now higher than ever before, supported by numerous university programs with excellent journals, texts and related readings available, to say nothing of the information on the internet. The improved availability of data and the application of new analytic

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methods have contributed to more insightful empirical analyses, with contributions to theory as well as to practice. Finally, participation in maritime economics has become truly global in both the residency of participants and the locus of studies. There is good sailing ahead!

Notes 1

2

3

4

5

6

7

This is 200 years after the founding of the Royal Society (350 years old in 2010!) but only 13 years after Fellows began to be elected solely on the merit of their scientiﬁc work. Incoterms are a series of international sales terms, published by the International Chamber of Commerce, widely used in international commercial transactions because they help traders avoid misunderstandings by clarifying the costs, risks and responsibilities of both buyers and sellers. John Grantham, a founding member of RINA, writing in 1859 on iron shipbuilding included a chapter headed “Iron vessels considered as a commercial question.” Among the eight subjects covered were capacity, speed and cost; on all subjects Grantham concludes “iron vessels [are] . . . superior to wooden vessels” (McCarthy 1988). Quoted in a Memorial Resolution to Eugene L. Grant. http://histsoc.stanford. edu/pdfmem/GrantE.pdf (accessed January 20, 2010). The late twentieth-century improvements in communications technologies have meant that individual locations such as the Baltic Exchange no longer play a signiﬁcant role in the ﬁxing (chartering) of ships. Published and printed by John Jones; the British Library Newspapers holds copies from 1897 to 1980. Isserlis (1938) notes that a 1903 Memorandum VIII of the British Board of

29

Trade to Parliament was on “The Course of Ocean Freights during the Past Twenty Years,” a subject warranting attention because of the importance of rates to “many questions relating to foreign trade . . . and the entire lack of existing data on the subject.” 8 Tinbergen (with R. Frisch) and Koopmans (with L. V. Kantorovich) went on to win the Nobel Prize in Economics in 1969 and 1975 respectively. 9 The regulation of conferences is national. The ﬁrst signiﬁcant step toward requiring greater competition under a conference regime was in the US Ocean Shipping Act, 1980. The ﬁnal step of disallowing price ﬁxing by a country was achieved by the European Union, effective October 2008; see IP/05/1586 and MEMO/05/480, adopted by the European Commission December 14, 2005. 10 Interestingly, one result has been the common use of the Baltic Dry Index as an indicator of the state of the world economy. 11 The term “maritime economics” had been adopted in the 1960s by an informal discussion group in London. The title was the suggestion of Eric Price, Chief Economist of the London Port Authority, to reﬂect the group’s interests in ports as well as ships (Goss 2002).

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Grammenos, C. Th. (2002b) Credit risk, analysis and policy in bank shipping ﬁnance. In The Handbook of Maritime Economics and Business, pp. 731–61. London: LLP. Grant, E. L. and W. G. Ireson (1960) Principles of Engineering Economy. New York: Ronald Press. Gwilliam, K. M. (1993) Maritime economics in transition.? In K. M. Gwilliam (ed.), Current Issues in Maritime Economics, pp. 1–7. Dordrecht: Kluwer Academic Publishers. Haralambides, H. E. (2002) Competition, excess capacity, and the pricing of port infrastructure. Journal of Maritime Economics and Logistics 4(4): 323–47. Heaver, T. D. (1968) The Economics of Vessel Size: A Study of Shipping Costs and Their Implication for Port Investment. Ottawa: National Harbours Board. Heaver, T. D. (1970) The cost of large vessels: an examination of the sensitivity of total vessel costs to certain operating conditions. National Ports Council, Research and Technical Bulletin 7: 342–56. Heaver, T. D. (1972) Trans-Paciﬁc trade, liner shipping and conference rates. Logistics and Transportation Review 8(2): 3–28. Heaver, T. D. (1973) The structure of liner conference rates. Journal of Industrial Economics 21(3): 257–65. Heaver, T. D. (1993) The many facets of maritime economics, in association: inaugural address to the Association of Maritime Economists. Maritime Policy & Management 20(2): 121–32. Heaver, T. D., H. Meersman, F. Moglia and E. Van de Voorde (2000) Do mergers and alliances inﬂuence European shipping and port competition? Maritime Policy and Management 27(4): 363–73. Heaver, T. D. and K. R. Studer (1972) Ship size and turn-around time: some empirical evidence. Journal of Transport Economics and Policy 6(1): 32–50. Heggie, I. G. (1974) Charging for port facilities. Journal of Transport Economics and Policy 8(1): 3–25.

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Hough, B. O. (1924) Ocean Trafﬁc and Trade. Chicago: LaSalle Extension University. Irwin, D. A. (2002) Long-run trends in world trade and income. World Trade Review 1(1): 89–100. Isserlis, J. (1938) Tramp shipping cargoes and freights. Journal of the Royal Statistical Society (May): 53–134. Jansson, J. O. and D. Shneerson (1987) Liner Shipping Economics. London: Chapman and Hall. Johnson, K. M. and Garnett, H. C. (1971) The Economics of Containerisation. London: George Allen & Unwin. Kavussanos, M. G. and I. D. Visvikisz (2006) Shipping freight derivatives: a survey of recent evidence. Maritime Policy and Management 33(3): 233–55. King, G. A. B. (1956) Tanker Practice. London: Maritime Press. Klaassen, L. H., L. M. Koyck and H. J. Witteveen (eds.) (1959) Jan Tinbergen: Selected Papers. Amsterdam: North-Holland. Koopmans, T. C. (1939) Tanker Freight Rates and Tankship Building: An Analysis of Cyclical Fluctuations. Haarlem, the Netherlands: PS King & Staple. Lewis, W. A. (1949) Overhead Costs: Some Essays in Economics Analysis. London: George Allen & Unwin. (US repr. Augustus M. Kelley, New York, 1970.) Lirn, T. C., H. A. Thanopoulou, M. J. Beynon and A. K. C. Beresford (2004) An application of AHP on transhipment port selection: a global perspective. Maritime Economics and Logistics 6(1): 70–91. Lorange, P. and V. D. Norman (1973) Shipping Management. Bergen: Institute for Shipping Research. Lundgren, N. G. (1996) Bulk trade and maritime transport costs: the evolution of global markets. Resources Policy 22(1/2): 5–32. Marx, D., Jr. (1953) International Shipping Cartels. Princeton: Princeton University Press. McCarthy, M. (1988) The iron hull: a brief history of iron ship building., Department of

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Maritime Archaeology, WA Maritime Museum, Fremantle. www.anmm.gov.au/ webdata/resources/pdfs/research_guides/ ironhulls.pdf (accessed December 20, 2009). McDowell, C. E. and H. M. Gibbs (1954) Ocean Transportation. New York: McGraw-Hill. Merikas, A., D. Gounopoulos and C. Nounis (2009) Global shipping IPOs performance. Maritime Policy & Management 36(6): 481–505. Metaxas, B. N. (1983) Maritime economics: problems and challenges. Maritime Policy and Management 10(3): 145–64. Meyer, J. R., M. J. Peck, J. Stenason and C. Zwick (1959) The Economics of Competition in the Transportation Industries. Cambridge, MA: Harvard University Press. Mohring, H. and M. Harwitz (1962) Highway Beneﬁts: An Analytical Framework. Evanston, IL: Northwestern University Press. Nir, A-S., K. Lin and G.-S. Liang (2003) Port choice behaviour – from the perspective of the shipper. Maritime Policy and Management 30(2): 165–73. Norman, V. and T. Wergeland (1981) NORTANK: a simulation model of the freight market for large tankers. Report 4/1981. Centre for Applied Research, Norwegian School of Economics and Business Administration, Bergen. Notteboom, T. E. (2006) The time factor in liner shipping services. Maritime Economics and Logistics 8(1): 19–39. O’Loughlin, C. (1967) The Economics of Sea Transport. Oxford: Pergamon Press. Owen, D. (1914) Ocean Trade and Shipping. Cambridge: Cambridge University Press. Pallis, A. A., T. E. Notteboom and P. W. De Langen (2008) Concession agreements and market entry in the container terminal industry. Maritime Economics and Logistics 10(3): 209–28. Pallis A. A, T. K. Vitsounis and P. W. De Langen (2010) Port economics, policy and management: review of an emerging research ﬁeld. Transport Reviews 30(1): 115–61.

Palmer, S. (1990) Book review of Akveld, L. M. and Bruijn, J. R. (eds.) Shipping Companies and Port Authorities in the Nineteenth and Twentieth Centuries: Their Common Interests in the Development of Port Facilities. The Hague: Nederlandse Vereniging voor Zeegeschiedenis, 1989. International Journal of Maritime History 2(2): 266–9. Palmer, S. (2003) Port economics in an historical context: the nineteenth century Port of London. International Journal of Maritime History 15(1): 27–67. Panayides, P. M. (2006a) Maritime policy, management and research: role and potential. Maritime Policy and Management 33(2): 95–105. Panayides, P. M. (2006b) Maritime logistics and global supply chains: towards a research agenda. Maritime Economics and Logistics 8(1): 3–18. Park, R. K. and P. De (2004) An alternative approach to efﬁciency measurement of seaports. Maritime Economics and Logistics 6(1): 53–69. Parkinson, J. R. (1960) The Economics of Shipbuilding in the United Kingdom. Cambridge: Cambridge University Press. Rochdale, The Rt. Hon. the Viscount (chair) (1970) Report of the Committee of Inquiry into Shipping. London: HMSO. Saeed, N. (2009) An analysis of carriers’ selection criteria when choosing container terminals in Pakistan. Maritime Economics and Logistics 11(3): 270–88. Sánchez, R. J., J. Hoffmann, A. Micco, G. V. Pizzolitto, M. Sgut and G. Wilmsmeier (2003) Port efﬁciency and international trade: port efﬁciency as a determinant of maritime transport costs. Maritime Economics and Logistics 5(2): 199–218. Shimojo, T. (1979) Economic analysis of shipping freights. Kobe Economic & Business Research Series 7. Research Institute for Economics and Business Administration, Kobe University. Shneerson, D. (1976) The structure of liner freight rates: a comparative route study.

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Journal of Transport Economics and Policy 10(1): 52–67. Song, D.-P., J. Zhang, J. Carter, T. Field, J. Marshall, J. Polak, K. Schumacher, P. SinhaRay and J. Woods (2005) On cost-efﬁciency of the global container shipping network. Maritime Policy and Management 32(1): 15–30. Song, D.-W. and Panayides, P. M. (2008) Global supply chain and port/terminal: integration and competitiveness. Maritime Policy and Management 35(1): 73–87. Strandenes, S. P. (1986) Norship: a simulation model of markets in bulk shipping. Discussion paper 11. Bergen: Norwegian School of Economics and Business Administration. Strandenes, S. P. (1999) Is there potential for a two-tier tanker market? Maritime Policy and Management 26(3): 249–64. Strømme Svendsen, A. (1958) Sea Transport and Shipping Economics. Bremen: Institute for Shipping Research. (Editor for Contributions in International Shipping Research, Gustav A Theel). Sturmey, S. G. (1962) British Shipping and World Competition. London: Athlone Press. Thorburn, T. (1960) Supply and Demand of Water Transport. Stockholm: Business Research Institute, Stockholm School of Economics. Thuesen, G. (2005) A ﬁfty-year editorial history of The Engineering Economist. Engineering Economist 50(1): 17–23. Thünen, J. H. von (1966) Isolated State: An English Edition of Der isolierte Staat (trans. C. M.

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Wartenberg). Oxford: Pergamon Press. (Original published 1826.) UNCTAD Secretariat (1969) Level and Structure of Freight Rates, Conference Practices and Adequacy of Shipping Services. TD/B/C.4/38/ Rev.1. New York: United Nations. United Nations (1967) The Turn-around Time of Ships in Port. ST/ECA/67. New York: United Nations. Veenstra, A. W. and S. De La Fosse (2006) Contributions to maritime economics: Zennon S. Zannetos, the theory of oil tankship rates. Maritime Policy and Management 33(1): 61–73. Verhoeven, P. (2009) European ports policy: meeting contemporary governance challenges. Maritime Policy and Management 36(1): 79–101. Wellington, A. M. (1887) The Economic Theory of the Location of Railways. New York: John Wiley & Sons. (Sixth edition 1914.) Wilmsmeier, G. and J. Hoffmann (2008) Liner shipping connectivity and port infrastructure as determinants of freight rates in the Caribbean. Maritime Economics and Logistics 10(1): 130–51. Wu, J., H. Yan and J. Liu (2009) Groups in DEA based cross-evaluation: an application to Asian container ports. Maritime Policy and Management 36(6): 545–58. Zannetos, Z. S. (1966) The Theory of Tankship Rates: An Economic Analysis of Tankship Operations. Cambridge, MA: MIT Press.

3

The Business of Shipping: An Historical Perspective Ingo Heidbrink

3.1

Introduction

Shipping is without any doubt the oldest transportation method for larger quantities of any cargo. From prehistoric times, human beings living along coastlines, rivers or lakes have used various watercraft for the transportation of their goods, as the waterways provided natural corridors that could be used for the transportation of larger quantities without complex engineering activities. While early use of watercraft often happened in conjunction with primary production and was done by the same entrepreneurs as the primary production itself, the business of shipping started with the separation of the transportation industry from the primary and secondary production, and to a certain degree from the trade. This development did not occur contemporaneously worldwide, but followed the patterns of development from primitive to developed societies all over the globe in the respective time frames. For example, the ancient cultures of

Mesopotamia, Egypt, Greece and Rome, as well as early developed Asian cultures, deﬁnitely knew a business of shipping, while much younger cultures in Northern Europe, the Americas or Africa did not develop such a business independently of primary and secondary production for a long time. From a theoretical point of view the historical emergence of the business of shipping is characterized by the following: •

use, to a certain extent, of specialized watercraft for cargo transportation, rather than of all-purpose vessels for occasional cargo transportation; • owners and operators of such vessels that focus their activities mainly on shipping, rather than on operating ships only in conjunction with other activities; • crews of the vessels that are primarily seamen for at least some part of the year; • trade routes that are used regularly and not only once or occasionally.

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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The most important point of these characteristics seems to be the development of specialized cargo vessels instead of allpurpose watercraft. Such cargo vessels normally had a large cargo capacity in relation to their total size, required only a small crew in comparison with naval vessels, used less sophisticated sailing or propulsion technology, and generally required less investment.

3.2 The Business of Shipping: Up to the Medieval Period A typical ancient Roman cargo vessel of the Mediterranean had a length between 15 and 37 meters, giving a cargo capacity of 100 to 150 tons (Greene 1986), while some of the state-owned grain transport ships already reached capacities of more than a thousand tons. The state-owned grain transporters can be categorized without any doubt as cargo vessels; nevertheless they are not really a part of the development of the business of shipping, as their development and operation were by no means governed by a market but by direct political control. Much later the same pattern can be found in many other seafaring cultures, for example the Scandinavian Vikings. The ocean-going trader Skuldelev I, an archaeological ﬁnd in Denmark, had a total length of 16.3 meters and a breadth of 4.6 meters, while Skudelev II, a longship used for naval purposes, had a length of 28 meters and a breadth of only 4.5 meters (GrahamCampbell 2001). Skuldelev I required an estimated crew of only twelve sailors, while the crew estimate for Skuldelev II is ﬁfty to sixty (Graham-Campbell 2001). While for a naval vessel speed was generally an important issue, for most cargoes of pre-modern

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shipping speed mattered less than transportation costs, as there was hardly any competition with other transportation carriers for long-distance trade. The general patterns that characterized ocean-going trade also determined riverine trafﬁc, although the maximum size of vessels here was mainly determined by the navigation conditions of the rivers. In addition land transport was, at least to a certain degree, an alternative to cargo shipping, although without an established road system inland waterway navigation continued for a long period as the only transportation system with the capacity to carry greater volumes or weights (Teubert 1912). As outlined above, the business of shipping started principally in prehistoric or at least ancient times, but today’s shipping business has its roots mainly in the medieval European shipping of the Hanseatic League and, more important, in development since the Age of Exploration.

3.3 The Business of Shipping: the Medieval Period The Hanseatic League, an empire of merchant guilds and merchant cities that spanned the whole of the north of Europe and reached out to Iceland and the Atlantic coasts mainly between the twelfth and ﬁfteenth centuries, based its commercial and political dominance on the superiority of maritime trade. Merchants from all around the Baltic and the North Sea traded salt, herring, timber, furs, tar, ﬂax, honey, beer, dried cod, metal ore (copper and iron), grain and, increasingly, manufactured goods like rolls of cloth (Dollinger 1970). The most important factor of Hanseatic shipping for the development of a business of

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shipping was the development as the main type of ocean-going cargo vessel of the Hanseatic cog, a multi-purpose cargo ship which can be classiﬁed as the box ship of the medieval period (Kiedel, Schnall and Ellmers 1985). A typical Hanseatic cog of the fourteenth century had a total length of up to 30 meters, a single mast and a cargo capacity of 40–100 Last (= ca. 80–200 tons), and could be used as a multi-purpose cargo vessel. Although Hanseatic cogs were used as naval vessels during the various maritime conﬂicts of the medieval period, most cogs were owned by private merchants and used for trade only. Beside the building up of a ﬂeet of cargo vessels, the Hanseatic shipping business was characterized by the establishment of major Kontore with port facilities all over Europe (Bryggen in Bergen, Steelyard in London, Hansekontor in Brugge and the Hansekontor in Novgorod), in addition to a widespread network of warehouses which could be used by Hanseatic merchants, for example in Boston, Bristol, Bishop’s Lynn, Hull, Ipswich, Norwich, Yarmouth and York, to name only those in England (Dollinger 1970). A high level of cooperation between the individual shipowners and merchants, at least with respect to the actual shipping operations, was typical of the Hanseatic trade, as is shown by the introduction of convoy shipping, especially during periods of war or increased pirate activities in the Baltic and the North Sea at the end of the fourteenth century (Meier 2006). However, the medieval shipping business of Hanseatic merchants was different to most modern shipping businesses in that shipping and trade were not completely separated, but the cargo ships were owned and operated

by the merchants rather than by independent companies specializing solely in the transportation of cargo. In addition, the Hanseatic trade did not adopt the method of negotiable instruments/promissory notes for ﬁnancial transactions, but stuck to the old-fashioned exchange of cash. This ﬁnally contributed to the decline of the trade empire in the sixteenth century (Dollinger 1970), which directly proves that even in historical periods ﬁnancial instruments have been of vital relevance to the development of the business of shipping. A great deal of knowledge about this particularly important period for the development of shipping was gathered as a consequence of wreck ﬁnds of Hanseatic cogs since the 1960s. Especially the Bremen cog, today preserved at the German Maritime Museum in Bremerhaven, clearly showed that merchant vessels, which were the backbone of the shipping business, were by no means at the cutting edge of contemporary technological development, but used standard technology and even comparatively cheap materials. For example, some of the timber used to build this particular vessel is of mediocre quality at best (Kiedel, Schnall and Ellmers 1985). Nevertheless, the cogs were reliable carriers of nearly all kinds of cargo throughout the operational area of the Hanseatic League, which was mainly limited to the North Sea and the Baltic, and for nearly three centuries served as the main ship type for the shipping business.

3.4 The Age of Exploration and the Early Modern Period Only the Age of Exploration ﬁnally brought the breakthrough for a globally oriented

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shipping business. The exploration since the late ﬁfteenth century of new parts of the globe, especially the Americas, would have made no sense without a parallel development of the shipping industry. While there was of course a strong political colonial element in the exploration and exploitation of the New World, that it was mainly a commercial endeavor should not be overlooked (Benjamin 2009). Such exploitation of the resources of the newly explored areas of the globe only became possible in conjunction with the development of a shipping business which could provide a reliable permanent connection between the old and new worlds. While state-owned companies like the British East India Company used highly sophisticated armed vessels which often carried nearly as much armament as naval vessels, the average cargo ship was of much simpler design and much more ﬂexible in its operational area. In particular the Dutchstyle Fleute became the most important cargo vessel between the sixteenth and eighteenth centuries (Kellenbenz 1976). These ships could operate all around Europe and were especially adapted to the trade in the North Sea and the Baltic region. With respect to the development of shipping as an industry, it seems relevant to look at the owners of the vessels. Although ships of the Fleute type and other standard commercial sailing ships were comparatively simple constructions, they were normally too expensive to be owned by a single private owner. Therefore it was common practice to use an ownership model comparable to the modern share system: the vessel was owned by a group of shareholders, one of whom served as the main owner and operator of the vessel, while the silent shareholders were often at the same time

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the main owners of other vessels or otherwise linked with the shipping industry (Gaastra 2008). This ownership structure, which became typical in the shipping business during the eighteenth and nineteenth centuries, provided at the same time an important tool for risk sharing, that is, a mutual insurance system. Generally, it can be stated that the business of commercial shipping developed to a certain extent in the shadow of the navies of the world’s leading naval powers, despite the fact that the merchant navies provided the vessels which brought the riches of the new worlds to the colonial mother nations. Consequently, the operational area of the merchant navies expanded, and soon after the whole globe was explored cargo vessels could also be found sailing all the oceans of the world. Shipping had become an international business, or the ﬁrst globalized industry. Despite the fact that the maritime industries were often heavily regulated in their home countries, an important element of this period in the development of the business of shipping was the fact that shipping operations on the oceans themselves were almost completely unregulated. Following the ideas of the Dutch lawyer Hugo Grotius, the main operational areas of international trade, the open seas, were not only openaccess but, more important, outside the control of any nation (Grotius 2004). While on the one hand the principle of the Freedom of the Seas opened economic opportunities to anybody interested in the business of shipping, on the other hand it set the stage for piracy, privateering, blockades and all kinds of other obstacles to the development of international trade, because of a lack of international law and related enforcement (Heidbrink 2008).

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While trans-ocean trade was deﬁnitely the most important branch of the shipping business, and ocean-going cargo vessels were the most sophisticated sailing ships, in the respective periods, the vast majority of commercial shipping did not sail the open seas but coastal waters or even inland waterways. An almost limitless number of small to medium-sized craft provided the backbone of the whole transportation systems of almost every nation in the world. While most of the commercial shipping ﬂeets of the world continued to be made up of multi- (or even all-)purpose vessels, some cargoes fostered the development of special ship types exclusively designed for the transport of one particular type of cargo. While overseas trade shipped mainly packaged goods (sacks, barrels, etc.) coastal trade and inland waterway trade used bulk transport from the late medieval period on, and some sources even mention bulk-tankers being used on Chinese waterways in pre-modern times (Brennecke 1975). One of the most lucrative trades of the Early Modern period that required specialized ships would become the slave trade between Africa and the Americas. While at ﬁrst slaves were transported on standard cargo ships, these vessels proved less than ideal for this type of business as they were too slow, and ships with additional decks could accommodate more slaves and consequently provide better economic results for their owners. The so-called triangular trade between Europe, Africa and the Americas became one of the most successful parts of the shipping business between the late seventeenth century and the end of the British slave trade in 1807. The triangle started by sailing from Europe to Africa with cargoes of weapons, steel, copper, manufactured

goods, etc. These cargoes were unloaded on the West African coast, and slaves were loaded for the middle passage to the Americas. The cargoes for the ﬁnal leg of the journey from the Americas back to Europe were cotton, tobacco, sugar, rum and other products of the plantations in the Caribbean and on the American mainland (Findlay 1980). French, Dutch, German and British trading companies participated in the triangular trade; in particular the British Royal African Company became famous for this trade. As happened in many other trades the Royal African Company and their international competitors became especially successful during the Early Modern period because they operated under a royal charter which provided a monopoly for that particular company. In other words the shipping business was often not a free enterprise but a heavily stateregulated and state-inﬂuenced one, and many of the major shipping companies were state-subsidized, privileged or in other ways state-supported. From an analytical point of view, the most important characteristic of the triangular trade was the combination of new cargoes like slaves or colonial products with the development of new shipping routes. Once a new cargo offered opportunities for successful operations for commercial shipping, it did not take long for shipping companies to establish new shipping routes and develop the required types of vessels. While this pattern could be generally observed during the whole history of the business of shipping, it was particularly relevant for the development of transatlantic trade (Benjamin 2009). The trade between the Americas and Europe became the basis of the whole modern development of the global shipping industries, and especially of

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the development of the world’s largest shipping companies during the nineteenth century. Nevertheless, the change from typical Early Modern shipping companies, which often operated only a single vessel, to the shipping empires of the nineteenth and twentieth centuries was a protracted one, and for most of it traditional and modern types of the business of shipping existed side by side.

3.5 The Emergence of Steam-Powered Vessels 3.5.1

The ﬁrst steam ships

The most notable change during the whole history of the shipping business was the introduction of the steam engine. While all shipping before the introduction of steam was dependent on natural forces for propulsion, and was consequently an unpredictable business, the introduction of steam enabled shipping companies to set up shipping lines that operated to reliable schedules and therefore made the whole business an industry that operated according to distinct operational agendas. However, the new technology was not adopted by the shipping industries immediately after Robert Fulton built the ﬁrst successful steam-powered ship in 1803 (Rebman 2008). Like earlier steamships, for example the steamboat designed by John Fitch which had a successful trial run on the Delaware River in 1787, Fulton’s boat was comparatively small and could by no means immediately replace the larger cargo-carrying sailing ships of the trans-ocean trades. Beside the size and the limited cargo capacity, it was mainly the problem of fuel that prohibited an immediate introduction of

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steam to the commercial shipping industries, at least to freight shipping. However, once Fulton’s North River Steamboat, later known as the Clermont, started to operate in 1807 as a passenger vessel between New York City and Albany, NY, the era of steam had begun for the shipping business – a change like none before. The Clermont was a passenger vessel; it started an era in which passenger transport would become one of the main parts of the shipping business. While it was obvious that trans-oceanic passenger transport could only be done with sailing ships, steampowered coastal and inland waterway vessels provided a speed and comfort for passenger transport that had never been seen before. Regardless of the success of inland waterway passenger transport, in most regions the shipping industries lost this particular market to the railways after a short period, and could only continue in areas with particularly good shipping conditions (Heidbrink 1996).

3.5.2

The transatlantic shipping lines

The trans-oceanic trade continued to use sailing ships for passenger and cargo transport, but the political changes around 1800 provided new opportunities for the shipping business that resulted in an almost complete change for the industry. The independence of the US created not only a demand for new shipping lines between Europe and the US but opened this trade to non-British shipping enterprises, for example from North German states like Hamburg and Bremen. The end of the Napoleonic period and the British blockade of continental European ports created opportunities for entrepreneurs who had been almost completely excluded from trans-oceanic trade

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during the previous decades (Marzagalli 2008). The settlement of the West Coast of the US created a demand for transport between the East and West Coasts which could not be satisﬁed by the underdeveloped overland transportation system (Roland, Bolster and Keyssar 2008). In particular the trade between the East Coast of the US and continental Europe brought a breakthrough for a modern business of shipping. Beside various cargoes the business of mass migration became a cornerstone for this particular trade. While the state of Bremen built a new port area near the mouth of the river Weser in the 1820s, today the city and port of Bremerhaven, the shipping operations themselves became a purely private business. The era of state-owned shipping companies was gone and the shipping business had become part of the private commercial sector. While this trend could be observed in most nations of the world, the region of Bremen/Bremerhaven seems to be particularly typical of this early period of the modern history of the shipping business. As already mentioned, the state of Bremen with its newly built port provided the infrastructure for the new business but did not engage in the shipping operations (Heidbrink 2005a). The ships that used the new port were privately owned cargo and passenger vessels, mostly owned by smaller shipping companies or even single shipowners. As the US trade became a solid staple, especially once mass emigration from Europe to the US started in the 1830s, inﬂuential ﬁnancial circles became interested in the trade. Heinrich Hermann Meyer and Eduard Crüsemann, two well-established Bremen merchants with some experience in the shipping industries, realized the opportunity and founded the Norddeutscher

Lloyd AG as a shipping company of a new style in 1857. Despite severe obstacles due to the bad world economy in the late 1850s, they started a service between the Weser region and England in the same year, and as early as the following year one between the Weser and Baltimore in the US (Thiel 2001). Why did the foundations of companies like the Norddeutscher Lloyd, the Hamburgbased HAPAG (founded in 1847), the British White Star Line (1867), and the French Compagnie Générale Transatlantique (1861) constitute such a major breakthrough for the shipping business? One reason was of course that these companies established trans-ocean shipping in the North Atlantic area which was based on regular scheduled steamship services, but more important seems the fact that these companies were fully integrated businesses that combined every single aspect of the whole shipping operation within one company, rather than only operating a number of ships. Beside owning and operating the vessels themselves these companies operated ship repair facilities, port infrastructure like warehouses, and sometimes even inland waterway trafﬁc systems as a hinterland connection for their transatlantic trade. The shipping business had developed from the mere operation of ships into a business that dealt with the whole logistics of transporting passengers and goods from one side of the ocean to the other. The main staple for these shipping lines was often passengers, and the passenger transport of these shipping lines was at least the most visible part of their operations. Passenger transport across the North Atlantic not only reached hitherto unknown dimensions during the second half of the nineteenth century but at the same time turned into a business of a totally new

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quality. While up to now the commercial shipping industries used ships of comparatively simple design and low technology, the new shipping companies of the second half of the nineteenth century built ships which could easily keep pace with the most advanced naval vessels of the respective period. Vessels like the Britannic (built 1874) for the White Star Line and her sister-ship Germanic not only competed for the Blue Riband as the unofﬁcial trophy for the fastest crossing of the Atlantic, but also brought the ﬁnal breakthrough for the screw steamer instead of the paddle steamer (Kludas 2000). Competing for the Blue Riband was not only a sport for the shipping companies but, more important, a relevant marketing tool within this particular business and especially for the new category of wealthy passengers willing and able to pay for highly priced ﬁrst-class cabins and passage.

3.5.3 Combined services and cargo shipping Of course, passenger transport across the North Atlantic was only one element of the shipping business during the second half of the nineteenth century and the early decades of the twentieth. Other destinations were often served by combined passenger/cargo vessels, and cargo-only trafﬁcs continued to be a vital part of the business. While the overseas cargo transport of previous times was characterized by multior all-purpose vessels, the second half of the nineteenth century was a period in which many shipping companies went in for specialization in certain cargoes, and consequently for specialized vessels. A typical example of this trend was the petroleum transport. While early petroleum

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shipping, in particular before the 1880s, often consisted of small cargoes of petroleum on board vessels with mixed cargoes, specialized petroleum vessels were developed as soon as the amount of petroleum shipped on certain routes reached a critical volume. Once this volume was reached it became much more economic to build ships especially designed for this transport than to continue the use of multi-purpose vessels. Of course, these ships, such as the ﬁrst real tanker for bulk transport of petroleum, the Glückauf (built in 1886), could no longer be used for transport of other goods and even needed to sail the return journey with ballast, but as they were highly efﬁcient means of transport such specialized vessels took over the transport of petroleum more or less completely in a very short period of time (Brennecke 1975). The shipping of petroleum was particularly signiﬁcant in the development of the shipping business for a number of reasons: ﬁrst, it introduced tankers that carried the cargo in bulk instead of in wooden barrels; second, petroleum shipping was the ﬁrst specialized shipping industry that dealt with a dangerous cargo on a large scale; and third, and maybe most important, most petroleum vessels were operated by shipping companies that no longer dealt with all types of cargo but only with petroleum, and were often linked to the petroleum industry itself or even a part of the petroleum companies. Finally, the petroleum shipping industry was one of the ﬁrst parts of the whole shipping business to establish complete transport chains from the oilﬁelds to the ﬁnal consumer by utilizing inland waterway shipping in addition to ocean-going tankers and company-owned port facilities (Heidbrink 2000).

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While there was a clear trend towards specialized ships and services using steamships at the end of the nineteenth century, the age of sail was not over yet. Owneroperated small-scale vessels in coastal trades all around the globe continued to use traditional sailing vessels and traditional operational schemes, and, more important, on some long-distance services sailing ships remained the main means of transport for another couple of decades. In particular, the long-distance services between Australia, Europe and the west coast of the Americas continued with sailing vessels (Roland, Bolster and Keyssar 2008). The main reasons for this use of a technology that seemed to a certain degree outdated were the limited operational range of steamships and, more important, cost efﬁciency, as sailing vessels were not only cheaper to build but cheaper to operate: they required basically no fuel supplies. In particular for bulk cargoes of grain (Australia) or guano the length of time required for transportation between the ports was more or less irrelevant, in contrast with the North Atlantic services, for which speed of transportation became one of the most inﬂuential factors in the development of the trade. These highly specialized shipping operations were normally owned and operated by a comparatively small number of larger shipping companies and depended heavily on the ﬁnancial markets of their countries: for example, a single passenger liner for the North Atlantic route could be considered a mega-investment which could only be operated by complex use of all available ﬁnancing mechanisms. In parallel with this development, the shipping business continued also as a small-scale family business. In the coastal trade all around the globe, small to medium-sized sailing vessels with or

without auxiliary engines continued to be the backbone of transportation. In contrast with the trans-ocean services, technical innovation only reached the coastal trade in a comparatively small segment of the business, because of the lack of available capital for modernization and the local character of the business. In addition, ships normally served much longer in the coastal trade than on the open seas as the structural stress to the hull of a vessel is less in coastal waters.

3.5.4 The state of the shipping business around 1900 The shipping business around 1900 can be summarized as follows. The scheduled trans-ocean passenger (or combined passenger/cargo) services of a small number of major shipping companies on the main routes across the North Atlantic and between other hubs around the world used the most sophisticated vessels available, and competed not only for the Blue Riband and ﬁrst-class passengers, but also in the mass migration market. The same major shipping companies normally operated combined passenger/ cargo vessels of slightly smaller size on routes between, for example, Europe and South America or the West Coast of the US and Australia that still operated on a regular schedule but often with departures only once in several months. Often these services were not purely commercial enterprises but also played a part in the administration of the overseas colonies of European nations and/or in national postal services. In particular the system of the Reichspostdampferlinien in Germany was a typical example of how shipping companies and national governments cooperated in

THE BUSINESS OF SHIPPING

the wider ﬁeld of the shipping business,1 and colonial interests provided the background for the development of a global network of scheduled steamship services all around the world (Norddeutscher Lloyd 1908). On long-distance routes, specialized large sailing vessels operated with (bulk) cargoes of comparatively low commercial value on ﬁxed routes but without ﬁxed schedules. Some of the most sophisticated and largest sailing vessels ever built operated in these trades; the so-called Flying P-Liners of the shipping company Ferdinand Laeisz in Hamburg might serve as the best-known example internationally. The four- or even ﬁve-masted barques, including the Peking, the Passat, the Potosi and the Preussen, were the technological climax of the development of the sailing vessel, and today still are considered the archetype of the windjammer2 (Rohrbach, Piening and Schmidt 1957). Beside the vessels operating on ﬁxed routes, a very large segment of the shipping business consisted of multi-purpose cargo vessels (sail, sail with auxiliary engine, or engine only) that operated as tramp-ships and as such serviced all those ports that were not part of the global network of regular shipping services. While some of these vessels were owned by the same companies that operated the services mentioned above, the majority of the tramp ﬂeet was owned and operated by smaller companies which often used second-hand or elderly tonnage. Ships for special cargoes, particularly tankers, operated on ﬁxed routes, and often were not only used by a single customer but owned and operated by the oil companies themselves or by shipping companies closely related to the oil companies. As these ships could be used for one particular cargo only

43

they normally returned in ballast (Brennecke 1975). Beside all the subtypes of the shipping business mentioned so far, it should be mentioned that ferries and shorter-distance combined passenger/cargo lines were another major part of the shipping business, often operated by the railway companies that used these ships as an extension of their network in areas where natural waterways were available, for example the Chesapeake Bay area in the eastern US or European rivers such as the Rhine, the Danube and the Elbe. Finally it should be mentioned that the shipping business did not consist only of trans-ocean trafﬁc: inland waterway trafﬁcs were a major part of the business around 1900, as other means of transport such as the truck had not yet taken over domestic transportation (Teubert 1912).

3.6 The Great War and the Interwar Period During the Great War, 1914–18, the shipping business was seriously affected by the war itself and many services could not be continued. The end of the Great War with its Paris peace treaties brought a change to the further development of the business as few developments had before. The demise of the colonial empires brought with it the end of many of the state-subsidized services, and the business of shipping turned into an almost purely commercial endeavor. In addition, new shipping companies entered the scene, and while the business of global shipping before the Great War was dominated by only a few nations, now they were joined by new nations like Norway (Tenold 2008). In particular this became

44

INGO HEIDBRINK

possible as Germany, one of the world’s leading shipping nations, had to surrender most of its trans-ocean ﬂeet, which opened an opportunity for new players. In addition, the Great War had fostered technological development in the maritime context and sailing vessels ﬁnally became outdated. Nevertheless the Ǻland-based Finnish merchant Gustav Erikson, who bought some of the Flying P-Liners from F. Laeisz, continued the operation of large sailing vessels in the grain trade and became famous for being the last owner of a shipping company with a ﬂeet that consisted almost completely of sailing vessels (K åhre and Greenhill 1978). The shipping business experienced a period of severe crisis during the interwar period despite major technological innovations. Many of these innovations were the direct consequences of the development of naval technology during the Great War which afterwards could be utilized for civil purposes. The global economic downturn that ended in the Great Depression brought a decrease in international cargo and passenger transport, while at the same time in the domestic markets land transport with trucks and railways took over great shares of the cargo volumes previously transported by shipping companies. However, it would be an oversimpliﬁcation to say that the interwar period was a period only of crisis for the international shipping business, as at least some nations, such as Norway, were able to utilize the special conditions of the period to establish new and successful shipping companies (Tenold 2008). Maybe the interwar period is better characterized as a period in which some of the traditional shipping nations, such as Germany, lost a lot of their relevance to the global shipping business, while other nations

which previously had not really been part of the business successfully entered the market. Some other notable changes happened in the passenger trade: for trans-ocean passenger transport, ships were still the only available means of transport. In particular the shipping companies involved in the North Atlantic routes built passenger liners that can be numbered among the most sophisticated and luxurious vessels ever made for civilian purposes. At the same time the domestic, and in particular the inland waterway, shipping companies had to face increasing competition from other transport carriers (Heidbrink 1996). While those shipping companies were used to competing with the railroads even before the Great War, the interwar period brought the automobile as a new competitor. Consequently, many shipping companies ceased their passenger lines on the inland waterways or reduced the number of ships involved in that particular trade. As mentioned earlier, this development does not apply to oceangoing passenger transport, but as early as the interwar period, before the war gained more signiﬁcance, another development started, namely the cruise industry. While initiated for employing vessels outside the peak of passenger transport seasons, cruise line operations developed into an independent and increasingly important sub-branch of the shipping business. While the director of the Hamburg-based HAPAG, with the support of the German Emperor Wilhelm II, initiated the ﬁrst cruises as early as in 1891 as a way of using passenger liners outside the season, it was also before the Great War that the ﬁrst ships exclusively for cruises were built. Again it was HAPAG that pioneered the business, with the Prinzessin Victoria Louise built in

THE BUSINESS OF SHIPPING

1900 (Shaw 2007). Despite the economic turmoil of the interwar period, cruise shipping became a success, especially in the Mediterranean region and off Scandinavia, and became available even for lower- to medium-income groups at the end of the interwar period when the Nazi-German Kraft durch Freude organization started to operate its ﬁrst cruise liners (Schön 2000). Of course, an organization like the NaziGerman Kraft durch Freude should not be confused with the development of an economy-driven industry, but it can be considered the beginning of an element of the business of shipping that started during the fascistic regimes of the 1930s and continued in a slightly different way in the socialistic economies of the post-war period: the statecontrolled or state-owned shipping companies of the twentieth century. Like the colonial empires of the previous centuries, the fascist regimes with their strong political inﬂuence on economic developments needed the shipping business for their economic policy and in particular for their international trade. Which services continued or were newly established was often no longer a question of market demand but of direct or indirect political intervention in the industry, as in the case of fascistic Italy, which needed shipping connections to its dependencies, for example Ethiopia which became an Italian colony under the Mussolini regime (Mallett 1998).

3.7 World War II and Post-War Reconstruction The outbreak of World War II was the ﬁnal catastrophe for the entire global shipping business. As the whole of the North Atlantic, and large parts of the Paciﬁc and the other

45

world oceans, turned into theaters of war within a short time, nearly all international shipping came under the direct inﬂuence of the war. As wartime shipping was by no means part of the regular development of the shipping business and can be considered as a kind of extension of naval warfare, there is no need for a detailed description as part of this survey of the development of the shipping business. However, some developments do need to be mentioned because of their relevance to the post-war development of the shipping business. Of course, World War II caused greater losses of cargo and passenger vessels than had any previous event in a comparably short time. The losses were to trans-ocean shipping and, at least in Europe, to inland waterway shipping. The US alone lost more than 1700 ships, of which more than 700 were above 1000 gross tons, during the war (Horodysky 1998–2007). Other nations suffered comparable losses, and by the end of World War II major parts of the pre-war commercial shipping ﬂeets no longer existed. On the other hand, some of the largest shipbuilding programs ever were undertaken during the war. In particular US shipyards became famous for their LibertyClass vessels – a standard-design ship type of ca. 7200 Brutto Register Tonnage (BRT) that was optimized for extremely short production time. The average construction time of the ca. 2700 Liberty Ships built was 40 days, with a record of only one week for the Robert E. Peary. The basic idea for the Liberty Class was to build ships faster than the enemy could sink them (Bourneuf 2008). Although nearly two hundred of the ships were sunk during World War II, the remaining ﬂeet of this ship type would turn into a cornerstone for the post-war rebuilding period of the shipping business

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(Bourneuf 2008). The vessels served all around the world for the shipping companies of nearly all shipping nations, and many of them remained in service as multipurpose tramp vessels for decades after the end of the war. The reconstruction of the shipping business after World War II was inﬂuenced by a number of other factors which would become crucial for the entire further development of the industry. On the one hand the wartime technological improvement of airplanes allowed them for the ﬁrst time to compete with ships for trans-ocean passenger transport. Although it took until the 1960s for the airline industry to really be able to take over the majority of transoceanic passenger transport, the main period of trans-ocean liners was over at the end of the war. The shipping business had lost one of its core elements to a new competitor because of technological innovation in a branch outside the shipping industry. On the other hand the separation of the world into the West and the Sovietcontrolled socialistic economies brought state-owned shipping companies into being in numbers unknown to the market so far. As these state-owned shipping lines of the Eastern world were often established without the shadows of tradition, they often introduced new technology such as diesel engines faster than the rebuilt shipping companies of traditional shipping nations like the UK. In any case, as the socialistic state-owned shipping companies normally did not directly compete with the shipping companies of Western nations, they had no direct effect on them. Beside these two factors and the ﬁnal demise of the commercial use of sailing vessels, the rebuilding of the shipping business followed basically the same lines as the

shipping business before World War II. Bulk cargoes like petroleum and ore were transported on specialized vessels owned by specialized shipping companies, often owned by or connected to the respective industrial branch, while other cargoes were transported as mixed freights on multi-purpose or even combined passenger/cargo vessels on ﬁxed routes or in tramp operations.

3.8 Towards Today’s Business of Shipping The next big change came a little unexpectedly in the late 1950s and was in the end more inﬂuential than the two world wars together. The US transport company of Malcom McLean introduced the container for transports at the US East Coast. McLean’s basic idea was the use of a standardized large box, the container, that could be transported, on trucks as well as on railroads or ships, for the whole transport chain. Once packed at the origin of the cargo, goods of all kinds could remain in the box until they reached their ﬁnal destination without unloading the transport goods for a change of carrier. Although most people in the business of shipping were not convinced by McLean’s concept and nicknamed the ﬁrst vessels box ships, the idea became a great success within a short period of time and today the great majority of cargoes outside the bulk market are transported in containers. Although the ﬁrst box ships crossed the Atlantic in the 1960s, and the ﬁrst containeronly vessels were built in Australia as early as 1964, traditional shipping companies often continued to build traditional multipurpose cargo vessels (Cudahy 2006). Even experimental vessels for the use of atomic

THE BUSINESS OF SHIPPING

energy, like the Savannah and the Otto Hahn, were still designed as conventional multipurpose freighters. Eventually those shipping companies who had realized that the box ship was the vessel of the future gained market shares with enormous speed, while many of the traditional shipping companies sailed into a severe crisis. While traditional major global players of the global shipping business such as the Hamburgbased HAPAG hesitated to introduce the new technology, formerly almost unknown companies like the Danish Maersk Line recognized the possibilities of the new technology. The crisis for those shipping lines that did not participate in the container business became even more severe as it coincided with the ﬁnal take-over of international, and in particular trans-oceanic, passenger transport by jet-propelled aircraft. McLean’s idea of containerized ocean transport with box ships and shipping companies like SeaLand Service, Inc., which he founded, revolutionized not only the whole world of shipping but also the wider ﬁeld of longdistance transportation and even military supply logistics; for example, during the Vietnam conﬂict Sea-Land delivered 1200 containers per month to the Indochina peninsula for the US military. At the same time as the ﬁrst box ships sailed the oceans the world saw an enormous increase in the demand for petroleum, and several political crises such as the closure of the Suez Canal brought about new trafﬁc patterns for petroleum transports between the Middle East and Europe or the US eastern seaboard. New tanker designs reached dimensions never seen before and within a couple of years supertankers of more than 100,000 deadweight tonnage (dwt) were being built. Every tanker generation was larger than the previ-

47

ous one, and ships of up to 500,000 dwt became the leviathans of the oceans. Beside the simple fact that only a very small number of shipping companies were able to ﬁnance super-tankers, the enormous draft of these ships caused another radical change for the business of shipping as only a very limited number of ports were able to accommodate super-tankers (Brennecke 1975). In consequence, petroleum shipping focused on a small number of deep-water ports, such as Rotterdam or Wilhelmshaven, while most ports could not participate in this trade. A similar trend could be observed some years later for the container transport when box ships for round-the-world services also reached dimensions too large for many ports around the world (Cudahy 2006). In combination these trends resulted in an intense concentration for the shipping business, with only a few large multinational companies and ports dominating world shipping, while other companies and ports served as a kind of hinterland trafﬁc for the round-the-world services. However, the trend towards unrestricted growth ended as quickly as it had begun. The reopening of the Suez Canal made smaller tankers economic again, and many of the super-tankers were laid up after only a few years of service. For the container shipping it was a little longer before the limits of growths were reached, or at least seemed to be reached. The 2009–10 crisis of international container shipping clearly showed that all sub-branches of the shipping business are affected by some limits of growth, and that the international shipping business is vulnerable to political and economical events today as it has been in the past. The breakdown of the majority of socialistic economies, and in particular the

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political and economical changes in China, caused other major changes in the development of the shipping business which are still going on and consequently should not be part of an historical survey of the development of shipping.

3.9

Recent Trends

Despite the fact that the following developments are not yet complete, they should be mentioned at least brieﬂy at the end of an historical survey before they are discussed in depth in some of the following chapters of the book. While for centuries it was a basic standard of the shipping business that vessels ﬂew the ﬂag of the state in which their shipping company was located, and consequently safety regimes, manning requirements and all other elements of the actual operation of the ship were governed by the regulations of that state, in the decades after World War II shipping companies moved towards a separation of the ﬂag state of a vessel from the state of the actual ownership of the vessel. The use of ﬂags of convenience became standard in the international shipping business. Comparatively small nations like Malta, Greece and Liberia became world-leading shipping nations as major shipping companies used their ﬂags to avoid the high standards and related costs of their home ﬂags and related regulations. The home country of the shipping company and the ﬂag state of the individual vessel were no longer automatically the same. The governments of ﬂag-of-convenience states often became more inﬂuential in the development of international regulations for the shipping business than the traditional leading shipping nations of the world.

In a second step of this development, many traditional shipping nations introduced second registers for vessels, which enabled them to ﬂy the ﬂag of their nation, but to use different standards for the vessels and, in particular, international crews. From the point of view of the maritime historian this is a particularly interesting development, as ﬂags of convenience and second registers brought back a situation that could be found throughout the whole pre-modern and Early Modern periods: the business of shipping as a globalized or at least internationalized economic activity with an international workforce and low relevance of the nation state. Ships were and are ﬁnanced on international markets, and actual ﬁnancial ownership often did not reﬂect the location of the shipping company or the ﬂag of the vessel. Furthermore, while from the Early Modern period shipping companies focused their business on the shipping itself, and during the medieval period shipping was often combined with trade, modern shipping companies have often widened their portfolio of services and are no longer offering only pure transportation services but a wide range of logistic services. Other recent developments within the shipping business, which will be discussed in detail throughout the other chapters of the book, often also have roots deep in history, although they returned only some decades ago. For example, alliances in the liner trade or pools in bulk trades resemble structures already used at the beginning of the twentieth century, when passenger lines set up combined services in order to guarantee scheduled services on certain routes which would not have been possible with the ships of one company alone. Modern single-vessel companies mirror, to a certain degree, the Early

THE BUSINESS OF SHIPPING

Modern model of ownership, as each company operates only a single vessel, while the actual ownership of the vessels is spread among a group of shareholders that often is involved in a large number of such single-vessel companies. Altogether these recent developments mainly demonstrate that the business of shipping is still an economic sector which is highly adaptable to its surrounding economic conditions. As throughout its entire history, the shipping business has reacted to global economical developments while at the same time it has fostered permanent change in international or global economy.

3.10

Summary

Altogether it can be stated that the development of the shipping business throughout history has always been affected by a number of factors and mechanisms that have repeated themselves in the same manner. First, the development of the shipping business was inﬂuenced by geopolitical factors that determined the demand for transport of passengers and/or goods on certain routes. Once these political factors changed, the shipping business needed to readjust and to develop new economic patterns. Second, the shipping business was always directly inﬂuenced by the development of maritime technology. Although new technology was often introduced in other maritime contexts, such as the navies, the shipping business normally adopted new technologies within a couple of years, or at least once the technology was no longer experimental. Third, the shipping business distinguished, in several historical periods, developments towards specialized ship types for certain cargoes, but in the end

49

the multi-purpose vessel for cargoes of all kind remained the most successful concept for all cargoes except bulk-cargoes such as oil, ore or grains; principally a modern box ship is very similar to a medieval cog that used the barrel as a kind of container. Finally, the business of shipping was used to heavy internal competition, but to only limited competition with other means of transport. Once other transport carriers, like the railways, trucks, pipelines and international air trafﬁc were able to compete with shipping on certain routes, it was normally only a short time before the shipping business gave up that particular ﬁeld of the business. In any case, as shipping is today still the only possibility for transporting larger volumes of cargoes across the oceans, the shipping business can normally replace its lost markets within a short period of time by new cargoes or increased cargo volume in the remaining ﬁelds. Altogether shipping is still the most relevant transport carrier for international trade, as it has been throughout the whole period of trade between many nations. Without the shipping business, the development of the modern industrialized world would have been not only impossible, but even unthinkable. One major difference between the shipping business as it is today and as it has been throughout history should be stated at the end of this chapter. Before passenger transport was taken over by the international air trafﬁc, the railways and the automobile, nearly all international travelers experienced the shipping business at ﬁrst hand, at least sometimes, as a passenger on board a vessel. Today the shipping business is normally a closed world without contact with the average population, and beside short-distance ferry trafﬁc or cruise

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INGO HEIDBRINK

liners there are very few opportunities for anybody outside the industry to experience the shipping business. In any case, the shipping business has lost nothing of its fascination, and the few opportunities to get on board ocean-going vessels are normally real crowd-pullers. Maybe that is the explanation of why a new and unexpected sub-branch of the shipping business has developed very successfully over the last decades: traditional ships operated for the purpose of demonstrating the history of the business of shipping itself and providing again an opportunity for average people to go on board cargo ships (Heidbrink 2005b). Although certainly a niche branch, it is an interesting observation that in the twenty-ﬁrst century the history of the business of shipping has itself become a part of the current industry of shipping.

Notes 1

2

The German Empire subsidized the major shipping companies for scheduled steamship services to regions like Australia and Southeast Asia. The former Flying P-Liner Padua is still sailing today under the Russian ﬂag with the name Kruzenshtern.

References Benjamin, Thomas (2009) The Atlantic World: Europeans, Africans and Their Shared History, 1400–1900. New York: Cambridge University Press. Bourneuf, Gus (2008) Workhorse of the Fleet: A History of the Design and Experiences of the Liberty Ships Built by American Shipbuilders during WWII. Houston, TX: American Bureau of Shipping.

Brennecke, Jochen (1975) Tanker: Vom Petroleumklipper zum Supertanker. Herford: Koehler. Cudahy, Brian J. (2006) Box Boats: How Container Ships Changed the World. New York: Fordham University Press. Dollinger, Philippe (1970) The German Hansa. London: Macmillan. Findlay, Ronald (1990) The “Triangular Trade” and the Atlantic Economy of the 18th Century. Princeton: Princeton University Press. Gaastra, Femme S. (2008) From crisis to prosperity: Dutch shipping 1860–1913. In Lars U. Scholl and David M. Williams (eds.), Crisis and Transition: Maritime Sectors in the North Sea Region 1790–1940, pp. 75–88. Bremen: Hauschild Verlag. Graham-Campbell, James (2001) The Viking World. London: F. Lincoln. Greene, Kevin (1986) The Archaeology of the Roman Economy. Berkeley: University of California Press. Grotius, Hugo (2004) The Free Sea. Indianapolis: Liberty Fund. Heidbrink, Ingo (1996) Raddampfer “Kaiser Wilhelm.” Hamburg: Maximilian Verlag. Heidbrink, Ingo (2000) Deutsche Binnentankschiffahrt. Hamburg: Convent Verlag. Heidbrink, Ingo (2005a) Bremen und die Häfen. In Konrad Elmshäuser and Hans Kloft (eds.), Der Stadtstaat – Bremen als Paradigma. Geschichte – Gegenwart – Perspektiven, pp. 129–54. Bremen: Hauschild Verlag. Heidbrink, Ingo (2005b) Historic ship safety. In David J. Starkey and Morten Hahn-Pedersen (eds.), Bridging Troubled Waters: Conﬂict and Co-operation in the North Sea Region since 1550, pp. 221–5. 7th North Sea History Conference, Dunkirk 2002. Esbjerg. Heidbrink, Ingo (2008) The oceans as the common property of mankind from Early Modern period to today. History Compass 6: 659–72. Horodysky, T. (1998–2007) U.S. Merchant Ships Sunk or Damaged in World War II. www.usmm.org/shipsunkdamaged.html (accessed February 19, 2010).

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K åhre, Georg and Basil Greenhill (1978) The Last Tall Ships: Gustaf Erikson and the ÅLand Sailing Fleets, 1872–1947. London: Conway Maritime Press. Kellenbenz, Hermann (1976) The Rise of the European Economy: An Economic History of Continental Europe from the Fifteenth to the Eighteenth Century. New York: Holms & Meier. Kiedel, Klaus, Uwe Schnall and Detlev Ellmers (1985) The Hanse Cog of 1380. Bremerhaven: Förderverein Deutsches Schiffahrtsmuseum. Kludas, Arnold (2000): Record Breakers of the North Atlantic: Blue Riband Liners 18381952. Brassey’s, Washington. Mallett, Robert (1998) The Italian Navy and Fascist Expansionism, 1935–40. London, and Portland, OR: Frank Cass. Marzagalli, Silvia (2008) The French Wars and the North Sea trade: the case of Hamburg. In Lars U. Scholl and David M. Williams (eds.), Crisis and Transition: Maritime Sectors in the North Sea Region 1790–1940, pp. 20–31. Bremen: Hauschild Verlag. Meier, Dirk (2006) Seafarers, Merchants and Pirates in the Middle Ages. Woodbridge, Suff., and Rochester, NY: Boydell Press. Norddeutscher Lloyd (1908) Handbuch der Reichspostdampfer – Linien nach Ostasien und Australien. Bremen: Norddeutscher Lloyd. Rebman, Renée (2008) Robert Fulton’s Steamboat. Minneapolis: Compass Point.

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Rohrbach, H. C. P., J. H. Piening and F. Schmidt (1957). F.L.: A Century and a Quarter of Reederei F. Laeisz (Owners of the “Flying P” Nitrate Clippers): An Account of the Founding and History of Reederei F Laeisz . . . (trans. Antoinette Greene Smith). Flagstaff, AZ: Colton. Roland, Alex, W. Jeffrey Bolster and Alexander Keyssar (2008) The Way of the Ship: America’s Maritime History Reenvisioned, 1600–2000. Hoboken, NJ: John Wiley & Sons. Schön, Heinz (2000) Hitlers Traumschiffe: Die “Kraft durch Freude” Flotte 1934–1939. Kiel: Arndt. Shaw, J. (2007) German giant: a look back at the 160-year history of the German ﬁrm HapagLloyd and its development into one of the world’s largest shipowners. In Ships Monthly 42(4): 52–5. Tenold, Stig (2008) Crisis? What crisis? The expansion of Norwegian shipping in the interwar period. In Lars U. Scholl and David M. Williams (eds.), Crisis and Transition: Maritime Sectors in the North Sea Region 1790–1940, pp. 117–33. Bremen: Hauschild Verlag. Teubert, Oskar (1912) Die Binnenschiffahrt. Ein Handbuch für alle Beteiligten, vol. 1. Leipzig: Verlag von Wilhelm Engelmann. Thiel, Reinhold (2001) Die Geschichte des Norddeutschen Lloyd 1857–1970. Volume 1: 1857– 1883. Bremen: Hauschild Verlag.

4

International Seaborne Trade Michael Tamvakis

4.1

Introduction

The student of maritime economics knows well that the demand for shipping services is a derived one. The driver behind this derived demand is world merchandise trade, whose complexity and ﬁne detail are considerable. The UN trade classiﬁcation system has one hundred major categories of commodities, each of which contains several sub-categories, providing an overwhelmingly detailed picture of what is a very complex international commodity trade system. Given the limitations of capturing and presenting such granularity of information, this chapter aims to provide an overview of the major commodity trade ﬂows which provide the majority of ship employment. Even so, the intent of the chapter is not to explicitly link trade ﬂows with freight rates. In fact, there is a dearth of literature on this particular subject, although plenty of authors have looked at trade ﬂows and freight rates on their own. What this chapter attempts to do is build a broad-brush picture

of key commodities, by looking primarily at the main export and import ﬂows in recent years, in the context of the underlying factors driving each commodity. The chapter has two major divisions. The ﬁrst, and longer, comprising sections 4.2– 4.9, looks at the major (by volume) cargo ﬂows, the so-called major bulk commodities. The second, section 4.10, looks at general cargo, and containerized trade ﬂows in particular. Figure 4.1 paints a very broad picture of these major commodities and the contribution they make to total seaborne demand. The difﬁculty of the task at hand is already visible: a third of total demand is generated by “other” cargo. But let’s start at the beginning. At the beginning of the twenty-ﬁrst century, Douglas Fleming stated that “nearly ﬁve and a third billion metric tons of goods were shipped in commercial ocean-borne trade. . . . roughly 60% of the total cargo volume moved in bulk” (Fleming 2002). We focus on the major patterns of trade ﬂows in three major groups, energy commodities, metallic minerals and agricultural

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

53

INTERNATIONAL SEABORNE TRADE

Total estimate in 2008: 32.3 billion ton-miles Other 32%

Crude oil 29% Grain 6%

Coal 12% Iron ore 15%

Oil products 6%

Figure 4.1 World seaborne trade shares, in billion ton-miles. Source: UNCTAD Review of Maritime Transport 2009, P. 14, based on data from Fearnleys Review, various issues.

crops, and look at some of the minor bulk commodities which make up bulk trades. Figure 4.2 expands across time the information given in the previous ﬁgure, but uses tons, rather than ton-miles, to show the long-term seaborne commodity ﬂows. Figure 4.3 combines the information in the two previous ﬁgures to give an idea of the distance (average haul) over which commodities have been carried, from the 1980s until recently.

4.2

Crude Oil

Standing head and shoulders above all other commodities is oil. From a total of nearly 3.8 billion metric tons,1 or 80 million barrels per day (bpd) of oil produced in 2009, some 2.6 billion tons (53 million bpd),2 or two-

thirds, was traded internationally. Of this, 70% was carried by sea. Looked at from a different perspective, crude oil and reﬁned products account for over a third of total seaborne trade in that year.3 Throughout oil’s turbulent history, international trade has played an important role. However, the paths of crude oil and reﬁned products have been quite diverse, albeit interrelated. Trade in oil was initiated in the early days of the industry, near the end of the nineteenth century. Before World War I, international trade was almost exclusively in products. Carrying crude was quite uneconomical, due to its low value in comparison with its transport cost. Reﬁneries were also located at the production sites, so that only the ﬁnal products were shipped to the endusers. Most of the world trade in oil products was structured around the United

Crude oil

Oil products

Iron ore

Coal

Grain

Other

9,000 8,000 7,000

Million tons

6,000 5,000 4,000 3,000 2,000

0

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1,000

Figure 4.2 World seaborne trade development by major commodity, in million tons. Source: UNCTAD Review of Maritime Transport 2009; ISL Shipping Statistics Yearbook 2009, compiled from Fearnleys World Bulk Trades and Fearnleys Review (various issues). Average haul (R-axis)

9,000

4,700

6,750

4,525

4,500

4,350

2,250

4,175

0

Nautical miles

Million tone

Seaborne trade (L-axis)

4,000 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008

Figure 4.3 World seaborne trade development, in million tons, and average haul. Source: Author, based on UNCTAD Review of Maritime Transport 2009; ISL Shipping Statistics Yearbook 2009, compiled from Fearnleys World Bulk Trades and Fearnleys Review (various issues).

INTERNATIONAL SEABORNE TRADE

States, which was the leading producer and exporter of oil. Around the 1920s, crude oil started being traded internationally, even though it was carried on short-haul routes. The main crude oil exporters were Mexico and later Venezuela, with United States being the recipient. With the gradual expansion of Middle Eastern and Southeast Asian oil production, crude oil trade increased in importance; there was little scope for local reﬁning, and most reﬁning capacity was now located in the consuming markets. World oil production and exports from 1939 to 1945 reﬂected closely the energy needs of World War II. As the ﬂow of oil and oil products from the US to its European allies increased, the Middle East proved of strategic signiﬁcance, especially with the construction of the big oil reﬁnery and terminal in Ras Tanura. At the end of World War II, Europe was largely destitute. To rebuild itself, it required substantial natural resources, many of which had to be imported. A large part of these were energy resources, primarily oil and oil products, and a large part of those needs were met by the Middle East, which became the world’s leading oil-exporting region, especially after production of the large Kuwaiti ﬁelds came on stream. During the same period, the United States turned into a net oil importer, with most of its imports coming from Venezuela, although some crude imports had already originated from the Middle East in the late 1940s. Soviet Union resumed exports in the late 1940s, most of them being directed to other countries in the communist bloc. At the same time, Japan embarked on its own reconstruction program. With energy resources virtually non-existent domestically, Japan had to turn to oil imports, in

55

order to fuel its rapidly growing economy. The 1960s was an era of growth: of the oil trade, and crude oil in particular; of the export expansion of the Middle East; and of the size of tankers used to carry oil internationally. Western Europe, Japan and the United States experienced high levels of growth during the decade, with a resultant augmentation of their energy requirements. It was this period that saw the establishment of the ﬁrst few major ﬂows of crude oil, which remain dominant in the trade today: AG–West and AG–East, i.e. Arabian Gulf4 to Western Europe and the US, and Arabian Gulf to the Far East. At the same time, reﬁnery capacity and throughputs increased immensely in all the major importing regions. Within the span of ten years, world reﬁning throughputs increased from 21,000 bpd to almost 45,000 bpd. Most were accounted for by Western Europe and Japan. This expansion has very much deﬁned the broad patterns of the trade in oil products which are in place today, which are quite distinct to those of crude oil. At the beginning of the 1970s the US weighed in the world scene as a major importer, owing to a combination of a fall in domestic production and a surge in demand. But just as economic growth and energy demand looked unstoppable, the Yom Kippur War and the subsequent Arab oil embargo brought about a sea change in the way oil prices were set and put OPEC right at its heart. Despite the big initial shock, however, economic growth resumed in 1974, although at lower levels; so did oil consumption and the demand for oil imports. In fact, during the 1970s dependence on the Middle East increased. As OPEC countries rose to prominence, with the Middle East at the forefront,

56

MICHAEL TAMVAKIS

Western producers sought new secure sources of oil and, at the same time, stability in their relationship with the Middle East. The USSR edged its way into the international oil market, taking advantage of the high prices to replenish its hard currency reserves. High energy consumption and broad dependence on oil, however, meant increased production costs and inevitable inﬂationary pressures. In fact, most of the oil producers’ incomes were being severely eroded by the explosive world inﬂation of the late 1970s. The bubble was again ready to burst; the Iranian Revolution kindly obliged. The reaction to the second oil price shock was markedly different from that to the ﬁrst. A number of important adjustments changed the structure of energy consumption. More speciﬁcally, renewed emphasis was put on energy conservation and oil substitution, with the result that the noncommunist world’s oil consumption went into steady decline after 1979. There was a switch to politically safer sources of oil, boosting the production of non-OPEC countries, while dependence on OPEC oil fell considerably during the ﬁrst half of the 1980s. The switch to new supply sources resulted in higher utilization of heavier and sourer crudes; this urged many reﬁners to upgrade an increasing proportion of their facilities in order to improve the yield of lighter products from heavier crudes. The new price increase boosted immensely the fortunes of new, high-cost suppliers, like the UK, Alaska and Canada. The combination of changed demand and supply patterns resulted in a radical structural readjustment of the international oil trade. The share of OPEC in oil production fell dramatically between 1979 and 1985, to the gain of non-OPEC producers.

Faced with decreasing world demand for oil, and increasing competition from non-OPEC producers, OPEC countries attempted to redress market conditions by reducing ofﬁcial prices, and by introducing quotas with a view to establishing some order among member countries. Following the radical change of the fortunes of OPEC producers, many of them had to compete for market share, resorting all too often to price undercutting all too often. It was this turn of events that also brought about a major shake-up of the way oil was priced. Just as for several other commodities and ﬁnancial markets, oil pricing moved to the spot market and then very quickly to the futures exchanges. Oil cargoes were, and still are, priced on a differential basis from the forward month on the futures markets for WTI (West Texas Intermediate) crude in New York and Brent crude in London, with Dubai crude only recently emerging as a pricing benchmark, particularly for cargoes ﬂowing to the Far Eastern markets. After the initial shock of the ﬁrst Gulf War in 1990, the rest of the decade saw relatively depressed prices, with a barrel of oil never again reaching US$30, and dipping as low as US$11 in 1999. Oil ﬂows, however, showed a steady increase through the decade; in fact, from 1990 to 1999 trade increased by approximately one-third. It was not until the new millennium, particularly from 2004 until the ﬁnancial crisis in 2008, that the oil trade, indeed trade in all commodities, saw a tremendous boom in prices and volumes globally, but particularly with a focus on the waking giant that China became. Figure 4.4 shows the development of crude oil imports in the twenty-ﬁrst century. The increasing role of China is obvious, as is that of India in the last few

57

INTERNATIONAL SEABORNE TRADE

2,000 1,800 1,600

Million tons

1,400 Rest of world Other Asia Pacific Japan Indiaa China Europe US

1,200 1,000 800 600 400 a

Data for India before 2008 are included under Other Asia Pacific.

200 0

2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 4.4 Crude oil import development, 2001–2009. Source: BP Statistical Review of World Energy, 2002–2010.

years. On the other hand, one can also notice the important role still played by the more traditional importers, such as the United States, Japan and Europe (excluding the former Soviet states (FSU)). On the supply side, exports are dominated by the Middle East, with former Soviet republics rising to prominence during the same period (see Figure 4.5). So today’s crude oil ﬂows are a combination of established trade routes, but with the addition of a few important new players. Table 4.1 uses the oil-trade matrix from the BP Statistical Review of World Energy, which gives an excellent snapshot of the current situation. Crude oil has two main hubs: Russia with a few former Soviet republics such as Kazakhstan and Azerbaijan; and the Middle East, from Suez to the Persian Gulf. The key destinations are to the major consumption hubs: Western Europe,

the US, China and Japan. However, the complexity is increasing. Although ﬂows from the Persian Gulf remain relatively straightforward and provide the bulk of business to the very large crude carrier (VLCC) ﬂeet, ﬂows from Russia and its fellow CIS members are more involved. A combination of pipelines and vessels makes the logistics of this trade quite intriguing and its future quite complicated. Russian crude oil ﬂows out of the Baltic Sea, through the Druzhba pipeline and the Black Sea. Kazakhstan and Azerbaijan also channel their exports through the Black Sea through a number of pipelines.5 In addition, Azeri crude ﬂows from Baku, through Tbilisi in Georgia, to the Turkish port of Ceyhan, from where it is lifted for its ﬁnal destinations.6 A number of additional pipelines are being proposed and are in various stages of development at the time of writing, which

58

MICHAEL TAMVAKIS

2,000 1,800 1,600

Million tons

1,400 Rest of world N Americaa S & C Ameria N Africa W Africa FSU M East

1,200 1,000 800 600 400 200 0

a N America includes USA, Canada and Mexico

2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 4.5 Crude oil export development, 2001–2009. Source: BP Statistical Review of World Energy, 2002–2010.

will undoubtedly continue to make the FSU–Europe oil ﬂow interesting from a geopolitical and economic viewpoint. A number of smaller but still substantial ﬂows supplement the major ones: Canada to US (via pipeline); North Sea (from the UK, but now mostly from Norway) to Western Europe and the US Gulf, or even to the Far East if the price is right; West Africa (still dominated by Nigeria, but with Angola increasing in importance) to the US, Europe and the Far East; Venezuela to the US; and a few short-haul ﬂows within Paciﬁc Rim countries.

4.3

Oil Products

As mentioned above, the trade ﬂows of products are different from, but intertwined with, those of crude cargoes. The supply of oil products is very much dependent on two

factors, or limitations: the available reﬁning capacity in different regions around the world; and the complexity of this reﬁning capacity, often known as barrel yield, which determines the supply of individual products (say unleaded gasoline, versus fuel oil, versus diesel) and which is quite diverse from region to region. As far as reﬁning capacity is concerned, three regions remain dominant: North America, Europe and the CIS, and the Far East. More speciﬁcally, the US is the single most important reﬁner, having a lot of its most sophisticated capacity in the US Gulf area. China has ascended quite rapidly to become the second-largest reﬁner in terms of installed capacity. It is followed by Russia and Japan, although the collective reﬁning capacity of Northwest Europe puts this region at the heart of the trade in oil products. However, the Middle East is also an important reﬁner, especially as most of the

–

– 21.6

5.0 3.9 – –

0.1 0.1

8.7 54.6

28.7

86.9

28.2

79.2

–

0.8

0.5

0.7

–

–

5.1

–

564.9

Former Soviet Union

Middle East

North Africa

West Africa

East & Southern Africa

Australasia

China

India

Japan

Singapore

Other Asia Paciﬁc

Unidentiﬁeda Total imports

0.2

–

0.1

5.1

13.8

0.2

0.1

0.1

–

0.1

–

4.3

66.4

<0.05

2.8

0.3

0.1

1.0

4.0

–

<0.05

14.8

5.4

0.6

0.2

3.9

<0.05

0.1

3.9

–

1.6

0.1

27.9

S. & Cent. America

665.1

22.1

68.3

2.8

2.5 0.4

4.4

–

0.4

0.7

<0.05

<0.05

3.9

–

33.5

1.4

18.7

1.1

–

–

2.9

Africa

1.9

1.1

3.5

1.8

<0.05

0.1

48.3

81.0

105.9

347.8

–

21

5.6

0.3

20.3

Europe

40.0

1.4

16.6

10.9

2.4

<0.05

0.4

–

<0.05

0.5

0.3

5.8

0.9

0.1

<0.05

–

–

0.7

Australasia

253.2

–

27.5

6.6

3.6

0.2

–

1.6

12.2

41.7

8.9

103.2

26.6

0.6

17.7

<0.05

<0.05

2.8

China

156.2

–

5.4

2.5

0.1

–

0.6

0.1

0.9

17.4

4.5

110.1

1.0

0.3

9.9

1.9

–

1.5

India

211.7

1.1

10.0

0.9

–

1.7

1.5

2.9

–

0.3

0.3

179.4

8.9

0.6

0.3

0.1

<0.05

3.7

Japan

Includes changes in the quantity of oil in transit, movements not otherwise shown, unidentiﬁed military use, etc. Source: BP Statistical Review of World Energy, 2010.

a

0.2

4.0

36.2

– 0.8

Europe

5.3

1.1

61.2

115.7

S. & Cent. America

0.1

15.4

Mexico

Mexico

–

7.2

–

121.7

Canada

US

Oil trade matrix (2009). Figures in million tons

Canada

US

To → From ↓

Table 4.1

125.9

–

26.8

–

6.5

5.5

4.7

3.4

0.1

<0.05

0.2

48

6.9

6.1

10.5

0.3

–

6.9

Singapore

356.1

–

–

47.8

2.6

21.7

18.8

5.9

1.7

7.4

3.3

230.0

13.4

1.9

0.9

<0.05

<0.05

0.7

Other Asia Paciﬁc

22.2

–

0.7

0.8

<0.05

0.9

0.9

†

<0.05

0.1

0.1

<0.05

7.1

9.8

0.1

<0.05

<0.05

1.7

Rest of world

2606.2

36.1

100.1

74.4

16.6

35.6

34.1

14.7

15

217.7

136.2

913.8

447

95.9

183.3

71.8

122.2

91.7

Total exports

60

MICHAEL TAMVAKIS

750

Million tons

600 Rest of world Other Asia Pacific Singaporea M East FSU Europe N Americab

450

300 a

Data for Singapore before 2006 are included under Other Asia Pacific.

150

b

0

N America includes 2001 2002 2003 2004 2005 2006 2007 2008 2009 USA, Canada and Mexico

Figure 4.6 Oil product export development, 2001–2009. Source: BP Statistical Review of World Energy, 2002–2010.

cargoes are destined for the export market. Figure 4.6 highlights the development of product exports by major region. Worth noting are the increasing ﬂows coming out of the FSU, the shrinking share of the Middle East and the rapid ascent of the Paciﬁc Rim as a substantial exporter. On the demand side, consumption patterns inﬂuence both the short- and the longterm balance of the market. Different regions have different tastes for oil products, depending on their economic activities, climatic conditions and other consumption habits. Although reﬁnery yields can change in the more sophisticated reﬁneries to match demand, imbalances do arise, and trade ﬂows are generated in order to cover them. The US, for example, is a heavy consumer of gasolines in comparison to diesel. The EU, on the other hand, with its increasing favoring of diesel for automobiles, is

generally short on diesel but long on gasolines. The result is a ﬂow of diesel cargoes from the US to the EU and gasolines in the opposite direction. In Japan, the long-term trend in products consumption has been one of decreasing demand for middle distillates and fuel oil and a steady, but very ﬂat, trend of gasolines consumption. China, on the other hand, has experienced phenomenal growth in its appetite for products. Between 1998 and 2008, consumption doubled, from 4 million to 8 million bpd, with most of this increase attributed to gasolines and middle distillates. Figure 4.7 summarizes the main product importers and their development since 2001. Again, it is interesting to see the rapid ascent of Asia Paciﬁc as an importer, particularly from 2005 onwards. As noted earlier, the trade patterns for products are a lot more complicated than

61

INTERNATIONAL SEABORNE TRADE

750

Million tons

600 Rest of world Other Asia Pacific Singaporea Japan China Europe US

450

300

150 a

Data for Singapore before 2006 are included 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 under Other Asia Pacific.

Figure 4.7 Oil product import development, 2001–2009. Source: BP Statistical Review of World Energy, 2002–2010.

those for crude oil. All the major consuming and reﬁning regions are active as both exporters and importers, as can be seen in Table 4.2. The Middle East, the FSU, the US, Europe and Singapore are the most active exporters. The US, Europe, China, Japan and the rest of the Asia Paciﬁc countries are the major importers. On a net basis, it is Russia, Saudi Arabia, Kuwait and Venezuela who lead as net exporters, with the US, Japan and China leading the list of net importers.

4.4

Natural Gas

Hailed for some time as the future of energy and favored as oil’s replacement, natural gas has increased substantially in importance over the last thirty years or so. Despite the rapid increase in exploration activity, proved

reserves, production and consumption, it remains only the third most consumed energy source, after oil and coal (at the end of 2009). Yet, as the cleanest-burning of the three hydrocarbons, natural gas is increasingly used in power and heating generation, often in competition with coal, and is seen as the “bridge” which will facilitate the transition from conventional exhaustible energy resources to renewables. Natural gas is not as extensively traded as oil and coal. Its physical characteristics make it more difﬁcult to handle and require substantial investment in either pipeline infrastructure or liquefaction facilities and a ﬂeet of LNG vessels. The choice between pipeline and LNG is not always a straightforward one. In some cases LNG is the only solution for an island country; this explains the predominance of Japan, for example, as an LNG importer. A host of

62

MICHAEL TAMVAKIS

Table 4.2 Oil and reﬁned products trade ﬂows (2009). Figures in million tons Crude imports US Canada Mexico S. & Cent. America Europe Former Soviet Union Middle East North Africa West Africa East & Southern Africa Australasia China India Japan Singapore Other Asia Paciﬁc Unidentiﬁeda Total world

Product imports

Crude exports

Product exports

122.0 15.3 21.0 41.3 152.0 3.2 10.5 10.0 12.1 5.7 17.1 49.8 10.4 35.3 79.8 127.6 0.9 714.0

2.2 96.5 63.8 128.9 23.1 342.0 822.1 111.1 212.3 14.8 12.8 4.7 0.1 – 2.3 40.2 15.5 1892.4

89.5 25.7 8.0 54.4 72.9 105.1 91.6 25.3 5.3 0.3 2.0 29.4 35.4 16.5 72.0 59.9 20.6 713.9

442.8 39.1 0.5 25.1 513.3 0.9 7.0 18.4 <0.05 21.9 22.8 203.5 145.8 176.5 46.3 228.6 – 1892.5

a Includes changes in the quantity of oil in transit, movements not otherwise shown, unidentiﬁed military use, etc. Source: BP Statistical Review of World Energy, 2010.

other factors are involved in making the choice: cost, distance, geopolitics, technology, regional supply and demand, and many more. Figure 4.8 shows how the ﬁrst two factors affect the choice of pipeline over LNG, depending on the required annual ﬂow of gas (5, 10, 15 or 20 billion cubic meters). As an example, one can see that for a relatively small annual ﬂow (5 bcm) LNG becomes more economical than a 28-inch pipeline when the distance is over 3,000 km. For a bigger ﬂow (15 bcm), this distance rises to 4,500 km. Of the ca. 3,000 bcm produced in 2009, 876 bcm, or just under 30%, entered international trade; the rest (ca. 70%) was consumed domestically. Of the 29% which was exported, 21% was by pipeline and the

remaining 8% in liqueﬁed form. Pipeline exports are predominant from Canada to the United States (92 bcm), and from Russia to Western Europe and former Soviet republics (176 bcm in total, of which 52 bcm were exported to Germany and Italy alone, and another 40 bcm to Ukraine and Belarus). Pipeline gas also ﬂows in large quantities from Norway (95 bcm), the Netherlands (50 bcm) and Algeria (31 bcm) to Europe.7 There are several other, smaller pipeline ﬂows, but these are set to increase as demand for gas increases, especially from emerging economies in East and South Asia such as China and India, which are looking to expand their energy consumption as they march ahead in their economic development. Figure 4.9 shows the development of

Cost $/MMBTU

cm

3

5b

cm

b 10

15

bcm

5 bcm 10 bcm 15 bcm 20 bcm

2 56’’ m bc 20

’’

’’

48

40

1

’’

28

0 LNG Pipe

2,000

4,000

6,000

8,000

Distance in km

Figure 4.8 The choice between gas pipeline and LNG. Source: Total.

900 800

Billion cubic meters

700 600 500 LNG Pipeline

400 300 200 100 0

2001

2002

2003

2004

2005

2006

2007

2008

2009

Figure 4.9 Natural gas trade development, 2001–2009. Source: BP Statistical Review of World Energy, 2002–2010; original data from Cedigaz.

64

MICHAEL TAMVAKIS

the gas trade since 2001, highlighting both pipeline and LNG shares. LNG trade is small in comparison with trade ﬂows of other energy commodities. LNG entered international trade in a very modest way in the 1960s. The ﬁrst experimental voyages with LNG carriers were carried out in the 1950s, but the ﬁrst commercial trip was in 1964, between Algeria and the UK. A year later LNG cargoes began to ﬂow from Algeria to France. In the 1970s the amount of gas entering world trade increased as a percentage of total production and new countries appeared on the scene, like the Netherlands, Norway, the Soviet Union, Iran and Mexico. The 1980s saw the opening of the submarine pipeline between Tunisia and Italy, the beginning of trade between Malaysia and Japan and the expansion of Soviet gas exports. The key characteristic of the LNG market is that it is structured around long-term projects. In fact, the transport element is only the last in a long chain of planning decisions that have to be made for any individual project, but the ships involved are probably among the most sophisticated and technology-intensive in the world. LNG projects are extremely capital-intensive, usually requiring funds in the order of several hundred million to a few billion dollars (Tusiani and Shearer 2007: 296–300), of which a substantial part has to be provided by equity holders. Projects are usually set up as joint ventures between developed and developing countries and involve long lead times. Once the project, including the transport element, is in place the buyer and seller face the challenge of operating a successful and proﬁtable venture. Notwithstanding any technical or operational issues, the key risk is proﬁtability. The buyer

requires a long-term, steady stream of income; the seller requires a competitively priced, highly marketable, easily transferable commodity. Long-term contracts (LTCs) have, therefore, been the obvious choice for LNG partners. This is not a novelty; iron ore and other mineral commodities have been traded for decades on the back of LTCs. In this contractual arrangement, the buyer normally takes the volume risk and the seller assumes the price risk. LTCs normally have take-or-pay (TOP) clauses, whereby a buyer is obliged to pay for a certain amount of cargo, even if he does not lift it. Often there are destination clauses: the cargo can only be destined to certain markets; it cannot be sold on, to more lucrative markets. With this context in mind, LNG trade ﬂows are concentrated around existing liquefaction/regasiﬁcation facilities and LTCs. For example (see Table 4.3), Japan has been, and remains, the world’s biggest importer of LNG, with some 86 bcm in 2009, or 35% of the world’s total, which stood at nearly 243 bcm. South Korea is the second-biggest importer, and the two were traditionally joined by Taiwan, also a sizable importer. In the last few years, however, India and China have emerged as dynamic importers as well, with their ever-increasing need for energy, particularly for power generation. In Europe, France has been a steadfast importer of Algerian gas. More recently though, Spain has overtaken France as the biggest LNG importer, with ﬂows coming from North Africa (Algeria and Egypt), the Middle East (Qatar), West Africa (Nigeria) and the Caribbean (Trinidad and Tobago), in almost equal shares. The only other sizable importer is the US, with most of its LNG ﬂowing from Trinidad and Tobago. The picture is completed by several smaller

INTERNATIONAL SEABORNE TRADE

ﬂows, primarily to European but also to Latin American countries. With a lot more buyer interest and more governments willing to export their production, LNG projects took off from 2000. Despite the temporary cutback in demand in the wake of the 2008 ﬁnancial crisis, the medium term is still quite promising. As of 2009,8 there are one hundred LNG terminals in operation, both for export (36) and import (64) purposes. On top of this, around the world another 35 terminals are under construction, 68 are proposed or planned, and there are a further 48 speculative proposals – quite a promising future in terms of trade ﬂows. In Europe alone, there are currently (2009) 11 operational import terminals; another seven are under construction, six are planned or proposed, and there are seven more speculative proposals. Even if the speculative ones never get the green light, it is quite obvious how European countries are striving to increase their gas import ﬂexibility, as they are trying to tackle the dependence on Russian pipeline imports. To complete the picture, it is worth mentioning the emergence of a modest, but important, spot market in LNG cargoes. As highlighted by Jensen (2004), the last ﬁve to six years have seen increased spot activity for LNG vessels, particularly in response to demand from the US. This partly explained the surge in orders for new vessels, as well as the increase in proposed and speculative import terminals in the US. However, the rapid development of the technology necessary to exploit domestic shale gas took its toll on the rush for imported LNG, leaving many of the new import terminals considerably underutilized (Rachman 2010). There is similar excitement about the potential of developing European shale gas,

65

which could temper the rapid development of LNG cargo ﬂows. However, the two most dominant exporters and substantial reserve holders, Russia and Qatar, are investing in substantial LNG export facilities and are likely to target the export markets aggressively, hence ensuring the continued expansion of LNG trade. Finally, technological innovations, such as LNG ships with their own regasiﬁcation capability and LNG Floating Production Storage and Offloading vessels (FPSOs) with onboard liquefaction, will bring increased ﬂexibility in terms of where the gas is produced and where it is shipped to, outside the established network of ﬁxed, large-scale export and import terminals.

4.5

Coal

To paraphrase Mark Twain, “reports of coal’s death have been exaggerated.” The second oil crisis, at the very end of the 1970s, revived the fortunes of coal as an internationally traded commodity. Following a mostly unremarkable 1970s, the early 1980s saw a renewed interest in coal, as power generators and industry at large began switching away from volatile oil to reliable coal. The world economic downturn resulted in reduced trade ﬂows for coal as well, but from 1986 onwards coal trade began growing again until it reached its next plateau from the early to the mid-1990s. From 1995, and particularly from 2000, onwards coal trade has seen a remarkable growth. In less than ten years, from 2000 to 2008, coal trade (moved by all means of transport) grew by more than 50%, from ca. 620 million tons to ca. 940 million tons. Figure 4.10 shows the development of hard coal trade (i.e. steam and coking coal) since

–

Mexico

–

Italy

–

0.04

–

–

–

–

–

France

Greece

0.72

–

–

Puerto Rico

–

0.16

0.76

–

Dom. Rep.

–

–

–

–

–

–

Belgium

–

0.56

–

Chile

Europe Belgium

0.27

0.16

Brazil

0.80

S. & Cent. America Argentina –

0.16

6.68

0.80

–

Trinidad & Tobago

Canada

US

North America – US

From → To ↓

–

–

0.44

0.17

–

–

–

–

–

0.09

–

0.84

Norway

–

–

–

–

–

–

–

–

–

–

–

–

Russia

–

–

–

–

–

–

–

–

–

–

–

–

Oman

1.55

–

0.17

6.03

–

–

0.16

–

–

0.12

0.09

0.36

Qatar

–

–

–

–

–

–

–

–

–

–

–

–

UAE

–

–

–

–

–

–

–

–

–

0.08

–

–

Yemen

Table 4.3 LNG trade matrix (2009). Figures in billion cubic meters

1.27

0.53

7.68

–

–

–

–

–

–

–

–

–

Algeria

0.08

0.17

1.63

0.09

–

–

–

–

0.16

0.34

0.08

4.54

Egypt

–

–

0.08

–

–

–

0.33

–

–

–

–

–

Equat. Guinea

–

–

–

–

–

–

–

–

–

–

–

–

Libya

–

–

2.35

0.08

–

–

–

0.08

–

2.69

–

0.38

Nigeria

–

–

–

–

–

–

–

–

–

–

–

–

Australia

–

–

–

–

–

–

–

–

–

–

–

–

Brunei

–

–

–

–

–

–

–

–

–

0.08

–

–

Indonesia

–

–

–

–

–

–

–

–

–

–

–

–

Malaysia

2.9

0.74

13.07

6.53

0.76

0.56

0.96

3.56

12.80

Total imports

0.68

0.14

–

–

–

0.86

–

–

0.86

Elsewhere Kuwait

Asia Paciﬁc China

India

Japan

S. Korea

Taiwan

Total exports

0.08

–

– 3.18 6.61

0.24

1.35

3.69

0.67

0.25

0.41

–

11.55

0.16

6.05

3.44

0.35

0.09

0.08

–

0.08

1.30

–

49.46

1.56

9.28

10.29

8.25

0.55

–

5.75

0.32

4.98

7

–

–

6.75

0.17

–

–

–

–

–

0.08 –

0.42

–

0.25

–

–

–

–

–

–

0.09

Source: BP Statistical Review of World Energy, 2010; original data from Cedigaz.

0.24

–

19.77

0.08

– –

–

–

–

–

–

–

–

–

0.26

– –

– 1.38

–

0.08

0.08

–

0.90

0.08

0.15

1.97

–

–

Turkey

–

0.08

0.40

4.18

UK

–

–

Portugal

Spain

0.11

20.9

–

0.08

–

0.16

–

–

1.68

4.20

5.19

–

12.82

0.08

0.31

0.24

0.33

0.08

–

0.51

0.08

4.10

4.72

0.67

1.52

1.70

0.25

0.08

–

–

–

–

0.09

–

0.72

–

–

–

–

–

–

–

–

0.72

2.14

15.98

0.93

0.23

0.77

0.32

0.08

–

–

0.94

4.99

–

24.25

0.60

1.75

15.87

1.12

4.75

0.08

0.08

–

–

–

8.81

–

0.70

8.11

–

–

–

–

–

–

–

26

3.77

4.10

17.25

0.08

0.72

–

–

–

–

–

29.53

3.71

7.81

16.79

0.25

0.88

0.09

–

–

–

2.82

242.82

11.80

34.33

85.90

12.63

7.64

0.89

9.99

5.96

27.01

68

MICHAEL TAMVAKIS

1,000,000 900,000 800,000

Million tons

700,000 600,000 500,000

Coking Steam

400,000 300,000 200,000 100,000 0 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 4.10 Hard coal trade development, 1980–2009. Source: IEA Coal Information, 2009.

the 1980s. The vast majority of these ﬂows were seaborne. In 2008, over 800 million tons were moved by sea, representing just over 85% of total trade for that year. Not all the coal that is produced is marketed internationally. Brown coal has a high humidity content, which makes it susceptible to spontaneous combustion, and therefore difﬁcult to transport. Moreover, its low carbon content makes brown coal uneconomical to export. Hard coal, however, is quite actively traded, and of the total of 946 million tons traded in 2009, about 648 million tons (70%) was steam coal and the remaining ca. 298 million tons was coking coal. The list of top exporters of coal differs somewhat from that of top producers.

Some of the most important producers of coal use it domestically; China is an extreme example: only a tiny portion of the country’s production (ca. 2%) is exported. At the other extreme, Australia channels over 65% of its production into the export market, while the United States presents a mixed picture, with substantial quantities of coal disappearing into domestic demand (see Table 4.4). Overall, the most prominent exporter of coal is Australia, controlling just under 18% of steam coal exports, and just over 45% of exports of coking coal. Other important exporters of coal include Indonesia, Russia, Colombia, the United States, South Africa, China, Canada, Kazakhstan, Vietnam and Poland. There are a few hubs of export

69

INTERNATIONAL SEABORNE TRADE

Table 4.4

Coal trade ﬂows (2008). Figures in million tons Major exporters

Australia Indonesia Russia Colombia USA South Africa China Canada Kazakhstan Vietnam Poland Netherlands Venezuela Rest of world

Major importers

Steam

Coking

Total

115,067 177,401 83,750 73,564 34,747 60,154 36,424 6,267 27,068 287 6,228 6,377 6,425 14,627

137,122 29,577 17,594 318 38,939 1,687 10,946 26,643 1 20,372 1,563 132 0 13,190

252,189 206,978 101,344 73,882 73,686 61,841 47,370 32,910 27,069 20,659 7,791 6,509 6,425 27,817

Japan South Korea Taiwan India Germany China UK USA Russia Italy France Spain Canada Turkey Netherlands Brazil Malaysia Hong Kong Rest of world

Steam

Coking

Total

123,000 72,435 60,159 33,906 35,699 16,031 37,384 29,143 25,833 19,028 14,046 16,639 16,863 14,943 14,943 5,049 16,532 13,499 115,599

62,568 27,150 6,052 28,963 10,424 29,656 6,349 1,769 0 6,071 7,239 4,328 3,777 4,546 4,449 12,625 30 0 41,939

185,568 99,585 66,211 62,869 46,123 45,687 43,733 30,912 25,833 25,099 21,285 20,967 20,640 19,489 19,083 17,674 16,562 13,499 157,538

Source: IEA Coal Information, 2009.

activity around key coal ports. For example: in the Paciﬁc, the east coast of Australia, the Indonesian east coast of Borneo, northeast China, and the west coast of Canada; in the Atlantic, the US East Coast as well as the Gulf; the north coast of South America; and ﬁnally Poland and South Africa. Focusing on steam coal trade now, Indonesia and Australia are the largest exporters, followed by Russia, Colombia and South Africa. The destination of most steam coal trade ﬂows is Asia (especially Japan, South Korea and Taiwan), which receives over 50% of world imports. Japan is the single most important importer of steam coal, absorbing 18% of world trade. The second-largest importing region is

Western Europe, with Germany, the UK, Italy, France and Spain the top ﬁve European importers. The situation in metallurgical coal is quite different. Both exports and imports are dominated by a few large players. Coking coal is not abundant, and there are only a few countries that have adequate reserves. Australia, the United States, and Canada have traditionally been the three most important exporters of coking coal, and they are joined by Indonesia and, more recently, Vietnam. The ﬁve of them account for a staggering 85% of total trade. Other exporters include Russia, China, Poland, and South Africa. Coking coal imports are directed primarily to Asia and Western

70

MICHAEL TAMVAKIS

Europe. Once again, Japan is the largest single importer of coking coal, sourcing most of its needs from Australia. Coal still has a powerful presence in the energy and steel industries. Despite the obvious problems with its high CO2 emissions rates, it remains the backbone of the power-generation industry in a number of countries, notably China, India and the US. Trade ﬂows increased rapidly, against all odds and with the help of the booming of the steel industry after 2000, which also dramatically changed the iron ore trade, as discussed below.

4.6

Iron Ore

Mineral projects require substantial capital investments, which impose an entry barrier for new participants. The ﬁrms which are already in the market are few and large and their commitment is imposed by the level of exit costs. Similar considerations arise in the case of metal manufacturers, who also tend to be large in size and vertically integrated. With these kinds of operational constraint it is not surprising that in most mineral and metal markets, power is concentrated in the hands of a few countries or companies (Tamvakis 2007: 103). For quite some time the iron ore and steel industries have offered little by way of excitement to international trade. From the late 1960s onwards, world steel production practically moved to the Far East, primarily Japan, but also South Korea and Taiwan. Although Europe and the US remained important producers, particularly of more technically speciﬁed steel alloys, the 1980s recession brought home the harsh realization that the loss of competitiveness would eventually result in a deep restructuring of

the industry. The resultant iron ore trade ﬂows concentrated on the Paciﬁc Rim. On the supplier side, the ascent of Brazil (with the help of Capesize class vessels) in the international export markets, created an equally weighty rival to Australia, the commonsensical ﬁrst-choice supplier to the Paciﬁc Rim. The resultant iron ore ﬂows are still dominant today: Australia and Brazil are the top two exporters, followed by India as an important but distant third and then by a number of very active, but smaller, exporters such as Canada and South Africa. It is useful to summarize the salient characteristics of the iron ore and steel industry as follows (Tamvakis 1999: 99): • •

•

•

•

iron ore is almost exclusively used for the production of steel; steel mills are the only customers of iron ore mines and, although scrap can be used to a certain extent, iron ore is by far the most important raw material for steelmaking; there are only a few dominant iron oreproducing countries, which have large capacities and low costs, and dominate the supply side; the procurement of iron ore supplies is handled directly by iron ore producers and steel mills; there is little scope for the existence of trading companies, and those that do exist are mere agents either for mining companies or for steel mills; steelmaking is a continuous procedure; a blast furnace needs a minimum throughput in order to operate at all, and production cannot be halted, except for necessary repairs to the refractory lining; it is paramount that iron ore feed be continuous and guaranteed.

INTERNATIONAL SEABORNE TRADE

Taking the points above into account, it is not surprising that steel producers have always tried to achieve some stability and security in the procurement of their iron ore requirements. In the 1950s and 1960s many steel mills, particularly in the United States, tackled the problem of supply security through the acquisition of equity stakes in both domestic and foreign iron ore mines. The Japanese, on the other hand, followed a strategy of arranging long-term contracts – usually of 10 to 15 years, but some of them even evergreen or “run-of-mine” – that would guarantee their supply requirements. Such contracts were also desirable for the mines because they provided them with a substantial collateral, on the back of which debt could be incurred to ﬁnance further expansion. Today, even though direct equity stakes are still in existence, most steel mills secure their supplies through long-term contracts (LTCs). Iron ore contracts come in a variety of formats, depending upon the time and duration of the agreement. Complementing these, there exists a market in annual contracts, particularly for iron ore exports from India to the Paciﬁc Rim countries, as well as several spot contracts, particularly for imports into China. It is these two markets which have brought renewed interest in this sector, instigated by the seemingly insatiable appetite of China for imports to supply its booming steel manufacturing. Coupled with this development is the rapid move away from the annual pricing rounds of LTCs, which have traditionally set benchmark prices for the commodity. The recent emergence of spot prices, the move to quarterly price determination based on spot prices, and the introduction of iron ore swap contracts offered by ﬁnancial institutions are making the case for a more com-

71

petitive, market-driven, but also more volatile pricing regime, with the ability to hedge price movements with derivatives. The momentum for these developments is maintained by the phenomenal increase of both production and trade activity in iron ore from 2000 onwards and particularly since 2004. In less than a decade, iron ore production and trade doubled. In 2008, yet another record year, some 2.2 billion tons were produced, over 850 million tons were traded (ca. 40% of total production), and of this nearly 95% (800 million tons) was seaborne, with the balance being traded overland, primarily between the US and Canada. Figure 4.11 shows the development of seaborne iron ore trade since the mid-1970s and highlights the rapid growth experienced in recent years, particularly from 2004 onwards. As highlighted earlier, Australia and Brazil are the heavyweight exporters, followed by India. Table 4.5 lists the remaining exporters of some signiﬁcance. The import side is clearly dominated by China: in 2008 it absorbed some 383 million tons of imports (ca. 45% of global imports); this was in addition to 770 million tons produced domestically, so in total it consumed just over half of the world’s iron ore production. Of the remaining importers, Japan is still quite signiﬁcant, followed by an equally signiﬁcant group of EU countries, led by Germany.

4.7

Steel

Unlike iron ore trade, whose trade patterns are very distinct and clear-cut, steel trade is complicated; in fact it is another textbook example of intra-industry trade. Starting with crude steel as an indicator or raw production activity, China stands head and

900 800 700

Million tons

600 500 400 300 200

0

1975 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

100

Figure 4.11 Seaborne iron ore trade development, 1975–2008. Source: UNCTAD Review of Maritime Transport 2009; ISL Shipping Statistics Yearbook 2009, compiled from Fearnleys World Bulk Trades and Fearnleys Review (various issues). Table 4.5

Iron ore trade ﬂows (2008). Figures in million tons

Major exporters Brazil Australia India South Africa Canada Netherlands Ukraine Russia Sweden Kazakhstan Mauritania USA Peru Chile Rest of world

Major importers 269.4 268.6 93.7 30.3 28.1 25.9 22.8 22.5 19.0 14.7 11.8 9.3 7.4 6.7 22.3

China Japan South Korea Other Asia Germany Netherlands France UK Italy Belgium Austria Poland Other EU (27) USA Canada Middle East Central and South America Rest of world

Source: IISI, World Steel in Figures 2009; UN Comtrade Database.

383.1 138.9 43.7 24.7 46.2 31.5 19.4 17.4 17.0 9.7 9.0 8.7 27.1 9.4 7.3 10.6 10.2 40.2

INTERNATIONAL SEABORNE TRADE

73

450 400 350

Million tons

300 250 200 150 100

0

1975 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

50

Figure 4.12 Steel products trade development, 1975–2008. Source: IISI, World Steel in Figures 2009.

shoulders above all other countries, with about 500 million tons in 2008. However, it also tops the list of world consumers, dwarfing all other nations; the USA and Japan are only a distant second and third. Crude steel is, of course, only one indicator of activity in this industry. Steel products come in a wide array of speciﬁcations, from the simplest carbon steel to the technically speciﬁed alloys developed for high-end applications. Figure 4.12 gives an overall view of how this particular trade has developed since the mid-1970s. One can observe the long-term, upward-sloping trend line and notice again the rapid growth in the last few years, particularly since 2005. World trade in steel products was ca. 434 million tons in 2008, and the three most important steelproducing regions, Paciﬁc Asia, Western Europe and North America, were all very active in both imports and exports.

On a gross basis (see left panel of Table 4.6), China, Japan and the EU are the top three exporters, with EU (again), the US and South Korea the top three importers. The picture is quite confusing, because of the intra-industry attribute mentioned above. A clearer picture is given in the right panel of Table 4.6, where countries are listed on a net (export or import) basis. There it is evident that the heavyweight exporters are China, Japan, Ukraine and Russia, while the biggest importers are the US and Iran. And a ﬁnal word on transportation. Unlike iron ore, where the use of Capesize vessels and very large specialized ore carriers is paramount for the trade to make economic sense, steel products have mixed transport requirements. The more basic, bulky products are usually carried in handy-size shiploads; specialized products, in contrast, are typically carried as unitized

74

MICHAEL TAMVAKIS

Table 4.6 Steel trade ﬂows (2008). Figures in million tons Exporters China Japan EU (27)a Ukraine Germanyb Russia Bel-Luxb South Korea Franceb Italyb Taiwan Netherlandsb Brazil USA UKb Spainb Austria Turkey Canada India

Importers 66.4 35.6 34.1 30.3 29.9 29.4 26.6 18.3 18.2 17.9 11.1 10.7 10.4 9.8 9.5 8.0 7.0 6.9 6.8 6.6

EU (27)a USA Germanyb South Korea Italyb Bel-Luxb Franceb China Spainb Turkey Iran Thailand UKb Taiwan Netherlandsb Vietnam Polandb Canada India Russia

Net exporters 41.6 27.7 27.4 26.2 24.6 19.2 18.1 17.2 15.0 13.5 12.2 9.8 9.3 9.2 8.8 8.5 8.0 8.0 7.7 7.3

China Japan Ukraine Russia Brazil Bel-Luxb Austriab South Africa Germanyb Slovakiab Netherlandsb Taiwan Kazakhstan Venezuela Moldova

49.2 30.9 28.1 22.1 8.8 7.4 2.8 2.5 2.4 2.3 1.9 1.9 1.2 0.7 0.6

Net importers USA Iran Vietnam South Korea EU (27)a Spainb Thailand Italyb UAE Turkey Saudi Arabia Indonesia Hong Kong Philippines Poland

17.9 11.7 8.3 7.9 7.5 7.1 7.0 6.7 6.6 6.6 4.2 4.2 3.7 3.4 3.1

a

Excluding intra-regional trade Individual EU (27) countries include intra-regional trade Source: International Iron & Steel Institute, World Steel in Figures 2009. b

cargo, in either multi-purpose or container vessels. †

4.8

Grains

Although smaller than the quantity of iron ore and coal transported, the quantity of grains transported has provided considerable employment for the world’s bulk ﬂeet, especially in the last few years. Before delving into further detail, let’s have a look at a few key characteristics of this commodity group. Grains are the fruits of relatively simple plants in the grass family. The impor-

tance of grains in the dietary requirements of all countries in the world cannot be overstated. Non-animal sources of food account for more than 60% of dietary energy requirements around the globe, with grains accounting for most of this share. Even when grains are not consumed directly by humans, they are used as animal feedstuff, and hence enter the food chain indirectly. Grains – excluding rice – are usually classiﬁed into three major groups: wheat, coarse grains, and other minor oilseeds. Soya beans also are usually included in this group because they substitute them in many uses. Coarse grains include maize, barley, sorghum, millet, oats and rye.

INTERNATIONAL SEABORNE TRADE

Oilseeds include sunﬂower seed, rapeseed and other minor crops, which are used both for animal feedstuff and for oil and fats destined for direct human consumption. Over the last 45 or so years the production of grains has exhibited a rising trend, but with considerable volatility, particularly from coarse grains and wheat. Wheat is produced in most countries, with some 690 million tons produced in 2008. China is the world’s largest producer with over 112 million tons in 2008, followed by India (78 million tons), USA (68), Russia (64) and France (39). Before its break-up, the FSU was a formidable wheat producer, leading the world’s largest producing nations. Today, Ukraine is the second most important former Soviet republic, with production placing it in eighth position in the world. Both spring and winter wheat are grown in Russia and Ukraine. Yields have improved, but weather extremities have created considerable instability in production from one year to the next. About 70% of the total production is spring wheat, which is planted north of the Caspian Sea and east of the river Volga. Winter wheat is also planted in the vicinity of the Black Sea, Moldavia, Volga and the northern Caucasus. Problems with extreme weather conditions are also faced in Canada, where the main type planted is spring wheat. This is sown in April/May and harvested in July/ August, mainly in the regions of Manitoba, Alberta and Saskatchewan. In the United States, both winter and spring wheat are grown. The latter is about a third of all US production, grown in a relatively narrow area in the states of North and South Dakota, Montana, Wyoming and Minnesota. The most common type of wheat in Western Europe is red winter wheat, which is planted between September and Novem-

75

ber. It is harvested between June and August. It is worth noting here that behind the stable growth of wheat production in Western Europe lies the considerable intervention of the EU with its long-standing (and expensive) Common Agricultural Policy. One recent example was the export subsidies given for the 2005 bumper crop, in order to avoid stockpiling, which resulted in a substantial increase in world grain shipments in that year (UNCTAD 2006: 14). In China wheat is grown throughout the country, but yields are better in the eastern and southern regions, where climatic and soil conditions are better. Wheat is mainly sown in autumn and harvested in the summer. In Australia and Argentina, the two most important producers of the southern hemisphere, both hard and soft wheat are sown in April/May (winter in the southern hemisphere) and harvested between November and January. Crops in Australia have also shown a great variability, mainly due to drought seasons. As an example, in the nine crop years between 2000 and 2008, Australian wheat production exceeded 20 million tons six times, but dipped to just above 10 million tons three times (in 2002, 2006 and 2007). Coarse grains are dominated by maize or corn; with over 820 million tons in 2008, corn accounted for over 70% of total coarse grains, followed at a distance by barley, sorghum, millet and oats. More than a third (37% in 2008) of the world production and half of the world exports of corn originate in the United States. Of this, about twothirds is produced in the Corn Belt,9 where it is planted in May – but sometimes as early as March – and harvested in October. Although ofﬁcially classiﬁed as a legume, soybeans are of great importance to the grain market, so it makes sense to look at

76

MICHAEL TAMVAKIS

them with the grains. Overall, ca. 230 million tons of soybeans were produced in 2008, primarily the yellow soybean, which is the dominant class in commercial markets. Soybeans are traded in their original form, but most of them are usually processed into soybean oil and meal. Most soybean oil is used in human food, such as margarine, cooking oils, mayonnaise and salad oils; and a small proportion is used industrially in paints, printing inks and other products. Soybean meal is used primarily as a highprotein ingredient in many animal feedstuffs. Like corn, soybeans are extensively grown in the US, which produces just over a third of world output per annum. They are planted at the same time of year as corn, and the Corn Belt is their main production area, particularly the central and southern sections. The US is closely followed by Brazil, which produces just over a quarter, and Argentina with about a ﬁfth, of the world’s output. China, India and Paraguay are next, but with much smaller outputs. The last important grain is rice, a member of the grass family, which has been cultivated since the third millennium BC, originally in China, and from there to India and the rest of South and East Asia. Over one hundred countries produced a total of 685 million tons of rice in 2008, with Asia accounting for approximately 90% of the world’s production, but also consumption. More speciﬁcally, China and India are the top two producers and together account for half of the world’s output. The next ﬁve countries (Indonesia, Bangladesh, Vietnam, Myanmar and Thailand) account for an additional 30%, so that the top seven producers account for 80% of world output. Rice is an extremely important crop, forming the basic diet for over half of the world’s population; indeed, the seven coun-

tries mentioned above have just over 45% of the world’s population (according to the UN World Population Division 2008).10 Having had a snapshot view of the key grain producers, let’s now turn our attention to trade ﬂows. As a proportion of their total crop production, ca. 20% of wheat and 17.5% of coarse grains is traded internationally. Figure 4.13 shows the development of seaborne grain trade since the mid-1970s. Asia (particularly the west), Africa (particularly the north) and the EU emerge as the three largest importers of wheat and products, whereas Asia (predominantly the east) and the EU, once more, are the largest importing regions for coarse grains. In East Asia, Japan, South Korea and China are the most prominent importers. All three, as well as the rest of the region, have built their agricultural policies around the goal of self-sufﬁciency in rice. However, all three are at various stages of industrialization and economic growth, which has resulted in an acquired taste for wheat and meat products, necessitating imports of both wheat and coarse grains. The other Southeast and South Asian countries base their diets on rice, with an increasing taste for wheat in newly industrializing economies which are experiencing high growth rates in their economies. The Middle East, on the other hand, has traditionally been a deﬁcit area, necessitating grain imports to satisfy most of their consumption requirements. Africa is a net importer of grains, with many of the less developed sub-Saharan countries receiving most of their grain as part of the World Food Program. Some African countries feature in the list of top importers of both wheat and coarse grains. Notably, Egypt was the world’s third-largest importer of wheat in 2007, with Algeria, Morocco and Nigeria also in the list of top

INTERNATIONAL SEABORNE TRADE

77

350 300

Million tons

250 200 150 100

0

1975 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

50

Figure 4.13 Seaborne grain trade development, 1975–2008. Source: UNCTAD Review of Maritime Transport 2009; ISL Shipping Statistics Yearbook 2009, compiled from Fearnleys World Bulk Trades and Fearnleys Review (various issues).

ten importers of the same commodity. The Soviet Union used to be a very important, and volatile, importer of grains, particularly wheat. Nowadays, however, Russia, Ukraine and Kazakhstan feature in the list of top exporters for both wheat (all three) and coarse grains (the ﬁrst two only). The development of the EU’s role in the international grain trade can be seen in the development of the Common Agricultural Policy, whose main result was that the Union not only became self-sufﬁcient in grains, but actually turned into a substantial exporter. Overall, the EU was a net wheat exporter in 2007, but a net importer of coarse grains. Table 4.7 gives an overview of the main exporting and importing nations for wheat and wheat products, and coarse grains. Looking at exporters, North America dominates the scene, in both wheat and coarse grains, but especially in the latter. In wheat,

the US and Canada alone generate over a third of world exports, primarily through the US Gulf, Great Lakes and West Coast ports. Featuring high on the list are Australia (in a good year), and several EU countries (especially France and Germany); other wheat exporters include Russia, Kazakhstan, Ukraine and China. Overall, the top 15 countries account for over 90% of world wheat exports. For coarse grains, the ﬁgure is almost identical. However, the most salient feature is the dominance of the US, which generates over 40% of world exports, with Argentina, Brazil and France all smaller, but substantial, exporters of over 10 million tons each. Soybeans are extensively traded internationally, especially when considered as a proportion of total production: nearly a third of the world’s production is exported, just over 74 million tons in 2007 (and another

7,527,567 6,291,902 5,911,255 5,289,754 5,277,960 4,862,785 3,828,640 3,744,038 3,689,551 3,423,446 3,338,026 3,279,137 3,166,742 3,006,353 2,621,534 65,258,690 129,794,736 50.3%

USA Canada France Australia Russia Argentina Kazakhstan Germany China UK Belgium Turkey Ukraine Hungary Pakistan Top 15 World Top 15 as % of world

33,441,607 17,862,985 15,451,029 14,979,574 14,829,665 10,877,598 8,198,604 5,432,118 3,369,184 2,114,043 1,895,332 1,748,247 1,728,120 1,726,865 1,178,081 134,833,052 143,558,379 93.9%

Japan Mexico Saudi Arabia South Korea Spain Netherlands China Egypt Germany Colombia Iran Italy Belgium USA Malaysia Top 15 World Top 15 as % of world

19,624,515 10,061,973 8,941,930 8,680,115 8,623,245 5,614,725 5,599,170 4,479,949 4,201,673 3,666,800 3,619,860 3,573,158 3,028,093 2,847,342 2,673,007 95,235,555 142,277,152 66.9%

Major importers

63,552,697 16,602,583 11,160,879 10,066,856 5,445,055 5,381,274 4,916,575 4,194,727 3,382,392 3,228,053 2,115,982 2,096,697 1,894,507 1,047,585 865,536 135,951,398 146,231,948 93.0%

Major exporters USA Argentina Brazil France China Hungary Canada Germany Ukraine India Paraguay Russia Australia Spain Netherlands Top 15 World Top 15 as % of world

Coarse grainsa

Coarse grains include barley, buckwheat, canary seed, cereals not elsewhere speciﬁed (nes), maize (corn), millet, mixed grains, oats, quinoa, rye, sorghum and triticale. Source: Food and Agriculture Organization of the United Nations (FAO). http://faostat.fao.org/site/535/default.aspx#ancor (accessed February 28, 2010).

a

Brazil Italy Egypt Netherlands Japan Algeria Spain Belgium Morocco Indonesia Mexico South Korea Iraq Nigeria USA Top 15 World Top 15 as % of world

Major importers

Major exporters

Wheat and coarse grains trade ﬂows (2007). Figures in tons

Wheat and wheat products

Table 4.7

INTERNATIONAL SEABORNE TRADE

12 million tons in the form of soybean oil). The three top soybean producers also dominate world exports. The US, Brazil and Argentina exported just over 65 million tons in 2007, over 85% of the world exports. In terms of imports, China absorbs almost 45% of world imports, far outstripping every other country on the list. Table 4.8 provides an overview of the major importers and exporters of soybeans (in the left panel) and rice (in the right). Although the world production of rice is almost equal to the world production of wheat, a far smaller proportion, less than 5%, of rice enters world trade. This is partly because China and India, the two largest producers of rice, in an average year need to keep almost all the rice they can produce to feed their own populations. Moreover it is difﬁcult to point to a regular pattern of trade. For instance it is not possible to say that most rice moves from developing to developed nations (or the reverse, as is the case for wheat). In fact most trade takes place between developing countries, reﬂecting the vagaries of monsoons and natural and man-made disasters and their effects on rice production. World rice trade is affected by a variety of factors. Production, obviously, is one of the most important. Climate affects production, which in turn inﬂuences world trade. The amount of rainfall during the main growing season, for instance, is critical in determining the rice supply. Similarly the use of fertilizers affects production. Other factors that inﬂuence world rice trade include prices of substitutes, income growth, currency values and foreign exchange reserves. Long-grain (indica) and aromatic types, such as jasmine and basmati, account for almost 90% of total trade. While Thailand,

79

India, Vietnam, Pakistan and USA are the major exporting countries, the Philippines, Indonesia, Senegal, Saudi Arabia and South Africa are among the importers, followed by several countries with similar import ﬂows. The major exporters of mediumgrain (japonica) rice are Australia, China, USA and Italy. Japan, Taiwan and Egypt are other exporting nations. South Korea and Japan are the major importers. A large part of the rice that is traded internationally is fully milled and bagged. A few countries, like the USA, also export their paddy rice. Although 50 kg or 100 lb bags are a common size, the packing requirements in rice contracts can vary from shiploads of bulk (loose) rice to 1 kg retail boxes. So the trade is serviced by both bulk and unitized/ containerized transportation.

4.9

Minor Bulk Cargoes

There are several more minor bulk cargoes that contribute to the global picture of world trade but cannot all be covered within this chapter. Of these minor bulk cargoes two stand out: aluminum oxides, namely bauxite and alumina, and phosphate rock, which is used for manufacturing some fertilizers and industrial products. In 2007, an estimated 82 million tons11 of bauxite and alumina was traded, with China, North America, the EU, Ukraine and Japan absorbing the vast majority for their aluminum smelting industries. On the exporting side, the major players were Australia, Indonesia, Brazil, Jamaica and India, with several smaller players including Guinea, the world’s largest reserve holder. With the surge of China as a major manufacturing economy, aluminum smelting has increased in line with other base metals, such as steel

33,150,449 4,191,355 4,160,718 3,692,754 3,610,902 2,728,684 2,245,391 2,240,795 1,693,966 1,540,835 1,530,966 1,261,790 1,230,908 1,185,167 1,136,186 65,600,866 74,410,491 88.2%

29,840,182 23,733,776 11,842,537 3,520,813 1,868,332 1,302,364 773,142 456,907 348,734 238,490

73,925,277 74,402,997 99.4%

USA Brazil Argentina Paraguay Canada Netherlands Uruguay China Ukraine Belgium

Top 10 World Top 10 as % of world

Philippines Indonesia Senegal Saudi Arabia South Africa Benin Iran Côte d’Ivoire Malaysia North Korea UAE Iraq Brazil USA Japan Top 15 World Top 15 as % of world

Ricea

1,902,916 1,406,278 1,072,706 969,376 959,217 939,611 935,484 808,780 798,459 785,000 741,177 735,814 704,480 683,071 643,371 14,085,740 30,922,647 45.6%

Major importers

Rice includes broken, husked, milled and paddy rice. Source: FAO, at http://faostat.fao.org/site/535/default.aspx#ancor (accessed February 28, 2010) 2010.

a

China Netherlands Japan Germany Mexico Spain Argentina Indonesia Belgium Thailand Italy Portugal Turkey South Korea Egypt Top 15 World Top 15 as % of world

Major exporters

Soybeans and rice trade ﬂows (2007)

Major importers

Soybeans

Table 4.8

Thailand India Vietnam Pakistan USA China Egypt Uruguay Italy Argentina Spain Belgium Brazil Australia Guyana Top 15 World Top 15 as % of world

9,195,610 6,450,062 4,558,000 3,129,306 2,986,589 1,324,807 1,223,390 798,705 726,880 451,271 235,510 211,655 201,432 192,307 179,976 31,865,500 33,666,620 94.7%

Major exporters

INTERNATIONAL SEABORNE TRADE

and copper. China usually relies on Indonesia for the bulk of its imports, but plans for expanding its smelting capacity mean that it is increasingly importing from India and also looking to Australia, Guinea and Brazil, which is likely to increase shipments both in volume and in distance covered. Phosphate rock is the key source for phosphate fertilizers, with China, the US and Morocco producing some two-thirds of the world output. Other smaller producers include Russia, Brazil, Tunisia and Jordan. Overall trade in phosphate rock was just over 30 million tons in 2008,12 with the key exporters predominantly in Africa (ca. 55%) and the Middle East (ca. 23%). Importers were more evenly spread, but the key ones are in Western Europe, South Asia and East Asia (each with ca. 18%). Of the myriad of other minor bulk commodities, we can mention indicatively: steel semis and ﬁnished products (partly covered earlier on); timber (roundwood) and products (sawn wood, wood chips, wood boards and panels, paper and paper scrap); cement; other fertilizers, such as potash, sulfur, nitrogenous fertilizers (ammonia, ammonium sulfates and nitrates, and urea) and processed phosphates; other agri-bulks, such as soybean meal and oil, oilseeds and oils, and natural rubber; raw sugar in bulk form; ferrous and non-ferrous scrap; pig iron; ores from several other non-ferrous metals, including copper, manganese, zinc, tin, lead, chromium and molybdenum; organic and inorganic chemicals; salt. The list is quite long and it eventually merges into the even longer list of commodities that move in smaller volumes, so their transport can be arranged either in slightly larger bulk consignments, or smaller, more regular parcels which enter unitized and containerized trades.

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Together they make up the rest of bulk trade and form part of what is described in Figure 4.1 as “Other” commodities. They make up a much more detailed and complicated nexus of trade ﬂows between developed and developing countries in all possible permutations. It is this “residual” trade which is the focus of the next section.

4.10

General Cargoes

Even after oil, reﬁned products, the ﬁve major dry bulk (iron ore, coal, grains, bauxite/alumina and phosphate rock) and all the minor bulk commodities have been accounted for, we are still left with a substantial amount of trade, an estimated 2.3 billion tons which travels the world as “other dry cargo” or “general cargo” (UNCTAD 2009: 24). The variety is bewildering, but Figure 4.14 gives a simpliﬁed view of these commodities, in eighteen different groups, as classiﬁed by the UN. The unit of measurement is value, rather than volume, but it still gives a rough idea of the main traded goods. At the bottom of the bar chart, the nine classes listed approximate the goods discussed under bulk cargoes earlier. The top nine classes essentially represent manufactured and processed goods, which are broadly traded as general cargoes. The combined value of trade for these bars was just over US$13.6 trillion in 2008, or 84% of the total; that should be a very crude approximation of the value of those 2.3 billion tons of goods (or 28% of total seaborne trade).13 In a similar vein, Lloyd’s Marine Intelligence Unit calculated that the combined general cargo and containerized trades account for less than 20% of the volume, but more than 70% of the value of total seaborne trade (see Figure 4.15).

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MICHAEL TAMVAKIS

Total merchandise trade in 2008: US$16,093 billion Machinery and transport equipment Other manufactured goods Chemicals Food, beverages and tobacco 949 Passenger road vehicles and their parts 678 381 Clothing Other manufactured metal products 328 260 Textile yarn and fabrics Textile fibres 36

5,448 3,815 1,656

Mineral fuels and related materials Crude materials (excl.fuels), oils and fats 670 Iron and steel 577 Non-ferrous metals 356 Metalliferous ores and metal scrap 263 Cereals 104 Animal and vegetable oils, fats and waxes 88 Oil seeds and oleaginous fruit 53 Crude fertilizers and minerals 39 0 1,500

2,867

3,000 US$ million

4,500

6,000

Figure 4.14 World merchandise trade by major commodity groups, 2008. Source: UN Monthly Bulletin of Statistics Online, Table 42: World exports by commodity, November 2009, http://unstats.un.org/unsd/mbs/data_ﬁles/t42.pdf (accessed March 1, 2010).

Within this “cargo space” there is constant competition among the break-bulk/ containerized segments, but also among these two, bulk and specialized shipping, and air freight. From the ﬁrst experiment with container boxes by Maclean in the mid-1950s to the launch of the ﬁrst international container service by Sealand, liner shipping has gone through a sea change. Moving away from the vagaries of slowmoving and pilferage-prone break-bulk services, more valuable goods, such as manufactures, consumer goods, textiles and chemicals, made the switch to containers very quickly. With the expansion of civil aviation and the advent of dedicated air cargo services, some of the high-value, high-priority goods, such as jewelry, high-

fashion clothing, engine spare parts and computer chips, were attracted to the much faster service provided by air freight. Some of the lower-value goods, which built up volume momentum, became so-called “neo-bulk” cargoes, such as forest products and cars, using their own customized vessels. Other goods which were already moving in specialized vessels, such as reefers, made the switch to reefer containers, especially for food commodities of relatively low volume and high value. As the old liner conference routes were populated by bigger and faster fully cellular container vessels, so the majority of break-bulk commodities switched to containers. Steel products, sugar, coffee and other softs, milled cereals, food preparations, paper products,

83

INTERNATIONAL SEABORNE TRADE

Seaborne trade shares by volume

Seaborne trade shares by volume

Dry bulk 38%

go car

General cargo 20%

Tanker 22%

al ner % e 9 G

b Dr y

ulk

6%

Container 10% Tanker 43%

Container 52%

Figure 4.15 Volume and value of seaborne trade by cargo type, 2006. Source: W. Mandryk (2009), Measuring Global Seaborne Trade, LMIU presentation, pp. 19–20, given at the International Maritime Statistics Forum, New Orleans, May, 4–6 2009, www.imsf.info/papers/NewOrleans2009/Wally_Mandryk_LMIU_IMSF09.pdf (accessed March 1, 2010).

bagged fertilizers, chemicals and every conceivable type of small to medium-sized commodity is most likely to travel in a container box. Indeed, the most consistent “story” in these trades has been the relentless penetration of containerization. From ca. 200 million tons (Stopford 2009: 516) in 1988, an estimated 1.3 billion tons (UNCTAD 2009: 98) were containerized in 2008; this was a steady annual growth of 10% for twenty years. In addition, the share of containerized trade has grown dramatically. Back in 1988, only 1 in 7 tons of “other dry cargo” was containerized; in 2008 this was 1 in 3. If we focus on the 2.3 billion tons of goods mentioned above, then more than half of these goods were containerized. If there were ever any doubts as to the importance of containerization to the breadth and

speed of globalization, the ascent of China from 2000 onwards dispelled them all. World manufacturing was largely delegated to this nation and the resulting trade ﬂows were as important for ﬁnished goods and liner shipping as they were for raw materials and bulk shipping. So what are the main trade patterns? In a world dominated by global container companies and global alliances, there are a number of main “trade lanes,” along which TEUs ﬂow back and forth in a pendulumlike movement, but still hampered by unbalanced cargo loads. There are three main types of ﬂow: east–west, north–south and intra-regional. Stopford (2009: 525) summarizes them as follows: east–west trades comprise transpaciﬁc, transatlantic, Europe–Far East, Europe–Middle East and Far East– Middle East; north–south trades comprise

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MICHAEL TAMVAKIS

Westbound/Southbound*

Eastbound/Northbound*

Europe–Asia N America–Europe Europe–Indian Sub & M East Intra-Europe* Europe–S & C America* Europe–Australia & Oceania* Europe–Sub–Saharan Africa* N America–Oceania N America–Africa F East–N America S Asia–N America N America–L America* F East–Oceania* Africa–F East F East–S Asia* F East–L America (12,000)

(7,500)

(3,000)

1,500 6,000 Thousand TEU

10,500

15,000

Figure 4.16 Containerized trade volumes, 2009 (estimates). Source: From Europe–Asia to Europe–Sub-Saharan Africa from the European Liner Affairs Association, www.elaa.net/trade/main_trade_routes (accessed March 1, 2010) From N America–Oceania to F East–L America from Containerisation International, February and June 2009 (ﬁgures for 2009 are estimates only).

Europe, North America and Far East to Latin America, South Asia, Africa and Australasia; ﬁnally, intra-regional trades are within Asia, Europe and North America, with negligible trades anywhere else. Figure 4.16 summarizes the broad trade movements along the routes described above. Although the ﬁgures are only estimates, and may eventually be further reduced in consequence of the 2008 ﬁnancial crisis, we can observe some important trade patterns, some of which were strengthened from 2000 onwards. The two key east–west routes are now Europe–Asia and Far East–North America. The Europe– North America route has diminished in importance and was in fact one of the worst

hit post-2008. Historically, however, it is a ﬁrmly established ﬂow and, with the help of the Europe–South and Central America and North America–Africa ﬂows, supports the importance of the transatlantic routes. The second observation is the strength shown by the intra-regional Asian trade, led by the Far East–South Asia ﬂow.

4.11

Summary

In the second decade of the twenty-ﬁrst century, we ﬁnd ourselves in the middle of a transitional period. After the surge in trade growth we experienced from the beginning of the millennium, the ﬁnancial

INTERNATIONAL SEABORNE TRADE

crisis in 2008 removed some of the exuberance of the previous years and introduced a sense of measure into our optimism. There are indeed reports of slowdown in world trade. In their majority, trade ﬂows are still growing, but at a much slower pace, but in some cases they are contracting, at least for now. At the time of writing, the world economy is looking for ﬁrm signs of recovery, but these signs are not yet clearly observable. The strong desire of China, India and other nations to continue developing is promising for world commodity trade and, indeed, for the world economy. However, there are still overarching issues, which, in the coming years, will become even more pressing. Greenhouse gas emissions are probably the single most important issue. With the uncertainty created by the failure of the Copenhagen summit in December 2009 to secure an international agreement, the path of development becomes unclear. Linked to this is the multifaceted issue of energy resources and the questions it raises: Will the rate of oil depletion result in prohibitive energy prices, which may stunt growth? Will natural gas sufﬁce as a bridge fuel between now and the next phase of energy from renewable sources? Will the lack of clean and reliable energy lead to a contraction of economic activity and, by deﬁnition, of merchandise trade at large? Can coal consumption remain sustainable, given the ever more pressing environmental concerns? These are just some of the many questions asked and they are not just relevant to the trade ﬂows of energy commodities; they have far-reaching repercussions for all other commodities, whether raw materials or ﬁnished goods. Whatever the answers may be, the need to communicate and trade with each

85

other is part of human nature. As long as commodities are out of the reach of those who need them, shipping will remain at the center of any trading activity, because of the convenience and resilience it offers.

Notes 1 2

3

4

5

6 7 8

9

All “tons” mentioned are metric (2,204 lbs.) tons. Trade ﬁgures include both crude oil and reﬁned products. Data sourced from the BP Statistical Review of the World Energy, 2010. Based on data sourced from Fearnleys and quoted in the Shipping Statistics Yearbook 2008, published by the Institute of Shipping Statistics and Logistics, Bremen. Although internationally recognized as the Persian Gulf, the Arabian Gulf, or more accurately its abbreviation “AG,” is the name commonly used in trade parlance, in both the oil-trading and the tanker businesses, to this day. The Caspian Pipeline Consortium (CPC) carries Kazakh crude from the Tengiz ﬁeld to Novorossiysk. Azeri crude ﬂows through the Baku–Supsa pipeline (to the Black Sea coast of Georgia) and the Baku– Novorossiysk pipeline. The aptly named BTC pipeline. All data for this paragraph are sourced from BP (2010). All data for LNG terminals in operation or otherwise are from Petroleum Economist (2009). The Corn Belt is deﬁned by the US Department of Agriculture (USDA) as a “region in the Midwestern United States where maize is grown on a vast scale, covering Illinois, Indiana, Iowa, Minnesota, Nebraska, and Ohio.” Sourced from USDA (2010), searched with the keywords corn belt region.

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10

The United Nations Population Division estimated world population in 2010 at 6.9 billion, with the seven countries totaling 3.2 billion. 11 All data for bauxite/alumina are from UNCTAD (2008: 21). However, Clarksons (2010) estimate total bauxite/alumina trade for 2008 to be 86 million tons. 12 Sourced from IFA (2010). 13 It is important to note that the total value of US$16.1 trillion is for the whole of merchandise trade, whether carried by sea, land or air. So this approximation is indeed very crude, but still illustrative.

References BP (2010) Statistical Review of the World Energy. British Petroleum. www.bp.com/ statisticalreview (accessed June 28, 2010). Clarksons (2010) Dry Bulk Trade Outlook 2 (February). Clarksons Research Services Ltd. www.clarksons.net (accessed February 28, 2010). Fleming, D. K. (2002) Patterns of international ocean trade. In C. T. Grammenos (ed.), The Handbook of Maritime Economics and Business, pp. 63–89. London: LLP Professional Publishing. IFA (2010) Fertilizer Supply Statistics. International Fertilizer Industry Association. www.fertilizer.org/ifa/Home-Page/ STATISTICS/Fertilizer-supply-statistics (accessed March 1, 2010). Jensen, J. T. (2004) The Development of a Global LNG Market: Is it Likely? If so, When? Oxford: Oxford Institute for Energy Studies.

Petroleum Economist (2009) World LNG Map, 2009. London: Petroleum Economist Ltd. Rachman, G. (2010) Shale gas will change the world. Financial Times, May 24, 2010. www.ft.com (accessed April 18 2011). Stopford, M. (2009) Maritime Economics. 3rd edn. London: Routledge. Tamvakis, M. (1999) An economic model of the iron ore trade. Ph.D. thesis, City University London. Tamvakis, M. (2007) Commodity Trade and Finance. London: Informa Law. Tusiani, M. D. and G. Shearer (2007) LNG: A Nontechnical Guide. Tulsa, OK: PennWell Books. UN World Population Division (2008) World Population Prospects: The 2008 Revision. Department of Economics and Social Affairs, United Nations Secretariat. http://esa.un. org/unpp (accessed February 28, 2010). UNCTAD (2006) Review of Maritime Transport, 2006. United Nations Conference on Trade and Development. www.unctad.org/en/ docs/rmt2006_en.pdf (accessed February 28, 2010). UNCTAD (2008) Review of Maritime Transport, 2008. United Nations Conference on Trade and Development. www.unctad.org/en/docs/ rmt2008_en.pdf (accessed February 28, 2010). UNCTAD (2009) Review of Maritime Transport, 2009. United Nations Conference on Trade and Development. www.unctad.org/en/docs/ rmt2009_en.pdf (accessed February 28, 2010. USDA (2010) National Agricultural Library Glossary. United States Department of Agriculture. http://peaches.nal.usda.gov/ glossary.shtml (accessed February 28, 2010).

II

Maritime Carriers and Markets

5

Maritime Carriers in Theory Wayne K. Talley

5.1

Introduction

A transportation carrier (or ﬁrm) provides for-hire transportation services. A transportation service is the movement of goods and/or individuals from one location to another. Freight (passenger) transportation service involves the movement of goods (individuals) from one location to another. A transportation service creates value for goods and individuals by transporting them so that they arrive at the right time (time utility) and at the right place (place utility). Unlike a transportation carrier that transports the goods of others in return for monetary compensation, a private provider of transportation service uses its own resources (e.g., its own vehicles and labor) for the transportation of its own goods and individuals. A maritime carrier is a carrier that uses a waterway – an ocean, a river or a lake – in the provision of a transportation service; that is, a maritime carrier transports goods and/or individuals in vessels that move over a waterway from one location to another.

Maritime carriers are described by the type of vessel utilized – cruise and ferry lines use cruise and ferry vessels – and by the type of cargo transported – container shipping lines transport containers and LNG carriers carry liqueﬁed natural gas (McConville 1999; Stopford 1997). This chapter describes a maritime carrier from a microeconomic theory perspective. Section 5.2 considers maritime carrier resources, production functions, transportation service measures, operating options for varying the quality of service, and resource functions. Section 5.3 discusses the cost of maritime transportation service – long-run and short-run cost functions of single-service and multi-service maritime carriers in providing cost-efﬁcient maritime transportation service in the long run and the short run, non-shared versus shared costs, and internal versus external costs. Section 5.4 discusses demand for the transportation services of maritime carriers with respect to the full prices for these services, that is the carrier’s price that is charged for a transportation service plus the logistics

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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WAYNE K. TALLEY

price incurred by the shipper of the cargo that is transported (or the passenger time price incurred by the individual who is transported). Section 5.5 discusses the effectiveness operating objectives of maritime carriers. Finally, a summary of the above discussion is presented.

5.2 Maritime Transportation Service 5.2.1

Maritime carrier resources

The resources utilized by maritime carriers in the provision of maritime transportation service may be classiﬁed into ﬁve categories: (1) labor, (2) energy (fuel), (3) waterways, (4) vessels and (5) marine terminals (Chadwin, Pope and Talley 1990; Talley 1988). Labor resources (L) include, for example, seafarers on vessels who are directly involved in the physical movement of freight and passengers and management labor who supervise, plan and coordinate the physical movement of goods and individuals (Talley 1983). Energy resources (E) include bunker fossil fuels used in vessel engines, and natural energy such as wind and water currents that enhance the movement of vessels. For any transportation carrier, the “way” is the path over which the transportation carrier operates. The way consists of the right of way supplied by nature plus additions to the right of way supplied by humans. For waterways (W), the rights of way may be such natural bodies of water as rivers and oceans, or land areas on which man-made bodies of water, e.g. canals, are constructed. The additions supplied by humans to natural bodies of water include navigational aids such as channel markers or buoys.

Vessels (V) are ﬂoating vehicles that are capable of transporting goods and/or individuals. They may be self-propelled, with onboard engines, e.g. container ships, tanker ships and cruise ships, or non-selfpropelled, e.g. barges that are pushed or pulled by tugboats. A transportation carrier’s terminal is a place where: goods and/or individuals are loaded to and unloaded from vessels and vehicles; administrative activities and vehicle maintenance are performed; vehicles are received and dispatched; and goods are stored. Marine terminals (T) are distinct infrastructures within ports for the transfer of goods and individuals to and from vessels (Haralambides, Cariou and Benacchio 2002; Notteboom 2004). Ports (or seaports) are places where the transfer of goods and individuals to and from waterways and shores occurs. A port (or seaport) may have one or several marine terminals.

5.2.2 Maritime carrier production functions In order for a maritime transportation service to be provided, two parties must be in agreement. One party is the maritime carrier. If maritime freight (passenger) transportation is provided, the other party is the shipper (passenger). If either party is not in agreement, no maritime transportation service will be provided. Speciﬁcally, the maritime freight (passenger) carrier must be willing to transport cargoes (passengers), and shippers (individuals) must be willing to provide their cargoes (themselves) to be transported by the maritime carrier. That is to say, if the maritime freight (passenger) carrier is unwilling to transport cargoes (passengers), even though shippers (individuals) are willing to provide cargoes

MARITIME CARRIERS IN THEORY

(themselves) to be transported, no maritime transportation service will occur. If shippers (individuals) are unwilling to provide cargoes (themselves) to be transported, even though maritime carriers are willing to provide transportation service, no maritime transportation service will occur. The maritime freight (passenger) carrier cannot force shippers (individuals) to provide cargoes (themselves) to be transported and shippers (individuals) cannot force maritime freight (passenger) carriers to provide freight (passenger) transportation service. The amount of maritime freight (passenger) transportation service that a maritime carrier can provide depends upon the amount of resources utilized by the carrier in its provision and the amounts of cargoes (numbers of passengers) provided by shippers (individuals) to be transported from origin “i” to destination “j”. If the amount of maritime transportation service provided by a maritime carrier is the maximum amount that can be provided given the amount of resources utilized by the carrier and the amounts of cargoesij (passengersij) provided by shippers (individuals) to be transported from origin “i” to destination “j”, then this relationship may be described as the maritime carrier’s production function in the provision of transportation service (Talley 1988). If the maritime carrier adheres to this production function in the provision of maritime transportation service, then the carrier is technically efﬁcient in the provision of maritime transportation service. If a maritime carrier provides freight (passenger) transportation service, its freight (passenger) production function may be expressed as: MFTS = f f (L, E, V, W, T; Cargoes ij )

(1)

91

MPTS = f p (L, E, V, W, T; Passengers ij ) (2) where MFTS is maritime freight transportation service and MPTS is maritime passenger transportation service. Together, the waterways (W) and marine terminals (T) utilized by a maritime carrier constitute the spatial network over which the maritime carrier transports cargoes and passengers, i.e., Maritime Carrier Spatial Network = g(W, T)

(3)

The marine terminals are the nodes of the network, and the waterways that spatially connect the marine terminals to each other are the links of the network. The maritime carrier utilizes vessels (V), energy to move vessels (Ev) and labor on board vessels (Lv) to transport cargoes and passengers over its spatial network. In addition to onboard vessel labor, the maritime carrier utilizes labor at marine terminals (Lt) and administrative labor (La) at various spatial locations along its spatial network. The maritime carrier also utilizes energy to move equipment and power buildings (Eo) at marine terminals, where “o” denotes other. Rewriting maritime carrier production functions (1) and (2) based upon the above discussion, it follows that: MFTS = Ff (Lv, Lt, La, Ev, Eo, V, W, T; Cargoes ij ) (4) MPTS = Fp (Lv, Lt, La, Ev, Eo, V, W, T; Passengers ij ) (5)

5.2.3 Maritime transportation service measures The amounts and types of resources utilized by a maritime carrier in the provision

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WAYNE K. TALLEY

of maritime transportation service depend upon the amount of cargoesij and passengersij provided to it by shippers and individuals, respectively, for transport. For example, for routes within the carrier’s network over which the amount of cargo to be transported is relatively small (large), smaller (larger) vessels are expected to be used. A maritime carrier will use its resources to provide vessel trips and thus incur vessel miles (i.e., miles of vessel movements) in the transportation of cargoesij and passengersij. Thus, it may be argued that a carrier’s measure of maritime transportation service should reﬂect the vessel (or nautical) miles that it incurs in the transportation of cargoes and passengers. It is interesting to note that a measure of transportation service utilized by the US Department of Transportation in measuring the freight (passenger) transportation service provided by US intercity freight transportation carriers is the tonmile (passenger-mile), i.e., a ton of cargo (one passenger) transported one mile (Talley 1988). Although the ton-mile and the passenger-mile consider the tonnage and the number of passengers transported by a carrier, and the miles incurred in doing so, they have the undesirable property that increases in their values may reﬂect increases in a carrier’s technical inefﬁciency (see the proof of Proposition 1). Proposition 1 Increases in a carrier’s tonmiles and passenger-miles may reﬂect increases in the technical inefﬁciency of the carrier. Proof: Assume a carrier transports cargoes and passengers between only one origin “i” and one destination “j.” The carrier receives tons of cargo (number of passengers) in the amount of Cargoesij

(Passengersij) from shippers (individuals). If the carrier takes the direct (shortest) route from “i” to “j” in transporting the cargo tonnage (passengers), the tonmiles (passenger-miles) provided by the carrier will be Cargoesij*Minimum-Miles (Passengersij*Minimum-Miles). If the carrier takes, not the direct, but a longer route, the ton-miles (passenger-miles) provided by the carrier will be Cargoesij*More-thanMinimum-Miles (Passengersij*More-thanMinimum Miles). The greater ton-miles (passenger-miles) of the latter route suggest that the carrier has provided greater output. However, the More-than-Minimum-Miles route is technically inefﬁcient in the transportation of Cargoesij and Passengersij, since more resources are used to transport the same tons (passengers) additional miles between origin “i” and destination “j” than by the Minimum-Miles route. If these transportation miles increase further, the technical inefﬁciency of the carrier will have increased even further, all else held constant. An alternative to the ton-mile (passengermile) as a measure of carrier freight (passenger) transportation service is the ton-ratio (passenger-ratio), where the tonratio (passenger-ratio) is the tons of cargo (number of passengers) transported by a carrier divided by the number of miles incurred by the carrier in their transport. The ton-ratio (passenger-ratio) has the desirable property that an increase in its value indicates a decrease in the carrier’s technical inefﬁciency, assuming that a decrease in a carrier’s technical inefﬁciency occurs when the percentage change in resources utilized by the carrier is less than the percentage change in the tons of cargo (number of passengers) transported by the carrier. Note that the latter deﬁnition of a

MARITIME CARRIERS IN THEORY

decrease in a carrier’s technical inefﬁciency is synonymous with an increase in the tonratio (passenger-ratio); see Proposition 2. Proposition 2 A carrier’s ton-ratio (passenger-ratio) will increase if the percentage change in resources utilized by the carrier is less than the percentage change in the tons of cargo (number of passengers) transported by the carrier, all else held constant. Proof: Proposition 2 will hold if a carrier’s ton-ratio (passenger-ratio) increases for all possible scenarios for which the percentage change in resources utilized by the carrier is less than the percentage change in the tons of cargo (number of passengers) transported by the carrier. It is assumed that there are no improvements in the technology of a carrier’s transportation service (Talley 2000). All possible scenarios for which the ton-ratio (passenger-ratio) can increase are listed below: 1.

2.

3.

4.

5.

Tons of cargo (number of passengers) increase and there is no increase in the number of miles incurred by the carrier in their transport; Tons of cargo (number of passengers) increase and there is a decrease in the number of miles incurred by the carrier in their transport; Tons of cargo (number of passengers) increase by a greater percentage than the percentage increase in the number of miles incurred by the carrier in their transport; Tons of cargo (number of passengers) do not change but there is a decrease in the number of miles incurred by the carrier in their transport; Both tons of cargo (number of passengers) and the number of miles incurred

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by the carrier in their transport decrease, but the percentage decrease for the latter is greater than that for the former. Since, for all possible scenarios for which the ton-ratio (passenger-ratio) can increase, the percentage change in resources utilized by the carrier is less than the percentage change in the tons of cargo (number of passengers) transported by the carrier, Proposition 2 holds. With the measurements of maritime freight transportation service and maritime passenger transportation service being the tonratio and passenger-ratio respectively, the maritime carrier’s production functions (4) and (5) may be written as: Ton-Ratio = Ff (Lv, Lt, La, Ev, Eo, V, W, T; Cargoes ij ) (6) Passenger-Ratio = Fp (Lv, Lt, La, Ev, Eo, V, W, T; (7) Passengers ij ) Thus, the maritime carrier’s production functions (6) and (7) relate the maximum tons of cargo and the maximum number of passengers that can be transported per vessel (or nautical) mile respectively, given the amount of resources utilized by the carrier and the tons of cargo (number of passengers) provided by shippers (individuals) to be transported from origin “i” to destination “j.”

5.2.4 Maritime carrier operating options A maritime carrier’s operating options are the means by which it can vary the quality

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of its service. These options include: vessel speed of movement, frequency of service, reliability of service, susceptibility to loss and damage of cargoes (or injuries to passengers), spatial accessibility of service and cleanliness of vessels (Talley 1988). Vessel speed of movement is the distance to be covered by a carrier’s vessel within a given period of time in the movement of cargoes and/or passengers, e.g., measured in nautical miles per hour (knots). The greater the speed of movement, the greater the quality of maritime transportation service, since cargoes and passengers will arrive at their destinations in less time. Frequency of service (or time accessibility) is how often a maritime carrier provides transportation service at a given location within a given time period. For example, if a maritime carrier increases its vessel calls at a given port from one to two vessel calls per week, the carrier’s frequency of service at this port per week will have doubled. The greater a carrier’s frequency of service, the greater will be the quality of the carrier’s service, since the carrier’s service will more likely be available when desired by shippers and individuals. Reliability of a maritime carrier’s service is the degree to which cargoes and passengers arrive at their destinations at the times speciﬁed by the maritime carrier. The reliability of a maritime carrier’s service may be measured by the difference between the expected arrival times of cargoes and passengers (as speciﬁed by the carrier) and their actual arrival times. The greater this difference, the greater the unreliability, and thus the poorer the quality of the carrier’s service. Susceptibility to loss and damage of cargoes (or injuries to passengers) is the probability that cargoes (passengers) trans-

ported by maritime carriers will be lost or damaged (injured). The greater this probability, the poorer will be the carrier’s quality of service. Spatial accessibility of maritime transportation service is the spatial convenience (or availability) of the maritime carrier’s transportation service and reﬂects the size of the carrier’s transportation service network. The greater this accessibility, the greater will be the number of origin–destination locations over which the carrier can transport cargoes and passengers and thus the greater the quality of the carrier’s service. Cleanliness of vessels is the degree to which vessels are clean in the transportation of cargoes and passengers. If a vessel tranports one type of cargo, but has not been cleaned prior to the transportation of another type of cargo, the latter cargo may be damaged, e.g., from the residue of the former cargo mixing with the latter cargo in the vessel. If a passenger vessel (e.g., a cruise vessel) is not cleaned before it transports another group of passengers, the latter passengers may become ill as a result of the uncleanliness. Thus, the greater the degree of the cleanliness of vessels, the greater will be the quality of the maritime carrier’s transportation service.

5.2.5 Maritime carrier resource functions A maritime carrier’s resource function for the kth type of resource (Rk) relates the minimum amount of this resource to be employed by the carrier to the levels of its operating options and the amounts of cargoes (passengers) provided by shippers (individuals) to be transported from origin “i” to destination “j,” i.e.,

MARITIME CARRIERS IN THEORY

R k = R k (OPTION m ; Cargoes ij, Passengers ij ) k = 1, 2, … K ; m = 1, 2, … M; i = 1, 2, … I; j = 1, 2, … J

(8)

where OPTIONm is the mth operating option (Talley 1988). Changes in the levels of the operating options by a maritime carrier for the purpose of increasing the quality of its service will require that it utilize additional resources if no excess capacity exists for these resources. That is to say, if no unused capacity exists for resource Rk, then an increase in the improvement level of operating option OPTIONm will result in an increase in the amount of resource Rk employed by the maritime carrier, i.e., ∂Rk/∂OPTIONm > 0. Also, if no excess capacity exists for resource Rk, then an increase in Cargoesij and Passengersij provided for transport by shippers and individuals, respectively, will result in an increase in the amount of resource Rk employed by the maritime carrier, i.e., ∂Rk/∂Cargoesij > 0 and ∂Rk/∂Passengersij > 0.

5.3 Maritime Transportation Service Costs A maritime carrier is cost-efﬁcient in the provision of maritime transportation service if it provides this service at the least (or minimum) cost. A necessary condition for a maritime carrier to be cost-efﬁcient is that it be technically efﬁcient. If it is technically inefﬁcient, it can provide additional maritime transportation service with the same resources by becoming technically efﬁcient. In using the same resources and incurring the same resource prices, whether it is tech-

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nically inefﬁcient or efﬁcient, a carrier will incur the same costs. However, the average cost per unit of maritime transportation service will decline with the carrier becoming technically efﬁcient.

5.3.1 Long-run cost – a single-service maritime carrier To be cost-efﬁcient in the provision of MFTS, a maritime carrier will seek to minimize cost in the provision of MFTS technically efﬁcient service, i.e., to minimize its cost (C) subject to production function (4) and the resource function for the kth type of resource Rk (8), considering only cargoes: Minimize C = PLv L V + PLt Lt + PLa La + PEv Ev + PEoEo + PV V + PW W + PT T subject to MFTS = Ff (Lv, Lt, La, Ev, Eo, V, W, T; Cargoes ij ) (9) R k = R k (OPTION m ; Cargoes ij ) k = 1, 2, … K ; m = 1, 2, … M; i = 1, 2, … I; j = 1, 2, … J where, PLv, PLt, PLa, PEv, PEo, PV, PW and PT are the prices of the resources Lv, Lt, La, Ev, Eo, V, W and T, respectively. If the maritime carrier were producing a physical product as opposed to a service, the carrier would select and employ those amounts of the resources for which C is minimized subject to the production function constraint. That is to say, the resource variables would be the choice variables for the optimization of equation (9). However, the maritime carrier is providing a service. As a consequence, the carrier’s operating options will be the choice variables for the optimization of equation (9). That is to say,

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the carrier will select values of its operating options which, in turn, via its Rk resource function, will determine the amounts of resources to be employed for which C is minimized subject to the production function constraint. In the optimization of function (9), for which the time period is such that the amounts of all resources can be varied, it follows that the carrier’s long-run total cost (LTCf ) function in the provision of MFTS can be derived as (Talley 1988): LTCf = LTCf (PLv , PLt, PLa PEv , PEo, PV PW , (10) PT, MFTS, Cargoes ij ) i = 1, 2, … I; j = 1, 2,… J In the long run, all costs of the maritime carrier are variable, i.e., no resource used by the carrier is ﬁxed in amount and therefore the carrier has no ﬁxed costs. The long-run average total cost (LATCf ) for a maritime carrier in the provision of MFTS amount of freight service is found by dividing the carrier’s LTCf by MFTS, i.e., LATCf = LTCf/MFTS. The carrier’s long-run marginal cost is the addition to the carrier’s long-run total cost in providing an additional unit of MFTS, i.e., LMCf = ∂LTCf/∂MFTS. If LATCf declines as MFTS increases, then the carrier exhibits “economies of scale” in the provision of MFTS, i.e., the percentage increase in MFTS will result in a smaller percentage increase in the carrier’s long-run total cost. If LATCf increases as MFTS increases, then the carrier exhibits “diseconomies of scale” in the provision of MFTS; i.e., a percentage increase in MFTS will result in a greater percentage increase in the carrier’s long-run total cost. If the carrier exhibits “constant returns to scale,” then a percentage increase in MFTS will

result in the same percentage increase in the carrier’s long-run total cost. Alternatively, economies of scale exist if Sf = LATCf/ LMCf = LTCf/MFTS*LMCf > 1; if Sf < 1, diseconomies of scale; and if Sf = 1, constant returns to scale. In order for a single-service maritime carrier to be cost-efﬁcient in the provision of MPTS, the maritime carrier will seek to minimize cost in the provision of MPTS technically efﬁcient service, i.e., to minimize cost subject to production function (5) and the resource function for the kth type of resource Rk (8), considering only passengers: Minimize C = PLv Lv + PLt Lt + PLa La + PEv Ev + PEoEo + PV V + PW W + PT T subject to MPTS = Fp (Lv, Lt, La, Ev, Eo, V, W, T; (11) Passengers ij ) R k = R k (OPTION m ; Passengers ij ) k = 1, 2, … K ; m = 1, 2, … M; i = 1, 2, … I; j = 1, 2, … J In the optimization of function (11), for which the carrier’s operating options are the choice variables, it follows that the carrier’s long-run total cost (LTCp) function in the provision of MPTS can be derived as: LTCp = LTCp (PLv , PLt, PLa, PEv , PEo, PV , PW , (12) PT, MPTS, Passengers ij ) i = 1, 2, … I; j = 1, 2, … J The carrier’s long-run average total cost (LATCp) in the provision of MPTS amount of passenger service is LATCp = LTCp/ MPTS and its marginal cost in provid-

MARITIME CARRIERS IN THEORY

ing an additional unit of MPTS is LMCp = ∂LTCp/∂MPTS. Economies of scale exist if Sp = LATCp/LMCp = LTCp/ MPTS*LMCp > 1; if Sp < 1, diseconomies of scale; and if Sp = 1, constant returns to scale.

5.3.2 Long-run cost – a multi-service maritime carrier Suppose the maritime carrier provides both freight and passenger services. To be costefﬁcient in the provision of MFTS and MPTS, a maritime carrier will seek to minimize its cost in the provision of MFTS and MPTS technically efﬁcient services (and subject to the resource function for the kth type of resource Rk) in deriving its long-run multi-service total cost function: LTCfp = LTCfp (PLv , PLt, PLa, PEv , PEo, PV , PW , PT, MFTS, MPTS, Cargoes ij, Passengers ij ) (13) i = 1, 2, … I; j = 1, 2,… J The two-service maritime carrier’s long-run marginal cost for freight service is the addition to the carrier’s long-run total cost LTCfp in providing an additional unit of MFTS, i.e., LMCffp = ∂LTCfp/∂MFTS. The maritime carrier’s long-run marginal cost in providing an additional unit of MPTS is LMCpfp = ∂LTCfp/∂MPTS. The two-service maritime carrier exhibits “economies of scale” (“diseconomies of scale”) if the percentage increase in MFTS and MPTS will result in a smaller (greater) percentage increase in the carrier’s long-run total cost LTCfp. Alternatively, the two-service maritime carrier exhibits “economies of scale” if Sfp = LTCfp/[MFTS* LMCffp + MPTS* LMCpfp] > 1 and “diseconomies of scale” if Sfp < 1. If Sfp = 1, the

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two-service maritime carrier exhibits constant returns to scale. The long-run average total cost for a single-service maritime carrier would be determined (as discussed above) by dividing its long-run total cost by the amount of service that incurred this cost. However, for a multiservice maritime carrier, some of its longrun total cost is shared among its services. Hence, the division of the multi-service carrier’s long-run total cost by the amount provided of a given service will not represent the long-run average total cost for that service, since not all the cost considered in deriving this unit cost is attributable to the service. The problem of determining the unit cost for a service of a multi-service ﬁrm has been addressed by computing the long-run average incremental total cost (LAITC) for this service (Talley 1988). The long-run average incremental total cost (LAITCffp) for MFTS amount of freight service provided by the multi-service maritime carrier may be expressed as (Talley 1988): LAITCf fp = [ LTCfp (PLv , PLt, PLa, PEv, PEo, PV , PW , PT, MFTS, MPTS, Cargoes ij, Passengers ij ) − LTCfp (PLv , PLt, PLa, PEv , PEo, PV , PW , PT, 0,, MPTS, 0, (14) Passengers ij )]/MFTS where, LTCfp(PLv, PLt, PLa, PEv, PEo, PV, PW, PT, MFTS, MPTS, Cargoesij, Passengersij) – LTCfp(PLv, PLt, PLa, PEv, PEo, PV, PW, PT, 0, MPTS, 0, Passengersij) is the long-run incremental cost for MFTS, given the amount of passenger service MPTS provided and number of Passengersij transported. Similarly, the long-run average incremental total cost (LAITCpfp) for MPTS amount

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of passenger service provided by the multiservice maritime carrier, given the amount of freight service MFTS provided and the amount of Cargoesij transported, may be expressed as: LAITCp fp = [ LTCfp (PLv , PLt, PLa, PEv, PEo, PV , PW , PT, MFTS, MPTS, Cargoes ij, Passengers ij ) − LTCfp (PLv , PLt, PLa, PEv , PEo, PV , PW , PT, 0,, MFTS, 0, (15) Cargoes ij, 0)]/MPTS Economies of scope exist for a multi-service maritime carrier if it can provide its services at less cost than if each service (at the same amount) were provided by single-service maritime carriers (Kim 1987). Speciﬁcally, the two-service maritime carrier exhibits economies of scope if: LTCfp (PLv , PLt, PLa, PEv , PEo, PV , PW , PT, MFTS, MPTS, Cargoes ij, Passengers ij ) < LTCfp (PLv , PLt, PLa, PEv , PEo, PV , PW , PT, 0, MPTS, 0, Passengers ij ) + LTCfp (PLv , PLt, PLa, PEv, PEo, PV , PW , PT, MFTS, 0, Cargoes ij, 0) (16) If the inequality sign is reversed, “>,” then diseconomies of scope exist. That is to say, the multi-service maritime carrier provides its services at greater cost than if each service (at the same amount) were provided by single-service maritime carriers (Talley 2001).

5.3.3

Short-run cost

The short-run time period is a period of time that is sufﬁciently short (unlike the long run) that the maritime carrier is unable

to vary the amount of every resource. For example, a carrier may be unable to expand its marine terminals, so terminal infrastructure cost will be a ﬁxed cost in the short run (McCarthy 2001). Suppose a freight (single-service) maritime carrier incurs ﬁxed costs in utilizing marine terminals (T) in the provision of freight service MFTS. Hence, in the optimization of function (9) for which T is ﬁxed, it can be shown that the carrier’s short-run total cost (STCf ) function that denotes cost efﬁciency in the short run by the carrier in the provision of MFTS can be derived as (Talley 1988): STCf = SFCf + SVCf (PLv , PLt, PLa, PEv , PEo, PV , PW , MFTS, Cargoes ij, T) (17) i = 1, 2, … I; j = 1, 2, … J where SFCf is the carrier’s short-run ﬁxed cost, i.e., SFCf = PTT, that does not vary with the amount of MFTS provided by the carrier. SVCf is the carrier’s short-run variable cost that does vary with the MFTS. SVCf is a function of the prices of the carrier’s resources (except for the price of ﬁxed resource T), MFTS, Cargoesij, and the ﬁxed resource T. The carrier’s short-unit costs are obtained by dividing STCf = SFCf + SVCf by the amount of freight service provided (MFTS) to obtain SATCf = SAFCf + SAVCf; i.e., the carrier’s short-run average total cost SATCf in the provision of MFTS is STCf/MFTS, short-run average ﬁxed cost SAFCf is SFCf/ MFTS, and short-run average variable cost SAVCf is SVCf/MFTS. The additional shortrun variable cost incurred by the carrier in providing an additional unit of service is the carrier’s short-run marginal cost SMCf; i.e., SMCf = ∂SVCf/∂MFTS.

MARITIME CARRIERS IN THEORY

By analogy, the short-run cost function for a passenger (single-service) maritime carrier (STCp) that denotes cost efﬁciency in the provision of MPTS by the carrier in the short run can be derived as: STCp = SFCp + SVCp (PLv , PLt, PLa, PEv , PEo, PV , PW , MPTS, Passengers ij, T) (18) i = 1, 2, … I; j = 1, 2, … J where SFCp is the carrier’s short-run ﬁxed cost, i.e., SFCp= PTT, and SVCp is the carrier’s short-run variable cost. The carrier’s short-run average total cost, average ﬁxed cost, average variable cost and marginal cost are SATCp, SAFCp, SAVCp and SMCp, respectively. Suppose a multi-service maritime carrier incurs ﬁxed costs in utilizing marine terminals (T) in the short run in the provision of freight and passenger services MFTS and MPTS. The carrier’s short-run total cost (STCfp) function that denotes cost efﬁciency in the provision of MFTS and MPTS by the carrier in the short run can be derived as: STCfp = SFCfp + SVCfp (PLv , PLt, PLa, PEv , PEo, PV , PW , MFTS, MPTS, Cargoes ij, Passengers ij, T) (19) i = 1, 2, … I; j = 1, 2,… J where SFCfp is the carrier’s short-run ﬁxed cost, i.e., SFCfp= PTT, and SVCfp is the carrier’s short-run variable cost.

5.3.4

Other types of costs

In addition to long-run and short-run costs, maritime carriers also incur non-shared versus shared costs and internal versus external costs (Talley 2001).

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5.3.4.1 Non-shared versus shared costs Maritime carriers incur costs that can be traced to particular transportation services, i.e., non-shared costs, and costs that cannot be traced to particular transportation services, i.e., shared costs. An example of a maritime carrier’s non-shared (or traceable) cost is the cost of the coolant that a container shipping line provides for refrigerated containers on board its vessels. The amount of coolant provided to a given container and its cost are traceable. Maritime carriers incur two types of shared costs – joint and common shared costs. A maritime carrier incurs a joint shared cost when it provides a transportation service that unavoidably results in the creation of another transportation service (Talley 1988, 1989). For example, if a maritime carrier transports cargo via a vessel from port A to port B, but then the vessel must return to port A, the cost of the vessel’s round trip is a joint cost to be shared between the vessel’s front-haul and backhaul trips. Thus, the vessel’s front-haul trip has unavoidably created its back-haul trip. A maritime carrier incurs a common shared cost when it provides a transportation service that does not unavoidably result in the creation of another transportation service (Talley 1982). Common shared costs incurred by maritime carriers include, for example, a ship’s depreciation, bunker fuel and hull insurance costs that are shared by onboard vessel cargoes in their transportation by the vessel from port A to port B. The cargo provided by one shipper to be shipped by a vessel does not unavoidably result in cargo being provided by another shipper to be shipped on the same vessel. When cargoes of different shippers are transported on a given vessel from location A to location B, the costs of the vessel trip

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incurred by the shipping line will include costs that are traceable to the transported cargoes and costs that are not traceable or shared among the transported cargoes, for example the bunker fuel that is burnt by the vessel in making the trip. Suppose the management of the shipping line wishes to determine the cost of the vessel trip to be borne by a given cargo. The cost to be borne by a given cargo may be determined by summing the cost of the trip that is traceable to the cargo and the cargo’s allocation or share of the trip’s shared costs. However, a problem arises in determining the latter, since there is no agreement on how shared costs should be allocated among the cargoes. Suggested rules or formulae for allocating shared transportation costs include (1) the ratio rule – allocate in proportion to carrier revenue generated, i.e., the revenue from a given cargo divided by the sum of the revenues generated by all cargoes on the vessel trip, and (2) the tonnage rule – allocate in proportion to the tonnage of all cargoes on the vessel trip, i.e., the tonnage of a given cargo divided by the sum of the tonnage of all cargoes on the vessel trip (Talley 1988). 5.3.4.2 Internal versus external costs Internal costs are generated and borne by maritime carriers in the provision of transportation services, and therefore enter into their decision-making processes. Such costs include, for example, those incurred by maritime carriers in the hiring and purchasing of resources to be used in the provision of transportation services. External costs are also costs generated by maritime carriers in the provision of transportation services, but are not borne by them and therefore do not enter into their decision-making processes. External costs generated by maritime carriers include

the costs of air, noise, water and esthetic (appearance) pollution. However, governments can place regulations on maritime carriers that require that they internalize these costs, i.e., incur the costs of eliminating pollution or compensate those who have incurred costs as a consequence of the pollution.

5.4

Transportation Demand

The demand by shippers and passengers for maritime carrier transportation services is a derived demand. Freight transportation service generates value to shippers by transporting their cargoes to the right place (place utility) and at the right time (time utility) for their consumption or use. Passenger transportation service generates value to passengers by transporting them to places where they desire to be (place utility) and at the time desired (time utility). The prices charged by maritime carriers for their services will be affected by the level of competition among carriers. The greater the competition, the greater the ability of the market – through the interaction of market demand and supply for carrier services – to set prices. Alternatively, the lower the competition, the greater the ability of carriers to set prices and the greater their ability to charge discriminatory prices to increase their total revenues and proﬁts. Carrier price discrimination occurs when carriers sell services at different prices to users and the prices do not reﬂect cost differences. For example, shippers of highvalued cargo may be charged a higher transportation price than shippers of lowvalued cargo for transportation service between the same origin and destination – value-of-service pricing (Talley 1989). The

MARITIME CARRIERS IN THEORY

rationale for value-of-service pricing is that freight transportation demand for highvalued cargo tends to be price-inelastic (i.e., shippers are less sensitive to higher transportation prices) and freight transportation demand for low-valued cargo tends to be price-elastic (i.e., shippers are more sensitive to higher prices). Value-of-service pricing may also be practiced by maritime carriers in the provision of passenger transportation services. For example, a high-income individual (say a business traveler) may be charged a higher price than a low-income individual (say a non-business traveler) for a passenger transportation service. The rationale for doing so is that passenger transportation demand for high-income individuals is price-inelastic (i.e., individuals are less sensitive to higher prices). For low-income individuals, passenger transportation demand is price-elastic (i.e., individuals are more sensitive to higher prices). Maritime carriers, whether providing passenger or freight transportation service, can increase their total revenue under value-of-service pricing by increasing prices when the demand for their transportation service is price-inelastic and decreasing prices when the demand for their transportation service is price-elastic.

5.4.1

Freight transportation demand

A maritime carrier incurs costs in using resources (e.g., vessels and seafarers) to transport cargoes, but receives compensation for these costs from shippers in transporting their cargoes in the form of prices (or rates) paid per unit of transportation service provided. Shippers also incur time prices (or costs) in the transportation of their cargoes. If a shipper retains ownership of his cargo until it reaches its ﬁnal destina-

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tion, the transported cargo (and thus its shipper) will incur other-than-transportation logistics costs in addition to the rate charged by the carrier. The phrase “otherthan-transportation logistics costs” denotes the fact that transportation cost is also a logistics cost (Talley 2009). Other-than-transportation logistics costs incurred by shippers in the transportation of their cargoes include inventory, order processing, warehousing, production scheduling, materials handling and packaging costs (Talley 2009). Inventory costs consist of stock-out (when a product is no longer in stock) and inventory carrying (storage, obsolescence, depreciation, insurance and opportunity) costs. Order processing costs are incurred by shippers in ﬁlling orders for customers. Warehousing costs are incurred in the management of the space that holds inventories. Production scheduling costs are incurred in coordinating production with other logistics activities. Materials handling costs are incurred in the movement of raw materials and products to and from production sites and storage areas. Packaging costs are incurred in packaging products. Other-than-transportation logistics costs per unit of transportation service incurred by a shipper in the transportation of his cargo have been referred to in the literature as the shipper’s logistics price (PLG) for freight transportation service (Talley 2009). The sum of the carrier’s rate (PR) and the shipper’s logistics price (PLG) for a unit of freight transportation service is the full (or total) price PMFTS for freight transportation service. The logistics price for freight transportation service is a function of the carrier’s operating options and the value of transported cargo (Talley 1983). The greater the carrier’s quality of transportation service,

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the lower will be the shipper’s logistics price for the transportation service, all else held constant. For example, the greater the speed of movement of vessels, the less time cargoes will be in transit, thus lowering the shipper’s inventory carrying costs. When carrier service is less susceptible to cargo damage and more reliable, shippers will incur lower inventory carrying costs by being able to maintain lower levels of inventory. The higher the value of cargo, the higher will be the logistics price for freight transportation service, since inventory costs such as inventory insurance and depreciation are positively related to the value of cargo, all else held constant. Shipper demand for freight transportation service with respect to the full price, PMFTS = PR + PLG, is represented by demand curve DFTS in Figure 5.1. At lower full prices, more freight transportation service is demanded by a shipper, and less service at higher prices, all else held constant. If a freight carrier seeks to improve the quality of its service, but has to use more resources in order to do so, it will incur greater costs and thus would be expected to charge a higher rate in the provision of a PMFTS = PR + PLG

DFTS MFTS Maritime freight transportation service

Figure 5.1 Shipper demand for maritime freight transportation service at full prices.

higher quality of service. However, if the decline in the shipper’s logistics price (from the improvement in the quality of service) more than offsets the increase in the carrier’s rate, the shipper’s full price for freight transportation service will decline. This explains why a shipper may demand transportation service from a carrier that charges a higher rate but provides a higher quality of service in preference to a carrier that charges a lower rate but provides a lower quality of service.

5.4.2

Passenger transportation demand

A maritime carrier incurs costs in using resources to transport passengers, but receives compensation for these costs from passengers in the form of prices (or fares) paid per unit of passenger transportation service provided. Passengers also incur time prices related to the times incurred in being transported from one location to another, i.e., time costs incurred per unit of passenger transportation service. Speciﬁcally, a passenger while in transit incurs an opportunity cost – the cost of an opportunity forgone while being transported (e.g., income that could have been earned if the time had been spent at work). In addition, he or she may incur beneﬁts while being transported (e.g., from the sights seen). A passenger’s time price (PTM) per unit of passenger transportation service is determined by multiplying the passenger’s value of time per unit of passenger transportation service time by the time that the passenger was involved in the provision of a unit of passenger transportation service. A passenger’s value of time per unit of passenger transportation service time is the passenger’s opportunity cost minus his or her

MARITIME CARRIERS IN THEORY

money equivalent of the direct level of satisfaction per unit of passenger transportation service time. The greater a passenger’s opportunity cost of time, the greater will be his or her value of time per unit of passenger transportation service time and thus the greater the passenger’s time price per unit of passenger transportation service, all else held constant. Alternatively, the greater the satisfaction a passenger receives from passenger transportation service, the lower will be the passenger’s value of time per unit of passenger transportation service time. Hence, a negative relationship exists between a passenger’s value of time and the satisfaction received from a passenger transportation service. Passenger demand for passenger transportation service with respect to the full price, PMPTS = PF + PTM, is represented by demand curve DPTS in Figure 5.2, where PF is the passenger’s fare per unit of passenger transportation service and PTM is the passenger time price per unit of passenger transportation service. At higher full prices, a smaller amount of passenger transporta-

PMPTS = PF + PTM

DPTS MPTS Maritime passenger transportation service

Figure 5.2 Passenger demand for maritime passenger transportation service at full prices.

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tion service will be demanded by the passenger; at lower full prices, a larger amount of passenger transportation service will be demanded.

5.5

Effectiveness

A maritime carrier, especially in a competitive environment, is concerned not only with whether it is technically and costefﬁcient, but also with whether it is able to optimize its overall operating objective, e.g., to maximize proﬁts or to maximize output subject to a minimum proﬁt constraint (in order to increase market share). A carrier’s overall operating objective has been referred to in the literature as the carrier’s effectiveness objective (Talley 2007). Hence, the economic operating objectives of a maritime carrier may be classiﬁed as either efﬁciency or effectiveness objectives. Maritime carrier efﬁciency operating objectives include the technical efﬁciency objective of maximizing transportation service in the employment of a given level of resources (exhibited by the carrier’s economic production function) and the cost efﬁciency objective of minimizing cost in the provision of a given level of transportation service (exhibited by the carrier’s economic cost function). Carrier effectiveness is concerned with how well the carrier provides transportation service to its users – shippers and passengers. From the perspective of the carrier, this may be measured by its adherence to its effectiveness operating objective, e.g., maximizing proﬁts. In order for a carrier to be effective, e.g., in maximizing proﬁts, it must be efﬁcient; i.e., it must be cost-efﬁcient, which in turn requires that it be technically efﬁcient. Alternatively, a necessary

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condition for a carrier to be cost-efﬁcient is that it be technically efﬁcient and a necessary condition for a carrier to be effective, e.g., to maximize proﬁts, is that it be cost-efﬁcient. The proﬁt function for a freight maritime carrier may be written as: Profit = PR MFTS − STCf

(20)

where PRMFTS represents the total revenue received by the freight maritime carrier in providing MFTS freight transportation service. The level of transportation service to be provided by a freight maritime carrier that results in the maximum proﬁts for the carrier is the level of MFTS for which the carrier’s marginal proﬁt is zero, i.e., dProﬁt/ dMFTS = 0. The proﬁt function for a passenger maritime carrier may be written as: Profit = PF MPTS − STCp

(21)

where PFMPTS represents the total revenue received by the passenger maritime carrier in providing MPTS passenger transportation service. The level of transportation service to be provided by a passenger maritime carrier that results in the maximum proﬁts for the carrier is the level of MPTS for which the carrier’s marginal proﬁt is zero, i.e., dProﬁt/dMPTS = 0. The proﬁt function for a multi-service (freight and passenger) maritime carrier may be written as: Profit = PR MFTS + PF MPTS − STCfp (22) where PRMFTS represents the total revenue received by the carrier in providing MFTS freight transportation service and PFMPTS represents the total revenue

received by the carrier in providing MPTS passenger transportation service. The level of transportation service to be provided by the multi-service maritime carrier that results in the maximum proﬁts for the carrier is the level of MFTS and MPTS for which the carrier’s marginal proﬁts are zero, i.e., for which ∂Proﬁt/∂MFTS = 0 and ∂Proﬁt/∂MPTS = 0.

5.6

Summary

A transportation ﬁrm (or carrier) is one that provides for-hire transportation service – the movement of goods and/or individuals from one location to another. A maritime carrier transports goods and/or individuals in vessels that move over a waterway from one location to another. The resources utilized by maritime carriers in the provision of maritime transportation services may be classiﬁed into ﬁve categories: (1) labor, (2) energy (fuel), (3) waterways, (4) vessels and (5) marine terminals. If the amount of maritime transportation service provided by a maritime carrier is the maximum amount that can be provided given the amount of resources utilized by the carrier and the amounts of cargoesij (numbers of passengersij) provided by shippers (individuals) to be transported from origin “i” to destination “j”, then this relationship may be described as the maritime carrier’s production function in the provision of transportation service. Further, the maritime carrier is technically efﬁcient. An alternate to the tonmile (passenger-mile) as a measure of carrier freight (passenger) transportation service is the ton ratio (passenger ratio), where the ton ratio (passenger ratio) is the tons of cargo (number of passengers) transported by a carrier divided by the number

MARITIME CARRIERS IN THEORY

of miles incurred by the carrier in their transport. A maritime carrier’s operating options are the means by which it can vary the quality of its service. These options include speed of movement of vessels, frequency of service, reliability of service, susceptibility to loss and damage of cargoes (or injuries to passengers), spatial accessibility of service and cleanliness of vessels. A carrier’s resource function for a given resource relates the minimum amount of this resource to be employed by the carrier to the levels of the carrier’s operating options and the amounts of cargoes (numbers of passengers) provided by shippers (individuals) to be transported. To be cost-efﬁcient in the provision of its services, a maritime carrier will seek to minimize cost in the provision of its technically efﬁcient services, i.e., to minimize its cost subject to its production function. The demand by shippers and passengers for maritime transportation services is a derived demand. The prices charged by maritime carriers for their services are affected by the level of competition among carriers. Price discrimination occurs when carriers sell services at different prices and the prices do not reﬂect cost differences. A shipper incurs two prices for a freight transportation service, namely the rate charged by the carrier in the transportation of his cargo and the logistics price incurred by the transported cargo. An individual incurs two prices for passenger transportation service, namely the fare charged by the carrier to transport him or her and the time price that he or she incurs while being transported. A maritime carrier’s effectiveness is concerned with how well the carrier provides transportation service to its users – shippers

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and passengers. From the perspective of the carrier, this may be measured by its adherence to its effectiveness operating objective, e.g., maximizing proﬁts. In order for a carrier to be effective, it must be efﬁcient; that is, it must be cost-efﬁcient, which in turn requires that it must be technically efﬁcient.

References Chadwin, M. L., J. A. Pope and W. K. Talley (1990) Ocean Container Transportation: An Operational Perspective. New York: Taylor and Francis. Haralambides, H. E., P. Cariou and M. Benacchio (2002) Costs, beneﬁts and pricing of dedicated container terminals. International Journal of Maritime Economics 4: 21–34. Kim, H. Y. (1987) Economies of scale and scope in multi-product ﬁrms: evidence from U.S. railroads. Applied Economics 19: 733–41. McCarthy, P. S. (2001) Transportation Economics. Oxford: Blackwell. McConville, J. (1999) Economics of Maritime Transport. London: Witherby. Notteboom, T. E. (2004) Container shipping and ports: an overview. In W. Talley (ed.), The Industrial Organization of Shipping and Ports, a special issue of the journal Review of Network Economics 3: 86–106. Stopford, M. (1997) Maritime Economics. London: Routledge. Talley, W. K. (1982) Determining fully allocated cost prices for regulated transportation industries. International Journal of Transport Economics 9: 25–43. Talley, W. K. (1983) Introduction to Transportation. Cincinnati, OH: South-Western Publishing Company. Talley, W. K. (1988) Transport Carrier Costing. New York: Gordon and Breach Science Publishers.

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Talley, W. K. (1989) Joint cost and competitive value-of-service pricing. International Journal of Transport Economics 16: 119–30. Talley, W. K. (2000) Ocean container shipping: impacts of a technological improvement. Journal of Economic Issues 34: 933–47. Talley, W. K. (2001) Costing theory and processes. In A. M. Brewer, K. J. Button and D. A. Hensher (eds.), Handbook of Logistics and Sup-

ply-Chain Management, pp. 313–23. Amsterdam: Elsevier. Talley, W. K. (2007) Port performance: an economics perspective. In M. Brooks and K. Cullinane (eds.), Devolution, Port Governance and Port Performance: Research in Transportation Economics, pp. 499–516. Amsterdam: Elsevier. Talley, W. K. (2009) Port Economics. Abingdon, Oxon: Routledge.

6

Maritime Freight Markets Siri Pettersen Strandenes

6.1

Introduction

Maritime freight markets generate shipowners income from their operations in the shipping industry. Understanding the freight markets is thus essential. The diversity of these mostly international markets makes it important to focus on their structural aspects and common features. The cyclicality of the freight markets further underlines the importance of analyzing the structural characteristics of the maritime freight markets. Maritime freight services facilitate world trade. The strong growth in international trade following China’s integration into the international economy would not have been possible without efﬁcient seaborne transport. At the same time shipping’s dependence on world trade developments causes ﬂuctuations in the demand for its services. Ships transport a wide variety of cargoes: raw materials, manufactured goods (both intermediary and consumer goods), refrigerated cargo, rolling stock and heavy lifts.

This variety in cargoes requires different cargo-handling and transport services. Hence, the world freight markets offer a wide range of transport services suited to carry these diverse cargoes. Shipping segments, each with their speciﬁc characteristics, are of course interlinked, both because transport demand in all segments varies with world economic activity and trade, and since some cargoes may migrate among the different segments. One example of migration is the current rising containerization of refrigerated goods. The structure of this chapter is as follows. Section 6.2 illustrates the cycles and variations in freight rates in bulk and container shipping and presents characteristics of the markets that contribute to volatility in freight rates. Section 6.3 describes the main transport networks in deep-sea shipping and the trade patterns facilitated by shipping. It also relates this network to international trade theory with transport costs. Section 6.4 presents the service characteristics in deep-sea shipping and explains the difference between tramp and liner

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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shipping and the effects such differing characteristics have on the competitive setting in these shipping segments. Section 6.5 concludes the chapter.

6.2 Freight Rate Cycles for Ocean Shipping Ocean freight rates are volatile and may change substantially over a short time span. Hence shipowners’ returns ﬂuctuate and cargo owners have a hard time calculating the costs of moving their goods. This volatility is a well-known characteristic of commercial ocean transport. The volatility has not dampened over the years, and since 2000 shipowners and cargo owners have faced both very high and rather low freight rates. In the dry-bulk market the trip charter freight rate for Panamax vessels quadrupled in two years, from a very low yearly average of US$8,000 per day in 2002 to US$35,000 per day in 2004. This yearly average of the freight rate peaked again in 2007, a year before the tanker freight rates, at US$57,200 per day, dampened somewhat in 2008, and dived to a low yearly average of US$19,700 per day in 2009. The day-to-day freight rates varied even more, as illustrated in Figure 6.1(a). Similarly the freight paid to owners of Very Large Crude Carriers (VLCC) quadrupled from a yearly average of US$22,700 per day in 2002, to US$88,700 per day in 2004. The VLCC freight rate peaked again at US$88,400 per day in 2008, but then fell sharply to US$28,000 per day in 2009 (RS Platou 2003, 2007, 2010). The container ship market also faces volatile freight incomes. The charter rates paid for a twelve-month time charter reached a low US$11,500 a day for a 3000-TEU (twenty-foot equivalent unit) container

vessel, but rose to US$33,3000 in 2004, rising further to peak at 39,700 in 2005. From 2006 to 2008 the 3000-TEU container vessel earned on average around US$25,000 per day and then faced a low of US$5,800 per day on average in 2009 (RS Platou 2003, 2007, 2010). Figure 6.1(a) illustrates the development of the Baltic Exchange Dry-bulk freight Index (BDI), showing separate indexes for the different vessel sizes. Figure 6.1(b) shows the Baltic Exchange Dirty Tanker Index (BDTI) and the Baltic Exchange Clean Tanker Index (BCTI). The development from 1998 onwards illustrates the volatility in the freight developments up to 2010, especially picturing the very volatile drybulk market since 2000. Figure 6.2 similarly illustrates the development in time charter rates for container vessels. These ﬂuctuations in returns to shipowners and in transport costs for shippers characterize the international transport markets, and are not a new phenomenon seen only in latter years. In bulk shipping, the volatility follows from the demand and supply characteristics in the freight markets. Koopmans (1939) explained these characteristics as consequences of the shape of the supply curve for transport capacity in the tanker freight market. Supply of transport capacity goes from being price-elastic to becoming price-inelastic to changes in freight rates as the degree of utilization of the ﬂeet capacity increases. When the ﬂeet capacity is underutilized a positive shift in demand induces shipowners to send laid-up vessels back into the market. This increases supply, and the freight rates stay low as long as the supply of active tonnage continues to rise, as when vessels break lay-up. The decision to lay up later was analyzed by Strømme Svendsen (1958) and Mossin (1968), and

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Figure 6.1

Volatility in Baltic Exchange freight indexes.

more recently was discussed by Dixit and Pindyck (1994) and Tvedt (1997). When the ﬂeet capacity is fully utilized the transport capacity cannot rise further in the short run and the effect of a positive shift in demand is only to press up freight rates. At this stage freight rates are set by the demand side in the market and may rise substantially, as

seen in latter years. Such high freight rates induce contracting of new vessels, and hence the supply of transport capacity increases two to four years on, when the new vessels ﬁnally enter the market. By then demand may have contracted, resulting in low utilization of the ﬂeet and depressed market activity and freight rates.

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Zannetos (1966) conﬁrmed the shape of the supply curve empirically and added the effects of expectations to further explain the cyclicality in freight rates. Beenstock and Vergottis (1993) gave an overview of early shipping market models developed to analyze freight rate developments, and built a model on the dry-bulk and tanker freight markets in the same tradition of structural modeling. Glen (2006) gives a more up-todate review of shipping market modeling. The basic explanation is thus that the characteristic form of the supply curve, the extended time needed to expand the ﬂeet capacity and the recurring short-term shifts up and down in demand cause the characteristic variations in freight rates and the differing amplitude in these variations. Amplitudes are dampened when demand for capacity is low relative to the ﬂeet size and high when the utilization of the ﬂeet is at the maximum of what the existing ﬂeet may produce. This typical pattern in the development of the freight rates is illustrated for the dry-bulk market in Figure 6.1(a) with dampened amplitudes in the freight volatility before 2003. The tanker industry faced periods with similar low and fairly stable freight rates in the 1990s. Figure 6.1(a) shows the development in the freight rates paid to the different dry bulk carriers from the larger Capesize vessels to the smaller handysize vessel. As shown in the graph the general picture is similar for all these vessel sizes. This similarity exists even though the different vessel sizes typically are best suited to, and consequently preferably employed in, speciﬁc dry bulk trades. The parallel development partly follows from all trades’ dependence on general economic activity, via the general level of seaborne trade in all bulk cargoes. On the other hand, the contracting activity,

and thus the ﬂeet capacity relative to demand in the trades most suited for the different-sized bulk vessels, may also vary, and thereby bring different freight levels and income to the owners of smaller versus larger bulk vessels. When the spread in freight income becomes large enough, the vessels will switch into trades better suited for slightly larger or slightly smaller vessels, thereby increasing supply and pressing down freight levels in trades they move into, and at the same time reducing supply and pushing up freight rates in the trades they leave. Strandenes (1981) estimated such chain reactions in the tanker trades in the 1970s and found that the tankers in adjacent size groups were substitutes. The results furthermore indicated that tankers with a wide difference in size had a complementary relationship. Glen (1990), however, suggested that the tanker markets became segmented during the 1970s following the increasing spread in vessel sizes. Still developments in these market segments are still correlated, as Figure 6.1(b) shows. These variations and the reappearing periods of excess bulk transport capacity have led to criticism of the shipping industry for their suboptimal investments decisions. Norman (1980) pointed out that this pattern, of short periods of full capacity utilization paired with longer periods of low utilization of the capacity and depressed rates, follows from the high costs to the cargo owners if they cannot get their cargoes moved. He used as an example the costs of closing down an oil reﬁnery if crude oil could not be transported to its site, pointing at the repercussions to the general economy of such reduced supply of energy. These costs are much higher than the cost of periodic excess capacity of tankers when demand for crude oil transport turns out

MARITIME FREIGHT MARKETS

somewhat lower than expected. Norman (1980) argues that the optimum ﬂeet size requires that the value to the cargo owner of one extra unit of available transport capacity, weighted by the probability of scarce transport capacity, is equal to the cost of one extra unit of transport capacity. Hence, as long as the value of one tonne cargo is well above the transport cost for this cargo, it is economically efﬁcient to have excess transport capacity in most periods to avoid short supply of cargo in peak periods. In the liner industry the shipping service is but one link in the total supply chain. This limits ﬂexibility in the liner industry. Vessels, initially general cargo liners but since the 1970s more and more predominantly container vessels, operate in a ﬁxed trade pattern or routes, irrespective of the shortterm variations in demand for their transport services. The efﬁciency of the supply chain depends on coordination and punctuality to a much larger degree than for bulk shipping, which limits the ﬂexibility experienced by the individual shipping operator. Each ship carries cargo owned by a large number of shippers, and freight rates need to be standardized and announced to facilitate the administrative handling of all the individual transport assignments. Hence, the freight rate, quoted per TEU, and thus the transport cost cargo owners pay, are ﬁxed in the short run. These announced freight rates are negotiable for larger cargo owners, however, whereas the occasional owners who need to ship a few containers face the announced prices. The cargo consists mainly of manufactured goods for ﬁnal consumption or intermediaries for further processing. The liner industry emerged in the nineteenth century when the steamship made

111

fast and regular service possible and the telegraph facilitated the information ﬂows needed for long-distance trade and the necessary transport of the traded goods. Both the trade between the European states and their colonies in the Far East, Oceania, Africa and South America, and the growing trade in manufactures and raw materials across the Atlantic, were furthered by fast, cheap and regular transport services (Stopford 2009). This trade induced economic growth, which again furthered transport. Following the initial period, when liners moved most kinds of cargo, the development of bulk vessels for dry and wet bulk, and, later, special-purpose vessels left the liner industry with the general cargo. The special-purpose vessels carry chemicals, liqueﬁed gas, refrigerated cargoes, and cars or other wheeled cargoes. A ﬂeet of heavy-lift and open-hatch vessels is also included in the special-purpose ﬂeet. Traditionally, the shipping lines invested in, owned and operated the liners, and later the container vessels, in integrated shipping companies. Similarly to what had been seen in the airline industry during the last twenty years, independent ﬁrms or investors outside shipping started to invest in container vessels. These vessels then were chartered to container line operators. This development created a charter market for container vessels and gave liner operators a somewhat higher ﬂexibility in their capacity decisions. Liner operators face changing time charter rates for the vessels they charter in. The time charter rates vary with the utilization of the container ﬂeet in a way similar to how the ﬂuctuations in bulk freight rates vary with the utilization of the bulk ﬂeet, and both reﬂect the changing volume in seaborne trade. Figure 6.2 illustrates development in the twelve-month

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12 MTHS CHARTER RATES FOR CONTAINER SHIPS MONTHLY

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Figure 6.2

Time charter rates for container vessels, 2000–2009, in US$/day.

time charter rates for container vessels. Assessing future freight rates is important for both shipowners and cargo owners. The volatility in freight rates makes such forecasting a challenging activity, and one that has drawn much attention from both practitioners and theorists.

6.3

RS Platou Economic Research a.s

Ocean Shipping Networks

The ocean shipping network or trade pattern is dominated by the east–west direction. In the oil trade the Arabian Gulf dominates. The oil from the Gulf is exported westwards to Europe and the USA and eastwards to Japan and the emerging economies in Asia. Even though other export areas for oil have emerged, the main direction of the oil trade remains east–west. Other raw materials such as coal and iron ore are distributed more widely than the oil reserves, and both Australia and South

America are exporters. Even so these trade ﬂows go mainly east–west. General cargoes, mainly transported by container vessels, also show an east–west pattern, a pattern that has been further strengthened by the increasing importance of China in the world trade of manufactured goods. The majority of general cargoes previously ﬂowed across the North Atlantic between North America and Europe. From the 1960s the ﬂows across the Paciﬁc between North America and Japan rose in importance. Since China entered the world trade as a major player the east–west trade via the Indian Ocean and Suez to Europe has risen markedly. So have exports from China to North America, which has increased trade ﬂows in the Paciﬁc. The current trade pattern is characterized by a high density of vessels on the major service routes for container shipping: the transpaciﬁc trade, the Europe–Far East trade, and the transatlantic trade. Other routes are not so

MARITIME FREIGHT MARKETS

dense but still are important service routes. These include the North–South trades from North America and Europe to South America, the trade between Oceania and South America and the intra-Asian shorthaul trades. Historically the trade pattern had a stronger North–South link than today. This followed from the dominance of Europe in international trade and European countries’ links to their colonies, many of which were located to the south of Europe, in Africa. Hence, the liner services that were established in the last part of the nineteenth century traded both east–west across the Atlantic, across the Paciﬁc and via Suez after its opening in 1869, and also north–south, connecting Africa and South America to the international trade network (Stopford 2009). The importance of north–south link routes has declined since the 1960s.

6.3.1

Fragmentation of production

In addition to the traditional sources of international trade – different locations of raw materials and the main consumption areas and the entry of more countries into world trade – the fragmentation of production processes across countries has inﬂuenced the volume and direction of trade ﬂows. Fragmentation of production processes is explained by Jones and Kierzkowski (2003). Whereas, traditionally, raw materials and ﬁnal goods made up the bulk of international trade, fragmentation by outsourcing and relocating steps in the production process has resulted in a substantial rise in the proportion of intermediary goods in the international exchange of goods. Geographical fragmentation of production processes is mainly introduced to exploit cost advantages.

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Fragmentation was made possible by the falling cost of information following the digital revolution. E-mail and the internet made information gathering and contact across countries and continents faster and cheaper. The growth and higher efﬁciency of the airline industry across the world facilitate management of multinational companies with fragmented production processes. In consequence of such cost reductions vertical foreign direct investments have increased and created a higher demand for transport of intermediaries in world trade. This increasing transport ﬂow of intermediate goods strengthened the exploitation of economies of scale in container trades. The TEU capacity of container vessels has increased steadily over the years and has reduced the TEU freight rate. The decline in transport costs facilitates seaborne trade and induces further fragmentation to exploit cost advantages. Fragmentation also strengthens the east– west pattern in trade ﬂows, since the production processes that are outsourced mainly are located in emerging markets in Asia and in transition economies in Eastern Europe. The low-income countries in the South have not received a comparative volume of outsourced production processes. This location pattern in outsourcing is reﬂected in the direction of the growing container trade; the strongest growth in recent years has been between the exporting countries in Asia (China) on the one hand, and the importing areas North America and Europe on the other.

6.3.2

Efﬁciency in the transport pattern

Because of lower transport costs and efﬁcient transport services seaborne transport has grown more strongly than the growth

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in world domestic product. The increased efﬁciency in the transport services is important for increasing the gain from division of labor in the world economy. Strandenes and Wergeland (1982) showed that transport of oil, iron ore and coal was quite efﬁcient. They compared the tonne-miles produced in these trades each year from 1967 to 1979 with a theoretical minimum trade distance for the given export and import volumes to and from the main import and export areas in each of the three bulk cargoes. The difference between actual tonne-miles produced and the theoretical minimum tonne-miles that fulﬁll the export–import movements was below 5 percent in the oil trade, reﬂecting the dominance of the countries of Arabian Gulf as exporters of oil in that period. Hence, only a limited number of alternative trade ﬂow patterns fulﬁll the export–import requirements for oil. For coal and iron ore that originates in several exporting areas the theoretical efﬁciency varied between 7 and 30 percent over the years studied. These are rather impressive efﬁciency levels, since the efﬁciency measure that is used as a benchmark in the analysis disregards differences in coal and iron ore qualities and also disregards port capacities. It therefore is a highly theoretical efﬁciency criterion. An interesting ﬁnding was that the estimated difference between the actual and theoretical efﬁciency was inversely related to the freight rate level. This inverse relationship was signiﬁcant in coal transport but not for transport of iron ore or crude oil. Ubøe, Andersson, Jörnsten and Strandenes (2009) re-estimated the transport efﬁciency for coal using data for 1967–2006. They estimate the efﬁciency both in relation to a theoretical minimum distance or costs, as in Strandenes and Wergeland (1982), and in the gravity model.

They found that the gravity model explains the trade pattern better, reporting a much lower difference between the current trade ﬂows and the theoretically optimal trade ﬂows for coal. This strengthens the assumptions that the transport pattern and trade ﬂow in seaborne coal trade are quite efﬁcient. More analysis is needed to evaluate whether this is the case also for other cargoes.

6.4 Service Characteristics in Tramp and Liner Shipping Service characteristics differ in the different segments of seaborne trade. As pointed out above, the main segments are the bulk trades (transport of raw materials) and general cargo trades transporting intermediate or ﬁnal goods. In addition to these two main segments several kinds of special cargoes are moved by vessels especially constructed or equipped to move such cargoes efﬁciently. Examples are heavylift vessels, vessels transporting liqueﬁed gas, and vessels suited to transporting wheeled cargoes. In the following, service characteristics in bulk and liner shipping are discussed.

6.4.1

Tramp and bulk shipping

Bulk trades are served by relatively simple standardized vessels. This facilitates entry into the bulk shipping industry, both dry and wet bulk. In bulk transport, services offered by alternative shipping ﬁrms cannot be differentiated. Terminals in ports are specialized for the major bulk cargoes, however. Unit loads are large in order to reduce handling costs and

MARITIME FREIGHT MARKETS

exploit economies of scale in vessels. This implies that the ports need ample space and facilities to handle large-unit bulk cargoes and to store large cargo volumes before they are moved to their ﬁnal destination. Large bulk vessels thus face a limitation in the number of ports or terminals capable of handling their cargo, but admittance is not inﬂuenced by who owns or operates the vessel. This limits the ﬂexibility of these large bulk vessels. Medium-sized vessels do not face similar limitations as there are a number of bulk terminals around the world that are open to them. Large importers of bulk cargoes often establish private ports to reduce the cargo-handling costs, thereby circumventing the ports and avoiding extra cargo handling. Bulk operations do not require a big organization ashore for technical or commercial management. Technical management, including manning services, may be outsourced from the ship-owning ﬁrm to special-purpose management ﬁrms that operate vessels for several owners. Neither do commercial operations in the bulk market require a big organization. Bulk shipping ﬁrms face a limited number of customers. They may use ship-broking ﬁrms that specialize in knowing the trade and the available transport capacity, and have an overview of cargo owners’ transport needs. Some broking ﬁrms operate mostly on behalf of cargo owners, whereas others mainly offer their services to a group of shipowners. So, even though there are some large shipowners and big operators with a large number of vessels, there also exists a fringe of smaller bulk ship operators with a few vessels each. These numerous smaller operators can compete with the big operators, since economies of scale at the ﬁrm level are very limited in bulk shipping.

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Following this structure, bulk shipping is regarded as an industry characterized by nearly perfect competition. See for example Norman (1979). In the tanker industry, for example, independent tanker owners control 83 percent of the tonnage (INTERTANKO 2009). This spread in ownership limits market power in the tanker market. There are of course important economies of scale in bulk vessels, but vessels of similar size operated by different shipping ﬁrms obtain similar freight rates, since shipowners are not able to differentiate their transport service in the bulk trades. The freight rates paid to different owners are the going market rates that reﬂect the operating cost of marginal vessel trading.

6.4.2

Liner and container shipping

Traditional liner shipping transported general cargo in ﬂexible vessels with cargohandling gear that could adjust to several lot sizes and kinds of cargo. Loading and ofﬂoading a liner vessel was a laborintensive, minimally automated process that took a long time. As a result the liner vessels spent long periods in port. This reduced their transport capacity and therefore their potential income generation. It was impossible to exploit economies of scale of vessel size, since the cargo-handling costs increased more or less in proportion to the higher cargo volume in the hull of the larger vessel. Unitizing the general cargo through containerization was an important step toward exploiting economies of scale in the vessels. Another consequence was that the shipping of general cargo was integrated into a transport system that moved containers right from the customer wishing to send the goods all the way to the

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customer who was to receive the goods sent in the container, that is, a door-to-door service. Thus vessels, lorries and cargohandling gear were all changed into equipment suited to handling standardized container sizes. The next step in the containerization process was to develop highspeed cargo-handling gear to facilitate the moving of containers from one vehicle or transport mode to another, that is, between lorry, vessel, railway and storage. The investment in these interrelated facilities at sea, on shore and on land required much capital. To ﬁnance these investments the traditional liner companies started to form consortia. The containerization of the liner industry led to a tremendous increase in productivity: by 2007 container shipping moved more than three-quarters of the general cargo trade. Containers became standardized to twenty-foot (TEU) and forty-foot containers, the majority being 40 feet (75% by 2004) (Containerisation International 2006). Container vessels operate in a ﬁxed trade pattern irrespective of the short-term variations in demand for transport services. The transport costs to the cargo owners are administratively set and ﬁxed in the short run. Hence, the cargo owners know the costs per container (TEU) on a speciﬁc leg. This is the general rule for occasional cargo owners with smaller cargo volumes or a small number of containers to send. The rigidity in the container trades implies that the container operators have to provide for the marginal demand for transport capacity and cannot let vessels move between market segments to exploit opportunities in markets where demand is high relative to the supply. Such a combination of ﬁxed prices and inﬂexibility of service capacity poses chal-

lenges for pricing. Even though large regular customers may negotiate contracts to move their goods at undisclosed cost per TEU, this implies a cost to container operators without increasing the ﬂexibility in their operations. The market reacted to this inﬂexibility in transport capacity. A market for space charter emerged, in which shipping lines may charter space in another ﬁrm’s ﬂeet. Following the disintegration of ship owning and ship operations since 1990, the market for chartering container vessels has also increased ﬂexibility in transport capacity to speciﬁc container operators. To the shipowners the charter rates they obtain for their vessels vary with the capacity utilization of the container ﬂeet. The charter rates will be fairly low when carrying capacity is ample, but may rise to high levels when demand is high and transport capacity is fully used. In Europe and the USA about half the container ﬂeet is now leased (Stopford 2009), which reduces capital requirements to liner operators. Service requirements dominate the liner business following the movement towards just-in-time and greater focus on product ﬂows in logistics. Liners are now part of a supply system and need to follow the service level of the system. Stopford (2009) divides liner shipping into two basic kinds. One is the low-cost option used for containers loaded with low-value goods. The other, suited for high-priced goods, is focused on service and punctuality, and may charge a higher price. The challenge is to differentiate freight rates for similar containers, reﬂecting the value of the goods therein. Punctuality (vessel time of departure and arrival, transit time for the cargo, and time door to door), carrier costs per move, cargo

MARITIME FREIGHT MARKETS

tracking, frequency of sailings, reliability of administration and available space at short notice are important. By differentiating the service the shipping line may secure a willingness to pay a higher freight for containers that offer a fuller service. Liner shipping with its multi-porting is a complicated operation when cargo lots for several cargo owners are carried in the hold of the vessels. The lines also had to coordinate to offer trans-shipment to ports not directly served by the line itself. One method was to organize the liner operations in liner conferences for the different routes, and by 1950 there were 360 such liner conferences in the deep-sea trades. The number of participating liner operators varied from just a few to forty members in a conference (Deakin and Seward 1973). These liner conferences worked as cartels. Liner conferences were exempt from antitrust in the US until 1984 and from competition rules in the EU until 2008. Shipping ﬁrms joining liner conferences agreed on the freight for containers on each leg and often differentiated the freight according to the value of the goods transported in the containers. The main difference between the US open conferences and the European closed conferences was the closed liner conferences’ right to control the transport capacity offered in each route and thereby the capacity utilization and income per deadweight tonne. After 1984 US legislation required the liner conferences to open up to all shipping ﬁrms who wanted to join. This limited the conferences’ market power by limiting their control over the capacity supplied in the trade. Prohibiting loyalty rebates had similar effects. The new legislation required that tariffs be ﬁled with the authorities and made public. The rules were amended in 1999 to

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further enforce competition. When the EU lifted the exemption for the liner business, the container shipping industry in Europe could not ﬁx prices and share the market among the conference members as before. This enforces competition also in the EU container shipping industry. Following these changes in regulations the industry has instead increased merger and acquisition activity. The ﬁrm size has increased, and the number of independent ﬁrms is reduced, both of which may affect competition. Entry into the container industry is further limited since this industry is characterized by economies of scale related to both vessel size and ﬁrm size. Container ﬁrms operating on ﬁxed schedules need several vessels in order to offer a minimum frequency to cargo owners. In addition to this requirement on ﬂeet size, the ﬁrm must establish a market organization that can handle contacts with large numbers of cargo owners, and offer container-tracking services, container renting and an empty container return service. Again competition may be reduced. As a result concentration in the container industry is high. According to UNCTAD (2010) the twenty largest ﬁrms controlled 69% of the TEU capacity in 2009. This share has been fairly stable in recent years. The top twenty operators controlled 71% of the capacity in 2005 (Lam, Yap and Cullinane 2007) and 61.8% in 2002 (UNCTAD 2003). The largest operator, Maersk Line, alone had 14.1% of the capacity in 2009, down from 16.1% in 2008 (UNCTAD 2010). Carrying capacity has grown sharply since the rise in seaborne trade and in demand following the integration of China into the international economy. The leading operators kept their leading position during this

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expansion period. Lam, Yap and Cullinane (2007) analyze the competitive environment in container shipping and argue that the concentration of capacity after the increased merger and acquisition activity up to 2002 still left the industry contestable. This implies that the largest operators do not seem able to generate monopoly proﬁts, since potential competition from their peers hampers such exploitation. After 2002 container capacity grew sharply and the industry enjoyed some years of exceptionally high activity. This stands in sharp contrast to the pressed marked conditions in 2002, the last year included in the Lam, Yap and Cullinane (2007) analysis. On the other hand the share of capacity controlled by the twenty leading operators was seen to be stable over the period. A closer study is needed to assess whether the industry still is contestable. The changes in EU policies in 2008 that ended the exemption of liner conferences from competition rules may have hampered the ability of the largest operators to inﬂuence market prices. The reduction in freight costs per TEU and in charter rates for container vessels following the ﬁnancial crises and the reduction in economic activity in 2009 suggests that the industry is not able to withstand the pressure on freight rates and time charter rates through cooperation. But Fusillo (2009) shows in his study of merger and acquisition activity that regulatory changes, e.g. the US Ocean Shipping Reform Act (OSRA) of 1998, increase the probability of carrier cooperation. He maintains that the characteristics of the liner industry, especially the ﬁxed-to-variable cost ratio, indicate that agents in the industry have incentives to cooperate either in conferences or alliances or by merger and acquisitions. Hence he

expects deregulation in Europe to have similar concentration effects to those OSRA had in the US market.

6.5

Summary

The volatility in shipping freight markets reﬂects both demand and supply characteristics of world shipping. Variations in demand for shipping services follow the cycles in world economic activity and in global trade. Hence demand for shipping services may vary a great deal even in the short run. Adjustments in supply of cargocarrying capacity, beyond speed adjustments and lay-ups, take longer. The time to deliver new vessels may be three to four years when shipbuilding capacity is scarce in relation to contracting activity. As a consequence of this difference in the time needed for volume adjustments on the supply and demand sides in shipping freight markets, prices, or rather freight rates, ﬂuctuate. The result is that shipping freight markets become volatile. The pattern of trade in the shipping freight markets is dominated by east–west ﬂows. The increasing importance of Asia in world trade strengthens this pattern, but has also increased the importance of interregional Asian trades. The pattern follows from the diverse locations of raw materials, production sites and consumption areas of cargoes in world trade. Geographical fragmentation of production processes has added more intermediary products to the trade ﬂows. Fragmentation also strengthens the east–west pattern in trade ﬂows, since the production processes that are outsourced are mainly located in emerging markets in Asia and in transition economies in Eastern Europe.

MARITIME FREIGHT MARKETS

Shipping freight markets range from almost perfectly competitive markets to markets with a high concentration among operators. Recent changes in regulation that removed the exemption of shipping from ordinary competition rules now encourage shipping lines that traditionally joined conferences and alliances to consider mergers and acquisitions to form bigger entities. The difference in organization between the competitive bulk operations and the more concentrated liner operations is shaped by liner shipping’s operation characteristics with preannounced schedules and its cost characteristics of small variable relative to ﬁxed cost.

References Beenstock, M. and A. Vergottis (1993) Econometric Modeling of World Shipping. London: Chapman and Hall. Containerisation International (2006) World Container Census 2005 Market Analysis. London: Informa UK. Deakin, B. M. and T. Seward (1973) Shipping Conferences: A Study of Their Origins, Development, and Economic Practices. University of Cambridge Dept. of Applied Economics Occasional Paper 37. Cambridge: Cambridge University Press. Dixit, A. K. and R. S. Pindyck (1994) Investment under Uncertainty. Princeton: Princeton University Press. Fusillo, M. (2009) Structural factors underlying mergers and acquisitions in liner shipping. Maritime Economics and Logistics 11(2): 209–26. Glen, D. (1990) The emergence of differentiation in the oil tanker market, 1970–1978. Maritime Policy and Management 17(4): 289–312. Glen, D. R. (2006) The modeling of dry bulk and tanker markets: a survey. Maritime Policy and Management 33(5): 431–45.

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INTERTANKO (2009) Tanker Facts 2009. Oslo: INTERTANKO. Jones, R. W. and H. Kierzkowski (2003) International fragmentation and the new economic geography. University of Rochester Graduate Institute of International Studies, Geneva. Koopmans, T. C. (1939) Tanker Freight Rates and Tankship Building: An Analysis of Cyclical Fluctuations. Haarlem: De Erven F. Bohn N.V. Lam, J. S. L., W. Y. Yap and K. Cullinane (2007) Structure, conduct and performance on the major liner shipping routes. Maritime Policy and Management 34(4): 359–81. Mossin, J. (1968) An optimal policy for lay-up decisions. Swedish Journal of Economics 70(3): 170–7. Norman, V. D. (1980) Organization of the tanker market. In Inger Rydén and Christopher von Schirach-Szmigiel (eds.), Shipping and Ships for the 1990’s: Proceedings of the International Conference “Supply and Demand of Water Transport,” June 18–19, 1979, pp. 181–90. Stockholm: Economic Research Institute (EFI) at the Stockholm School of Economics. Norman, V. D. (1979) Economics of Bulk Shipping. Bergen: Institute for Shipping Research, Norwegian School of Economics and Business Administration. RS Platou (2003) The Platou Report 2003. Oslo: RS Platou ASA. RS Platou (2007) The Platou Report 2007. Oslo: RS Platou ASA. RS Platou (2010) The Platou Report 2010. Oslo: RS Platou ASA. Stopford, M. (2009) Maritime Economics. 3rd edn. London: Routledge. Strandenes, S. P. (1981) Demand substitution between tankers of different sizes. In Einar Hope (ed.), Studies in Shipping Economics, pp. 63–77 Bedriftsøkonomens Forlag, Oslo. Also in Norwegian Maritime Research 11(4) (1983): 27–36. Strandenes, S. P. and T. Wergeland (1982) Freight markets and bulk demand efﬁciency. Center for Applied Research, NHH, Bergen, Report 3/1982.

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Strømme Svendsen, A. (1958) Sea Transport and Shipping Economics. Bremen: Institute for Shipping Research. Tvedt, J. (1997) Valuation of VLCCs under income uncertainty. Maritime Policy and Management 24(2): 159–74. Ubøe, J., J. Andersson, K. Jörnsten and S. P. Strandenes (2009) Modelling freight markets for coal. Maritime Economics and Logistics 11(3): 289–301.

UNCTAD (2003) Review of Maritime Transport, 2002. Geneva: United Nations Conference on Trade and Development. UNCTAD (2010) Review of Maritime Transport, 2009. Geneva: United Nations Conference on Trade and Development. Zannetos, Z. (1966) The Theory of Oil Tankship Rates: An Economic Analysis of Tankship Operations. Cambridge, MA: MIT Press.

7

Intermodalism and New Trade Flows Lixian Fan, Mohan M. Koehler and Wesley W. Wilson

7.1

Introduction

Over the last ﬁfty years, there has been signiﬁcant growth in international trade. In turn, ports and carriers, ocean and intermodal, have been under pressure to provide sufﬁcient infrastructure and mobile capital to support this growth. Intermodal transportation today generally refers to the transportation of freight in an intermodal container or vehicle, using two or more modes of transportation. Before containers were introduced in the 1950s, boxes, barrels and bags in which cargoes were packed were transported between carriers and/or modes, namely truck, rail, and ships, by a laborious and inefﬁcient unloading and reloading process. This situation began to change in the 1950s with the introduction of containers. Ocean container transportation not only reduced the delivery time of international trade in general cargo but also the delivery costs (for example from the lower rates for ocean container transportation). In 2007, the ocean

transportation of containers increased to 487 million TEUs (twenty-foot equivalent units), 13 times greater than the number in the 1980s (UNCTAD 2010). The growth in international trade has been accompanied by a growth in new trade ﬂows, i.e., cargo ﬂow to a US port from a foreign port from which cargo has not previously ﬂowed. If the US port is a container port, an increase in the port’s intermodal (e.g., rail and truck) infrastructure will be required, assuming no excess capacity in this infrastructure. The role of intermodalism in the success of these new trade ﬂows is investigated in this chapter. In the following section, the evolution of intermodalism is discussed. Section 3 discusses the advantages of intermodalism and its impact on world trade. Section 4 presents the data, models and empirical results from the estimation of these models in investigating the role of intermodalism on new trade ﬂows to the US. Finally, a summary and conclusions are provided.

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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7.2 The Evolution of Intermodalism Intermodal transportation dates back at least to the eighteenth century and predates even railways. Long before the introduction of containers, there was, of course, the need to transfer cargoes from one transportation mode to another. Before containerization, the ship loading and unloading of general cargo as break-bulk cargo (on pallets or in barrels) was a slow, labor-intensive process. One of the earliest uses of containers in shipping was in the 1780s, when coal was shipped in “loose boxes” on the Bridgewater Canal in England. Thereafter, the coal was shipped by rail. In1841, Isambard Kingdom Brunel introduced iron containers to transport coal that were more reliable and sturdy than traditional wood containers (British Broadcasting Corporation (BBC)). Covered containers made their ﬁrst appearance, primarily for the movement of furniture between road and rail. However, a lack of standard-sized containers reduced the value of this service. The Railway Clearing House in the United Kingdom was the ﬁrst company to standardize containers. In the 1920s, these standardized containers were transported on standard container ﬂats by rail and road vehicles (Smith 2003). During World War I, the Great Eastern Railway of England used wooden containers to transship luggage and other goods between ships and trains (Wilson 1936). As early as before World War II, railroads transported truck trailers on ﬂat railroad cars in an arrangement that came to be called a “piggyback” or “trailer-on-a-ﬂatcar” service (Mahoney 1985).

During World War II, pallets made their ﬁrst appearance. The US military assembled cargo on pallets. This allowed for the quicker transfer of cargo between warehouses, trucks, trains, ships and aircraft. Also, fewer personnel were needed, since cargo was not individually handled. However, the boxes, barrels and pallets containing cargo had to be packed and unpacked and loaded to and from multi-modes – a slow and laborious process (Donovan 2000). In the late 1950s, 60–75% of the cost of transporting cargo by sea was incurred in port; today under ocean containerization this percentage has declined to 37% of total seaborne costs (Levinson 2006). Ocean container transportation appeared in the 1950s, pioneered by a US businessman, Malcom McLean, the owner of the less-than-truckload trucking ﬁrm McLean Trucking, which had a ﬂeet of 1,700 vehicles. In 1955, he bought the Pan Atlantic Tanker Company and adapted its ships to carry truck trailers on their decks. On April 26, he launched the world’s ﬁrst seaborne container ship, which sailed from New Jersey to Houston in the US. In April 1966, Malcom McLean renamed his company Sea-Land, and started the ﬁrst transatlantic containerization service, sailing on its maiden voyage from its newly constructed terminal in New Jersey to McLean’s new trailer terminal in Rotterdam. With the advent of standardized containers, the intermodal transportation of international trade had begun to be revolutionized. The United States Defense Department produced speciﬁcation standards for containers that were later used by the International Organization for Standardization (ISO) to ensure interchangeability between different modes of transportation worldwide. ISO containers were appealing

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Table 7.1 Ranking

The twenty leading service operators of container ships at the beginning of 2009 Operator

Country/territory

1 Maersk Line Denmark 2 MSC Switzerland 3 CMA-CGM Group France 4 Evergreen Taiwan Province of China 5 Hapag-Lloyd Germany 6 COSCON China 7 APL Singapore 8 CSCL China 9 MOL Japan 10 Hanjin Republic of Korea 11 OOCL Hong Kong (China) 12 NYK Japan 13 Yang Ming Taiwan Province of China 14 K Line Japan 15 HMM Republic of Korea 16 Hamburg Sud Germany 17 Zim Israel 18 UASC Kuwait 19 PIL Singapore 20 CSAV Chile Total 1–20 World container cellular ﬂeet at January 1, 2009

Number of ships in 2009

TEU capacity in 2009

426 431 280 181 132 141 128 121 109 83 90 82 85 99 58 81 82 43 76 56 2784 9447

1740936 1510720 864893 629615 496724 491580 470901 431582 387107 365605 364384 358094 317473 309496 258648 256513 251717 155462 147985 141957 9951392 14429080

Source: UNCTAD, Review of Maritime Transport, 2009.

because their rectangular shape made them stackable. In addition, containers are both ﬂexible and sturdy due to their design and components of steel or aluminum (Rodrigue, Slack and Comtois 2009). Container transportation has reduced the time that ships transporting containers are in port. Ocean container transportation has also changed the way liner companies operate. “Door-to-door” service has become an essential part of container transportation service. The need to manage both the land and the sea legs of transport has further stimulated the development of intermodalism.

In 1980, the world’s top twenty container shipping lines (ranked by their ship TEUcarrying capacity) controlled 26% of the world’s ship total capacity (Talley 2000), while at the beginning of 2009 (see Table 7.1), the twenty largest container shipping lines controlled 69% of the world total capacity (UNCTAD 2010). Hence, concentration in the container shipping industry has increased. The lower rates of ocean container transportation versus those of break-bulk transportation have been a major factor in the signiﬁcant growth in the world trade of general cargo. In 1980, international cargo

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Table 7.2 Degree of containerization in a selection of European mainland ports Port Hamburg La Spezia Le Havre Algeciras Leixoes Rotterdam Bremerhaven Valencia Antwerp Bordeaux Thessaloniki Barcelona Lisbon Piraeus Genoa Bilbao Marseilles Zeebrugge Rouen Amsterdam Trieste Dunkirk Zeeland Seaports

Country

1980

1985

1990

1995

2000

2003

2005

Germany Italy France Spain Portugal The Netherlands Germany Spain Belgium France Greece Spain Portugal Greece Italy Spain France Belgium France The Netherlands Italy France The Netherlands

32.0 34.4 58.9 71.8 22.0 57.4 35.6 35.4 21.5 32.3 1.2 30.0 32.2 20.4 36.5 26.4 32.3 30.6 23.1 21.0 34.4 14.6 11.1

42.6 40.3 67.7 69.4 28.7 65.8 47.1 68.5 29.0 34.4 3.1 61.3 47.3 36.5 46.0 33.0 42.4 22.5 40.4 21.6 46.7 14.7 10.0

66.2 76.1 71.2 70.8 37.1 69.9 58.7 60.3 38.0 43.4 14.3 71.0 58.0 45.8 45.2 53.1 50.5 23.3 36.7 30.2 55.4 10.5 4.4

81.7 88.0 66.8 79.2 63.5 73.9 73.4 68.6 50.9 31.3 43.8 74.3 65.8 65.3 49.7 46.7 46.9 30.0 31.8 40.5 28.9 11.5 3.1

93.1 90.3 80.4 88.5 75.4 77.7 81.9 74.8 64.8 42.4 42.8 73.9 69.5 74.8 65.0 49.2 53.2 41.5 32.9 25.9 27.4 27.9 2.3

95.4 93.2 86.9 89.4 85.1 79.1 82.9 79.1 75.0 67.5 68.8 73.4 72.9 76.3 61.7 58.1 54.2 51.0 36.5 22.9 18.8 13.9 4.3

96.4 93.2 90.3 89.7 87.7 83.1 82.8 79.7 77.6 76.1 73.9 73.1 72.0 68.6 63.0 58.9 56.9 55.0 42.0 29.7 29.6 15.0 4.3

Source: Notteboom and Rodrigue 2008.

transported in containers by water carriers was 36.4 million TEUs (twenty-foot equivalent units), increasing to 487 million TEUs in 2007 (UNCTAD 2010). Beginning in the 1960s, the US intermodal transportation of containers increased signiﬁcantly. From 1980 to 2002, the US rail intermodal transportation of containers increased from 3.1 million to 9.3 million. As of 2007, 50% of international cargo transported by water carriers was containerized. Table 7.2 presents the degree of containerization in some European ports from 1980 to 2005. The degree of containerization is the ratio of containerized cargo to total general

cargo handled by a port. By 2005, this degree was over 90% in some large ports, such as Hamburg, La Spezia and Le Havre.

7.3 Intermodal Container Transportation: Advantages and Impacts The term “intermodalism” itself is a relatively new one that has different deﬁnitions. It was apparently introduced in the early 1960s (Donovan 2000), who deﬁned it as “the transportation of freight in an intermodal container or vehicle, using two or

INTERMODALISM AND NEW TRADE FLOWS

more modes of transportation (rail, ship, air and truck) without the handling of the freight itself when changing modes.” The European Communities Working Group on Transport Statistics (European Communities 2003: 103) deﬁnes intermodal transportation as the “movement of goods (in one and the same loading unit or a vehicle) by successive modes of transport without handling of the goods themselves when changing modes.” Dewitt and Clinger (1999: 1) deﬁne the term without the reference to the handling of freight: “the use of two or more modes to move a shipment from origin to destination. An intermodal movement involves the physical infrastructure, goods movement and transfer, and information drivers and capabilities under a single freight bill.” Jones, Cassady and Bowden (2000: 349) deﬁne intermodalism as “the shipment of cargo and the movement of people involving more than one mode of transportation during a single, seamless journey.” Deﬁnitions of intermodalism note that multiple modes are involved and goods are not individually handled in their transfer from one mode to another. The intermodal movement of containers has a number of advantages: it is reliable, efﬁcient, safe and environmentally friendly. Advantages of less cargo handling include fewer cargo losses and damages, and faster delivery times (due for example to time savings). Herod (1998) also found that there are potentially sizable cost savings in using multiple modes; for example, he compares intermodal container movements with non-container truck movements in intracontinental transportation. As containers’ contents are unknown to outsiders and are sealed when loaded, cargo theft is signiﬁcantly reduced. Also, intermodal container

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transportation plays a signiﬁcant role in reducing the supply chain costs of shippers (Dewitt and Clinger 1999). Intermodal container transportation has also impacted transportation networks. In the early 1980s, seaborne trade from Asia to the US East Coast arrived via the Panama Canal. In April 1984, this routing began to change when container ships began calling at ports along the US West Coast in order to unload their containers for placement on rail cars for transport to the US East Coast, i.e., in the provision of landbridge service – the movement of cargo across a body of land between two ocean legs (Chadwin, Pope and Talley 1990). The introduction of US landbridge service led in turn to the development and use of double-stack trains in the provision of this service. Double-stack trains consist of platform rail cars capable of moving containers stacked two high. They have a signiﬁcant cost advantage over conventional COFC (container-on-ﬂatcar) trains in that, for slightly more locomotive power, the same labor and slightly more fuel, two hundred containers can be transported on a double-stack train as opposed to one hundred containers on a COFC train (Talley 2009). By the late 1980s, most of the containerized cargo from Asia bound for the US East Coast did not arrive by ship, but was landbridged by double-stack trains from West Coast ports to the East, thereby placing US West Coast ports in competition with US East Coast ports. Landbridge service by double-stack trains is less time-intensive – ﬁve to six days faster – than the all-water service via the Panama Canal to the East Coast, but is more costly. Landbridging stimulated the growth of US West Coast container ports, especially the ports of Los Angeles and

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Long Beach (the two largest US container ports). In addition to stimulating a signiﬁcant increase in container trafﬁc at the ports of Los Angeles and Long Beach, the doublestack rail landbridge service also stimulated a signiﬁcant increase in highway congestion in the port cities, from highway trafﬁc having to stop at rail crossings for doublestack trains departing and entering the ports. This problem for the two ports was addressed with the construction of the US$2.4 billion Alameda Corridor, a highcapacity intermodal rail grade-separated (trench) corridor that consolidated more than ninety miles of rail operations into one twenty-mile corridor, linking the ports of Los Angeles and Long Beach and rail lines leading eastward. Two hundred railroad crossings at street level along the corridor were eliminated. The Alameda Corridor was opened in 2002 and is the largest intermodal construction project in US history. US double-stack train landbridge service (to and from ports) itself has been stimulated by the passage of the US Shipping Act of 1984 and the US Staggers Act of 1980. The 1984 Act permitted door-to-door rates as opposed to just port-to-port rates for shipping lines involved in US foreign commerce. For cargo moving under a door-todoor rate, the shipping line is responsible for hiring inland carriers to transport cargo to and from ports. The door-to-door rate provision enabled shipping lines to negotiate, given their large volumes of containerized cargo, lower rates from inland carriers for the inland transportation of containers. The railroad service contract provision of the US Staggers Act of 1980 allowed US railroads to enter into individual contracts with customers and thereby charge contract or market rates for

rail transportation service. The contract rate provision of the Staggers Act, in conjunction with the door-to-door rate provision of the 1984 Act, enabled container shipping lines to negotiate even lower double-stack train rates (than otherwise) as well as double-stack train service improvements for containerized cargo moving under door-to-door shipping rates. . Truck carriers that transport cargo to and from container ports include: harbor drayage and over-the-road truck carriers. The former provides local truck service, e.g., moving containers between the port and local distribution warehouses and railyards. Over-the-road truck carriers provide intercity truck service, moving containers between the port and locations other than in the local area of the port. The truck drivers for these carriers often suffer port congestion from waiting in lines. Harbor drayage drivers, who are paid by the trip, have their earnings reduced when long waits result in fewer port trips per day. In 2005, the ports of Los Angeles and Long Beach adopted the Pier Pass program in an attempt to relieve congestion at their terminal gates by shifting port trafﬁc to less busy hours of the day. The Pier Pass program charges an US$80-per-FEU (fortyfoot equivalent unit) fee to shippers when their cargo enters the ports by truck after 3 a.m. and before 6 p.m. during Monday through Thursday and during a day shift on Saturday. At other times of the day, the shipper avoids the pier pass fee.

7.4

Empirical Application

The increase in world trade volumes provides the incentive for the establishment of new trade ﬂows (cargo) between the US and

INTERMODALISM AND NEW TRADE FLOWS

a foreign port. The success or failure of such trade ﬂows is the focus of the empirical work that follows.1 In the model the dependent variable is the amount of trade cargo that ﬂows to the US from a foreign port that does not have a history of trade ﬂows to the US, i.e., “new ﬂows” in trade. Such ﬂows may or may not be successful. If they are successful, it is expected that the new trade ﬂows will increase over time; if they are not successful, they will decrease over time and eventually go to zero. If that happens, the “new ﬂows” will become “failed ﬂows”. There are many factors that contribute to whether the ﬂows survive or fail, such as the extent of intermodalism and the level of transport infrastructure. A description of the data and the empirical models used to investigate whether these factors are determinants of whether new trade ﬂows to the US grow or fail follows.

7.4.1

Data

The data used in the analysis are from two sources. The ﬁrst is the National Data Center (NDC) of the Army Corps of Engineers, for which each year its data are generated from US Census IA 245 ﬁles Census ﬁles and then matched to Customs vessel entrances/clearances for more complete and accurate vessel and US port data. These data are available from 1991 to 2005 and allow for a long enough time period to identify new ﬂows to the US and to consider the time path of the ﬂows. In the data, there are exports (in kilos as well as value) for all types of cargo (e.g., container, break-bulk, dry-bulk and liquid-bulk cargoes) to the US by foreign ports through time. A new ﬂow from a foreign port to a US port is the focus of the analysis. New ﬂows over time are tracked in the data. In addition, the data set

127

also includes the percentage of containerized trafﬁc and unit values of goods that ﬂow from the foreign port to the US The second source of data is the countrylevel data of the World Bank.2 The data include country GDP (in constant US$), population, the total length of railroads (in km), the number of road miles, the percentage of rural population, and the percentage of roads that are paved. The data also include information on the level of development of a country as well as the nature of its transportation network infrastructure (for ports and domestic transportation in foreign countries). When combined with the port-to-port ﬂow data, the combined data provide an excellent opportunity to examine the evolution and success of new trade ﬂows from foreign ports as a function of their (the foreign ports) transportation infrastructure, the development level of foreign countries and, especially, the effects of intermodalism as measured by their containerization. In raw form, the trade ﬂow data deﬁne a record that includes a foreign port, a US port, and the six-digit Harmonized Tariff Commodity codes (http://hts.usitc.gov). The data set is very large, including well over 400,000 imports received by the US in the early 1990s to well over 900,000 in 2005. This more than doubling of records reﬂects the growth of the commodities transported to the US. For the purpose of the study, the data were collapsed by foreign port to give the total quantity exported from a foreign port to the US over time. The analysis is restricted to new trade ﬂows. Intermittent trade ﬂows are removed from the data. Hence, the data all have zero quantities for 1991, but positive entries through time thereafter. The collapsed data include a total of 282 new ﬂows

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Table 7.3 New trade ﬂows by year Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total

Number 38 18 5 53 13 16 5 40 18 15 23 14 10 14 282

250

Percentage 13.48 6.38 1.77 18.79 4.61 5.67 1.77 14.18 6.38 5.32 8.16 4.96 3.55 4.96 100.00

Source: National Data Center (NDC) of the Army Corps of Engineers.

from foreign ports that do not have a history of trading with the US. The number of these new trade ﬂows over time is shown in Table 7.3. Note that there is no discernible pattern through time and the timing of trade ﬂow entry. For the analysis of the trade ﬂows’ evolution, the observations are the transported volume of each of the 282 ﬂows to the US from 1991 to 2005 – 2,125 observations. Figure 7.1 provides a summary of median quantity and years since entry, for the survivors and for failed new ﬂows. It is distinctly clear from this ﬁgure that surviving trade ﬂow quantities grow signiﬁcantly through time, while failed ﬂow quantities seem to be relatively constant or even to decline through time. There are a number of variables in the data set that may explain the variation in the quantities of new ﬂows over time. These variables include: whether the new ﬂow

200

Survivor

150 100 50 0 0

5 10 Years since entry Survivor

Failure 15

Failure

Figure 7.1 Average quantity over time (million kilo).

(from a foreign port to the US) fails or survives (FAILED); the time since entry of the new ﬂow (YEARSINCE); the per capita gross domestic product in real US dollars (GDPPC) of the country of the foreign port; whether or not the foreign port is containerized (CONT); the extent of rail in kilometers (RAILKM) of the country of the foreign port and the extent of roadway in kilometers (ROADKM) of the country of the foreign port;3 the number of ports (NUMP) of the country of the foreign port; and the percentage of containerized trafﬁc (PERCON) of the country of the foreign port. Per capita GDP is a measure of the level of development, and the extents of the rail and road networks are measures of the transportation network development, as is whether or not there are containerized movements emanating from the foreign port. Each of these variables is expected to increase the level of trade to the US from the foreign port.

7.4.2

Empirical results

7.4.2.1 Port evolution The empirical work on new ﬂows is framed around a simple equation given by:

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INTERMODALISM AND NEW TRADE FLOWS

Table 7.4 Coefﬁcient estimates for equation (1)

Constant FAILED YEARSINCE YEARSINCE x FAILED Observations R-squared

1

2

3

320.683 (153.977)* −74.763 (476.948) 165.801 (23.040)** −181.705 (112.883) 2125 0.03

312.891 (145.699)*

2.164 (0.154)** −2.208 (0.478)** 0.227 (0.023)** −0.146 (0.113) 2125 0.10

166.794 (22.147)** −195.712 (68.960)** 2125 0.03

4 3.438 (0.103)**

0.060 (0.023)** −0.295 (0.144)* 1843

Standard errors are in (). *, ** indicate statistical signiﬁcance at the ﬁve and one percent levels.

qit = β 0 + β1 × YEARSINCE + β 2 × FAILED + β 3 × YEARSINCE × FAILED + ε it (1) and a modest variation with other variables added given by: qit = β 0 + β1 × YEARSINCE + β 2 × FAILED + β 3 × YEARSINCE × FAILED + β 4 Other Explanatory Variables + ε it (2) where the dependent variable, qit, is port i’s transported quantity to the US in year t. The key hypotheses in the new ﬂow model are that the successful new ﬂows follow an increasing trend through time, while unsuccessful new ﬂows follow a decreasing trend through time. The two hypotheses will be tested by the signiﬁcance of the coefﬁcients β1 and β3, while β2 is included to capture the difference between successful and unsuccessful new ﬂows. For successful new ﬂows, it is expected that trade volumes will increase over time, so the coefﬁcient of β1 should be signiﬁcantly positive. For the

unsuccessful new ﬂows, their trade volumes will decrease over time; i.e., the coefﬁcient of β3 should be signiﬁcantly negative. The results in the estimation of equation (1) are found in Table 7.4. There are a total of 282 new ﬂows, and these are observed through time for a total of 2125 observations in the base model. Results in column 1 indicate that the ﬁt of the equation is somewhat low, but there is strong evidence that surviving new ﬂows grow through time and grow signiﬁcantly. In contrast, new ﬂows that fail do not grow through time; in fact, the point estimate is negative. Further, the estimated coefﬁcient on FAILED is not statistically different from zero. Column 2 presents results in which the failed dummy is removed. This speciﬁcation yields stronger statistical results on the growth of surviving new ﬂows and failing new ﬂows. In this case surviving new ﬂows grow through time while failing new ﬂows fall through time. Column 3 is the same as column 1 except that the dependent variable is measured in natural log form. In this formulation, the intercept dummy is

LIXIAN FAN, MOHAN KOEHLER AND WESLEY WILSON

2500 Kilos (100,000)

statistically different from zero, but the interaction term is not. This means that the entry quantities of failed new ﬂows are smaller than those of the surviving ﬂows. Further, when added together, the results suggest that surviving new ﬂows grow at .227 percent per year, while failing new ﬂows are not statistically different from zero. Finally, column 4 presents the results with ﬁxed effects4 included for each port to capture unobserved heterogeneity in the port.5 The results suggest that the port ﬁxed effects should be included in the model (F (242, 1598) =10.53) and an autocorrelation statistic of .38. These results point to positive growth rates for surviving new ﬂows, but large negative growth rates for failing new ﬂows. Overall, the above estimates point to growth rates for surviving new ﬂows that are higher than those for the failing new ﬂows. These ﬁndings are generally consistent (especially when controlling for ﬁxed effects) with Jovanovic’s model of industry evolution, in which entry occurs, and over time survivors grow, while failures fall (see Appendix). These ﬁndings are illustrated in Figures 7.2 and 7.3. In Table 7.5, the new ﬂow dependent variable is measured in natural logs of transported quantity relative to entry quantity. All three estimates include port ﬁxed effects. Column 2 adds ﬁxed port effects with a correction for autocorrelation, and column 3 adds various explanatory variables. In some countries some of the values of the added explanatory variables are missing, and so they are not included in the estimation. In each of the three estimates, there is growth in surviving new ﬂows, and either negative or zero growth in failed new ﬂows. This is a recurrent theme throughout the empirical results and is robust to measure-

2000

Survivor

1500 1000 500 Failure

0 0

5 10 Years since entry Survivor

15

Failure

Figure 7.2 Surviving and failing new ﬂows – linear.

80 Kilos (100,000)

130

60

Survivor

40 20 Failure

0 0

5 10 Years since entry Survivor

15

Failure

Figure 7.3 Surviving and failing new ﬂows – log.

ment of the dependent variable. Column 3 of Table 7.5 presents a set of results with a number of plausible variables that may explain the growth in new ﬂows. While these variables dramatically increase the ﬁt of the model, it is clear that inclusion of these variables does not inﬂuence the basic empirical results – that surviving new ﬂows grow, while failing new ﬂows either do not change or decrease over time. The coefﬁcients suggest that relative new ﬂows are larger for countries with a lot of hinterland transport infrastructure (measured by kilometers of rail network)6 and if the port is containerized, but lower for countries with

131

INTERMODALISM AND NEW TRADE FLOWS

Table 7.5 Coefﬁcient estimates for equations (1) and (2) with a natural log dependent variable 1 Constant FAILED YEARSINCE YEARSINCE x FAILED

2

1.282 (0.180)** 0.33 (0.687) 0.176 (0.025)** −0.359 (0.137)**

1.398 (0.230)** −0.341 (0.727) 0.14 (0.018)** −0.227 (0.107)*

Ln(RAILKM) NUMP PERCONT Ln(GDPPC) CONT Ln(Entry Size) Observations R-squared

1843 0.04

1843

3 6.719 (0.425)** −0.903 (0.466) 0.108 (0.017)** −0.197 (0.093)* 0.132 (0.024)** −0.013 (0.003)** −0.038 (0.001)** −0.345 (0.042)** 0.000 (0.000) −0.681 (0.017)** 1811 0.56

Standard errors are in (). *, ** indicate statistical signiﬁcance at the ﬁve and one percent levels.

a lot of ports, ports with a high percentage of containerized trafﬁc, and high per capita incomes. 7.4.2.2 Probability of failed ﬂows from ports For the exit decision, the logit model is used to analyze the factors that affect whether the new ﬂow from a foreign to US ports ceases. The term “failed ﬂow” is deﬁned as a new ﬂow from a foreign port that is not competitive in the world market. The dependent variable is a dummy variable that indicates whether the new ﬂow is failed or not. If a new ﬂow failed

during 1992 to 2005, the value of the dependent variable is 1, otherwise it is 0. As indicated in Table 7.6, there were a total of 282 new ﬂows in the data, and about 19% failed during the years 1992–2005. For the new ﬂows from ports that handle containerized cargo, the proportion that failed is 17%, while it is much higher – 75% – for the new ﬂows from ports without containerized cargo. This suggests that the initial character of ports, containerized or not, is a very important factor inﬂuencing whether new ﬂows from the port are successful or not.

132

LIXIAN FAN, MOHAN KOEHLER AND WESLEY WILSON

Table 7.7 Coefﬁcient estimates of failure probability

Table 7.6 Failure proportions by containerization Containerized Failed 0 1 Total

0 3 9 12

1 225 45 270

Total 228 54 282

FAILED = 1 Exit Fail if y * > 0, FAILED = 0 Not Exit Fail if y * ≤ 0. The latent variable y* is deﬁned as a linear function of explanatory variables and is given by:

(3)

where εit represents an unobservable stochastic component. The probability of exit can then be expressed as: e y* e y* + 1

2

0.770 (0.686) −0.134 (0.049)** −2.331 (0.704)**

1.026 (1.363) −0.151 (0.052)** −2.575 (0.832)** 0.026 (0.125) −0.007 (0.008) 0.000 (0.000) 274 0.11 0.000

Ln(GDPPC)

Following Dunne, Klimek and Roberts (2005), the properties of the foreign port when it enters the market are considered in the logit model. These properties are the Entry Quantity (ENQ) and whether the port is a container port or not. The discrete dependent variable in the exit decision model is speciﬁed in the form of a latent variable, whereby it is assumed that there is some underlying (and unobserved) response variable y* ∈ (−∞, +∞). But y* cannot be observed directly, and is therefore modeled with a binary outcome FAILED such that:

Prob( FAILED) =

Ln(ENQ) CONT

Source: the National Data Center (NDC) of the Army Corps of Engineers.

y * = γ 0 + γ 1 × ENTQ + γ 2 × CONT + γ 3 × Other Variables + ε it

Constant

1

(4)

NUMP RAILKM Observations Pseudo R2 Prob

282 0.10 0.000

Standard errors are in (). *, ** indicate statistical signiﬁcance at the ﬁve and one percent levels.

The hypothesis is that the foreign port’s properties when it ﬁrst enters the market determine its future success, which means that the coefﬁcients of γ1 and γ2 should have economically and statistically important effects on whether the entry decision is a success or a failure. The entry quantity is the quantity of the new ﬂow when the foreign port ﬁrst entered the market, which describes the initial condition of the port and may determine the port’s proﬁtability in the future and consequently affect its exit decision. Other variables, such as natural log capita GDP, the number of ports and the extent of rail in kilometers for the country of the foreign port, are included to control for possible factors that could affect the port’s exit decision. Table 7.7 reports the results of logit models on whether new ﬂows from a

133

foreign port succeed or fail. Column 1 contains only the key variables – i.e, the initial conditions of new ﬂows from a port to the US – entry quantity and whether the foreign port is a container port. The two variables are highly signiﬁcant and negatively inﬂuence the probability that a new ﬂow from the foreign port will fail. If a port’s quantity of the new ﬂow at the time it entered the market is high, the probability of failure is low. This is reasonable as the high entry quantity means that the port’s underlying productivity and proﬁtability in the market in future periods is likely to be greater. If a foreign port decides to enter a market, for example, to provide terminal service for transporting cargoes to a US port, it has to assess the demand for transportation from its hinterland at the time it decides to enter the market. The product market and its import and export situation are the key factors that affect the port’s further development, which determine its productivity and transport volume. Considering all of this information, a foreign port’s entry new ﬂow quantity reﬂects its market condition and development potential. If a port’s entry quantity is low, its hinterland product market may be underdeveloped, and the transportation demand low. In a portcompetitive environment, this kind of port may exit the transportation market, its demand being satisﬁed by rail or truck connections to neighborhood ports. The negative coefﬁcient of CONT suggests that new ﬂows from foreign ports are more likely to survive if they are highly containerized. Containerization is an innovation for the intermodal industry and ports. Thus, ﬂows from ports that have the capability of containerization will subsequently realize greater growth than those that do not.

Probability of exit

INTERMODALISM AND NEW TRADE FLOWS

0.8 0.6

Not containerized

0.4 0.2

Containerized 0

5

15 10 Entry quantity

Containerized

20

Not containerized

Figure 7.4 Probability of exit, entry size and containerized.

Column 2 includes other possibly inﬂuential variables introduced previously in the estimation. But the results remain basically the same, which is consistent with Dunne, Klimek and Roberts’s (2005) key ﬁndings. To further illuminate the role of the entry characteristic in the exit decision, the probability of exit for new ﬂow container ports and non-container ports with respect to new ﬂow entry quantity is plotted in Figure 7.4. Foreign container ports providing new ﬂows have a lower probability of exiting the market than non-container ports. With respect to the entry quantity, the probability of failure decreases with increases in entry quantity.

7.5

Summary

World trade has grown dramatically over the last few decades. There have been signiﬁcant changes in the transportation infrastructure that have coincided with the growth in trade. In particular, there has been dramatic growth in intermodalism and, more speciﬁcally, in containerization.

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LIXIAN FAN, MOHAN KOEHLER AND WESLEY WILSON

Intermodalism has a long history: it dates back well over one hundred years. The basic idea of intermodalism today is that cargo is loaded into a container and moved from one location to another by a multiplicity of modes. In early years this meant cargo moving between ships and horse-drawn wagons, and later between ships and railroads and trucks. Before containerization, movement of cargoes between modes was quite labor-intensive. With the advent of ocean container transportation in the 1950s, the labor intensity of moving cargoes between ships and land carriers was greatly reduced. However, this movement became more capital-intensive, as the need for greater infrastructure and mobile equipment at container ports grew. Data for new trade ﬂows (cargoes) into the US from foreign ports without a history of ﬂows to the US were analyzed. For surviving new ﬂows, the primary ﬁnding is that there is considerable and positive growth, while for failed new ﬂows there is zero or negative growth. These results hold in a wide variety of model speciﬁcations, with ﬁxed effects, serial correlation ﬁxes, and inclusion of other control variables. The results also suggest that new ﬂows are larger for exporting foreign countries that have relatively large amounts of hinterland transport infrastructure and whose foreign ports handle container cargoes, but are lower for these countries if they have a large number of ports, ports with a high percentage of containerized cargo trafﬁc, and high per capita incomes. The exit decisions for foreign ports involved in new trade ﬂows were investigated using logit models. The key ﬁnding is that the initial property of a port has a great inﬂuence on its survival in the new ﬂow market. Both the new ﬂow and exit logit

models indicate that the containerization infrastructure is important for a foreign port to grow as well as for its failure. The more developed a foreign port is from an intermodal perspective in providing new trade ﬂows to the US the greater the likelihood that it will grow and the less the likelihood that it will fail. Appendix: Economics Literature Review – New Entrants and Exits Given the growth in trade and the pressure placed on ports, the focus of the chapter is on the growth of trade ﬂows and/or ports. The approach is to examine imports from foreign ports without a history of shipping to the US. That is, the empirical work focuses on the growth of ﬂows to the US from foreign ports and on whether such ﬂows are transitory or long-lived. The former is akin to the growth rate of entrants into a market and the latter to the survival of such ﬁrms. The economics literature includes many texts on the patterns of new ﬁrm entrants and exits, the evolution of new ﬁrms, and the growth and performance of new ﬁrms. Many of these are based on Jovanovic’s (1982) seminal paper on the evolution of industry. In this work, he considers ﬁrms that have lower-than-expected costs and increasing levels of output through time, and ﬁrms that have higher-thanexpected costs and decreasing levels of output through time along with eventual failure (exit).7 Audretsch and Mahmood (1994) empirically examined the post-entry performance of new ﬁrms. They observed that almost all new ﬁrms start at a very limited amount of output, which is lower than minimum efﬁcient scale. Firm growth is shaped by the need to attain an efﬁcient level of output.

INTERMODALISM AND NEW TRADE FLOWS

They framed their model in terms of Jovanovic’s model of “noisy” selection and examined the post-entry performance of 11,000 new start-ups in US manufacturing from 1976. The implications of their work are that ﬁrms which are started in industries characterized by a high degree of innovative activity have a greater prospect of growth, but a low likelihood of survival. Containerization is a degree of innovation in the intermodal industry and in ports. Thus, ports that have the capability of containerization will subsequently realize greater prospects of growth than those that do not. Dunne, Roberts and Samuelson (1988) examined patterns of ﬁrm entry and exit in the US manufacturing industries. They examined the relative importance of different types of entrants, the persistence of industry entry and exit patterns over time, the correlation between industry entry and exit rates, and the post-entry performance of entrants over the period 1963–82. They found that there is considerable heterogeneity in the growth of ﬁrms postentry and that there is also considerable heterogeneity in entry and exit across industries. The present research provides an examination of the post-entry performance of new trades with the US. As indicated below, there are considerable and statistically important differences in patterns across ports and through time. For the exit decision, Dunne, Klimek and Roberts (2005) investigated producers’ decisions to exit a market in the manufacturing industries in the US using probit models. They found that a producer’s characteristic at the time it enters a market plays an important role in the subsequent exit decision. This indicates that the exit decision cannot be treated as determined solely by

135

current and future ﬁrm and market conditions, but that the ﬁrm’s history is also an important independent determinant of the likelihood of survival. They explained that the initial characteristic at the time of entrance is simply a proxy for the ﬁrm’s underlying productivity and proﬁtability in the market in future periods. In this view, variables that affect the ﬁrm’s current and future proﬁts are the determinants of ﬁrm exit. In the following sections, the role of entry characteristics in the port’s exit decision is examined. Roberts and Tybout (1997) developed and estimated an empirical model of entry with sunk costs and the decision whether or not to export in Colombia. The development of ports has high sunk costs. Sunk costs are found to be signiﬁcant, and prior export experience is shown to increase the probability of exporting by as much as 60 percentage points. The study used panel data on a large number of Colombian manufacturing plants. The results show that exports decline once plants cease to service foreign markets. When there is a two-year absence the re-entry costs are not signiﬁcantly different from those faced by a new exporter. This is consistent with the view that an important source of sunk entry costs for exporters is the need to accumulate information on demand sources, information that is likely to decline upon exit from the market. Audretsch (1995) examined innovation, growth and survival in order to explain why the likelihood of survival and post-entry growth rates vary systematically from industry to industry. He noted that the postentry performance of new ﬁrms is linked to the underlying technological conditions in an industry. Where innovative activity plays an important role, the likelihood of new

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entrants’ surviving over a decade is lower than where innovation is less important. Therefore, a highly innovative environment exerts an unequal effect on the post-entry performance of new entrants. These conclusions can be drawn in relation to ports and their subsequent growth. Containerization is a type of innovation in the port industry that realizes much efﬁciency. Ports that have the capability of containerization most likely also have a higher chance of survival than those that do not.

Notes 1

2

3

4

5

A related literature review on the industrial ﬁrm entry, exit and evolution is presented in the Appendix. The actual data came from the World Bank on-line database (www.data.worldbank.org), and in particular the World Development Indicators and Global Development Finance database. A correspondence between the two sources was developed manually. These variables are directly calculated in the data in a relatively straightforward fashion. GPD per capita in US$ is deﬁned as GDP in constant US$/population. Kilometers of rail and road are directly measured by year and country. However, there are a number of missing values. Also, some values are generally constant or relatively constant through the years. Hence, country average values for the sample were used. The term “ﬁxed effects” (as contrasted with “random effects”) is related to how particular coefﬁcients in a model are treated. Fixed effects control for all possible characteristics of the individual ports in the data so long as those characteristics do not change over time. It is noted that column 4 also contains an autocorrelation correction. In the algorithm, the ﬁrst observation of each cross-section is

omitted. Hence, the number of observations used in the analysis is 282 less than in columns 1–3. 6 This is a variable that is positively and highly correlated with road kilometers, and so only rail was included. 7 He proposed a model wherein ﬁrms in a new industry have different costs, but ﬁrms do not know their cost type. They have common information on the distribution of costs, and then learn their cost type over time. In his model, ﬁrms receive feedback from market performance and adjust their expectation of their ﬁrm type. Hence, ﬁrms that receive a multitude of positive signals (pointing to relative efﬁciency and a lower cost type) continue to grow and survive, while ﬁrms that receive a multitude of negative signals (pointing to relative inefﬁciency and a higher cost type) reduce output over time and eventually exit the market.

Acknowledgments The authors gratefully acknowledge research support from the Navigation and Economics Technologies Program (NETS) of the Institute for Water Resources, Army Corp of Engineers, directed by Keith Hofseth. The authors also gratefully acknowledge the efforts of the staff of the National Data Center of the Institute for Water Resources for their help in organizing data ﬁles used in this analysis.

References Audretsch, David (1995) Innovation, growth and survival. International Journal of Industrial Organization 13(4): 441–57. Audretsch, David and Talat Mahmood (1994) Firm selection and industry evolution: the post-entry performance of new ﬁrms. Journal of Evolutionary Economics 4(3): 243–60.

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British Broadcasting Corporation. Historic Figures: Isambard Kingdom Brunel. www. bbc.co.uk/history/historic_ﬁgures/brunel_ kingdom_isambard.shtml (accessed April 22, 2011). Chadwin, M. L., J. A. Pope and W. K. Talley (1990) Ocean Container Transportation: An Operational Perspective. New York: Taylor and Francis. Dewitt, William and Jennifer Clinger (1999) Intermodal Freight Transportation. Washington, DC: Committee on Intermodal Freight Transport, Transportation Research Board. Donovan, Arthur (2000) Intermodal Transportation in Historical Perspective. Transportation Law Journal 27(3): 317–44. Dunne, Timothy, Mark Roberts and Larry Samuelson (1988) Patterns of ﬁrm entry and exit in US manufacturing industries. Rand Journal of Economics 19(4): 495–515. Dunne, Timothy, Shawn D. Klimek and Mark Roberts (2005) Exit from regional manufacturing markets: the role of entrant experience. International Journal of Industrial Organization 23: 399–421. European Communities (2003) Glossary for Transport Statistics: Document Prepared by the Intersecretariat Working Group on Transport Statistics. Luxembourg: Ofﬁce for Ofﬁcial Publications of the European Communities. Herod, Andrew (1998) Discourse on the docks: containerization and inter-union work disputes in US ports, 1955–85. Transactions of the Institute of British Geographers ns 23(2): 177–91. Jones, Brad, Richard Cassady and Royce Bowden (2000) Developing a standard deﬁnition of

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intermodal transportation. Transportation Law Journal 27: 345–52. Jovanovic, Boyan (1982) Selection and the evolution of industry. Econometrica 50(3): 649–70. Levinson, Mark (2006) The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger. Princeton: Princeton University Press. Mahoney, J. H. (1985) Intermodal Freight Transport. Westport, CT: Eno Foundation. Notteboom, T. and J. Rodrigue (2008) Containerisation, box logistics and global supply chains: the integration of port and liner shipping networks. Maritime Economics and Logistics 10: 152–74. Roberts, Mark and James Tybout (1997) The decision to export in Colombia: an empirical model of entry with sunk costs. American Economic Review 87(4): 545–64. Rodrigue, Jean-Paul, Claude Comtois and Brian Slack (2009) The Geography of Transport Systems. 2nd edn. New York: Routledge. Smith, Mike (2003) RCH – The Railway Clearing House. http://myweb.tiscali.co.uk/gansg/ 1-hist/hist-b.htm. Talley, W. K. (2000) Ocean container shipping: impacts of a technological improvement. Journal of Economic Issues 34(4): 933–47. Talley, W. K. (2009) Port Economics. New York: Routledge. UNCTAD (2010) Review of Maritime Transport, 2009. New York and Geneva: United Nations Conference on Trade and Development. Wilson, G. Lloyd (1936) The use of freight containers by British railways. Annals of the American Academy of Political and Social Sciences 187: 173–9.

8

Cruise Lines and Passengers Simon Véronneau and Jacques Roy

8.1

Introduction

An old and oft-cited saying has it that cruises are for the newly wed and the nearly dead. At one time there may have been a germ of truth at the heart of this witticism, but no more. Over the past few decades, typical cruise-goers have undergone a radical shift in character, and the industry has evolved to accommodate them in ways that are nothing short of revolutionary. Despite this unprecedented success, surprisingly few articles or books have acknowledged this industry-wide reinvigoration, though many authors have noted the lamentable paucity of current research (Marti 2004; Teye and Leclerc 1998; Toh, Rivers and Ling 2005; Véronneau 2008). Evidence of the industry’s evolution is its adaptation to niche markets. Each cruise line has designed its onboard product to target a speciﬁc market (Gibson 2006). Once the targeted market is obtained, retention is the goal: Each line attempts to tailor its products to accommodate the changing

needs of its current customers and to develop the market offering with them. As passengers grow accustomed to a given line’s market offering, they typically want new markets and products, thereby powering an observable market maturation cycle. The goal of this chapter is to shed light on the cruise market’s evolution, current structure and conditions, through a literature review and empirical data analysis. The chapter is divided into ﬁve main sections: Section 8.2 deals with general industry background information, Section 8.3 with the evolution of the cruise market, Section 8.4 with current market conditions, structures and economics, and, ﬁnally, Section 8.5 with future tendencies and implications.

8.2 Historical Perspective: The Liner Years Early cruise-liner culture exuded elegance: The elite met to socialize on beautiful ships

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

CRUISE LINES AND PASSENGERS

offering unparalleled service and catering (Quartermaine and Peter 2006). The vessels were either small liners converted to meet the needs of cruising or passenger liners taken out of their regular service. On these modiﬁed cruise liners, sophisticates, often from the US Northeast, indulged in what would now be considered expedition cruising to the then exotic but now rather common destination of the Caribbean (Dawson 2005). Such a trip was purely a circle itinerary not meant to fulﬁll any transport need. The task of transporting the bulk of passenger trafﬁc fell to the passenger liners, which were, from the mid-nineteenth century to the mid-twentieth, the only possible means of intercontinental travel. The passenger liners were designed to transport passengers from A to B in their respective social classes, each with its own tailored product: third class, cheap and functional for immigrants on their often one-way crossing of the Atlantic; ﬁrst class, plush with amenities for the afﬂuent on intercontinental journeys (Dawson 2005). In their time, passenger liners were an essential mode of transportation rarely used for leisure. Built for speed, the liners attempted to minimize the time required to cross the Atlantic or to reach a transport market in the Paciﬁc. Their design revolved around functionality. Only ﬁrst-class passengers were offered a luxurious leisure experience akin to that of a grand hotel. The majority of the passengers on board slept in tight quarters with limited space and privacy. It wasn’t until the 1960s, with the advent of the jet age, that the dramatic change from liner to pure cruise ships occurred. Fast and efﬁcient air travel took a serious toll on old liner operations, forcing many companies to reduce their offering or to go

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out of business (Hobson 1993; Lawton and Butler 1987). From the 1950s to the 1980s, progress in the cruise ships industry was uneven (Page 1987); this early cyclical progress is not atypical in the maritime industry, as noted by Stopford (1997). Currently, the industry favors long-term planning, which is essential, for important strategic decisions and commitments are often made years in advance (Véronneau and Roy 2009a). The capacity investment of cruise companies is very focused on the long term (Wie 2005). For example, a new ship design, from concept to sailing date, can take up to seven years, as in the case of the Royal Caribbean’s Oasis of the Seas. Despite a slowdown forced by the economy, the cruise industry shows modest growth and continues to outperform the hotel industry. Its history and detailed development are further discussed in Sections 8.4 and 8.5 of this chapter.

8.3 Passenger Ships Through Time As mentioned previously, the cruise industry has, overall, experienced considerable growth, with a marked ascent in the 1980s. Over time, the early converted liner that took the upper class on expedition-style cruises to colonies in the Caribbean and tourist spots in Central America gave way to the purpose-built ship of the 1970s, which revolutionized the way cruising was enjoyed and continues to be the hallmark of a multimarket industry offering a wide array of products to a market segment from all walks of life. The ancestor of the modern cruise ship, as noted in Section 8.2, is the passenger

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liner, which connected the continents as well as isolated areas around the continents. Despite its functionality, the liner suffered from a major market limitation: directional trafﬁc. Passengers traveled from A to B for a purpose, mainly, from the early 1900s to the 1950s, to emigrate from Europe to North America or to other New World destinations such as Australia. The one-way nature of emigration means inefﬁcient capacity utilization. Though some ﬁrst-class passengers made roundtrips, second- and third-class passengers, who generated the core revenue, were mainly emigrants, the very embodiment of directional trafﬁc. Because emigrants had no intention of completing a roundtrip, a liner’s capacity was underutilized on the return leg to Europe. In contrast, today’s cruise ships make use of their capacity year round by relocating to satisfy a circular, or cruising, market need. They seldom serve as mere transport, except in some rare circumstances, but rather cater solely to tourists en route to what are perceived to be pleasant or exotic destinations.

8.3.1

The 1970s: dawn of an industry

The 1970s were the dawn of the cruise industry as we know it today. First light came with the move away from converted passenger liners toward purpose-built cruise ships. Built from the ground up for leisure, these ships would change the way people experienced cruising and thereby mark the tipping point in ship design that resulted in the growth momentum of the late 1970s (Mancini 2004). The ﬁrst purpose-built ship, as credited by many, to usher in this new era in the industry was the Song of Norway, built for Royal Caribbean Cruise Line (Garin 2005).

In another area of the business, the Love Boat television series, airing in the late 1970s, proved a phenomenal marketing campaign for Princess Cruises and, by association, the entire cruise industry (Dickinson and Vladimir 2008). A commercial success not only for the TV producers but also for the industry, The Love Boat commercialized and romanticized the cruise trip as a kind of fantasy vacation.

8.3.2 The 1980s: business model reﬁnement The 1980s were the reﬁnement and redeﬁnition decade. During The Love Boat’s run, the North American cruise market tripled, serving close to 3 million passengers per year (Garin 2005). As a result, a number of companies added purpose-built ships to their ﬂeet in order to meet the growing demand. The eighties also saw a fundamental and very proﬁtable change in the way cruises generated revenue. Carnival Cruise Line’s Micki Harrison revolutionized the industry by installing slot machines on board a cruise ship (Dickinson and Vladimir 2008). So successful were the slot machines that soon after every company followed suit by building onboard casinos. As the time when cruise lines experimented with ways to add revenue streams apart from tickets sold, the eighties could be called the era of onboard revenues, which are now essential in the cruise model, a point to be discussed in Section 8.4. Product offering underwent a redeﬁnition as well. The 3- to 4-day cruise model, ﬁrst introduced in the eighties, offered a short break from the daily grind and a new type of affordable cruise (Hall and Braithwaite 1990). This format remains a

CRUISE LINES AND PASSENGERS

favorite for those cruise-goers looking for a weekend getaway. Capitalizing on the getaway theme, Carnival Cruise Lines marketed themselves as the fun ships with a massive campaign featuring Kathie Lee Gifford (Wood 2000). Finally, in the area of itinerary development, the integration of air service with cruise companies allowed them to offer an expanded variety of new and distant market destinations to satisfy the demand from their large North American customer base (Page 1987).

8.3.3 The 1990s: ﬂeet and product expansions During the 1990s, cruise brands continued to consolidate, a trend that had started in the eighties (Hobson 1993) and eventually reduced the market to a handful of corporations, giving rise to today’s cruise-industry oligopoly (Wie 2005). The stage was set for the era of ampliﬁcation and innovation. As in previous decades, each brand added more ships, but now the ships were bulking up, growing their average passenger capacity from 1500 to 2500. The increase in passengers inspired brands to rethink their onboard product offering and further develop their onboard revenue stream by charging additional fees for such amenities as high-end specialty restaurants and spa salons. In the realm of innovation, Royal Caribbean once again gets credit for pushing the envelope. In 1999, they branded themselves as an adventure in cruising, introducing a new class of ships known as the Voyager Class, which featured ice-skating rinks, rollerblade tracks, and rock-climbing walls, and perhaps quelling once and for all any lingering public sentiment that cruises are tedium on the high seas.

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8.3.4 The 2000s decade: evolution and revolution of the cruise product design The new millennium continued where the last left off, with newer ships with large passenger capacities entering the market. It was business as usual until the terror attacks of September 11, 2001. Before 9/11 most cruise companies based their operations in Miami, with ships sailing out of south Florida and passengers being ﬂown in from all over the world. After 9/11 many people were leery about ﬂying to join a ship, and bookings waned. To bypass prospective customers’ fear of ﬂying, cruise companies relocated their ships closer to market: ships started sailing out of Texas and Northeastern cities, notably New York. The unprecedented number of people now within driving distance of cruise ships freed the cruise industry from its former dependence on airlines. This proved a coup for the cruise industry, for cruisers saving on airfare had more money to spend on their cruise and so the market was opened to a new price point. The mid-2000s are further notable for Cunard’s liner revival, the fruition of which was the Queen Mary 2, the largest liner of its day, offering an experience reminiscent of the Golden Age of cruising to a new generation of cruise-goers. The Queen Mary 2 ruled the seas for only one year before being dethroned as the biggest passenger ship by Royal’s Freedom of the Seas, a supersized Voyager Class cruise ship. In 2009 Royal surpassed Freedom with its own Oasis of the Seas, currently the largest cruise ship aﬂoat and likely to remain so for at least the next four years. The Oasis of the Seas has advanced the idea of the cruise ship as a destination in itself. With so many onboard activities,

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passengers often elect to forgo disembarking in ports of call. This effect is likely to continue in tandem with the past decade’s trend to build ships of a capacity exceeding 1,500 passengers (Talley, Jin and Kite-Powell 2008); what’s more, the more onboard cruise dollars a line can capture per passenger per day, the more likely the big-ship trend is to gain momentum. It’s not unlikely that 2,500 passengers will become the new minimum capacity for competitive cruise ships. Though more behemoths are on the way, like Norwegian Cruise Line’s Norwegian Epic and Royal Caribbean’s Allure of the Seas, more modest ships continue to be ordered, and few signiﬁcant industry-wide changes appear on the horizon. Perhaps in the coming years the biggest growth percentagewise will be in exploration cruising, which is served by smaller ships and caters to an upscale clientele who can afford cruises to exotic or faraway places, such as Antarctica, Easter Island and the Galapagos, a point to be discussed in Section 8.5. Despite all the growth, ﬁnancial and physical, the industry’s future is not without challenges: The increasing size of ships and the vigorous growth of operations have compelled and will continue to compel innovative technological developments to achieve gains in efﬁciency (Véronneau and Roy 2009b).

8.4 Current Market and Economics As discussed in the previous sections, the revenue streams and markets served have greatly diversiﬁed over the years. In this section we discuss current cost and revenue structures, as well as the current geographi-

cal markets in operation and the number of cruise passengers each draws yearly.

8.4.1

Cruise revenues and expenses

This subsection examines the sources of revenue and the distribution of expenses of three major international cruise lines: Carnival Corporation, including all of its subsidiaries, such as Princess Cruises, Holland America, and P&O Cruises (Carnival); Royal Caribbean Cruises Ltd and all of its brands, such as Celebrity Cruises (RCCL); and Norwegian Cruise Line (NCL). In 2008, these three cruise lines accounted for 92.8% of the North American cruise market share and 79.2% of the international cruise market share (Cruise Industry News Annual Report 2009). 8.4.1.1 Sources of revenue Cruise line revenues consist of passenger ticket sales, onboard goods and services sales, and other revenue sources, such as fees charged to third-party concessionaires. Passenger ticket revenues include the sale of cruise passenger tickets and of air transportation to and from the ships. The passenger ticket price normally includes accommodations, most meals, some non-alcoholic beverages, and most onboard entertainment and activities. Air transportation arrangements are often offered as a convenience to cruise passengers, but the revenues they generate are largely offset by commissions and transportation fees paid to airlines (see Carnival Corporation 2005–9; Norwegian Cruise Line 2005–9; Royal Caribbean Cruises Ltd. 2005–9). Onboard revenues are generated from the sale of goods, activities and services that are not included in the ticket price. Typically, these revenues come from bar and beverage

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Table 8.1

Revenues for three major cruise lines in 2009 Carnival

Passenger tickets Onboard and other Total revenues

RCCL

NCL

$

%

$

%

$

%

9,985 3,172

75.9 24.1

4,205 1,684

71.4 28.6

1,276 579

68.8 31.2

13,157

100

5,890

100

1,855

100

Source: Carnival Corporation (2005–2009), Royal Caribbean Cruises Ltd. (2005–2009), Norwegian Cruise Line (2005–2009) (annual reports, Form 10-K).

Table 8.2 Aggregate revenues for three major cruise lines between 2005 and 2009 2009

Passenger tickets Onboard and other Total revenues

2008

2007

2006

2005

$

%

$

%

$

%

$

%

$

%

15,466 5,435

74 26

17,441 5,844

74.9 25.1

15,795 5,564

74 26

14,181 4,864

74.5 25.5

13,192 4,421

74.9 25.1

20,902

100

23,285

21,359

100

19,045

100

100

17,613

100

Source: Carnival Corporation (2005–2009), Royal Caribbean Cruises Ltd. (2005–2009), Norwegian Cruise Line (2005–2009) (annual reports, Form 10-K).

sales, spa services, shore excursions, cancellation fees, and pre- and post-cruise land packages. Some of these services are provided by independent, third-party concessionaires, who pay the cruise line a percentage of their revenues or a fee in exchange for the right to provide services on board the ships. Table 8.1 shows the distribution of revenues for the three major cruise lines in 2009. We note that a signiﬁcant part of the cruise line revenues is generated by onboard and other revenues. Table 8.2 provides the distribution of aggregate revenues for the same three major cruise lines over a ﬁve-year period, from 2005 through 2009. We note that the distribution of revenues among passenger tickets,

on the one hand, and onboard and other revenues, on the other, is relatively constant over the ﬁve-year period, with roughly three-quarters of total revenues in the cruise line industry coming from the sale of passenger tickets. 8.4.1.2 Distribution of expenses The cruise operating expenses consist mainly of the following: (1) travel agent commissions, air and other transportation expenses, and costs directly related to passenger ticket revenue, such as port costs and credit card fees; (2) onboard and other expenses, such as the cost of goods and services sold on board the ships and other costs directly related to onboard and other revenues; (3) payroll and related expenses for shipboard

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Table 8.3 Operating expenses for three major cruise lines for 2009 Carnival

Commissions, transportation and other Onboard and other Payroll and related Fuel Food Other ship operating Total cruise operating expenses

RCCL

NCL

$

%

$

%

$

%

1,917

14.6

1,031

17.5

311

16.8

461 1,498 1,156 839 2,233 8,104

3.5 11.4 8.8 6.4 17.0 61.6

459 683 601 348 960 4,082

7.8 11.6 10.2 5.9 16.3 69.3

158 318 163 119 220 1,289

8.5 17.1 8.8 6.4 11.9 69.5

Source: Carnival Corporation (2005–2009), Royal Caribbean Cruises Ltd. (2005–2009), Norwegian Cruise Line (2005–2009) (annual reports, Form 10-K).

personnel; (4) fuel expenses, including storage and delivery; (5) food expenses for both passengers and crew; and (6) other ship-operating expenses, such as repairs and maintenance. Table 8.3 shows the distribution of operating expenses for the same three major cruise lines referred to above, both in dollars and as a percentage of total revenues for 2009. From Table 8.3 it is clear that Carnival enjoys a competitive advantage as a result of a leaner operating ratio (61.6%), compared to 69.3% and 69.5% for its competitors. This advantageous operating ratio can be partly explained by a gross margin of 61.3% on passenger ticket revenues (75.9% minus 14.6%) compared to 53.9% and 52% for RCCL and NCL respectively. At ﬁrst glance, it would seem that onboard and other expenses would also favor Carnival, but a closer look at gross margins points to a slight advantage for NCL. NCL is, however, posting relatively high payroll expenses (17.1% of total revenues) compared to the other two cruise lines, although its other ship-operating expenses

are lower. This can be partly explained by the fact that NCL has recently been operating three US-ﬂagged ships in the Hawaiian market. This experiment has proven costly because of the unionized US crew. The reason NCL has US-ﬂagged ships is that they allow NCL to cover all Hawaiian itineraries without the inclusion of a foreign port. Due to cabotage laws, foreign-ﬂagged ships cannot operate without penalty in a domestic market without calling at a foreign port. In the United States this law is speciﬁcally called the Passenger Vessel Services Act (PVSA), which was passed on June 19 1886 (US Customs and Border Protection 2010). This act is a cabotage law, passed to protect US shipping companies. To call on a foreign port while servicing inter-island itineraries in Hawaii would be prohibitively costly in both fuel and time. Hence it has been argued by researchers at the University of Hawaii that the current law just hampers current cruise tourism development in Hawaii and in the US, and should therefore be repealed (Mak, Sheehey and Toriki 2009).

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Table 8.4

Aggregated operating expenses for three major cruise lines in 2007, 2008 and 2009 2009 $

Commissions, 3,259 transportation and other Onboard and other 1,078 Payroll and related 2,499 Fuel 1,920 Food 1,306 Other ship operating 3,413 Total cruise operating 13,475 expenses

2008 %

$

15.6

2007 %

3,769 16.2

5.2 1,141 12.0 2,507 9.2 2,757 6.2 1,323 16.3 3,530 64.5 15,027

$

2006 %

3,501 16.4

$

2005 %

$

3,093 16.2

%

2,823 16.0

4.9 1,106 5.2 970 5.1 859 4.9 10.8 2,357 11.0 2,073 10.9 1,953 11.1 11.8 1,836 8.6 1,565 8.2 1,194 6.8 5.7 1,194 5.6 1,023 5.4 977 5.5 15.2 3,316 15.5 2,865 15.0 2,615 14.8 64.5 13,310 62.3 11,606 60.9 10,419 59.2

Source: Carnival Corporation (2005–2009), Royal Caribbean Cruises Ltd. (2005–2009), Norwegian Cruise Line (2005–2009) (annual reports, Form 10-K).

Table 8.5

Operating and net income for three major cruise lines in 2009 Carnival

Total revenues Total cruise operating expenses Other operating expenses Operating income Net income

RCCL

NCL

$

%

$

%

$

%

13,157 8,104 2,899 2,154 1,790

100 61.6 22.0 16.4 13.6

5,890 4,082 1,325 483 159

100 69.3 22.5 8.2 2.7

1,855 1,289 394 171 67

100 69.5 21.2 9.2 3.6

Source: Carnival Corporation (2005–2009), Royal Caribbean Cruises Ltd. (2005–2009), Norwegian Cruise Line (2005–2009) (annual reports, Form 10-K).

Table 8.4 provides the distribution of aggregate operating expenses, in millions of dollars and as a percentage of total aggregated revenues, for the three major cruise lines for the 2005 through 2009 period. As the table shows, fuel costs, reﬂecting market conditions, increased signiﬁcantly between 2005 and 2008. Indeed, during that period, fuel costs rose from 6.8% of total revenues to 11.8%. However, the economic downturn of late 2008 and 2009 lowered fuel

costs in 2009. With the other expenses remaining relatively stable, it can be argued that the increase in fuel costs is responsible for the rise in total cruise-operating expenses with respect to total revenues. Table 8.5 shows the proﬁtability level of the three major cruise lines for 2009. It starts with total revenues (from Table 8.1), from which total cruise-operating expenses (from Table 8.3) and other operating expenses are deducted to obtain the

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operating income. Other operating expenses include marketing, general and administrative expenses, and depreciation and amortization. As Table 8.5 shows, these other operating expenses are relatively constant from one cruise line to another. Finally, net income is obtained by deducting (or adding) non-operating expenses (or income), such as interest and income taxes. Overall, the ﬁnancial performance of the cruise line industry is quite good compared to other sectors in related industries. For example, the Marriott group reported an operating income of 5.8% and a net income of 3.1% in 2009. In the entertainment sector, a leader like Disney reported a net income of 9.1% in 2009. In the travel industry, a major group like TUI Travel reported an operating income of 3.2% and a small net loss in 2009.

8.4.2

Markets and itineraries

There are two markets at play in the cruise industry, the passenger market and the destination market. The passenger market is the set of characteristics describing passengers, including the type of vacation they want to experience. The destination market is the set of characteristics describing the destination. The success of a line depends on its ability to match these two markets to a ship. The matching of a ship to a given destination and passenger market, or simply “itinerary planning,” is a strategic decision for each line. Itineraries are planned years in advance, and deployment to new destinations is taken very seriously (Véronneau and Roy 2009a). Cruise ships can be classiﬁed into four main types according to the markets they service. Type one ships are the small, expedition-style ships. These gener-

ally accommodate fewer than ﬁve hundred passengers and call at small exotic destinations that do not necessarily possess cruiseship infrastructure. Type two ships are cruisers with a capacity of 500 to 1500 passengers. These ﬁll smaller, niche markets with cruise-ship infrastructure or call to new markets that are not quite mainstream. Type three ships are what have become the new medium-sized ships, with a capacity of 1600 to 2400 passengers. These serve markets that have a medium demand or mature markets that are limited in infrastructure or by the size of the ships they can accommodate, such as Alaska. Type four ships are the large ships, with capacities from 2,500 passengers to, currently, about 5,400 passengers. They serve mature markets in high demand and cater to passengers who see the ship as a destination. A ship’s size, however, does not necessarily determine its level of service; instead, the crew-to-passenger ratio is the measure that positions a ship on the mass-market-toluxury spectrum. Generally, smaller ships have a better crew-to-passenger ratio, provide better service and, therefore, charge higher fees.

8.4.3

Passenger market maps

In order that the scale of the global market and each port’s share of passengers could be appreciated, trafﬁc maps were generated using the data from the Cruise Industry News Annual Report (2009), an independent publication and a reliable source for data on the cruise industry. Though not all destinations are represented, all currently signiﬁcant markets are, with the exception of the emerging expedition market for destinations such as Antarctica, the Galapagos, and the South Paciﬁc islands. Large disparities in

147

CRUISE LINES AND PASSENGERS

Passenger Traffic North American Ports 2008 Skagway Haines Seward Juneau Sitka Wrangell Gulf of Ketchikan Prince Rupert Alaska Vancouver Seattle

Honolulu

5,000 - 183,462 183,463 - 523,730 523,731 - 1,496,853 1,496,854 - 4,137,531

Hudson Bay

Charlottetown

Corner Brook

Quebec Saint John Montreal

St. SydneyJohn's Halifax Boston Brooklyn Cape Liberty

Manhattan Philadelphia Baltimore San Francisco Norfolk Whittier Los Angeles Houston New Charleston Bermuda Orleans San Diego Jacksonville Galveston Cape Canaveral Atlantic Tampa Ocean Everglades Gulf of Mexico Miami Key West Ca San Juan rib Pacific bean Ocean Sea

Figure 8.1 North American passenger market. Source: Original map using data from Cruise Industry News Annual Report (2009).

size within a given market cluster are accounted for by the fact that the larger ports within a cluster are usually main turnaround ports, while smaller locations are various destination spots chosen by cruise lines in their itinerary planning. It is also worth noting that some port trafﬁc is associated with cities and others with only a country, as current data availability and reporting by various agencies permitted. Unfortunately, no data set is perfect, and few are kept properly in this global industry. Lastly, in a handful of instances the data for a given port were not available in 2008, so

the 2007 data were used. Even though this is not an ideal situation, the overall global picture is not adversely affected. As can be seen in the North American Passenger Market map (see Figure 8.1), there are clear geographical clusters of activity. (Mexican and Caribbean ports are represented on different maps.) For each market segment, we have also computed the average annual growth for each port or country, depending on data availability. The growth rates relate the number of cruise passengers for 2008 to the number of passengers for 1999

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SIMON VÉRONNEAU AND JACQUES ROY

Baltimore Bermuda Brooklyn Boston Canaveral Cape Liberty Charleston Charlottetown Corner Brook Everglades Galveston Haines Halifax Honolulu Houston Jacksonville Juneau Ketchikan Key West Los Angeles Manhattan Miami Montreal New Orleans Norfolk Philadelphia Prince Rupert Quebec San Diego San Francisco San Juan Seattle Seward Sitka Skagway Saint John, NB St. John’s, NF Sydney, NS Tampa Vancouver Whittier Wrangell Average

–50

0

50

100

150

200

The growth rates relate the number of cruise passengers for 2008 with the number of passengers for 1999 using the following formula: Passengers in 2008 = Passengers in 1999 x (1 + r)9, where “r” is the growth rate expressed as a percentage.

Figure 8.2

Average annual passenger trafﬁc growths (%) – North America (1999–2008).

using the following formula: Passengers in 2008 = Passengers in 1999 x (1 + r)9, where “r” is the growth rate expressed as a percentage. In some cases, intermediate points were missing, so the number of years observed may be fewer than nine. However, this does not impact the overall result. It is to be noted that ports showing a double-digit

growth are newer destination ports for which the data did not go back to 1999 (see Figure 8.2). The main turnaround ports serving the west coast of Mexico are Los Angeles and San Diego, while those for the east coast are Galveston, Tampa, Miami and Fort Lauderdale. As can be seen in Figure 8.3 Cozumel is the leading cruise destination.

149

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Passenger Traffic Mexican & Central American Ports 2008

Ensenada

2,665 - 121,238 121,239 - 442,791 442,792 - 818,716 818,717 - 2,569,596

Gulf of Mexico

La Paz Mazatlan

Cabo San Lucas

Progreso

Puerto Vallarta

Cozumel Zihuatanejo Acapulco

Pacific Ocean

Chiapas

Caribbean Sea

Belize Honduras

Guatemala

Nicaragua

Costa Rica

Panama

Figure 8.3 Mexican and Central American market. Source: Original map using data from Cruise Industry News Annual Report (2009).

As for Ensenada’s popularity, it can be explained by the 3–4-day cruise market in the west coast that needs a foreign port to respect Cabotage law. The ports that have had the biggest above-average growth are Progresso and Cabo San Lucas in Mexico and Roatan in Honduras. These ports, with their limited infrastructure, have been welcomed as a new offering in their respective regions (see Figure 8.4). The extraordinary percentage growth in Chiapas can be explained by its low number of passengers, which makes

just a handful of additional ship calls an important percentage growth. In some markets, notably the Caribbean market, data for cruises to private destinations are unavailable. Some cruise lines elect to have their own private islands, like Disney Cruise Line’s Castaway Cay, or a private beach, like Royal Caribbean’s Labadee, an enclosed area on the coast of Haiti. These areas are fully controlled and in some cases partially staffed by shipboard personnel for the day. These private destinations are very popular with cruise-goers

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SIMON VÉRONNEAU AND JACQUES ROY

Acapulco Belize Cabo San Lucas Chiapas Costa Rica Cozumel Ensenada Guatemala Honduras La Paz, Baja Mazatlan Nicaragua Panama Progreso Puerto Vallarta Zihuatanejo Average –37.5

0

37.5

75.0

112.5

150.0

The growth rates relate the number of cruise passengers for 2008 with the number of passengers for 1999 using the following formula: Passengers in 2008 = Passengers in 1999 x (1 + r)9, where “r” is the growth rate expressed as a percentage.

Figure 8.4 Average annual passenger trafﬁc growths (%) – Mexico and Central America (1999–2008).

who ﬁnd the ideal version of their Caribbean dreams. As can be seen in Figure 8.5 we have no data for these destinations. As can be seen in Figure 8.6, the destinations with negative growth have in common the level of maturity of the destinations. As explained earlier, there are market cycles at play. When a destination for cruise passengers is exhausted, repeating cruisers demand novel itineraries to destinations they have yet to see. An exception to this is mature destinations that have developed their infrastructure to serve bigger ships for the mass market, e.g. St. Maarten, Nassau.

The European market in Figure 8.7 is experiencing rapid growth, as many tourists prefer sampling many cultures one day at a time from the comfort of their ships to traveling by bus and repeatedly changing hotels. As a result, the European market might be slowly reaching the point of maturation or saturation (see Figures 8.7 and 8.8). It will be interesting to see whether the market will remain sustainable, or recede and stagnate as Alaska’s did. The Far East and Oceania are the current growth markets, making the transition from exotic/expedition cruising to mass-

151

CRUISE LINES AND PASSENGERS

Lucaya

Passenger Traffic Caribbean Ports 2008

Atlantic Ocean

9,146 - 170,000 170,001 - 380,671 380,672 - 1,076,000 1,076,001 - 2,094,208

Nassau Turks and Caicos Caymans San Juan

Jamaica

US Virgin St.Maarten Islands St.Martin St.Barts Tortola St.Kitts

Car ib b e a n

Aruba

Sea

Saint Vincent and the Grenadines

Curacao Bonaire

La Guaira

Grenada

Antigua Guadeloupe Dominica Martinique St. Lucia Barbados Trinidad and Tobago

Figure 8.5 Caribbean ports passenger market. Source: Original map using data from Cruise Industry News Annual Report (2009).

market tourism with medium-sized ships. The infrastructure in Asian countries, as well as in New Zealand and Australia, is currently being upgraded in order to accept larger ships. These destinations appeal to passengers who want to tour an exotic location from the safety and comfort of a ship. Further fueling the region’s growth are the growing middle and upper classes in Asia who want to experience a Westernstyle cruise, even if only to tour their backyard. Future growth in the Chinese market is uncertain. However, growth in the Austral-

ian market is expected, fueled by the local and international populations and by substantial investments to improve terminals and general cruise facilities. Hence the popularity of Hong Kong and Singapore (see Figure 8.9) can be partially attributed to their capacity to receive ships of various sizes and to their overall infrastructure quality, which makes them a prime choice as a turnaround port or a resupply port. The growth in Oceania and Asia is likely to continue, as shown in Figure 8.10, as bigger ships will enter the market

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SIMON VÉRONNEAU AND JACQUES ROY

Antigua Aruba Barbados Bonaire Caymans Curaçao Dominica Grenada Guadeloupe Jamaica Lucaya (Freeport) La Guaira Martinique Nassau San Juan St. Barts St. Kitts St. Lucia St. Maarten St. Martin St. Vincent & Grenadines Tortola, BVI Trinidad & Tobago Turks & Caicos US Virgin Islands –37.5 0 37.5 75.0 112.5 150.0 The growth rates relate the number of cruise passengers for 2008 with the number of passengers for 1999 using the following formula: Passengers in 2008 = Passengers in 1999 x (1 + r)9, where “r” is the growth rate expressed as a percentage.

Figure 8.6

Average annual passenger trafﬁc growths (%) – Caribbean (1999–2008).

when new port facilities come into service and due to an increase in demand for cruises and tourism product from a fast-emerging economy in Asia. As for Australia and New Zealand, they are likely to become the new wilderness and outdoor cruise destination of choice given their many pristine national parks and unique fauna.

8.5 Future Perspectives and Trends The average size of ships should continue to stabilize at the current market mix, and passenger classes and overall offerings will likely continue to show parallel growth.

This section discusses the implications for practitioners and researchers.

8.5.1

Future ships

The economic downturn of 2008–10 has forced the cruise industry to slow its rate of expansion. Though a number of ships continue to enter the North American and European markets (see Tables 8.6 and 8.7), shipyards’ order books are much less full than they were in the previous two decades; indeed, some shipyards are bound for closure unless they get help from their respective states. Regrouping after the boom of the recent past means cruise lines are currently consolidating and restructuring to achieve

153

CRUISE LINES AND PASSENGERS

Passenger Traffic European Ports 2008 6,128 - 273,817 273,818 - 660,000 660,001 - 1,237,078 1,237,079 - 2,069,651

Bergen

Oslo

Helsinki Stockholm Tallinn

North Sea

Copenhagen Baltic Sea Kiel Hamburg Gdansk London Harwich Amsterdam Dover Southampton Savona Genoa Venice Monaco Nice Cannes Marseille Livorno

Atlantic Ocean

Odessa

Dubrovnik Barcelona Lisbon

Civitavecchia Naples

Valencia Palma

Cadiz

Palermo

Black Sea

Bari Istanbul Messina Kusadasi Piraeus Valletta M e d i t e r ra n e a n Limassol Sea

Canary Islands

Figure 8.7 European passenger market. Source: Original map using data from Cruise Industry News Annual Report (2009).

some efﬁciency in their new, somewhat inﬂated scale of operations. Cruise lines, wishing to locate their ships in the most promising market, are delaying certain strategic decisions until they see the overall ﬁnancial picture and any resulting demand for tourism.

8.5.2

Future expansion and growth

Despite the slowdown in ship orders and the slight reduction in demand and disposable income, the cruise industry will no doubt continue single-digit growth for

many destinations. This growth will be experienced in parallel, though not necessarily in proportion, for a number of markets, which can be classiﬁed into three broad categories. First, signiﬁcant growth will continue for small luxury expeditions. While the market growth could be impressive in terms of percentages, the small size of these ships means the absolute number of passengers will never rival the two categories discussed below. Nevertheless, this category is bound to sustain the interest of a population that is typically unfazed by global ﬁnancial

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SIMON VÉRONNEAU AND JACQUES ROY

Amsterdam Barcelona Bari Bergen Canary Islands Cadiz Bay Cannes Civitavecchia Copenhagen Dubrovnik Dover Gdansk Genoa Hamburg Harwich Helsinki Istanbul Kiel Kusadasi Limassol Lisbon Livorno London Marseille Messina Monaco Naples Nice Odessa Oslo Palermo Palma Piraeus Savona Southampton Stockholm Tallinn Valencia Valletta Venice Average

–22.5

0

22.5

45.0

67.5

90.0

The growth rates relate the number of cruise passengers for 2008 with the number of passengers for 1999 using the following formula: Passengers in 2008 = Passengers in 1999 x (1 + r)9, where “r” is the growth rate expressed as a percentage.

Figure 8.8

Average annual passenger trafﬁc growths (%) – Europe (1999–2008).

turmoil. The cruises will continue to focus on faraway destinations not yet mapped as tourist sites or commercially developed; these include protected areas, such as the Galapagos Islands and some undeveloped areas on the west coast of Australia, and remote places like the Arctic and Antarctica. The second category that will continue low single-digit or ﬂat growth in the upcoming years is the medium-sized ship, which

targets emerging destinations or those incapable of accepting bigger ships. These include upcoming ports in Australia and New Zealand and the new Far East market cities of Singapore and Hong Kong. Medium-sized ships also cover markets restricted in ship size, such as the Alaskan and New England markets. This market segment typically targets and appeals to the upper middle class, who can afford a massmarket yet exotic and somewhat exclusive

155

CRUISE LINES AND PASSENGERS

Passenger Traffic Far East & Oceania Ports 2008

Yokohama Shanghai

86,383 - 250,000 250,001 - 697,631 697,632 - 920,700 920,701 - 2,475,500

Hong Kong North Pacific Ocean South China Sea Penang Klang

Philippine Sea

Singapore

Indian Ocean

Papeet

Coral Sea Noumea

Sydney Tasman Melbourne Sea

Auckland

South Pacific Ocean

Figure 8.9 Far East and Oceania passenger market. Source: Original map using data from Cruise Industry News Annual Report (2009).

destination. However, because this class of passengers is affected by the economic downturn, the earning potential of lines vying for their dollar will suffer. Last are the large ships serving mature, mass-tourism markets, such as the Caribbean and the main Mediterranean market, which can accommodate ships carrying in excess of 2,600 passengers. These ships, destinations in themselves and as appealing to prospective passengers as any geographical destination, will call only at fully developed cities or private resorts with solid tendering facilities or a private pier.

8.5.3

Growth and expansion markets

Current growth is in new markets; old markets, having reached saturation, are receding, as in the case of Alaska. Explosive growth is in the Far East, Middle East and Australian markets, which are emerging with new facilities to attract the cruise ship business. Expedition tourism will continue to gain popularity, fueled as it is by complementary interests: that of a select, afﬂuent population and that of an industry interested in appealing to that population for the

156

SIMON VÉRONNEAU AND JACQUES ROY

Auckland Hong Kong Klang Melbourne Noumea Papeete Penang Shanghai Singapore Sydney Yokohama Average –7.5

0

7.5

15.0

22.5

30.0

The growth rates relate the number of cruise passengers for 2008 with the number of passengers for 1999 using the following formula: Passengers in 2008 = Passengers in 1999 x (1 + r)9, where “r” is the growth rate expressed as a percentage.

Figure 8.10 Average annual passenger trafﬁc growths (%) – Far East and Oceania (1999–2008).

passenger-per-day revenue it generates. Remote destinations devoid of piers and other company installations and unspoiled by mass tourism are what draw these passengers. Doubtless many with the taste for discovery and the funds to satisfy it are motivated by the growing number of documentaries featuring secluded and outof-the-way places, such as Antarctica and the many historic islands dotting the Paciﬁc Ocean. Lastly, the newest member of the cruising family, and one bound for sustained double-digit growth in the coming years, is

the inland waterway cruise in Europe. Europe’s extensive network of canals and rivers, once constructed or used for transport but relegated to a fallback position by modern trucking, has been reinvented by tourists who have discovered that traveling Europe on a small river-cruise ship is much more comfortable than bouncing along by bus – and they avoid the hassles of hauling luggage and stalling in city trafﬁc. These riverboats, despite being small, offer amenities far surpassing those of the average hotel and restaurant associated with a typical bus tour, but at a comparable price point.

N/A 130,000 117,000 N/A 220,000 32,000 36,000 118,000 86,000 150,000 65,000 220,000 32,000 130,000 118,000 122,000 65,000 32,000 118,000 122,000 65,000

698 450 940 500 1,100 250 735 798 750 500 300 798 750 500

Celebrity Eclipse Nieuw Amsterdam Norwegian Epic Marina Allure of the Seas Seabourn Sojourn

Carnival Magic Unnamed Dream Unnamed Unnamed

Unnamed Fantasy Unnamed option

Gross registered tonnage

N/A 672 640 N/A 1,100 250 250

Cost (in US$ millions)

Independence Carnival Dream Celebrity Equinox Pearl Mist Oasis of the Seas Seabourn Odyssey Silver Spirit

Ship

North American market ships

Source: Cruise Industry News Annual Report, 2009.

2009 ACL Carnival Celebrity Pearl Seas RCI Seabourn Silversea 2010 Celebrity HAL NCL Oceania RCI Seabourn 2011 Carnival Celebrity Disney Oceania Seabourn 2012 Celebrity Disney Oceania

Cruise line

Table 8.6

2,850 2,500 1,260

3,650 2,850 2,500 1,260 450

2,850 2,100 4,200 1,260 5,400 450

114 3,650 2,850 210 5,400 450 540

Passenger capacity

Meyer Meyer Fincantieri

Fincantieri Meyer Meyer Fincantieri T. Mariotti

Meyer Fincantieri STX Fincantieri STX T. Mariotti

Chesapeake Fincantieri Meyer Irving STX T. Mariotti Fincantieri

Contracted shipyard

TBA TBA World

Caribbean TBA TBA World World

Eur./Carib. TBA Caribbean World Caribbean World

Domestic Caribbean Eur./Carib. Eur./Carib. Caribbean World World

Sailing area

Fall TBA TBA

Fall Fall TBA July Summer

Summer June March Sept. TBA June

Q3 Fall July June Nov. June Q4

Scheduled delivery

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SIMON VÉRONNEAU AND JACQUES ROY

Table 8.7 European market ships Cruise line 2009 AIDA Costa Costa MSC 2010 AIDA Costa Cunard MSC P&O Ponant Ponant 2011 AIDA Costa MSC 2012 AIDA Costa MSC

Ship

Cost (in US$ millions)

Gross registered tonnage

Passenger capacity

Contracted shipyard

Sailing area

Scheduled delivery

AIDAluna Luminosa Paciﬁca Splendida

400 500 580 550

68,500 92,700 112,000 133,500

2,030 2,260 3,000 3,300

Meyer Fincantieri Fincantieri STX

Eur./Canary Eur./Canary Med. Med./Carib.

March April May June

AIDAblu Deliziosa QE Magniﬁca Azura Le Boreal L’Austral

525 500 700 400 695 150 150

71,000 92,700 92,000 90,000 116,000 10,600 10,600

2,174 2,260 2,092 2,550 3,076 264 264

Meyer Fincantieri Fincantieri STX Fincantieri Fincantieri Fincantieri

TBA TBA TBA Med./Carib. TBA World World

Summer January Fall Spring Spring April July

Unnamed Unnamed Meraviglia

570 750 500

71,000 114,200 90,000

2,174 3,012 2,550

Meyer Fincantieri STX

TBA TBA TBA

April TBA February

Unnamed Unnamed Favolosa

575 750 500

71,000 114,200 90,000

2,174 3,012 2,550

Meyer Fincantieri STX

TBA TBA TBA

May TBA February

Source: Cruise Industry News Annual Report, 2009.

8.5.4

Implications for researchers

The paucity of research on cruise-ship management, which has many researchers calling for more to be carried out, can be attributed to three main causes, which might be interrelated: (1) few researchers specialize in the industry; (2) access to the industry, given its competitive status in an oligopolistic market, is limited; and (3) few quality outlets for such research exist. Still, an industry generating trillions in economic impact worldwide compels further study.

Future research should attempt to look at the onboard operations of these large ships and at the revenue structures in place, e.g., concessions like spas and shops.

8.5.5

Implications for practitioners

Markets are bound to mature and, as a result, experience a receding, or at best ﬂat, demand. Recognizing and understanding such market movements are crucial if industry stakeholders – government agen-

CRUISE LINES AND PASSENGERS

cies, tour operators, and populations and businesses local to destinations – are to develop strategies aligned with future cruise line decisions and market assignments. Still, the cyclical nature of the shipping industry is nothing new, and tourists can be ﬁckle. They seek not only bargains but novelty too. While there remains some demand for repeating past itineraries, a large segment of cruise-goers want to experience novel markets in a familiar brand environment. Where the actual saturation point of any market lies is unknown. No one can really predict market trepidation or the ﬁckleness of passenger taste.

References Carnival Corporation (2005–2009) Annual Reports. United States Securities and Exchange Commission, Form 10-K. Cruise Industry News Annual Report (2009) Cruise Industry News Annual Report 2009. New York: Cruise Industry News. Dawson, P. (2005) The Liner: Retrospective and Renaissance. New York: W. W. Norton. Dickinson, B. and Vladimir, A. (2008) Selling the Sea: An Inside Look at the Cruise Industry. 2nd edn. Hoboken, NJ: John Wiley & Sons. Garin, K. A. (2005) Devils on the Deep Blue Sea. New York: Penguin Group. Gibson, P. (2006) Cruise Operations Management. Oxford: Butterworth Heinemann. Hall, J. A. and R. Braithwaite (1990) Caribbean cruise tourism: a business of transnational partnerships. Tourism Management 11(4): 339–47. Hobson, J. S. P. (1993) Analysis of the US cruise line industry. Tourism Management 14(6): 453–62. Lawton, L. J. and R. W. Butler (1987) Cruise ship industry: patterns in the Caribbean 1880– 1986. Tourism Management 8(4): 329–43.

159

Mak, J., C. Sheehey and S. Toriki (2009) The Passenger Vessel Services Act and America’s cruise tourism industry. Working Paper 200917, University of Hawaii at Manoa. Mancini, M. (2004) Cruising: A Guide to the Cruise Line Industry. 2nd edn. Clifton Park, NY: Thomson Learning. Marti, B. E. (2004) Trends in world and extendedlength cruising (1985–2002). Marine Policy 28(3): 199–211. Norwegian Cruise Line (2005–2009) Annual Reports. United States Securities and Exchange Commission, Form 10-K. Page, K. (1987) The future of cruise shipping. Tourism Management 8(2): 166–8. Quartermaine, P. and B. Peter (2006) Cruise: Identity, Design and Culture. New York: Rizzoli International Publications. Royal Caribbean Cruises Ltd. (2005–2009) Annual Reports. United States Securities and Exchange Commission, Form 10-K. Stopford, M. (1997) Maritime Economics. London: Routledge. Talley, W. K., D. Jin and H. Kite-Powell (2008) Determinants of the severity of cruise vessel accidents. Transportation Research Part D: Transport and Environment 13: 86–94. Teye, V. B. and D. Leclerc (1998) Product and service delivery satisfaction among North American cruise passengers. Tourism Management 19(2): 153–60. Toh, R. S., M. J. Rivers and T. W. Ling (2005) Room occupancies: cruise lines out-do the hotels. International Journal of Hospitality Management 24(1): 121–35. US Customs and Border Protection (2010) The Passenger Vessel Services Act (an Informed Compliance publication). www.cbp.gov/xp/ cgov/trade/legal/informed_compliance_ pubs/ (accessed June 15, 2010). Véronneau, S. (2008) Three essays on cruise ship supply chain management. PhD thesis, Université de Montréal. Véronneau, S. and J. Roy (2009a) Global service supply chains: an empirical study of current

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practices and challenges of a cruise line corporation. Tourism Management 30(1): 128–39. Véronneau, S. and J. Roy (2009b) RFID beneﬁts, costs, and possibilities: the economical analysis of RFID deployment in a cruise corporation global service supply chain. International Journal of Production Economics 122(2): 692–702. Wie, B.-W. (2005) A dynamic game model of strategic capacity investment in the cruise line industry. Tourism Management 26(2): 203–17. Wood, R. E. (2000). Caribbean cruise tourism: globalization at sea. Annals of Tourism Research 27(2): 345–70.

Further Reading Elder, G., E. Pavalko and E. Clipp (1992) Working with Archival Data: Studying Lives. Newbury Park, CA: Sage. Fetterman, D. (1998) Ethnography Step by Step. Thousand Oaks, CA: Sage. Van Maanen, J. (1988) Tales of the Field: On Writing Ethnography. Chicago, IL: University of Chicago Press.

9

Ferry Passenger Markets Tor Wergeland

9.1

Introduction

World ferries play a very important role in global transportation. The estimate is that a little more than two billion passengers were ferried in 2009 in about eight million trips – all ships included. This is almost on a par with the airline industry, which recorded 2.24 billion passengers in 2007 (ShipPax 2010). In addition to the passengers, the ferries carried in 2009 no less than 252 million cars, 677,000 buses and 32 million trailers. These vehicles represent a queuing line that would go 41 times around the globe. The 2009 ﬁgures are down compared to 2008 – passenger numbers by 1% and vehicle trafﬁc down by 1–2%, and this has had a signiﬁcant negative impact on a business used to growth, and with capacity expansions requiring growth. The ﬁnancial crisis of 2008–9 deﬁnitely affects the ferry industry, also in a negative way.

9.2

Deﬁnition

It is quite a task to precisely deﬁne what a ferry is. An internet search reveals several deﬁnitions, two of which are:

•

•

A ferry is a form of transportation, usually a boat, but sometimes a ship, used to carry (or ferry) primarily passengers, and sometimes vehicles and cargo as well, across a body of water. Most ferries operate on regular, frequent, return services. (en.wikipedia. org/wiki/Ferry) A specially constructed vessel to bring passengers and property across rivers and other bodies of water from one shoreline to another, making contact with a thoroughfare at each terminus. (www.answers.com, from West’s Encyclopedia of American Law)

These deﬁnitions may appeal intuitively, but they are not very operational, as they do not give any indication of how the ferry should be “specially constructed,” or any indication of size, speed, etc. These deﬁnitions have, therefore limited practical value. The leading provider of ferry information, ShipPax, employs the following deﬁnition: A ferry is a ship larger than 1000 GT that sails on a regular line and has passenger accommodation and is using ro-ro technology for

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

162

TOR WERGELAND

Travel motive Ship as the destination

The “cargo” mix Cargo only Passengers only

To get from A to B

Ferry passenger market Commuter ferry Car ferry

Fast ferry Cruise ferry

Ro-pax ferry

Cruise market Ro-ro ferry

Ro-ro market

Transportation

Entertainment Travel motive

Figure 9.1

Overlaps in the ferry market.

the transportation of cars and commercial vehicles (if any), having sufﬁcient free height on car deck(s) for this. (Adapted from ShipPax 2008)

The cut-off point of 1000 GT is here an important delimitation, effectively eliminating many small ferries. The classiﬁcation societies deﬁne a passenger ship as a ship carrying more than 12 passengers, and if less (or with vehicles only) it is normally a ro-ro vessel. The ferry is a rather complicated vessel, as we can have pure passenger ferries as well as pure ro-ro ferries, but ferries may transport cargo, passengers and vehicles (cargo and passenger). It is, therefore, not so easy to precisely deﬁne the passenger ferry market, because many ferries will, directly or indirectly, be in competition with vessels associated with separate shipping segments like the ro-ro segment and the cruise segment. Figure 9.1 is an attempt at illustrating the overlaps among types of ferries

and types of markets along two dimensions – the travel motive and the mix of cargo. Ferry passengers have different motives for choosing a particular ferry. Some just want to get from A to B, so the motive is pure transportation; some want to go on a ship just for the fun of it, so the ship itself becomes a destination; and one may have all sorts of combinations in between. If passenger transportation is then combined with cargo transportation, the picture quickly becomes too complicated for simple deﬁnitions or delimitations. In this chapter the ShipPax deﬁnitions are used, and Table 9.1 summarizes the total capacities for the four relevant segments. Table 9.1 shows that although the conventional ferries constitute 24% of the total number of vessels in all categories, they account for 54% of passengers carried. Cruise vessels constitute 9% of the total number, but 23% of the passengers. The fast ferries have 37% of the number of vessels, but only 22% of the passengers.

163

FERRY PASSENGER MARKETS

Table 9.1 Fleet for four segments 2008, including ships on order Capacities (’000) Ship type

Number of ships

Passengers

Cars

Lane meters

Average passenger capacity

1121 1719 1431 419 4690

1105 444 24 457 2030

259 24 2137 n/a 2420

739 8 1563 n/a 2310

986 258 17 1091 433

Ferry High-speed ferry Ro-ro vessel Cruise vessel All types Source: ShipPax databases.

Only very few of the fast ferries have car and ro-ro capacity.

9.3 The Ferry Market: A Brief History Ferries are old. The ferryman Charon even appears in Greek mythology as the one carrying people to the underworld over the river Styx. Since then, history tells of ferryboats powered by oxen or horses, and of numerous cable ferries used to cross rivers. It is claimed that the oldest continuous ferry service is to be found in Connecticut, USA, connecting the small towns of Rocky Hill and Glastonbury; it has been in operation since 1655, only ceasing operation in winter when the river is frozen.1 The ﬁrst steam-powered ferry is said to be the Juliana, founded by John Stevens, which started a service between New York and Hoboken, New Jersey in 1811 in competition with Livingston, who had a monopoly there. Stevens was forced out of this business after only one year, because the New York Legislature enacted a law prohibiting steamboats not authorized by the state monopoly.2

Using ferries to carry train wagons started as early as 1833, when the Monkland and Kirkintilloch Railway operated a wagon ferry on the Forth and Clyde Canal in Scotland. In 1836 the train ferry Susquehanna started operating between Havre de Grace and Perriville on the Susquehanna River. The ﬁrst train ferry in a “modern” design – the Leviathan – started operations in 1850 between Granton and Burntisland on the Firth of Forth, near Edinburgh. Although passenger and train ferries had been in operation for quite some time, one could argue that the history of the modern ferry market starts in North America, on the west coast near Vancouver and Seattle. The ﬁrst wooden side-wheeler to travel between Victoria and New Westminster on the Fraser River was the Enterprise, built in San Francisco in 1861 and operated by the Hudson’s Bay Company from 1862 to 1885. At 143 feet, she carried passengers, mail and freight twice a week in summer and once a week in winter, ice permitting. Originating in the early 1900s, the Puget Sound ferry service was initially provided by a number of companies using small steamers known as the “Mosquito Fleet.” By 1929, the ferry industry had consolidated

164

TOR WERGELAND

into two companies: Puget Sound Navigation Company and Kitsap County Transportation Company. A strike in 1935 forced Kitsap out of business and left the Puget Sound Navigation Company, commonly known as the Black Ball line, with primary control of the ferry service on Puget Sound. In 1951 this company was transformed into Washington State Ferries (WSF), a company that is still in operation and is one of the largest ferry companies in the world. The ﬁrst car ferry is considered to be the Motor Princess, which was built in 1923 for the Canadian Paciﬁc Railway Company’s (CP) BC Coast Service. The mid-war period saw the construction of several car-carrying ferries, but it was in the period after World War II that the car ferry concept really made a signiﬁcant step forward. Since the 1950s, different drivers of the economic environment have inﬂuenced the direction of the ferry market.3 Increased length of industry vacations after 1950, together with less tight passport regulations, spurred international tourism; this was further enhanced by the introduction of tax-free shopping, which made market conditions favorable for the fastgrowing car ferry industry. The ﬁrst oil price shock in 1973 sent bunker prices sky-rocketing and the industry response was to start exploiting economies of scale by building larger and larger car ferries with several car decks. This led to the so-called jumbo ferries. In parallel with this, many ferries started to evolve into cruise ferries, where the emphasis was on onboard space and onboard experiences for the passengers. This development had a setback after the abolition of tax-free sales in the EU in 1999, and some services have been closed, but

some routes still pursue this concept. Since the mid-1980s, many operators have embraced the high-speed ferries, and they have grown in size and seen similar developments in onboard facilities as the conventional ferries. The jumboizing of the catamaran concept that was introduced by the Stena HSS ferries, with 1500 passengers on a 40-knot ferry, represented a technological shift of great importance to the industry. In recent years, the focus has been more on developing passenger facilities on primarily cargo services, which has led to the use of the ro-pax term. Ro-pax vessels are showing the same tendency towards jumboizing as the car ferry and the high-speed ferry, indicating interesting future challenges for the industry as well as implying demands for onshore infrastructure. To generalize, one could argue that the history of the ferry can be divided into overlapping periods where different types of ferries have been in core focus: • • • • • •

Early history with mainly train and passenger ferries (1830s–1940s) Train ferries (1950s) Car ferries (1950s–1970s) Jumbo ferries (1970s–1980s) Cruise ferries (1980s–2000s) Ro-pax ferries (1990s–2000s).

9.4 The Ferry Market: Demand Side The demand side is extremely fragmented, much as in the aviation industry. Ferry passengers consist of individuals and families buying their tickets through a multitude of different channels, so there are no dominant players one can identify in this market.

165

FERRY PASSENGER MARKETS

Similarly to the cruise market, where each ship in principle creates its own demand, there is a strong link between demand and supply in the ferry market in the sense that trafﬁc on a particular route can only be established if there is someone supplying a service on this route. It is impossible, therefore, to study the demand for ferry services without looking at actual services offered.

9.4.1

Main ferry trafﬁc areas

Table 9.2 gives the distribution of world ferry trafﬁc for 2008 and indicates that Asia is a vast passenger ferry market, with an interesting mix of very old ferries and modern fast ferries. Europe is clearly dominating in ro-ro, with more than 80 percent of the trafﬁc. There are ferries all over the world and thus thousands of ferry routes. Europe is extremely ferry-intensive, with two huge main markets – Northern Europe and the Baltic, and all of the Mediterranean. The domestic market in Greece, with all the trafﬁc among the myriad of islands, is Table 9.2

one of the world’s largest ferry markets. Japan is also very ferry-intensive. In North America the main ferry market is on the Paciﬁc border between USA and Canada. South America has very limited ferry operations, and the same goes for Africa. There is some ferry activity in the Red Sea. In Asia the Philippines have a lot of ferry trafﬁc in their ferry-friendly archipelago. In Indonesia the ferry market experienced high growth for some time, but with extensive competition from low-fare airlines ferry activity has experienced a setback. Hong Kong and Singapore are huge markets for high-speed ferries and in China a lot of new activity is taking place in the Bohai Sea, with a new generation of ferries. To examine ferry routes all over the world in even some detail is clearly beyond the scope of this short chapter: we are talking thousands of routes. Given the high density of ferries in Europe and the fact that the largest operators are European, the chapter will use selected European routes to examine the salient features of ferry operations.

Distribution of world ferry trafﬁc volumes, 2008 Passengers

World trafﬁc volumes 2008, millions Regional market shares (%) Baltic North Sea Mediterranean Inland lakes/rivers America Red Sea and Persian Gulf Southeast Asia Paciﬁc a 0.0 means less than 0.1. Source: ShipPax 2009.

2052 10.8 4.3 21.1 0.5 14.5 3.7 43.5 1.5

Cars

Buses

252

677

33.5 7.5 14.1 0.6 29.5 0.5 13.8 0.4

38.6 32.4 14.9 0.0a 11.9 0.9 1.3 0.0a

Trucks 32.2 24.3 31.7 26.7 0.1 2.7 0.2 12.9 1.5

166

9.4.2

TOR WERGELAND

European ferry routes

When an operator sets up a new ferry route, the ideal would be to obtain a monopoly on that route. If it proves proﬁtable, however, it is very difﬁcult to prevent competition from entering. An examination of speciﬁc routes shows that it is very common for competitors to choose other ports on both sides of the same body of water, partly to avoid head-on competition in the same ports, but also to differentiate the product from that of the competitors. So being alone on a speciﬁc route does not mean that the route is without competition. Many routes may connect to larger regions, thus creating competition. This is illustrated in Table 9.3 for three of the European areas with most ferry trafﬁc. Table 9.3 indicates that although there are several operators on

the same route, there is a tendency towards one dominant player. The three examples are in a sense quite unique in Europe. It is actually difﬁcult to ﬁnd European examples of three or more competitors on the same route. A manual check of all the 946 individual routes given for the Baltic, North Sea and Mediterranean routes in ShipPax 2007, and, where passenger trafﬁc is available, for 2006, reveals only eight routes with three or more operators listed for exactly the same pair of ports. These routes are listed in Table 9.4. It is interesting to note that these eight routes cover both short and longer routes, so distance is not the main explanatory factor. It may be noted that no domestic Greek route is listed in Table 9.4. There is a good reason for this: The enormous Greek archipelago is ideal for ferry activities and more

Table 9.3 Number of routes and competitors in selected ferry regions, 2006 Routes between Norway and Denmark UK and Ireland Greece and Italy

Passengers (millions)

No. of routes

% for largest route

No. of operators

Largest operator

Share of trafﬁc (%)

4.2 3.2 4.7

12 8 17

23 28 24

6 4 12

Color Line Stena Line n/a

55 56

Source: ShipPax 2007.

Table 9.4 From Helsingoer Tallinn Maryann Calais Durres Split Marseilles Tangier

European ferry routes with three or more competitors To

Distance (naut. miles)

No. of competitors

Helsingborg Helsinki Stockholm Dover Bari Ancon Tunis Algeciras

23 48 83 21 121 131 472 33

3 6 3 4 9 3 3 8

Source: ShipPax 2007, author’s own calculation.

167

FERRY PASSENGER MARKETS

Table 9.5

Ferry trafﬁc in the Greek archipelago in 2005

Route areas Argos–Saronic (Aegina/Poros/Hydra-Kithera) Crete North Cyclades (Evia/Andros/Tinos) North Cyclades (Mykonos/Tinos) - Samos Dodecanese (Patmos/Leros/Kos/Rhodes) Eastern Cyclades (Paros/Naxos/Antiparos) All other route areas Total Greece domestic

Passengers (millions)

% of total

3.3 2.5 2.2 1.6 1.5 1.1 33.3 45.5

7.2 5.4 4.9 3.5 3.2 2.5 73.3 100.0

Source: ShipPax 2007.

than 40 million passengers are carried among this myriad of islands every year. It is not easy, however, to deﬁne speciﬁc routes in the Greek ferry market; ferries can combine islands in lots of different ways, so it is hard to say what constitutes one route. Table 9.5 shows trafﬁc regions in the Greek market with more than 1 million passengers for the year 2005 as grouped by ShipPax 2007, indicating a highly fragmented market. All of this seems to support the conclusion that the demand side of the ferry market is indeed very fragmented as far as creation of actual services is concerned, but for each route there is a tendency towards monopoly, or at best oligopoly.

9.4.3

Preferences

The success of a ferry operation will depend on how well the actual service matches the underlying demand in the area under consideration. As previously mentioned, people can have very different motives for choosing a ferry. For some it is a means of transportation – they want to get from A to B as safely, cheaply and fast as possible; for others it may be more like an adventure – the experi-

ence of the trip, what they can do while on board and what they may experience at each side of the trip constitute the essentials. Figure 9.2 is an attempt at illustrating the complexity of demand motives, inspired by Maslow’s hierarchy of needs in psychology (Maslow 1943). The basic demands must be met ﬁrst: Is it safe? Will it take me where I want to go in a convenient, timely fashion? And will it be comfortable enough? If the service aims at commuters or business people, this will be the essential criterion for designing the ship or the service. If the target groups are holiday travelers, people who would go more for the experience itself, the other part of the hierarchy becomes more important, essentially Will it give me a good experience? In practice, one may aim at satisfying several target groups with the same service, but then some real trade-offs will have to be considered, including: • • •

speed versus cost, comfort and seaworthiness service level versus cost, space requirement, safety considerations seasonal considerations

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Considerations of ferry customers Onboard Any fun things on board-games, movies, shopping? activities Autonomy/ movement Status/ image Experience demands

Service level

Transport demands

Travel comfort

Can I move around, stretch my legs, go out on deck?

45 knots is cool… ./ This ship looks great! Can I get a decent meal or just a hot-dog? Will I get seasick? Can I work on my PC on a table? Can I read my book in a comfortable chair?

Accessibility/ availability

Does the ferry leave at a converient time? Easy access to the terminal with car, luggage, etc.?

Transport efficiency

The trip takes way too long. I’ll catch a plane and tire a car.

Security and safety of trip

Is this ship really safe? Going so fast in this sea?

Figure 9.2 Hierarchy of ferry demands. Source: Developed by author.

•

departure times for commuters versus holiday travelers.

This multidimensional aspect of ferry demand is the main challenge for an operator when setting up a ferry route.

9.5 The Ferry Market: Supply Side Outside of Europe there are many ferry operators, but they are generally small in size compared to the European ones. Table 9.6 shows the passenger capacity for selected large operators in various parts of the world outside Europe. Only the ﬁrst two companies are comparable in size to the largest European companies.

9.5.1 The main European ferry operators To measure the size of a ferry operator, a number of different criteria can be adopted: • • • • • •

revenue size in GT passenger capacity of vessels car capacity of vessels the lane-meter capacity of vessels bed capacity of vessels.

It is clear that the ranking will be different for each of these criteria, but as this chapter focuses on the passenger ferry market, the passenger capacity of vessels will be used. Table 9.7 shows the twenty largest ferry operators in Europe in 2008. If the ranking had been made by revenue, P&O Ferries

Table 9.6

Selected large non-European ferry operators, 2008

Country USA Canada China China Macau Singapore USA China South Korea South Korea China Japan Malaysia

Company

No. of fast ferries

No. of conventional ferries

Passenger capacity

Washington State Ferries BC Ferries TurboJET New World First Ferry The Venetian/CotaiJet Penguin Express Ferries NY Waterways Hong Kong and Yaumati Ferry Nam Hae Express Semo Ferry Boat Shenzun Shipping Yasuda Ocean Line Langkawi Ferry

4 0 30 15 10 17 16 25 8 10 9 17 9

22 27 0 0 0 0 0 0 1 0 0 0 0

36110 28148 8828 5909 4110 3136 2631 2466 2381 1922 1511 1485 1245

Source: ShipPax databases.

Table 9.7 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Ranking of European ferry operators by passenger capacity of ships, 2008 Company

Ferries

High-speed

Ro-pax

Total

Total passenger capacity

Tirrenia Istanbul Deniz Otobüsleri (IDO) Tallink/Silja Line Stena Line Jadrolinija Hellenic Seaways P&O Ferries Superfast Ferries/Blue Star Corsica Ferries MOBY Lines Viking Line ANEK Lines Scandlines Acciona Trasmediterranea GA Ferries SNCM Ferryterranée Color Line Siremar Brittany Ferries Grandi Navi Veloci (GNV)

16 10 14 15 23 9 12 12 10 12 8 10 17 11 8 7 7 9 7 8

4 34

6

26 44 16 32 31 32 28 12 12 12 8 10 23 28 10 10 7 26 9 8

42,589 29,514 26,891 26,511 20,804 20,117 19,746 19,219 19,173 17,823 17,583 17,445 16,748 16,736 14,985 14,653 14,423 13,256 12,028 11,516

Source: ShipPax databases 2008.

4 8 20 1

2 13 3 15

2

7 1 1

6 10 1 2

17 1

1

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would have been number 1; by GT or lanemeter capacity, Stena Line would have been a clear number 1; and by bed capacity, Tallink Silja Line would have been number 1. This clearly indicates the diversity of the supply side, but it also reﬂects that different technological choices must be made that depend on which routes are targeted for service. Figure 9.6 offers another way of looking at the diversity of the main players, and is an illustration for the top ﬁve from Table 9.7. The various dimensions have been measured as follows (total ﬂeet means all conventional ferries plus all high-speed ferries): •

•

•

•

Focus on large ferries: Average passenger size of ﬂeet, divided by average passenger size of total ﬂeet; Focus on overnight ferries: Number of total beds divided by total passenger capacity of ﬂeet, divided by the same ratio for the total ﬂeet; Focus on ro-ro: Total lane-meter capacity divided by total car capacity of the ﬂeet, divided by the same ratio for the total ﬂeet; Focus on high speed: Simply the percentage number of high-speed ferries in the ﬂeet.

For the three ﬁrst ratios, any number above 1 indicates above average ﬁgures. Figure 9.3 indicates that two companies are highly specialized: IDO with a focus on high-speed passenger and car ferries (which are smaller than conventional ferries), and Tallink with a clear focus on large overnight ferries with car capacity. The other three are all well diversiﬁed, with Stena having the clearest ro-ro focus, Tirrenia having generally larger ferries and Jadrolinjia a slightly

higher percentage of high-speed ferries. Figure 9.3 clearly indicates a high degree of differentiation among the top operators. Table 9.8 conﬁrms that we are talking about a very fragmented industry. The top operator, Tirrenia, has a mere 2.1% of the total passenger capacity of all the ships in all four categories and the top twenty account for only 8% of the number of ships and less than 20% of total passenger capacity, or 25% if calculated as the share of the total passenger capacity for the ferries alone. The combination of a very complex demand preference structure, the very different technological choices made by the various operators, and the fragmented nature of the business indicates that it is not really meaningful to talk about one passenger ferry market. The critical, strategic decisions must be made on a route level, so in a sense each route is a market in itself. Table 9.9 gives insight into the route engagement of the top ten operators. The only ferry operator with a signiﬁcant activity quite outside of the geographical region of the home base is Stena Line, which has signiﬁcant operations in UK–Continent and UK–Ireland routes. The other “pure international routes” in the table could just as well be in the column for international routes from home base. Two of the operators are purely domestic: Istanbul Deniz Otobüsleri, which has a monopoly on all Bosporos and Marmara Sea trafﬁc (carrying more than 90 million passengers per year and almost 6 million cars), and Hellenic Seaways, which operates a multitude of short routes among the Greek islands (the route number of 40 in the table is merely a suggestion, as the possible route combinations are many more).

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FERRY PASSENGER MARKETS

Focus on large ferries 3

Tirrenia Tallink

IDO Focus on fast 80% ferries

Focus on 4.5 overnight ferries Jadrolinija Average all ferries

Stena

2.5 Focus on ro-ro

Figure 9.3 The diversity of the top ﬁve ferry operators, 2008. Source: based on ShipPax 2008 databases.

Table 9.8 Market shares of top twenty ferry operators Share of top 20 companies in: Number of all ship types Number of all ferries Number of all high-speed ferries Total passenger capacity of all ships Passenger capacity of all ferries

% 8.2 20.1 5.8 19.3 25.3

Source: ShipPax databases 2008.

The overall conclusion seems to be that the ferry industry is totally dominated by local, domestic (regional) operators. Stena is the only company with something that resembles an international proﬁle. In this

context, the ferry industry is very different from all other shipping segments. Attempts have been made to establish other international ferry companies: Sea Containers tried in both the Baltic and the US, but has now exited the ferry business altogether. Superfast and Blue Star were also on the way towards getting an international proﬁle, with a ship in the Baltic and two ro-ro vessels operating in France, but that changed with the sale to Marﬁn.4 Currently they seem to concentrate on the Greece–Italy connection. These may be indications that it is very difﬁcult indeed to get established outside of the home base.

Italy Italy Finland

Corsica Ferries MOBY Viking Line

4 10 2

3 ca. 40 0 31 68 18

63 100 0

0

30

80 100

% of capacity

28 32 82

100

7 5 4 4

37

54

56

20

% of passenger capacity

4

9

7

1

Number

France, Ireland, Spain France France Sweden, Estonia

Sweden Germany Denmark, Germany, Poland Italy

Albania

Destinations

International routes from home base

Sources: ShipPax 2008, Lloyd’s Register Fairplay 2008, company websites.

Croatia Greece UK

4

Estonia/ Finland Sweden 0

18 12

Number

Domestic routes

Italy Turkey

Home country

Jadrolinjija Hellenic Seaways P&O Ferries

Stena Line

Tirrenia Istanbul Deniz Otobüsleri Tallink Silja Oy

Company name

Table 9.9 The route basis of the top ten operators, with the percentage of their passenger capacity

Fra-Cor

Lat-Swe Ger-Rus Nor-Den UK-Cont Irish Sea

Area

7

1 1 3 5 1

Number

41

46

15

% of passenger capacity

Pure international routes

FERRY PASSENGER MARKETS

This difﬁculty probably reﬂects the importance of local political connections and of local knowledge of demand preferences, but this is not so easy to substantiate. The facts that most ferry routes are based on concessions, that access to port infrastructure often requires political decisions, and that state ownership in the ferry business is common (often through national railway companies), all seem to point towards a salient feature of the industry: that political connections are very important for obtaining the necessary concessions and access to terminals.

9.5.2

The role of shipbuilders

An examination of where ferries are built reveals a very diversiﬁed picture. A large number of smaller shipyards have produced ferries, and many of the ferry operators seem to favor local, domestic producers. Again this probably reﬂects the political nature of the business. Some operators clearly favor their home country (Tirrenia, IDO, Tallink, Hellenic, Viking, Acciona T, SNCM, Siremar and GNV); others are extremely international – Stena has ships from no less than twelve different shipbuilding countries. The big cruise shipbuilders are building few of the ferries, and those are mostly for operators of the same country. This picture seems to reinforce the conclusion above, that there are lots of national interests in the ferry business; this clearly extends to the newbuilding sector as well. In the building of conventional ferries, a number of different yards are active. In the period 2003–8 Fincantieri and former Aker Yards (now STX) delivered around half a million GT of ferries each, which gives the two yards the leadership in ferry building,

173

just as in cruise vessel building, but the number of smaller yards producing ferries is very high, very unlike in the cruise sector. As far as high-speed ferries are concerned, the picture is different. In the late 1970s and 1980s, the Norwegians dominated the highspeed market with catamarans, particularly from Kvaerner Fjellstrand. At the end of the 1980s, Australia started to export fast ferries, led by InCat International, a company soon to become a dominant producer of highspeed crafts, notably with their own wavepiercer design. Australia is currently the market leader in fast ferry production, and Australian producers like Austal and Incat dominate the Asian market.

9.5.3

The choice of technology

Just as the demand side is complicated, with many different aspects regarding customers’ preferences, the supply side is similarly complicated as there are many different basic designs of ferry, and each type has many design variations. One obvious trend in ferry construction is the increased size of the vessels, and particularly the move towards more trailerdecks, which has led to the current focus on ro-pax. Figure 9.4 shows the number of trailer-decks on ships delivered, which clearly demonstrates how the development has been towards more and more ro-ro capacity on ferries. The variation in design is particularly large for fast ferries. The earliest fast ferries were hydrofoils, using wing-like foils mounted on struts to give lift. Then the catamaran became the hull of choice; it is dominant in numbers among the fast ferries in existence today. Two parallel hulls give the lift of the ship. The earliest generations were 25–42 m long, but today

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100% 2, 3 or 4 deck

90% 80% 70% 60% 50% 40% 30% 20%

1 deck

10% 0% 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Figure 9.4 Number of trailer-decks on ferries delivered 1965–2010. Source: ShipPax 2009.

much larger catamarans are in operation. Stena developed their High-Speed Sea Service design, and the HSS 1500 in 1996 – with a hull length of 126 m – tripled the length of the most popular model at the time, the FlyingCat 40 m from Kværner Fjellstrand. The HSS 1500 represented a huge improvement in technology, as this much larger ship could handle much rougher seas at speeds around 40 knots. Incat International in Australia developed its wave piercer, which is a catamaran with hulls that are designed to cut through the waves. The wave piercers are also getting larger in size, currently around the size of the HSS 1500. The trimaran is another multihull construction that many see as a further development of the catamaran with higher payload for the same speed and greater

comfort. The trimaran has also reached the size of the HSS 1500. A special catamaran, the so-called SWAT (Small Waterplane Area Twin hull) has two torpedo-shaped, bulbous hulls under the water which stay submerged in high speeds. Here they are not affected so much by waves, which gives a ship that can handle rough seas in high speed very well. Another type of fast ship is the Surface Effect Ship (SES), which combines the lift of a catamaran with an air cushion that further lifts the ship in water and thus reduces resistance. It is essentially a combination of a catamaran and a hovercraft (which hovers over the water on an air cushion). SES vessels are widely used as naval vessels. In contrast to all of these multihull constructions, another category of fast ferries is a ship with only one hull, the monohull.

175

FERRY PASSENGER MARKETS

Table 9.10 Possible ranking of technologies regarding various route aspects Subjective ranking of ferry technologies regarding selected aspects: 1 = best Design type

Displacement monohull Planing monohull Hydrofoil Catamaran Wave piercer Trimaran Swath SES

Speed

Payload in med. waves and speed:

Overall costs when speed is

Low

High

Low

High

8

1

8

1

8

2

6

2

6

4 5 5 3 7 1

8 3 3 2 3 7

3 5 5 4 7 1

8 3 3 5 2 7

Ease of cargo/ passenger handling

Wave handling/comfort dependent on water and weather Sheltered

Open sea

Good

Bad

Good

Bad

4

3

7

6

3

6

4

5

8

6

7

2 3 3 5 7 1

8 1 7 1 6 3

3 7 7 6 1 2

3 5 5 3 2 1

1 4 4 3 2 8

1 5 4 6 1 8

Source: Adapted from Wergeland 1993.

Table 9.10 tries to summarize, in a highly subjective way, the many technologies available to potential fast ferry operators. There is no clear winning technology in this table, as most of the design types score an average around 4. This means that there are some designs that may be superior in some circumstances and not so good in others; so, again, decisions regarding technology will be route-dependent. A couple of conclusions may, however, be indicated: •

•

Displacement monohulls seem best in terms of cost and when used at low speed in up to medium waves with high payload. The SES (surface effective ship) seems best when high speed is required, but only in sheltered waters.

The overall conclusion, though, is that optimal choices can only be made for given

routes and the characteristics of these routes. Route patterns are not static, as an example from 2007–9 indicates. In 2007 the market saw seven routes closing down, with 13 in 2008 and 11 in 2009. However, 14 new services were starting up in 2007, 13 in 2008 and 17 in 2009.5 The majority of the new routes were in the Mediterranean. The ferry market is constantly adjusting to changes in market conditions.

9.5.4

The ferry second-hand market

As it has so far been argued that a ferry is normally designed to suit just one particular route, one would expect that it would be difﬁcult to sell a ferry secondhand, as the ship would hardly be ideal for other routes with different characteristics. Despite this, the ferry second-hand market is quite active. 62 sales were recorded in

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TOR WERGELAND

2008, which corresponds to a little over 2% of all ferries. There are three main reasons for the active second-hand market:

9.6 Market Structure and Competition

•

The ferry market is a very fragmented one, but it is not like the tanker market, which exhibits all signs of being a pure competitive markets, if examined on a route-by-route basis. Two economic dimensions mainly determine the economic structure of a shipping segment: the potential for exploiting economies of scale, and the potential for differentiating the service from that of competitors. This is indicated in Figure 9.5, which presents four distinct strategic types of shipping. The four strategic types in Figure 9.5 are not static. There are strong dynamic forces in the competitive picture. A typical development is that innovations (which historically have been made by people or money in commodity shipping sectors) create some new specialty shipping, which is further developed into either contract shipping or industry shipping. This will require a consolidation of the segment. There are also many examples of new special shipping segments that return to commodity shipping because of quick copying of the ship concept and over-contracting (e.g. combined carriers, heavy-lift vessels, container feeder vessels; (Wijnolst and Wergeland 2008: 107–11). As already pointed out several times, each ferry route is a market of its own and there is a clear tendency towards a monopoly on each route. One could, therefore, claim that the ferry market is a game in which an operator tries to establish itself as a monopoly, and, if successful, will earn money. In that respect the ferry market

•

•

Ferries are very mobile and can easily be moved to other markets. Less sophisticated markets are happy to take over older tonnage that more sophisticated markets ﬁnd outdated. It is often cheaper to buy second-hand and convert the ship so it ﬁts the new route than to place an order for a newbuilding.

Historically, a typical life for a Baltic newbuilding would have been: • • • •

1st second-hand sale to Skagerrak or the English Channel 2nd second-hand sale to the Mediterranean 3rd second-hand sale to Africa 4th second-hand sale to Asia, then for demolition.

This structure is no longer so typical; currently we see examples of a ﬁrst secondhand sale being from Japan to the Mediterranean or from Mediterranean to, say, Indonesia. Typically these vessels will be converted. • •

Slender Japanese ferries sold to Greek operators are completely refurbished. Car ferries sold to Indonesia will often be converted so that car decks are replaced by sleeping bunks.

The second-hand values of ferries are much less volatile than in other shipping segments, and the values are kept high for many years.

9.6.1

Strategic types of shipping

177

FERRY PASSENGER MARKETS

Industry shipping

Degree of economics of scale

Contract shipping Concentrated industry Positive scale effects of floot size Fairly hamageneous service Liquid second-hand market Close customer relations

Concentrated industry Positive scale effects of floot size Specialized services Difficult second-hand market Tailor made customer service

Fragmented industry No scale effect in fleet Homogeneous service Liquid second-hand market Little direct customer contact

Local monopolies Limited scale effects Specialized services Difficult second-hand market Direct customer contact

Commodity shipping

Special shipping

Degree of service differentiation

Figure 9.5 Strategic types of shipping markets. Source: Wijnolst and Wergeland (1997).

could be classiﬁed as a special segment in shipping, as illustrated in Figure 9.6. The fragmented structure of the supply side discussed above could lead one to the conclusion that no economies of scale exist in this market. The suggested placement of the segment indicates, however, that economies of scale must be seen in relation to the size of the market, and if the market is understood as the individual route, there will be some economies of scale effects in each case (ship size, booking systems, etc.). The sector shows no signs of consolidation, though, hence the placement in the special shipping box. The market structures for the many ferry routes are dynamically inﬂuenced by innovations and competition, and competition can come not only from other ferry opera-

tors, but also from competing sectors in the business of moving people, like airlines or trains. In general, market conditions may change because of many different factors. New technologies, new strategies, governmental infrastructure investments and the inﬂuence of substitutability from other transport sectors are all examples of such factors. Some cases from the ferry market may illustrate that.

9.6.2

The role of technology shifts

A classical example of how new technologies can completely change the structure of the market is the ferry route on the Rio de la Plata, introduced by Buquebus in the early 1990s. By cutting travel time between

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TOR WERGELAND

Contract shipping

Industry shipping

Chemical

Cruise

Degree of economies of scale

Car

Ferries

Large bulk Commodity shipping

Special shipping

Degree of service differentiation

Figure 9.6

Positioning of the ferry shipping segment.

Buenos Aires and Montevideo from 9–12 hours with conventional tonnage down to 2–3 hours with fast ferries, they suddenly could offer a good alternative to airline services in terms of travel time city centre to city centre. The number of passengers per year went up from 400,000 in 1990 to 1.4 million in 1993. After the initial success, the route has in recent years had problems keeping up with the success of the lowprice airlines. Another example is the introduction of the HSS by Stena Line in the Irish Sea in 1996. The HSS was a unique combination of high speed and onboard experiences. It reduced crossing time from three hours to 90 minutes, thus increasing transport efﬁciency substantially, and at the same the ship was offering onboard experiences not seen in high-speed ferry markets before. One could easily argue that the Stena HSS represents one of the major technology advances in the fast ferry business since the late 1980s.

9.6.3 Effects of competition: the Dover Strait case In the past ten to ﬁfteen years, quite dramatic changes have taken place for trafﬁc between UK and France over the Dover Strait. Some saw the introduction of the £10 billion Eurotunnel in 1994 as the end of ferry services across the Strait. The tunnel quickly built up a large passenger base, more than 15 million in 1997 and over 19 million in 1998. Since then, however, the trend has been of stagnation and even decline for the tunnel, which fell to 16.3 million passengers in 2003; in 2007 the volume remained less than that of 1998. Ferry volumes are down from more than 23 million in 1997 to some 14 million in 2007, which is slightly higher than the lowest level of 13.3 million in 2005. Since total volumes of trafﬁc across the channel have increased from some 116 million passengers in 1997 to almost 157 million in 2007, some other means of transportation must be the

179

FERRY PASSENGER MARKETS

winner. The development is the reﬂection of the great success of low-price air transportation. Air transport has increased its market share from about 60% in 1997 to more than 75% in 2007 (ShipPax 2008). This is conﬁrmation that ferry transportation is in competition with all other modes of transport. The internal competition among the ferry companies also tells a story of change. P&O used to be the undisputed leader of this route. P&O was then purchased by Stena Line and changed its name to P&O Stena before reverting to P&O Ferries. The main competitors on the route used to be SeaFrance and Hoverspeed. Since the turn of the century, two new players have entered the game, Norfolk Line and Speed Ferries. The latter has basically replaced Hoverspeed, which has now exited the route. The development of market shares is given in Table 9.11. The development clearly shows that Norfolk is on the offensive, and that the dominance of P&O is on the verge of disintegrating. One explanation for this development is that Norfolk represents a low-cost

supplier that attracts, particularly, overseas visitors to the UK, who are increasing in relative numbers. P&O must conclude that customer loyalty is limited, and that in the longer run it will be the right combination of price, service contents and availability that will win out.

9.7

Industry Attractiveness

Companies like Tallink, Blue Star and Minoan line all reported operating proﬁt margins between 15% and 27% for the years 2006–7, and Tallink shows a particularly high proﬁt, indicating that the purchase of Silja Line in 2006 is paying off. After the oil price hike in 2008, however, all lines complain about high bunker costs and report declining proﬁts, reinforced by the crisis in 2009. The fact that several ferry operators show healthy and fairly stable proﬁts has obviously started to attract the institutional investors. In 2007 Stena Line tried to take Scandlines over completely, but this company ended up being split between

Table 9.11 Development of market shares on the Dover–Calais route (%)

Passengers P&O SeaFrance Norfolk Hoverspeed/Speed Ferries Cars P&O SeaFrance Norfolk Hoverspeed/Speed Ferries Source: ShipPax 2008.

2001

2005

2006

2007

68 17 2 13

58 24 6 12

58 26 11 5

55 26 14 5

60 20 2 18

47 24 7 22

47 25 16 12

43 26 20 11

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TOR WERGELAND

Clipper group, which purchased Scandlines Sydfynske, and a coalition of the investment funds 3i and Allianz in consortium with Deutsche Seerederei, which took over the rest of Scandlines in a €1.56 billion deal, ﬁnally taking the company off the hands of the German railways and the Danish government. In October 2007 Panagopulos sold completely out of Attica to Marﬁn Investment Group in a €290 million deal. These deals may indicate that investors see investment in successful ferry companies as a safe and proﬁtable placement of money. There are several factors that may inﬂuence the attractiveness of an industry. The following seven factors are regarded as the most important (Wijnolst and Wergeland 2008):6 Barriers to entry In general one would say that high barriers to entry are good for the incumbents and contribute to high proﬁtability. The barriers to entry in the ferry market are very high if a newcomer tries to open a new service in a foreign environment. Access to ports and terminals is often politically determined, and one needs very good local contacts to obtain it. This is a decisive point in many cases. Competitors The fewer the competitors, the greater the potential to exploit market power, and normally the greater the attractiveness of the industry (particularly for the incumbents). The ferry industry is a very fragmented one, but on a speciﬁc route the number of competitors is few, as discussed above. Product similarity In general it is argued that the more differentiated the market is, the greater the attractiveness of the industry. It has been argued above that

each ferry route is essentially unique, and in this respect one could argue that the market is highly differentiated. Switching costs High switching costs are associated with high attractiveness. Loyal customers contribute a great deal to bottom-line proﬁts. In the ferry market, the switching costs are fairly low, as it is easy to move to another operator, if a competitor sets up a competing service on a route. Demand growth High demand growth is clearly associated with high attractiveness of the industry. The ferry market has shown fairly high growth rates – in some regions even 2-digit rates. Fixed costs Low ﬁxed costs are normally associated with high industry attractiveness. A ferry service is a commitment to service a particular route. The initial investment costs in ships need not be very high, as it is possible to buy ships second-hand. The marketing costs of developing the market may, however, be substantial. Barriers to exit Low barriers to exit normally favor proﬁtability. It is relatively easy to sell a ferry if one wants to exit a route, so in general the barriers to exit are fairly low. A ferry will normally be tailor-made for a speciﬁc route, however, so it may not always be easy to ﬁnd a buyer. Table 9.12 tries to summarize these seven factors. The table has been made from the perspective of individual routes rather than the industry as a whole, following the arguments put forward earlier that it is the routes that constitute the markets places where competition really meets. The conclusion, therefore, is that the ferry

181

FERRY PASSENGER MARKETS

Table 9.12

Ferry industry attractiveness, from a route perspective

Factors

Higher proﬁtability

Barriers to entry Competitors Products Switching costs Demand growth Fixed costs Barriers to exit Overall

High Few Different High High Low Low

market may be seen as quite attractive, given that one is successful in actually establishing a particular service. It may, however, prove to be quite challenging to get a new service established.

9.8

•

•

Low Many Similar Low Low High High

•

Summary

This chapter has set out to describe the vast global market of passenger ferries and to identify the main characteristics of this market. The main conclusions of this exercise are: In a global transport perspective, the ferry industry plays a vital role. Ferries carry almost as many passengers per year as the entire world’s airlines together. In addition, they carry enough cars, buses and lorries to form a queue that would go more than forty times around the globe. It makes no sense to talk about one global passenger ferry market. The relevant market includes the areas on both sides of the body of water in question, where the conditions tend to be very speciﬁc and often unique in terms of

Lower proﬁtability

•

•

•

•

distance, sea and weather conditions, composition of demand, port and terminal accessibility, etc. The demand side is extremely fragmented, but also complicated, because people have very different motives for traveling on a passenger ferry. The demands vary from pure transport needs – to get as quickly as possible from A to B – to a desire for entertainment and good experiences. The supply side is also highly fragmented, and similarly complex, as the operators have a wide range of technologies to choose from, of which each represents some form of trade-off against demand requirements. The ferry industry is not very international: very few ferry companies have set up business much outside of their home region. It is complicated to set up a new ferry route, partly because of the complexity of both demand and supply, but also because good connections are needed to obtain eventual concessions and access to port and terminals. On each ferry route competition is limited in the sense that only very

182

•

TOR WERGELAND

few routes in the world have more than two competitors. On the majority of routes there will be one, dominant, player. As an industry, viewed from the perspective of individual routes, the ferry business has the characteristics of an attractive business to be in, if one actually succeeds in establishing a good route.

Wergeland, Tor (1993) The potential for fast ships in European freight transport: a comment. In Niko Wijnolst, Chris Peeters and Pieter Liebman (eds.), European Shortsea Shipping: Proceedings from the First European Research Roundtable Conference on Shortsea Shipping. London: Lloyd’s of London Press. Wijnolst, N. and T. Wergeland (1997) Shipping. Delft: Delft University Press. Wijnolst, N. and T. Wergeland (2008) Shipping Innovation. Amsterdam: IOS Press.

Notes Further Reading 1

2 3 4 5 6

http://en.wikipedia.org/wiki/Rocky_ Hill_–_Glastonbury_Ferry (accessed May 2, 2011). http://business.highbeam.com (accessed May 2, 2011). ShipPax 2007, 2008, 2009. A Greek investment group, owning banks and a number of other assets. ShipPax, various issues. This framework is very similar to the well-known Porter’s ﬁve forces (Porter 1985).

References Lloyd’s Register Fairplay (2008) Sea-web. www. sea-web.com (accessed April 24, 2011). Maslow, A. H. (1943) A theory of human motivation. Psychological Review 50: 370–96. Porter, Michael E. (1985) Competitive Advantage: Creating and Sustaining Superior Performance. New York: Free Press. ShipPax (2007) Ferry market & outlook, by Klas Brogren, in ShipPax MARKET 07. ShipPax (2008) Ferry market & outlook, by Klas Brogren, in ShipPax MARKET 08. ShipPax (2009) Ferry market & outlook, by Klas Brogren, in ShipPax MARKET 09. ShipPax (2010) Ferry market & outlook, by Klas Brogren, in ShipPax MARKET 10.

Wergeland, T. and A. Osmundsvaag (1997) Fast ferries in the European shortsea network: the potential and the implications. In Chris Peeters and Tor Wergeland (eds.), European Shortsea Shipping: Proceedings from the Third European Research Roundtable Conference on Shortsea Shipping. Delft: Delft University Press.

Websites Answers.com, deﬁnition of “ferry.” www. answers.com/topic/ferry (accessed April 4, 2011). British Columbia Ferry Services Inc. (BC Ferries). www.bcferries.com/about/. Corsica Ferries: www.corsica-ferries.co.uk/ (accessed April 4, 2011). Hellenic Seaways. www.hellenicseaways.gr (accessed April 4, 2011). Highbeam Business. http://business.highbeam. com: http://business.highbeam.com/industryreports/transportation/ferries (accessed April 4, 2011). IDO. www.ido.com.tr/ (accessed April 4, 2011). Jadrolinija. www.jadrolinija.hr/ (accessed April 4, 2011). MOBY Lines. www.mobylines.it/cms/export/ it/index.html (accessed April 4, 2011).

FERRY PASSENGER MARKETS

P&O Ferries. www.poferries.com/tourist/ (accessed April 4, 2011). P&O Irish Sea. www.directferries.co.uk/ poirishsea.htm (accessed April 4, 2011). Stena Line. www.stenaline.com (accessed April 4, 2011). Superfast. www.superfast.com/site/splash.html (accessed April 4, 2011).

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Tallink. www.tallink.com/ (accessed April 4, 2011). Tirrenia di Navigazione. www.tirrenia.it (accessed April 4, 2011). Washington State Ferries. www.wsdot.wa.gov/ ferries/your_wsf/index.cfm?fuseaction= our_history (accessed April 4, 2011).

III

Shipping Economics

10

Dry Bulk Shipping George A. Gratsos, Helen A. Thanopoulou and Albert W. Veenstra

10.1

Introduction

The ﬁnal milestone in the long ascent of dry bulk shipping towards the top of the world’s ﬂeet carrying capacity had been reached by the start of 2009. At the end of a long journey since the early post-war period, when the segment was formed, this development for the ﬁrst time put dry bulk shipping on a par with tankers in terms of share in the world ﬂeet deadweight (UNCTAD 2009). However, about ﬁfty years after it ﬁrst emerged, the general bulk carrier remains remarkably similar to its predecessors: a one-deck, rather simple ship structure with several holds, only larger, as exempliﬁed in the size of recent Very Large Ore Carriers (VLOC) orders. The chapter reviews ﬁrst the main elements of the bulk transport system over the post-war period, highlighting the extended stay of the modern bulk carrier in the ascending phase of its product cycle. Despite the allure of stability, however, a wave of changes in other aspects of this market have taken place, especially in the new century.

The authors focus initially on the ascent of new entrants in the list of leading bulk carrier ﬂeets at ﬂag and beneﬁcial ownership level; these changes in the international division of labor in shipping are found to be largely symmetrical to the second wave of spectacular redistribution of the world’s industrial activity (Gratsos 2010). However, as the authors point out next, there has been remarkably little change in the core market traits: successive reversals of dry bulk market states have been going strong in the new century along with the quick reversal of fortunes of bulk carrier owners. If anything, the traditional dry bulk market volatility has been taken to new heights; the rapidity and magnitude of the decline of the dry bulk freight market in late 2008 shows that it was taken to historical extremes also. The main sources of the market’s dynamics have been both endogenous and exogenous and can be distinguished in: •

External inﬂuences; these relate mainly to changes in the economic geography

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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of bulk trades and in the state of the world economy (Stopford 2009). Inherent dynamics from inter-ﬁrm competition as crises exacerbate the latter; as a rule they ring the changes in the distribution of maritime activity among countries also (Thanopoulou 1995).

This recent period of signiﬁcant changes in various aspects of dry bulk demand and supply allowed the authors to view this traditional shipping market from a fresh – and hopefully original – perspective. Otherwise the compilation of one more analysis of the dry bulk shipping segment risked verging on the superﬂuous, as many valid and original approaches have seen the light over the past years. A number of these have been impressively exhaustive as well, and among them some – such as Stopford (2009) – were equally deﬁnitive. The authors focus on the changing dynamics of the industry; they set constants that have survived by now for more than half a century against structural breaks which underpinned the adaptation of dry bulk shipping to the globalized conditions of these very Late Modern times. The main body of the chapter is structured as follows: Section 10.2 outlines continuities and shifts in the new century in geographical patterns, ﬂeet characteristics and market traits. Section 10.3 considers developments in the international hierarchy of the dry-bulk tonnage. Section 10.4 illustrates the changing dynamics of facets of the market in the period before and after the credit crunch. Finally, Section 10.5 considers what to retain as the sector’s perennial characteristics amidst all the new elements, and highlights areas for further research. The thread that runs through the chapter, tying in all its sections, is the recent transformation of the segment through the dialectic

between shifts and continuity as the two, intertwining, have shaped the face of dry bulk shipping in the twenty-ﬁrst century.

10.2 Twenty-First-Century Dry Bulk Shipping Markets 10.2.1 A broad deﬁnition of dry bulk shipping The deﬁnition of dry bulk shipping has usually been derived from the traditional one of bulk shipping in general as transport by sea on a “one cargo/one ship basis” (Stopford 2009: 89). Often, bulk transport has been associated in literature and in practice with the shipping of commodities in unpackaged form, subdivided according to the physical properties of cargoes, i.e. dry, and liquid including gases. However, the perplexing cases of cargoes such as bananas, split between bulk and liner – whether in pallets or containers or eventually in both – or cars, eligible for either a “lonely” sea journey on a general cargo ship, a dedicated liner operation, or a tailor-made vessel, highlight the fragmentation of the sector in both traditional and specialized markets; they also highlight the difﬁculty of distinguishing between the two main shipping sectors, bulk and liner (Stopford 2009). In the end, the only certainty for this approach to market typology is the type and size of the ship. Alternatively – and especially when there is doubt – dry bulk shipping can be deﬁned on a commercial basis according to which party is dictating the essential terms in a speciﬁc contract for transport by sea. The main contract types are period charters (contracts for a period of time charged in US$/day), voyage charters (contracts for a particular voyage, charged in US$/ton) and

DRY BULK SHIPPING

trip time charters (TTC, essentially a charter contract for one voyage but charged in US$/day). The deﬁning feature is that under a period (and under a TTC) contract, the charterer, and not the shipowner, bears the costs of fuel. Other contract types exist, such as contracts of affreightment (contracts for the carriage of a ﬁxed volume of cargo without naming the ship), and bareboat charters (charter contracts without crew or management ships). Eventually, such a deﬁnition leaves the researcher, along with all contracting parties, in little doubt as to whether the speciﬁc sea-transport operation falls under bulk or liner shipping. Parties to contracts are usually much more positive about who is responsible for what, through the main types of contracts and their associated clauses (Wilson 1998). Despite complications created by liner operators who increasingly time-charter ships for container trades (UNCTAD 2009), any transport of dry goods where time and route have not been dictated by the shipping owning/operating company can be considered to be within the realm of dry bulk shipping along the lines of Metaxas’s (1971) classic distinction between bulk and liner. Such a deﬁnition, which is essentially one by exclusion, applies both to specialized sub-markets, such as reefers or car carriers, and to the traditional ore and bulk carrier segment (Stopford 2009: 419), which is classiﬁed usually in commodity shipping (Wijnolst and Wergeland 1996: 300) and on which the chapter focuses. Analysis of this market is also facilitated by the decline of the combination carrier capacity. The share of the latter fell from about a quarter of the bulk carrier ﬂeet around the time of the last dry bulk shipping crisis of the 1980s to less than three percent nowadays (Gratsos 2010). This was

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only one change among many in the dry bulk segment, while the dry bulk ﬂeet grew to top the world tonnage list as the ﬁrst decade of the new century came to a close.

10.2.2 The forces shaping modern dry bulk shipping: stability and adaptation The recent accelerated growth of the dry bulk ﬂeet has put additional emphasis on whether the trend was coupled with a departure from the market’s traditional traits. Until the winter of disbelief in market developments, that of 2008/9, the serial freight market records of the decade had turned such a hypothesis almost into a certainty. This was at least a popular belief among the eager – too eager as it proved – investors in dry bulk tonnage. However, developments after the ﬁnancial crisis of 2008 provided proof of the remarkable resilience of many of the market’s generic original characteristics (Thanopoulou 2010). Central among these was the endemic tendency to over-invest (Metaxas 1971). The rampant reorganization of the seaborne trades as new growth poles for international shipping and trade, too fast for the world economy to retain stability, proved ultimately to have added risk to shipping investment to a greater extent than it had created opportunities. Yet, in that reorganization of the demand side and the – delayed as always (Stopford 2009) – response of the supply side, there were elements that remained constant and reminiscent of the old, as well as shifts ushering in the new. Overall, the workings to which the dry bulk shipping of today owes its characteristics have had two main forces: •

The ﬁrst is one of relative stability in terms of the overall trade composition

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despite changes in the pecking order of main bulk cargoes, of market form and of the main factors of dry bulk shipping competitiveness. The other has been the dynamic adaptation of the supply side to the logistical needs of world dry bulk cargo trades. The response of industry to changing demand traits has been at the basis of the evolution of vessel class-sizes and was accompanied by the evolution of typical charters and vessel sizes that have been included in main freight indexes over time.

10.2.3 Top dry bulk cargoes in the new century The stability of typical dry bulk cargoes is reﬂected in the origins of the term dry bulk shipping. These are rooted deep in the long history of sea transport of bulk commodities, and all remain topical in the twenty-ﬁrst century. This is valid whether the historical horizon is stretched as far back as classical antiquity (Stopford 2009: 9) or remains within the conﬁnes of modern times and the nineteenth-century British Industrial Revolution (Alizadeh and Nomikos 2002: 227). In either case, both speciﬁc bulk trades involved have transcended time: for two and a half thousand years and a couple of centuries respectively, grain and coal have remained among the three largest dry bulk cargoes. Nevertheless, there have been signiﬁcant changes in recent years in terms of the relative importance in world trade of major dry bulk commodities as well as in which of them is the leading bulk cargo. These changes were the ones to set the dynamics of the ﬂexible adaptation of the supply side in motion.

The post-war era was marked by the rapid re-industrialization of countries ravaged by the war, which created the momentum that marked bulk trades, both wet and dry (Stopford 2009). As coal was abandoned in favor of oil, and as grain trades followed the trend from a distance, despite having increased faster than the world population for over half a century (see Table 10.1), iron ore emerged as the leader of the segment’s cargoes. The magnitude of iron ore volumes transported by sea inspired the massive introduction of ore carriers in the 1950s, reﬂected in the quick penetration of bulk vessels into the trade (see Table 10.1); it was followed by the creation of the versatile dry bulk carrier shortly after (Mitropoulos 1980). However, the re-invention of steam coal as a promising primary energy source in the wake of the two oil price shocks of the early and late 1970s (Stopford 2009) led to the return of coal for a second reign over the world’s dry cargoes in the early 1990s. This was to last for a decade and a half, with only a brief interruption in 1994 and 1995. The critical development that ushered dry bulk shipping into an era of reigning equally with tankers – or even in a position of dominance – over world tonnage was the recapturing by the top dry cargoes of the momentum they seemed to have lost around the millennium (see Figure 10.1). Iron ore was central in this process, crowning dry bulk volumes traded by sea by 2007 (www.clarksons.net) with a marked difference from the rest. Progressively, and despite the traditional “ﬁve main dry bulk cargoes” remaining unchanged, the two last among them, bauxite and alumina, and – especially – phosphate rock, lost relative ground. In 1970 both trades had represented about 45–6% of grain volumes transported

Table 10.1 World population and large dry-bulk cargoes in million metric tons, 1960–2009

1960 1970 1980 1990 2000 2009 Growth 1960– 2009 (%)

World population (millions)

Iron ore

Coal

Grain

Bauxite and alumina

Phosphate rock

3,023 3,686 4,438 5,290 6,115 6,756 123

101 (31) 247 (212) 314 347 448 849 741

46 (3) 101 (70) 188 329 520 777 1,589

46 (1) 73 (43) 198 215 264 320 596

17 (3) 34 (20) 48 55 54 81

18 (–) 33 (14) 48 37 30 27

Figures in brackets are million metric ton ﬁgures corresponding to bulk carrier penetration in total trade. Source: World population ( July 1 data): for 1960 to 2000, United Nations (2009); for 2009, US Census Bureau at www.census.gov/ipc/www/popclockworld.html (accessed March, 2010). Dry-bulk main trades: for 1960 and 1970, OECD (1976), Les Transports Maritimes 1975, p. 124; for 1980, OECD (1983), Les Transports Maritimes 1982, Table III (a), p. 143; for 1990 and 2000, Clarkson Research Studies (2008a), p. 101; for 2009, estimate in www.clarksons.net/tables/tables.asp (accessed March and April, 2010). Steam and coking coal data added for table totals. Growth rates calculated by the authors.

60% 50% 40% oil 30%

5 main dry bulk other (bulk and general)

20% 10% 0% 1970

1980

1990

2000

2008

Figure 10.1 Bulk cargoes, 1970–2008. Source: based on data in UNCTAD (2009: 8, Table 3).

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(OECD 1971). In 2009 their share had been reduced to 25% for bauxite and alumina and to just 8% for phosphate rock (data: www.clarksons.net). In reality these two trades were progressively relegated to a gray zone between major and minor bulks. Their main legacy to the new century was the prompting by the bauxite trade of the creation of a new size class of dry bulk carrier, the Kamsarmax, a larger Panamax vessel maximized for this Guinea loading port. Its introduction exempliﬁes the adaptation of dry bulk supply to demand patterns in recent years and the role of new trades, new routes and waterway restrictions in optimizing dry-bulk vessel capacities and design, as was the case, especially with the Panama Canal, in the more distant past.

to have become less efﬁcient as the geography and structure of the trades altered in the light of the expansion of the large China-bound dry-bulk trades (Gratsos 2010). Once more, the feature of distance played not only to the advantage of bulk carrier owners but also to that of larger vessels serving big individual trades, which led ﬁnally to the ﬁrst increase in the maximum size of ordered bulk carriers since the 1980s. Overall, two aspects have been most critical for the recent transformation of dry bulk shipping: •

10.2.4 From demand to supply: a process cast in iron ore The introduction of the Kamsarmax is hardly the only example of demand trends bringing about the restructuring of the dry bulk shipping system; in this process, distance mattered: Tubarao could hardly have been further away as an export center from the main iron ore Asian importing areas (Stopford 2009), or Colombia from Indian coal importers. Overall, the trend for the average distance was towards an increase after 2002. However, this was not the case for all dry bulk trades and some, such as coal, performed rather erratically in this respect; although in the period the dry markets boomed, marginal increases were recorded even for coal trades; still, recorded increases do not take into account the impact of trade trends on triangulation. The latter involves the repositioning of ships with a view to a reduction of the ballast leg. Triangulation has been deemed

•

The current geography of main bulk trades. As the stability of main export areas for the leading large-parcel trades, such as iron ore (Stopford 2009), was coupled with major changes in the list of main importers (see Table 10.2), the seeds of the current bulk carrier reign in the world ﬂeet were sown. The trend towards redeﬁning – while adding to – dry-bulk vessel size-classes (see Table 10.3). This trend was accompanied by a renewed momentum towards large vessels such as VLOCs (see Table 10.4); this was driven mainly by the iron ore trade and was vaguely

Table 10.2 Major iron ore importers, mid-1980s and 2008. Mid-1980s Western Europe Japan USA Rest of the world

2008 40

(EU)

14

40 8 12

Japan China Rest of the world

17 53 16

Sources: For the mid-1980s, Berengier and Givry (1986). For 2008, UNCTAD (2009), ﬁgure 6(a), p. 20.

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DRY BULK SHIPPING

Table 10.3 Dry-bulk vessel sizes, mid-1980s and mid-2000s

Handysize Handymax Supramax Panamax Kamsarmax Capesize Chinamax VLBC max. VLOC max.

Mid-1980s

Mid-2000s

25,000 45000

30,000

50–80,000 >80,000 364,767 (364,767)

50,000–60,000 60–80,000 80,000–82,977 >100,000 300,000–388,000

Table 10.4 Share of vessels > 200,000 dwt in total bulk carriers within age bands Age (2008)a 15 years and over 14 to 5 years 4 to 0 years

Share in total age band of vessels (%) 1.32 0.45 3.49

a

beginning of March. Source: Calculated from data in Clarkson Research Studies (2008a), p. 130.

388,000a

a Awaiting delivery. Source: Various market reports; Clarkson Research, Shipping Review and Outlook, various dates; Stopford (2009); Gratsos (2010); Waldegrave (2006). www.clarksons.net (accessed March, 2010). The Baltic (2007).

reminiscent of the VLCC revolution of the 1960s. The newly coined term Chinamax is indicative of the inﬂuence the Chinese iron ore trade had on vessel size evolution. The term has been applied as an alternate term to both the planned – earlier in this century – orders of 400,000 dwt vessels (Gratsos 2010) and 300,000 dwt ships destined for longhaul iron ore trades (Baltic 2007). At the same time as the oil share declined in the world trade, after the two oil crises of the 1970s, dry bulk shipping picked up part of the loss. The tables were really turned, however, in the present century. The dramatic rise in iron ore world trades, coupled with a healthy demand for all types of coal, resulted in the ﬁve main dry bulk cargoes, and essentially the top three among them, iron ore, grain and coal, leaping to over a quarter of the world seaborne trade. The rise of China as the most dynamic industrial country, well on its way to becom-

ing the world’s largest economy, was quintessential in the rise of dry bulk trades. China had taken the position of the main center of creation of bulk demand that Japan had held in the post-war period. Like the latter in the early 1970s (Thanopoulou 1994: 51), China was on its way to becoming the world’s leading national dry bulk twenty-ﬁrst-century ﬂeet. This hardly implied it would stay behind other ﬂeets as long as Japan had, either in this speciﬁc segment or in any other or in total (Thanopoulou 2008). Similarly, in terms of the impact of specialization on overall ﬂeet development, no analogy can be made with the ﬁrst post-war decades when bulk carriers were an innovation creating the next leaders in world shipping (Thanopoulou 1994). Bulk carriers were in the 1960s a fastrising but, unlike today, a small tonnage category and just a fraction of the leading oil tanker capacity (see Figure 10.2).

10.3 International Division of Labor in Dry Bulk Shipping: Developments and Prospects The shift towards ore and bulk carriers had been instrumental in deﬁning the competitive position of a number of ﬂeets

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2009 2006 2003 2000 1997 1994 1991 1988 1985 1982 1979 1976 1973 1970

Total tanker fleet (over 10,000dwt) Total bulk-carrier fleet

0

50

100

150

200

250

300

350

400

450

Figure 10.2 Tanker and bulk carrier capacity in million dwt, 1970–2009. Source: based on Clarkson Research data, www.clarksons.net.

in the second half of the twentieth century (Thanopoulou 1994). In competitive market segments such as dry bulk shipping, the pattern of post-war shipping competitiveness was based on specialization adapted to demand trends and on terms related more to the ﬁxed and variable cost levels of ﬂeets (Thanopoulou 1998). Freedom of entry, non-differentiation of the product by the ﬁrm and absence of advertising have for long been synonymous with the state of competition in this market (Alizadeh and Nomikos 2002; Wijnolst and Wergeland 1996). Unlike tanker shipping, where the pressure of increased regulation has changed rapidly the terms of inter-ﬂeet and inter-ﬁrm competition, dry bulk shipping remains even today a sanctuary for both theoretical principles and practical manifestations of fully competitive markets. Although the concept of quality had permeated various aspects of shipping

practice in other segments since the 1990s (Thanopoulou 2007), dry bulk shipping followed only after some delay. Previous research on dry bulk freight rate differentiation had found sporadic evidence and, accordingly, reached tentative conclusions on two-tieredness of markets (Tamvakis and Thanopoulou 2000). Conﬁrmation of quality rate differentiation in major segments of the market, such as Panamaxes, came in the boom period of the present century (Kohn and Thanopoulou 2009) and was the ﬁrst solid conﬁrmation of a clear departure from non-differentiated rates. Up to the ﬁrst decade of the present century any such differentiation had only existed between ore and bulk carriers on the one hand and their predecessors on the other hand; this however was at the time when bulk carriers had entered the market as a new tonnage category to compete directly with older vessel types.

DRY BULK SHIPPING

10.3.1 The bulk carrier in a product-life cycle perspective Bulk carriers, hardly at the beginning of their product life cycle, remain a largely unsophisticated tonnage segment even today. This vessel type seems to have been exempt so far from sweeping innovation in the way that, for example, traditional general cargo ships were affected by containerization; it has also been spared from direct competition from newer vessel types or from a newer class of service, unlike break-bulk and – later – pallet-friendly reefers, and bulk reefer shipping as a whole, in the last decades (Thanopoulou 2009). Following earlier attempts (Stopford 2009), the creation of the modern dry bulk segment has its origins over ﬁfty years ago in the mass building of the dedicated ore carrier (Mitropoulos 1980). The rather short product life cycle of the latter (Thanopoulou, Theotokas and Constantelou 2010) was prolonged mainly through its successful evolutionary transformation into the general-purpose bulk carrier. These were well adapted to serve the three most important dry bulk commodities that developed trades with large volumes. Smaller bulk carriers remained conﬁned mainly to the bottom two of the ﬁve major dry bulk cargoes and in the wide range of minor ones (Stopford 2009). Two elements of the bulk carrier were at the origin of the segment’s success at the time when the general bulk carrier evolved from the ore generation in the late 1950s: •

Size; they were much larger than the Liberty, Empire and Park designs that were the versatile legacy of the shipbuilding war effort (Metaxas 1971; Mitropoulos 1980).

•

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Adaptation to the requirements of charterers/ shippers; this became evident through the rapid penetration of the market by the bulk carrier into the iron ore and coal trades. The bulk carrier had captured more than half of those markets by the middle of the 1960s (Thanopoulou 1994).

Adaptation to demand trends proved critical for the ascent of maritime countries in the international division of labor in shipping during the second half of the twentieth century. It was the turn towards the more evolved and ﬂexible general bulk carriers – and not the early turn towards ore carriers in the 1950s – that correlated well with the relative progress of ﬂeets in the international division of labor over the post-war period. This was proved ex post by the strong correlation between the degree of specialization in general bulk carriers and the overall ﬂeet development of Japan, Greece and Norway at the time (Thanopoulou 1994; Thanopoulou, Theotokas and Constantelou 2010). China was added to the list of main competitors in the world dry bulk ﬂeet well before the millennium, amidst the second wave of post-war changes in the international division of labor which took place and had become evident by the 1980s. However, despite similarities with the case of Japan, the dynamics of China’s involvement either in dry-bulk shipping or in the world ﬂeet overall do not have to be strictly analogous (Thanopoulou 2008).

10.3.2 Dry bulk ﬂeet distribution in the new century: shippers today – leading owners tomorrow As China resurrected the interest in everything absolute, including advantage

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(Thanopoulou 2008), it redeﬁned the terms of competitiveness in twentieth-century shipping as well. Unlike Japan, this was an economy which was important not only for bulk shipping imports, but also as an exporter of various dry bulk cargoes with a still largely untapped potential. The size and geography of the country also implied signiﬁcant cabotage activities. In the case of a country with China’s endowment in natural resources, such as coal, coastal trades cannot be sniffed at as being of secondary importance. On the contrary, the Chinese bulk trades absorbed recently more than seven times the tonnage US coastal trades required for their transport. As these transport requirements do not usually enter international trade statistics, they introduce a considerable asymmetry into attempts to compare demand and supply. It has been estimated that before the end of the 2000s the ﬂeet servicing this trade amounted to somewhere between four and nine percent of the world dry bulk carrier tonnage (Gratsos 2010). China’s shipbuilding capacity had been boosting the country’s orientation towards the supply side of dry bulk shipping as well. The quick success of Chinese shipyards in attracting international orders during the shipping boom period proved an unexpected aid for the development of the Chinese ﬂeet in the difﬁcult times that were to come: the 2009 stimulus plan, following the market reversal in 2008, encouraged local sources to pick up order cancellations (Li and Mehlsen 2009). The state ownership regime under which many Chinese yards operate (Barry Rogliano Salles 2010) facilitated moves like this that helped the expansion of the Chinese dry bulk ﬂeet. As shown in Table 10.5, the latter had started well before the latest market cycle.

Table 10.5 Share of the leading dry-bulk carrier ﬂeets in the world dry-bulk tonnage by ﬂag, 1989 and 2009 1989 (GRT basis)a (%) Panama Liberia Greece Japan Cyprus Philippines PRCb

13.53 11.10 7.71 7.13 6.81 5.40 3.65

2009 (dwt basis) (%) Panama Hong Kong Liberia Malta Greece Marshall Islands PRCb

35.48 8.91 6.65 5.78 5.13 4.52 4.33

a

including combination carriers for 1989. Hong Kong not included. Source: Calculated for 1989 from data in OECD (1990) Maritime Transport 1989, and for 2009 from September 1, 2009 data in www.clarksons.net. b

Long-term strategies of leading shipper– charterer countries, as China has emerged to be in this century, had intertwined with shipbuilding activity before. The two previous leaders in world shipbuilding, Japan and South Korea, were instrumental in creating the world’s bulk carrier capacity until the end of the twentieth century. In the process, they also built their own bulk shipping ﬂeets, which served trades that were crucial for the industrial development of their economies (Stopford 2007). Changes in the distribution of the dry bulk tonnage and the ascent of China in the segment become even more striking when tonnage under beneﬁcial control ﬂying all ﬂags is taken into account (see Table 10.6). If the capacity under Chinese control is combined in part or in total with the capacity beneﬁcially owned by Hong Kong – according to how much of the latter’s interests are deemed to be associated with the mainland – the balance between recent shifts and pattern continuity in dry bulk shipping tips further in favor of the former.

DRY BULK SHIPPING

Table 10.6 Top six dry-bulk carrier ﬂeets controlled by nationals, January 2009 Controlling nation

Capacity (mill. dwt)

Japan Greece China South Korea Hong Kong Germany

86.5 82.7 43.0 20.2 17.2 14.1

Source: Data in UNCTAD (2009).

Delving deeper into supply developments, however, suggests that new traits at various levels have clearly been accompanied by the repetition of very traditional patterns. In terms of ﬂeet composition, the share of smaller and geared vessels continued to decline; in terms of shares and of vessel sizes, those of ships classed in the Panamax and Capesize ranges kept on increasing (Gratsos 2010). However, the more dramatic developments were related to the overall supply of tonnage in the context of rapidly – and surprisingly – rising markets. The over-ordering in the previous dry bulk market boom of 1994 and 1995 had left the sector with a chronic overcapacity not entirely absorbed for years (Thanopoulou 1998). As the twenty-ﬁrst century dawned, there were few potential wild cards which could raise the market suddenly as the millennium US energy crisis had done for tankers. However, the subsequent take-off of the second wave of emerging Asian economies, including China, was to upset, in a positive way, the outlook for all bulk markets, wet and dry. As dry bulk freight market records lined up to be serially broken from 2003 to 2008, so record orders were placed. Near the end of 2008 the orderbook-to-ﬂeet dwt ratios

197

had risen to three ﬁgures for speciﬁc dry bulk market sub-segments such as the 80 to 100,000 dwt vessels, with only the Handysize ratio staying, at around 36 percent (Clarkson Research Studies 2008b) at levels comparable to those of the – also oversubscribed in terms of orders – tanker market. The results of this (over-)ordering behavior, which ﬁnally propelled bulk carriers to the top position in the world ﬂeet, are still hanging over the market about half a decade later. The recurrence of the endemic tendency to over-invest, especially after 2006 (Thanopoulou 2010) was – in its exaggeration – an exacerbated repetition of known investment patterns in the course of shipping cycles. It was also part of a general euphoric hubris permeating most markets at the time along with the ﬁnancial ones from where redemption ﬁnally came through the credit crisis. Following the full manifestation of the latter in September 2008, trends in dry bulk market practices that had evolved over the longer term in the new century were momentarily overshadowed by extreme phenomena ushered in by the collapse of its habitual business environment.

10.4 Illustrating Twenty-FirstCentury Bulk Shipping Trends: Market Practices Mainstream dry bulk practice has acquired much more visibility since the millennium. This was a shift from the low proﬁle shipping had typically held and was highlighted especially at the time of the collapse of the ﬁnancial markets in 2008 along with that of dry-bulk freight rates. For better or for worse, the elevation of dry bulk shipping

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to the position of a predictor of the state of the world economy, on the basis usually of the Baltic Dry Index, brought dry bulk shipping closer to general economic forecasts as well as to the average consumer and investor in the fast-changing twenty-ﬁrstcentury markets. Other changes were more esoteric to the segment. They were not, however, entirely unrelated to the exuberant ﬁnancial climate of the time just before the credit crunch. As speculation took hold, chartering chains became long and frail. The spectacular collapse of some of these exacerbated the problem of business continuity in the unusual circumstances of international transactions after the ﬁnancial crash (Thanopoulou 2010). Available data for shortly before the market crash (Lloyd’s List 2007) point out that time-charters of longer than one year had been contracted by about 80 percent of owners and operators, thus increasing the overall risk of non-payment to owners (Gratsos 2010), who remain responsible for the ﬁxed paid-out costs. Such difﬁculties were exacerbated by the Letter of Credit problem (Porter 2009) that almost brought dry bulk commerce to a halt in the months following September 2008. As trust disappeared, it hurt the heart of an industry of which it had traditionally been the unquestionable foundation (Thanopoulou 2010). The dynamic picture of dry bulk shipping presented above creates considerable challenges for both researchers and analysts. Market models for dry bulk shipping – as reviewed by Veenstra (1999) and more recently by Glen (2006) – while containing dynamic structures, do not reﬂect some of the more important dynamic processes. These relate to the way business was conducted in the segment and to the ensuing

term structure of rates as this emerged in the twenty-ﬁrst century. Consider the balance between the three main chartering contract types: period charters, voyage charters and trip time charters. Unlike in the 1970s, the increase in bunker prices after 2003 was not such a major problem for dry bulk operators in the context of a buoyant market; it had a more noted impact in blurring the picture of real market returns of voyage charters. As most freight indices moved progressively towards trip-charter rates, the Baltic Dry Index came to rely ultimately on no traditional voyage charters at all; the latter survived only in the calculations of sub-indices (Baltic Exchange). The overall trends for charter types over the past decade are illustrated through the distribution of ﬁxture counts presented in Figure 10.3. Fixture counts, while being extremely simple indicators, have not been used extensively in the analysis of market structures or of market conditions. Much of the academic work has been based on already processed data reported by professional data providers and maritime publications. A ﬁrst insight from the ﬁxture counts after the millennium is that the dominant contract in dry bulk shipping is not the spot or the period contract but the trip time charter contract, which represents on average twothirds of the number of contracts. This is an interesting observation, because a substantial body of work has been presented in recent years on the relationship between period and spot rates (see for instance the review in Adland and Cullinane 2005). The situation is actually more complex: apparently there is no dichotomy in shipping contracts but a “trichotomy.” Figure 10.3 also illustrates how complex the dynamic of this trichotomy really is.

199

DRY BULK SHIPPING

0.9 0.8 0.7 0.6 0.5

PERIOD SPOT TTC

0.4 0.3 0.2

Jul-09

Jul-08 Jan-09

Jul-07 Jan-08

Jul-06 Jan-07

Jan-06

Jul-05

Jul-04 Jan-05

Jul-03

Jan-04

Jul-02 Jan-03

Jan-02

Jul-01

0

Jan-01

0.1

Figure 10.3 Fixture counts per contract type per month, 2001 : 1 to 2009 : 12 (in percentage share). Source: based on ﬁxture data available through www.clarksons.net.

The ﬁgure presents the shares of the three types of contracts by month as derived from the ﬁxture counts. It is worth noting the almost exact mirroring of these shares between TTCs and spot charters in the beginning of the period, and another mirroring, but this time between TTC and period chartering in the right-hand side of the graph. Apparently, there is an economic regime at play, where contract parties (charterer and shipowner) are considering the choice between two types of contracts (for instance spot and TTC). As the main difference between these contracts is who pays the fuel costs, which account for around 20– 30% of the total costs of shipowners (Gratsos 2010; Stopford 2009), one could conjecture that bunker prices might be a driver for choosing TTCs over spot contracts, or vice versa. At another level, there is a shift in decision space where spot contracts stop being an interesting contract type altogether, and shipowners focus on the length of the contract (one trip against

a longer period). This shift coincides with the extreme peak in freight rate levels around 2007/2008. This process of locking in high rates is a well-known phenomenon in shipping and is described in classic texts, such as Stopford (2009) and chartering handbooks. Another issue that is much more complex than it has been considered in most analyses and academic research in the past is the identiﬁcation of the dry bulk shipping market structure. In most maritime economic contributions, especially those where the industry as a whole is portrayed (see, for instance, Marlow and Gardner 1980 or Norman 1979), dry bulk shipping is listed as one of the purest representations of competitive markets as measured by, among other things, the number of buyers and sellers. However, market extremes need to be taken into account and explored further (as was done for instance in Adland and Cullinane 2006). Figure 10.4 underlines the existence of troughs but especially of spikes in this regard.

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45 40 35 30 25 20 15 10

Sep-09

Jan-09

May-09

Sep-08

May-08

Jan-08

Sep-07

Jan-07

May-07

Sep-06

May-06

Jan-06

Sep-05

Jan-05

May-05

Sep-04

Jan-04

May-04

Sep-03

May-03

Jan-03

Sep-02

Jan-02

May-02

Sep-01

Jan-01

0

May-01

5

Figure 10.4 Fixture counts by month, 2001–2009; loading iron ore at West Australian ports. Source: based on ﬁxture data available through www.clarksons.net.

We assume that the ﬁxtures “done” are an accurate representation of supply and demand, an idea whose origins go back to Tinbergen (1934) and Koopmans (1939). From Figure 10.4, it is clear that the size of the market, measured by the number of ﬁxtures, ﬂuctuates strongly over time. This means that the degree of competition reigning in the market at any given time may not be stable either and that the market may sometimes be more competitive than in other periods. This has repercussions for the price determination process, which will reﬂect a combination of a pure competitive state of the market and of processes allowing prices to rise high above normal cost levels. This may still mean the market is competitive overall, but the sources of this competitiveness are not straight from the textbook, and merit further attention in maritime economic research. Laulajainen (2006) has proceeded in this context to a much more extensive analysis of the geog-

raphy in dry bulk shipping in relation to market structure. Geography and volatility relations are clearly reﬂected in the way freight rate ratios for iron ore between different routes ﬂuctuated during market extremes. In the summer of 2008 the Brazil–China/ Australia–China spot US$ per tonne ratio was as high as 2.82. When the dry bulk market collapsed a few months later, in December 2008, the ratio declined to 1.67 (Gratsos 2010) as the overall demand and supply balance in the market had shifted; also, bunker prices, rapidly falling at the time, were increasingly reﬂected in the freight rates, which were closer to the variable cost of the most efﬁcient vessel than to anything proﬁtable. Market extremes also affected the ratio of earnings; during the crash of rates in the months following September 2008 the latter dropped to its lowest point for Panamaxes versus Capesize vessels, decreasing at the time to less than

201

DRY BULK SHIPPING

60.00

160000.00

Capesize average duration Capesize average rate

50.00

140000.00 120000.00

40.00

100000.00

30.00

80000.00 60000.00

20.00

40000.00 10.00

20000.00 Jan-09

Jul-08

Jan-08

Jul-07

Jan-07

Jul-06

Jul-05

Jan-06

Jul-04

Jan-05

Jul-03

Jan-04

Jul-02

Jan-03

Jul-01

Jan-02

Jan-01

Jul-09

0.0

0.00

Figure 10.5 Contracts duration and average period rate, Capesize vessels. Source: based on ﬁxture data available through www.clarksons.net.

one-third (Gratsos 2010). In addition, the inﬂuence of commodity prices negotiated at regular intervals, such as the price of iron ore, created seasonal spikes through transport demand peaking when current and spot prices were perceived to be substantially lower than had been anticipated. In the context of commodity prices, price volatility became an inﬂuential factor increasing on occasion almost twofold, as in the case of the FOB iron ore price from Australia to China between, most signiﬁcantly, 2004 and 2005 and between 2007 and 2008 (Gratsos 2010). The degree of volatility observed over this period speaks for the preservation of the competitive character of the segment. The dry bulk carrier market, despite having been a breeding ground for tonnage pools (Drewry 1974), seems to have equally failed to demonstrate any real impact of these pools on freight rate formation. Individual pools may well prove to have “no market power” in a competitive environment in markets “with

low entry barriers” (Lorenzon and Nazzini 2009:116); sustained volatility seems to corroborate this. A ﬁnal illustration of market dynamics is provided in Figure 10.5 through the relationship between contract duration and freight rate levels. Contract duration has not received much attention in the dry bulk shipping industry, as evidenced by the lack of freight rate time series in which duration is incorporated as a freight rate feature. Most of the freight rate series are transaction series, focusing on the price per ton or day at the date of contracting. For longterm charter contracts, however, this means that these series do not really reﬂect cost of use or average charter levels in the market of new and existing contracts. The relationship between duration and freight level is in fact a fairly stable relationship, as illustrated by Figure 10.5. The lack of period contracts until mid-2003 in the Capesize segment is notable in this context. In this coal- and iron ore-oriented segment,

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voyage charters and contracts of affreightment have been the main transport contracting approach in recent years (Gratsos 2010). Period charters occur when the shipper or receiver wishes to control the transport cost over a long period of time and/or encourage the construction of bigger ships. At a time of ample supply of tonnage and in a weak market, much as the one that existed from 1998 to 2003, charterers could negotiate very low rates; apparently, owners disagreed that the latter would remain at low levels and therefore were not willing to commit vessels for longer periods. Figure 10.5 shows clearly the codevelopment of the two series: average contract duration and average period rate levels. One could infer from the graph that the rate acceleration in the period 2006/2007 is not entirely mirrored in the increase in average contract duration. This would indicate some degree of dynamics in the relationship between duration and rate, but at least this dynamic seems to be single-layered and could be represented with a simple regime shift model (for a survey see van Dijk, Terasvirta and Franses 2002).

10.5

Summary

Solid certainties and dry bulk shipping may seem suited, but in reality this is true only from a linguistic point of view. In the broader perspective of maritime economics, in which geography and economics should ideally be combined, dry bulk cargoes rhyme better with the ﬂexibility and ﬂuid reorganizations of trade networks. As underlined by dry bulk shipping developments in the new century, economic geography should claim a more signiﬁcant and rightful place, next to pure shipping market

analysis, in providing concepts and tools to understand the mechanics of the market’s transformation. Despite dry bulk shipping being in a state of ﬂux since the start of the new century, shifts took place within the stability that a mature, yet adaptable, technology provided in the context of the evolution of this type of tonnage and service. Nevertheless, the term stability sounds like an oxymoron when one tries to describe the ﬁve glorious years from 2003 to the summer of 2008, during which, momentarily, the laws of shipping economics seemed to stand still. With hindsight, this was only in order for them to be again set in – accelerated – motion as the next major shock shook the world economy through the credit crash; as became evident in the aftermath also, there has not been any structural change in freight market response (Gratsos 2010). Price determination through market free-play emerged in an even more prevalent way as the market collapsed. Still, one of the new market trends, that of the remuneration of tonnage quality, needs to be assessed again in the context of this uniquely spectacular fall of rates during late 2008. This will allow a more deﬁnitive verdict on whether quality matters – and pays – in all phases and extreme conditions of market cycles. Measuring the repercussions for the sector of the magnitude of the ﬁnancial crisis in terms of volatility and of the term structure of dry bulk rates is equally essential in order to test the validity of previous results during periods of market extremes. This brings to the fore the issues related to decisions affecting supply in the long term. As traditional investment patterns seem to have survived all too well in the new century, prolonging or aggravating ﬁnancial difﬁculties otherwise unjustiﬁed by prevailing

DRY BULK SHIPPING

freight market levels alone, the behavioral foundations of investment patterns would be perhaps a most appropriate angle from where to explore the paths taken by investors’ minds en masse as they placed their orders in bulk.

References Adland, R. and K. Cullinane (2005) A timevarying risk premium in the term structure of bulk shipping freight rates. Journal of Transport Economics and Policy 36: 191–208. Adland, R. and K. Cullinane (2006) The nonlinear dynamics of spot freight rates in tanker markets. Transportation Research Part E: Logistics and Transportation Review 42(3): 211–24. Alizadeh, A. and N. Nomikos (2002) The dry bulk shipping market. In C. Grammenos (ed.), The Handbook of Maritime Economics and Business, pp. 227–50. London: Lloyd’s of London Press. Baltic, The (2007) Shipbulding revival in South America. September. www.thebaltic.co.uk/ september_2007/p_57.php (accessed May 4, 2011). Baltic Exchange. www.balticexchange.com (accessed various dates November 2009– March 2010). Barry Rogliano Salles (2010) Shipping and Shipbuilding Markets: Annual Review 2010. Paris: BRS. Berengier, J. and C. Givry (1986) Transport maritime et logistique des matières premières. Paris: Economica. Clarkson Research Studies (1998) Shipping Review and Outlook. Autumn 1998. London: Clarkson. Clarkson Research Studies (2008a) Shipping Review and Outlook. Spring 2008. London: Clarkson. Clarkson Research Studies (2008b) World Shipyard Monitor. December 2008. London: Clarkson.

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Drewry (1974) Bulk Shipping Pools and Consortia. London: Drewry. Glen, D. R. (2006) The modelling of dry bulk and tanker markets: a survey. Maritime Policy and Management 33: 431–45. Gratsos, G. (2010) Freight market signals in a changing environment: an internal view of dynamic forces that shape the dry bulk business. PhD thesis, University of the Aegean. Köhn, S. and H. A. Thanopoulou (2009) A GAM evaluation of 21st century quality rewards: the case of the dry bulk time-charter market 2003–2007. Paper presented at the annual conference of the International Association of Maritime Economists (IAME), Copenhagen, June 24–6, 2009. Koopmans, T. (1939) Tanker Freight Rates and Tankship Building. Haarlem: de Erven F. Bohn NV. Laulajainen, R. (2006) The geographical foundation of dry bulk shipping. Gothenburg School of Business, Gothenburg. Li, B. and A. K. Mehlsen (2009) The report on the Chinese shipbuilding industry: targets after 2008 (public version). Di-Asia Base Business Services Ltd. Lloyd’s List (2007), October 30. Lorenzon, F. and R. Nazzini (2009) Setting sail on a sea of doubt: tramp shipping pools competition law and the noble quest for certainty. In A. Antapassis, L. Athanassiou and E. Røsæg (eds.), Competition and Regulation in Shipping and Shipping Related Industries. Leiden: Martinus Nijhoff Publishers. Marlow, P. B. and B. Gardner (1980) Some thoughts on the dry bulk shipping sector. Journal of Industrial Economics 29: 71–84. Metaxas, B. N. (1971) The Economics of Tramp Shipping. London: Athlone Press. Mitropoulos, E. (1980) Katigories kai Syghronoi Typi Emporikon Ploion [Categories and modern types of merchant ships]. 2nd edn. Piraeus: Stavridakis. (In Greek.) Norman, V. D. (1979) The economics of bulk shipping. Institute for Shipping Research, Bergen.

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OECD. (annual) Les Transports maritimes. Paris: OECD. Various issues. (Also published in English as Maritime Transport.) Porter, J. (2009) Letters of credit crisis continues to halt cargo. Lloyd’s List, January 9. Stopford, M. (2007) China and the maritime economy: the next phase. Paper delivered at the Senior Maritime Forum “China’s Economy and the Global Maritime Industry,” Shanghai, November 27. Stopford, M. (2009) Maritime Economics. 3rd edn. London: Routledge. Tamvakis, M. N. and H. A. Thanopoulou (2000) Does quality pay? The case of the dry bulk market. Transportation Research Part E: Logistics and Transportation Review 36: 297–307. Thanopoulou, H. (1994) Elliniki kai Diethnis Naytilia [Greek and international shipping]. Athens: Papazissis. (In Greek.) Thanopoulou, H. A. (1995) Changes in the international division of labour in shipping and maritime crises. Maritime Policy and Management 22: 51–62. Thanopoulou, H. A. (1998) What price the ﬂag? The terms of competitiveness in shipping. Marine Policy 22: 359–74. Thanopoulou, H. A. (2007) A ﬂeet for the 21st century: modern greek shipping. Research in Transportation Economics 21: 23–61. Thanopoulou, H. (2008) Great occurrences, great opportunities, great challenges. Naftica Chronika August 2008: 24–6. (In Greek.) Thanopoulou, H. (2009). Bulk reefer economics in a product life perspective. Paper presented at the annual conference of the International Association of Maritime Economists (IAME), Copenhagen, June 24–6, 2009.

Thanopoulou, H. (2010) Investing in twentyﬁrst century shipping: an essay on perennial constraints, risks and great expectations. In C. Th. Grammenos (ed.), The Handbook of Maritime Economics and Business, pp. 659–682. London: Informa. Thanopoulou, H. A., J. Theotokas and A. Constantelou (2010) Leading by following: innovation and post-war strategies of Greek shipowners. International Journal of Maritime History 22(2): 199–226. Tinbergen, J. (1934) Tonnage and freight. De Nederlandsche Conjunctuur March: 23–35. Reprinted in J. H. Klassen, L. M. Koyck and H. J. Wittenveen (eds.), Jan Tinbergen: Selected Papers. Haarlem: North Holland, 1959. UNCTAD (2009) Review of Maritime Transport, 2009. Geneva: United Nations. United Nations (2009) World Population Resources: the 2008 revision. POP/DB/ WPP/Rev.2008/02/F01#. Van Dijk, D., T. Terasvirta and P. H. Franses (2002) Smooth transition autoregressive models: a survey of recent developments. Econometric Reviews 21: 1–47. Veenstra, A. W. (1999) Quantitative Analysis of Shipping Markets. Delft: Delft University Press. Waldegrave, C. (2006) When is a Capesize not a Capesize? Shipping Intelligence Network, March 1. Wijnolst, N. and T. Wergeland (1996) Shipping. Delft: Delft University Press. Wilson, J. F. (1998) Carriage of Goods by Sea. 3rd edn. London: Pitman. www.clarksons.net (accessed various dates February–March 2010).

11

Liquid Bulk Shipping Dimitrios V. Lyridis and Panayotis Zacharioudakis

11.1

Introduction

Liquid bulk, as deﬁned by the United Nations (Stopford 2009; UNCTAD 2008), is bulk cargo that can be transported in tanks and handled by pumping systems. The two main categories of this cargo are crude oil and oil products but there are also other smaller categories (not very clearly identiﬁed). Liqueﬁed gas (LNG and LPG) is another category of liquid cargo, while the ﬁnal one covers diverse cargoes such as vegetable oil and liquid chemicals such as phosphoric acid (Stopford 2009). Liquid bulk shipping is an essential part of the global transportation market for the community of oil consumer and producer countries. This market segment includes also shipbrokers and shipowners. Liquid bulk shipping is vital for the transportation of oil and its products from a limited number of oil-producer countries to the rest of the world. This particular sector has the highest share in maritime cargo volumes, reaching or exceeding one-third of global shipping cargoes. Although oil is also trans-

ferred via an extensive pipeline network inland or by special trucks and trains, this kind of transportation is very small compared to the cargo ﬂows using oil tankers, as it is restricted within national borders (as for example the Sumed pipeline in Egypt) or local geographical areas (e.g. Kirkuk– Ceyhan). Commercial operations in the entire shipping market and especially in the oil shipping market have drawn worldwide attention for environmental as well as geopolitical reasons.

11.1.1 Routes and demand trends for oil tankers Oil transportation began at the end of the nineteenth century. The USA at the time was the dominant oil producer. It used to export processed oil byproducts to Europe using a ﬂeet of small ships. A little later, during the 1870s, Alfred Nobel’s brothers Robert and Ludvig built a competitive European ﬂeet in order to import oil from Russia. In the meantime the industry evolved. The US Energy Information Administration

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

206 Table 11.1 No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

DIMITRIOS V. LYRIDIS AND PANAYOTIS ZACHARIOUDAKIS

Top 15 crude oil producers and consumers Top world oil producers, 2008 Saudi Arabia Russia United States Iran China Canada Mexico United Arab Emirates Kuwait Venezuela Norway Brazil Iraq Algeria Nigeria

(’000 barrels per day)

No.

10,782 9,790 8,514 4,174 3,973 3,350 3,186 3,046

1 2 3 4 5 6 7 8

2,741 2,643 2,466 2,402 2,385 2,180 2,169

9 10 11 12 13 14 15

Top world oil consumers, 2008 United States China Japan India Russia Germany Brazil Saudi Arabia Canada South Korea Mexico France Iran United Kingdom Italy

(’000 barrels per day) 19,498 7,831 4,785 2,962 2,916 2,569 2,485 2,376 2,261 2,175 2,128 1,986 1,741 1,710 1,639

Source: Energy Information Administration.

(EIA; www.eia.gov) reports that world oil production peaked in 2008 at 81.73 million barrels/day (mbd). The top 15 crude oil producers and consumers as well as the top 15 crude oil exporters and importers for 2008 are given in Tables 11.1 and 11.2 respectively. A study by Glen and Martin (2002) estimated that 59% of the oil produced in 2000 was transported by sea, a signiﬁcant rise in comparison with 48% in 1990 and 56% in 1995. Nevertheless, an estimate of oil tanker demand based on the oil quantities being transported would be inaccurate unless one took into account also the distances over which these are transported. For example, because of the disruption of trade between the USA and the Middle East owing to the Iraqi invasion of Kuwait, the US was forced to curb its dependence on oil from the Middle East and turn to oil

sources that were politically more stable or located closer, such as the North Sea, West Africa, Venezuela, Mexico and Colombia. Therefore, even though the imported quantities were the same, the demand in tonmiles decreased. Consequently, if demand for oil tankers does not increase on other long-distance routes, large oil tanker ships will “migrate” to shorter-distance routes (not suitable to them and better covered by smaller ships). This will trigger a drop in the respective freight rates. Although at least half of the exported crude oil is shipped from the Middle East, the largest importers are Asian regions in the Paciﬁc Ocean like Japan and South Korea. As oil trade between these Asian regions and the Middle East takes place over long distances and the quantities of crude oil being transported by sea are increasing, the

207

LIQUID BULK SHIPPING

Table 11.2 Top 15 crude oil importers and exporters No.

Top world oil net importers, 2008

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

United States Japan China Germany Korea, South India France Spain Italy Taiwan Singapore Netherlands Belgium Turkey Thailand

('000 barrels per day)

No.

Top world oil net exporters, 2008

('000 barrels per day)

10,984 4,652 3,858 2,418 2,144 2,078 1,915 1,534 1,477 939 925 891 706 629 572

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Saudi Arabia Russia United Arab Emirates Iran Kuwait Norway Angola Venezuela Algeria Nigeria Iraq Libya Kazakhstan Canada Qatar

8,406 6,874 2,521 2,433 2,390 2,246 1,948 1,893 1,888 1,883 1,769 1,597 1,185 1,089 1,085

Source: Energy Information Administration.

Table 11.3 Estimated productivity of tankers, bulk carriers and the residual ﬂeet, selected years Year

Oil cargo (mill. tons)

Tanker ﬂeet (mill. DWT, beginning of year)

Tons carried per dwt of tankers

Main dry bulks (mill. tons)

Dry bulk ﬂeet (mill. DWT, beginning of year)

Tons carried per dwt of bulk carriers

All other dry cargoes (mill. tons)

Residual ﬂeet (mill. DWT, beginning of year)

Tons carried per dwt of the residual ﬂeet

1970 1980 1990 2000 2006 2007

1442 1871 1755 2163 2595 2681

148 339 246 282 354 383

9.74 5.51 7.14 7.66 7.33 7.00

448 796 968 1288 1876 1997

72 186 235 1276 346 368

6.21 4.29 4.13 4.67 5.42 5.43

676 1037 1285 2532 3181 3344

106 158 178 240 260 292

6.38 6.57 7.23 10.53 12.24 11.46

Source: UNCTAD.

excess number of large tankers due to the shift of crude oil sources for Western Europe and the US did not have an immediate impact on the market. Table 11.3 shows the productivity of tankers, bulk carriers and the remaining

ﬂeet (tons carried per dwt). This has an upward trend. The largest oil-exporting regions for the ﬁrst decade of the new millennium were the countries around the Persian Gulf, West Africa, Venezuela, Mexico, North Africa,

208

DIMITRIOS V. LYRIDIS AND PANAYOTIS ZACHARIOUDAKIS

the Black Sea, Indonesia/Eastern Malaysia, China, the Eastern Mediterranean Sea, the Baltic Sea and the North Sea. The largest oil importers were Western Europe, the USA, Japan, South Korea, the east coast of Canada, Taiwan and Hong Kong.

11.1.2

Oil tanker nomenclature

Oil tankerships can be classiﬁed either as crude oil tankers, which are very large vessels used exclusively for this purpose (the cleanup operation required before other cargo can be loaded is expensive and very rare nowadays), or as product tankers, which carry oil byproducts and many different cargo types simultaneously. Crude oil tankers are classiﬁed according to their carrying capacity and their capability to be deployed in certain routes. Nevertheless, there is signiﬁcant differentiation in DWT tonnage for each ship type. VLCC and ULCC tankers are mainly used on long-distance routes, while middlesized ships like Suezmax (the largest that can sail through the Suez Canal) and Aframax (for sailing around Africa) are used for medium distances, such as West Africa– Gulf of Mexico/US East Coast. Panamax tankers are the largest ships that can pass through the Panama Canal. Product tankers are smaller than crude oil tankers. They can transport pure products as well as impure byproducts of the reﬁnery process, but because of the necessary cleanup process changes in cargo type are not easily made. Different cargoes are stored separately during all processes, thanks to a complex piping network and valve system on board. Crude oil transport is unidirectional (vessels return empty to the oil-exporting region), while this is not usual for product tankers, which can hence be better exploited by the

shipowners. A third category consists of tanker-barges moving mainly along the coastline. Finally, Combination carriers are specially designed ships capable of switching their cargo, from crude oil to dry bulk and vice versa. They are a minor player in the market, however. The Parcel tanker sector includes highly specialized chemical tanker vessels transporting liqueﬁed petroleum gas (LPG carriers), or liqueﬁed natural gas (LNG carriers). These ships are used outside the oil tanker market as well and are not normally used for oil transportation. An extensive study conducted as early as the late 1950s by Zannetos (1964) showed that this market is highly concentrated. Zannetos also found that the market is perfectly competitive. Some of the ﬁndings of that study remain valid to this day despite the dramatic changes of the seventies. Tanker shippers are oil companies that cover their transportation needs by using chartered vessels, but they can also employ their own tankers. Independent shipowners on the other hand have no transportation needs of their own. There are many explanations for their existence in this market: 1. 2.

3.

There is uncertainty about the transportation needs of companies. Because of a general disequilibrium between the production and reﬁnery capacity of oil companies, there is a need for oil transportation between companies. This is met by independent shipowners, as no individual company wants to be dependent on a rival company for this kind of transportation. Independent shipowners can offer more economical capacity due to specialization, and they are also free from

LIQUID BULK SHIPPING

political pressures regarding crew origin, ﬂag, etc. 4. Oil companies generally have a lower cost of capital and they prefer not to borrow capital, so they resort to vessel chartering instead of issuing debt, in order to build a vessel. 5. Independent shipowners take faster decisions due to lack of bureaucracy, mostly regarding new ship orders. Such orders mainly occur simultaneously in high freight rate periods. This drives independent shipowners to increase their share in the global oil tanker ﬂeet. A few theoretical scenarios regarding the tanker market structure have been studied but never realized: •

•

Monopolistic structure of buyers: oil companies, being sole shippers, could exert pressure on the oil tanker market and impose their own terms regarding freight rate levels. Global ﬂeet take-over by oil-producing countries forming a cartel structure (parallel to OPEC).

The oil transportation industry by sea has several important characteristics: Mobility The total capital invested for the building of a ﬂeet is not reserved in a geographical region. The fact that a ship can be transferred anywhere reduces exit costs from a non-proﬁtable market. It also contributes to the equilibrium of supply and demand geographically and the preservation of the investment value. Ease of entry In terms of economics, few obstacles exist if someone desires to enter the oil tanker chartering market (in contrast to the liner–container market).

209

It is relatively easy to issue debt for ﬁnancing new shipbuildings. No complex administration structures are required for oil tanker operations. From the moment a contract is signed, via shipbrokers, the ship captain takes over the operation of the ship almost exclusively. There are no signiﬁcant economies of scale in terms of number of ships in a company, although economies of scale do exist as far as ship size is concerned. Large shipping companies have no competitive advantage in introducing a ship to the market. In fact most companies only own one vessel. Lack of concentration The fact that there are so many shipowners, many of whom own only one vessel, makes consolidation for the purpose of freight rate manipulation difﬁcult. Even if all oil tankers were the size of the largest vessel of this kind, the number of ships required to cover the needed carrying capacity would still be too great, which would exclude any possibility of market concentration. Homogeneity Although there are several types of oil, tanker technology is generally homogeneous. This makes all vessels almost perfectly interchangeable and renders demands for higher freight rates almost impossible. (Some exceptions are certain routes involving shallow ports, and ships for pure oil products, product carriers). Although the market has preserved its competitive character, the ownership structure has undergone radical changes. In particular, the largest oil companies shifted away from a policy of direct control of their transportation needs and began to charter oil tankers in the spot market.

210

DIMITRIOS V. LYRIDIS AND PANAYOTIS ZACHARIOUDAKIS

A study conducted by Glen and Martin (1998) gave three reasons for an observed change in the composition of ownership, which still hold. These are: the evolution and growth of the spot oil tanker market, a change in the logistics strategy of large companies, and the growing environmental concerns of the public, which has imposed stricter environmental protection regulations for oil tanker operations. This research also showed that the oil tanker ﬂeet belonging to the ten largest shipowners was 162% greater than the ﬂeet under ownership of the ten largest oil companies. But if we excluded vessels of statecontrolled oil companies, the ship capacity of the remaining oil companies would amount to only ten percent of the ﬂeet capacity of the ten largest independent shipowners. The world demand for oil tanker services can be satisﬁed either by oil companies owning their vessels or by ﬁnding available vessels via charter markets in London and New York which bring together cargobrokers and shipbrokers. The vessels are chartered with long-term charters, longterm contracts or voyage/spot charter short-term contracts, which are becoming increasingly popular. Long-term contracts give exclusive use of the vessel and crew for a ﬁxed period, for example one year, while short-term contracts can last for just one voyage. A bareboat charter (without crew) can also be signed for a speciﬁc period on standardized contract terms.

11.1.3 Expenses and oil tanker vessel administration Expenses in the oil transportation market can be categorized as follows:

• •

•

Capital costs (ﬁxed) include the acquisition costs of the oil tanker. Running costs (semi-variable) include crew salaries, maintenance expenses, procurement, lubricants and administration expenses and dry docking costs. Voyage costs may vary, depending on the voyage distance and the selected route. They include fuel costs, tugging, and port and canal costs.

All these expenses are paid by the charterer or the shipowner, according to the contract terms. In the case of a one-voyage contract, the shipowner pays for all three expense categories, while any occurring surplus will be collected by him as proﬁt. In long-term contracts, the shipowner is responsible for the capital costs and other expenses. In bareboat contracts, the shipowner is responsible for capital costs, and all other expenses are covered by the charterer. Unlike capital and voyage costs, the running costs can be reduced and settled by various tactics and strategies. For example, shipowners often ﬂy a ﬂag of convenience. These ﬂags have adopted a looser attitude towards taxation and regulations, especially in issues related to crew nationality. States like Panama and Liberia have attracted many ships under their ﬂag, although the beneﬁts of the ownership of the oil tankers are enjoyed by shipowners from countries like Greece, the USA or Japan. Unfortunately, a few shipowners may also implement these practices and violate safety regulations: this has defamed the free image of shipping. Another strategy is to reduce administration costs by ﬂying a ﬂag of convenience and outsourcing technical management to third parties specialized in ship manage-

LIQUID BULK SHIPPING

ment. This is useful nowadays, since it helps shipowners to focus on their ownership strategy by using the technical expertise of those who already possess a competitive edge in world ﬂeet administration. Non-conventional shipowners like banks and ﬁnancial institutions have no choice but to hire specialized ship managers who themselves constitute a very competitive market with relatively few barriers to entry. There is, under certain circumstances, an exchange of ships among these expert operators with speciﬁc guarantees. It must be noted that the cost of transportation is a very small percentage of the oil retail price. This small contribution of the freight costs to oil price renders the demand for transportation capacity inelastic vis-à-vis freight rates. Therefore, in bad market conditions, shipowners have the option of docking a ship, which eliminates voyage and running costs (although capital costs still remain). However, as the market recovers, the inactive ﬂeet re-enters it.

11.1.4 Environmental protection, safety and security Although most voyages are completed safely, even a minor accident that pollutes the environment draws media attention, especially when dramatic pictures of a polluted coast appear. Given the growing environmental concerns of the public, environmental protection regulations were expected to and actually did become stricter for oil tanker operators. Moreover, research has shown that human factor plays the main role in most of the cases. Given the separation in general of ship ownership and ship administration, the existence of complex legislation does not render the industry safer; a research on past

211

incidents showed that, under speciﬁc ﬂags, international laws are systematically neglected. This has led to the adoption of inspections of ships by the local authorities of many countries. Such inspections are very common in ports where there is oil trade. Names of violators are published, and they also face substantial legal and economic penalties. The latest developments in the ﬁrst decade of the new millennium constitute an excellent summary of the unpredictable behavior of oil tanker markets. The extraordinary progress in sea safety issues brought about a reduction of pollution from oil tankers and a continuous drop in loss of vessels and life. In the last serious oil tanker accident, Prestige, the vessel loaded with heavy oil, sank near the Spanish coasts in 2006. This 26-year-old single-hull ship, built in Spain, under the Bahamas ﬂag, managed by a Greek company and certiﬁed by a US classiﬁcation society, had been chartered by a Russian company based in Switzerland for the transportation of heavy fuel from Letonia to Singapore. This accident stressed the conﬂict between double and single hull advocates in the EU and the USA. The EU demanded the complete scrapping of singlehull oil tankers and all oil tankers more than 23 years old, i.e. ﬁve years earlier than foreseen by the legislation in force. The EU also prohibited the entrance of such ships with this cargo in all European ports. All actions signiﬁcantly inﬂuenced the oil tanker market. Nevertheless, there are additional problems in the industry, such as piracy assaults on commercial ships that cost several billions of dollars each year. The consequences of a piracy attack against a loaded oil tanker in a sensitive region would be catastrophic, and the economic losses would be unprecedented. Finally, the oil

212

DIMITRIOS V. LYRIDIS AND PANAYOTIS ZACHARIOUDAKIS

Shipping activity

eudemonia

eudemonia recession

rejuvenation crash

Time

Figure 11.1

The shipping cycle stages.

tanker market is also defenseless in the face of a potential terrorist attack.

11.2 Liquid Bulk Shipping: The Freight Rate Generation Mechanism The best way to deﬁne oil tanker shipping market levels is via their relevant variables. It has been observed that liquid bulk shipping has many interaction mechanisms as a system, as deﬁned by the shipping cycle phenomenon. Initially, the basic variables must be deﬁned and grouped and then sorted according to their freight interaction mechanism, i.e. the balance between demand for and supply of transportation capacity. Liquid bulk should not be seen as a closed system, but rather as a globalized market participating in the international economic system. There are countless

external and internal inﬂuences. A ﬁrst modeling attempt was made by creating the concept of the shipping cycle theory (Metaxas 1988). According to Stopford (2009), it is deﬁned as the mechanism aiming at eliminating disequilibria between supply and demand, as depicted in Figure 11.1. The traditional shipping cycle (Metaxas 1988) has the following stages: Rejuvenation After ship supply has dropped signiﬁcantly freight rates increase. The number of laid-up vessels decreases and there is balance between supply and demand. Market expectations become increasingly positive, and second-hand as well as scrapping prices rise. Eudemonia The shipping market is now at high levels, and it exceeds, two- and threefold (and even more as observed recently), ship operational costs. The ﬂeet operates at full speed in order to

LIQUID BULK SHIPPING

satisfy demand, and very few inefﬁcient ships are laid up. The ease of ﬁnancing from banks certiﬁes good market conditions. Second-hand prices exceed book value and orders for newbuildings rise, as shipping companies have accumulated capital. Shipyards have long waiting lists and new vessels are delivered with a signiﬁcant delay. Recession This phase is observed when there is surplus ship capacity. There are many ships in the ports and they are operating in slow steaming mode. Freight rates drop dramatically and inefﬁcient ships are laid up. In the ﬁnal stage, the prolonged duration of low freight levels, combined with negative cash ﬂows, leads some shipping companies to sell vessels at low prices. Demolitions increase and prices for old ships reach scrap-market levels. New orders decrease and banks are very cautious when issuing new loans. Crash Ordered ships are gradually delivered and ship capacity exceeds demand. There is a negative psychology in the market that accelerates the market crash. Freight rates drop and ships operate at slow steaming mode again. Although liquidity is now much higher than earlier, there is general confusion and orders for newbuildings begin to drop in parallel with second-hand prices for ships.

11.3 Parameters of the Global Liquid Bulk Shipping Market System The descriptive variables of the global liquid bulk shipping system may come from the shipping environment, but also from the international economic system interacting

213

indirectly with the state of the shipping market. In order to comprehend the system dynamics, we should examine the shipping market from 1979 till now. The main inﬂuential events have been the Iraqi revolution in 1979, the Iran–Iraq War in 1980, the deep oil crisis that started in 1981, the 1982–3 period characterized by the struggle of shipowners for survival, the oil tanker war in 1984, the hostage state of shipping from 1985 to 1987, the end of the Iran–Iraq war in 1988, the Exxon-Valdez tragedy in 1989, the Kuwait invasion in 1990, the OPA90 application in 1990, the Desert Storm operation in 1991, the freight rate drop in 1992, the recession in 1993, the emergence of small oil tanker ships in 1994, the market restructuring in 1995, the oil price instability in 1996, the economic growth in 1997, the market reversal due to the Asian economies crisis in 1998, the sinking of the vessel Erika and market relapse in 1999, the rise in 2000, the September 11 New York terrorist attack and the attack against an oil tanker in Yemen in 2001, the relapse at the end of 2002, the sinking of the Prestige, the war in Iraq, the strike in Venezuela in 2003, and the good years, starting in 2004, due to the economic growth of China the boom of the dry bulk market (also due to the economic growth of China), and ﬁnally the banking crisis of 2008–2010.

11.3.1 The internal factors of the international shipping system The main factors inﬂuencing or describing the state of the shipping market are described below (Zacharioudakis 2007; Zacharioudakis and Lyridis 2005): Freight rates These are the most valuable description variables containing signiﬁcant

214

DIMITRIOS V. LYRIDIS AND PANAYOTIS ZACHARIOUDAKIS

information about the state of the system. They may refer to spot or period rates, for various ship types, lines, cargoes and capacities. The variability of freight rates is so intense that at times it can exceed 500%; minor changes of the order of 10– 15% go almost unnoticed. Because of this volatility, the margin for proﬁt or loss is very big for both charterers and shipowners. There are many ways to express the freight rates for oil tankers. The most important is Worldscale (WS). Worldscale at 100, namely WS100, is the base for the index. Worldscale Association publishes an annual list for WS100 (in US$/metric ton) for all routes, which is based on oil being transported in a 75,000 tons DWT oil tanker operating under speciﬁc conditions and a hypothetical daily chartering of US$12,000. The basic principle in the WS system is that, regardless of the route of the oil tanker, similar oil tankers should earn the same daily gross revenue. The WS100 nominal base acts as a starting point for negotiations in the spot market. As the total freight rates are proportional to the cargo quantity, smaller-capacity ships will attempt to reach higher WS prices than a higher-capacity ship, assuming that they operate in the same or a similar route. In every spot market, in which freight rate levels expressed in US$/ton can readily be converted into WS prices, comparisons can easily be made. By converting WS prices into Time Charter Equivalent (TCE) it is possible to compare current prices in time charter markets. Similarly, a Time Charter price can be converted into Worldscale Equivalent (WSE) for comparison. The Worldscale index appeared in its present form on January 1, 1989. Its ﬁrst appearance (not in today’s form) was during World War II. Before World War WII, the

freight rates for oil tankers were expressed in dollars or shillings and pence/long ton (£1 sterling = twenty shillings, one shilling = twelve pence). This implied that a charterer was required to agree on several freight rates when demanding a long-term oil loading/unloading contract. The New Worldscale introduced in 1989 was quickly renamed Worldscale, and the older index is now called “Old Worldscale.” Nowadays, two independent, nonproﬁt organizations, Worldscale Association (London) Ltd. and Worldscale Association (NYC) Inc., publish this index. Their respective boards of directors consist of shipbrokers working in these cities. The freight rates affect market psychology. Zannetos (1964), using autocorrelation diagrams of the market’s past history, showed that a rising market is more likely to continue to rise. The opposite is also true, and remains so to this date. Therefore, market returns also affect market levels. According to the shipping cycle psychology, a bad market period will further push down the freight rates. Figure 11.2 shows the time series for the route from Ras Tanura to Rotterdam with a 280,000 ton VLCC in Worldscale Rates. Currently, the crude oil and product tanker market levels are described mainly by two indices, BDTI and BCTI, published by the Baltic Exchange. They are calculated daily, according to the reports of the Baltic Exchange partners, shipbrokers and panelists. The reports of the panelists are based on an oil and oil products global route sample, determined by the Baltic Exchange. For the calculation of BDTI, ten routes are used, and for BCTI 4 routes. Each route average is multiplied by its respective weight factor, also determined by the Baltic Exchange. The main routes for each of the two indices are given below:

215

LIQUID BULK SHIPPING

250 200 150 100 50

1990-01 1990-11 1991-09 1992-07 1993-05 1994-03 1995-01 1995-11 1996-09 1997-07 1998-05 1999-03 2000-01 2000-11 2001-09 2002-07 2003-05 2004-03 2005-01 2005-11 2006-09 2007-07 2008-05 2009-03 2010-01

0

Figure 11.2 Ras Tanura–Rotterdam 280K tons VLCC Worldscale rate time series. Source: Clarksons Research Studies.

BDTI (Baltic Dirty Tanker Index) Route 1:

Route 2:

Route 3:

Route 4:

Route 5:

Route 6:

Route 7:

Route 8:

280,000 mt, Ras Tanura, Saudi Arabia/Middle East Gulf to US Gulf 260,000 mt, Ras Tanura, Saudi Arabia/Middle East Gulf to Singapore 250,000 mt, Ras Tanura, Saudi Arabia/Middle East Gulf to Japan 260,000 mt, Off Shore Bonny, Nigeria/West Africa to US Gulf 130,000 mt, Off Shore Bonny, Nigeria/West Africa to Philadelphia (USAC) 135,000 mt, Black Sea/ Mediterranean – Cross Mediterranean: Sidi Kerir, Egypt to South of France. 80,000 mt, North Sea to Continental Europe: Sullom Voe, Scotland, to Wilhelmshaven, Germany 80,000 mt, Kuwait to Singapore

70,000 mt, Puerto La Cruz, Venezuela to Corpus Christi (US Gulf ) Route 10: 50,000 mt, Aruba, Caribbean to New York (USAC) Route 9:

BCTI (Baltic Clean Tanker Index) Route 1:

Route 2: Route 3: Route 4:

75,000 mt, CPP/UNL Naphtha Condensate, Middle East Gulf to Japan 33000 mt, Rotterdam, Netherlands to New York (USAC) 30000 mt, Aruba, Caribbean to New York (USAC) 30000 mt, Singapore (CPP/UNL) to Chiba, Japan

Note: All ships must have the approval of a major oil company. This is called vetting. For a more detailed alternative calculation of a representative market index we refer the reader to Lyridis, Zacharioudakis and Hatzovoulos (2005).

216

DIMITRIOS V. LYRIDIS AND PANAYOTIS ZACHARIOUDAKIS

Available ship capacity or ship supply This is an important factor in freight rate determination which describes the available ﬂeet per ship type and capacity. It is negatively correlated with freight rate levels, but if we observe the two variables with a time lag, we can observe a sign reversal in the correlation between them. This means that the relation between the supply of ship capacity and the freight rate level is such that the latter compensate for the change of supply not instantaneously but rather after some time has elapsed (Lyridis, Zacharioudakis and Leoussis 2005; Lyridis, Zacharioudakis and Panagopoulos 2005). The graph in Figure 11.3 shows the evolution of VLCC ship capacity supply. Demand for ship transportation capacity This is the required number of ships per type and capacity. Demand is inelastic and there is no sign reversal in correlation with freight rates, even if we observe it in different time lags. In Figure 11.4, a time series of the demand for oil tanker capacity is presented.

Laid-up ships This is the number of inactive ships under the current freight rates, and it is negatively correlated with freight rate levels. Figure 11.5 presents laid-up tonnage for oil tankers. Slow steaming This is the number of ships operating in slow steaming mode due to the market condition, in order to reduce their breakeven point. It is negatively correlated with freight rate levels. All data are reported per ship type and capacity. Figure 11.6 shows the time series for 150,000 tons DWT oil tankers in slow steaming mode. Demolition volume This is the number of ships destined for demolition. Data are given per ship type and capacity, and it is negatively correlated with freight rate levels. OBO ships These ships operate in either the dry bulk or the liquid bulk shipping market subcategory. They have a compensating effect between the freight rates of the two markets. This variable is the number of

250 200 150 100 50

1970-01 1971-10 1973-07 1975-04 1977-01 1978-10 1980-07 1982-04 1984-01 1985-10 1987-07 1989-04 1991-01 1992-10 1994-07 1996-04 1998-01 1999-10 2001-07 2003-04 2005-01 2006-10 2008-07 2010-04

0

Figure 11.3 VLCC vessel capacity supply time series in million tons DWT. Source: Clarksons Research Studies.

217

LIQUID BULK SHIPPING

6,000 5,000

M DWT

4,000 3,000 2,000 1,000 1970-01 1971-10 1973-07 1975-04 1977-01 1978-10 1980-07 1982-04 1984-01 1985-10 1987-07 1989-04 1991-01 1992-10 1994-07 1996-04 1998-01 1999-10 2001-07 2003-04 2005-01 2006-10 2008-07

0

Figure 11.4 Oil tanker capacity demand time series. Source: Clarksons Research Studies.

160 140

M DWT

120 100 80 60 40 20 2003-12

2002-07

2001-02

1999-09

1998-04

1996-11

1995-06

1994-01

1992-08

1991-03

1989-10

1988-05

1986-12

1985-07

1984-02

1982-09

1981-04

1979-11

0

Figure 11.5 Laid-up tonnage for oil tankers. Source: Clarksons Research Studies.

OBO ships operating in a speciﬁc shipping market; it is positively correlated with the freight rate levels of the market. Data is usually given per ship capacity. Figure 11.7 presents the time series for Capesize OBO ships (larger than 160,000 tons DWT).

Ship losses This is the number of ships exiting the market because of accident, per ship type and capacity. Order book This is the waiting list length for orders in shipyards. It shows market

218

DIMITRIOS V. LYRIDIS AND PANAYOTIS ZACHARIOUDAKIS

60 50

M DWT

40 30 20 10

1995-05

1994-06

1993-07

1992-08

1991-09

1990-10

1989-11

1988-12

1988-01

1987-02

1986-03

1985-04

1984-05

1983-06

1982-07

1981-08

1980-09

1979-10

0

2004-07

2002-08

2000-09

1998-10

1996-11

1994-12

1993-01

1991-02

1989-03

1987-04

1985-05

1983-06

1981-07

1979-08

1977-09

1975-10

1973-11

1971-12

18 16 14 12 10 8 6 4 2 0 1970-01

M DWT

Figure 11.6 150,000 tons DWT oil tankers in slow steaming mode. Source: Clarksons Research Studies.

Figure 11.7 OBO ships, Capesize > 160,000 tons DWT supply time series. Source: Clarksons Research Studies.

reaction and future market dynamics. This factor has positive correlation with freight rates and is given per ship type and capacity. Figure 11.8 shows the time series for the Capesize Bulker (vessels greater than 80,000 tons DWT) order book.

Future market This is the number of newbuildings to enter the market in the future. The data is given per ship type, capacity and delivery time. Figure 11.9 gives the time series of the future market for Capesize Bulker in tons DWT.

219

LIQUID BULK SHIPPING

1996-01 1996-09 1997-05 1998-01 1998-09 1999-05 2000-01 2000-09 2001-05 2002-01 2002-09 2003-05 2004-01 2004-09 2005-05 2006-01 2006-09 2007-05 2008-01 2008-09 2009-05 2010-01

14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0

Figure 11.8 O&P Aframax Tankers order book time series in tons DWT. Source: Clarksons Research Studies.

2,500,000

DWT

2,000,000 1,500,000 1,000,000 500,000

2004-09

2002-07

2000-05

1998-03

1996-01

1993-11

1991-09

1989-07

1987-05

1985-03

1983-01

1980-11

1978-09

1976-07

1974-05

1972-03

1970-01

0

Figure 11.9 Future market for Capesize Bulker in tons DWT. Source: Clarksons Research Studies.

Chartering trends This is data on contracts to be executed or cargo to be transported, per ship type, capacity, cargo and line. Newbuilding prices These are expressed in US$/ton and given per ship type and capacity, or they are expressed in US$ million for a speciﬁc ship type. These prices are positively correlated with freight rate levels. The time series for newbuilding (315,000–

320,000 tons DWT VLCC) prices is given in Figure 11.10. Second-hand prices Prices for second-hand vessels are positively correlated with freight rate levels and are given per ship type, capacity and vessel age. Figure 11.11 shows, indicatively, the time series of the price for a ﬁve-year-old double hull 310,000 tons DWT VLCC.

220

DIMITRIOS V. LYRIDIS AND PANAYOTIS ZACHARIOUDAKIS

1992-01 1992-11 1993-09 1994-07 1995-05 1996-03 1997-01 1997-11 1998-09 1999-07 2000-05 2001-03 2002-01 2002-11 2003-09 2004-07 2005-05 2006-03 2007-01 2007-11 2008-09 2009-07

180 160 140 120 100 80 60 40 20 0

Figure 11.10 Newbuilding prices for a VLCC of 315,000–320,000 tons DWT VLCC in US$ million. Source: Clarksons Research Studies. 180 160 140 120 100 80 60 40 20 1976-01 1977-06 1978-11 1980-04 1981-09 1983-02 1984-07 1985-12 1987-05 1988-10 1990-03 1991-08 1993-01 1994-06 1995-11 1997-04 1998-09 2000-02 2001-07 2002-12 2004-05 2005-10 2007-03 2008-08 2010-01

0

Figure 11.11 Price in US$ million for a ﬁve-year-old double-hull 310,000 tons DWT VLCC. Source: Clarksons Research Studies.

Scrap/demolition prices These are positively correlated with the level of freight rates, expressed in US$/ton and given per ship type, capacity and age, or in US$million for a speciﬁc ship type. Figure 11.12 presents the time series of scrap prices for VLCC oil tankers. Apart from demand, all the factors are related to the demand for transportation

services. Therefore, the demand-related group of variables has an autonomous behavior and a considerable effect on freight rates evolution, while the supply-related variables group plays a role through many cross-correlated variables. In the shipping cycle model, only supply-related variables act, while the demand for transportation services is assumed (reasonably enough) to

221

LIQUID BULK SHIPPING

30 25 20 15 10 5 1976-01 1977-07 1979-01 1980-07 1982-01 1983-07 1985-01 1986-07 1988-01 1989-07 1991-01 1992-07 1994-01 1995-07 1997-01 1998-07 2000-01 2001-07 2003-01 2004-07 2006-01 2007-07 2009-01

0

Figure 11.12 Scrap prices in US$ million for VLCC oil tankers time series. Source: Clarksons Research Studies.

Short term (+) cor Freight levels

New orders

Long term (–) cor

Figure 11.13 Interaction between shipping market variables in the time ﬁeld. Source: Clarksons Research Studies.

be inelastic. However, freight rate elasticity is observed with respect to other variables related to supply. The shipping cycle facilitates the investigation of interactions in the shipping markets. The research on cross-correlation shows that most factors affecting freight rates have an inverted correlation (with a time lag). VLCC freight rates (Lyridis, Zacharioudakis and Ousantzopoulos 2004; Lyridis, Zacharioudakis and Paschos 2004), for example, have a positive correlation with new orders with a zero time lag. Because of the shipping cycle phenomenon, after a prolonged period of high rates many

new ships enter the market and increase vessel supply, pushing down freight rates. This means that eventually, in the long run, there is a negative correlation between new orders and freight rate levels (Figure 11.13). The same applies to other variables that affect freight rates. This leads to market trend reversal and market equilibrium. The same correlation reversal between shipping market variables and freight rates, with a time lag of 36 months, is clear in Figure 11.14. Another ﬁnding is that reversal does not appear in the cross-correlation between freight rates and sea transport services.

222

DIMITRIOS V. LYRIDIS AND PANAYOTIS ZACHARIOUDAKIS

SUPPLY with WS 1.0

CCF

.5

0.0

–.5

Confidence limits

Coefficient

–1.0 –36

–28

–32

–20

–24

–12

–16

–4 –8

4 0

12 8

20 16

28 24

36 32

Lag number

Figure 11.14 Cross-correlation between supply for transport services and freight rates. Source: Clarksons Research Srudies.

Thus, the shipping cycle dynamics apply to all supply of transport services-related variables. Figure 11.15 shows the preservation of positive cross-correlation between freight rates and demand for sea transport services in the time ﬁeld. Therefore, demand is inelastic vis-à-vis freight rate levels and there is no sign reversal of cross-correlation in the time ﬁeld. The demand for sea transport services has been considered independent by most researchers (Beenstock and Vergottis 1989, 1993; Hawdon 1978; Koopmans 1939; Norman and Wergeland 1981). According to the analysis above, all shipping market variables have an interactive cyclical relation in the time ﬁeld with freight

rate levels. This is expected from theory and compensates for any disequilibrium in the market state. The cyclical process is perpetual. All compensation mechanisms of the shipping markets are divided into four main categories, brieﬂy described below: Short-term reaction If the freight demand level is low, many ships will cease their operation and thus supply will be driven down. This reaction is direct, happening as soon as the market senses change in demand levels. Long-term reaction When demand is low and consequently freight rates drop, new orders will drop in their turn. This will lead to a further drop in supply in the

223

LIQUID BULK SHIPPING

DEMAND with WS 1.0

CCF

.5

0.0

–.5 Confidence limits

Coefficient

–1.0 –36 –28 –20 –12 –4 4 12 20 28 36 –32 –24 –16 –8 0 8 16 24 32 Lag number

Figure 11.15 Cross-correlation between freight rates and demand for sea transportation services. Source: Clarksons Research Studies.

future. This reaction has no direct repercussion on the supply/demand balance or on freight rate levels. Reversible reaction In low-demand market conditions and subsequent low freight rate levels, OBO ships are expected to move to other markets. This choice is reversible. Irreversible reaction In a case of freight rate drop, many ships will not be chartered and will be demolished, an irreversible and permanent development. The most important example explaining the demand effect mechanism was the liquid bulk freight rates from 2002 up to the

beginning of the ﬁnancial crisis. The market was initially driven by demand due to China’s fast economic growth, and then by the global recession and the banking crisis. The supply was not sufﬁcient in the beginning, but then the market conditions were reversed. The following processes in the shipping markets then occurred: • •

Freight rates rose in both main markets. Newbuildings orders increased and a waiting list in the shipyards was established. • Second-hand and laid-up vessel prices rose. • Ship demolitions decreased.

224

• •

DIMITRIOS V. LYRIDIS AND PANAYOTIS ZACHARIOUDAKIS

Laid-up vessels and vessels in slow steaming mode decreased. Ship capacity increased, because of the return of laid-up ships, the rise of operational speed, the drop in the number of demolitions and, indirectly, newbuildings after a certain period of time.

The effect of external factors on ship capacity supply and freight rate levels should not be underestimated. Their effect, however, is long-term and indirect. With the exception of the oil tankers war, no supply shock has ever been observed so far. The term “shock” refers to a sudden, unpredictable and large change in the supply curve. A similar phenomenon is common, but from the demand side. An event like the oil tanker war is very rare and extreme. During the Iran–Iraq war in 1984, both sides tried to damage the oil infrastructure of the enemy; thus the Iraqis decided to deter oil tankers from loading Iranian oil. An Iraqi military aircraft attacked an oil tanker and Iran’s response was to hit an Indian oil tanker, a Kuwaiti oil tanker near Bahrain and a Saudi Arabian oil tanker near South Arabia. Freight rates for routes like Persian Gulf–Northwest Europe thus took off. Hostilities continued and trafﬁc in the region decreased. Eleven VLCC oil tankers were lost in 1984 and 71 ships in total suffered severe damage (Economides and Oligney 2000; Lyridis, Zacharioudakis, Mitrou and Mylonas 2004; Stopford 2009). Events affecting ship capacity supply are mostly accidents, with a total or temporary exit of tonnage from the supply side. However, in general, the effect of the loss of one ship is negligible. On the contrary, the long-term and indirect repercussions of the implementation of stricter maritime

regulations are very important, but the shipping system can also react. This is possible, since new measures are not taken immediately and the application is gradual, so that the liquid bulk shipping system can adjust. The order book shows the reaction and the market dynamics from the implementation of the new regulations. 11.3.2 External factors affecting the international shipping system Factors that inﬂuence the generation of cargo such as oil (and naturally dry bulk commodities) are numerous. The main ones are: Global economy growth It has been observed that a growing global economy increases demand for commodities. The more developed a country, the higher its requirements for energy resources. Geopolitical events Events such as goods production credits, embargos, the closing of a pipeline or a canal disrupt production, transport or distribution of goods. Military events They naturally inﬂuence global trade, alter the world map and the production capacity of lands, and destroy production units (and transportation, as we have seen earlier). Fuel and goods reserves Inventory levels affect demand for sea transportation capacity. Climate conditions They affect goods production (for example, a drought may negatively affect wheat production or a hurricane like Katrina in the USA may disrupt oil tanker trafﬁc and the loading/ unloading processes). A cold winter can also increase oil consumption in the northern hemisphere. Exploitation of new oilﬁelds They can create changes in the global energy map along with oil arbitrage, and thus affect transportation.

225

LIQUID BULK SHIPPING

Product prices The demand for oil, iron, etc. exhibits elasticity with respect to product prices. This elasticity may depend on the existence of product or service substitutes, inventory levels, etc. All these events indirectly affect freight rates in liquid and dry bulk shipping by inﬂuencing the demand for transportation services. The analysis shows that oil production indirectly affects demand for liquid bulk sea transportation. Most of the oil is transported by sea, and cross-correlation tests have shown that the oil production of OPEC countries substantially affects freight rate levels. Table 11.4 shows the results of cross-correlation tests between oil production of OPEC countries and demand for oil tanker transport services. The crosscorrelation has a value of 0.918, an almost perfect cross-correlation of the two variables. Table 11.5 shows the cross-correlation between the oil production of OPEC countries and VLCC oil freight rates. In the

cross-correlation test, the data used refer to the spot freight rate for the route Ras Tanura (Arabic peninsula)–Rotterdam (Holland) with VLCC ships. Figure 11.16 shows this cross-correlation graphically. A value of 0.641 is statistically signiﬁcant and implies an effect of oil production on freight rates. Moreover, freight rates determination depends on the supply/demand balance at a speciﬁc point in time, while a value of 0.641 explains the partial contribution of demand through oil production in the freight rate determination.

11.4 The Freight Rate Generation Mechanism Figure 11.17 presents the basic model behind the freight rate generation mechanism. The external factors have an effect on the shipping market state, as described in the previous subsection. The variables enter the model/mechanism of freight rate

Table 11.4 Cross-correlation tests between oil production of OPEC countries and demand for oil tanker transport service Pearson correlation Oil production of OPEC countries Oil tanker transport service demand

Oil production of OPEC countries

Oil tanker transport service demand

1.000 0.918

0.918 1.000

Table 11.5 Cross-correlation between oil production of OPEC countries and VLCC oil freight rates Pearson correlation Oil production of OPEC countries VLCC WS

Oil production of OPEC countries

VLCC WS

1.000 0.641

0.641 1.000

226

DIMITRIOS V. LYRIDIS AND PANAYOTIS ZACHARIOUDAKIS

OPEC Production & VL Earnings 32.0

m.bpd

$,000/d 200

OPEC Oil Production VLCC Earnings

31.0 30.0

150 29.0 28.0

100

27.0 26.0

50

25.0 24.0 Mar-00 Jul-00 Nov-00 Mar-01 Jul-01 Nov-01 Mar-02 Jul-02 Nov-02 Mar-03 Jul-03 Nov-03 Mar-04 Jul-04 Nov-04 Mar-05

0

Figure 11.16 Oil production of OPEC countries versus VLCC oil freight rates. Source: Clarksons Research Studies.

External factors

Shipping market state

Freight rate generation model

Freight rate levels

Figure 11.17 Freight rate generation mechanism. Source: Clarksons Research Studies.

determination, and the feedback from new freight rate levels, as well as the changes in external factors, will have an impact on the shipping market state. This in turn will inﬂuence the shipping market state, and freight rates consequently will change. This is considered a continuous process and we assume (possibly not very correctly) that the shipping market has no impact on the

external system. Oil production is related to demand for transport capacity and any change affects the balance between supply and demand for freight rates. Figure 11.18 shows how external factors affect (through demand) the freight rates. Finally, Figure 11.19 summarizes the dominant dynamics in the freight rate generation mechanism, by categorizing them

External factors

Oil production

Transportation services demand

Freight rates

Figure 11.18

Effects of external factors on freight rates.

External factors: • State of global economy and development • Political events. • Military actions. • Oil reserves. • Climate conditions • New oil deposits • Commodities prices–arbitrage

Production – Transportation: • Oil • Iron ore • Coal, etc.

Demand for transport services

Shipping sector state: • Freight rates levels • Supply of transport services • Laid-up vessels • Slow steaming vessels • Demolitions • OBO vessels • Vessel losses • Vessel deliveries • New orders • Chartering trends • Newbuilding prices

Freight rates generation model

Freight rates level

Figure 11.19

Schematic approach of the freight rates generation mechanism.

228

DIMITRIOS V. LYRIDIS AND PANAYOTIS ZACHARIOUDAKIS

in a cascade-like structure and showing their interactions.

11.5

Summary

Estimating the time series of freight rates and crude oil and oil products production is an extremely challenging econometric problem, because they are inﬂuenced by quantitative and qualitative variables with high uncertainty, as can be observed from the highly random historical events. The shipping system contains selfregulation mechanisms following a shipping cycle. It is a dynamic econometric system exchanging information and adapting to the world economy and geopolitical status quo mainly through the demand for sea transportation services. A deterministic estimation of demand is surely difﬁcult due to the highly random and unpredictable nature of the system. Market psychology plays a very important role in amplifying emerging trends, either positive or negative, in freight rate levels and shipbuilding activity. Short-term as well as long-term reactions of the shipping companies lead to reversible or irreversible repercussions in the transport capacity of the world ﬂeet, while the contemporary regulation framework in ship speciﬁcations and operations issues also inﬂuences the decision making of the market participants. As crude oil will continue to be the main energy source for almost all means of transportation at least for the foreseeable future, the oil tanker industry will remain one of the fundamental sectors in world trade, connecting the main oil-exporting states with the major oil-consuming economies in a versatile and economically efﬁcient manner.

References Beenstock, M. and A. Vergottis (1989) An econometric model of the world tanker markets. Journal of Transport Economics and Policy 23: 263–80. Beenstock, M. and A. Vergottis (1993) Econometric Modelling of World Shipping. Chapman & Hall. Clarkson Research. The Shipping Intelligence Network. www.clarksons.net. Economides, M. and R. Oligney (2000) The Color of Oil: The History, the Money and the Politics of the World’s Biggest Business. Katy, TX: Round Oak Publishing Company. Glen, D. and B. Martin (1998) Conditional modelling of tanker market risk using route speciﬁc freight rates. Maritime Policy and Management 25: 117–28. Glen, D. and B. Martin (2002), The tanker market: current structure and market analysis. In Costas Grammenos (ed.), The Handbook of Maritime Economics and Business, pp. 251– 79, London: Lloyd’s of London Press. Hawdon, D. (1978) Tanker freight rates in the short and long run. Applied Economics 10: 203–17. Koopmans, T. C. (1939) Tanker Freight Rates and Tankship Building: An Analysis of Cyclical Fluctuations. Haarlem, the Netherlands: PS King & Staple. Lyridis, D. V., P. G. Zacharioudakis and D. Hatzovoulos (2005) An innovative dynamic tanker freight rate index. IMAM05 Conference, Porto, Portugal. Lyridis, D. V., P. G. Zacharioudakis and S. Leoussis (2005) Predicting in the tanker market using hybrid expert intelligence techniques (ANFIS). ICMRT’05 Conference, 19–21, Ischia, Italy. Lyridis, D. V., P. G. Zacharioudakis, P. Mitrou and A. Mylonas (2004) Forecasting tanker market using artiﬁcial neural networks. Maritime Economics and Logistics 6(2) ( June): 93–108. Lyridis, D. V., P. Zacharioudakis and G. Ousantzopoulos (2004) A multi-regression

LIQUID BULK SHIPPING

approach to forecasting freight rates in the dry bulk shipping market using neural networks. Proceedings of the Annual Conference of the International Association of Maritime Economists (IAME), Izmir, June 30–July 2, 2004, vol. II, pp. 797–811. Lyridis, D. V., P. G. Zacharioudakis and S.-N. Panagopoulos (2005) Simulating the tanker shipping market with the use of combined generalized autoregressive conditional heteroscedasticity and auto regressive moving average models (GARCH-ARMA) SNAME Conference, Athens. Lyridis, D. V., P. G. Zacharioudakis and C. Paschos (2004) Prediction of the tanker shipbuilding market in relation to the tanker shipping market. Proceedings of the Annual Conference of the International Association of Maritime Economists (IAME), Izmir, June 30– July 2, 2004, vol. II, pp. 712–27. Metaxas, V. (1988) Principles of Maritime Economics. Athens: Papazisis. Norman, V. D. and T. Wergeland (1981) Nortank: a simulation model of the freight market

229

for large tankers. Centre for Applied Research, Norwegian School of Economics and Business Administration, Report 4/81. Bergen, Norway. Stopford, Martin (2009) Maritime Economics. 2nd edn. London: Routledge. UNCTAD, Review of Maritime Transport (2008). Report by the UNCTAD secretariat. Zacharioudakis, P. G. (2007) Development of decision support tools in shipping. PhD thesis, National Technical University of Athens (in Greek). Zacharioudakis, P. G. and D. V. Lyridis (2005) FORESIM: an innovative simulation technique combining stochastic models and artiﬁcial neural networks – the tanker market case. Proceedings of the Annual Conference of the International Association of Maritime Economists (IAME), Limassol, June 23–5, 2005. Zannetos, Z. S. (1966) The Theory of Tankship Rates: An Economic Analysis of Tankship Operations. Cambridge, MA: MIT Press.

12

Container Shipping Theo Notteboom

12.1

Introduction

The container shipping industry consists of shipping companies with as core activity the transportation of containerized goods over sea via regular liner services. A liner service is “a ﬂeet of ships, with a common ownership or management, which provide a ﬁxed service, at regular intervals, between named ports, and offer transport to any goods in the catchment area served by those ports and ready for transit by their sailing dates” (Stopford 1997: 343). Container liner services are speciﬁcally focused on the transport of a limited range of standardized unit loads: the twenty-foot dry-cargo container or TEU and the forty-foot dry-cargo container or FEU. Occasionally, slightly diverging container units are also loaded on container vessels, such as high cube containers, tank and open-top containers and 45foot containers. The diversity in unit loads in the container shipping industry is low due to the need for uniformity when stacking containers below and on the deck of specialized container vessels. Container shipping has a dynamic history of only 55 years. The launching of the ﬁrst

container ship, Ideal X, by Malcolm McLean in 1956 can be considered as the beginning of the container era. In the early years of container shipping, vessel capacity remained very limited in scale and geographical deployment, and the ships used were simply converted tankers. Shipping companies and other logistics players hesitated to embrace the new technology as it required large capital investments in ships, terminals and inland transport. The ﬁrst transatlantic container service between the US East Coast and Northern Europe in 1966 marked the start of long-distance containerized trade. The ﬁrst specialized cellular container ships were delivered in 1968, and soon the containerization process expanded over maritime and inland freight transport systems (Levinson 2006; Rodrigue and Notteboom 2009a). Container shipping developed rapidly because of the adoption of standard container sizes in the mid-1960s and the awareness of industry players of the advantages and cost savings resulting from faster vessel turnaround times in ports, a reduction in the level of damages and associated insurance fees, and integration with inland transport modes such as trucks, barges and

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

231

CONTAINER SHIPPING

trains. The container and the associated maritime and inland transport systems proved to be very instrumental to the consecutive waves of globalization. Hence, emerging worldwide container shipping networks allowed changes in the economic and transport geography, as they signiﬁcantly shortened the maritime cost distances between production and consumption centers around the world. Container shipping also became an essential driver in reshaping global supply chain practices, allowing global sourcing strategies of multinational enterprises, pull logistics solutions and the development of global production networks. New supply chain practices in turn increased the requirements on container shipping in terms of frequency, schedule reliability/integrity, global coverage of services and rate setting. This chapter aims to provide a comprehensive overview of current issues in the container shipping industry. Section 12.2 analyzes market growth and the changing geography in container shipments. Sections 12.3 and 12.4 zoom in on, respectively, the

capacity management issue and the pricing problem in the container shipping industry. Section 12.5 deals with carriers’ search for scale and scope in their operations. A last section discusses the evolving nature of the container shipping networks operated by carriers.

12.2 Growth in the Container Shipping Industry The shipping industry has witnessed spectacular growth in container trade, fueled by the globalization process and the large-scale adoption of the container. Worldwide container port throughput increased from 36 million TEU in 1980 and 88 million TEU in 1990 to about 535 million TEU in 2008. Around 60% of the world port throughput involves laden containers, about 15% are empty containers. The remainder consists of transshipped containers. Sea–sea transshipment shows the strongest growth: it has more than tripled in the last 15 years (see Table 12.1). World container trafﬁc, the

Table 12.1 World container port throughput and its components for selected years (million TEU) Total port handling 1990 1995 2000 2005 2009 (est.) 2009 vs 1995 (%) 2009 vs 2005 (%)

Port-to-port Full

Empty

87.9 145.2 235.4 399.2 478.0 +229

57.4 92.1 136.7 231.3 275.0 +199

14.6 20.8 36.8 59.7 69.0 +232

+20

+19

+16

Transshipment

16.0 32.3 62.1 108.2 134.0 +315 +24

Sources: Drewry (2006), ITMMA/ESPO (2007) and estimates 2009.

Port-to-port Full (%)

Empty (%)

100.0 100.0 100.0 100.0 100.0

25.4 22.6 26.9 25.8 25.1

Transshipment (%) 27.9 35.1 45.4 46.8 48.7

232

THEO NOTTEBOOM

absolute number of containers being carried by sea, has grown from 28.7 million TEU in 1990 to 152 million TEU in 2008 – an average annual increase of 9.5%. The ratio of container trafﬁc over container throughput evolved from 3 in 1990 to around 3.5 in 2008; i.e., a container on average is handled (loaded or discharged) 3.5 times between the ﬁrst port of loading and the last port of discharge. The changing conﬁguration of liner service networks is at the core of the rise in the average number of port handlings per box (see Section 12.6, “Dynamics in Container Shipping Networks”). With the exception of the year 2009 (when there was a decline in world container trafﬁc of about 12% to 478 million TEU), the container shipping business has always witnessed moderate-to-strong yearon-year growth ﬁgures. The pace of growth

even accelerated in the period 2002–8, partly as a result of the “China effect” in the world economy. The absolute rise of container trafﬁc is the result of the interplay of economic, policy-oriented and technological factors. World trade was facilitated through the mitigation of trade barriers and the introduction of market liberalization and deregulation. Market liberalization also enhanced the development of logistics throughout the world. The center of gravity of the container business is shifting to Asia. During the last twenty years the transatlantic container trade has gradually lost its dominance to the transpaciﬁc and Europe–Far East trades, with large volumes moving from Asia to North America and Europe (Figure 12.1). The container ports in East Asia handled 19.8% of the global container throughput

Container trade in 1000 TEU (full containers only)

18000 16000 14000 12000

Asia–USA USA–Asia

10000

Asia–Europe 8000

Europe–Asia USA–Europe

6000

Europe–USA

4000 2000

19

90 19 95 19 96 19 97 19 98 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08

0

Figure 12.1 Container trade on the main routes, in TEU (full containers). Source: own elaboration based on data in various reports of Drewry and UNCTAD, Review of Maritime Transport.

CONTAINER SHIPPING

in 1980. In 2008, their share had increased to about 37%. Ports in Southeast Asia saw a steep rise in their joint market share, from 4.8% in 1980 to around 14% in 2008. In contrast, Western Europe saw its share fall from 30.3% (then the highest in the world) to about 18% in the same period. North America also witnessed its share declining, from 24.5% (then the second-highest in the world) to less than 10%. The dominance of Asia is also reﬂected in world container port rankings (Table 12.2). In 2009 fourteen of the twenty busiest container ports came from Asia, mainly from China. In the mid1980s there were only six Asian ports in the top twenty, mainly Japanese load centers. The top twenty container ports represented 46% of the world container port throughput in 2009, the top ﬁve an elevated 21.3%. Table 12.3 provides a list of the main container-handling regions in the world. The share of gateway trafﬁc in total container throughput tends to differ quite signiﬁcantly between the gateway regions. The Singapore region primarily acts as a sea–sea transshipment platform (that is, it functions mainly as a hub, not as a gateway), whereas the seaport system in the Yangtze Delta, for instance, is a true multi-port gateway region, giving access to vast service areas in the Delta and along the Yangtze River. Moreover, some multi-port gateway regions feature a high density of port terminals in a small geographical space, while other regions cover larger areas with interport distances of up to 350 km. The Rhine– Scheldt Delta region in Europe was the main container-handling region in the world till the early 1990s. From that moment on Asia took over the leadership. One out of every ten containers handled worldwide is handled in ports of the Pearl River Delta. The joint cargo throughput of the ten port

233

regions considered constitutes almost half of the world container port handlings. Within the region of East Asia, exportoriented industrialization policies adopted by Hong Kong, Taiwan and South Korea sustained a strong growth in the container throughput handled by these economies from the 1980s. China developed similar strategies in the late 1980s, which resulted in elevated growth, ﬁrst in the Pearl River Delta and later also in the Yangtze Delta port system and the Bohai Bay region. In recent years Shanghai, Guangzhou, Shenzhen, Qingdao and Ningbo joined Hong Kong and Singapore in the list of busiest container ports in the world. The future could see more Chinese ports entering the ranks of the busiest container ports. Despite the sustained growth brought about by the containerization process (particularly in relation to Asia), container carriers have always somewhat underperformed ﬁnancially compared to other players in the logistics industries. The weaker performance is linked to the combination of capitalintensive operations and high risks associated with the revenues.

12.3 Capacity Management in Container Shipping 12.3.1 Asset management and the capital-intensive nature of the industry Container shipping is a very capital-intensive industry, in which some assets are owned and others leased and there exists a wide variability in cost bases (Brooks 2000). Asset management is a key component of the operational and commercial success of container shipping lines, since they are primarily asset-based. Common asset management

0.90

0.80

0.56

0.52

0.48

0.41

0.39

0.36

0.33

0.30

0.26

Kobe

Hong Kong

Keelung

Oakland

Seattle

Bremerhaven

Long Beach

Melbourne

Tokyo

Antwerp

Yokohama

Hamburg

Sydney Harbour

3

4

5

6

7

8

9

10

11

12

13

14

15

0.36

0.36

0.95

New York/NJ

1.08

Rotterdam

mTEU

2

Port

1975

1

R

Oakland

San Juan

Bremerhaven

Tokyo

Los Angeles

Long Beach

Busan

Keelung

Hamburg

Yokohama

Antwerp

Kobe

Hong Kong

New York/NJ

Rotterdam

Port

1985

0.86

0.88

0.99

1.00

1.10

1.14

1.15

1.16

1.16

1.33

1.35

1.52

2.29

2.37

2.65

mTEU

Felixstowe

Dubai

Keelung

Tokyo

New York/NJ

Antwerp

Long Beach

Los Angeles

Yokohama

Hamburg

Busan

Rotterdam

Kaohsiung

Singapore

Hong Kong

Port

1995

1.90

2.07

2.17

2.18

2.28

2.33

2.39

2.56

2.76

2.89

4.50

4.79

5.23

11.85

12.55

mTEU

5.14 4.47

New York/ NJ

5.24

5.78

6.06

6.42

7.00

7.32

8.22

9.71

11.43

13.66

14.55

21.33

21.93

mTEU

Qingdao

Port Kelang

Long Beach

Antwerp

Dubai

Hamburg

Los Angeles

Rotterdam

Kaohsiung

Busan

Shenzhen

Shanghai

Singapore

Hong Kong

Port

2004

2006

Guangzhou

Antwerp

Ningbo

Long Beach

Qingdao

Los Angeles

Hamburg

Dubai

Rotterdam

Kaohsiung

Busan

Shenzhen

Shanghai

Hong Kong

Singapore

Port

Table 12.2 Top twenty container ports based on throughput in million TEU (1975–2009)

6.60

7.02

7.07

7.29

7.70

8.47

8.86

8.92

9.69

9.77

12.04

18.46

21.70

23.31

24.79

mTEU

Port Kelang

Tianjin

Antwerp

Kaohsiung

Hamburg

Qingdao

Rotterdam

Guangzhou

Ningbo

Dubai

Busan

Shenzhen

Hong Kong

Shanghai

Singapore

Port

2008

7.97

8.50

8.66

9.68

9.74

10.32

10.83

11.00

11.23

11.83

13.43

21.41

24.25

27.98

29.92

mTEU

Hamburg

Port Kelang

Antwerp

Kaohsiung

Tianjin

Rotterdam

Qingdao

Ningbo

Dubai

Guangzhou

Busan

Shenzhen

Hong Kong

Shanghai

Singapore

Port

2009

7.01

7.31

7.31

8.58

8.70

9.74

10.26

10.50

11.10

11.19

11.95

18.25

20.93

25.00

25.87

mTEU

15

14

13

12

11

10

9

8

7

6

5

4

3

2

1

R

0.23

0.21

9.2 24.1

38.3%

26.8%

17.9%

Le Havre

Kaohsiung

Jacksonville

Top 20 World total

Share of top 20

Share of top 10

Share of top 5

18

19

20

Share of top 5 17.7%

28.1%

43.1%

Share of top 20

Share of top 10

24.7 57.4

0.68

0.71

Top 20 World total

Jeddah

Baltimore

0.71

0.83

Bremerhaven

Dunkirk

0.85

Seattle

Share of top 5

Share of top 10

Share of top 20

Top 20 World total

Bremerhaven

Shanghai

Oakland

San Juan

Manila

26.8%

35.7%

48.4%

70.3 145.2

Share of top 5

Share of top 10

Share of top 20

Top 20 World total

Tokyo

23.4%

34.3%

47.2%

167.3 354.5

3.58

3.62

Laem Chabang

1.53 1.53

3.81

4.01

4.02

Tianjin

Ningbo

Tanjung Pelepas

1.55

1.59

1.67

Source: own elaboration based on the statistics of the respective port authorities.

0.23

0.23

Tilbury

17

0.26

San Juan

16

33.2% 22.8%

Share of top 5

47.3%

208.3 440

4.45

4.77

5.13

5.95

6.33

Share of top 10

Share of top 20

Top 20 World total

Bremerhaven

Tanjung Pelepas

New York/NJ

Tianjin

Port Kelang

Share of top 5

Share of top 10

Share of top 20

Top 20 World total

New York/NJ

21.9%

32.2%

46.3%

247.5 535

5.27

5.60

5.60

Bremerhaven

6.49

Tanjung Pelepas

7.85

Long Beach

Los Angeles

4.64

Share of top 5

Share of top 10

Share of top 20

21.3%

32.4%

46.2%

220.8 478

Laem Chabang Top 20 World total

4.68

Xiamen

5.07

6.02

Tanjung Pelepas Long Beach

6.70

Los Angeles

20

19

18

17

16

Rhine– Scheldt Delta

Yangtze River Delta Bohai Bay

Dalian, Qingdao, Tianjin Rotterdam, Antwerp, Zeebrugge, Amsterdam

Hong Kong, Shenzhen, Guangzhou, Zhongzhan, Jiuzhou Singapore, Port Klang, Tanjung Pelepas Shanghai, Ningbo

Pearl River Delta

Malacca Straits

Main container ports

Cluster

105

350

180

340

130

Distancea (km)

4.20

0.20

0.20

1.70

2.34

1985

1

10

9

6

3

R

5.62

0.55

0.47

5.56

5.37

1990

1

9

10

2

3

R

10 3

7.74

9

2

1

R

1.68

1.69

12.98

13.74

1995

11.38

4.84

6.51

20.66

24.26

2000

3

9

7

2

1

R

15.59

11.16

18.56

30.41

40.16

2004

4

7

3

2

1

R

18.67

16.86

28.78

35.88

49.95

2006

Table 12.3 The ranking of major container handling regions in the world (in million TEU)

4

5

3

2

1

R

21.37

20.37

35.51

40.27

55.98

2007

4

5

3

2

1

R

22.08

23.05

39.21

43.49

58.30

2008

5

4

3

2

1

R

19.58

23.51

35.50

39.20

51.87

2009

Sb (%)

5

4

3

2

4.1

4.9

7.4

8.2

1 10.9

R

2.15

95

35.3%

3.37

29.5%

2

0.92

31.04 87.9

2.46

50

8

3.13

3.71

2.35

1990

16.94 57.4

0.30

150

5

4

7

R

5

8

6

4

7

R

5

5.16

40.9%

59.37 145.2

8

7

4

6

R

2.07

4.41

5.40

4.50

1995

42.9%

101.02 235.4

5.63

3.05

7.03

9.48

8.18

2000

b

Longest distance between competing ports in the cluster. Share of cluster in world port throughput. Source: own elaboration based on the statistics of the respective port authorities.

a

Gulf/ Emirates Tokyo Bay Tokyo, Yokohama, Shimizu Total of 10 clusters Total world port container throughput Share of 10 clusters

2.25

10

Los Angeles, Long Beach Hamburg, Bremerhaven, Wilhelmshaven Dubai

1.16

135

Busan, Gwangyang

1985

Korean Twin Hub San Pedro Bay Helgoland Bay

Distancea (km)

Main container ports

Cluster

8

10

6

4

5

R

46.8%

165.79 354.5

6.59

6.42

10.52

13.10

13.28

2004

9

10

8

5

6

R

47.5%

209.12 440

7.20

8.92

13.31

15.76

13.79

2006

10

9

8

6

7

R

48.1%

236.83 492

7.62

10.71

14.80

15.67

14.53

2007

10

9

8

6

7

R

46.6%

249.47 535

7.68

11.83

15.19

14.34

14.30

2008

10

9

6

7

8

R

46.8%

223.81 478

6.92

11.10

11.57

11.77

12.79

2009

10

9

8

7

6

R

1.4

2.3

2.4

2.5

2.7

Sb (%)

238

THEO NOTTEBOOM

decisions for shipping lines include management of the equipment to reduce downtime and operating costs, increase the useful service life and residual value of vessels, increase equipment safety and reduce potential liabilities, and reduce costs through better capacity management. Container shipping lines are particularly challenged to develop an effective asset management program for the ﬂeet they own or operate. Vessel life cycle management includes the procurement, acquisition, deployment and disposal of container vessels. Fleet capacity management is complex, given the inﬂexible nature of vessel capacity in the short run due to ﬁxed timetables, the seasonality effects in the shipping business and cargo imbalances on trade routes. Lines vie for market share and capacity tends to be added as additional loops (i.e. in large chunks) to already existing services. Lines incur high ﬁxed costs in this process. For example, eight to ten ships are needed to operate one regular liner service on the Europe–Far East trade, and

each of the post-Panamax container vessels has a typical newbuilding price of US$100– 200 million, depending on the unit capacity of the ship and the market situation in the shipbuilding industry at the time of the vessel order placements. The total slot capacity of the cellular container ﬂeet stood at 12.94 million TEU in October 2009, 9.44 million TEU in 2007, 3.09 million TEU in 1997 and 1.22 million TEU in 1987. Container shipping lines on average charter about 58% of the vessels and 51% of the total capacity from third-party shipowners (Table 12.4). Ship chartering is particularly a common practice for mid-size box ships (i.e. 1,000 to 3,000 TEU). Container shipping lines also face having to make large investments in their box ﬂeets. The ex-factory prices of new containers typically amount to US$3000–3500 for a 40-foot dry container and around US$2000 for a 20-foot box (Containerisation International, various issues). The total slot capacity of the world’s container ﬂeet amounted to 13.3 million TEU in April 2008, while the

Table 12.4 Composition of the world cellular container ship ﬂeet in October 2009 Size range (TEU)

Total Number

>7500 5000–7499 4000–4999 3000–3999 2000–2999 1500–1999 1000–1499 500–999 100–499 Total Average vessel size

267 402 588 325 717 568 698 837 313 4,715

Chartered TEU

2,418,951 2,439,772 2,656,079 1,106,690 1,819,329 962,082 824,213 616,408 101,472 12,944,996 2,745

Source: based on www.alphaliner.com/.

Number 83 163 310 166 537 388 446 557 106 2,756

Chartered

TEU

% number

% TEU

709,663 989,545 1,392,479 567,801 1,368,111 658,163 525,257 414,579 34,529 6,660,127 2,417

31.1 40.5 52.7 51.1 74.9 68.3 63.9 66.5 33.9 58.5

29.3 40.6 52.4 51.3 75.2 68.4 63.7 67.3 34.0 51.4

CONTAINER SHIPPING

total box ﬂeet reached 25.36 million TEU (CI online, May 2008). Thus, the number of containers needed to run a regular container service is about twice the joint TEU capacity of the vessels deployed in that liner service. For example, a container carrier operating a regular service between Europe and Asia with eight vessels of 10,000 TEU needs a box ﬂeet of at least 160,000 TEU to support the service. Theofanis and Boile (2009) report that container shipping lines and other transport operators own about 59% of the total global container equipment ﬂeet (compared to 53.6% in 2002), while leasing companies own the remaining 41%. The large investments in assets and the ﬁxed nature of the liner service schedules, even if the cargo volume is too low to ﬁll the vessel, lie at the core of the risk proﬁle in the container liner shipping industry. High commercial and operational risks are associated with the deployment of a ﬁxed ﬂeet capacity (at least in the short run) within a ﬁxed schedule between a set of ports of call at both ends of a trade route. Unused capacity cannot be stored and used later. Once the large and expensive liner services are set up, the pressure is on to ﬁll the ships with freight. When there is an oversupply of vessels in the market, high ﬁxed costs and product perishability give shipping lines an incentive to ﬁll vessels at a marginal cost-only approach, often leading to direct operational losses on the trades considered.

12.3.2 The drive towards scale enlargement in vessel size Since the 1990s a great deal of attention has been devoted to larger, more fuel-efﬁcient vessels (see for example Cullinane and

239

Khanna 1999). The average vessel size increased from 1,155 TEU in 1987 to 1,581 TEU ten years later, 2,417 TEU in 2007 and 2,618 TEU in 2009 (UNCTAD 2009). The mid-1970s brought the ﬁrst ships of over 2,000 TEU capacity. The Panamax vessel of 4,000 to 5,000 TEU was introduced in the early 1990s. In 1989 APL was the ﬁrst shipping line to deploy a post-Panamax vessel. Maersk Line introduced the Regina Maersk (nominal capacity of 6,418 TEU but “stretchable” to about 8,000 TEU) in 1996. Ten years later the Emma Maersk of around 13,500 TEU capacity was the ﬁrst vessel to move far beyond the 10,000 TEU mark. Given the relentless search for cost savings at sea (through economies of scale), many shipping lines’ expansion plans are heavily focused towards large post-Panamax (5000+ TEU) container ships. Whereas 78 of such ships provided a total slot capacity of just 464,000 TEU at the beginning of 2000, these numbers already amounted to 504 units and 3.3 million TEU at the beginning of 2007 and 669 units and nearly 4.9 million TEU at the end of 2009 (Table 12.5). Whereas 5000+ TEU ships provided just 10% of the total cellular ﬂeet capacity at the beginning of 2000, their share increased to 37.5% at the end of 2009. The total ﬂeet in late 2009 counted 39 vessels in the range of 10,000– 15,500 TEU, and another 168 vessels of above 10,000 TEU unit capacity were on order. The massive inﬂux of new tonnage and the cascading-down effect triggered by the introduction of large post-Panamax ships on the arterial trade routes invoked a signiﬁcant increase in average vessel sizes on the main trade routes. For example, the size of a typical container vessel deployed on the Far East–Europe trade increased from 4,500–5,500 TEU in 2000 to about 7,500 TEU in 2010.

258 116 194 45 60 56 71 65 0 865

Number 2,914,640 760,150 869,607 156,020 156,166 98,357 84,439 52,511 0 5,091,890 5,887

TEU

Order book Oct. 2009

Source: based on www.alphaliner.com/.

>7500 5000–7499 4000–4999 3000–3999 2000–2999 1500–1999 1000–1499 500–999 100–499 Total Average vessel size

Size range (TEU)

267 402 588 325 717 568 698 837 313 4,715

Number 2,418,951 2,439,772 2,656,079 1,106,690 1,819,329 962,082 824,213 616,408 101,472 12,944,996 2,745

TEU

Oct. 10, 2009

147 357 346 282 648 466 595 722 387 3,950

Number 1,250,003 2,070,373 1,529,854 956,165 1,630,850 786,591 705,600 525,853 122,944 9,578,233 2,425

TEU

Jan. 1, 2007

Table 12.5 Composition of the cellular container ship ﬂeet for selected dates

10 68 156 227 389 327 484 539 422 2,622

Number

80,822 383,415 682,428 770,410 960,443 552,003 565,073 381,630 132,484 4,508,708 1,720

TEU

Jan. 1, 2000

0 0 79 164 255 198 367 336 343 1,742

Number

0 0 345,351 541,516 637,502 339,511 433,533 239,439 107,046 2,643,898 1,518

TEU

Jan. 1, 1995

CONTAINER SHIPPING

The focus of container carriers on vessel sizes did not lead to a more stable market environment. Consecutive rounds of scale enlargements in vessel size have reduced the slot costs in container trades, but carriers have not reaped the full beneﬁts of economies of scale at sea (see for example Lim 1998). The large container vessels can be deployed efﬁciently on the major trade lanes, provided they are full. Many carriers have not been able to realize consistent high utilization of available slot capacity on their bigger vessels, which would have offset some of the scale advantages. Unpredictable business cycles and the seasonality on some of the major trade lanes (e.g. demand peak just before Chinese New Year) have more than once resulted in unstable cargo guarantees to shipping lines. Adding post-Panamax capacity gave a short-term competitive edge to the early mover, putting pressure on the followers in the market to upgrade their container ﬂeet and avert a serious unit cost disadvantage. A boomerang effect eventually also hurt the carrier who started the vessel scaling up round. The economic slowdown since late 2008 has had its consequences on vessel size. There is a common belief that the market will not see an increase in the maximum size of container vessel for at least the next ﬁve years. The Emma Maersk class and comparable vessel sizes of MSC (cf. the MSC Beatrice of around 14,000 TEU) are thus expected to form the upper limit in vessel size, at least for the coming years. The crisis has also urged shipping lines to rationalize services and to cascade larger vessels downstream to secondary trade routes. There is also a renewed interest in “baby post-Panamax” ships with unit capacities ranging from 5,000 to 7,500 TEU. These ships are more ﬂexible, since they can

241

be deployed in routes to emerging markets, where port systems typically face draught and berth limitations.

12.3.3 Operational strategies to absorb vessel overcapacity The container shipping industry goes through consecutive cycles of vessel oversupply and capacity shortages. However, the periods with vessel overcapacity are generally much longer, as shipowners massively order new ships when demand is surging and the peak in demand is near. In recent years, ﬂeet investments have been facilitated by the ease of getting ships ﬁnanced, low interest rates and superoptimism about future demand. Overcapacity situations are often sustained as a result of a vicious circle which takes many years to dissolve. It is very difﬁcult to absorb overcapacity, for several reasons. First of all, shipyards are not eager to give in to requests of shipowners to cancel orders or delay deliveries. Secondly, oversupply in the market results in a weak second-hand market for ships, low charter prices and low newbuilding prices. Third, shipowners are not eager to reduce capacity by scrapping vessels, as scrap prices are low in a weak market. The four main segments of the shipping sector (shipbuilding, charter market, second-hand market and the scrap market) thus actively reinforce the negative downward spiral. Overall, crises and overcapacity situations in the container shipping industry are partly the result of exogenous factors, such as a decrease in demand, and partly the result of endogenous factors, such as wrong investment decisions by shipping lines. Many of the overcapacity problems are linked to the failure by the key stakeholders,

242

THEO NOTTEBOOM

in the ﬁrst place the shipowners and providers of ship ﬁnance (many without a maritime background), to correctly anticipate the future markets for different ship types and sizes. This observation is in line with the views of Randers and Göluke (2007) on system dynamics in shipping markets. They argue that the turbulence in shipping markets is partly the consequence of the collective action of the members of the shipping community. In principle, one player can exploit the cyclicality for his or her own proﬁt by selling vessels near the peak in freight rates or by not entering the shipping business during extremely good times. But in practice, a common market sentiment means that shipping lines seldom go anti-cyclical. The liner shipping community creates the cyclicality and adds signiﬁcantly to the volatility of the business environment through investment and allocation decisions. If the container shipping community acted rationally on the available information (on ordering, scrapping, utilization and so on) and better anticipated ﬂuctuations in demand, they could greatly reduce the violent volatility, at least if the regulatory powers would allow them to

Table 12.6

collect such information and use it. With the outlawing of liner conferences in Europe since October 2008, market-related information about capacity deployment, demand/supply dynamics and pricing of liner services has become more scarce. The economic crisis which started in late 2008 provides a good example of the difﬁculties the container shipping industry has in adapting capacity to changing market conditions. Until early 2008, shipyards struggled to satisfy demand for new and bigger container ships. The economic crisis generated a large surplus of cargo capacities, particularly on the Europe–Asia and transpaciﬁc routes. World container shipping demand in TEU-mile fell by 12.4% in 2009. As shipyards were still completing the numerous orders from previous years, total slot capacities in the market would have continued climbing, with 15.6% in 2009, if no action had been taken to absorb some of that capacity (Table 12.6). In late 2008, a number of shipping lines started to postpone orders, and older ships were put out of service in large numbers. Since the late summer of 2008, shipyards have been renegotiating price and delivery dates, with various ship-

Changes in ﬂeet operations, TEU-mile supply

Deliveries of new vessels Delayed deliveries from previous years Scrapping Newbuilding delivery deferrals Newbuilding cancellations Lay–ups/service suspensions Slow-steaming/re-routing Effective supply growth Effective demand growth

2006 (%)

2007 (%)

2008 (%)

2009 (est.) (%)

14.1 – –0.3 1.0 – – – 14.8 12.4

13.1 – –0.2 –0.3 – – –1.9 10.7 11.3

12.7 – –0.9 –1.2 – – –5.6 5.0 –0.3

15.6 1.2 –2.0 –5.0 –2.0 –10.0 –7.5 –9.7 –12.4

Source: own compilation based on ﬁgures from Drewry and Goldman Sachs.

CONTAINER SHIPPING

ping lines looking for delayed deliveries. The total number of cancellations of container ship orders amounted to 140 ships or 436,000 TEU between the start of the ﬁnancial crisis in September 2008 and midFebruary 2010 (Alphaliner 2010a). The order cancellations represent 6.7% of the container ship order book at October 1, 2008. A limited number of container ship orders were converted into other vessel types by their owners. Shipping lines also tried to absorb overcapacity by laying up vessels. In mid-April 2009, the worldwide laid-up ﬂeet totaled about 1.3 million TEU or 10.4% of the world container ﬂeet and even reached more than 12% in the fall of 2009. Most of the idled ships were midsize vessels between 1000 and 3000 TEU capacity, while hardly any post-Panamax vessels were laid up. The idle container ship ﬂeet decreased to 9.9% of the world ﬂeet capacity in February 2010 (508 ships totaling 1.3 million TEU; Alphaliner 2010b). Another measure taken to absorb overcapacity involves the suspension of liner services, particularly on the Far East–Europe and transpaciﬁc trade routes. Total capacity on the Far East–Europe trade fell by 21% between October 2008 and March 2009. This corresponded to a net withdrawal of 19 liner services on the trade, leaving only 45 services between Europe/Med and the Far East in March 2009 (ﬁgures www.alphaliner.com/). Maersk Line suspended several major loops, such as the AE5 and AE8 services. The New World Alliance took out 25% of its capacity, while the CKHY group decreased capacity by about 24%. Senator Lines ceased all its operations from February 2009. Vessel lay-ups, order cancellations and service suspensions were not the only tools

243

used by shipping lines in an attempt to absorb overcapacity, as suggested by Table 12.6. Many vessels continue to slow steam at around 18 to 19 knots as the longer roundtrip time helps to absorb surplus capacity in the market (because more vessels are needed per loop). Initially, shipping lines introduced slow steaming in 2007 to offset the rise in bunker costs (Notteboom and Vernimmen 2009), but the slow steaming option remained popular even after a steep decline in the bunker price from the peak of US$700 in July 2008 to a low of US$170 per ton in December 2009 (bunker price for IFO 380 grade in Rotterdam obtained from www.bunkerworld.com/). Alphaliner reported that during the second half of 2009, 42 liner services in the world (of which 13 were on the Northern Europe– Asia trade) switched to (super)slow steaming of 14 to 18 knots. In total, 47 additional container vessels between 3,000 and 13,000 TEU had to be deployed on these services in order to guarantee weekly calls in each of the visited ports. Slow steaming absorbed about 300,000 TEU of vessel capacity, or 2.3% of the world container ﬂeet. The cost model used by Notteboom and Vernimmen (2009) shows that the cost savings linked to slow steaming on a liner service between Europe and Asia compensate for the cost increases linked to the deployment of an additional vessel to guarantee a weekly call in each port included in the service. Quite a number of shipping lines are now examining the possibilities of making cost savings by further slowing down ships to about half their usual speeds. A service speed of 14 knots is considered by some the possible future norm for container ships, in contrast to speeds of up to 22–3 knots before slow steaming was introduced. While some container carriers, such as Maersk Line and

244

THEO NOTTEBOOM

CMA CGM, are moving to super slow steaming, others continue to run their services at full speed despite the high fuel price. Some shipowners who have managed to defer newbuilding deliveries are taking advantage of the extra time to modify designs and specify smaller, more fuelefﬁcient propulsion systems with lower service speeds. Many shipowners, however, are still reluctant to commit to smaller engines, as they fear that at some stage higher speeds will be viable again. Quite a number of shippers are concerned about the higher transit times brought about by slow steaming practices. If super slow steaming becomes the norm, shippers might have to redesign their supply chains to meet the new reality of longer transit times. The future might bring premiumpriced high-speed services to carry timesensitive cargo, but most ships would be operated at a much slower speed to save on bunkers, reduce emissions and absorb part of the overcapacity in the market. The situation in the charter market is particularly interesting. In late 2009 container ship operators owned around 58% of the global vessel ﬂeet, while the remainder was owned by ﬁnanciers through chartering contracts (see Table 12.4). Given the current market situation, chartered-in vessels are returned when leases expire and, consequently, taken out of the market. The rental reversion rate for the chartered ﬂeet currently stands at 20–2% of the global container ship market, based on an average tenure of 4.5 to 4.9 years. Given that half of the ﬂeet is chartered in, as much as 1.37 million TEU of available capacity could in theory be removed from the network per annum. That would be about 10% of the entire ﬂeet per annum, which could mitigate expected nominal supply growth in the

years to come. However, a certain proportion of the charter expiries are renewed, with daily rates in late 2009 about 75% lower than the average level of 2008. It is also expected that many operators will return chartered ﬂeet when the leases expire, because they have their own newly built deliveries coming to market. Consequently, redelivered vessels are likely to be laid up, since charter owners cannot effectively operate container ships without a network, unlike bulk carriers and tanker vessels. This will have a substantial impact on the balance sheet of those who have provided ﬁnancing to these charter ships. Therefore, the market could see fewer container ships on trade routes, at least until rates rebound to proﬁtable levels. This brings us to the pricing issue in the container shipping industry.

12.4 Pricing and the Risks Associated with Revenue Streams 12.4.1 The pricing problem in container shipping The container shipping industry does not face challenges only in the area of capacity management. A combination of poorly differentiated rates (too many customers to negotiate a rate for every cargo) and inﬂexible capacity causes a pricing problem and explains existing freight rate volatility in the market. Shipping lines are not able to achieve rate stability, as they cannot adjust vessel capacity to meet short-run demand ﬂuctuations (see discussion in the previous section). For most shipments freight accounts for only a very small portion of the shipment’s total value, but as carriers cannot inﬂuence the size of the ﬁnal market,

CONTAINER SHIPPING

they will try to increase their short-run market share by reducing prices. Thus, shipping lines may reduce freight rates without substantially affecting the underlying demand for container freight. The only additional demand can come from lowvalue products which will only be shipped overseas if freight rates are very low (e.g. waste paper and metal scrap). These “temporary” markets disappear again once the freight rate is above a threshold level that does not allow a proﬁt on trading these products overseas. The fairly inelastic nature of demand for shipping services constitutes the core problem for the ﬁnancial performance of container shipping lines. Through their pricing strategies container lines only have a marginal impact on total trade volumes. In a market situation with vessel oversupply, processes of rate erosion unfold as shipping lines try to increase their market shares by lowering the freight rates, without substantially impacting the total demand. Such price competition continues till the freight stabilizes at a low level, just above the “refusal rate,” i.e. the lowest rate at which the shipping line is prepared to operate its vessel rather than having it in lay-up. If the freight rate on a speciﬁc route fell below the refusal rate then many vessels would be laid up. The resulting reduction in vessel capacity would push rates back up to a level above the refusal rate. When demand starts to pick up, ships are taken out of lay-up. The freight rates move away from the refusal rate once all vessels are out of lay-up and all deployable capacity is operational in the market. It is only then that rates start to increase signiﬁcantly. Rates will reach their highest level when the utilization of the ﬂeet reaches its upper limits and not enough new capacity is added to the market. At that

245

moment, container shipping lines massively order new vessel capacity, leading to a shockwave of new capacity being brought into the market one-and-a-half to two years later, typically pushing the shipping market back into a period of overcapacity and lower rates. These dynamics in the shipping market combined with the rather inelastic demand force shipping lines to an intense concentration on costs and to seeking negotiated long-term contracts with large shippers with a view to securing cargo. Even though lower rates may allow carriers to take on extra cargo, in most cases, where there remains capacity, they also reduce their proﬁtability. In many cases, shipping lines can earn more money with higher rates and lower utilization than with lower rates and higher utilization. Evidence on the pricing problem can be found in the way shipping lines reacted to the economic crisis which started to unfold in late 2008. The sudden decline in demand meant that spot container freight rates on many trade routes were reduced to very low levels in early 2009. The global freight rate index developed by Drewry fell from US$2,727 per FEU in July 2008 to US$1,536 per FEU in May 2009. For cargo ﬂows from Asia to Europe the index plunged from US$3,169 per FEU in July 2008 to a low point of US$1,071 in March 2010. Rates bottomed out in February/March 2009 as they could not go much lower. In the second quarter of 2009, vessel capacity reductions on the major trade lanes started to have a positive effect on rates. In April 2009, NOL started to charge US$250 more for a TEU from Asia to Europe. Maersk Line increased its rates for all cargo in the Asia to Europe trade (e.g. +US$250 per TEU/main port, effective 1 April 2009, and +US$300 per TEU/main port, effective 1 July 2009). Also,

246

THEO NOTTEBOOM

Table 12.7 Financial results for a number of major container shipping lines Shipping line

Maersk Line China Shipping COSCO Hapag-Lloyd OOCL NOL/APL Hanjin ZIM Line

Operating losses in H1 2009 (US$ million)

Percentage rate shortfall in H1 2009a

829 475 630 618 197 379 342 380

8 37 38 19 10 15 17 33

a Shortfall as percentage of average rate (EBIT/ Revenue). Source: own compilation based on Marsoft (2009).

CMA CGM carried through a rate restoration strategy on its main trades for the second quarter of 2009 (westbound: + US$350 per TEU; eastbound: + US$100 per TEU). The increases were a signal that the liner shipping industry was slowly adapting to the volume adjustments. Still, the low rates in early 2009 caused many leading container shipping lines to incur high losses in 2009 (Table 12.7). In the ﬁrst half of 2009, liner revenues averaged 20% below operating breakeven. In comparison, Goldman Sachs (2009) reports long-term average EBIT margins of +11.8% in the period 1995–2008. Some shipping lines were initially still going fairly strong, especially those with a global coverage of services, such as MSC and CMA CGM. It seems that volumes on other routes, such as South America and Africa, were helping these lines to secure a leadership position in the Asian shipping market. However, the accumulated losses incurred in late 2008 and 2009 started to have their full effect in the autumn of 2009. In early October 2009,

CMA CGM had to seek a restructuring of a US$5 billion debt in order to stay aﬂoat. ZIM Line, CSAV and Hapag-Lloyd have entered into far-reaching restructuring programs, and Maersk Line and MSC also faced ﬁnancial problems. All-in ocean freight rates continued to climb throughout the rest of 2009 and early 2010. Drewry’s global freight rate index increased by 18% between July and September 2009 and by another 6% between September and November. Together with spot rates, contract container freight rates increased signiﬁcantly, as shippers went into negotiations at a time, in early 2010, when spot freight rates were consistently higher than the year before on most trade routes. Despite increases in freight rates, there is still quite a lot of volatility and vulnerability in the rate restoration process as many vessels are still laid up (see discussion in the previous section), which represents a large latent vessel capacity that could be made operational in a time span of one to six months. Another aspect of the pricing problem relates to the existence of large cargo imbalances on a number of trade routes. In recent years, the ﬂow of full containers between Asia and the USA has been about three times higher than the trade ﬂows in the opposite shipping direction (Figure 12.2). The imbalance in cargo ﬂows on the Europe–Asia route is evolving in a similar way, thereby escalating the associated volume of empty containers to be repositioned from consumption to production regions (see Theofanis and Boilé 2009 for an in-depth discussion). The existing imbalances between westbound and eastbound trade ﬂows or between northbound and southbound container volumes spurred container shipping lines to generate the

CONTAINER SHIPPING

90% 80%

247

Share of eastbound volume in total two-way volume Asia-USA Share of westbound volume in total two-way volume Asia-Europe Share of westbound volume in total two-way volume Europe-USA

70% 60% 50% 40% 30% 20% 10% 0% 1990 1995 1996 1997 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008

Figure 12.2 Trafﬁc imbalances on the main routes, based on volumes in TEU (full containers). Source: own elaboration based on data in various reports of Drewry and UNCTAD, Review of Maritime Transport.

bulk of their revenues on the full leg, leading to large differences in freight rates between sailing directions. Shipping lines have developed a range of organizational strategies to reposition their empty containers (Lopez 2003), for example the spot organization of the repositioning ﬂows, and the adoption of different renewable contracts to frame the externalization of the repositioning problem, often using leasing companies to absorb some of the associated risks. The trade imbalance and container repositioning issues also affect shippers in their ability to access equipment. In order to guarantee space, shippers may doublebook their container loads, which leads to missed bookings for shipping lines. Container liner companies have reacted by imposing additional surcharges in the form of “no-show” fees.

12.4.2 The economics of additional price items and surcharges The container shipping industry is characterized by speciﬁc and complex pricing practices, partly to seek protection from freight rate instability. Base freight rates or Freight All Kinds (FAK) rates are applicable in most trades. These freight rates are lump sum rates for a container on a speciﬁc origin–destination relation irrespective of its contents and irrespective of the quantity of cargo stuffed into the box by the shipper himself. On top of these base freight rates, liner companies charge separately for additional items. The most common surcharges include fuel surcharges (Bunker Adjustment Factor or BAF), surcharges related to the exchange rate risk (Currency Adjustment Factor or CAF), port congestion surcharges,

248

THEO NOTTEBOOM

terminal handling charges (THCs) and various container-equipment related surcharges (e.g. demurrage, detention, and equipment handover charges, equipment imbalance surcharge, and charges for the special equipment needed for handling open-top containers, heavy lift, etc.). Table 12.8 provides an empirical example of the relative importance of the base freight rate compared to the total out-of-pocket costs and time costs for a shipment from Shanghai to Brussels. Fuel surcharges are aimed at passing (part of ) the fuel costs on to the customer through variable charges. The use of fuel surcharges has always been a source of contention in shipping circles, particularly in times of high fuel prices. Shippers’ organizations argue that the way fuel surcharges are determined is opaque, without uniformity, and involves a signiﬁcant element of revenue making. In contrast, shipping lines underline that the increase in bunker prices, especially in the short term, is only partially compensated through surcharges to the freight rates and that it still affects their earnings negatively. Empirical research by Notteboom and Cariou (2011) related to data for mid-2008 and early 2009 and by Meyrick and Associates (2008) shows that fuel surcharges are mainly used by shipping lines for revenue-making purposes and go beyond mere cost recovery. The analysis of Cariou and Wolff (2006) of the causal relationship between the fuel surcharges imposed by members of the Far Eastern Freight Conference and bunker prices on the Europe–Far East container trade concluded that from 2000 to 2004 a causality can be established and that an increase in fuel price by 1 would lead to an increase in the Bunker Adjustment Factor by 1.5. Time lags can be observed between changes in

the bunker price and corresponding changes in fuel surcharges. For example, the economic slowdown since late 2008 initially put a strong downward pressure on the fuel price with a positive impact on vessel operating costs. A number of shipping lines kept the fuel surcharges artiﬁcially high for some time to generate some revenue out of the container business. But in early 2009 lines started to quote all-in prices rather than split ocean rates from currency, bunker and terminal handling surcharges. The Currency Adjustment Factor (CAF) is typically expressed as a percentage of the basic freight rate. This surcharge ensures that shipping lines enjoy a more or less stable income in the currency of their own country. Terminal Handling Charges (THCs) are a tariff charged by the shipping line to the shipper which is intended to cover (part or all of ) the terminal handling costs, and which the shipping line pays to the terminal operator (Dynamar 2003). THCs vary within a port by trade route and are a negotiable item for large customers. The origin of THCs is to be found in the development of a common formula in 1989 by the Council of European and Japanese National Shipping Association (CENSA). The basic principle was to distribute all cost components of the terminal handling operation on an 80/20 basis, with the shipping lines being responsible for the 20 percent. The use of THCs is widely accepted in Europe and North America, and THCs are also found in ports in the Far East (China and Vietnam) and Israel. In many countries, though (including Indonesia, Malaysia and Hong Kong), a resistance exists against the level and/or the application of THCs. Shippers’ councils and individual shippers argue that THCs are used as a source of income rather

249

CONTAINER SHIPPING

Table 12.8 Breakdown of transport costs Shanghai–Brussels for a 40-foot container with a cargo load value of 85,000 euro (market prices of February 2007) Shanghai–Brussels Value container content (euro) Time variables Transit time to Shanghai (by barge) Dwell time Shanghai Transit time Shanghai–Antwerp Dwell time Antwerp End-haulage (including pickup and delivery) Total transit time Transport and handling costs Pre-haulage Shanghai (by barge) Typical freight rate Shanghai–Antwerp THC Shanghai THC Antwerp (per container) BAF CAF ISPS surcharge Antwerp (per container) Delivery order (20 euro/BL) Customs clearance fee (IM4) Administration fee (25 euro/BL) Dwell time charges Antwerp – import containers End-haulage by truck (including handling): Antwerp–Brussels (60 km) Total transport and handling costs Time costs goods Opportunity cost capital (6% per year) Depreciation cost (economic/technical – 10% per year) Damage and loss costs (5% per year) Insurance (2% per year) Leasing costs container (0.65 euro/day) Total time costs goods Total costs % of value of goods

85000 Days 0 3 28 5 0.5 36.5 Euro 0 1641 56 112 367 141 15 20 75 25 0 215 2667 Euro 510 850 425 170 24 1979 4645 5.5

Source: own elaboration based on data of an Antwerp-based freight forwarding company.

than cost recovery and that they were only introduced to compensate for declining rates. Shipping lines underline that THCs are certainly not a proﬁt centre and that THC levels have not been increased for years, despite inﬂation. In a recent study, the European Commission (2009) analyzed the

impact of the end of the liner conference block exemption on the THCs applied by all container carriers in most ports. The study revealed that THCs are an insigniﬁcant part of the pricing mix when freight rates are high, but during a freight rate collapse, as in early 2009, they constitute a much higher

250

THEO NOTTEBOOM

Total price (base rate + BAF/CAF+congestion surcharge) for FEU (in US$) without THC

percentage of the total port-to-port price. After the abolition of liner conferences in Europe, THCs were simpliﬁed and restructured on a country basis rather than a port basis. Similarly to how they deal with fuel surcharges, individual shipping companies follow different approaches on what they include in THCs. Freight rates can vary greatly depending on the economic characteristics (e.g. cargo availability, imbalances, competitive situation among shipping lines) and technological characteristics (e.g. maximum allowable vessel size) of the trade route concerned. Figure 12.3 gives an example of applicable freight rates (including fuel surcharges and CAF) for the shipment of an FEU from a

major North European container port to a large number of overseas destinations. It can be concluded that there is no straightforward relation between price and sailing distance. Many destinations in West Africa and East Africa are relatively expensive given the market risks involved (cargo availability and port congestion), the imbalance in container ﬂows (southbound volumes are much higher than northbound trafﬁc), the market structure, which has relatively few suppliers of regular container services, and the limitations in terms of vessel scale. Rates to the Far East were very low in comparison, because of the scale economies in vessels deployed, the imbalance between westbound and eastbound trade ﬂows

OCTOBER 2009 8000 Export Rates – from a North European hub 7000

Lobito - Angola Luanda - Angola

6000 Cape Verde

5000

Reunion/Mauritius and Madagascar

4000

= Africa = Far East = India/Pakistan = Middle East = Australia - New Zealand = Mediterranean = Baltic/Iberian peninsula = South and Latin America

South African ports

3000

AUSTRALIA - NEW ZEALAND

2000

FAR EAST 1000 0 0

2000

4000

6000

8000

10000

12000

14000

Distance from North European hub (in nautical miles)

Figure 12.3 Container rates (including BAF and CAF) from a North European container port to a series of overseas destinations, in October 2009, in US$. Source: own elaboration based on company data.

CONTAINER SHIPPING

which makes it very cheap to ship cargo to Asia, and the large number of competing ﬁrms on this route.

12.5 In Search of Scale and Scope 12.5.1 Scale increases via operational agreements and mergers and acquisitions Shipping lines are viewing market mass as one of the most effective ways of coping with a trade environment that is characterized by intense pricing pressure. Operational cooperation between container shipping companies comes in many forms, ranging from slot-chartering and vessel-sharing agreements to strategic alliances. The container shipping industry has also been marked by several waves of mergers and acquisitions (M&A). Trade agreements in the form of liner conferences were very common till these forms of cooperation were outlawed by the European Commission in October 2008. The ﬁrst strategic alliances between shipping lines date back to the mid-1990s, a period that coincided with the introduction of the ﬁrst 6000+ TEU vessels on the Europe–Far East trade. In 1997, about 70 percent of the services on the main east– west trades were supplied by the four main strategic alliances. The main incentives for shipping lines to engage in strategic alliances relate to the need for critical mass in the scale of operation and to the need to spread the risks associated with investments in large post-Panamax vessels (Ryoo and Thanopoulou 1999; Slack, Comtois and McCalla 2002). The alliance partnerships evolved as a result of mergers and acquisi-

251

tions and the market entry and exit of liner shipping companies (Figure 12.4). Strategic alliances provide their members easy access to more loops or services with relatively low cost implications and allow them to share terminals and to cooperate in many areas at sea and ashore, thereby achieving costs savings in the end. Parola and Musso (2007) rightly point out that an individual company will not opt for alliance membership once it reaches a scale that allows it, by itself, to beneﬁt from the same economies of scale and scope that strategic alliances offer. A number of shipping lines stay out of alliances for reasons of commercial independence and ﬂexibility (e.g. Evergreen). McLellan (2006) argues that the formerly strong ties between members of strategic alliances are getting looser. Alliance members engage increasingly in vesselsharing agreements with outside carriers. Individual shipping lines show an increased level of pragmatism when setting up partnerships with other carriers on speciﬁc trade routes. The shipping business has been subject to several waves of mergers and acquisitions. Yap (2010) reports that the number of acquisitions rose from three in 1993 to thirteen in 1998 before peaking at eighteen in 2006. The main M&A events include the merger between P&O Container Line and Nedlloyd in 1997, the merger between CMA and CGM in 1999 and the take-over by Maersk of Sea-Land in 1999 and P&O Nedlloyd in 2005. Shipping lines opt for mergers and acquisitions in order to obtain a larger size, to secure growth and to beneﬁt from scale advantages. Other motives for mergers and acquisitions in liner shipping relate to gaining instant access to markets and distribution networks, obtaining access

UNITED ALLIANCE: Hanjin (incl. DSR-Senator) Cho Yang UASC CYK ALLIANCE: K-Line Yang Ming COSCO Evergreen

Exit: Cho Yang

Evergreen UASC

CYKH group: Hanjin (incl. DSR-Senator) K-Line Yang Ming COSCO

MSC Norasia

Figure 12.4 Evolution in strategic alliance conﬁguration in liner shipping. Source: updated from Notteboom (2004).

Evergreen UASC COSCO

Maersk Sea-Land Hyundai MSC Norasia Hanjin Tricon-consortium: - DSR Senator - Cho Yang K-Line Yang Ming

GRAND ALLIANCE II: Hapag-Lloyd NYK Line P&O Nedlloyd OOCL MISC Maersk Sea-Land MSC Norasia

GRAND ALLIANCE: Hapag-Lloyd NYK Line NOL P&OCL

Evergreen UASC

CYKH group: Hanjin (incl. DSR-Senator) K-Line Yang Ming COSCO CMA-CGM slot chartering with CSCL

MSC

Maersk Line

GRAND ALLIANCE: Hapag-Lloyd/CP Ships NYK Line OOCL MISC

NEW WORLD ALLIANCE: APL/NOL Mitsui OSK Lines Hyundai

NEW WORLD ALLIANCE: APL/NOL Mitsui OSK Lines Hyundai

NEW WORLD ALLIANCE: APL/NOL Mitsui OSK Lines Hyundai

GLOBAL ALLIANCE: APL Mitsui OSK Lines Nedlloyd OOCL MISC GRAND ALLIANCE II: Hapag-Lloyd NYK Line P&O Nedlloyd OOCL MISC Maersk SeaLand

End 2005

End 2001

March 1998

May 1996

Evergreen UASC MISC

CYKH group: Hanjin K-Line Yang Ming COSCO CMA-CGM slot chartering with CSCL

MSC

Maersk Line

GRAND ALLIANCE: Hapag-Lloyd Group NYK Line OOCL

NEW WORLD ALLIANCE: APL/NOL Mitsui OSK Lines Hyundai

End 2009

CONTAINER SHIPPING

to new technologies or diversifying the asset base. Acquisitions typically feature some pitfalls, certainly in the highly international maritime industry: cultural differences, overestimated synergies and high expenses with respect to the integration of departments. Still, acquisitions make sense in liner shipping as the maritime industry is mature and the barriers to entry are relatively high (because of the investment volumes required and the need to develop a customer base). Through a series of major acquisitions (besides Sea-Land and P&O Nedlloyd there was Safmarine in 1999), Maersk Line was able to increase its market share substantially and to make strategic adjustments to secure its competitive advantage on key trade routes. Fusillo (2002) argued that a large ﬂeet capacity enabled Maersk Line to use excess capacity as a form of entry deterrence by saturating the market and reducing proﬁt opportunities for competing carriers. In contrast to Maersk Line, MSC reached the number two position in the world ranking of container lines by organic or internal growth. MSC was only involved in two minor take-overs: Kenya National in 1997 and Lauro in 1989. The liner shipping industry has witnessed a concentration trend in slot capacity control, mainly as a result of M&A activity (Table 12.9). The top twenty carriers controlled about 83% of the world’s container vessel capacity in late 2009, compared to 56% in 1990 and 26% in 1980. The top three lines (Maersk Line, MSC and CMA-CGM) alone supplied about a third of the global ﬂeet capacity. These carriers generally operated as independent entities (Slack and Frémont 2009) instead of engaging in various forms of cooperation such as strategic alliances. In particular, the mainline vessels of these carriers are supported by a

253

network of feeder ships and dedicated container-handling facilities and a truly global service coverage. Sys (2010) used a range of concentration measures to examine the oligopolistic nature of the container shipping industry. The results show that the industry is confronted with increased concentration and has shifted from a formally collusive market towards a tacitly collusive market. The degree of oligopoly formation is strongly dependent on the trade lane. Fusillo (2006) noted that the size distribution of liner shipping companies is increasingly skewed to the right, which would imply that large companies capture efﬁciencies not attainable by smaller shipping lines, enabling them to become even larger. It also indicates that individual ﬁrm cost structures in the industry are heterogeneous; the larger ﬁrms beneﬁt from the most competitive cost structures through scale economies in vessel size and lower port costs per unit handled through their large bargaining power vis-à-vis terminal operators and port authorities. The economic crisis of late 2008 had an impact on the market structure. While there was no major M&A activity in liner shipping between October 2008 and early 2010, a wave of acquisitions and mergers appears inevitable in the medium term. CMA CGM and Maersk Line set up a new vessel-sharing agreement on the Asia– Europe trade. This can be considered a ﬁrst step towards a capacity consolidation on the trade. The driving forces for a further consolidation in the liner business relate to the poor ﬁnancial results of shipping lines, which could see some shipping lines default, and to the objective of many shipping lines to push down costs by increasing the scale of operations. The crisis seems to have increased the diversity among the shipping

Sea-Land

Hapag-Lloyd OCL

Maersk

NYK Line

Evergreen

OOCL

ZIM

US Line

APL Mitsui OSK Lines

1

2 3

4

5

6

7

8

9

10 11

20,000 19,800

20,900

21,100

22,800

23,600

24,000

25,600

41,000 31,400

70,000

January 1980

MSC APL

Hanjin Shipping

Mitsui OSK Lines P&OCL

Nedlloyd

NYK Line

COSCO

Maersk Evergreen

Sea-Land

88,955 81,547

92,332

98,893

118,208

119,599

137,018

169,795

186,040 181,982

196,708

September 1995

Ships– Americana ZIM Mitsui OSK Lines

CP

NYK Line

COSCO

NOL/APL

Hanjin/DSR Senator MSC

A.P. Moller– Maersk Evergreen P&O Nedlloyd

136,075 132,618

141,419

166,206

198,841

207,992

224,620

244,636

317,292 280,794

620,324

January 2000

NYK Line OOCL

Hanjin/ Senator COSCO

MSC CMA/ CGM Group Evergreen Group Hapag Lloyd/ CP Ships China Shipping NOL/APL

Maersk Line

303,799 236,789

311,644

315,153

331,639

334,337

413,281

458,490

733,471 485,250

1,620,587

November 2005

Table 12.9 Slot capacities of the ﬂeets operated by the top twenty container lines (in TEU)

APL OOCL

Hanjin/ Senator

NYK

COSCO

CSCL

MSC CMA CGM Group Evergreen Group HapagLloyd

Maersk Line

342,899 303,864

345,037

353,832

391,527

417,337

467,030

566,271

1,081,005 746,185

1,758,857

March 2007

NYK CSAV Group

Hanjin Shipping

CSCL

HapagLloyd COSCO

Evergreen Group APL

MSC CMA CGM Group

Maersk Line

407,300 348,746

428,436

438,176

453,922

495,894

548,788

554,316

1,536,244 1,042,308

2,061,607

February 2010

NOL Trans Freight Line CGM

Yang Ming

Nedlloyd

Columbus Line Safmarine

Ben Line

13 14

15

16

17

18

19

20

67.5

69.1

2,058,063

46,026

55,811

59,195

60,034

63,469

71,688

75,528 75,497

79,738

35.7 42.3

CMA

OOCL

Hyundai

Yang Ming

K-Line DSRSenator HapagLloyd NOL

ZIM

38.6 44.1

435,000

10,300

11,100

11,200

11,700

12,700

12,700

14,800 13,900

16,400

September 1995

Wan Hai

China Shipping UASC

Yang Ming

OOCL

Hyundai

K-Line Hapag-Lloyd

CMA/CGM

71.7

41.4 47.7

3,538,103

70,755

74,989

86,335

93,348

101,044

102,314

112,884 102,769

122,848

January 2000

Paciﬁc Int’ l Lines Wan Hai Lines

Hyundai

HamburgSüd

Yang Ming

73.9

45.9 56.3

7,185,608

106,505

134,292

148,681

185,355

185,639

201,263

228,612 220,122

230,699

November 2005 CSAV Group K Line Mitsui OSK Lines ZIM

Source: compiled from BRS Alphaliner, ASX Alphaliner and Containerisation International.

Slop capacity of top 20 C4-index (%) Share of top 5 in top 20 (%) Share of top 10 in top 20 (%)

Farrell Lines

12

January 1980

Wan Hai Lines

PIL

HamburgSüd Group HMM

MOL Yang Ming Line CSAV Group ZIM

K-Line

74.0

47.5 57.6

8,745,315

116,439

146,174

168,966

222,907

248,922

250,436

281,447 253,104

283,076

March 2007

PIL

Yang Ming Line HamburgSüd Group Hyundai M.M. UASC

ZIM

MOL K Line

OOCL

73.0

47.6 57.2

10,916,509

189,281

202,099

283,550

302,056

308,664

310,568

336,971 325,071

342,512

February 2010

256

THEO NOTTEBOOM

lines’ long-term strategies. MSC, Evergreen and Hapag-Lloyd are among the shipping lines concentrating on the core business of liner shipping. The concept is to invest capital in liner shipping and to demand a return on that capital. While MSC and Evergreen are also present in the terminal business and have some presence in inland logistics, Hapag-Lloyd limits itself to operating ships. APL and OOCL on the other hand are trying to reinvent themselves as logistics service providers competing directly with established logistics service providers such as Kuehne & Nagel and DHL. They have become logistics providers by cutting their sea freight prices, but it allows them to control the cargo for the line. Japanese and Korean lines increasingly rely on their role within large shipping conglomerates. For example, NYK and MOL have only 40 percent of their business in liner shipping. By being involved in many sectors, these conglomerates spread risk. Finally, the A.P. Moller group (of which Maersk Line is a subsidiary) and CMA CGM continue to rely heavily on vertical integration; they have involvements in container shipping, terminal operations and inland logistics. The A.P. Moller group in particular has gone beyond container logistics and has involvements in supermarkets and the oil business.

12.5.2 Extending the scope of operations The operating scale of the top-tier shipping lines gives them enormous bargaining power vis-à-vis terminal operators. Over the past decades, the largest container lines have shown a keen interest in developing dedicated terminal capacity in an effort to better control costs and operational per-

formance, and as a measure to remedy against poor vessel schedule integrity (see Notteboom 2006 and Vernimmen, Dullaert and Engelen 2007 for a discussion of schedule unreliability). Maersk Line’s parent company, A.P. Moller–Maersk, operates a large number of container terminals in Europe (and abroad) through its subsidiary APM Terminals. CMA CGM, MSC, Evergreen, Cosco and Hanjin are among the shipping lines that fully or partly control terminal capacity around the world. Global terminal operators such as Hutchison Port Holdings, PSA and DP World are increasingly hedging the risks by setting up dedicated terminal joint ventures in cooperation with shipping lines and strategic alliances. Terminal operators also seek long-term contracts with shipping lines using gain sharing clauses. The above developments have given rise to a growing complexity in terminal ownership structures and partnership arrangements. The scope extension of a number of shipping lines goes beyond terminal operations to include inland transport and logistics (see for example Cariou 2001; Frémont and Soppé 2007; Graham 1998). The deployment of larger vessels, the formation of strategic alliances and waves of M&A have resulted in lower costs at sea, shifting the cost burden to landside operations. Notteboom (2009) estimated that the cost per FEU-km for a post-Panamax vessel between Shanghai and Europe amounts to €0.12, while inland haulage from North European ports usually ranges from €1.5 to €4 per FEU-km for trucks and €0.5 to €1.5 euro per FEU-km for barges (excluding handling costs and pre- and end-haul by truck). The observed price difference per FEU-km makes clear that cost savings in land operations potentially have a large impact on total

CONTAINER SHIPPING

transport costs. Shipping lines develop doorto-door services based on the principle of carrier haulage in an attempt to get a stronger grip on the routing of inland container ﬂows. Carrier haulage is said to have a positive inﬂuence on the modal split in port-based inland transportation, as it provides shipping lines with a better overview of the ﬂows so that intermodal bundling options come into play. If the inland leg is based on merchant haulage then the carrier often loses control of and information on its boxes. A number of shipping lines try to enhance network integration through structural or ad hoc coordination with independent inland transport operators and logistics service providers. They do not own inland transport equipment. Instead they tend to use trustworthy independent inland operators’ services on a (long-term) contract basis. Other shipping lines combine a strategy of selective investments in key supporting activities (e.g. agency services or distribution centers) with subcontracting of less critical services. With only a few exceptions, the management of pure logistics services is done by subsidiaries that share the same mother company as the shipping line but operate independently of liner shipping operations, and as such also ship cargo on competitor lines (Heaver 2002). A last group of shipping lines is increasingly active in the management of hinterland ﬂows. The focus is now on the efﬁcient synchronization of inland distribution capacities with port capacities. Shipping lines can offer their own rail, barge and truck services through subsidiary companies or through strategic partnerships with major third-party operators. Maersk Line is actively involved in rail services through its sister company European

257

Rail Services (ERS). Since 2001, CMA CGM has operated container shuttle trains in France, Benelux and Germany through its subsidiary Rail Link. The large majority of shipping lines, however, buy slot capacity from third-party rail operators. Only a few container lines offer their own inland barge services (e.g. CMA CGM via River Shuttle Containers in Europe). Shipping lines are exploring ways to integrate deep-sea operations and inland depots. Following the extended gate principle as described in Rodrigue and Notteboom (2009b), a number of shipping lines push export containers from an inland location to the ocean terminal, initiated by the shipping line, yet prioritized according to available inland transport capacity and the ETA of the mother vessel. A similar concept can be applied to push import containers from the deep-sea terminal to an inland location, from where ﬁnal delivery to the receiver will be initiated at a later stage. Shipping lines face signiﬁcant challenges if they wish to further optimize inland logistics. Competition with the merchant haulage option remains ﬁerce. Customers often consider land transport part of the “normal” service provision of a shipping line, for which no additional ﬁnancial remuneration is required. Shipping lines are also challenged to monitor container ﬂows with a view to managing the empty repositioning problem from the global to the local level. The logistics requirements of customers (e.g. late bookings, peaks in equipment demand) typically lead to money-wasting peaks in inland logistics costs. Given the mounting challenges in inland logistics, shipping lines that do succeed in achieving a better management of inland logistics can secure an important cost advantage over their rivals.

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12.6 Dynamics in Container Shipping Networks Liner shipping networks are developed to meet the growing demand in global supply chains in terms of frequency, direct accessibility and transit times. Shippers demand direct services between their preferred ports of loading and discharge. The demand side thus exerts a strong pressure on the service schedules, port rotations and feeder linkages. Shipping lines, however, have to design their liner services and networks to optimize ship utilization and beneﬁt the most from scale economies in vessel size. Their objective is to optimize their shipping networks by rationalizing coverage of ports, shipping routes and transit time (Lirn, Thanopoulou, Beynon and Beresford 2004; Zohil and Prijon 1999). Shipping lines may direct ﬂows along paths that are optimal for the system, the lowest cost for the entire network being achieved by indirect routing via hubs and the amalgamation of ﬂows. However, the more efﬁcient the network from the carrier’s point of view, the less convenient that network could be for shippers’ needs (Notteboom 2006). When designing their networks, shipping lines thus implicitly have to make a trade-off between the requirements of the customers and operational cost considerations. A higher demand for service segmentation adds to the growing complexity of the networks. As a result, liner shipping networks feature a great diversity in types of liner services and a great complexity in the way end-to-end services, line-bundling services and pendulum services are connected to form extensive shipping networks. Maersk Line, MSC and CMA-CGM operate truly global liner service networks, with a strong

presence also on secondary routes. Maersk Line, especially, has created a balanced global coverage of liner services. The networks of CMA-CGM and MSC differ from the general scheme of trafﬁc circulation by incorporating a network of speciﬁc hubs (many of these are not among the world’s biggest container ports) and a more selective serving of secondary markets such as Africa (where MSC has a strong presence), the Caribbean and the East Mediterranean. Notwithstanding the demand pull for global services, a large number of individual carriers remain regionally based. Asian carriers such as APL, Hanjin, NYK, China Shipping and HMM mainly focus on intra-Asian trade, transpaciﬁc trade and the Europe–Far East route, partly because of their huge dependence on export ﬂows generated by their Asian home bases. MOL and Evergreen are among the few exceptions frequenting secondary routes such as Africa and South America. Profound differences exist in service network design among shipping lines. Some carriers have clearly opted for a truly global coverage; others are somewhat stuck in a triad-based service network forcing them to develop a strong focus on cost bases. Most liner services are line-bundling itineraries connecting two to ﬁve ports of call scheduled in each of the main markets. The establishment of global networks has given rise to hub port development at the crossing points of trade lanes. Intermediate hubs have emerged since the mid-1990s within many global port systems: Freeport (Bahamas), Salalah (Oman), Tanjung Pelepas (Malaysia), and Gioia Tauro, Algeciras, Taranto, Cagliari, Damietta and Malta in the Mediterranean, to name but a few. The role of intermediate hubs in maritime hub-and-spoke systems has been

CONTAINER SHIPPING

extensively discussed (see for instance Baird 2006; Fagerholt 2004; Guy 2003; McCalla, Slack and Comtois 2005). The hubs have a range of common characteristics in terms of nautical accessibility, proximity to main shipping lanes, and ownership, in whole or in part, by carriers or multinational terminal operators. Most of these intermediate hubs are located along the global beltway or equatorial round-the-world route (i.e. the Caribbean, Southeast and East Asia, the Middle East and the Mediterranean). These nodes multiply shipping options and improve connectivity within the network through their pivotal role in regional huband-spoke networks and in cargo relay and interlining operations between the carriers’ east–west services and other inter- and intra-regional services. Container ports in Northern Europe, North America and mainland China mainly act as gateways to the respective hinterlands. Two developments undermine the position of pure transshipment hubs (Rodrigue and Notteboom 2010). First of all, the insertion of hubs often represents a temporary phase in connecting a region to global shipping networks. Once trafﬁc volumes for the gateway ports are sufﬁcient, hubs are bypassed and become redundant (see also Wilmsmeier and Notteboom 2010). Secondly, transshipment cargo can easily be moved to new hub terminals that emerge along the long-distance shipping lanes. The combination of these factors means that seaports which are able to combine a transshipment function with gateway cargo obtain a less vulnerable and thus more sustainable position in shipping networks. In channeling gateway and transshipment ﬂows through their shipping networks, container carriers aim for control over key terminals in the network (see dis-

259

cussion earlier in this chapter). Decisions on the desired port hierarchy are guided by strategic, commercial and operational considerations. Shipping lines rarely opt for the same port hierarchy, in the sense that a terminal can be a regional hub for one shipping line and a secondary feeder port for another operator. While some expect a further concentration of cargo and ships on equatorial roundthe-world services (linked to the expansion of the Panama Canal), the global shipping landscape exhibits an increasing complexity linked to a hierarchical set of networks reﬂecting differing cost/efﬁciency levels in the market. At one end of the spectrum, we ﬁnd high-order service networks featuring slow-steaming large vessels, few ports of call and a strong port hierarchy within multi-layered feeder subsystems that involve north–south and regional routes. Different services dovetail to provide smooth connections and operations at the main hubs which are under the control of the carrier. At the other extreme lower-order networks support an increasing segmentation in liner service networks.

12.7

Summary

The highly dynamic container shipping industry is one of the youngest market segments in shipping. The establishment of world-embracing liner shipping networks has facilitated globalization processes and associated global production and logistics practices. At the same time, the economic and logistic actors exert an everlarger demand pull on the capacity, connectivity, coverage and reliability of the liner shipping networks. Container carriers operate in a market characterized by

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moderate-to-strong growth (at least till 2009) with Asian economies representing an ever-larger share in the global container volumes. Still, the ﬁnancial performance of many container shipping lines is rather poor compared to other logistics market players. The core of the problem lies in a combination of the capital-intensive operations and high risks associated with the revenues due to a combination of volatile markets and inﬂexible capacity in the short run. On top of this, the pricing strategies of container lines have only a marginal impact on total trade volumes. The speciﬁcities of the market have urged shipping lines to develop capacity management strategies aimed at reducing the cost per TEU carried, but also to develop vertical integration strategies with a view to extending their control over the inland segment. Larger companies have expanded their control of the market. Exogenous shocks in demand in combination with the endogenous vessel order strategies of shipping lines mean that the container shipping industry regularly faces long periods of vessel oversupply and rate erosion. Capacity management proves to be a very difﬁcult issue in periods of shrinking demand, as the carriers which decide to cut capacity might see other shipping lines freeriding on the resulting rate restoration. The economic crisis challenges shipping lines to carry out a comprehensive review of their business models. Recent declines in global trade and container ﬂows were unprecedented. Shipping lines incurred massive losses and have no other option than to seek recovery in total revenue streams up to a level where carriers may achieve mid-cycle margins and returns. Rate restoration will remain vulnerable as long as deferred deliveries and idle ships are not fully absorbed by growth in demand. The shipping industry

not only needs to ﬁnd a solution to bridge the current situation, but should also develop appropriate strategies to cope with different potential scenarios.

References Alphaliner (2010a) Weekly Newsletter 2010(8). Alphaliner (2010b) Weekly Newsletter 2010(7). Baird, A. (2006) Optimising the container transshipment hub location in northern Europe. Journal of Transport Geography 14(3): 195–214. Brooks, M. (2000) Sea Change in Liner Shipping: Regulation and Managerial Decision-Making in a Global Industry. Oxford: Pergamon. Cariou, P. (2001) Vertical integration within the logistic chain: does regulation play rational? The case for dedicated container terminals. Trasporti Europei 7: 37–41. Cariou, P. and F.-C. Wolff (2006) An analysis of Bunker Adjustment Factor and freight rates in the Europe/Far East market 2000– 2004. Maritime Economics and Logistics 8(2): 187–201. Cullinane, K. and M. Khanna (1999) Economies of scale in large container ships. Journal of Transport Economics and Policy 33(2): 185–208. Drewry (2006) The Drewry Container Market Quarterly. Dynamar (2003) Terminal handling charges: a bone of contention. Dynamar report, Alkmaar. European Commission (2009) Terminal handling charges during and after the liner conference era. Competition Reports, European Commission, Brussels. Fagerholt, K. (2004) Designing optimal routes in a liner shipping problem. Maritime Policy and Management 31(4): 259–68. Frémont, A. and M. Soppé (2007) Northern European range: shipping line concentration and port hierarchy. In J. Wang, T. Notteboom, D. Olivier and B. Slack (eds.), Ports, Cities, and

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Global Supply Chains, pp. 105–20. Aldershot, Hants: Ashgate. Fusillo, M. (2002) Excess capacity and entry deterrence: the case of ocean liner shipping markets. Maritime Economics and Logistics 5(2): 100–15. Fusillo, M. (2006) Some notes on structure and stability in liner shipping. Maritime Policy and Management 33(5): 463–75. Goldman Sachs (2009) Containerships: big bounce off the bottom. What next? Goldman Sachs Asia, Singapore. Graham, M. G. (1998) Stability and competition in intermodal container shipping: ﬁnding a balance. Maritime Policy and Management 25: 129–47. Guy, E. (2003) Shipping line networks and the integration of South America trades. Maritime Policy and Management 30(3): 231–42. Heaver, T. (2002) The evolving roles of shipping lines in international logistics. International Journal of Maritime Economics 4: 210–30. ITMMA/ESPO (2007) Market report on the European seaport industry. Annual Report 2006–2007, pp. 15–91. Brussels: European Sea Ports Organization. Levinson, M. (2006) The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger. Princeton, NJ: Princeton University Press. Lim, S.-M. (1998) Economies of scale in container shipping. Maritime Policy and Management 25: 361–73. Lirn, T. C., H. A. Thanopoulou, M. J. Beynon and A. K. C. Beresford (2004) An application of AHP on transshipment port selection: a global perspective. Maritime Economics and Logistics 6: 70–91. Lopez, E. (2003) How do ocean carriers organize the empty containers reposition activity in the USA? Maritime Policy and Management 30(4): 339–55. Marsoft (2009) Containership Market Outlook. Marsoft, Singapore. McCalla, R., B. Slack and C. Comtois (2005) The Caribbean basin: adjusting to global trends in

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containerization. Maritime Policy and Management 32(3): 245–61. McLellan, R. (2006) Liner shipping development trends. Maritime Policy and Management 33(5): 519–25. Meyrick and Associates (2008) Review of BAFs – Transatlantic and Europe/Far East trades. Report for the European Shippers’ Council, Melbourne. Notteboom, T. (2004) Container shipping and ports: an overview. Review of Network Economics 3(2): 86–106. Notteboom, T. (2006) The time factor in liner shipping services. Maritime Economics and Logistics 8(1): 19–39. Notteboom, T. (2009) The relationship between seaports and the intermodal hinterland in light of global supply chains: European challenges. In OECD/International Transport Forum, Port Competition and Hinterland Connections, pp. 25–75. Round Table 143. Paris: OECD Publishing. Notteboom, T. and P. Cariou (2011) Are Bunker Adjustment Factors aimed at revenue-making or cost recovery? Empirical evidence on pricing strategies of shipping lines. In K. Cullinane (ed.), International Handbook of Maritime Economics, pp. 223–55. Cheltenham: Edward Elgar. Notteboom, T. and B. Vernimmen (2009) The effect of high fuel costs on liner service conﬁguration in container shipping. Journal of Transport Geography 17(5): 325–37. Parola, F. and E. Musso (2007) Market structures and competitive strategies: the carrier– stevedore arm-wrestling in northern European ports. Maritime Policy and Management 34(3): 259–78. Randers, J. and J. Göluke (2007) Forecasting turning points in shipping freight rates: lessons from 30 years of practical effort. System Dynamics Review 23(2/3), 253–84. Rodrigue, J.-P. and T. Notteboom (2009a) The future of containerization: perspectives from maritime and inland freight distribution. Geo Journal 74: 7–22.

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Rodrigue, J.-P. and T. Notteboom (2009b) The terminalization of supply chains: reassessing port–hinterland logistical relationships. Maritime Policy and Management 36(2): 165–83. Rodrigue, J.-P. and T. Notteboom (2010) Foreland-based regionalization: integrating intermediate hubs with port hinterlands. Research in Transportation Economics 27(1): 19–29. Special issue: The Port and Maritime Industries in the Post-2008 World: Challenges and Opportunities. Ryoo, D. K. and H. A. Thanopoulou (1999) Liner alliances in the globalisation era: a strategic tool for Asian container carriers. Maritime Policy and Management 26: 349–67. Slack, B., C. Comtois and R. J. McCalla (2002) Strategic alliances in the container shipping industry: a global perspective. Maritime Policy and Management 29: 65–75. Slack, B. and A. Frémont (2009) Fifty years of organisational change in container shipping: regional shift and the role of family ﬁrms. GeoJournal 74: 23–34. Stopford, M. (1997) Maritime Economics. London: Routledge.

Sys, C. (2010) Is the container liner shipping industry an oligopoly? Transport Policy 16: 259–70. Theofanis, S. and M. Boile (2009) Empty marine container logistics: facts, issues and management strategies. GeoJournal 74: 51–65. UNCTAD (2009) Review of Maritime Transport, 2009. Geneva: UNCTAD. Vernimmen, B., W. Dullaert and S. Engelen (2007) Schedule unreliability in liner shipping: origins and consequences for the hinterland supply chain. Maritime Economics and Logistics 9(3): 193–213. Wilmsmeier, G. and T. Notteboom (2011) Determinants of liner shipping network conﬁguration: a two-region comparison. GeoJournal 76(3): 213–28. Yap, W. Y. (2010) Container Shipping Services and Their Impact on Container Port Competitiveness. Antwerp: University Press Antwerp. Zohil, J. and M. Prijon (1999) The MED rule: the interdependence of container throughput and transshipment volumes in the Mediterranean ports. Maritime Policy and Management 26: 175–93.

13

New Business Models and Strategies in Shipping Peter Lorange and Øystein D. Fjeldstad

13.1

Introduction

Shipping is characterized by the permanence of ships that ply traditional routes with their cargoes, linking industries and consumers. The combination of the two fundamental properties of shipping – high intensity of ﬁxed assets, with long leadtimes and lifetimes, and high exposure to volatile global ﬂows of cargo and energy – results in complex market dynamics and high risk. The exposure of industry actors to these forces drives business models, strategies and industry developments. Recent events – dramatic falls in ship freight rates, signiﬁcant lessening of world trade, and the lack of available capital for shipping projects – have further accentuated these complex dynamics and risks. In this chapter we analyze emergent business models and industries as the classic shipping ﬁrms unbundle and regroup. We contribute to the shipping literature in three ways. First, we describe and analyze how the broader changes in business models shape the trans-

formation of the shipping industry and drive shipping ﬁrm strategy. Second, we tie shipping strategies to the broader strategic management literature. Third, we supplement the business model insights derived from the IT-focused industries that currently dominate the empirical context of the emerging literature (cf. Chesbrough, Vanhaverbeke and West 2006; Zott and Amit 2007). The remainder of the chapter is organized as follows. In Section 13.2 we review the broader industry forces driving change in shipping business models and strategies. We discuss the concept of business models and their relationship to shipping strategy in Section 13.3. Section 13.4 presents four shipping industry business model archetypes that, taken together, capture the shipping industry. In Section 13.5 we examine competitive and cooperative strategies within the shipping value system composed of ﬁrms representing the business model archetypes. Section 13.6 discusses implications for theory and management practice

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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in shipping and other asset-intensive network industries, and Section 13.7 concludes.

13.2 The Changing Shipping Landscape The shipping industry is unique, given its heavy exposure to global market mechanisms, and fascinating in terms of attracting some of the world’s most risk-willing, charismatic entrepreneurs and fortune-builders. It has experienced extraordinary changes in the last few years, which have seen the global landscape shifting, and emerging nations driving demand. Certainly, many new fortunes have been made – and lost–– during these exceptional times. Until recently, the industry had been enjoying an unprecedented period of sustained proﬁtability and increased investor interest. Tonnage output was rising fast and the level of newbuilding activities was at a record high, if somewhat tempered by the ﬁnancial liquidity squeeze. Many foresaw a looming oversupply of shipping capacity – even another industry depression, perhaps similar in magnitude to the one we saw in the 1980s. Shipping is one of the frontline industries when it comes to an economic downturn. At the time of writing, shipping rates and stock prices have fallen dramatically in response to the global ﬁnancial crisis. Across many industries ﬁrms perform activities that require distinctly different resources and differ signiﬁcantly in their economics of scale and scope. During the last twenty years we have witnessed an unbundling of the classic integrated corporation into highly focused business entities (Hagel and Singer 1999) whose actions are linked in multi-ﬁrm networks (Miles and

Snow 1986, 1994). The recent developments in shipping industry business models and organizational design mirror the transformations seen in other industries. However, the speciﬁc properties of shipping, to do with its role as a commodity industry that, in the aggregate, provides a global transportation network, shape the industry’s business models, and contribute to a highly volatile environment that puts a premium on efﬁciency and agility in strategy and organization design (Lorange and Fjeldstad 2010). Traditional shipping companies typically encompassed diverse yet similarly organized activities housed in a single organization. For example, A.P. Moller–Maersk combined ship owning, ship chartering and shipbuilding; Bjørge and Fearnley and Eger combined ship owning with substantive free-standing chartering activities; and A.O. Sorensen integrated ship management and crewing. Ship owning usually constituted the primary activity, supported by innovation-, operation- and marketing-related activities typical of integrated value chains in other industries (Porter 1985). There are three major problems associated with the integrated approach. First, internally organized units are constrained in their exploitation of global economies of scale, scope and location (Chandler 1962; Knarvik and Steen 2002; Krugman 1981, 1991). Second, managerial cognitive limits and blinders of dominant logic constrain effective decision making in peripheral activities (Prahalad 2004; Prahalad and Bettis 1986). Third, integration of unrelated activities under a single organizational structure leads to increased bureaucracy (Galbraith 2002, 2010). Previously, shipping ﬁrms tended to be integrated, owning several different ship types, and running their own chartering,

NEW BUSINESS MODELS AND STRATEGIES IN SHIPPING

operations and technical departments. Now, three discrete major specializations are developing: ship-owning, trading in “steel” and operating ships. Over the last few years, there has been a strong inﬂux of capital, largely from sources that previously were not usually available to this industry, such as general investors, asset management funds and bank ﬁnanciers. There has also been a dramatic increase in the ship freight derivatives business over the last few years – the so-called Freight Forward Agreements (FFA) trading. It is estimated that, for dry bulk shipping, the volume of FFA trading in 2008 might be at virtually the same level as physical trading in ships. Derivatives trading has become critical in several shipping business segments, above all in dry bulk, but also in tankers. The container shipping segment, by contrast, has so far not been subject to much derivatives trading. Coupled with all of this, there has also been a strong inﬂux of new professional talent; many of the newcomers have entirely different backgrounds than those traditionally found in shipping. An example is found in a recent introduction of two large heavy lift ships in the Norwegian K/S market. In summary, two major causes underlie these larger-scale developments. First, management has cognitive limits – it is hard to be a specialist in every type of business, and also perhaps excessively demanding to bring all of this together into a risk-exposure-efﬁcient overall portfolio. Second, the equity markets call for specialization. The new types of investor prefer relatively focused activities that they can understand, above all in terms of risk exposure, growth and yield characteristics. Specialization may be the key for companies that aspire to be global winners. This seems to be the case for most, if not all, mature industries. The question

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is: What are the business model specialization options available to shipping companies, and how do they support and affect the competitive and cooperative strategy of shipping companies?

13.3

Shipping Business Models

A business model articulates how a ﬁrm creates and captures value (Miles, Snow, Fjeldstad et al. 2010). Much of the emerging business model research has addressed IT industries (Afuah and Tucci 2000; Zott and Amit 2007). Less attention has been paid in the literature to the rather dramatic changes that have taken place in shipping business models over the last decade and the implications these have for our understanding of shipping company strategies. Business model innovations are often the key to capitalizing on new technologies or responding to shifting bases of competition ( Johnson, Christensen and Kagerman 2008). Both are important in shipping. The business model includes the ﬁrm’s resources and activities, its proﬁt formula, and the relationships in which resources and activities are embedded (Afuah 2000; Chesbrough and Rosenbloom 2002; Christensen, Grossman and Hwang 2008; Christensen and Raynor 2003; Zott and Amit 2008). The term directs attention both to what a ﬁrm does for its customers and to the resources it employs to do so. Activities (Porter 1985; Porter and Siggelkow 2008) and resources (Barney 1991; Penrose 1959) respectively set the stage for strategic choices the ﬁrm makes about its relationship to its environment, its location in the extended value system, and relationships with other actors on whom the ﬁrm depends for strategically critical resources (Pfeffer

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and Salancik 1978; Williamson 1975). Resources enable the performance of activities – and the performance of activities adds to or depletes resources (Dierickx and Cool 1989; Itami 1987). The quest to uncover and illuminate the independent variables that contribute to sustained superior ﬁrm performance has left in the shade the equally important tasks of modeling the ﬁrm and deriving implications for strategy from careful examination of the assumed interrelationships and dynamics (Morecroft 1984). As a result, proponents of the two fundamental dimensions of business models, activities and resources, have artiﬁcially divided the ﬁeld of strategic management over the last twenty years, in pursuit of a single critical factor explaining performance. Choice of business model is only part of a ﬁrm’s strategy. As Margretta (2002) succinctly points out, a business model is both a narrative describing how the business works, and a quantitative model of its behavior. Regardless of format, a business model does not describe strategy or elaborate all the detailed choices made to execute that strategy – it models the business as a system. The business model is closely related to the older, well-known value chain model (Porter 1985). While the value chain captures the logic of manufacturing, additional categories, distinguished by their value creation logic, capture business models across a wide variety of sectors (Alberts, Garstka, Hayes and Signori 1999; Christensen, Grossman and Hwang 2008; Harris and Burgman 2005; Lorange 2002; OECD 2004; Stabell and Fjeldstad 1998). They vary in the relative importance they give to knowledge, customer relationships and physical infrastructure assets (Hagel and Singer 1999).

The introduction of the value chain model fueled a strategic agenda of local and global redistribution of activities to achieve supply-side economies of scale and location in all the manufacturing ﬁrm’s major categories. The value chain model carries with it explicit and implicit assumptions about how value is created, by whom, and the nature of inter-relationships between the actors involved, i.e. ﬁrms and consumers (Ramirez 1999). Its overall concept is upstream transformation of raw materials and components into valuable products that are made available to customers downstream. Shipping is obviously vital to both the upstream and the downstream sections of a global supply chain, but the shipping company itself provides a networking service: it is part of a large global logistics grid that links buyers and suppliers along a multitude of value chains (North 1991; Teece 2006). Stated differently, the value chain provides a suitable representation of the markets serviced by shipping companies, but it is less directly applicable to actual shipping industry ﬁrms, excepting shipyards. Of greater consequence than the mapping of the ﬁrm’s activities are the associated drivers of performance, resources and inter-ﬁrm relationships, i.e. the essential elements of the business model. We review the two additional models: the value network and the value shop. The value network describes the value creation of ﬁrms that facilitate global ﬂows of goods, information and ﬁnancial instruments; the value shop describes ﬁrms that mobilize knowledge resources to innovate and solve problems for their clients (Stabell and Fjeldstad 1998). For network businesses, customer value is related to connectivity and conductivity of the network – deﬁning which nodes can be connected and what types of

NEW BUSINESS MODELS AND STRATEGIES IN SHIPPING

objects can be exchanged. Logistic services, insurance companies and shipbrokers exemplify this business model (Fjeldstad and Ketels 2006; Stabell and Fjeldstad 1998). The three primary categories of activity in the value network are: Network promotion and contract management: activities associated with attracting, selecting and retaining potential customers or nodes for the network. 2. Service provisioning: activities associated with managing the inter-customer ﬂows of goods, information and ﬁnancial instruments. Service provisioning often organizes ﬂow through interconnection with other providers. 3. Infrastructure management: activities associated with maintaining and operating the physical, ﬁnancial and information infrastructure that allows the company to provide services to its customer base (ports and terminals are obvious shipping examples).

1.

2.

1.

Reﬂecting a wide spectrum of service types, the activities are represented as layered rather than sequentially related. The value shop describes ﬁrms that mobilize their resources, people, tools and relationships, on a case-by-case basis, to create solutions. Customer value is associated with positive change resulting from the application of the resources mobilized by the ﬁrm. Examples include medical clinics (Christensen, Grossman and Hwang 2008), research-centered business schools (Lorange 2002), commercial research, for example in biotechnology, and ship consultants (Lorange 2009). The ﬁve primary categories of activity in the value shop are all related to problem solving:

3. 4.

5.

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Problem ﬁnding and acquisition: activities associated with recording, reviewing and formulating the problem to be solved and choosing the overall approach to solving it. Problem solving: activities associated with generating and evaluating alternative solutions. Choice: activities associated with choosing among alternative solutions. Execution: activities associated with communicating, organizing and implementing the chosen solution. Control and evaluation: activities associated with measuring and evaluating to what extent implementation has solved the initial problem statement.

In addition, a number of businesses follow a straightforward value-creation recipe: they invest in a physical, human or immaterial resource and make it available to their customers (Molineux 2002). One example is owning ships. Shipping clearly has a networking function in the economy: it links suppliers and customers across continents. The overall industry value system reﬂects a networking logic with important implications for how we understand companies’ strategies, in particular with respect to the way they relate to overall industry developments. In network industries connectivity – which nodes can be connected – and conductivity – what types of objects can be exchanged among them – deﬁne service value. The value of connectivity is clearly seen in the container ship operations of A.P. Moller, which operates a global network of ﬁxed interconnected routes, including feeder ships and terminals (Greve, Wendelboe Hansen and Schaumburg-Müller 2007). However, the same mechanisms also carry

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over to competitors who engage operationally with each other to enable exchange between their respective customers, as when competing brokers represent trading customers. Interconnection allows for greater connectivity of the overall network than can be provided by a single ﬁrm. Increased attention to point-to-point logistics is an example of how seamless interconnection with other types of transporter is necessary in order to increase connectivity. Conductivity captures types of cargo, speed and efﬁciency on routes and in port, and the management of logistics information ﬂows. The latter is currently offered by both shipowners, such as A.P. Moller, and shipbrokers, such as Clarksons. A resource-centered perspective on business models in shipping reveals three distinct categories of resources that deﬁne both strategic investments and their exploitation. Examination of the relative magnitude of physical infrastructure assets, human resources and ﬁrm relationships further informs our understanding of current shipping business models and the unbundling processes from which they emerged (Hagel and Singer 1999). Certain resource and activity-conﬁguration combinations are more prevalent than others, but resources reﬂect distinct dimensions of a business model, as we highlight next.

13.4 Shipping Business Model Archetypes Lorange (2009) identiﬁes four distinct strategic foci for shipping companies: owning, using, operating, and innovating around steel. These differ signiﬁcantly in terms of the investments in resources that the ﬁrms make, as well as the activities they perform.

Consequently, their respective strategic levers also differ, and the different ways they manage synergies, complementarities and conﬂicts have portfolio implications. In a practical sense, these foci represent different business models in the industry today. Table 13.1 provides an outline of the major ways in which they differ.

13.4.1

Owning steel

Ships and terminals are the shipping industry’s literal infrastructure resources. Ship owning is very capital-intensive and requires a long-term focus. Ships last for more than twenty years and a shipowner needs to be able to stay in the business for at least one business cycle. This requires a lot of liquidity, making the risk proﬁle of a ship-owning business model fairly high. The fundamental focus associated with owning ships, however, is that of taking a longer-term, full-market-cycle perspective. Understanding the long-term supply and demand of different forms of tonnage is important, but timing is a crucial strategic capability. Securing the lowest cost of capital is equally important. Cheap ﬁnancing will make ships less expensive, and therefore more competitive. The cheapest ﬁnancing can only be obtained if one ship, or a series of ships, is ﬁnanced on the basis of longterm charters: this creates an opportunity for chartering business models. Similarly matched business models are found in the airline industry. While owning a ship is a simple business model, complexity is introduced by the high stakes and volatility of the chartering and ﬁnancial markets. Sound portfolio management is therefore very important in ship owning. Figure 13.1 depicts portfolio choices related to ownership. The container

Costs

Ships

Culture

Primary resources

Cost economies of scope

Charter and trade

Brokering

Integrated logistic services

Using steel FAA exchange and clearing

Innovating around steel

Network effects Network effects related Network Timing and related to client to shippers, effects reputation base; recipients, ports and related to reputation and terminals trading signaling effects clients Team Customer Customers and Customers and Customer Employees individual partners brokers Human Customer Customer Networks of Customer Human resources relationships relationships relationships, relationships talent and and liquidity and people physical and knowledge infrastructure and IT technology networks

Cost Cost of economies labor of scale

Economics

Operating steel

Owning steel

Archetypes of specialists Strategic focus

Table 13.1 Shipping business model archetypes

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PETER LORANGE AND ØYSTEIN D. FJELDSTAD Ai1

L1

Eij1

Ai2

L2 Ai

L

Eij2 Eij

d

Eijk

(debt/equity ratio) • • • • •

• • • • • (Investment in trade i)

(Investment in trade i for chartering policy j)

Financial exposure/financing Leverage decisions Banks/leverage

Assets/instruments Allocations across ship type Ship size

Time exposure to charterers Allocations within ship type Charter lengths/expires

Degree of risk OK?

Correlation among assets (high vs. low?)

Coverage (long vs. spot) OK?

Ain

Ln

Critical success factors

• • • • • Eijn

Figure 13.1 Portfolio: owning steel – Seaspan example (container ﬂeet owner). Source: Lorange (2009).

ﬂeet owner Seaspan is used to exemplify a progressive set of portfolio decisions: 1.

Financial leverage: debt versus equity. Often shipping loan contracts have minimum market-value clauses that can force the sale of a ship if its market value falls below a certain level. 2. Diversiﬁcation across trades and associated ship types and sizes. Correlation between trades and assets is crucial. 3. Diversiﬁcation of time exposure across short and long charters.

13.4.2

Using steel

Firms with business models for using steel provide services that turn ships into a global transportation network. This cate-

gory includes several specialized business models. Chartering ships on medium- and longterm contracts and subsequently trading them in the spot market is less capitalintensive than ship owning, but is a signiﬁcantly more relationship-intensive business model. The focus is short-term, requiring almost constant adjustments based on both the long- and short-term aspects of the business cycle, and seeing rapid entries and exits. Firms with this business model span “structural holes” between shipowners and cargo customers (Burt 1992). Their business model combines ﬁnancial and relational resources – leveraging valuable network positions by trading on the spread between short- and longer-term rates. This trading typically requires less liquidity than ship

NEW BUSINESS MODELS AND STRATEGIES IN SHIPPING

owning and so the risk proﬁle will be lower. The cash-ﬂow patterns associated with this business model, unbundled from the shipping ﬁrm, are more stable than those associated with the classic integrated ship-owning company that combines owning and chartering; this stability facilitates access to more reasonable ﬁnancing. For both the owners and the users of ships FFAs are a way to reduce the risks associated with future cash in-ﬂows. Ship brokering has low capital intensity, and combines relationship resources with human resources. Shipbrokers also span structural holes, organizing a number of exchanges within the shipping industry, principally ship chartering, newbuilding, purchasing and selling. Shipbrokers invest in creating and maintaining relationships, across which future deals can ﬂow. These relationships are conduits for market information as well as actual transactions. Their customers – shipowners, traders and cargo shippers – rely on them for information about the market. Managed well, their position at the center of the network is selfreinforcing (Arthur, Ermoliev and Kaniovski 1987), because central players are better informed and therefore more attractive. Shipbrokers, like brokers in other industries, leverage information from their network through forecasts and market reports. Shipbrokering is still a relatively human resource-intensive business. There are a wide variety of markets, deﬁned by geography and ship type, and no common global databases of ship availability and demand. Establishing such databases would disrupt the current business model (Christensen 1997). The emerging FFA market is highly automated, yet here also the performance of the network-facilitating ﬁrm is a function of network effects, by

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which the value of network membership depends on the other users (Katz and Shapiro 1994). A major difference between conventional ship brokerage and FAA trading, however, is that the users have relationships with the trading platform provider rather than with its individual employees. As the FAA layer increases in size and scope it may prompt disruption of the conventional brokerage model. Container liners and logistic service operators also fall into this category. Closeness to the shippers and the use of business-to-business marketing, rather than ownership of ships or terminals, are critical factors here. Traders, brokers, liner operators and logistic service providers all provide networking services, but their business models differ in their combination of assets and in the way they make their proﬁts. Traders make their proﬁts on spread, whereas shipbrokers make theirs on a percentage of the transactions they facilitate. Liner operators and some logistic service providers make their proﬁts on freight income per container minus operating costs; others have feebased agreements. Figure 13.2 depicts a portfolio characteristic of a ship charter/ trading ﬁrm.

13.4.3

Operating steel

Several shipowners have abandoned the crewing of their ships themselves, and rely instead on established ship-operating ﬁrms. For example, John Fredriksen, one of the world’s largest shipowners, does not crew his own ships, but uses ﬁve different shipoperating companies. This allows him to keep tabs on the relative performance of each, including their costs. Ship operation is much concerned with human resources, less so with relationships and physical assets.

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PETER LORANGE AND ØYSTEIN D. FJELDSTAD

P

d1

A1

ai1

d2

A2

ai2

A

Ai

d (debt/equity ratio)

aij

dn

Financial exposure/leveraging Capitalization/leverage

An

(investment in trade i) Assets/instruments FFA and equity porifolios (FF As dry, wel) (equity–by firm)

aim (investment in trade i for chartering policy i) Time exposure Lengths of exposure (long/short), including uses of • hadges • options (to impact long/short)

Figure 13.2 Portfolio: using steel – Clarkson offshore hedge fund example. Source: Lorange (2009).

Ship-operating companies provide crews and take care of the day-to-day maintenance of the ships. The largest shipoperating companies are V Group, Thome, Denholm, Wallem, OSM and Schulthess. Ship-operating companies invest in people. Typically, these ﬁrms have bases in countries like the Philippines, India and Eastern Europe, in order to secure access to reliable labor at low cost. The raison d’être of such ﬁrms is to be able to offer costefﬁcient operations for the ships. To this end, they train crews in appropriate competencies. Good human resource and operations management is imperative for these companies. Investment is required, mostly related to recruitment and training. Active crew size can be adjusted during downturns. There are also specialized crew brokerage ﬁrms, corresponding to the tem-

porary stafﬁng agencies found in other sectors of the economy (Fernandez-Mateo 2007). These are generally small and operate in highly specialized segments, for example, offshore exploration vessels. All these models reﬂect combinations of value-creation logic and resources. The resources required for ship ownership are different from those required for ship operation, as are the processes by which these resources are accumulated. In ship owning, the timing of ship investment and divestment is crucial, whereas in ship operation personnel recruitment, training and supervision are crucial. Unbundling takes place at all layers of the shipping value system; brokers, for example, outsource ownership of computing and communication facilities. A shipbroker invests in a network of relationships with shipowners, operators and

NEW BUSINESS MODELS AND STRATEGIES IN SHIPPING

shippers and does not need to own, or be a specialist in the operation of, computer systems. In some cases, business model innovation changes the value-creation logic; in other cases, it changes the intensity and combination of primary resources, or the location in the web of inter-ﬁrm relationships. In the next subsection we address a third dimension that relates to a distinction between exploration and exploitation (March 1991).

13.4.4 Creating waves of change: innovating around steel Innovation is both a pure option for some ﬁrms, typically consultants, and a strategic posture for other actors in the value system. Innovation takes many forms and, in addition to its more narrow sense, includes things such as search, variation, risk taking, experimentation, play, ﬂexibility and discovery. In contrast, exploitation seeks to capture the gains from innovation. It includes reﬁnement, choice, production, efﬁciency, selection, implementation and execution. In the shipping industry at large we see an emphasis on innovation (exploration) versus exploitation as distinct strategic postures for all the types of ﬁrm we have looked at here. Innovation and problem solving require investment in people. Having access to top talent and providing them with opportunities to learn and develop are strategically important. The innovating ﬁrm needs to manage its development portfolio and its relationships with partners to maximize its learning and its future collaboration opportunities. The pure consulting ﬁrm faces principal–agent-type problems, associated with employees being the ﬁrm’s main resource. Complementary resources such as tools, methods, software and ﬁrm reputa-

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tion are strategically vital to ﬁrm proﬁtability. Forecasting consulting ﬁrms such as Marsoft, and specialized ship-consulting ﬁrms such as Carl Bro, Vik and Sandvik, and Skipsteknisk, which specialize in developing tailored ship designs on demand, are examples of solution creators with limited complementary assets available for exploitation. Because of the high risks associated with ships, and the frequent impossibility of ex post assessment of damage, insurance arrangements in shipping differ from those in other industries. Ship classiﬁcation is key to overcoming the problems of both adverse selection and moral hazard (Rothschild and Stiglitz 1976). Ship classiﬁcation, that is, an objective assessment of a ship’s characteristics and qualities, including its operations, is an important people-intensive business. Det Norske Veritas (DNV) is one of the major global players in this business. Classiﬁcation is synergistic with and potentially complementary to consulting. There are many opportunities for knowledge to be shared across these two distinct practice areas. Diagnostic identiﬁcation of problems also leads to a need for innovative solutions. The practices are both statically and dynamically related through a common pool of knowledge (Itami 1987). Classiﬁcation is predominately a diagnosis-intensive business, an audit required by insurance companies and port authorities. When this business model is combined with a consulting business model, care must be taken to avoid conﬂict of interest. Examples from other industries, such as combining auditing with consulting, or investment banking with fund management, have demonstrated the ethical complexities involved. Not all combinations of innovation and potential exploitation are available to

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all types of ﬁrms. Direct exploitation of innovation typically requires control of complementary physical, relational or human resources. Firms that pursue innovation without controlling the resources required for full exploitation usually exploit their knowledge through a consulting model (Stabell and Fjeldstad 1998). Other ﬁrms may be able to exploit the results of their exploration capabilities directly, and combine innovation with any of the other three shipping business models we have described here: owning, using and operating steel. In this case, there will be strategic issues at portfolio level. Our assessment is that the portfolio should be built around business model specialization rather than a mix of past activities.

13.5 Competitive and Cooperative Strategies within the Shipping Value System Strategy means choice (Lorange 2005). Corporate management makes two kinds of strategic business model decisions: what types of business model the corporation will pursue (this pertains strongly to its capabilities), and speciﬁc choices at the business unit level. Each of the business models we have reviewed here, related to owning, operating, using and innovating around steel, relies on distinct resources and has distinct performance drivers. Strategy involves making the choices that create sustainable competitive advantages for the corporation as well as for its individual businesses. Our discussion so far has addressed the sources of competitive advantage of individual focused unbundled businesses; in this section, we discuss coop-

erative arrangements within the shipping industry. There is a long tradition of cooperative strategies in shipping. Liner conferences are a cooperative arrangement in which owners work together to offer a coordinated service. In effect they operate as if the participating companies jointly owned line operations. The structure mimics that of other network service industries, for example airline, telecommunication and banking alliances. Liner conferences were very popular in the past, but are fast disappearing following the emergence of combined-based lines. These exemplify focused layering of the shipping value system. Typically, there is a single owning party focused around the marketing of logistics-based customer service. This ﬁrm will usually own a proportion of its container ship tonnage, and charter in a further proportion. The focus is on the overall network of customers, terminals and providers of other modes of transportation. Given the capital intensity of container shipping, it is no wonder that most container lines elect to charter in tonnage: after all, considerable investment goes into marketing, containers, IT systems and other logistical support. A shipping pool is a joint venture in which shipowners market their ships as a single entity and share revenues. The primary purpose is to increase the capacity to take large contracts of affreightment (CoAs), but other motives include the use of improved capacity and technology sharing (Haralambides 1996). By acquiring a portfolio of CoAs, the pool can optimize ﬂeet needs, to minimize ballast bags, waiting time, etc. Most pools have restrictions on the ships they allow into their operation. They standardize in terms of size, age, speed, quality routines, etc. There are large

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pools in various bulk carrier segments, and in smaller, specialized wet-tonnage types; there are also widespread pool arrangements in reefers. However, there are no pools in large, standard tankers, such as VLCCs, large bulk, gas or car carriers. In the car carrier business several independent owners have elected to form jointly owned operations, such as Wallenius Wilhelmsen, the world’s largest car carrier group – jointly owned by Wallenius of Stockholm and W. Wilhelmsen of Oslo. The ships are owned directly by the parent companies. Hoegh and Ugland have a similar cooperation, HVAL. Ugland has since exited and A.P. Moller–Maersk has entered instead. Both US and EU anti-trust authorities are on the alert for structures that may limit competition within a given market segment. The key criterion for approval of any such arrangement is that it must not lead to the creation of a signiﬁcant market share and potential loss of competition. For example, Heerema and Fredriksen cooperated internally within the heavy-lift ship segment, enjoying substantial control over rates by means of their very high combined market share. This cooperation was ruled illegal and both parties were ﬁned heavily. The four major players within the chemical tanker segment, Stolt-Nielsen, Odfjell, Jo Tankers and Tokyo Tankers were similarly penalized for informal cooperation over rates and price setting. However, there are other reasons for cooperation, both legal and potentially beneﬁcial. In a study of the global liner shipping industry, Mitsuhashi and Greve (2009) found that alliances based on market complementarities related to expanding network size and, where the partners had compatible ships that would allow ﬂexible capacity

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adjustments, improved the performance of the alliance partners. Their ﬁndings are very much in line with the network business models of the shipping industry. In general ﬁrms cooperate in order to: •

•

•

deliver better service and achieve longterm stability and presence, as opposed to the in/out, long/short reality for independent shipping companies; innovate and specialize, as opposed to offering very standard ships whose sole focus is a low breakeven point; develop a more long-term industrial approach to shipping, including ship ﬁnancing, in contrast to the typical asset-based ﬁnancing of independent operations.

In summary, typical cooperative arrangements reﬂect the basic properties of the associated business models. Pooling of ships provides advantages of scale and capacity utilization in the physical asset-intensive ship-owning business model. Liner and strategic logistic service alliances increase the connectivity and conductivity of networks to the beneﬁt of customers; and technology development alliances share the cost of development and increase the availability and diversity of talent. All in all, cooperation may lead to a more industrial approach, within more clearly deﬁned niches, in contrast to the more commodity-based shipping that is typical where there is full market exposure.

13.6

Discussion

There is a trend toward clearer separation of businesses with different value creation

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logics and distinct types of resources. The reasons may be found in differing and sometimes conﬂicting economics, cultures and risk properties. There are, however, situations in which combining different business logics can be essential. In this section we review some of the corporate issues related to business models. As a tool for corporate strategy, the activity perspective emphasizes potential activitylevel synergies – e.g. activity sharing among business units (Porter 1987) – whereas the core competence concept (Prahalad and Hamel 1990) provides a resource-based approach to corporate strategy. The origins of the resource argument go back to the classic work of Edith Penrose (1959), who maintained that the ﬁrm’s capacity for management development deﬁned the limits of its growth and, by extension, its size and scope. The core competence concept focuses on the dynamics (Dierickx and Cool 1989) of how crucial resources are created or explored and how they are exploited (March 1991). A common shortcoming of both the activity and the resource approaches, when used to guide portfolio choices, is that they address only supply-side synergies within the portfolio at the expense of potentially important demand-side complementarities. They also fail to address portfolio conﬂicts, as exempliﬁed above. Many potential synergies, complementarities and conﬂicts are inherently related to the business models involved. There are supply-side synergies among businesses in a portfolio when increased scope improves the efﬁciency of activities, either directly, or indirectly through internal accumulation of resources, for example knowledge. There are demandside complementarities in the portfolio when one business increases its demand for

the products and services of others. An example from shipping is the complementarity of ship brokering and ship owning; as ship brokering matured it was gradually unbundled from the activities of shipowning companies. A shipbroker can clear the markets for ships and their use efﬁciently, but it can also increase the overall demand for ships. Demand-side complementarities among diverse businesses are found in many industries and have important strategic implications captured by the concept of “co-opetition” (Brandenburger and Nalebuff 1997), in which ﬁrms have to choose between working with competitors to increase the size of the market and going it alone for the largest market share. Ship owning and ship brokering are obviously two very different business models. They differ in their primary resources – steel versus networks of relationships – and in their speciﬁc activities. Although in some ways similar, buying, selling and contracting the use of ships have very different economic implications for the ﬁrms that practice them. The shipowner conducts relatively few transactions, with very high economic impact on its ﬁnancial and physical resources. Choices of tonnage and timing are crucial. The broker, in contrast, conducts a large number of transactions, of which each has a small direct impact on its results, but which cumulatively have large indirect impacts on its relationships and its reputation, the two resources critical to its ability to conduct business. These examples can also be used to illustrate the relationship between business models and strategies. Describing the resources and activities of a shipowner, such as Ship Finance International Ltd, provides an insight into its business model: the company focuses exclusively on owning

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ships that it charters out on medium- or long-term contracts. In addition to choice of business model, the strategies of Ship Finance International are related to the types of ships it owns, and to where and when it chooses to acquire and sell ships. Ship Finance International is partially spun off from its former parent company Frontline, an important customer of Ship Finance International, with a focus on ship trading and spot market chartering. Companies that combine different business models face not only the challenges of different economics and culture, but also potential conﬂicts in the market place. High dependence on external funding for a shipowner may be incompatible with vessel chartering. An internal R&D department may not be allowed to take on projects that could beneﬁt competitors, and so have to forgo knowledge and network development opportunities that might help enhance its own problem-solving learning. In other cases there are ethical constraints on combining multiple business models. A shipbroker that also trades for its own accounts will be in conﬂict with its customers, and is likely to be punished for this by the market.

13.7

Summary

Perhaps the biggest driver for specialization and simple business models is the focus that these bring to management.1 Managing too many unrelated activities to world-class standards can be difﬁcult, if not impossible. Trying to do too many tasks well will exceed the cognitive limits of most (Chesbrough and Rosenbloom 2002). Different roles in the value system require different resources and relationships. Focusing on fewer activi-

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ties increases the chances of excellence, competitive advantage and, by extension, the ﬁrm’s chances of success. The overall portfolio model for shipping companies is particularly critical now, as combinations of business models are being pursued. Clearly, this is partly a function of top-down versus bottom-up focus, dictated to a signiﬁcant degree by the nature of the function of the business. The portfolio also reﬂects the kinds of asset a company manages. The differentiation of business models in shipping reﬂects signiﬁcant differences in activity conﬁgurations and in the properties of the resources that drive the business. The capabilities required for investing in and exploiting steel are fundamentally different from those required for investing in and capitalizing on human resources and networks of relationships. Using the shipping industry as our empirical context, in this chapter we have discussed business models as abstract representations of a business. The two fundamental components of these models are activity conﬁgurations and resources. The activity conﬁgurations reﬂect the organizational technology of a business – the way the business creates value for its customers and appropriates its share. We highlight the role of the primary resources that the ﬁrm invests in and exploits: physical assets, human resources and relationships. Cooperative shipping arrangements increase participants’ performance when they are matched to extend the corresponding resource compatibilities and market complementarities. A good business model should have the power to frame and guide further strategic choice. The power of a good model comes from its being simple enough to provide focus yet cover the most important

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elements. In words attributed to Einstein, “Everything should be made as simple as possible, but not simpler.”2 That also holds for the management of shipping companies.

Notes 1

Figure 13.2 shows the trend toward niche focus within business model type. This also exempliﬁes clearly the difference between business model and strategy we discussed earlier. The business model describes a way of doing business. Strategy entails making speciﬁc choices about resources, activities and markets. 2 A. Calaprice (ed.), The Expanded Quotable Einstein, p. 314. Princeton, NJ: Princeton University Press, 2000.

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14

Shipping Regulatory Institutions and Regulations Paul G. Wright

14.1

Introduction

The United Nations Conference on the Law of the Sea (UNCLOS) provides the framework for the establishment of relationships between nations, coastlines and activities at sea. The active use of the seas and oceans is becoming increasingly important as mankind develops its knowledge and ability to use the seas not only as trade routes, but also in the exploitation of offshore resources, including renewable energy. The concept of the freedom of the seas dates from the seventeenth century, when national rights were limited to some miles from the coast. The concept has been altered by need and recognized in international law through UNCLOS. Three signiﬁcant international conferences since the end of World War II have shaped legal concerns associated with the sea. The conferences, UNCLOS I, UNCLOS II and UNCLOS III, were held between 1958 and 1982. UNCLOS III resulted in the establishment of the 1982 United Nations Convention

on the Law of the Sea, which came into force in 1994. The 1982 United Nations Convention on the Law of the Sea established the limits of internal waters, territorial waters and archipelagic waters, and deﬁned the contiguous zone, the exclusive economic zone (EEZ) and the continental shelf. It describes the legal regime that governs the high seas, the deep seabed, and straits used for international navigation. The Convention, which consists of 320 Articles and 9 Annexes, covers the governance of ocean space and issues such as marine environmental control, economic and commercial activities, marine scientiﬁc research, technology transfer and the settlement of disputes. Areas of importance to international shipping include the right of innocent passage in territorial seas, criminal and civil jurisdiction on board and in relation to ships in territorial seas, rights of passage through straits used for international navigation, and freedom of the high seas. Under Article 94 of UNCLOS, it is the ﬂag state which is

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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required to take “such measures for ships ﬂying its ﬂag as are necessary to ensure safety at sea with regard . . . to: (a) the construction, equipment and seaworthiness of ships; (b) the manning of ships . . . and the training of crews . . . : (c) . . . the maintenance of communications and the prevention of collisions.” The responsibility of a ﬂag state is to ensure that ships ﬂying its ﬂag are surveyed by a qualiﬁed surveyor, have on board appropriate charts and navigation equipment, and are in the charge of properly qualiﬁed masters and ofﬁcers. It is also required to ensure that crew numbers and their qualiﬁcations are appropriate. The ﬂag state’s responsibilities described in Article 94 require that “the master, ofﬁcers and, to the extent appropriate, the crew are fully conversant with and required to observe the applicable international regulations concerning the safety of life at sea, the prevention of collisions, the prevention, reduction and control of marine pollution and the maintenance of communications by radio.” The development of regulations concerning the protection and preservation of the marine environment, including the enforcement measures which can be taken by the ﬂag, coastal and port states, are becoming increasingly rigorous. These international regulations have, for the main part, been developed under the aegis of the International Maritime Organization (IMO); they will be considered further in this chapter. There are other international organizations which are of importance in establishing laws associated with shipping. They include the World Health Organization (WHO), the International Telecommunication Union (ITU) and the International Labour Organization (ILO).

14.2

Regulatory Authorities

The purpose of regulation is to control human or societal behavior by means of rules or restrictions. The shipping industry has developed as a global industry in which regulation helps to provide a level playing ﬁeld and deﬁne standards, permitting the development of competitive advantages through commercial efﬁciency. Regulatory authorities include classiﬁcation societies, ﬂag, coastal and port states, and agencies of the United Nations. A classiﬁcation society is an independent, non-governmental, commercial enterprise which develops and updates the rules, regulations and standards required for the safe design, construction and maintenance of ships. Knowledge that a ship is designed, built and maintained to a standard is of importance to shipowners, insurers, bankers, those who buy and sell ships, shippers and other stakeholders. The classiﬁcation of a ship is conditional on compliance with the classiﬁcation society’s regulations for the hull and machinery. Ships which enter class continue in class so long as they are maintained in accordance with the classiﬁcation society’s rules. Maintaining a ship in class depends on a program of periodical hull and machinery surveys, carried out within prescribed times. Surveys are undertaken by inspectors employed by the classiﬁcation society. There are three types of survey: special, annual and intermediate. If a ship is damaged by collision, grounding or other cause, the classiﬁcation society will ensure that any repairs made are of a standard which does not reduce the strength of the original build. Classiﬁcation societies provide other services, including design advice, bunker fuel analysis, quality scheme accreditation and ship emergency response services.

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A classiﬁcation society may act as a recognized organization of a ﬂag state, which enables the state to verify that a ship complies with international or national statutory regulations. Classiﬁcation societies take no liability for the safety, ﬁtness for purpose or seaworthiness of a ship; they undertake their activities on an international basis using their own exclusive staff. There are seventy organizations that claim to be classiﬁcation societies. The International Association of Classiﬁcation Societies (IACS) represents the world’s major classiﬁcation societies, which between them cover more than 90 percent of the world’s tonnage. To ensure uniformity between societies IACS members are bound by ISO Quality Assurance standards. The present members of IACS are: ABS BV CCS DNV GL KR LR NKK PRS RINA RS

American Bureau of Shipping Bureau Veritas China Classiﬁcation Society Det Norske Veritas Germanischer Lloyd Korean Register of Shipping Lloyd’s Register Nippon Kaiji Kyokai Polski Rejestr Statkow Registro Italiano Navale Register of Shipping (Russia)

The ﬂag state is the state in which a ship is registered. It has jurisdiction under its own internal laws over each ship which ﬂies its ﬂag. Jurisdiction covers the ship’s master, ofﬁcers and crew regarding the control of ship safety, administration, technical and social matters. The duty of the ﬂag state is to enforce regulations derived from international conventions on ships ﬂying its ﬂag. The ﬂag state can prevent a ship ﬂying its ﬂag from sailing if the ship is deﬁcient and

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does not conform to the requirements of the regulations which it has ratiﬁed. A ﬂag state is required to investigate any incident in which a ship ﬂying its ﬂag commits “a violation of rules,” including rules and standards designed to prevent pollution from ships. Article 211 of UNCLOS requires that “states, acting through the competent international organization or general diplomatic conference, shall establish international rules and standards to prevent, reduce and control pollution of the marine environment from vessels.” In practice compliance with the article is met through observance of the International Convention for the Prevention of Pollution from Ships (MARPOL 73/78). UNCLOS requires that a ship can only sail under one ﬂag and gives every nation, even landlocked nations, the right to have ships ﬂy their own national ﬂag. Flag states are required to ensure that ships ﬂying their ﬂag are under effective jurisdiction and control. A genuine link has to exist between the ﬂag state and the ship; this is established through registration. Registration deﬁnes a ship’s nationality, provides documentary evidence of ownership and allows a ship to enjoy state privileges, such as support from naval forces. Registration helps to facilitate the purchase and sale of ships, and the raising of a ship’s mortgage. Shipping companies have the freedom to determine where their ships are registered. Some registries have a prestige status, which can be of importance for the marketing of certain ship types, e.g. cruise ships. Maintaining a ship’s register is of strategic and ﬁnancial importance to a ﬂag state. Ships are required to carry a Certiﬁcate of Registry showing details of the ship. The Certiﬁcate of Registry is the main proof of the ship’s nationality and is valid for a period of ﬁve years. It is the most important

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document carried on board a ship and is held by the ship’s master to be presented to customs authorities on entry into and departure from port or when otherwise required. National legislation provides detailed rules associated with registration. Current legislation concerning British Registry is found in the United Kingdom’s Merchant Shipping Act 1995. When the link between a ﬂag state and a ship is not genuine, the ﬂag ﬂown by that ship is known as a ﬂag of convenience (FOC). Deﬁning a ﬂag of convenience is not easy. The International Transport Workers’ Federation (ITF), which is concerned with safety standards, wages, long hours of work and unsafe working condition for seafarers, deﬁnes a ﬂag of convenience thus: “Where beneﬁcial ownership and control of the vessel [ship] is found to lie elsewhere than in the country of the ﬂag the vessel is ﬂying, the vessel is considered as sailing under a ﬂag of convenience.” The Maritime Transport Committee of the Organization for European Economic Cooperation has deﬁned FOCs as “the ﬂags of . . . countries . . . whose laws allow – and indeed make it easy for – ships owned by foreign nationals or companies to ﬂy these ﬂags. This is in contrast to the practice in the maritime countries . . . where the right to ﬂy the national ﬂag is subject to stringent conditions and involves far-reaching obligations” (Rochdale 1970). Common features associated with the use of a ﬂag of convenience are ownership, registration, tax regime and manning. The Rochdale Committee of Inquiry into Shipping (1970) states that a ﬂag of convenience registry “has neither the power nor the administrative machinery effectively to impose any government or international regulation; nor has the country the wish or the power to control the companies themselves.”

A shipowner choosing to register a ship under an FOC nation will do so for one or more reasons, including the freedom to employ foreign nationals, a low tax regime on company earnings, low registration and survey fees, relaxed foreign exchange controls and non-restrictive ownership qualiﬁcations. The limited maritime infrastructure of most FOC nations makes it difﬁcult to ensure that ships registered with them conform to accepted international regulations. The establishment and growth of the FOC weakened the power of the traditional ﬂag state, leading to the development of Port State Control (PSC). When a ship ﬂying the ﬂag of one country is in the internal waters of another, the latter is its port state. To help eliminate substandard ships, and improve the general quality of ships, a port state has powers through PSC to inspect a foreign ship to ensure that it complies with international regulations and is properly manned and operated. PSC was established to support the regulatory control of the ﬂag state and has proven to be very effective. Deﬁciencies found during a PSC inspection can lead to actions that include the ship’s master being instructed by the Port State Control Ofﬁcer (PSCO) to rectify a deﬁciency before the ship is allowed to depart from port. The PSCO can detain a ship and inform the ﬂag state authorities of the action it has taken. The main criterion used for detaining a ship is that its “deﬁciencies are clearly hazardous to safety, health or the environment” (Paris MoU 2010). When established on a regional basis through a Memorandum of Understanding (MoU), PSC can be even more effective in helping reduce the number of substandard ships and raising the overall quality of ships operating in an area. For example, the Paris

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MoU is an agreement between 27 countries within Europe and Canada. Selection of ships for inspection by PSC is known as targeting. The targeting regime of nations belonging to the Paris MoU is based on an assessment of ship risk and company performance criteria. The regime focuses on ships which are more likely to be substandard. During 2009 more than 24,000 inspections were conducted on 14,700 ships calling at ports within the Paris MoU area, resulting in 1,054 ships being detained. A ship jumping detention or failing to undertake repairs as required faces a ban on entry to all ports within a MoU region, essentially preventing it from trading. Information about a ship’s PSC record is made public. The Paris MoU provides a publicly accessible website known as Equasis (European Quality Shipping Information System; www.equasis.org/EquasisWeb/public/ HomePage). The information is of value to the many parties which have an interest in the quality of a ship, including shippers and charterers. Coastal states are required to enforce pollution regulations in their own internal waters, territorial sea and exclusive economic zones (EEZ). The coastal state can impose navigational controls, such as trafﬁc separation schemes, and control the movement of dangerous and hazardous cargoes in the area of their jurisdiction.

14.3

UN Agencies

“Because of the international nature of the shipping industry, it had long been recognized that action to improve safety in maritime operations would be more effective if carried out at an international level

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rather than by individual countries acting unilaterally and without coordination with others” (IMO 2010). The International Maritime Organization (IMO) has been established as an agency of the United Nations to coordinate maritime matters at an international level. Its headquarters are in London. Established under its own convention, the core purpose of the IMO is “to provide machinery for co-operation among Governments in the ﬁeld of governmental regulation and practices relating to technical matters of all kinds affecting shipping engaged in international trade; to encourage and facilitate the general adoption of the highest practicable standards in matters concerning maritime safety, efﬁciency of navigation and prevention and control of marine pollution from ships” (IMO 1998). The IMO strap line, “safe, secure and efﬁcient shipping on clean oceans,” sums up its raison d’être. During the sixty years since its establishment, the IMO has promoted ﬁfty conventions and protocols and has adopted more than one thousand codes and recommendations which have contributed to the safe and clean operation of ships. The organizational structure of the IMO is shown in ﬁgure 14.1. The governing body of the IMO is the Assembly, which meets every two years. A prime responsibility of the Assembly is to approve the work program for the organization. The IMO Council consists of forty member states, who are elected by the Assembly. The Council is the executive body of the IMO and is responsible for supervising the work program established by the Assembly. Membership of the IMO Council has three categories, (a), (b) and (c). The categories consider the economic interests of the nation states who are

SAFETY OF NAVIGATION (NAV)

STABILITY, LOAD LINES & FISHING VESSEL SAFETY (SLF)

Structure of the IMO.

DESIGN AND EQUIPMENT (DE)

FLAG STATE IMPLEMENTATION (FSI)

Figure 14.1

FIRE PROTECTION (FP)

LEGAL COMMITTEE

CARRIAGE OF DANGEROUS GOODS, SOLID CARGDES AND CONTAINERS (DSC)

STANDARDS OF TRAINNG AND WATCHKEEPING (STW)

RADIO-COMMUNICATIONS & SEARCH AND RESCUE (COMSAR)

FACILITATION COMMITTEE

SUB-COMMITTEES

MARITIME SAFETY COMMITTEE

BULK LIQUIDS AND GASES (BLG)

MARINE ENVIRONMENT PROTECTION COMMITTEE

COUNCIL

ASSEMBLY

Structure of IMO Bodies

INTERNATIONAL MARITIME ORGANIZATION

IMO

TECHNICAL CO-OPERATION COMMITTEE

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Council members. There are ten Category (a) members, which are nation states having the largest interest in providing international shipping services. Category (b) members comprise ten other nation states, which have the largest interest in international seaborne trade. The twenty Category (c) members are nation states which have a special interest in maritime transport or navigation and are elected to ensure that all major geographic areas of the world are represented on Council. The establishment of IMO conventions and subsequent regulations can have huge ﬁnancial implications for the international shipping community and nation states. The categories and spread of Council membership help ensure that the economic interests of ﬂag, port and coastal states are fully considered in the development of regulation. The technical work of the IMO is undertaken by ﬁve main committees, which report to Council. The committees are the Maritime Safety Committee (MSC), the Marine Environment Protection Committee (MEPC), the Legal Committee (LC), the Technical Co-operation Committee (TCC) and the Facilitation Committee (FAL). In turn the MSC and MEPC are supported by nine technical subcommittees, covering bulk liquids and gases (BLG), carriage of dangerous goods, solid cargoes and containers (DSC), ﬁre protection (FP), radiocommunications and search and rescue (COMSAR), safety of navigation (NAV), ship design and equipment (DE), stability and load lines and ﬁshing vessels safety (SLF), standards of training and watchkeeping (STW), and ﬂag state implementation (FSI). There are other United Nations agencies which organize and draft maritime Conventions.

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The International Labour Organization (ILO) works with governments, employers and workers of contracting nations to establish decent working conditions. Founded in 1919, it became the ﬁrst agency of the United Nations in 1946. The ILO is responsible for establishing and overseeing international labor standards. In 2006 the ILO completed the production of the Maritime Labour Convention (MLC), a document which is claimed to establish a global level playing ﬁeld for maritime industrial relations and standards in the workplace. The MLC draws together and updates seventy earlier conventions and recommendations into a single enforceable document. It is described as the fourth pillar of the maritime regulatory regime and sits alongside the SOLAS, STCW and MARPOL Conventions (Mitropoulos 2006). The United Nations World Health Organization (WHO) is responsible for providing leadership on global health matters. The WHO publishes the International Health Regulations (IHR), an international legal instrument which aims to prevent health risks crossing borders and threatening worldwide health. The regulations are binding on all nations. The growth of the shipping industry and the development of the cruise ship industry are of particular interest to the WHO. Another important agency of the United Nations is the International Telecommunication Union (ITU). The ITU sets standards and regulations for telecommunication of all types including marine radio telecommunication. It allocates the radio frequency spectrum and provides information for radio communications by ships through its Manual for Use by the Maritime Mobile and Maritime Mobile Satellite Services (Maclachlan 2004).

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Safety Conventions

As will already have been recognized, the international shipping industry is highly regulated. An appendix lists the principal IMO Conventions which are in place. Establishment, ratiﬁcation, employment and enforcement of regulation have a cost which is borne by the industry. There are eight IMO Conventions that establish the international regulatory framework for safety at sea. Of these, the Safety of Life at Sea Convention (SOLAS), the Load Line Convention (LL), the Convention on International Regulations for Preventing Collision at Sea (COLREGS) and the Standards of Training Certiﬁcation and Watchkeeping Convention (STCW) have prime roles in setting global standards. They are brieﬂy covered in the following section.

14.4.1 Safety of Life at Sea Convention (SOLAS) SOLAS was established as an international treaty in 1914, following the sinking of the RMS Titanic. The present convention, referred to as SOLAS 74 as amended, comprises the convention text and two technical parts. Part 1 consists of 12 chapters and an appendix, Part 2 of three annexes. SOLAS Chapter One includes regulations that concern the safety survey requirements of ship types and the issuance of documents which conﬁrm that a ship meets the requirements of the convention. There is a cost to the shipowner for surveys and the provision of certiﬁcates. Chapter Two is divided into two sections. Section 1 covers ships’ structure, subdivision, stability, machinery and electrical installations. The second section covers ship construction associated with ﬁre protec-

tion, detection and extinction arrangements. Because passenger ships are more vulnerable to ﬁre, the regulations give details of construction materials, vertical and horizontal zoning, ﬁre bulkheads and means of escape. Unsurprisingly ﬁre detection and ﬁre-extinguishing systems are covered in detail. The design requirements and provision of approved equipment to meet regulatory demands are embedded costs in the ﬁnal delivered price of a new ship. The third Chapter of the SOLAS Convention is concerned with life-saving appliances and arrangements. A major criticism of the RMS Titanic incident was that the ship was not provided with sufﬁcient lifeboats for all the passengers that were on board. Today on passenger ships engaged on international voyages “partially or totally enclosed lifeboats are required on each side able to accommodate not less than 50 per cent of all persons on board” (SOLAS 1974). In addition a passenger ship must also carry rigid or inﬂatable life rafts able to accommodate 25% of the total number of persons on board. There is also the need to carry rescue boats, one on each side for passenger ships greater than 500 gross tons (gt). Personal life-saving appliances such as life buoys, lifejackets and immersion suits are detailed in the regulations. Costs of providing safety equipment, which it is hoped will never be used, are high. In 2010 the purchase cost of a 25-person SOLAS approved life raft was US$7,500 and that of a single SOLAS-approved life jacket US$160. The increase in physical size and passenger capacity of cruise ships is a cause of concern, in particular with regard to the issue of safe abandonment of the ship where there is the possibility that many thousands of persons may be involved. In 2000 the IMO

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undertook a study of large passenger ships, which subsequently considered all passengers ships. A new safety philosophy was agreed which stated that the regulatory framework should place more emphasis on the prevention of casualties, and that future passenger ships should be designed for improved survivability so that, in the event of a casualty, persons can safely stay on board as the ship proceeds to port (Westwood-Booth 2007). The Maritime Safety Committee of IMO adopted a package of amendments to SOLAS which affects all passenger ships built after 2010. The key guiding principle of the amendments is casualty prevention. Areas of concern include navigational passage planning in remote areas, engine room resource management, advanced ﬁre-ﬁghting techniques and damage control. The regulations will inﬂuence and have an impact on the economics of ship operation. A second guiding principle is the recognition that a ship is its own best lifeboat. The design of a new passenger ship requires a safe area to be provided which can be inhabited by crew and passengers following ﬁre or ﬂooding damage that has rendered a space a complete loss. Signiﬁcant costs are associated with the need to support a ship’s movement to the nearest port for help, including the provision of additional propulsion, steering, navigation, communication, ﬁre-ﬁghting and damage-control systems. A safety center, positioned on or adjacent to the ship’s bridge and capable of supporting the ship’s management in an emergency, is a further requirement and an additional cost. Such regulations inﬂuence the ship’s capital cost and economics of operation. In the event of a ship becoming a casualty, communication with other ships and rescue services plays an invaluable part in

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saving life. Satellite technology has led to the establishment of the Global Maritime Distress Safety System (GMDSS) and to the need for a ship to install communication equipment, including an INMARSAT system able to transmit distress alerts and a satellite Emergency Position-Indicating Radio Beacon (EPIRB). In addition, VHF radio telephony, and NAVTEX, an automated system capable of delivering navigational and meteorological warnings, are among the radio communication requirements covered in Chapter Four of the SOLAS Convention. The change in communication technology over the last two decades has impacted not only on equipment costs, but also on manpower needs: a ship is no longer required to carry a radio ofﬁcer. SOLAS Chapter Five describes the responsibilities of contracting governments for safe navigation. It covers infrastructure requirements, including the provision of meteorological services for ships, the Atlantic ice patrol service, ship routing and the maintenance of search and rescue services. Ship manning is an important issue in the economics of ship operation; the chapter considers the levels which are required for the purpose of ensuring safety of life at sea. Many other operational provisions are included in the chapter, such as the obligation of a ship to proceed to the assistance of a ship or persons in distress and the requirement to carry navigational equipment such as a voyage data recorder (VDR) and an automatic ship identiﬁcation system (AIS). Compliance with the demands of the chapter has economic consequences for both governments and shipowners. The carriage of cargoes is the concern of Chapter Six, which focuses on the requirements for the stowage and securing of

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cargo. The loss of “on-deck” cargo such as timber or containers can be a serious issue, leading to monetary loss and creating a potential danger to other users of the sea. There has been a growth in the carriage of dangerous goods by sea. Fifty percent of packaged goods and bulk cargoes moving by sea are hazardous or harmful to the environment. SOLAS Chapter Seven provides a framework to ensure the safe movement of cargoes. The chapter covers the carriage of packaged dangerous goods including irradiated nuclear fuel, cargoes in solid bulk form and the construction and equipment of ships built to carry dangerous liquid chemicals and liqueﬁed gases in bulk. The chapter also refers to detailed codes, including the International Maritime Dangerous Goods Code (IMDG), the International Bulk Chemical Code (IBC) the International Gas Carrier Code (IGC) and the Irradiated Nuclear Fuel Code (INF). Meeting the strict requirement of the codes requires signiﬁcant expenditure, but is necessary to ensure safe carriage and reduce to a minimum the risk of pollution. The IMDG Code, which is compatible with similar codes used by other transport modes, requires that goods are classiﬁed and declared by the shipper and that they are packaged to withstand the ordinary risks of handling and transport. Costs are associated with packaging and onboard stowage of dangerous cargoes, including the segregation of incompatible cargo types. Non-declaration of dangerous cargoes by shippers, either through ignorance or to evade higher freight charges, has on occasion caused the total loss of a ship. While to date only four experimental cargocarrying ships have used nuclear reactors as a primary source of energy for propulsion, it is possible that in the future nuclear power

could be an alternative to fossil fuels. Cost comparisons based on today’s oil prices show the low cost of nuclear fuel compared to the cost of fossil fuels used for ship’s bunkers (Corkhill 2010). Chapter Eight of the SOLAS Convention concerns nuclear ships. The ship’s master needs the support of company management in overseeing his duties and responsibilities. The ﬁndings of the inquiry into the capsize of the roll-on/ roll-off ferry Herald of Free Enterprise found that sloppy management practices made a serious contribution to the disaster (Crainer 1993). Chapter Nine of SOLAS establishes the International Management Code for the Safe Operation of Ships and for Pollution Prevention, more simply known as the International Safety Management (ISM) Code. The ISM Code ensures that the directing mind of a ship-operating company cannot dissociate itself from its responsibilities to run a safe operation. The Code requires that a designated person be appointed on shore who is able to report to the highest level in the company about safety issues. It also requires the establishment of a safety management system (SMS) which has commitment from the top, involvement of shore- and ship-based personnel, and resources allocated to ensure that it is effective. The establishment of an SMS will require ﬁnancial outlay. Developments in ship technology have led to the high-speed ship. High-speed ships, mainly fast ferries, have peculiar characteristics such as innovative hull forms and propulsion systems. SOLAS Chapter Ten, “Safety measures for high speed ships,” has an accompanying code, established in 1994, known as the High Speed Craft Code (HSC). Fuel costs are a high proportion of the operational costs of this type of ship, making it

SHIPPING REGULATORY INSTITUTIONS & REGULATIONS

vulnerable to changes in freight income and capacity demands. “Special measures to enhance maritime safety” is the title of the ﬁrst section of SOLAS Chapter Eleven. It covers a miscellany of interests, including those associated with the operational aspects of PSC. The second section of the chapter was added following the 9/11 terrorist attack on New York and is concerned with enhancing maritime security. The section recognizes the vulnerability of ships and ports to terrorist attack and their potential use by terrorists. The establishment of the International Ship and Port Facilities Code (ISPS) requires that ship and port operators provide a secure operational environment. Under the ISPS Code, ships are required to be equipped with a Ship Security Alert System (SSAS). A ship is required to undertake a security assessment and produce a ship security plan. Providing security measures to meet the requirements of the ISPS Code, including technology, operational changes and human resources, is an additional cost for both ship and port owner. The Convention for the Suppression of Unlawful Acts Against the Safety of Marine Navigation (SUA) 1988 is of relevance to ship security as its main purpose is “to ensure that appropriate action is taken against persons committing unlawful acts against ships. These include the seizure of ships by force; acts of violence against persons on board ships; and the placing of devices on board a ship which are likely to destroy or damage it. The convention obliges contracting governments either to extradite or prosecute alleged offenders.” In the last decade of the twentieth century, regulators were alarmed at the numbers of bulk carriers being lost at sea. Between 1990 and 1997 a total of 99 bulk

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carriers sank, some without trace. To improve the survivability of bulk carriers SOLAS Chapter Twelve was adopted. Titled “Additional safety measures for bulk carriers” the chapter concerns the structural strength of the bulk carrier, the need for a bulk carrier to carry a loading instrument capable of monitoring ship stresses during the loading and discharge of cargo, improvements in cargo-handling practice and the enhancement of hull inspection. All safety requirements have ﬁnancial implications for the shipowner. The Annexes to SOLAS cover the establishment of a global and uniform system for safety survey and certiﬁcation, which implies an upfront cost for the administration authorities of contracting governments.

14.4.2

Load line convention

Overloading a ship reduces the reserve buoyancy which a ship needs to ride out heavy seas. In the latter part of the nineteenth century unscrupulous shipowners deliberately overloaded ships, sometimes with the intent of sinking them; insurance would cover the ﬁnancial loss. Many lives were lost on what became known as cofﬁn ships. Samuel Plimsoll reformed the law and established the need for a load line mark. A requirement for a load line mark was included in the Merchant Shipping Act of 1876. The mark, which consisted of a circle with a horizontal line drawn through the center, became known as the Plimsoll Line. It was not until 1894 that rules were agreed on how the position of the mark should be assigned. All ships, except ships of war, ships engaged in ﬁshing, and pleasure yachts, have to conform to the Load Line Rules. The ﬁrst International Load Line Rules were agreed in 1930, while

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LT

LF

540mm FORWARD

LF F

LS LW

T

Freeboard

540 mm AFT LTF

closed by watertight covers of steel. Type B ships are all other ship types. Corrections are made to the tabulated summer freeboard for features which contribute to the ship’s sea-keeping qualities, such as the block coefﬁcient, sheer and bow height. The Load Line Rules establish the areas and seasons associated with the use of the speciﬁc load line marks. Speciﬁc load line marks are assigned for the Winter North Atlantic (WNA), Winter (W), Summer (S) and Tropical (T) situations. For example, a ship making passage across the North Atlantic in winter will expect to face heavier weather than one sailing in tropical waters. To improve safety, greater reserve buoyancy is required. Thus the WNA freeboard is greater than the Tropical freeboard, with consequences for the amount of cargo which can be carried. The LL Rules recognize that fresh water is less dense than seawater and that a ship can thus be loaded deeper in fresh or brackish water, as it will

Assigned Summer

the IMO Convention on Load Lines (LL) was agreed in 1966 and came into force in 1968. The Load Line Rules have ﬁve objectives: to provide adequate reserve buoyancy, to prevent entry of water into the ship’s hull, to protect the crew, to provide structural strength to the hull, and to limit the amount of green water taken on deck. They recognize that conditions vary in different parts of the world and during different seasons of the year. Ships conforming to the Load line Rules have load lines marked on each side, as shown in ﬁgure 14.2. The load lines are determined from the assigned summer freeboard, i.e. the distance from the summer load line to the deck line. The assignment of the summer freeboard depends on the length and type of ship and can be found in tables in the Load Line Convention. Two types of ships, A and B, are considered for freeboard purposes. The Type A ship is designed to carry liquids in bulk and has cargo tanks which have only small openings

S W

LWNA 230mm

WNA 230mm

230mm

230mm

Figure 14.2 Timber load line mark and lines to be used with this mark. Source: Statutory Instrument 1998 No 2241 The Merchant Shipping (Load Line Regulations).

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rise when moving into seawater. A ship may be provided with timber load lines which recognize the buoyancy provided by timber and allows a ship carrying a timber deck cargo to be loaded deeper than if not so loaded. Timber load lines are preﬁxed with the letter “L” for lumber. Before a Load Line Certiﬁcate is issued a survey will take place to ensure that the LL Rules’ requirements for detailed structural features, including freeing ports, air pipes, hatchways, openings in the ship’s side and access to crew quarters, are conformed with. The commercial and economic importance of LL Rules is of particular interest in respect of ships which carry deadweight cargoes, as each tonne loaded contributes to the ship’s earnings and freight received. Load line calculations are undertaken at the commencement of each voyage to ensure that the maximum cargo can be carried without the appropriate load line being immersed at any point on the passage.

14.4.3 Convention on the International Regulations for the Prevention of Collision at Sea (COLREGs) Collision between ships may involve loss of ship, cargo and life. The International Regulations for the Prevention of Collision at Sea (COLREGs), as amended, have been established to reduce the occurrence of collision. They cover both clear- and restrictedvisibility encounters. The responsibilities for avoiding collision are attached to three parties: owner, master and crew. Rule 2 of the COLREGs states that “Nothing in these Rules shall exonerate any vessel, or the owner, master or crew thereof, from the consequences of any neglect to comply with these Rules or of the neglect of any precaution which may be required by the ordinary

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practice of seamen, or by the special circumstances of the case.” The history of the COLREGs can be traced back to 1840, when Trinity House drew up a set of rules to prevent collision between ships. The rules were enacted by the United Kingdom Parliament in 1849. Forty years later, at an international maritime conference held in Washington, a set of rules was agreed and brought into force by several countries, including the United States of America and the United Kingdom. Full internationalization of the COLREGs was not established until 1910. The international rules were revised in 1954 and again in 1960 due to advancing technology, including the use of radar for anti-collision assessment. The present COLREGs, as amended, were agreed by IMO and came into force in 1972. Further rules on lookout, safe speed, risk of collision and trafﬁc separation schemes were included (Cockcroft and Lameijer 1996). The 1972 COLREGs consist of 38 Rules. They are divided into ﬁve parts, A to E. Part A, comprising Rules 1–3, provides comment on the application of the rules, deﬁnitions and responsibilities. The section recognizes that the steering and sailing rules require interpretation which will need to consider the practice of good seamanship and the special circumstances associated with a particular case. The use of the steering and sailing rules requires knowledge and judgement of ship's deck ofﬁcers. Part B is subdivided into three sections. Section 1 comprises Rules 4–10, which concern the behavior of vessels in any condition of visibility. Rule 5 requires that “every vessel shall at all times maintain a proper look-out by sight and hearing as well as by all available means appropriate in the prevailing circumstances and conditions so as to make a full appraisal of the situation

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and of the risk of collision.” Safe ship manning requires that a ship should have sufﬁcient crew on board to maintain a proper lookout. Many incidents, including collision and groundings, occur when a ship has failed to comply with such a basic requirement. Rule 6 deals with safe speed and states that “Every vessel shall at all times proceed at a safe speed.” The rule describes factors which need to be taken into account when determining a safe speed. When ships are on tight schedules there are commercial pressures on the ship’s master to maintain the schedule. Reduced speed leads to increased passage time and can result in a missed tide and consequent loss of a berthing slot. Proceeding at a safe speed can compromise the schedule and have an impact on overall costs. Section 2 of Part B comprises Rules 11–18 and concerns the conduct of vessels in sight of one another. The rules cover collision avoidance between sailing vessels, overtaking vessels and power-driven vessels. Section 3 consists of one rule, 19, which concerns the conduct of vessels operating in restricted visibility with or without radar. It makes clear that in restricted visibility every vessel should “proceed at a safe speed adapted to the prevailing circumstances and conditions.” Part C (Rules 20–31) covers lights and shapes used to identify different ship types and situations, for example a ship at anchor, a ship not under command, or vessels engaged in ﬁshing. Part D (Rules 32–7) concerns sound and light signals used for maneuvering, warning or attracting attention. The ﬁnal part, E (Rule 38), covers exemptions to the Rules. The provision, positioning and survey of approved lights and shapes, sound signals and distress signals are described in the four Annexes to

the COLREGs. Costs associated with the purchase, maintenance and updating of signals have to be met by the shipowner.

14.4.4 The Standards of Training, Certiﬁcation and Watchkeeping Convention (STCW) Since its inception the International Maritime Organization has tried not only to improve the safety of ships and their equipment but also to raise the standards of seafarers’ skills and competencies. In 1960, because of the increasing internationalization of the shipping business, the IMO took the ﬁrst steps towards ensuring that the education and training of seafarers in the use of navigation and ships’ equipment was comprehensive and kept up to date. This resulted in the establishment of the 1978 Standards of Training, Certiﬁcation and Watchkeeping Convention (STCW). The STCW 78 convention attempted to establish global minimum professional standards and ensure a common level of competence of masters, ofﬁcers and ratings of all seagoing ships, regardless of nationality and culture. Despite initial global acceptance, the STCW 78 convention lost credibility because of a lack of precision in the stated standards and competencies required. The dramatic changes in the technical, social and structural development experienced by the international shipping industry during the period also reduced the value of the STCW Convention. The STCW 78 convention as amended underwent an accelerated revision between 1993 and 1995 and became known as STCW 95. Details contained in STCW 95 were fully implemented by 2002. A major feature of the revision was the development of a separate Convention and Code. The STCW 95 convention consists of

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eight chapters that set out requirements for ensuring compliance with the convention by member states, measures to prevent fatigue of watchkeeping personnel, and the use of technical innovations, such as simulators, for training and assessment purposes. The Code provides a set of skills and competencies which have to be attained by seafarers. STCW 95 lays down that the shipoperating company is responsible for ensuring that each seafarer holds appropriate certiﬁcates relating to their competence and that documentation and data relevant to all the seafarers it employs are maintained and readily accessible. A further requirement of STCW 95 is that seafarers assigned to a ship must be familiar with ship arrangements, equipment and emergency duties. Despite the substantive revision of the STCW Convention in 1995, the Convention was further amended in 2010 to ensure that new developments, including updated training and competency requirements are covered. The economic implications of the STCW Convention include costs associated with statutory training, the provision of personnel to ensure that ship familiarization and watchkeeping duties are effectively undertaken, and the establishment and continuity of a management system which can provide an accurate record of the attainments of each seafarer employed. Non-conformity with the requirements of the STCW Convention can lead to the detention of a ship and the subsequent loss of the ship’s earnings capability.

14.5

Environmental Regulation

In addition to the promotion of safety, the International Maritime Organization is con-

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cerned to prevent and control marine pollution from ships. The work of IMO in preventing pollution originated in the 1954 International Convention for the Prevention of Pollution of the Sea by Oil (OILPOL). Major oil pollution incidents, such as the grounding of the tanker Torrey Canyon in 1967 and pollution caused by operational procedures, gave reason for the IMO to revise the rules on oil pollution prevention. IMO also introduced controls on other forms of pollution from ships, through the adoption of the International Convention for the Prevention of Pollution from Ships (MARPOL). The original MARPOL regulations were seen as inadequate following a further spate of high-proﬁle tanker accidents in the 1970s, including the grounding of the Argo Merchant off Nantucket Island, USA, and the Amoco Cadiz off the coast of Brittany. To reduce the impact of oil tanker pollution, a conference of the IMO adopted measures affecting tanker design, including the establishment of maximum cargo tank size, the protective location of cargo tanks and the use of segregated ballast tanks. The ﬁtting of crude oil washing (COW) equipment also became a requirement. The improved convention became known as MARPOL 73/78. A related safety measure, for all new tankers greater than 20,000 deadweight tonnes (dwt) to install an inert gas system (IGS), was introduced at the same time through SOLAS. Inert gas is used in cargo tanks to replace ﬂammable gases, reducing the risk of explosion and subsequent pollution. Following the Exxon Valdez incident off Alaska in 1992, the USA unilaterally produced its own Oil Pollution Act 1990 (OPA 90). OPA 90 called for all tankers operating on the United States coast to be of

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double-hull construction. The requirement led to major shifts in the deployment of single-hull tankers. Tankers which had navigated in US waters moved to operate in other areas of the globe. The IMO followed the lead of the US, making it mandatory for all new tankers greater than 5,000 dwt to be of either double-hull construction or an alternative IMO-approved design. The international phasing out of single-hull tankers was planned so that by 2010, with limited exceptions, all tankers would be of double-hull construction. The economic impact of the requirement for doublehulled tankers manifested itself in several ways, including the increased cost of new shipbuilding, a reduction in the carrying capacity of a double-hulled tanker compared to a single-hulled tanker of the same dimensions, and additional maintenance of internal void spaces between the inner and outer hulls of a double hull. The long period of time required for the phase-out of the single-hull tankers was designed to ensure minimum disruption to the tanker market, the shipbuilding market and patterns of trade. Details regarding actions to prevent the pollution of the sea by oil are described in Annex 1 of MARPOL 73/78. The Annex provides regulations aimed at minimizing pollution due to over-side pumping of oily bilge water or to spillage during bunkering operations, the loading and discharge of oil cargoes, and onboard transfer of oil between different tanks. The maintenance of an Oil Record Book, which contains a record of all onboard movements of oil, is critical; failure to complete it correctly can lead to large ﬁnes. MARPOL 73/78 has ﬁve other Annexes. Annex 2 covers the prevention of pollution of the sea caused by noxious liquid substances (NLS) in bulk. Although the quanti-

ties of noxious liquid substances carried by sea are less than those of oil, they are potentially more dangerous to the environment. The International Code for the Construction and Equipment of Ships Carrying Dangerous Chemicals in Bulk (IBC Code) provides mandatory regulations for tankers in this sector of the industry. Annex 3 concerns harmful substances carried by sea in packaged form, including cargo and materials which are needed for the ship’s operation. The regulations relate to the International Maritime Dangerous Goods Code established in the SOLAS Convention, which has already been covered in this chapter. Sewage disposal from ships is covered in Annex 4 of MARPOL. The scale of the problem depends on the numbers of persons carried by the ship. The disposal of sewage from a passenger ship is a major challenge. Three forms of sewage are considered: black water (material ﬂushed through the toilet system), grey water (waste water from showers, sinks, laundry and onboard cleaning activities), and sewage sludge (residue left in sewage-holding tanks). A large cruise ship, such as the Freedom of the Seas, which is able to carry more than 6,300 persons, will create more than 500,000 gallons of grey water and black water every day (Klein 2009). Direct disposal of untreated sewage into the sea is not allowed, as black or grey water contains harmful bacteria, pathogens, intestinal parasites and harmful nutrients, which can damage life in the sea. The management of sewage requires a ship to be equipped with sewage treatment facilities, the cost of which has to be borne by the ship operator. Garbage, including non-biodegradable plastics, can create a serious risk to marine

SHIPPING REGULATORY INSTITUTIONS & REGULATIONS

life if discharged into the sea. Garbage also fouls beaches and coastlines. Annex 5 of MARPOL 73/78 considers the prevention of pollution by garbage from ships. It prohibits the disposal of plastics into the sea and places severe restrictions on the discharge of other forms of garbage into coastal waters. Garbage can be disposed of by incineration, or compacted and landed ashore for disposal. Costs associated with garbage disposal, including separation, incineration, compacting or the use of shore facilities have to be met by the shipowner. The ﬁnal Annex in MARPOL 73/78, 6, concerns the prevention of air pollution from ships. Although the issue was considered in 1973, at a time when international cooperation was being sought to combat acid rain, it took until 1991 for IMO to begin the preparation of an Annex to limit air pollution by ships. The Annex took six years to develop, was adopted by the IMO in 1997 and entered into force in 2005. Annex 6 sets limits on sulfur oxide (SOx) and nitrogen oxide (NOx) emissions from ship exhausts. The 2008 revision of MARPOL Annex 6 aims to progressively reduce the amount of sulfur emissions from ships. To accomplish the reduction, the sulfur content of any fuel oil used on a ship outside a SOx Emission Control Area (SECA) shall not exceed 4.5% m/m prior to January 1, 2012, 3.5% m/m on or after January 1, 2012 and 0.5% m/m on or after January 1, 2020, subject to a review in 2018 to determine the availability of low sulfur content fuel oil. The use of an exhaust gas cleaning device able to achieve the equivalent sulfur emission levels is an alternative. SECAs are being established to control the amount of SOx which can be emitted into the atmosphere. Greenhouse

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gases (GHG) are emitted by ships and contribute to climate change. Work is being undertaken by the international shipping industry, through the IMO, to reduce the amount of CO2 emitted into the atmosphere. The implementation of the revised Annex 6 will add cost to ship operation through the requirement to burn highquality fuels and/or use emission gas cleaning technology. Pollution incidents can place severe pressure on a company’s ﬁnancial resources. Parties that suffer loss or damage caused by a third party will expect ﬁnancial compensation. Limits of liability are established by different international maritime conventions, including the International Convention on Civil Liability for Oil Pollution Damage (CLC) 1969, the Convention on Limitation of Liability for Maritime Claims (LLMC) 1976, and the Bunker Oil Convention. Liability limits are based on the gross tonnage of the ship. Ships carrying more than 2,000 tonnes of oil cargo are required to be insured for or have security equivalent in value to the owner’s total liability for one incident. Failure to meet the demands of MARPOL 73/78 can lead to criminal charges, which can result in a ﬁne or imprisonment or both.

14.6

Maritime Labor

The Maritime Labour Convention (MLC) was adopted by the ILO in 2006. It sets out minimum standards concerning industrial relations, and covers heath and safety. The convention updates more than 65 international labor standards relating to seafarers which have been adopted over the last eighty years and provides them in a single unambiguous text. The Maritime

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Labour Convention has a similar structure to the STCW Convention – the Convention precedes a Code. Articles III and IV of the MLC are of particular importance. Article III states the four fundamental rights and principles which are required of a nation’s labor laws, namely the rights of freedom of association and to collective bargaining, the elimination of forced or compulsory labor, the elimination of child labor, and the elimination of discrimination in respect of employment and occupation. Article IV covers the employment and social rights of seafarers. It states that every seafarer has a right to a safe and secure workplace that complies with safety standards, to fair terms of employment, to decent working and living conditions on board ship, and to health protection, medical care, welfare measures and other forms of social protection. The MLC has ﬁve sections, called Titles, which cover the minimum requirements for all seafarers, including conditions of employment, accommodation, recreational facilities, food and catering, health protection, medical care, welfare and social security provisions, and the compliance and enforcement responsibilities of the ﬂag state, the port state and parties involved in the supply of labor. It is anticipated that the Maritime Labour Convention will be ratiﬁed by sufﬁcient nations during 2011 (ISF 2006). The Maritime Labour Convention will then enter into force twelve months after it has been ratiﬁed by at least thirty Member states with a total share of 33% of the world's gross tonnage of ships. The MLC is waiting for the target to be reached which is anticipated to be in late 2011 or early 2012. The shipowner is required to bear the costs of implementing the MLC.

14.7 Convention Enforcement: The UK The rules and regulations determined by conventions established by the agencies of the United Nations need to be ratiﬁed by a nation state before they can be established within a meaningful legal framework. Only then are they capable of enforcement. It has already been noted that the ﬂag state has the principal function of overseeing the application and enforcement of the agreed conventions within its own jurisdiction. Port and coastal states also have a role in ensuring that national law is maintained. Different national structures have been established by ﬂag states to permit international regulatory obligations to be overseen. The structure established by the United Kingdom and followed by many maritime nations is described. The UK Department for Transport (DfT) is a governmental department, headed by a Secretary of State, concerned with the development and control of transport. The DfT ensures that the UK government fulﬁlls its international obligations. The Secretary of State for Transport is a member of Cabinet and has the authority to sign secondary legislation. The remit of the DfT concerning shipping and ports is “to put together policy that ensures the United Kingdom balances commercial interests with safety, security and environmental considerations, to promote a successful, safe and sustainable United Kingdom ports sector that meets the needs of its customers, to encourage shipping companies to be British registered, to implement and inﬂuence European Union legislation and to ensure the efﬁcient delivery and modernisation of marine aids to navigation” (DfT 2010).

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The two principal organizations of the DfT associated with shipping are the Maritime Coastguard Agency (MCA) and the Marine Accident Investigation Branch (MAIB). The MCA is responsible for implementing maritime safety policy, including ship inspection and safety surveys, to ensure that both UK and international safety rules are met. Through Her Majesty’s Coastguard (HMCG), the MCA coordinates search and rescue actions and works to prevent loss of life and pollution, both at sea and on the coast. The MCA strap line “Safer lives, safer ships, cleaner seas” sums up its work. Details of its activities can be found on its website (www.dft.gov.uk/mca/). The Marine Accident Investigation Branch (MAIB) was formed in 1989 following the capsize of the roll-on/roll-off ferry Herald of Free Enterprise. It is an independent investigation body concerned with establishing the cause, promoting awareness of the risk, and preventing the recurrence, of marine accidents. The MAIB does not apportion liability or blame. Under the 1995 Merchant Shipping Act the Secretary of State has the power to appoint inspectors to investigate accidents involving a ship or a ship’s boat when, at the time of the accident, the ship is UK-registered or the ship or (in the case of an accident involving a ship’s boat) boat is within UK waters. As already stated, international conventions developed by the IMO need to be ratiﬁed by national governments before they can be enforced by the nation on ships ﬂying its ﬂag or operating within its seas. The highest level of UK law is an Act of Parliament. An Act is a primary piece of legislation, which in the case of shipping is the Merchant Shipping Act of 1995, Chapter 21. An Act of Parliament contains the fundamental requirements, and grants powers

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to a government minister to create detailed law, which is known as secondary legislation. Secondary legislation is usually of a technical nature and provides detailed regulation. UK secondary legislation is published as a Statutory Instrument (SI). There are more than 270 Statutory Instruments that cover marine activities (MCA 2010). They are categorized under the headings of ship construction and equipment, diving and submersibles, ﬁre, ﬁshing vessels, general, high-speed craft and hovercraft, life saving, load line, tonnage, navigation and collision regulations, and radio and navigation. Merchant Shipping Notices (M Notices), issued by the MCA, publicize important safety and pollution prevention measures and other relevant information, including changes to legislation concerning the shipping and ﬁshing industries. M Notices are required to be carried and maintained by every UK registered ship. There are three types of M Notices: the Merchant Shipping Notice (MSN), the Marine Guidance Notice (MGN) and the Marine Information Notice (MIN). The MSNs contain ﬁne details regarding the law and are legally enforceable when referred to by an SI. The MGNs provide advice and guidance concerning interpretation of law associated with ship safety. MINs are written for a speciﬁc readership, for example training establishments. They provide time-limited information and changes of address. The full set of M Notices which are in force can be found on the website of the MCA. Various forms of codes are published for the shipping industry. Codes may be used to extend a Convention and have the advantage that they can be rapidly updated. Mandatory Codes associated with SOLAS include the International Safety Management (ISM) Code, the International Maritime

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Dangerous Goods (IMDG) Code and the International Ship and Port Facility Security (ISPS) Code. National governments may also establish their own codes of practice, for example the UK’s MCA Code of Safe Working Practice for Seamen (COSWP). COSWP is intended to be used primarily on UK-registered ships and relates to regulations associated with health and safety on board ship. Because of the specialist nature of certain shipping sectors, guidelines for stakeholders involved in these sectors are produced by representative bodies. They do not have mandatory authority but are important in supporting safe ship operations. Examples include Safe Transport of Containers by Sea: Guidelines on Best Practices, produced by the International Chamber of Shipping (ICS) and the World Shipping Council (WSC), and International Safety Guidelines for Oil Tankers and Terminals, produced by the Oil Companies Maritime Forum (OCIMF), the International Chamber of Shipping (ICS) and the International Association of Ports and Harbors (IAPH).

14.8 Convention Enforcement: The European Maritime Policy Europe’s shipping interests are large. The European Union (EU) contains 22 coastal or island states and has a coastline seven times longer than that of the US and four times that of Russia. More than 3.5 billion tonnes of cargo and 550 million passengers pass through EU seaports each year. Forty percent of the world’s registered ﬂeet is European (European Commission 2006). In 2008 an Integrated EU Maritime Policy agreed to establish a high level of maritime

safety and security, helping to safeguard human lives and the environment while promoting an international level playing ﬁeld (European Commission 2008). The break-up and sinking of the tanker MV Erika in December 1999, and the subsequent pollution of the coasts of France and Spain, were a catalyst for the development of European action concerning ship safety and marine pollution prevention. Two sets of EU regulations, Erika I and Erika II, were developed. Erika I covered the enhancement of port state control, the audit of classiﬁcation societies and the phasing out of single-hull tankers. Erika II established improved trafﬁc monitoring in EU waters, the creation of a European Maritime Safety Agency (EMSA) and a European compensation fund for oil-spill victims. Despite the measures taken, three years later the tanker MV Prestige broke up and sank in broadly similar circumstances to the Erika, causing heavy pollution of the Northwest European coastline. The MV Prestige incident led to a further set of measures being agreed by the European Commission which became known as Erika III or the EU Maritime Safety Package. Erika III contains proposals that include a further revision of the EU Port State Control Directive, an update to the Directive on Vessel Trafﬁc Monitoring, accession to the Convention on Limitation of Liability for Maritime Claims (LLMC 96), and a mandatory requirement for all EU ﬂag states to comply with the IMO voluntary Flag State Audit Scheme. The proposals led to the adoption of legislative instruments designed to improve the effectiveness of existing accident prevention measures and the management of the consequences of maritime accidents in European waters.

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The European Marine Safety Agency (EMSA), created in the aftermath of the MV Erika disaster, was established to provide technical and scientiﬁc advice to the European Commission and EU member states in the areas of maritime safety and pollution prevention. Located in Portugal, EMSA works with other EU national maritime agencies. The key areas of activity concern the strengthening of port state control, the auditing of Communityrecognized classiﬁcation societies, the development of a common methodology for the investigation of maritime accidents, and the establishment of a Community vessel trafﬁc monitoring and information system (EMSA 2010).

14.9

Summary

This chapter has considered the main regulatory institutions and regulations associated with the international shipping industry. The amount of regulation which helps to ensure a level operational playing ﬁeld and to provide a safe and clean environment is daunting. The discussion in the chapter, while limited, provides an indication of the fundamental areas of regulation concerned with the operation of ships. The inclusion of a chapter on the marine regulatory environment and regulation can be justiﬁed in a text on maritime economics as the establishment of and compliance with regulations does not come without cost. Costs are incurred in the development of regulations at an international level and the later ratiﬁcation and enforcement of the regulations in the national context by government and government agencies. A shipowner will bear signiﬁcant costs from the outset. From the start of the ship’s

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design, regulations regarding the structure of the ship and the equipment required have to be considered. Equipment maintenance and the updates compelled by advancing technologies and the increasing demand for safer and cleaner ships are additional costs which have to be borne during the life of the ship. To meet the demands of the regulatory environment, staff must be appropriately trained. The cost of basic training and statutory training programs is signiﬁcant, involving course fees, salaries, travel and accommodation. Failure to conform to regulations can lead to detention of the ship and criminal proceedings against the shipowner, each of which has an economic impact on the business. In an increasingly litigious age, liabilities for damage to third parties can be large; against these insurance is compulsory, the premium being an additional cost. The international conventions discussed in the chapter aim to provide a safer and cleaner maritime environment for the beneﬁt of all. There is a signiﬁcant ﬁnancial cost which has to be met by the shipping industry. Some of the proactive measures, such as building a ship with a double-hull form and providing equipment to comply with MARPOL 73/78, require high capital investment. The economic impact of compliance with the COLREGs is less direct. Collision avoidance negates costs associated with loss or damage to the ship or cargo and with the marine pollution which may occur as a result of impact. In the past shipowners who failed to undertake their responsibilities could operate at an advantage over those who were diligent. Regulation and fair enforcement across the international community help to establish a level playing ﬁeld with

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respect to the standards required for safety, pollution prevention and basic crew provision. This ensures that competition between commercial organizations is based on the genuine quality and efﬁciency of the service provided. Appendix: Principal IMO Conventions

Maritime Safety International Convention for the Safety of Life at Sea (SOLAS) 1974. International Convention on Load Lines (LL) 1966. Convention on International Regulations for Preventing Collisions at Sea (COLREGs) 1972. International Convention for Safe Containers (CSC) 1972. Convention on the International Maritime Satellite Organization (INMARSAT) 1976. The Torremolinos International Convention for the Safety of Fishing Vessels (SFV) 1977. International Convention on Standards of Training, Certiﬁcation and Watchkeeping for Seafarers (STCW) 1978. International Convention on Maritime Search and Rescue (SAR) 1979.

Pollution Prevention International Convention for the Prevention of Pollution from Ships (MARPOL 73/78). International Convention Relating to Intervention on the High Seas in Cases of Oil Pollution Casualties (INTERVENTION) 1969. Convention on the Prevention of Marine Pollution by Dumping of Wastes and Other Matter (LDC) 1972.

International Convention on Oil Pollution Preparedness, Response and Co-operation (OPRC) 1990. Protocol on Preparedness, Response and Co-operation to Pollution Incidents by Hazardous and Noxious Substances 2000 (OPRC-HNS Protocol). International Convention on the Control of Harmful Anti-fouling Systems on Ships (AFS) 2001. International Convention for the Control and Management of Ships’ Ballast Water and Sediments 2004.

Liability and compensation International Convention on Civil Liability for Oil Pollution Damage (CLC) 1969. International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage (FUND) 1971. Convention relating to Civil Liability in the Field of Maritime Carriage of Nuclear Material (NUCLEAR) 1971. Athens Convention relating to the Carriage of Passengers and their Luggage by Sea (PAL) 1974. Convention on Limitation of Liability for Maritime Claims (LLMC) 1976. International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea (HNS) 1996. International Convention on Civil Liability for Bunker Oil Pollution Damage 2001.

Other important conventions Convention on Facilitation of International Maritime Trafﬁc (FAL) 1965.

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International Convention on Tonnage Measurement of Ships (TONNAGE) 1969. Convention for the Suppression of Unlawful Acts Against the Safety of Maritime Navigation (SUA) 1988 and the 2005 Protocol. International Convention on Salvage (SALVAGE) 1989. International Convention on the Removal of Wrecks 2007 (not yet in force). Source: IMO (2010). Sources & Citations of IMO Conventions.

References Cockroft, A. N. and J. Lameijer (1996) A Guide to the Collision Avoidance Rules. London: Butterworth-Heinemann. Corkhill, M. (2010) Going ﬁssion – exploring the potential for nuclear-powered merchant ships. BIMCO News, February 3. www. bimco.org/en/Members/News/2010/ 2010/02/03_Feature_Week_05.aspx Crainer, S. (1993) Zeebrugge: Learning from Disaster: Lessons in Corporate Responsibility. London: Herald Charitable Trust. DfT (2010) An Introduction to Maritime. Department for Transport. www.dft.gov.uk/ pgr/shippingports/introtomaritime. EMSA (2010) EMSA – Its Origins and Tasks. www.emsa.europa.eu/. European Commission (2006) Towards a Future Maritime Policy for the Union: A European Vision for the Oceans and Seas. Luxembourg: European Communities. European Commission (2008) An Ocean of Opportunity: An Integrated Maritime Policy for the European Union. Luxembourg: Ofﬁce for Ofﬁcial Publications of the European Communities. IMO (1998) IMO 1948–1998: a process of change. Focus on IMO, September. http://

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www5.imo.org/SharePoint/ blastDataHelper.asp/data_id%3D7994/ IMO1948to1998processofchangeﬁn.pdf (accessed June 5, 2011). IMO (2010) IMO – What it is. Pamphlet. www.imo.org/about (accessed May 23 2011). ISF (2006) ILO Maritime Labour Convention: A Guide for the Shipping Industry. London: Marisec. Klein, R. (2009) Getting a grip on cruise ship pollution. Friends of the Earth. www.foe.org/ sites/default/ﬁles/CruiseShipReport_ Klein.pdf Maclachlan, M. (2004) The Shipmaster’s Business Companion. London: Nautical Institute. MCA (2010) Statutory Instruments. Maritime and Coastguard Agency. www.dft.gov.uk/mca/ mcga07 - home/shipsandcargoes/mcga shipsregsandguidance/mcga-si.htm. Mitropoulos, E. (2006) Speech at the International Labour Conference, 94th (Maritime) Session, Geneva. www.imo.org/Newsroom/ mainframe.asp?topic_id=1322&doc_id= 6136. Paris MoU (2010) The Paris Memorandum of Understanding on Port State Control. Banned Ships. www.parismou.org/inspection_ efforts/detentions/ (accessed July 1, 2011). Rochdale, The Rt. Hon. the Viscount (chair) (1970) Report of the Committee of Inquiry into Shipping. London: HMSO. SOLAS (1974) International Convention for the Safety of Life at Sea, Chapter 3, Part B, Section 2: Survival Craft and Rescue Boats. London: IMO. Statutory Instrument (1998) No. 2241. The Merchant Shipping (Load Line) Regulations. Part III: Load Lines and Marks. www.mcga.gov.uk/c4mca/mcga-notice.htm ?textobjid=8560AD86B16D67E8 Westwood-Booth, J. (2007) The IMO Passenger Ship Safety Initiative. Seaways March. Nautical Institute.

15

Shipping Taxation Peter Marlow and Kyriaki Mitroussi

15.1

Introduction

The shipping industry is characterized by various features which make it unique and which warrant treating the taxation of the industry in a special way. First, ships differ from most other capital assets in that they constitute mobile investments. Secondly, ships may be registered anywhere in the world and the existence of alternative registers opens up a myriad possible choices. Thirdly, the shipowner (or his or her banker) is free to choose any of the available registers, and this choice has often been argued to be determined by the level of taxation under each register. Finally, there exist many so-called “ﬂags of convenience” or “open registers,” and it has been contended that the existence of such ﬂags of convenience makes it impossible for traditional maritime countries to tax their shipping industries (Bergantino and Marlow 1998). States that issue ﬂags of convenience allow easy access to their registries, allow the ownership or control of their vessels by non-nationals and typically, levy low taxes.

Bergstrand (1983) adopted the following deﬁnition: A ﬂag of convenience is a ﬂag of a state whose government sees registration not as a procedure necessary in order to impose sovereignty and hence control over its shipping but as a service which can be sold to foreign shipowners wishing to escape the ﬁscal or other consequences of registration under their own ﬂags.

In this discussion the term taxation is used to denote corporation tax or proﬁts tax and does not include other taxes such as VAT or personal taxation of seafarers’ wages. This chapter will focus only on the tax burden of companies, since the ﬁrm is the decision-making unit and will make decisions which directly affect it. It has been noted (CEBR 1993) that “in circumstances where the tax base is internationally mobile there is an incentive for national governments to compete to reduce their rates of taxation to attract this mobile tax base.” This statement is especially true for shipping since ships, by their very nature, are

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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mobile assets, and many governments offer some form of assistance to their shipping industry in an effort to retain its activity. The stated objective of such assistance is to encourage investment in national ﬂag shipping, i.e. either to attract shipping to or retain it under the national ﬂag. If the shipping activity is lost to another country with a more favorable tax regime, then the ﬁrst country loses not only the tax revenue from corporate taxes and other taxes (for example property taxes, and income taxes from employees) but it also becomes vulnerable to the loss of employment opportunities and their accompanying skill sets. This has become a major problem in many countries.

15.2

The Shipping Industry

The shipping industry can provide great value to a national economy. As discussed elsewhere, by Marlow, Pettit and Bergantino (1998), the beneﬁts accruing from shipping can be both direct and indirect. A direct beneﬁt would be the shipping industry’s contribution to the balance of payments, and this is considered to be direct since all the activities of shipping are either exportearning or import-saving. The existence of the ﬂeet allows it to offer shipping services to foreigners, thereby earning foreign exchange, whereas if the national ﬂeet did not exist the country would be paying foreign shipowners to provide such services. Another direct beneﬁt would be the employment of national seafarers in shipping. Indirect beneﬁts might be employment opportunities in associated industries, i.e. industries which rely on shipping for their existence, as well as the signiﬁcant earnings which accrue to countries consid-

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ered as maritime centers as a result of their providing services such as ship broking or marine insurance. In the UK, Maritime London, a body for UK-based companies that provide professional services to the international shipping industry, exists to promote the UK as a world-beating location in which to base a maritime-related business. Its earnings are signiﬁcant and provide considerable justiﬁcation for the support of the shipping industry. Other beneﬁts, such as defense capabilities or participation in regulating bodies such as the IMO, might be considered more political than economic but they exist nonetheless. The economic importance of the shipping industry can be established through a consideration of the maritime cluster. The idea of a cluster stems from Michael Porter’s work, in which he provided the following deﬁnition: “Clusters are geographic concentrations of interconnected companies and institutions in a particular ﬁeld. Clusters encompass an array of linked industries and other entities important to competition.” “Paradoxically, the enduring competitive advantages in a global economy lie increasingly in local things – knowledge, relationships, and motivation that distant rivals cannot match” (Porter 1998). Typically the ﬁrms within a cluster compete but also cooperate. The essential features of any cluster will include specialization, proximity, synergies and networks, and examples in the maritime ﬁeld would include Maritime London, the Dutch maritime network, and cities such as Hong Kong, Piraeus and Singapore. De Langen and others have written extensively on this topic (e.g. De Langen 2002, 2003). A study by the European Commission suggests that a maritime cluster could comprise, inter alia: Shipping (merchant

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Shipbuilding

Shipping

Scrapping

Maritime services EU’S maritime cluster Recreation &leisure

Fishing

Ports& related services

Offshore supply

Maritime works

Figure 15.1 The EU maritime cluster. Source: derived from information in European Commission (2006).

shipping, ship management, inland shipping); shipbuilding; scrapping; offshore supply; maritime works (cables, pipelines, dredging); ports and related services; ﬁshing; recreation and leisure; and maritime services (see Figure 15.1). Given the signiﬁcance to an economy of the shipping industry and its associated cluster, it is inevitable and understandable that governments should wish to secure this activity for their countries by offering various incentives or inducements to shipping companies. These companies need to compete in an international arena and the importance of international ﬁscal competitiveness is obvious. Put simply, shipping companies will not remain under their national ﬂags if the tax regime therein places them at a disadvantage against foreign shipowners. Governments wishing to retain the industry and its associated beneﬁts will engage in some form of intervention; typi-

cally this has been achieved via the tax system. The questions then become: How much support should be given and how should the value of such support be measured? If the level of support is perceived to be too low it will have no effect on the shipowner’s choice of ﬂag; on the other hand, if the level of support is considered to be generous (high) this could act as a magnet to attract foreign shipowners away from their national ﬂag, which would, in turn, invite retaliation from foreign governments. Shipping companies are interested in the ﬁnancial consequences of their actions and are not generally concerned with any wider macroeconomic repercussions of their decisions, such as their impact on the balance of payments. Gardner (1975) proposed the introduction of a Balance of Payments Test to ensure that increased support for the shipping industry in the

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form of investment grants would not adversely affect the balance of payments. The investment incentives are, of course, internal transfer payments and as such do not affect the balance of payments directly. However, the value added by a shipping investment has been shown to be equivalent to the direct current account effect, while the purchasing of ships from abroad will have an adverse effect on the balance of payments. Commercial and balance-ofpayments aspects of the investment may conﬂict. Similarly, there could be a conﬂict between public and private aspects of ﬂag choice, with governments anxious to protect the interests of the country while companies wish to satisfy their shareholders. Provided the macroeconomic beneﬁt of retaining vessels under the national ﬂag can be measured, governments have a clear indication of the value of shipping to the national economy and hence some idea of the maximum support it could merit. This would provide an indication of the value of the package of subsidies/tax incentives/ grants which could be given to the shipowners to compensate them for not ﬂagging out. Such a solution could be a Pareto optimal one in that the gainers (the national economy/government) would in effect be compensating the losers (the shipowners) for not ﬂagging out.

15.3 The Traditional Approach to Shipping Taxation Some of the economic arguments in favor of supporting a shipping industry have been laid out in the preceding paragraphs and, once the decision to support the industry has been taken, the government must

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decide in what form this support should be offered. The generic name for such intervention is the ﬁscal treatment of shipping, and this involves both taxation and subsidies. Traditionally companies are taxed by means of the corporate tax system, with tax at a speciﬁed rate being levied on a company’s proﬁts. The nominal tax rate may be high (for example, in the United Kingdom in the 1970s the rate of corporation tax was 52 percent) and governments may seek to mitigate the effect of such a high rate by awarding tax-related investment incentives designed speciﬁcally to reduce the tax liability of the company. At ﬁrst glance it appears that any tax-related investment incentive is only a relief from taxes that would otherwise be levied and that if there were no taxes there would be no need for incentives to offset their effect. While this rather cynical view is probably true in essence it fails to recognize a crucial point. Tax rates are usually generic and apply equally to all companies, but tax allowances/investment incentives can be speciﬁc and tailored to particular industries or sectors of the economy, thereby creating potentially different “effective tax rates” for different sectors, depending on the ability of the companies in those industries to make use of them. An effective tax rate is the one at which tax is actually paid after all allowances have been factored in and offset against the proﬁts. It can be affected by various types of allowances and by the length of any lag in payment as well as by the rates of discount and inﬂation within an economy. A simple example (detailed in Table 15.1) will clarify the principles involved: a company with US$50 million proﬁt operating under a regime where the tax rate is 40% should expect to pay US$20 million in tax. However,

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Table 15.1 Calculation of the effective rate of tax US$ million a)

b)

c)

d)

Company proﬁt Tax @ 40% Company post-tax proﬁt Company proﬁt Tax allowances Taxable proﬁt Tax @ 40% Company post-tax proﬁt Effective tax rate (16/50) Company proﬁt Tax allowances Taxable proﬁt Tax @ 40% PV of tax payment Effective tax rate (14.54/50) Company proﬁt Tax allowances Taxable proﬁt Tax @ 40% PV of tax payment Effective tax rate (13.85/50)

50 20 30 50 10 40 16 34 32% 50 10 40 16 14.54a 29% 50 10 40 16 13.85b 27.7%

a The present value (PV) of tax payment when the tax is paid one year in arrears and the discount rate is 10% is given by

PV ( Tax ) = Tax × (1 + disr )− tlag = 16 × (1.1)−1 = 14.545 b

If there is inﬂation in an economy then the discount factor must be modiﬁed to reﬂect this. Hence the formula becomes PV ( Tax ) = Tax × [(1 + disr )(1 + rinf )]− tlag = 16 × [(1.1)(1.05)]−1 = 16 × [1.155]−1 = 16 × 0.8658 = 13.85

Source: authors.

if the company receives tax allowances worth US$10 million it only has to pay tax on US$40 million; the tax payment becomes US$16 million, which makes the effective rate of tax only 32%. If this payment is made one year in arrears and the rate of discount is 10%, the present value of the payment is only US$14.54 million and the effective rate of tax is reduced still further to only 29%. Furthermore, if the annual rate of inﬂation in this economy is 5% the present value of the tax payment becomes US$13.85 million and the effective rate of tax falls to 27.7%. This is the essence of the ﬁscal treatment of shipping, whereby the maritime industry can receive more favorable tax treatment than other domestic industries in recognition of its contribution to the national economy, the international nature of its business and the mobility of its assets. The form of the incentives will be discussed later, but ﬁrst it is important to realize that there are different types of corporation tax systems, which may also have an impact on the effective rate of tax.

15.4

Corporate Tax Systems

Traditionally, there were three different types of corporate tax systems. Under the classical system of corporation tax the company paid a ﬂat rate of tax on its taxable proﬁts and then the shareholders paid income tax on their dividends. Proﬁts which were distributed were thus taxed twice – once as proﬁts and again as dividends. To prevent this double taxation of distributed proﬁts an imputation system of taxation was introduced, under which shareholders receive credit (at the basic rate of personal taxation) for tax paid by the company and

SHIPPING TAXATION

this credit may be used to offset their income tax liability on dividends. Distributed proﬁts are now only taxed once provided the taxpaying shareholder is liable to personal taxation at the standard rate. In the third type of taxation system, the split-rate system, separate and different rates of tax are applied to non-distributed and distributed proﬁts. As can be deduced from these descriptions, the effective rate of taxation varies under each system, depending on the levels of distributed proﬁts. Only one of these systems would exist in a country at any given time but the incompatibility of these tax structures between different countries could deter joint ventures and cross-border operations. Furthermore, within each of these tax systems, there could exist a variety of tax allowances, designed to mitigate the effect of the nominally high tax rate but giving rise to a very complicated situation. A list of these possible investment incentives could include the following: Accelerated depreciation involves bringing the depreciation allowances forward in time. These may take the form of initial (i.e. ﬁrst-year) allowances or accelerated allowances (in excess of those deriving from the usual depreciation arrangements) spread over a number of years. The advantage in being permitted to claim allowances earlier in the life of the investment is that, provided there are sufﬁcient proﬁts against which to offset the allowances, their present value is increased, since the impact of any discount factor will be reduced. In other words they are worth more to the company if taken earlier and the ability of the company to make use of these allowances will depend on its tax position (see below).

309

Advance depreciation provides for depreciation allowances to be used once a commitment has been made to the purchase of a qualifying asset and before the delivery of that asset. Initial allowances are a form of accelerated depreciation used to increase the amount of depreciation allowances that may be taken in the ﬁrst year of the life of an investment. These initial allowances do not increase the depreciable base of the qualifying asset. Investment allowances are those which increase the depreciable base of an asset before writing down commences; for example, an investment allowance of 40% means that 140% of the cost of the qualifying asset may be written off against tax liability. Investment grants are a lump sum cash payment of X% of the cost of the asset. Such payments are usually made in arrears (often one year) and often must be deducted from the level of capital allowances available on that asset. The present value of such grants is obviously reduced by the delay in their receipt. Tax-free reserves are monies set aside in a fund to be used for some speciﬁed purpose (such as the purchase of new assets or the modiﬁcation of existing ones) at some future date. Such monies will not be taxed provided they are used in an approved way within the time limit. Such measures could clearly affect the timing of new investment and the decisions may be made for tax reasons without due regard for the current conditions in the market. Such reserves could encourage inappropriate investment simply because a large proportion of the cost of the new asset is, in effect, being borne by the tax authorities.

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This list includes the more usual generic forms of incentives but, of course, any country is free to vary the rates at which any of these are granted or to introduce new forms of speciﬁc, possibly short-term incentives to achieve particular objectives. All of these listed measures provide something extra, in addition to the norm which is determined by the method of depreciation used to calculate the annual level of capital (or writing down) allowances. This method is often either the straight-line or the declining (reducing) balance method, but in the UK free depreciation (where the shipowner is free to choose the rate at which to write down the capital value of the ship for tax purposes and the only limit is the overall cost of the asset) was permitted during the period 1965–86, and other methods, such as the sum-of-the-years’-digits method, exist in other countries (e.g. the USA).

15.5

Tax Positions

Any corporate tax regime which seeks to stimulate investment through a system of tax allowances will create different tax positions for companies. A tax position is deﬁned in terms of the number of years a company will require to write off any available tax allowances which it has accumulated, including those associated with the current investment. A company’s tax position affects the net present value of any investment proposal it undertakes and, while there are many tax positions, the literature identiﬁes three key tax positions which together encompass the full range of possibilities (Marlow 1991a, 1991b). These are known as the “no tax,” the “full tax” and the “new entry” positions, and are deﬁned as follows:

•

•

•

The “no tax” position: a company is in this tax position if it has accumulated tax allowances from earlier years to the extent that it is now unlikely, given the prospective level of aggregate proﬁts, to have any tax liability for the indeﬁnite future. The “full tax” position: a company is in this tax position if it is earning sufﬁcient proﬁts from other sources to take full and immediate advantage of any tax allowances which may be available on the capital cost involved in the investment proposal itself. The “new entry” position: a company is in this tax position if, given the tax allowances available on the capital cost involved in an investment proposal and the level of proﬁt expected to be earned on it, it neither is earning sufﬁcient proﬁts from other sources nor has accumulated sufﬁcient allowances from earlier years for either of these factors to have any inﬂuence at all on the net present value of the proposed investment. Since neither proﬁts from other sources nor accumulated allowances enter into the calculation of the net present value, this tax position is equivalent to that of a newly established company entering the industry, hence its name.

Companies in different tax positions within the same ﬁscal regime will ﬁnd that the proﬁtability of an investment will vary even though it is exactly the same investment, undertaken at the same time, in the same type of ship, operating in the same market, with the same level of risk. The difference in their tax positions is determined by their corporate history in the sense of either their past proﬁtability or their previous inability

311

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to make full use of any allowances being offered by their tax system. Even for companies in the same tax position, the impact of changes in the incentives or depreciation arrangements on the proﬁtability of the investment should not be underestimated. In 1984 the Chancellor of the Exchequer (the ﬁnance minister) announced major changes to the tax system in the UK. These changes would apply to all industries, including shipping, and the major changes can be summarized thus: corporation tax rate would fall in stages from 52% to 35%; the corporate tax system would become an imputation system, with tax payments being made between nine and 21 months in arrears; capital allowances would be calculated according to a rate of 25% on a reducing-balance basis and not according to a system of free depreciation with 100% ﬁrst-year allowances as previously. All phased changes would be complete by 1986 so that the new system would be entirely operational post-1986. Marlow’s (1984) paper showed the effect of these changes in terms of net present values per million pounds of shipping investment under different assumptions concerning rates of discount, inﬂation and return. Table 15.2 summarizes a few of his results: It is clear that UK shipping companies were made worse off under the new regime Table 15.2

15.6

The UK Shipping Industry

Before these changes, the UK shipping industry had received more favorable treatment than other domestic industries, and this raised other concerns. Economists questioned the opportunity cost of such arrangements and wondered whether such support was justiﬁed, though an examination of the value of the multiplier for shipping suggested that it was higher than that for other industries, and hence that the economy as a whole would receive greater beneﬁt from encouraging investment in shipping. In terms of the industry itself it was obvious that the shipping industry received high levels of tax allowances, which meant, given the general level of proﬁt prevailing in the industry, that it was unlikely

Net present value per £1 m invested

Rate of discount (%)

5 10 10

despite the reduction in the rate of corporation tax from 52% to 35%. This is due to the combined effect of the changes. The lower tax rate means that there is a reduced posttax value of any capital allowances and a reduced post-tax value of tax relief on any interest charges incurred on loans taken out to purchase the vessel. Furthermore, the rate at which capital allowances can be taken has been reduced, to the detriment of the net present value.

Rate of inﬂation (%)

5 5 10

Source: Derived from Marlow (1984).

Rate of return (%)

5 10 10

NPV per £1 m invested (investment life of 20 years) Pre-1984

Post-1986

155266 242999 318674

72022 144102 206864

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to be able to set all of its allowances against proﬁts for tax purposes. Consequently it would build up reserves of unused tax allowances, which could prompt the company to make decisions concerning the timing of new investments according to tax considerations rather than commercial ones. Furthermore, those companies with unused tax allowances became attractive to other, non-shipping, companies which had high rates of proﬁt but relatively low levels of tax allowances. These non-shipping companies could invest in ships as a means of tax shelter for their proﬁts, or even merge with shipping companies so that, under group relief, the proﬁts of the non-shipping activity could be set against the unused tax allowances of the shipping enterprise so as to reduce the tax payments of the group as a whole. This explains the apparently unlikely mergers of shipping companies and (house-)building companies such as P&O and Bovis, and also Cunard and Trafalgar House.

Clearly there exist a variety of ways in which to tax or to compensate (for tax) the shipping industry, and it is the whole package of incentives which determines the effective rate of tax. Considerable research was conducted during the 1970s and 1980s (Evans 1984; Gardner, Goss and Marlow 1984; Gardner and Marlow 1983; Gardner and Richardson 1973; Marlow 1984) which showed how to allow for the different incentives in calculating the net present value (NPV) of a shipping investment in different countries. These international comparisons of the ﬁscal treatment of shipping demonstrated the inequalities inherent in shipping taxation and the uncertainty in the decisions facing shipowners seeking a level playing ﬁeld. The results of this type of analysis were often displayed in bar charts (Figure 15.2). The ﬁgure shows, for different European countries and for the period 1997–8, the net present value (as a percentage of capital value) from a standard investment in an identical ship with the same

UK(pre-TT) Germany(pre-TT) France Greece Norway Germany(post-TT) Netherlands 0

2

4

6

8

10

12

14

NPV%

Figure 15.2 Comparison of ﬁscal regimes. Source: derived from data in Department of the Environment, Transport and the Regions (1998).

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pre-tax rate of return. The UK’s ﬁscal regime results in the lowest percentage of capital value achieved in any of these countries. It is therefore not surprising that shipping investment, both existing and potential, moved away from the UK. The tax uncertainty inherent in the UK system, together with the accounting complications regarding the treatment of deferred tax liabilities, deterred foreign investors. There is some debate in the literature as to the efﬁcacy of such ﬁscal regimes. If their aim was to promote investment in shipping (a direct effect) so as to protect the shipping industry’s contribution to the national economy (an indirect effect), were they successful? Can any sort of relationship between the value of investment incentives and the level of investment be discerned, or are there too many other factors affecting the decision to invest? And should a distinction be drawn between gross investment, net investment and replacement investment? It is suggested that there are many determinants of the level of investment and that these might include the rate of interest, the availability of credit, the terms of credit, expectations, tax policy, time lags, growth rates, conﬁdence, and the degree of capacity utilization. In his empirical study of the UK shipping industry, Marlow (1991c) was unable to ﬁnd any real link between the value of the investment incentives packages available to the UK shipping industry in the period 1963–87 and the size of the UK ﬂeet during this period. The a priori expectation was of a positive relationship between the level of investment and the value of the ﬁscal package of incentives: as the latter increased so would the level of investment, possibly after a suitable time lag. His results failed to show this and, in fact, he detected a (negative) inverse relationship between

these variables. One possible reason for this could be that investment incentives were seen more as a means of providing tax shelter for proﬁts than as a determinant of investment. It was also noted that ﬁnancial considerations could play a more signiﬁcant role than ﬁscal measures in determining investment, though it was difﬁcult to decide whether the impact of the latter was more on the liquidity or the proﬁtability of the company. Given such divergence in the proﬁtability of the investment and the uncertainty regarding the effectiveness of such measures, it is not surprising that governments and shipowners sought a more transparent approach to shipping taxation, though it was nearly the end of the century before a new system of taxation began to be adopted. It is now normal for countries to create a substantially tax-free environment to retain and attract shipping investment.

15.7

The Tonnage Tax System

The term “tonnage tax” is shorthand for “tonnage-based corporation tax”; recent years have seen the rise and growth of the tonnage tax system. This has occurred to such an extent that it is no longer seen as an inventive form of shipping taxation but as a global standard (Marlow and Mitroussi 2008), and one to be followed if a country’s shipping industry is not to be placed at a disadvantage vis-à-vis its competitors. Table 15.3 exhibits the worldwide adoption of tonnage tax. It shows that out of the 15 most important European Economic Area (EEA) ﬂags (ECSA 2009), 14 of them, representing 98% of all EEA-registered ﬂeet, have a tonnage tax system in place. In addition, the 15 most important world ﬂags,

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Table 15.3 Tonnage tax in different ﬂags in 2009 European Economic Area most important ﬂags (measured by dwt) Greece Malta Cyprus Norway Germany United Kingdom Italy Denmark France Belgium Netherlands Sweden Spain Gibraltar Register Portugal

Tonnage tax

World most important ﬂags (measured by dwt)

Tonnage tax

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✗

Panama Liberia Marshall Islands Hong Kong Greece Bahamas Singapore Malta China Cyprus Republic of Korea Norway (NIS) UK Japan India

✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓

Source: various, derived by authors.

which represent around 80% of the total world ﬂeet (UNCTAD 2009), also offer a tonnage tax system for the ships registered in them. Tonnage tax has been introduced into different countries for different purposes, but often as a method of reversing the decline of the maritime industry (Leggate and McConville 2005). Previous methods or systems of taxing shipping have relied on subsidies or tax allowances to mitigate the effect of taxation, but such an approach can only ever be a second-best solution. However, it can be justiﬁed using Ricardian trade theory, which states that “in a free and fair global market place a country should maximize its economic efﬁciency by deploying resources in those sectors in which it holds a comparative advantage” (Brownrigg, Dawe, Mann and Weston 2001) and, addi-

tionally, if foreign countries are already providing subsidies to their industry. This seems to suggest a circle of subsidy, in which one country introduces subsidies in response to the activities of others, whereupon the original countries respond by increasing their own subsidies, and so on. Clearly any advantages from such an approach can only ever be temporary and will arise from a country “getting its retaliation in ﬁrst.” This is not sustainable and may incur a high opportunity cost in some cases. The optimum solution would involve an end to such global tax competition; a tonnage tax system may arguably be considered to do this. The economic justiﬁcation for introducing a tonnage tax sometimes revolves around the lack of training opportunities for seafarers and the subsequent loss of the

315

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maritime skills base if the decline in the size of the ﬂeet is not halted. Against this argument must be considered the potential downsides of such a tax. These are: the risk of tax avoidance (which can be avoided by appropriate ring-fencing legislation); the cost to the tax authorities (it has already been suggested that shipping companies may have paid little tax in the ﬁrst place and hence the tax revenue forgone is not likely to be large), and the potential distortion of competition between the modes of transport (again this effect is likely to be slight as the potential for a modal shift to shipping is likely to be limited). Within the European Union (EU) the tonnage tax system can be broadly divided into two categories, namely the Greek model (a tonnage tax strictly speaking) and the Dutch model (a tonnage-based corporation tax). The latter is more common and is generally what is thought of nowadays when the term “tonnage tax” is used. Under this system a shipowner pays tax according to the amount of tonnage in operation, regardless of any proﬁt or loss. Corporation tax is levied at the normal rate on the derived or “notional” proﬁt, which is calculated as a given amount per hundred net tons per day. This amount is calculated using a sliding scale, depending on size ranges for the ship. The system currently operating in the UK is virtually a copy of the one introduced in the Netherlands in 1996. It was introduced into the UK only after an enquiry conducted by Lord Alexander of Weedon QC (Alexander 1999). It is summarized in Table 15.4. Using the rates shown in this table it is a simple matter to calculate the daily “proﬁt” for a vessel of a particular size. Multiply this ﬁgure by the number of days the vessel is in operation during a year and

Table 15.4

UK tonnage tax rates

Taxation categories and rates Net tonnage 0–1000 1,001–10,000 10,001–25,000 25,001 and over

Derived proﬁt per 100 net tons per day (£) 0.60 0.45 0.30 0.15

Source: HM Revenue and Customs.

then multiply this answer by the rate of corporation tax, e.g. 30% for the UK. The result is the total amount of tax which the shipowner must pay on that vessel’s earnings during the year, regardless of any actual proﬁt or loss. One of the great advantages of this system for shipowners is knowing exactly how much tax they will pay in a particular year. For example, the owner of a container ship of 30,853 net registered tonnes will pay US$22,025 for every year of the vessel’s life. If the vessel is retained for 15 years, the total tax over its life can be calculated as US$167,524 in present-value terms when based on a 10% p.a. rate of discount and the relevant exchange rate (Marlow and Mitroussi 2008). This is a simple calculation; the result and its meaning are easily understood and clear to everybody. Furthermore, each investment can now be made on its own merits on the basis of commercial factors, and not for tax reasons relating to previous levels of proﬁtability. Previously, the decision to invest in shipping was often driven by tax considerations because, as explained earlier, the ﬁscal regime had allowed the company to build up sufﬁcient tax advantages that a signiﬁcant proportion of the capital cost of the asset was effectively being paid by the Exchequer or tax

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authorities. This meant that an essentially non-proﬁtable – when judged on purely commercial criteria – investment could still return a proﬁt because of the tax allowances on offer. In other words, the tax system could encourage uneconomic investments. A ﬁnal but obvious advantage of a tonnage-tax regime is that it is compatible with the regimes of other countries and provides a more level playing ﬁeld for international competition than the previous systems (Selkou and Roe 2002). It also provides greater opportunity for joint ventures and global operations. The above statement would appear to be true insofar as many countries (including Greece, the Netherlands, Germany, Denmark, Spain, Finland, Belgium, Italy, Ireland, Norway, the UK and the USA) have now adopted a tonnage tax system (Inland Revenue and the Department for Transport 2004), and this confers a degree of transparency on the tax liability of the shipowner; but open registries still exist and operate what might be termed “traditional” tonnage tax schemes, where each vessel pays an initial registration fee followed by annual fees (taxes) based on the size of the vessel. Such registers are able to vary or even waive their fees as they wish, and hence could still be attractive to shipowners wishing to reduce their tax payments. Marlow and Mitroussi (2008) demonstrated the different present values of tonnage taxes under ﬁve different regimes for ﬁve different ship types. Their results showed that Panama was consistently the most favorable regime in terms of minimizing tax payments, while the UK was often the least favorable (being marginally more expensive than the Netherlands as a consequence of having a slightly higher rate of corporation tax).

Shipowners in many countries have campaigned for a tonnage tax system for many years, but it is possible that their enthusiasm for such a regime is based more on their perception of the levels of taxation than on the reality. Many years ago, Kay and King1 (1980: 194) provided evidence that, despite nominally high rates of corporation tax, many companies in fact paid zero or next to zero amounts. Given that the rate of corporation tax in the UK in the years to which the data refer was 52 percent, how can the amounts paid be so low, or even zero in many cases? The mainstream corporation tax (MCT) represents the tax burden for the company and it would seem that the perception of a heavy tax burden, based on the rate of 52%, did not always materialize in practice for many companies, including shipping ones. If this was the case then the shipowners’ position might not be improved by paying tonnage taxes, which would have to be paid every year regardless of whether the vessel was trading proﬁtably or not.

15.8 The Impact of Shipping Taxation Policies It has already been suggested that two of the (presumably) inadvertent consequences of the previously favorable tax treatment for shipping were (1) to provide tax shelter for proﬁts from non-shipping activity and (2) the unlikely merger of shipping companies with other companies. It has further been suggested that the actual burden of corporate taxation on shipping may not have been too onerous and that shipowners’ enthusiasm for ﬂagging out owed more to their perception of high tax rates than to the taxes actually being paid. Nonetheless

SHIPPING TAXATION

ﬂagging out did occur, and to a signiﬁcant extent. The practice became so widespread that governments felt they had to take action to halt the decline in their national ﬂag ﬂeet and, if possible, to attract vessels back to their ﬂag. The problem for governments is that ship registry is an increasingly competitive business and “shipping is capable, within minutes, of fundamental relocation and restructuring that would take months, if not years, to achieve ashore” (Dickinson 2009). Any country that does not appreciate this runs the risk of vessels leaving the ﬂag for more attractive registries, thereby reducing the opportunity for the industry to add value to the economy. That this risk is very real is borne out by the recent (2009) decision by Maersk to relocate key elements of its operations, which will result in the loss of ﬁfteen container ships and tankers from the UK ﬂeet (Lloyd’s List 2009a). In Belgium there has been a revitalization of the maritime sector stemming from the revival of the Belgium ship register ﬁve years ago, and supporting the register is a top priority for government policy. The government feels that the stability of regulations is crucial, since this provides shipowners with some certainty in their decision making. The Belgian view is that if other countries give further state aid this will disrupt the level playing ﬁeld which has been built up over a number of years (Lloyd’s List 2009b). Corporation tax is not the only issue for shipping companies. Shipping ﬁnance schemes also have an inﬂuence on the industry, since traditionally any interest charges incurred during the year can be taken as a legitimate expense when calculating proﬁts for tax purposes. Schemes such as the Kommanditgesellschaft (KG) ﬁnance

317

scheme in Germany have been very successful in attracting private investors to fund ships. The equity part of the ﬁnancing often comes from several small investors via a shipping fund and provides secure offbalance sheet assets for shipowners or charterers. Effectively, such schemes transfer many of the ﬁnancial risks of operating a vessel to private investors, for whom the fund provides a long-term investment with nearly tax-free returns. However, the beneﬁt of this, as in the Danish “doctors and dentists” scheme, is primarily for individuals, not companies. Such schemes are successful in providing ﬁnance for ship acquisition.

15.9 The Shipping Business in a Wider Context The structure of the shipping business is affected by factors other than taxation. Regulation or deregulation of the industry, concentration of activities, mergers and acquisitions and, in the case especially of liner shipping, supply chain and logistics management strategies have all had an impact on the way the shipping business is structured, controlled and operated. Mergers and acquisitions can occur for several reasons (to capture economies of scale, to increase management efﬁciencies, or to exploit synergies – Fusillo 2009), and merger and acquisition activity has increased considerably over the last twenty years; some notable examples are Maersk–Sealand, Maersk–P&O Nedlloyd, and NOL–APL. It is highly likely that, given the recent reforms in European liner markets and elsewhere, the levels of industry concentration will rise as shipping companies seek to increase the load factor of their even bigger ships in order to achieve their potential cost savings.

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Heaver (2002) has noted that “the change in the liner shipping industry has been characterized by increased horizontal and vertical integration.” He argues that the horizontal integration has been the result of mergers, acquisitions and alliances, while the vertical integration stems from an extension of services in the management of container terminals and from the provision of intermodal and logistics services. Globalization involves a strategy of sourcing in low-cost locations and this, coupled with just-in-time ( JIT) deliveries, postponement, and reductions in cycle times, has led to transport becoming a more signiﬁcant component of the logistics supply chain. The aim of any distribution channel is to provide a sufﬁcient level of service to match customers’ requirements, but to do so at an effective cost. Hence there is a major focus on costs, and control of the key cost elements is crucial. It is entirely understandable that the shipping industry should try to reduce costs whenever possible and would lobby for reduced taxation as a means of doing so. There is still debate as to whether the major effect of tax incentives is on the proﬁtability of the company or on its liquidity, but this distinction may be only a matter of semantics for the company. If it feels disadvantaged because of the tax system, then any measure that alleviates the perceived disadvantage is worthwhile. If the package of ﬁscal and ﬁnancial measures taken as a whole is sufﬁcient to compete with that on offer in other countries, the company may decide to choose its national ﬂag over a foreign registry. In this case the national economy will retain all the beneﬁts associated with having its own ﬂeet. As discussed above, taxation is only one of the parameters which will determine location and, in liner shipping at least, it

may no longer be the most important one. Other factors might include the attitude of trade unions towards certain ﬂags depending on which IMO list they appear in, inspection procedures by national authorities, and manning regulations. In 2007 the Greek government relaxed requirements to employ Greek seafarers under the national ﬂag and noticed an increase in tonnage under the Greek ﬂag. This could suggest that manning regulations are a more important determinant of ﬂag than taxation considerations. If this is so it may mean that ﬁscal regimes have become so similar in their impact that there is little or nothing to choose between them, and that shipping taxation is no longer a major issue for the industry (Marlow and Mitroussi 2008), if indeed it ever was. Writing over a decade ago, Goss and Marlow (1997) concluded their commentary on investment incentives with the statement “Given . . . the continued growth of the ﬂeets registered under ﬂags of convenience, it is not clear that ﬁscal matters are uppermost in the minds of those who control investment in ships.” It appears that even then other factors, such as crew costs, were signiﬁcant determinants of vessel location.

15.10

Summary

The tax treatment of the shipping industry over the last thirty years exhibits alternative forms of corporate taxation systems implemented by various governments. A variety of inventive measures, used as tax allowances to mitigate the effect of high corporate rates of tax, have been adopted but ultimately became self-defeating and unsustainable. A consensus view of the way in which shipping should be treated for tax

SHIPPING TAXATION

purposes has emerged, resulting in the increasingly widespread adoption of the tonnage tax, and more recently by European countries, too. The economic justiﬁcation for such a tax, and its implications for shipping in terms of the liquidity of companies and future investment decisions, have been analyzed. Generally, the impact of ﬁscal policies directed at the shipping industry, and their effectiveness over time, should be considered in terms of their opportunity cost to the countries concerned and in the wider context of the shipping business. Recent developments and structural changes in shipping may increase the importance of new parameters in respect of their role in determining location of shipping activities.

Note 1

At the time of writing Mervyn King is the Governor of the Bank of England; John Kay is a past Director of the Institute for Fiscal Studies.

References Alexander, Lord, of Weedon, QC (1999). Independent enquiry into a tonnage tax. Report. HM Treasury, London. Bergantino, A. S. and P. B. Marlow (1998) Factors inﬂuencing the choice of ﬂag: empirical evidence. Journal of Maritime Policy and Management 25(2): 157–74. Bergstrand, S. (1983) Buy the ﬂag: developments in the open registry debate. Transport Studies Group Discussion Paper 13, Polytechnic of Central London. Brownrigg, M., G. Dawe, M. Mann and P. Weston (2001) Developments in UK shipping: the tonnage tax. Journal of Maritime Policy and Management 2(3): 213–23.

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CEBR (1993) Taxing the UK shipping industry: a study of the economic implications of various tax regimes for the shipping industry. Centre for Economics and Business Research Ltd, London De Langen, P. W. (2002) Clustering and performance: the case of maritime clustering in the Netherlands. Maritime Policy and Management 29(3): 209–21. De Langen, P. W. (2003) The port authority as cluster manager. Proceedings of the 2nd International Conference on Maritime Transport, Technical University of Catalonia, Barcelona, Spain, November, pp. 67–84. Department of the Environment, Transport and the Regions (1998) British shipping: charting a new course. UK Government White Paper, London. http://webarchive.nationalarchives. gov.uk/+/http:/www.dft.gov.uk/about/ strategy/whitepapers/previous/ britishshippingchartinganewc5696 (accessed September 10, 2010). Dickinson, M. (2009) UK policy is driving owners to seek better value elsewhere. Lloyd’s List October 28: 2. ECSA (2009) Annual Report 2008–2009. European Community Shipowners’ Association, Brussels. European Commission (2006) Towards a future Maritime Policy for the Union: a European vision for the oceans and seas. Ofﬁce for Ofﬁcial Publications of the European Communities, Luxembourg. Evans, J. J. (1984) Some practical aspects of investment appraisal in shipping. Maritime Policy and Management 11(3): 197–222. Fusillo, M. (2009) Structural factors underlying mergers and acquisitions in liner shipping. Maritime Economics and Logistics 11(2): 209–26. Gardner, B. M. (1975) Investment grants and balance of payment tests. Maritime Studies and Management 2(4): 221–30. Gardner, B. M., R. O. Goss and P. B. Marlow (1984) Ship ﬁnance and ﬁscal policy. Maritime Policy and Management 11(3): 153–96.

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Gardner, B. M. and P. B. Marlow (1983) An international comparison of the ﬁscal treatment of shipping. Journal of Industrial Economics 31(4): 397–415. Gardner, B. M. and P. W. Richardson (1973) The ﬁscal treatment of shipping. Journal of Industrial Economics 22(2): 95–117 Goss, R. O. and P. B. Marlow (1997) Investment incentives for British shipping: a comment on recent work. Journal of Maritime Policy and Management 24(4): 389–91. Heaver, Trevor D. (2002) The evolving roles of shipping lines in international logistics. Maritime Economics and Logistics 4(3): 210–30. HM Revenue and Customs. TTM01010 – Introduction to Tonnage Tax: A Brief Guide. www.hmrc.gov.uk/manuals/ttmmanual/ ttm01010.htm (accessed July 1, 2011). Inland Revenue and the Department for Transport (2004). Post implementation review of tonnage tax. Report. Inland Revenue and the Department for Transport, London. Kay, J. A. and M. A. King (1980) The British Tax System. 2nd edn. New York: Oxford University Press. Leggate, H. and J. McConville (2005) Tonnage tax: is it working? Journal of Maritime Policy and Management 32(2): 177–86. Lloyd’s List (2009a) Maersk to reﬂag vessels from the UK to Denmark. October 19: 3. Lloyd’s List (2009b) Quality control system puts register in the spotlight. October 29: 10. Marlow, P. B. (1984) The effect of the 1984 Budget proposals on the UK shipping industry. Maritime Policy and Management 11(2): 75–7.

Marlow, P. B. (1991a) Shipping and investment incentives: a trilogy. Part 1: Investment incentives for industry. Journal of Maritime Policy and Management 18(2): 123–38. Marlow, P. B. (1991b) Shipping and investment incentives: a trilogy. Part 2: Investment incentives for shipping. Journal of Maritime Policy and Management 18(3): 201–16. Marlow, P. B. (1991c) Shipping and investment incentives: a trilogy. Part 3: The effectiveness of investment incentives for shipping. Journal of Maritime Policy and Management 18(4): 283–311. Marlow, P. and K. Mitroussi (2008) EU shipping taxation: the comparative position of Greek shipping. Maritime Economics and Logistics 1(1/2): 185–207. Marlow, P., S. Pettit and A. Bergantino (1998) The decision to ﬂag out and its impact on the national economy. In K. Misztal and J. Zurek (eds.), Maritime Transport and Economic Reconstruction, pp. 37–55. Gdansk: University of Gdansk. Porter, Michael E. (1998) Clusters and the new economics of competition. Harvard Business Review 76(6): 77–90. Selkou, E. and M. Roe (2002) UK tonnage tax: subsidy or special case? Maritime Policy and Management 29(4): 393–404. UK Ship Register (2010) www.ukshipregister. co.uk/ukr-home/merchant/tontax-holding/ tontax-4.htm (accessed February 15, 2010). UNCTAD (2009) Review of Maritime Transport, 2009. United Nations Convention on Trade and Development.

16

Seafarers and Seafaring Heather Leggate McLaughlin

16.1

Introduction

Much discussion and research is devoted to operational aspects of the maritime industry. It is perhaps surprising, therefore, that so little research is devoted to the people at the sharp end of this operation, namely the seafarers. Seafarers play a vital role in ensuring that vessels and cargoes are delivered from origin to destination safely and efﬁciently. It is a profession which draws on physical effort, skill, and intellectual power over a range of disciplines. One of the oldest professions, it has undergone considerable change both from technological evolution and globalization. Such changes have created a global market for the supply of seafarers. This chapter explores the seafaring market and its speciﬁc characteristics. The focus is largely on supply – the number, the proﬁle, recruitment and retention issues, mobility and migration. The nature of shipping itself and of the international seafaring labor force creates separation in the markets, which makes discrimination possible and probable. Such practices are tempered by regulation

and representation by international organizations such as the International Labour Organization (ILO) and the International Transport Workers’ Federation (ITF).

16.2

The Seafaring Labor Market

The function of any market is to bring buyers (demanders) and sellers (suppliers) together. The demand for seafarers is a derived demand. Seafaring labor is demanded not for itself, but because of the demand for shipping services, which, in turn, is derived from the demand for the products being shipped. On the supply side, the seafaring labor force is not a single homogeneous entity, but a complexity of associated individuals with different education, training and other characteristics and capabilities. Furthermore, the supply of seafarers is inﬂuenced substantially by national and international institutions and social factors which are absent in other factor markets. The controlling and regulating institutions, both national and

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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international, function outside the industry in establishing criteria for the professional standards for the industry and licenses, without which it is illegal to practice. The seafarer is the archetypal international worker, employed on board vessels registered under differing ﬂags, owned and operated by citizens of many countries. The international structure of the industry is further reﬂected in the numerous nationalities of the seafarers themselves. BIMCO/ ISF (2005) estimates the worldwide supply of seafarers at almost 1.2 million, comprising 466,000 ofﬁcers and 721,000 ratings, the majority originating from a fairly small number of countries. Over recent decades, changes in economic and commercial activities have been fundamental in the restructuring of international seafarer employment. There has been a relentless decline in the number of seafarers coming from developed countries, due to an appreciable reduction in recruitment and retention, which means that the age structure of this group has become progressively older. The lack of suitable seafarers from developed countries, coupled with a desire to reduce labor unit Table 16.2

costs, has created an increasing demand for seafarers from developing countries. These are the main elements which have gradually created the concept of the seafaring laborsupplying country, which typically has little or no maritime tradition. Initially the vast majority of seafarers from these countries were ratings, but they are now supplying a growing number of ofﬁcers. The estimated supply of seafarers is shown in Table 16.1. The main suppliers of ofﬁcers and ratings are the OECD and the Far East but, as previously mentioned, the former group is very much in decline. The supply for selected countries in Table 16.2 demonstrates the Table 16.1 Estimated supply of seafarers 2005

OECD Eastern Europe Africa/Latin America Far East Indian Subcontinent All national groups

Ofﬁcers

Ratings

133 95 38 133 68 466

174 115 110 226 96 721

Source: BIMCO/ISF (2005).

Estimates of numbers of seafarers for top ten supplying countries

Country

Ofﬁcers

Ratings

Total in 2005

Total in 2000

The Philippines Indonesia Turkey China India Russia Japan Greece Ukraine Italy Totals

46,359 7,750 22,091 42,704 11,700 21,680 12,968 17,000 28,906 9,560 220,718

74,040 34,000 60,328 79,504 43,000 34,000 6,856 15,000 36,119 11,390 394,237

120,399 41,750 82,419 122,208 54,700 55,680 19,824 32,000 65,025 20,950 614,955

230,000 83,500 62,447 82,017 54,700 55,680 31,013 32,500 37,000 23,500 692,357

Source: BIMCO/ISF (2005).

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increasing importance of the Far East and Eastern Europe as labor-supplying countries. These top ten labor-supplying countries provided 52% of all seafarers in 2005, with China and the Philippines accounting for some 20% of the total supply. It is interesting to note that the majority of Chinese seafarers are needed to man the Chinese ﬂeet, and so they do not tend to sail on foreign vessels. The vast majority of Filipinos, however, are employed on foreign vessels. BIMCO/ISF (2005) derives the demand for seafarers from estimates of the size, number, ship type and age composition of the world ﬂeet (see Table 16.3). Putting the supply and demand together the study suggests a 10,000 excess demand for ofﬁcers and a 135,000 excess supply of ratings. The shortage of ofﬁcers is expected to be compounded by an expected long-term growth in world trade and hence the growth of the world ﬂeet. It should be noted that seafaring labor statistics are often unreliable and even nonexistent. Glen and Marlow (2009: 187) argue: “There is a general lack of reliable information on seafarer numbers: full stop. A cursory look at manning and training conference presentations posted online

Table 16.3 Estimated demand for seafarers 2005

OECD Eastern Europe Africa/Latin America Far East Indian Subcontinent All national groups Source: BIMCO/ISF (2005).

Ofﬁcers

Ratings

168 29 144 117 18 476

218 29 166 149 23 586

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reveals that, even recently, the industry practitioners quote the same, single source of estimated seafarer supply and demand, namely the BIMCO/ISF 2005 Update.” They further maintain that data on seafarer supply are particularly difﬁcult, especially for ratings. Indeed, Leggate (2004) seriously questioned the existing published information based on ﬁndings from research commissioned by the International Labour Organization (ILO). This study was based on a questionnaire distributed to government departments, shipowners’ associations and unions worldwide during 2001. Responses were obtained from 73 institutions representing 62 different states, and further supplemented by a number of case studies of major maritime countries. The survey and case studies demonstrated the lack of deﬁnite information on seafarer numbers. Of the 62 ﬂag states questioned, only 38 provided ﬁgures for the numbers of seafarers employed on vessels registered under their ﬂag. In most cases the ﬁgures were estimates. Quantifying the seafarer population is extremely difﬁcult, as many countries have no established system in place to achieve this. Numbers are often based on employment statistics, which leaves the problem of determining the number available for employment – often referred to as “active.” Furthermore, there are few records of seafarers leaving their profession to pursue other careers. Since BIMCO/ISF (2005), there have been two further studies that suggest a growing shortfall in the number of ofﬁcers. Drewry Shipping Consultants (2009) estimated ofﬁcer supply in 2009 at 517,000, an increase of 11% since 2005 and 28% since 1990, with the shortfall at 33,000. By 2013, after allowing for 10% newbuilding

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cancellations and a 10% rise in scrapping, the shortfall ﬁgure is estimated at 42,700. More recently, the Nippon Foundation and the Japan International Transport Institute ( JITI) have presented ﬁndings from a study called “The future global supply and demand for seafarers and possible measures to facilitate stakeholders to secure a quantity of quality seafarers” (Leander 2010). The work estimates current demand by taking the number of ships in 2010 and applying standard crewing numbers to particular vessel types. The calculations show current demand for ofﬁcers as 445,055 and that for ratings as 648,914. Future demand is then estimated by using various assumptions of market conditions and economic growth. The results indicate that demand will increase to 3.5% above its stated current levels for both ofﬁcers and ratings by 2015. This translates into 32,153 ofﬁcers and 46,881 ratings, which is less than the ﬁgures estimated by the Drewry study. Apart from the varying methodologies, the difference is partly explained by different assumptions on economic growth, which were more optimistic in the 2009 study when the full implications of the global crisis were not yet known. In addition, the 2010 study assumes that the crewing shortage that preceded the global ﬁnancial crisis would be mitigated by the falling demand for shipping, which is ﬁercely contested.

16.3

Recruitment and Retention

Despite the lack of deﬁnitive data, there is general acceptance of a downward trend in the supply of ofﬁcers, particularly from OECD nations, some of which are trying to address the issue. Many European countries, for example, have instituted tonnage

tax legislation. In the UK this began in the year 2000 and is linked explicitly to recruitment. For every 15 posts in the effective ofﬁcer complement for the ships qualifying for the tax, the company shall provide the ﬁrst year of training on a relevant course for not less than one eligible ofﬁcer trainee. There is, however, an opt-out for the company: it can make a payment in lieu of training. The ﬁgures for cadet intakes since the legislation came into force do show a gradual increase in the numbers of trainees. Indeed if the number of cadets recruited in 2008/2009 were maintained over the next few years, this would be sufﬁcient to stabilize the UK ofﬁcer total (Department for Transport 2010). Leggate and McConville (2005) conclude that the tonnage tax in the EU context has been successful in attracting tonnage but less so in attracting numbers of vessels. These effects are likely to be enhanced by the EU State Aid guidelines, which strengthen the link between ﬂag and tonnage tax. However, the EU is witnessing a decline in the number of EU nationality ofﬁcers, particularly at junior level. In the UK a similar ﬂeet enlargement has been observed. Despite cadet increases, eventual employment opportunities have been largely conﬁned to non-European seafarers. Leggate and McConville (2005) stress that, in terms of employment, it is numbers of vessels rather than the tonnage which is the signiﬁcant factor, despite the decline in average manning levels due to increasing technology (Li and Wonham 1999). The tonnage tax system has not led to a substantial increase in the number of vessels. Furthermore, many companies in the regime have opted out of the recruitment program. In Denmark, the government has taken positive steps to encourage recruitment into

SEAFARERS AND SEAFARING

the industry. A substantial marketing effort has been targeted at primary schools in an attempt to heighten awareness of shipping and the broader maritime industry as an interesting and fulﬁlling career. Similarly, the UK Chamber of Shipping has launched a “Sea Vision” program to educate young people about the maritime sector and maritime careers. On an international level, the “Go to Sea” campaign (International Maritime Organization 2008) is aimed at encouraging government initiatives, promoting seafaring and addressing some of the issues of life–work balance and living conditions. Despite these and other efforts, there is a deﬁnite decline in the number of seafarers from the developed countries, which is essentially being counteracted by an increase in those from the labor-supplying countries at junior ofﬁcer and ratings levels. Over the coming years we would expect to see a larger number of senior ofﬁcers from these countries to replace the aging OECD seafarers. However, there are also signs that the labor-supplying countries are experiencing some difﬁculty in recruiting. Leggate and McConville (2002) reported that 76 percent of Filipino seafarers were between 25 and 44 years of age. Little opportunity exists for Filipinos beyond 45 years of age, mainly due to insurance issues. Even in China, recruitment was becoming problematic, with the average Chinese seafarer only prepared to be at sea for ﬁve to eight years. Increasingly the Chinese are looking away from the more prosperous coastal areas to the poorer inland agricultural areas to recruit seafaring labor (see also Section 16.5, “Market Segmentation”). The living and working conditions of seafarers have come under scrutiny in analysis of recruitment and retention. Apart

325

from ﬁshing, seafaring is the occupation with the highest mortality rate in developed countries. In national merchant ﬂeets such as Denmark, Sweden and Germany, which are regarded as among the safest in the world, mortality through accidents at work has been calculated as ranging from between seven and 20 times more than among shorebased workers (Roberts 2000). However, differences in procedures for reporting seafarer injuries put into question the reliability of the statistics and certainly comparability between states (Ellis, Bloor and Sampson 2010). Thomas, Sampson and Zhao (2003) point to the stress associated with separation from family as a major inﬂuence in the decision to reduce planned sea service. In their study, many seafarers spoke of colleagues leaving the sea because of pressure from their partners and families, and the difﬁculties they themselves experienced in being separated from home and loved ones. The data showed that the impact of separation was not uniform, and that the conditions of service and degree of support from the company considerably affected the experience of seafarers and their partners. Interviews with seafarers’ partners suggested a number of measures that could be taken to reduce the impact of seafaring on family life at little cost. Indeed any cost could well be offset by better retention of expensively trained staff who might otherwise leave the sea or be subject to stressrelated illnesses. These include: • • •

shorter trips (preferably no longer than four months); paid leave of a comparable duration to sea-time; continuous employment rather than employment by voyage;

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• • • • •

HEATHER LEGGATE MCLAUGHLIN

training time to be added on to leave period; opportunities for partners (and where possible children) to sail; improved access to cheaper communication such as the internet; increased contact between seafarers’ partners and seafarers’ employers; and opportunities for seafarers’ families to make contact with each other.

16.4

Mobility and Migration

Labor mobility and migration are extremely important in the seafaring labor market. In this context, mobility means occupational mobility, namely movements between occupational skill levels, and migration refers to geographical movements between areas or regions. Seafarer employment is often regarded as transitory, despite its regularity. The concept of casual labor essentially implies an excess of supply for a given number of job opportunities, often combined with isolated workers and a scattered industry. Furthermore, seafaring labor costs are essentially viewed as variable costs which can be reduced by altering labor requirements in response to short-term variations in demand. Hence, mobility of the labor force within ﬁrms and the industry at national and international level is seen as the norm. Occupational mobility is strongly inﬂuenced by the ability to secure licenses and certiﬁcates. The International Convention on Standards of Training, Certiﬁcation and Watchkeeping for Seafarers (STCW) 1978, as amended, sets qualiﬁcation standards for masters, ofﬁcers and watch personnel on seagoing merchant ships. STCW was adopted in 1978 by a conference at the

International Maritime Organization (IMO) in London, and entered into force in 1984. The Convention was the ﬁrst to establish basic requirements in training, certiﬁcation and watchkeeping for seafarers at an international level. Previously, standards were established by individual governments, usually without reference to best practices in other countries, and, as a result, varied widely. The Convention prescribes minimum standards for seafarers which countries are obliged to meet or exceed. The 1995 amendments recognized the need to bring the Convention up to date and to be more explicit in areas which were thought to be open to interpretation. These amendments entered into force on February 1, 1997. More recently, major revisions to the STCW Convention were adopted at a Diplomatic Conference in Manila, the Philippines in June 2010 and are set to enter into force in January 2012. The “Manila amendments” largely recognize changing requirements as a result of new technology with respect to training and certiﬁcation. Professional ships ofﬁcers thus secure their position and progress through the gaining of certiﬁcates (of competency) controlled by departments of governments. Once secured, these qualiﬁcations allow the ofﬁcer mobility, but only within the limitations of the industry. They are generally of only minimal relevance in an alternative occupation. Ratings are semi-skilled experienced workers, capable of mobility between ﬁrms across the industry, but as with ofﬁcers, this horizontal mobility is of marginal relevance to alternative employment. Migration, the movement between geographical areas, is particularly interesting in the context of seafaring. Seafarers are unquestionably unique migrants, since they enter and participate in a country’s

SEAFARERS AND SEAFARING

workforce (labor market) without actually entering the country. This is accomplished by working on a vessel whose nationality is indicated by its register and ﬂag and which often differs from the seafarer’s own. The usual deﬁnition of labor migration involves the simultaneous change of employment and residence, but seafarers do not fulﬁll the latter criterion since their residence remains their home country. Further, it would not be viewed as unusual to remain with the same employer while the nationality of the registry of the vessel on which the seafarer is employed changes. Shipowners are attracted to migrant seafarers, who not only are inexpensive, but also possess the necessary skills and qualiﬁcations. For the migrant seafarer, the costs of training have already been incurred in the country of origin by the individual seafarer, their families, the state, or some combination of all three. Such commitment has caused the industry’s labor market to contain “occupation crowds,” particularly among ratings. These occur where there is a high density of people wanting to do the same job, and help explain the growth of labor-supplying countries.

16.5

Market Segmentation

In the international seafaring labor market there is a disparity of opportunity, which presents barriers to mobility and migration. The barriers may be direct, in that they deny employment to foreign seafarers on a particular ﬂag, or indirect, in the terms and conditions offered to different groups. Such friction discourages the free movement of labor, that is, the employment of seafarers of any nationality on any ﬂag register, and serves to create market segmentation.

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A number of socio-cultural differences also separate the markets. Communication skills and social structures vary considerably across different states. The ability to communicate effectively in English is still very much a requirement of the international seafarer, particularly when operating within a crew of mixed nationalities. It is for this reason that the Philippines remains the largest provider of labor to international ﬂeets. Challenges to its position must come not only in terms of lower unit costs but also on comparable ﬂuency in English. Linguistic ability is often cited as a reason for restricting the use of foreign seafarers. This was certainly the case in India, particularly at ofﬁcer level. The age proﬁle of seafarers is indicative of the different social structures and pressures which exist in the various states. The reluctance of people from developed countries to enter the seafaring profession, discussed above, is leading to an aging seafaring workforce in those countries. In Denmark, statistics show that many seafaring ofﬁcers move to land-based employment by the age of 40 and that only 60% of graduates remain at sea long enough to become masters (Leggate and McConville 2002). Between the ages of 40 and 50 the drop-out rate for active seafarers is insigniﬁcant, but by the age of 55 the percentage of seafarers remaining active has fallen to 55%, and by the age of 65 to 9%, of those who had originally gone to sea. On the other hand, seafaring in the developing countries is very much a young person’s occupation, particularly for ofﬁcers. Both the Shipowners (Indian National Shipowners’ Association) and the Ofﬁcers’ Union (Maritime Union of India) recognize a sharp break in employment between 36 and 40 years of age (Leggate and McConville 2002), when many ofﬁcers

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go ashore to take up other forms of employment. Because of the high turnover, it is possible to become a master by the age of 29. On average the ofﬁcers’ union estimate the senior ofﬁcer age range to be 40–50 years and the junior ofﬁcer 25–40 years. The main reasons behind this young “retirement” age are sociological and traditional, based on the importance of extended family commitments. The high earning power during the short sea career enables the ofﬁcer to accumulate sufﬁcient funds to work ashore, presumably in a less highly paid position. The situation differs on home trade or coastal shipping industry, where the age proﬁle is much higher; many seafarers continue to the age of 60 years. This ﬁts the family argument, since such seafarers would not generally spend excessively long periods away from home (International Labour Organization 2001). Section 16.3, “Recruitment and Retention,” discussed the age proﬁle of Filipino seafarers and the relatively low numbers over the age of 45. Apart from insurance factors, social structures are also behind this trend. The family unit is very important in the Philippines, and when the costs of schooling children have been met and less money is required, the seafarers may move ashore to less lucrative employment. There is also the suggestion of a shift from overseas (deep-sea) to domestic trade vessels at this time (Scalabrini Migration Centre 2000).

16.6

Discrimination

Market separation opens the door to discriminatory practices. Shipowners can and do indulge their preferences for particular groups on the basis of skills, nationality and cost. Employers certainly perceive seafarers

as heterogeneous and not as perfect substitutes one for another. Even though qualiﬁcations, certiﬁcates and licenses conform to international standards, and groups have undergone the same training, employers’ perceptions of their efﬁciency vary considerably. Preference for certain groups may be rational or irrational. Some shipowners have particular technical requirements relating to the ability to use equipment, which requires speciﬁc types of labor. Some may prefer some types of crews to others, despite the presence of equal qualiﬁcations and skills within the industry. Some prefer young ratings to old, or ofﬁcers from developed countries to those from developing countries. In each of these situations this choice is a form of discrimination. The existence of separate markets and separate jurisdictions makes discrimination prevalent in the international seafaring labor market. Such discrimination takes varying forms, but the most widespread is in terms of wage differentials between different nationalities. International Labour Organization (2001) found that a response to the request for detailed information on wages for the various ranks over nationalities was only given sporadically. A general question on wage discrimination, however, did produce a 55% response and did expose the existence of wage differences between nationals and non-nationals working on the same ﬂag vessels. Only 40% of the total stated that no wage discrimination existed. Where discrimination was practiced (in 15% of cases), it took various forms. In Yemen considerably higher rates were paid to non-nationals. Similarly in Peru, non-national seafarers from EU countries and North America secured wages 50% higher than nationals.

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This practice was reversed in other cases, where non-nationals received lower wages, for example in Papua New Guinea, Malaysia and Japan. In the European ﬂeets of Denmark, Italy and Norway, non-nationals or non-EU seafarers were paid less than EUdomiciled seafarers. Tsamourgelis (2009) provides a model to explain the tendency for seafarers from developed countries to be replaced by those from developing countries. His analysis is based on the assumption that when shipowners are called upon to make decisions concerning crew characteristics (such as crew composition and employment levels), they are looking at two very separate and distinct markets. Workers from developed countries are considered (rightly or wrongly) to perform better in terms of efﬁciency and loyalty and are therefore recruited into the senior positions on board. Decisions on the rest of the crew are then based on the remaining budget. Thus the employment of nationals from developed countries is negatively affected by their wages, and positively affected by the performance differential between them and non-national seafarers of corresponding specialization. Thus, any policy aiming to contain wage increases of nationals and/or to enhance their productivity differential with nonnationals of the same specialties will result in higher employment levels for them. It follows that low pay rates for non-nationals, and good productivity relative to nationals, will further encourage the replacement of nationals by non-nationals. Discrimination thus arises out of the unique nature of the seafaring market, in which groups are separated by nationality and jurisdiction. Shipowners exhibit preferences for certain groups, which are often different for ofﬁcers and ratings. Cost,

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however, is the primary driver, particularly at the lower-ranking levels.

16.7

Seafarer Representation

Trade unions were established in response to the shipowners’ domination of an unorganized labor market. They attempt to harmonize their members’ individual strength and more speciﬁcally to prevent competition between seafarers in an overcrowded labor market. Seafaring trade unions exist in a number of countries and have enjoyed varying degrees of success in defending their members’ interests. However, the international nature of seafaring and the mobility and migration issues already discussed in this chapter clearly emphasize the need for international regulation and representation. These have been provided by the International Labour Organization (ILO) and the International Transport Workers’ Federation (ITF) respectively. The main focus of ILO’s maritime program concerns the promotion of the maritime labor standards, which has resulted in the adoption of codes of practice, guidelines and reports that address seafarers’ issues. The 94th Maritime Session of the International Labour Conference adopted the 2006 Maritime Labour Convention ( www.ilo.org/public/english/dialogue/ sector/sectors/mariti/shipping/standardsmlc.htm, accessed May 12, 2011), which sets out standards for decent working conditions in the increasingly globalized maritime sector. The Convention sets minimum requirements for seafarers to work on a ship and contains provisions on conditions of employment, hours of work and rest, accommodation, recreational facilities, food

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HEATHER LEGGATE MCLAUGHLIN

and catering, health protection, medical care, welfare and social security protection. Compliance and enforcement are secured through onboard and onshore complaint procedures for seafarers, ﬂag states’ jurisdiction and control over their ships, and port state inspection (www.ilo.org/ public/english/dialogue/sector/sectors/ mariti/shipping/standards-inspection.htm) of foreign ships. The Convention also provides for a maritime labor certiﬁcate, which can be issued to ships once the ﬂag state has veriﬁed that labor conditions on board a ship comply with the national laws and regulations that implement the Convention. This Convention consolidates and updates 68 existing ILO maritime Conventions and Recommendations adopted since 1920. However, it will not come into effect until at least 30 countries, representing a third of the world ﬂeet, have ratiﬁed it. As at May 12, 2011, only 12 countries had ratiﬁed this convention. There is clearly much work to be done in terms of gaining worldwide support for this “umbrella” Convention. The ITF has been representing the interests of seafarers worldwide since 1896, and more than 600,000 of them are now members of ITF-afﬁliated seafaring unions. The ITF aims to improve conditions for seafarers of all nationalities and to ensure that adequate regulation is in place to protect the interests and rights of the workers. The Seafarers Section of ITF provides international coordination and support to afﬁliated unions and individual seafarers through: involvement with the ILO, IMO, OECD and other international agencies; assistance to seafarers; a network of ITF inspectors around the world; ITF agreements for FOC ships; policy making through committees where afﬁliated unions are represented; and the provision and dissemination of information.

Their most important campaign, which has lasted some ﬁfty years, is that against ﬂags of convenience (FOCs). They argue that the shipping companies that use these FOCs or “open registers” have no “genuine link” to the ﬂag state, but merely use them in order to avoid the taxation and regulation which their own countries would impose. According to the ITF, FOC vessels have a disproportionately high percentage of casualties and Port State Control detentions, because they do not adequately exercise their responsibilities as ﬂag states with regard to ILO or IMO conventions and recommendations. The ITF campaign against ﬂags of convenience combines political and industrial elements. The political side is aimed at establishing agreement from governments on the need to demonstrate a “genuine link” between the ﬂag a ship ﬂies and the nationality or residence of its owners, managers and seafarers. This would eliminate the ﬂag of convenience system. This has not yet been achieved. The industrial side is designed to ensure that seafarers who serve on ﬂag of convenience ships, whatever their nationality, are protected from any exploitation by shipowners. The industrial campaign has been the more successful. Decent minimum wages and conditions have been enforced on board some ﬁve thousand ships, and every year millions of dollars are recovered by the ITF and its afﬁliated unions in back pay and in compensation for death or injury on behalf of seafarers (ITF 2010).

16.8

Summary

This chapter has examined the seafaring market, with a focus on the supply side. In recent years seafaring has become a less

SEAFARERS AND SEAFARING

attractive profession. The advent of cheap travel combined with heavily reduced port turnaround times has meant that it has lost its cachet as a great way to see the world. Certainly in developed countries, recruitment and retention have proved problematic, and there has been an increase in the number of seafarers from developing countries, particularly at junior ofﬁcer and ratings levels. This very international labor force has some interesting and unique characteristics in terms of migration and mobility, which have also created a highly segmented market. The segmentation allows shipowners to indulge their preferences for certain groups and their desire to reduce cost, a phenomenon which has led to different terms and working conditions within the seafaring labor market. The improvement of such conditions is very pertinent to the issue of recruitment and retention. In this respect, international organizations such as the ILO and ITF have made a signiﬁcant contribution to the lives of the international seafarer. However, these important issues need to be properly addressed by governments in order to secure the long-term future of our seafaring labor.

References BIMCO/ISF (2005) Manpower 2005 Update: the world demand for and supply of seafarers. Institute for Employment Research, University of Warwick. Department for Transport (2010) Transport Statistics Bulletin: UK Seafarer Statistics: 2009. National Statistics publication produced on behalf of Transport Statistics: DfT. Drewry Shipping Consultants (2009) Manning 2009. London: Drewry Publishing.

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Ellis, N., M. Bloor and H. Sampson (2010) Patterns of seafarer injuries. Maritime Policy and Management 37(2): 121–8. Glen, D. and P. Marlow (2009) Maritime statistics: a new forum for practitioners. Maritime Policy and Management 36(2): 185–95. International Labour Organization (2001) The impact on seafarers’ living and working conditions of changes in the structure of the shipping industry: Report for discussion at the 29th Session of the Joint Maritime Commission, Geneva 2001. JMC/29/2001/3. International Labour Ofﬁce, Geneva. International Maritime Organization (2008) Go to sea! A campaign to attract entrants to the shipping industry. Campaign document. November. International Transport Workers’ Federation (2010). Flags of convenience campaign. www. itfglobal.org/ﬂags-convenience/index.cfm (accessed May 12, 2011). Leander, Tom (2010) Seafarers in short supply. Lloyd’s List, May 20. Leggate, H. (2004) The future shortage of seafarers: will it become a reality? Maritime Policy and Management 31(1): 3–13. Leggate, H. and J. McConville (2002) Report on an ILO investigation into the living and working conditions of seafarers. Report II: Report for discussion at the Meeting of Experts on Working and Living Conditions of Seafarers on board Ships in International Registers: Case studies. MEWLCS/2002/2. International Labour Ofﬁce, Geneva. Leggate, H. and J. McConville (2005) Tonnage tax: is it working? Maritime Policy and Management 32(2): 177–86. Li, K. X. and J. Wonham (1999) Who is safe and who is at risk: a study of 20-year-record on accident total loss in different ﬂags, Maritime Policy and Management 26(2): 137–44. Roberts, S. (2000) Occupational mortality among British merchant seafarers (1986– 1995), Maritime Policy and Management 27(3): 253–65.

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Scalabrini Migration Center (2000) The need for an international seafarers’ center in Manila. Manila. Thomas, M., H. Sampson and M. Zhao (2003) Finding a balance: companies, seafarers and family life. Maritime Policy and Management 30(1): 59–76.

Tsamourgelis, I. (2009) Selective replacement of national by non-national seafarers in OECD countries and the employment function in the maritime sector. Maritime Policy and Management 36(5): 457–68.

17

Safety in Shipping Di Jin, Hauke Kite-Powell and Wayne K. Talley

17.1

Introduction

A vessel accident is an unintended happening that may or may not result in damage to the vessel. The probability of a vessel sustaining damage in an accident is the product of two probabilities: (1) the probability of involvement in an accident (event probability) and (2) the probability of vessel damage given that an accident has occurred (damage-conditional probability). The severity of a vessel accident varies from no vessel damage to the loss of the vessel. This chapter investigates determinants of the vessel damage severity of cargo vessels involved in accidents, using the US Coast Guard data from 2001 to 2008. Four types of cargo vessel (freight barge, freight ship, tank barge and tanker) are considered in the investigation. Is the accident vessel damage severity of a cargo vessel likely to be greater for a certain type of vessel, vessel accident, vessel characteristic, visibility condition, vessel propulsion, hull construction and season? The results of the investigation will be useful for policy makers that regulate the

safety of cargo vessels, insurance companies that insure cargo vessels, managers of cargo vessel services, and shippers, in selecting cargo vessel services. The chapter is structured as follows. Section 17.2 presents a discussion of vessel safety regulation, followed by a brief overview of vessel accident studies in Section 17.3. A model of the vessel damage severity of cargo vessel accidents is found in Section 17.4, and data are discussed in Section 17.5. Estimation procedures and results are detailed in Sections 17.6 and 17.7 respectively. Estimated marginal effects are presented in Section 17.8. Conclusions are set forth in Section 17.9.

17.2

Vessel Safety Regulation

Vessel safety regulation consists of safety regulation of the vessel itself and safety regulation in the operation of the vessel. The former is concerned with whether a vessel is seaworthy, that is, whether it adheres to construction, design and

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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technical standards. The latter is concerned with outcomes of vessel operation, such as vessel accidents and the vessel damage, fatalities and injuries from these accidents. Before World War I, the safety regulation of vessels involved in international commerce was undertaken by their ﬂag states or countries of registry, which adopted and enforced internationally agreed-upon vessel safety rules. The enforcement of safety rules worked well until ﬂags of convenience (FOCs), or open registries – the registration of vessels in countries other than those of their citizen owners – were adopted. Today, over ﬁfty percent of the world’s oceangoing vessels are registered with open registers. Concerns about the enforcement of international safety rules by FOCs have increased with the increase in the number of FOCs – since some FOCs are more interested in collecting registration dues than in adopting and enforcing safety rules. The major open-registry ﬂag countries include the Bahamas, Cyprus, Liberia and Panama. Some countries have addressed the ineffective FOC enforcement of international vessel safety rules by establishing port state control (PSC) systems, that is, systems that unilaterally enforce such rules (Payoyo 1994). The International Maritime Organization (IMO) deﬁnes PSC as “the inspection of foreign ships in national ports to verify that the condition of the ship and its equipment comply with the requirements of international regulations and that the ship is manned and operated in compliance with these rules” (International Maritime Organization 2009). In 1982 twelve European countries signed the Paris PSC Memorandum of Understanding, agreeing to inspect safety and other certiﬁcates carried by vessels of all ﬂags (including each other’s)

visiting their ports, and to insist, by detention if necessary, that deﬁciencies be rectiﬁed. Port state control is addressed in Chapter 32, “Port State Control Inspection Deﬁciencies.” Vessel safety enforcement by classiﬁcation societies is also of concern. Classiﬁcation societies inspect vessels to ensure that they meet ﬂag-state safety requirements, conform to international safety standards and are seaworthy. They also produce vessel speciﬁcation rules and supervise the design and construction of vessels with respect to adherence to safety rules. Both existing and new vessels are classiﬁed. Vessel insurers will only insure vessels that have been classiﬁed and vessels charterers will only charter vessels that have been classiﬁed. Also, non-classiﬁed vessels cannot obtain the necessary trading certiﬁcates for port calls (Talley 2005). Since vessel owners hire classiﬁcation societies to class vessels, there is an insoluble conﬂict between vessel owners and classiﬁcation societies. Consequently, classiﬁcation societies may face pressure from vessel owners to classify non-seaworthy vessels. The ﬁve largest classiﬁcation societies (based upon the number of vessels that they classify) are the American Bureau of Shipping, Bureau Veritas (France), Det Norske Veritas (Norway), Lloyd’s Register of Shipping, and Nippon Kaiji Kyokei. Classiﬁcation societies have been criticized for (1) safety rules that do not consider onboard operations, (2) extreme variations in the quality of services provided, (3) difﬁculty in obtaining vessel inspection reports and (4) unwarranted extensions of the classiﬁcation of older vessels (Boisson 1994). The major classiﬁcation societies responded to their critics by establishing the International Association of Classiﬁcation Societies (IACS). IACS members are

SAFETY IN SHIPPING

required to adhere to Quality System Certiﬁcation Scheme (QSCS) standards. Protection and Indemnity Clubs have responded to the criticism that classiﬁcation societies do not provide an accurate evaluation of vessel quality by establishing their own vessel appraisal systems. Protection and indemnity (P&I) clubs are vessel owners’ organizations that provide liability insurance for the same vessel owners. Vessel safety regulation has focused on the vessel rather than on humans aboard the vessel. This focus shifted in 1998 when the International Safety Management Code for vessels became mandatory. The Code requires shipping lines to document their vessel management procedures for detecting and eliminating unsafe human behavior. It was motivated by the fact that vessel accident insurance claims are often attributed to human error and a change in human behavior aboard vessels is less expensive than redesigning vessels for safety.

17.3

Vessel Accident Studies

Most studies of the causes and consequences of vessel accidents are focused either on the circumstances of one particular accident (e.g., accident investigations carried out by the US Coast Guard or the National Transportation Safety Board), or on efforts to build statistical models relating causal factors and circumstances to the occurrence of a general class of accidents. Analyses of individual accidents can be useful, but broader statistical studies of historical data tend to be a better guide to policy, because they capture a more representative cross-section of maritime commerce activity. The work described in this chapter falls into the latter category.

335

Pioneering efforts of the statistical studies of historical vessel accident data include the Port Needs Study (Maio, Ricci, Rossetti et al. 1991) carried out for the US Coast Guard to support Vessel Trafﬁc Service (VTS) investment decisions, and the Transit Risk Project (Kite-Powell, Jin, Jebsen et al. 1999). These studies have quantiﬁed the overall risk level of a grounding vessel accident and a collision vessel accident in 1,000 to 2,000 vessel transits. Examples of similar work include those found in Amrozowicz (1996), Goulielmos (2001), Giziakis and Bardi-Giziaki (2002), and Merrick and von Dorp (2006). The general hypothesis of the statistical study of historical vessel accident data is that the probability of an accident on a particular transit, or of accident severity given an accident has occurred, depends on a set of risk factors or “explanatory variables.” The latter include such variables as operator skill, vessel characteristics, trafﬁc characteristics, topographic and environmental difﬁculty of the transit, and quality of operator’s information about the transit. For example, studies have consistently shown that poor visibility remains an important contributor to vessel accident risk even with modern navigation infrastructure, and can increase the risk of an accident by more than an order of magnitude on transits through US ports (Kite-Powell, Jin, Jebsen et al. 1999). The study described here builds on and reﬁnes the results of those broad statistical studies that have focused more closely on particular vessel classes or accident types. Speciﬁcally, the chapter extends earlier studies by the same authors of vessel damages resulting from vessel accidents in US waters from 1981 to 2001. Jin, KitePowell and Talley (2008) provides a detailed summary of those studies. The studies

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DI JIN, HAUKE KITE-POWELL AND WAYNE K. TALLEY

analyze vessel accident damages of oil tankers (Talley 1999, 2002), tank barges (Talley 2000, 2001), container ships (Talley 1996, 2002), commercial ﬁshing vessels ( Jin, Kite-Powell and Talley 2001), passenger vessels (Talley, Jin and Kite-Powell 2006), cruise vessels (Talley, Jin and Kite-Powell 2008a), and ferry vessels (Talley, Jin and Kite-Powell 2008b). The results of these studies indicate that, across all vessel types, greater vessel damages are associated with ﬁre and exploration, equipment failure and collision than with other types of vessel accidents. Vessel accident damages are greater when vessels are underway or adrift, during precipitation, and at nighttime. Human factors, vessel size and vessel age appear to have a signiﬁcant effect on vessel accident damage severity among different types of vessels. Vessel accident damage severity does not appear to differ across regions (i.e., Coast Guard Districts).

17.4

The Model

The vessel damage severity (D) incurred by a cargo vessel involved in an accident is expected to vary with the type of vessel (v), type of vessel accident (a), vessel characteristics (c), type of vessel propulsion (p), type of vessel hull construction (h), and time of vessel accident (t), i.e., D = f ( v,a,c, p, h, t )

(1)

Each vector on the right-hand side of equation (1) consists of a number of measurement variables. The type of cargo vessel (v) includes freight barge, freight ship, tank barge, and tanker.1 The type of accident (a) includes many traditional variables found in

Coast Guard statistics (allision,2 capsize, collision, explosion, ﬁre, ﬂooding, grounding, material failure, and sinking), several new variables describing post-ship-accident activities (vessel abandonment, vessel set adrift, loss of electrical power, and losses of vessel stability and maneuverability), and other new variables (vessel-caused environmental damage and vessel-requested emergency response). The damage severity (D) incurred by a vessel accident is expected to be greater if the vessel is abandoned, and in allision and collision vessel accidents because of the speed of impact. Otherwise, the a priori relationship between type of accident and D is indeterminate. Vessel characteristics (c) include vessel size (gross ton), vessel age, and whether the vessel is a US ﬂag vessel. The a priori sign of the relationship between accident vessel damage severity (D) and vessel size is negative, as larger vessels are expected to be more seaworthy (e.g., less susceptible to adverse weather). The a priori sign of the relationship between D and vessel age is positive, since vessel structural failure is expected to increase with age. A negative relationship is expected between D and US ﬂag, since the US is among the nations with the highest vessel safety standards. Propulsion for a cargo ship (freight ship and tanker) (p) includes diesel and turbine. It is unclear, however, which of these propulsion sources are expected to result in greater vessel damage. A vessel’s hull (h) may be constructed with aluminum, ﬁberglass, steel or wood. Since steel is the strongest of these materials, it is expected that a vessel constructed with steel will incur less damage, all else held constant. Time of vessel accident (t) includes time of day (nighttime versus daytime) and time of year (season). These variables capture

337

SAFETY IN SHIPPING

the effects of changes in visibility and weather conditions, respectively. Adverse weather and visibility are expected to increase the risk of a vessel accident, and in turn the vessel’s damage severity. Replacing the vectors in equation (1) with the abovedescribed measurement variables (x), one obtains the vessel damage severity reducedform equation: D = F (x)

17.5

(2)

Data

Equation (2) is estimated utilizing detailed data of individual cargo vessel accidents that were investigated by the US Coast Guard during the 8-year time period 2001– 8, extracted from the Coast Guard’s Marine Information for Safety and Law Enforcement (MISLE) database. The US Coast Guard compiles vessel casualty and pollution statistics and maintains a computer database of detailed records on vessel accident and pollution events in US waters. For the vessel accident data, each observation is a vessel involved in an accident. A long list of variables describes the vessel, time and location of the accident, and other related information (e.g., vessel type and ﬂag). The name and format of the database have changed over the years. Between 1981 and 1991, the vessel casualty database was called CASMAIN. From 1992 to 2001, vessel casualty and pollution records were incorporated into a larger database called Marine Safety Information System (MSIS). Since December 2001, the database has transitioned to the MISLE information system. Two MISLE data tables were merged to obtain the data set for this study: the Vessel

Event Table (MisleVslEvents) and the Vessel Table (MisleVessel). As noted above, in the new MISLE data set there are several postship-accident activity variables, such as ship abandonment, loss of electrical power, and losses of ship stability and maneuverability, for which we can now make inferences with respect to ship accident damage. The data set records accidents of foreign ﬂag vessels that occurred in US waters; those of US ﬂag vessels are not restricted to any body of water, although most occurred in US waters. Variables used in the equation estimation, their speciﬁc measurements, and descriptive statistics (mean and standard deviation) appear in Table 17.1. The mean for the dependent variable, damage severity (D), is 0.44. Among the accident cases in the data set, 58.1% are classiﬁed as vessel “undamaged” (D = 0), 39.5% as vessel “damaged” (D = 1), and 2.4% as vessel “total constructive loss” or “actual total loss” (D = 2). The mean statistics for the explanatory variables reveal that 40.1%, 23.8%, 25.8% and 10.3% of the cargo vessel accidents involved freight barge, freight ship, tank barge and tanker, respectively. The average size of a cargo vessel involved in an accident is 10,602 gross tons and its average age 19.5 years. Of the accidents, 47.8% occurred at nighttime and and 31.4% in winter. Most frequent accident types include grounding (19.9%), material failure (19.7%), and allision (16.9%).

17.6

Estimation Procedures

Given that speciﬁc information on vessel damage severity is not recorded, but only whether the vessel is undamaged, damaged or total loss, vessel damage severity is deﬁned as a latent variable D*, i.e.,

Table 17.1 Variable deﬁnitions and descriptive statistics Variable Dependent variable Damage severity

Explanatory variable Vessel type Freight barge Freight ship Tank barge Tanker Type of accident Abandonment Adrift Allision Capsize Collision Emergency response Environmental damage Explosion Fire Flooding Grounding Lost electrical power Lost stability Maneuverability Material failure Sinking Vessel characteristics Vessel gross ton Vessel age US ﬂag Type of propulsion Diesel engine Turbine Type of hull construction Aluminum hull Fiberglass hull Steel hull Wood hull

Measurement

Mean

Std. dev.

0 if vessel undamaged (58.1%) 1 if vessel damaged (39.5%) 2 if vessel total loss (2.4%)

0.4437

0.5438

1 if 1 if 1 if 1 if

0.4014 0.2376 0.2579 0.1031

0.4902 0.4256 0.4375 0.3041

1 if vessel abandoned, 0 otherwise 1 if vessel set adrift, 0 otherwise 1 if an allision, 0 otherwise 1 if a capsize, 0 otherwise 1 if a collision, 0 otherwise 1 if vessel requested emergency response, 0 otherwise 1 if vessel caused environmental damage, 0 otherwise 1 if an explosion vessel accident, 0 otherwise 1 if a ﬁre vessel accident, 0 otherwise 1 if a ﬂooding vessel accident, 0 otherwise 1 if a grounding vessel accident, 0 otherwise 1 if vessel lost electrical power, 0 otherwise 1 if vessel lost stability, 0 otherwise 1 if vessel had a maneuverability problem, 0 otherwise 1 if a material failure, 0 otherwise 1 if a sinking, 0 otherwise

0.0004 0.1013 0.1693 0.0020 0.0632 0.0084

0.0204 0.3017 0.3750 0.0449 0.2433 0.0914

0.1074

0.3096

0.0012 0.0101 0.0337 0.1989 0.0115 0.0019 0.0740

0.0344 0.0999 0.1804 0.3992 0.1065 0.0433 0.2618

0.1971 0.0107

0.3978 0.1030

vessel size in gross tons vessel age in years 1 if a US ﬂag vessel, 0 otherwise

10,602 19.48 0.7690

17,570 12.91 0.4215

1 if vessel is under diesel propulsion, 0 otherwise 1 if vessel is under turbine propulsion, 0 otherwise

0.2860

0.4519

0.0317

0.1751

1 if 1 if 1 if 1 if

0.0003 0.0003 0.9546 0.0003

0.0186 0.0186 0.2082 0.0167

a freight barge, 0 otherwise a freight ship, 0 otherwise a tank barge, 0 otherwise a tanker, 0 otherwise

aluminum hull construction, 0 otherwise ﬁberglass hull construction, 0 otherwise steel hull construction, 0 otherwise wood hull construction, 0 otherwise

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SAFETY IN SHIPPING

Table 17.1 (Continued) Variable

Measurement

Time of accident Night Season Spring Summer Fall Winter Year 2001 2002 2003 2004 2005 2006 2007 2008

Mean

Std. dev.

1 if nighttime, 0 otherwise

0.4782

0.4995

1 if 1 if 1 if 1 if

spring, 0 otherwise summer, 0 otherwise fall, 0 otherwise winter, 0 otherwise

0.2536 0.2139 0.2182 0.3144

0.4351 0.4101 0.4130 0.4643

1 if 1 if 1 if 1 if 1 if 1 if 1 if 1 if

year 2001, 0 otherwise year 2002, 0 otherwise year 2003, 0 otherwise year 2004, 0 otherwise year 2005, 0 otherwise year 2006, 0 otherwise year 2007, 0 otherwise year 2008, 0 otherwise

0.0378 0.1681 0.1448 0.1930 0.2418 0.1206 0.0459 0.0478

0.1908 0.3740 0.3519 0.3947 0.4282 0.3257 0.2093 0.2133

D * = b ′x + ε

(3)

where x is the set of independent variables, β is a vector of parameter coefﬁcients to be estimated, and ε is a normally distributed error term with zero mean and unit variance. Although we do not observe D*, we do observe the ordinal vessel damage severity variable D, which is positively related to actual vessel damage severity. As mentioned above, our data set D has three entries, taking on the value of 0, 1 or 2: D = 0, if there is no accident damage to the vessel; D = 1, if there is accident damage to the vessel; and D = 2, if the accident damage to the vessel is classiﬁed as a total loss. We have D = 0 if D * ≤ 0 D = 1 if 0 < D * ≤ μ D = 2 if μ < D *

(4)

where μ is an estimable threshold parameter that distinguishes the damage severity of a vessel accident. Given the distribution assumptions on ε, the model deﬁned in (4) is an ordered probit model with choice probabilities (Greene 1997):

Porb( D = 0) = 1 − Φ (b ′x ) Porb( D = 1) = Φ ( μ − b ′x ) − Φ ( −b ′x ) (5) Porb( D = 2) = 1 − Φ ( μ − b ′x)

with μ > 0 to insure that all probabilities are positive. Possible estimation bias from omission of relevant explanatory variables is addressed by including yearly binary variables (see Table 17.1) in the estimations.

340

17.7

DI JIN, HAUKE KITE-POWELL AND WAYNE K. TALLEY

Estimation Results

Table 17.2 reports the results from the estimation of equation (2) – ordered probit estimation results for the D* equation (3). The table includes results for statistically signiﬁcant explanatory variables and constant term. The chi-square statistic is large and statistically signiﬁcant at the 0.01 level. The estimation results suggest that accident vessel damage severity is greater for freight barge, but less for freight ship, than for other types of vessels. Among accident types, vessel damage severity is greater if a vessel is abandoned as the result of an accident or is involved in sinking, explosion, ﬂooding or ﬁre accident. Other types of vessel accident that are associated with greater damage severities include loss of stability, collision, material failure and emergency response. The damage severity is expected to be less for vessels involved in grounding and loss of maneuverability. The coefﬁcients of the vessel characteristics variables suggest larger vessels are expected to sustain lower vessel damage, while older vessels are associated with greater vessel damage. US ﬂag vessels are unexpectedly related to greater damage severity than non-US ﬂag vessels, which may be a result of the large number of barge accidents in the data set. Barges have been the subject of safety and pollution concerns in US waters (Talley 2001; Talley, Jin, and Kite-Powell 2001). As expected, vessels with steel hulls are subject to lower vessel damage severity, but accidents occurring at nighttime and in spring are linked to elevated levels of vessel damage. Vessel damage severity is expected to be lowest in summer. In the study period, vessel damage severities were lower in 2005, 2006 and 2008

than in other years. Note that to insure positive probabilities, the threshold parameter μ must be positive. As reported in Table 17.2, the estimate of this parameter is positive and highly signiﬁcant.

17.8

Marginal Effects

Although the signs of the estimated ordered probit coefﬁcients provide information on whether changes in given explanatory variables increase or lower the damage severity of a cargo vessel involved in an accident, they do not provide information on the extent to which the underlying damage severity probabilities change. For example, what is the impact of changes in the explanatory variables upon the probability of a cargo vessel accident sustaining no vessel damage (D = 0) versus the probability of sustaining vessel damage (D = 1)? For the ordered probit severity model, the marginal probability effects are:

∂Porb( D = 0)/ ∂x = −φ (b ′x )b ∂Porb( D = 1)/ ∂x = [φ ( −b ′x ) − φ ( μ − b ′x )]b (6) ∂Porb( D = 2)/ ∂x = φ ( μ − b ′x )b

where ϕ is the standard normal density function. When β’x is a linear function of xi (a vector in x), the partial derivative ∂(β’x)/∂xi is simply βi, the coefﬁcient of the explanatory variable xi. Suppose that an increase in xi increases vessel damage severity. Then the coefﬁcient of xi is positive. Thus, via equation (6), an increase in xi increases the probability of the

Table 17.2 Cargo vessel accident damage severity equation estimates Explanatory variable Vessel type Freight barge Freight ship Type of accident Abandonment Collision Emergency response Explosion Fire Flooding Grounding Lost stability Maneuverability Material failure Sinking Vessel characteristics Vessel gross ton Vessel age US ﬂag Type of hull construction Steel hull Time of accident Night Season Spring Summer Fall Year 2002 2003 2004 2005 2006 2007 2008 Constant Ordered probit parameter, μ Number of observations Chi-square statistic

Coefﬁcient

t-value

0.3138*** −0.0864**

11.82 −2.52

3.2291*** 0.6509*** 0.3579*** 1.7072*** 1.1126*** 1.3661*** −0.3778*** 0.8783*** −0.1987*** 0.5897*** 1.9616***

6.20 15.00 3.17 5.95 11.05 23.36 −12.27 3.87 −4.02 19.86 19.71

−3.94E-06*** 0.0063*** 0.0898**

−4.79 7.26 2.46

−0.0978*

−1.75

0.1026***

4.75

0.0694** −0.1391*** −0.0665**

2.47 −4.59 −2.22

−0.2228*** −0.1432** −0.2650*** −0.3713*** −0.3659*** −0.2730*** −0.5254*** −0.2685*** 2.0983*** 14,375 2,669.32***

−3.78 −2.40 −4.55 −6.45 −5.95 −3.77 −7.18 −3.30 72.85

*, ** and *** denote signiﬁcance at the 10%, 5% and 1% signiﬁcance levels, respectively.

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DI JIN, HAUKE KITE-POWELL AND WAYNE K. TALLEY

highest damage severity category, D = 2, and decreases the probability of the lowest damage severity category, D = 0. However, we don’t know the effect of xi on the probability of the damage severity category D = 1. This probability depends upon the extent to which some cargo vessel accidents that are in the lower-vessel-damage category (D = 1) shift into total losses (D = 2) and the extent to which some accidents that are in the no-damage category (D = 0) shift into vessel damages (D = 1). This is shown in equation (6) by the weighted difference in the two standard normal density functions. Table 17.3 provides estimates of these marginal probabilities for the explanatory variables found in Table 17.2. The estimated marginal probabilities in Table 17.3 indicate that if a cargo vessel accident involves a freight ship, the probability that the vessel will incur damage or a total loss decreases by 0.0313 and 0.0023, respectively. In contrast, if a cargo vessel accident involves a freight barge, the probability that the vessel will incur damage and a total loss increases by 0.1132 and 0.0095, respectively. Among types of vessel accidents, a grounding accident has the highest probability of incurring no damage, i.e., a marginal probability of 0.1422. If a vessel is abandoned as the result of an accident, it has the highest marginal probability of incurring a total loss (0.8102). Other accident types with high marginal probability of a total loss include sinking (0.3460), explosion (0.2622), ﬂooding (0.1519), and ﬁre (0.1033). As expected, an increase in vessel age of one year is associated with increases in the probabilities of vessel damage (0.0023) and total loss (0.0002). Cargo vessels with a steel hull lower probabilities of vessel damages

by 0.0354 and total losses by 0.0030. Accidents at nighttime are associated with greater marginal probabilities of vessel damage (0.0372) and total losses (0.0029). Among seasons, cargo vessel accidents in spring have the highest marginal probabilities of incurring damage and total losses, i.e., increases in the probabilities of 0.0252 and 0.0020, respectively.

17.9

Summary

This study has investigated determinants of the vessel damage severities of cargo vessel accidents. Four types of cargo vessel – freight barge, freight ship, tank barge and tanker – were considered. Detailed data of individual cargo vessel accidents for the 8-year time period 2001–8 that were investigated by the US Coast Guard were used to estimate a vessel accident damage severity equation. The equation was estimated utilizing the ordered probit model. The estimation results suggest that freight ships are expected to incur less vessel accident damage than freight barges, tank barges and tankers. Freight barge accidents have the highest probabilities of incurring vessel damages and total losses. Accidents involving older vessels and at nighttime are associated with greater vessel damage. Larger vessels, vessels with steel hulls, and accidents in summer are expected to incur smaller vessel damage. If the accident vessel is abandoned, the probability of a total loss increases by 0.8102. In light of these ﬁndings, relevant vessel safety regulations should be designed or modiﬁed to improve the safety of freight barges, older vessels, and nighttime navigation.

Table 17.3 Marginal cargo vessel accident damage severity probabilities Explanatory variable Vessel type Freight barge Freight ship Type of accident Abandonment Collision Emergency response Explosion Fire Flooding Grounding Lost stability Maneuverability Material failure Sinking Vessel characteristics Vessel gross ton Vessel age US ﬂag Type of hull construction Steel hull Time of accident Night Season Spring Summer Fall Year 2002 2003 2004 2005 2006 2007 2008 a

D = 0a

D = 1b

D = 2c

−0.1227 0.0335

0.1132 −0.0313

0.0095 −0.0023

−0.5831 −0.2545 −0.1419 −0.5170 −0.4014 −0.4679 0.1422 −0.3314 0.0758 −0.2318 −0.5501

−0.2271 0.2193 0.1270 0.2547 0.2981 0.3160 −0.1340 0.2660 −0.0712 0.2063 0.2041

0.8102 0.0352 0.0149 0.2622 0.1033 0.1519 −0.0082 0.0655 −0.0045 0.0255 0.3460

1.54E-06 −0.0024 −0.0348

−1.43E-06 0.0023 0.0325

−1.09E-07 0.0002 0.0024

0.0384

−0.0354

−0.0030

−0.0400

0.0372

0.0029

−0.0272 0.0537 0.0258

0.0252 −0.0502 −0.0241

0.0020 −0.0035 −0.0018

0.0852 0.0552 0.1010 0.1406 0.1366 0.1026 0.1878

−0.0799 −0.0516 −0.0949 −0.1321 −0.1291 −0.0969 −0.1791

−0.0052 −0.0035 −0.0061 −0.0084 −0.0075 −0.0057 −0.0087

Change in the probability of vessel undamaged. Change in the probability of vessel damaged. c Change in the probability of vessel total loss. b

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Notes 1

2

Freight includes dry bulk and containers. Barges are used in inland and coastal waterways. An allision accident occurs when a vessel strikes a stationary object (not another vessel) on the water surface. A collision accident occurs when a vessel strikes or is struck by another vessel on the water surface. A grounding accident occurs when the vessel is in contact with the sea bottom or a bottom obstacle.

References Amrozowicz, M. D. (1996) The quantitative risk of oil tanker groundings. Master’s degree thesis, Ocean Engineering Department, Massachusetts Institute of Technology. Boisson, P. (1994) Classiﬁcation societies and safety at sea. Marine Policy 18: 363–77. Giziakis, K. and E. Bardi-Giziaki (2002) Assessing the risk of pollution from ship accidents. Disaster Prevention and Management 11: 109–14. Goulielmos, A. M. (2001) Maritime safety: facts and proposals for the European OPA. Disaster Prevention and Management 10: 278–85. Greene, W. H. (1997) Econometric Analysis. 3rd edn. Upper Saddle River, NJ: Prentice Hall. International Maritime Organization (2009) Port State Control. www.imo.org/ourwork/ safety/implementation/pages/ portstatecontrol.aspx (accessed July 3, 2009). Jin, D., H. L. Kite-Powell and W. K. Talley (2001) The safety of commercial ﬁshing: determinants of vessel total losses and injuries. Journal of Safety Research 32: 209–28. Jin, D., H. L. Kite-Powell and W. K. Talley (2008) U.S. ship accident research. In W. K. Talley (ed.), Maritime Safety, Security and Piracy, pp. 55–71. London: Informa.

Kite-Powell, H. L., D. Jin, J. Jebsen, V. Papakonstantinou and N. Patrikalakis (1999) Investigation of potential risk factors for groundings of commercial vessels in U.S. ports. International Journal of Offshore and Polar Engineering 9: 16–21. Maio, D., R. Ricci, M. Rossetti, J. Schwenk and T. Liu (1991) Port Needs Study (Vessel Trafﬁc Services Beneﬁts). DOT-CG-N-01-91. National Technical Information Service, document PB92-107697. Washington, D.C.: US Coast Guard. Merrick, J. R. W. and R. van Dorp (2006) Speaking the truth in maritime risk assessment. Risk Analysis 26: 223–37. Payoyo, P. B. (1994) Implementation of international conventions through port state control: an assessment. Marine Policy 18: 379–92. Talley, W. K. (1996) Determinants of cargo damage risk and severity: the case of containership accidents. Logistics and Transportation Review 32: 377–88. Talley, W. K. (1999) Determinants of the property damage costs of tanker accidents. Transportation Research Part D 4: 413–26. Talley, W. K. (2000) Oil spillage and damage costs: U.S. inland waterway tank barge accidents. International Journal of Maritime Economics 2, 217–234. Talley, W. K. (2001) Determinants of the property damage cost of bulk barge accidents. Maritime Policy and Management 28, 175–186. Talley, W. K. (2002) Vessel damage cost differentials: bulk, container and tanker accidents. International Journal of Maritime Economics 4: 307–22. Talley, W. K. (2005) Regulatory issues: the role of international maritime institutions. In D. A. Hensher and K. Button (eds.), Handbook of Transport Strategy: Policy and Institutions, pp. 421–33. Amsterdam: Elsevier. Talley, W. K., D. Jin and H. L. Kite-Powell (2001) Vessel accident oil spillage: post US OPA-90. Transportation Research Part D 6: 405–15.

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Talley, W. K., D. Jin and H. L. Kite-Powell (2006) Determinants of the severity of passenger vessel accidents. Maritime Policy and Management 33: 173–86. Talley, W. K., D. Jin and H. L. Kite-Powell (2008a) Determinants of the severity of cruise vessel

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accidents. Transportation Research Part D 13: 86–94. Talley, W. K., D. Jin and H. L. Kite-Powell (2008b) Determinants of the damage cost and injury severity of ferry vessel accidents. WMU Journal of Maritime Affairs 7: 175–88.

18

Piracy in Shipping Maximo Q. Mejia, Jr., Pierre Cariou and François-Charles Wolff

18.1

Introduction

Piracy in its various forms has posed a threat to trade and shipping for millennia. Ancient accounts record piracy as having been a menace to the security and efﬁciency of the ﬂourishing Minoan maritime commerce in the Eastern Mediterranean as early as four thousand years ago (Dubner 1980; Gosse 1932; Ormerod 1997; Sestier 1880; Sundberg 1999). Arguably made extinct around the turn of the nineteenth to the twentieth century, this proved to be a mere short-lived respite. In the 1970s, less than a century after piracy’s supposed demise, a steady rise in the number of attacks ushered in the phenomenon of modern piracy. In fact, not many parts of the world’s seas are free from piracy in one form or another today. The last three decades have recorded a steady increase in the number of piratical incidents. According to the latest annual report from the International Chamber of Commerce’s International Maritime Bureau

(ICC-IMB), a total of 406 piracy and armed robbery incidents were reported worldwide in 2009, a 40% increase on the previous year. Contrast these totals with those from 1992 (106 reported attacks), and one observes that annual ﬁgures have increased almost fourfold. In the year 2009, eight persons were killed, 1,052 seafarers were taken hostage, 68 were injured, and eight are still missing as a result of the attacks, the waters around Somalia being the most piracyprone, with 53% of all reported cases in 2009 (ICC-IMB 2010). This chapter reviews the historical and geographical developments of piracy in shipping. Section 18.2 offers a review of piracy in an historical perspective. Section 18.3 presents a discussion on the contentious issues involved in deﬁning piracy. Section 18.4 focuses on recent changes in the geography and modi operandi of acts of piracy, while Section 18.5 investigates how poverty and political instability could be seen as the root causes of piracy.

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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18.2 Piracy in an Historical Perspective The origins of piracy predate written historical records. Writers in general agree that it is probably as ancient as shipping itself. As stated by Lucie-Smith (1978), “As soon as men learned to build boats, and to cross even short stretches of water in them, other men were making plans to attack and rob them.” Piracy in the Mediterranean seems to be given the earliest mention in surviving records. King Minos of Crete, traditionally credited with having built the ﬁrst navy, did so to rid the Aegean Sea of pirates (Ormerod 1997). Piracy is mentioned in the writings of the ancient Greeks and Romans; Homer (eighth century BC) described it in the Iliad and the Odyssey, and Thucydides (ﬁfth century BC) included accounts of Aegean Sea piracy in his chronicles. In the early days of the Roman Empire, no less a promising military leader than Julius Caesar was held hostage by pirates (Ormerod 1997). In Southeast Asia, the narratives of Buddhist monk Shih Fa-Hsien (414 AD) tell of “raising, robbing, and other instance of marauding in the waters of the South China Sea” (Chalk 2002). Piracy was also rampant in the eastern and southern fringes of the Mediterranean, as in the Maghreb where “privateering and captive taking were a response to declining trade” (Viktus and Matar 2001). In the Adriatic, it is claimed that “one of the prime causes for the Roman intervention in the regions east of the Adriatic was maritime piracy . . . . When the forces of the Republic ﬁrst crossed that sea in 229 B.C., the purpose was to curb the activities” of Illyrian pirates (Dell 1967). In Northern Europe the dani piratae, Viking marauders, were notorious

347

for attacking ships and pillaging villages (Rubin 1998). In India, piracy on the Malabar coast in the seventeenth and eighteenth centuries ﬂourished under the control of the Angrias “dynasty of pirates”; in the Middle East, the most signiﬁcant centre of piracy was established by the Joasmees in the eighteenth and nineteenth centuries along the southeast shore of the Persian Gulf (Thomson 1994). In the Malay Archipelago, piracy became such a threat to commerce in the 1840s that Labuan Island was ceded by the sultan of Brunei to British forces “for the suppression of piracy and the encouragement and extension of trade” (Thomson 1994). In the ﬁrst half of the nineteenth century, “the Iranun and Balangingi of the Southern Philippines who were sponsored by the local sultans were the most feared of all pirates” (Xu 2006). In eighteenth- and nineteenth-century China, the legendary woman pirate Cheng I Sao presided over “six (and at times seven) well-ordered and regulated ﬂeets consisting of between 40,000 and 70,000 individuals” (Murray 2001). By far the most popular depiction of piracy in history is that of the Caribbean pirate of the sixteenth to the nineteenth centuries. Names like Captain Kidd, Sir Henry Morgan, Calico Jack Rackham, Bartholomew Roberts and Blackbeard are associated with colorful, swashbuckling, free-spirited adventurers. Fact or ﬁction, the stories woven around these characters have helped cultivate the romantic image accorded to these criminals by literature and the entertainment industry (Gosse 1932). Until recently, it was widely believed that “as a result of strong punitive action by legitimate users of the sea” (Brittin 1986)

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the fearful days of piracy as a global and regional threat to shipping had ended at the dawn of the twentieth century. In 1981, the creation of the International Maritime Bureau by the International Chamber of Commerce, with a mandate to prevent fraud in international trade and maritime transport, reduce the risk of piracy, and assist law enforcement in protecting crews, proved this assertion to be wrong. IMB quickly received the support of the International Maritime Organization (IMO) through an assembly resolution that urged governments and law enforcement agencies to cooperate with the new body. At the same time, the IMO’s resolution A545(13) on Measures to Prevent Acts of Piracy and Armed Robbery Against Ships in 1983 led the following year to the inclusion of “piracy and armed robbery against ships” as a separate and ﬁxed agenda item in the work program of IMO’s Maritime Safety Committee.

18.3

suggests that the numerous meanings of the word piracy include the following: 1. 2.

3.

4.

Deﬁnitions of Piracy

The deﬁnition of “piracy” has been a perennial bone of contention among bureaucrats, academics and industry practitioners. The different interpretations and permutations of these terms condition the manner in which the crimes have been treated and the gravity with which they are perceived. Any confusion in terminology invariably leads to debates about the extent of state sovereignty and universal jurisdiction over such crimes. A discussion on the deﬁnition has preoccupied jurists for many centuries (Genet 1938) and has become de rigueur in any comprehensive treatment of the subject. In The Law of Piracy, Rubin (1998)

5.

6.

a vernacular usage with no direct legal implications; an international law meaning related to unrecognized states or recognized states whose governments are not considered to be empowered at international law to authorize the sorts of public activity that is questioned, like that of the Barbary States of about 1600–1830, the Malay Sultanates of about 1800–1880, and the Persian Gulf Sheikhdoms of about 1820–1830; an international law meaning related to unrecognized belligerency, like Confederate States commerce raiders and privateers during the American Civil War of 1861–65 in the eyes of the Federal Government of the United States; an international law meaning related to the private acts of foreigners against other foreigners in circumstances making criminal jurisdiction by a third state acceptable to the international community despite the absence of the usual territorial or national links that are normally required to justify the extension abroad of national criminal jurisdiction; various special international law meanings derived from particular treaty negotiations; and various municipal (i.e., national, domestic) law meanings deﬁned by the statutes and practices of individual states.

The Oxford English Dictionary provides the following deﬁnition of piracy: “the practice or crime of robbery and depredation on the

PIRACY IN SHIPPING

sea or navigable rivers, etc., or by descent from the sea upon the coast, by persons not holding a commission from an established civilized state” (Simpson and Weiner 1989). It is a layman’s deﬁnition that covers a broad range of violent acts, thus reﬂecting the common or vernacular meaning of the term. Passman (2009) offers the following description in the context of maritime law: “Piracy has one meaning in the insurance industry, another in the international shipping industry, another in international law, another in criminal law, and yet another in the ‘common law.’ Therefore, there are no less than ﬁve reasonable interpretations of the word ‘piracy’ and the context of the word may determine its meaning.” One could add to this a sixth usage of the word piracy, to do with intellectual property law rather than maritime law. The use of the word piracy has been extended to different contemporary issues such as video, software and recorded music. Article 15 of the Convention on the High Seas (United Nations 2005) and Article 101 of the United Nations Convention on the Law of the Sea (United Nations 1982) are generally recognized as providing the deﬁnition of piracy in international law. These two articles deﬁne piracy as consisting of any of the following acts: (a)

any illegal acts of violence or detention, or any act of depredation, committed for private ends by the crew or the passengers of a private ship or a private aircraft, and directed: (i) on the high seas, against another ship or aircraft, or against persons or property on board such ship or aircraft; (ii) against a ship, aircraft, persons or property in a place outside the jurisdiction of any State;

349

(b) any act of voluntary participation in the operation of a ship or of an aircraft with knowledge of facts making it a pirate ship or aircraft; (c) any act of inciting or of intentionally facilitating an act described in subparagraph (a) or (b). (United Nations 1982)

The above deﬁnition essentially retains the same elements that came out of debates in the early twentieth century over the development or codiﬁcation of the international law of piracy (Rubin 1988). While the period between the conferences for the Geneva High Seas Convention in 1958 and UNCLOS in 1982 was marked by dramatic geopolitical developments that would result in the adoption of the modern regime of maritime zones, the high seas piracy provisions remain trapped in a time when the high seas started only three miles from shore (Collin and Hassan 2009; Halberstam 1988; Murphy 2007). This asynchronous situation has been likened to a gerrymandering of the oceans that effectively legislated piracy away to areas far beyond its traditional locus (Mejia 2003). The international convention deﬁnition of piracy is seen as being highly restrictive, particularly because it requires the act to be motivated by private ends involving two ships located on the high seas. According to numerous reports and studies (Farley 1993; ICC-IMB 2010; International Maritime Organization 2010a; ReCAAP 2010), the majority of acts reported today take place in waters within the jurisdiction of states. This causes a potential inconsistency in the case of many coastal states where the crime of piracy may not carry the same deﬁnition in municipal law (Birnie 1987) or, as in some cases, where it might not be deﬁned at all. The exercise in deﬁning piracy goes beyond semantic discussions; it has practical

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implications for the enforcement of overlapping and sometimes conﬂicting law. These implications manifest themselves largely in terms of tensions between universal and domestic jurisdiction, proclivities toward labeling all unlawful acts at sea as piracy, and the resolution of disputes among parties to a marine insurance policy or other commercial contract. While a coastal state might invoke municipal law in exerting jurisdiction over a piratical incident, the same unlawful act classiﬁed as piracy under international law could pave the way for any other state to claim jurisdiction over the case. Such an incident would put each of the states concerned in the difﬁcult position of having to “choose between its desire to preserve its sovereign authority and the international community’s need to expand international jurisdiction to effectively pursue and prosecute pirates” (Fokas 1997). This tension is prevalent in most piracy cases around the world, with the exception of those reported in waters off Somalia. The situation in the Strait of Malacca and Singapore during the height of the piracy problem in that area is illustrative. Offers by foreign navies to assist in patrolling the Strait were rebuffed by Indonesia and Malaysia (Institute for the Analysis of Global Security 2004), motivated by a national policy that guarded against the remotest hint of a challenge to its sovereignty and territorial integrity. The labeling of incidents in that body of water as piracy was met by strong protest and objection at every forum. In contrast, piracy incidents off the coast of Somalia fall under the strict deﬁnition of the crime under international law. Therefore, foreign naval forces patrolling the area generally assume universal jurisdiction over arrested pirates. Any lingering doubts as to

the legitimacy of this position have been dismissed through the UN Security Council resolutions, adopted at the behest of the transitional federal Somali government (Zou 2009), that expressly extend the application of certain provisions of the international law on piracy into areas otherwise coming under domestic jurisdiction.1 The confusion as to what constitutes piracy in international law is compounded further by its occasional use as a political or journalistic pejorative. Menefee (1999) writes, “international lawyers have come to expect, whenever there is an act of violence or lawlessness on or above the sea which involves community sensibilities, that the Press will describe the act as piracy.” Brown (1994) presents the submarine attacks against neutral merchant vessels during the Spanish Civil War, the seizure of the Santa Maria in 1961, the Cambodian seizure of the Mayaguez in 1975, and the hijacking of the Achille Lauro in 1985 as classic examples of the use of the term “piracy” as a political pejorative. Such labeling, aimed at connecting the incident with the naked greed and malevolence universally attached to the crime of piracy, is employed as a means to counter any “higher” political claims that opposing or belligerent groups might make to justify their use of violence. Finally, the characterization of a criminal act as piracy may inﬂuence the outcome of disputes among parties to, and the provisions contained in, a marine insurance policy or other commercial contract. Passman (2009) writes, “the words ‘piracy’ and ‘pirates’ have no consistent deﬁnitions when used as legal terminology [and] “have been particularly hard to deﬁne in the commercial realm of marine insurance. Consistently interpreting piracy clauses in insurance contracts is necessary to

PIRACY IN SHIPPING

determine whether there is insurance coverage for attacks at sea.” In insurance policies where speciﬁc perils might be identiﬁed and differentiated, the deﬁnition of piracy is of utmost relevance in judging the validity of claims (Gauci 2003; Todd 2003). In fact, the price of insurance coverage can be directly affected by the manner in which attacks are classiﬁed. The constant use of the word “piracy” to refer commonly to any violence against ships in the Strait of Malacca and Singapore led the Lloyd’s Insurance Market in London to charge higher premiums for vessels passing the Strait by classing the waterway a “war risk” in 2005 (Wendell 2007). In order to ensure that all crimes against shipping that resemble piracy are addressed in its documents and deliberations, IMO uses the compound “piracy and armed robbery against ships.” IMO deﬁnes armed robbery against ships as “any unlawful act of violence or detention or any act of depredation, or threat thereof, other than an act of piracy [as deﬁned in Article 101 of UNCLOS], committed for private ends and directed against a ship or against persons or property on board such a ship, within a State’s internal waters, archipelagic waters and territorial sea” (International Maritime Organization 2010b). The ICC also employs the compound “piracy and armed robbery against ships,” which it deﬁnes as “an act of boarding or attempting to board any ship with the apparent intent to commit theft or any other crime and with the apparent intent or capability to use force in the furtherance of that act” (ICC-IMB 2010: 3). ICC’s deﬁnition is intentionally broad and is designed to capture all reports of violence against ships; it is used for statistical purposes only and has no standing in international law.

351

18.4 Geography and Modi Operandi of Piracy in Recent Times Piracy in recent times has experienced drastic changes. We now attempt to further document these evolutions in terms of number, geography and modi operandi of acts. For that purpose, we rely on data on piracy acts, collected from the IMB, relating to 3,957 attacks that took place between 1996 and 2008. Some descriptive results are reported in Table 18.1 and Figures 18.1 through 18.5. The increase in the number of reported acts of piracy since 2006 (Figure 18.1) is particularly striking in comparison with the relative slowdown in previous years (2003– 6). However, it should be noted that the number of attacks is still signiﬁcantly lower than the numbers observed in 2000 or 2003 for instance. In fact, it is the changes in location and modi operandi and the enormous ransom payments involved, rather than any increase in the number of attacks, that have made piracy the subject of so much media attention in recent years. Considering ﬁrst the location (Figure 18.2), a shift has taken place during recent years from Asia (Indonesia, Bangladesh and the Malacca Strait for instance) to Nigeria, the Gulf of Aden, Somalia and Tanzania. The other area of concern is that together with this change in the location of attacks, the types of attack have evolved (Figures 18.3 and 18.4). Recent years have witnessed a marked decrease in the number of reports of subsistence or opportunistic piracy, that is, piracy in its simplest form, perpetrated by petty criminals or out-ofwork ﬁshermen who target the victim ship’s safe, coils of rope, buckets of paint, and anything else that is portable and easily

Ship type

Status

Type

Variables

Boarded Not stated Attempted Hijacked Fired upon Not stated Anchored Steaming Berthed Bulk carrier General cargo Container ship Tanker Chemical tanker Fishing vessel Other

62.95 27.41 8.13 1.20 0.30 36.45 45.18 13.55 4.82 23.80 23.80 15.36 7.53 6.33 7.53 15.66

52.82 27.70 14.34 3.66 1.48 40.95 30.17 24.13 4.75 33.23 12.46

10.19

15.43 9.30

0.40 18.99

0.84 40.17

12.55 11.72

6.28

69.46 10.88 10.46 3.35 5.86 21.76 45.61 25.10 7.53 18.83 9.62

14.22 26.61

15.14 4.13

13.76

22.02 43.12 21.56 4.13 9.17 51.38 0.92 47.71 0.00 13.30 12.84

0.00 23.65

17.73 12.32

13.30

56.65 29.56 12.32 1.48 0.00 50.74 34.48 9.85 4.93 20.69 12.32

11.04 31.90

6.75 3.07

9.20

12.27 12.88 12.88 31.29 30.67 22.70 7.36 67.48 2.45 15.34 22.70

2.61 22.22

10.46 16.34

7.84

3.92 6.54 41.18 22.88 25.49 11.11 0.00 88.89 0.00 26.14 14.38

Indonesia Bangladesh Nigeria Malacca India Somalia Gulf of Strait Aden

17.48 26.57

10.49 5.59

10.49

49.65 28.67 7.69 13.99 0.00 46.15 25.87 20.28 7.69 15.38 13.99

13.76 28.44

6.42 0.92

19.27

38.53 26.61 19.27 6.42 9.17 46.79 20.18 30.28 2.75 16.51 14.68

1.09 17.39

7.61 6.52

30.43

61.96 31.52 4.35 1.09 1.09 48.91 34.78 1.09 15.22 18.48 18.48

3.75 7.50

13.75 7.50

25.00

71.25 22.50 2.50 1.25 2.50 35.00 48.75 7.50 8.75 21.25 21.25

0.00 6.85

15.07 4.11

54.79

79.45 9.59 10.96 0.00 0.00 27.40 31.51 35.62 5.48 5.48 13.70

49.99 26.08 14.18 5.03 4.73 39.73 28.58 26 5.69 21.96 16.73

4.40 4.22 33.18 23.30

12.87 11.93 7.56 7.53

21.44 14.33

67.16 36.79 18.28 2.60 3.95 57.11 37.25 24.27 10.16 22.01 27.31

Malaysia Philippines Brazil Vietnam Tanzania Other Total

Table 18.1 Characteristics of 3,957 reported acts of piracy and armed robbery against ships (1996–2008), by location of attack (%)

14.76 9.94 3.92 3.92 3.61 2.11 6.33 2.71 1.81 3.92 46.99 8.39

21.86 13.85 8.41 5.84 4.45 2.47 3.96 3.36 3.26 0.79

31.75 25.55

45.61 6.04

7.95 2.09 15.48 1.26 3.77 5.44 7.53 6.69 2.51 1.67 29.35 5.51

15.60 14.22 5.05 27.06 0.92 0.92 1.83 1.83 1.83 1.38 49.26 5.13

12.32 8.87 4.93 1.48 6.90 2.96 7.88 1.48 2.46 1.48 58.9 4.12

12.27 1.84 3.07 0.61 6.75 3.68 4.91 3.07 3.07 1.84 43.14 3.87

20.92 5.23 3.92 3.27 3.27 3.27 3.92 3.27 7.19 2.61

Indonesia Bangladesh Nigeria Malacca India Somalia Gulf of Strait Aden

Source: authors’ calculations from IMB (1996–2008).

Flag of Panama registry Singapore Liberia Malaysia Cyprus Not stated Malta Bahamas Hong Kong Antigua & Barbuda Others Total

Variables

23.78 3.61

13.29 11.19 2.80 36.36 4.20 2.10 2.80 0.70 2.80 0.00 39.45 2.75

12.84 10.09 8.26 5.50 3.67 8.26 0.00 2.75 7.34 1.83 46.74 2.32

7.61 4.35 11.96 0.00 7.61 3.26 4.35 5.43 0.00 8.70

37.5 2.02

6.25 13.75 3.75 5.00 7.50 1.25 6.25 8.75 5.00 5.00

35.62 1.84

15.07 6.85 6.85 2.74 15.07 1.37 2.74 4.11 1.37 8.22

53.95 39.57 28.83 100

16.48 15.21 5.98 8.54 9.26 7.1 2.60 5.81 9.03 5.36 11.06 4.52 4.63 4.27 6.43 3.84 3.61 3.01 5.76 2.75

Malaysia Philippines Brazil Vietnam Tanzania Other Total

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M. Q. MEJIA, JR., P. CARIOU AND F.-C. WOLFF

400

300

200

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

0

1997

100

1996

Number of reported acts of piracy

500

Figure 18.1 Number of reported acts of piracy and armed robbery against ships (1996–2008), by year. Source: authors’ calculations from IMB (1996–2008).

converted to cash, and a noticeable increase in the number of vessels ﬁred upon or hijacked (Table 18.1). The more recent phenomenon of Somali hijackings is quite different from the ship hijackings reported in Southeast Asian waters in the 1990s. The objective of the former variety is to demand ransom payments, while the latter variety was carried out in order to steal the ship and its cargo. Both varieties differ with the unplanned, opportunistic variety of piracy, because these are “more sophisticated; rather than pirating for petty cash and mooring ropes, international piracy rings seek a bigger prize – the vessel itself ” (Garmon 2002). The Southeast Asian hijackings of the 1990s were popularly referred to as the “phantom ship” phenomenon, of which the case of the M/T Petro Ranger is a classic example. On April 16, 1998, the oil tanker,

laden with a cargo of petroleum products, sailed from Singapore for its next destination, Vietnam. Less than ten hours into the voyage, a speedboat came alongside the vessel and transferred a dozen heavily armed men in balaclavas. They strapped the captain to a chair and threatened him with a machete to his throat and another to his groin. The hijackers kept the crew locked in the mess room while they sailed the vessel to Hainan Island, off the southern coast of China. They renamed the ship Wilby and supplied it with fresh registration papers and false bills of lading for the cargo. Shortly after their arrival in Hainan, two tankers came alongside the Petro Ranger/Wilby and ofﬂoaded about US$3 million worth of cargo. In an ironic and frustrating twist of events, Chinese authorities boarded the Petro Ranger, accused the original crew of

Number of reported acts of piracy

Malacca Straits

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

India

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Gulf of Aden

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

150

Nigeria

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

100

Bangladesh

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

50

0 Indonesia

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Brazil

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Vietnam

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Tanzania

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

40

Philippines

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

30

Malaysia

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

20

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

10

0 Somalia

Figure 18.2 Number of reported acts of piracy and armed robbery against ships (1996–2008), by location. Source: authors’ calculations from IMB (1996–2008).

Number of reported acts of piracy

357

PIRACY IN SHIPPING

200

1997 1998 1999 2001 2003 2004 2005 2006 2007 2008

1997 1998 1999 2001 2003 2004 2005 2006 2007 2008

0

1997 1998 1999 2001 2003 2004 2005 2006 2007 2008

100

1997 1998 1999 2001 2003 2004 2005 2006 2007 2008

Number of reported acts of piracy

300

Attempted

Boarded

Fired upon

Hijacked

Figure 18.3 Number of reported acts of piracy and armed robbery against ships (1996– 2008), by type. Years 1996, 2000 and 2002, for which most information on types is not stated, were removed. Source: authors’ calculations from IMB (1996–2008).

smuggling, detained and questioned them for over two weeks, and even kept the master for a further month. The twelve Indonesian pirates, while eventually discovered by the authorities, were never prosecuted and were simply repatriated to Indonesia. Petroships, the vessel’s owner, had to pay a hefty fee to the Chinese authorities to retrieve the vessel. The cargo owner never recovered his property (Abhyankar 2005; The Economist 1999). Ship hijackings are well-planned operations carried out by highly organized criminal groups. Such attacks are premeditated, highly sophisticated, and oftentimes

extremely violent. Nowadays, these are particularly prevalent in Somalia (31.3% of hijacked ships and 30.7% of those ﬁred upon) and in the Gulf of Aden (respectively 22.9% and 25.5%). The recent move to hijacking of ships in Somalia and in the Gulf of Aden for the purpose of kidnapping the crew for ransom also implies that attacks occur more often nowadays when the vessel is steaming (67.5% for Somalia and 88.9% for Gulf of Aden). In 2009, Somali pirates were reported attacking ships as far as one thousand nautical miles from the Somali coast. The Somali brand of piracy is perpetrated by an alliance between ﬁsherfolk,

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M. Q. MEJIA, JR., P. CARIOU AND F.-C. WOLFF

Number of reported acts of piracy

200

150

100

50

2003 2004 2005 2006 2007 2008

2003 2004 2005 2006 2007 2008

2003 2004 2005 2006 2007 2008

0

Anchored

Berthed

Steaming

Figure 18.4 Number of reported acts of piracy and armed robbery against ships (1996– 2008), by status of ship when attacked. Years 1996–2002, for which most information on status is not stated, were removed. Source: authors’ calculations from IMB (1996–2008).

who provide knowledge of navigation, militiamen, who bring with them expertise in the use of violence, and information technology-savvy individuals assigned the task of carrying out sophisticated ransom negotiations with the shipowners. Somali pirates extend the range of their attacks by employing mother ships that carry the smaller boats and skiffs used to deliver pirates aboard the victim ships. The waters surrounding Somalia provide rich hunting grounds for pirates who are aware that an average of ﬁfty ships transit between the Indian Ocean and the Suez Canal through the Gulf of Aden every day (Cutler 2008). While maritime kidnap for ransom has always been closely associated with

Somali piracy, similar attacks have been reported elsewhere around the world. Secessionist and terrorist groups in Indonesia and the Philippines have in the past been known to use kidnapping for ransom to supplement their movements’ revenues. Today, however, it is the Delta region of Nigeria that represents the secondgreatest threat (after Somalia) in terms of the kidnapping of ships’ crew, but with a notable difference (Menefee 2007): attacks are mainly performed when vessels are anchored (45.6%). Understandably, the maritime industry has been preoccupied with efforts to prevent and deter piracy attacks. While a full complement of highly alert crew on a ship

PIRACY IN SHIPPING

capable of conducting evasive maneuvers is the ﬁrst step towards averting capture by pirates, ship security can be further enhanced through a combination of different measures employing everything from shipboard equipment to specially installed non-lethal technology solutions. Equipment such as the ship’s whistle, ﬂare guns, masthead lights, ﬁre hoses, ship’s radar, the Global Positioning System (GPS), the Automatic Identiﬁcation System (AIS), Long Range Acoustic Devices (LRAD), closed-circuit television (CCTV), and electric fences (Talley and Rule 2008) have proven effective in recent years. However, there is growing realization that a purely defensive approach is no longer sufﬁcient to deter attacks, particularly in the context of Somali piracy. Indeed, a more aggressive stance backed by lethal force is slowly becoming the norm. A few countries from time to time deployed warships off the coast of Somalia in the early to mid-2000s, but in the second half of 2008 a truly international armada began to converge off the Horn of Africa as a deterrent against the ever-increasing and unabated threat of piracy (Kraska and Wilson 2009b). While the presence of naval forces has brought down the success rate of Somali pirates, the number of attempted attacks continue to rise (ICC-IMB 2010) and, as a result, some seafarers and shipping companies have begun to supplement naval protection with private arrangements. Although some seafarers argue that they should be allowed to arm themselves, this has always been frowned upon by all sectors in the maritime industry. Unions and shipowners are in agreement “that seafarers should not be armed, and that there should be no arms onboard” (SIU 2009). Nevertheless, the regulation of the bearing of

359

arms on board ship remains the prerogative of the ﬂag state – and there are signs that attitudes on this issue are changing. The US Coast Guard issued Port Security Advisory 3-09 “Guidance on self-defense or defense of others by US ﬂagged commercial vessels operating in high risk waters” in June 2009; it allows and regulates not only the use of private security providers but the carrying of arms by individuals on board US ships (USCG 2009). The negative implications of this evolving situation are by no means insigniﬁcant. Putting weapons in the hands of personnel whose main professional occupation is ship operation and not closequarter combat can give rise to countless legal and liability issues, not to mention an arms race with the pirates, who might be expected to adapt to the situation with increasing violence (CNN 2009a; SIU 2009). What would happen if a crewmember killed a suspected pirate that surviving kin claim to be no more than an innocent ﬁsherman? Or if a seafarer were killed with a gun by his own shipmate? Similar scenarios apply in cases where private security providers are contracted to deploy armed professionals on board ship. One shipping executive expressed fears that a ﬁreﬁght could lead “to lawsuits, damaged goods or a sunken ship [that] could cost hundreds of millions of dollars, a sum far exceeding the few million dollars in ransom that pirates usually demand.” According to the same executive, not only does the deployment of security professionals pose incredible logistical challenges, it potentially violates a number of national and international laws, exposing shipping companies, seafarers and armed professionals to “costly litigation in a foreign country where their rights might not be respected or where they could be prevented from doing

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business in the future” (Miller 2010). Yet in spite of these apprehensions, the use of armed professionals from private security providers seems to be slowly gaining wider acceptance. It is, at the very least, seen as a less controversial option than allowing individual seafarers to arm themselves. Maersk, Clipper Marine and Liberty Maritime are but a few examples of shipping companies that have contracted the services of private security providers (CNN 2009b; Leach 2010). In a related development, some independent states are actually hiring out military units on private contract. It is reported, for instance, that Maersk Tankers have contracted a navy ship from Tanzania (Leach 2010). Gulf of Aden Group Transits, a private security provider, has entered into an agreement with the government of Yemen to offer that country’s active duty navy vessels and personnel to shipping companies in need of armed escort services (Coker 2011). This is a disturbing phenomenon, not only because it brings out a mercenary disposition in some navies, but more so because it ﬂies in the face of two dozen other navies from outside the region that deploy ships and sailors in the area to perform anti-piracy duties at great cost to their national budgets but without levying charges against the shipping industry. It is of course broadly accepted that only socioeconomic development, political stability and robust law enforcement can eliminate the threat of piracy, in waters off Somalia and elsewhere (Fouché 2010; Jenisch 2009). However, unless a land-based political solution is forthcoming, the above short-term and intermediate measures will continue to be essential to the secure and efﬁcient ﬂow of global commerce.

Turning to the types of vessel subject to attacks (Figure 18.5), bulk carriers (21.9%), general cargo vessels (16.7%) and container ships (14.3%) are the three types of vessel most subject to attacks (Mejia, Cariou and Wolff 2008, 2009). The over-representation of Asian-ﬂag vessels (Singapore with 8.54% of all attacks, Malaysia with 5.81%) in comparison with their importance in the world ﬂeet (Table 18.1) is largely explained by the number of vessels ﬂying these ﬂags trading in regions where attacks occur (Indonesia 25.5% of attacks, Bangladesh 8.4%, Malacca Strait 5.5% and India 5.1%). To conclude, while acts of piracy have not increased greatly in number in recent years (the numbers reported in 2008 are about one-third lower than in 2000), the changes in terms of location and type of attacks (hijacking/ﬁred upon when steaming) during the same period are much more remarkable. The next section investigates whether this shift can be explained by poverty and political instability, as these factors are very often mentioned by professionals and media as the root causes of piracy development.

18.5 Economic and Sociopolitical Instability as Root Causes of Piracy The changes in the location and type of piracy over different periods in time suggest a link between piracy and the prevailing level of poverty, economic hardship and socio-political instability (Anderson 1995; Eklöf 2005; Nankivell 2004). Some writers point to Somalia as a glaring example. For instance, Fouché (2009) highlights “political instability and poverty” as being highly relevant, particularly in the case of Somalia, as

Container ship

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Tanker

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Chemical tanker

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Fishing vessel

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Others

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

150

General cargo

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

100

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

50

0 Bulk carrier

Figure 18.5 Number of reported acts of piracy and armed robbery against ships (1996–2008), by type of vessel. Source: authors’ calculations from IMB (1996–2008).

Number of reported acts of piracy

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M. Q. MEJIA, JR., P. CARIOU AND F.-C. WOLFF

“Piracy seldom takes place in isolation, frequently occurring in concert with poverty, weak or no governance and economic stagnation.” Kraska and Wilson (2009a) assert that the renaissance in piracy can be attributed in part to “the dire situation within Somalia.” This section investigates this potential relationship. The changes in the sociopolitical state of a country from 1996 to 2008 were assessed, using various indicators: ﬁrst, the real GDP per capita in US$ 2005 (US Department of Agriculture 2010); secondly, indicators as reported by the independent organization Freedom House for political rights (scale from 1 to 7 for “Worst”), civil liberties (1 to 7) and freedom status (1 for “Free”, 2 for “Partly Free” and 3 for “Not Free”). The indicators that relate

to political rights and civil rights are evaluated by experts from Freedom House “based on a checklist of 10 political rights questions and 15 civil liberties questions while for the freedom status, each pair of political rights and civil liberties ratings is averaged to determine an overall status of ‘Free,’ ‘Partly Free,’ or ‘Not Free.’ Those whose ratings average 1.0 to 2.5 are considered Free, 3.0 to 5.0 Partly Free, and 5.5 to 7.0 Not Free” (Freedom House 2010). Our calculation is based on 152 countries that were selected as locations where attacks could potentially take place (all landlocked countries were removed as well as attacks taking place outside the jurisdiction of a speciﬁc country, such as in the Malacca Strait). Figure 18.6 represents the relationship between the real GDP per capita and the

Number of attacks (per year)

10

8

6

4

2

0 0

5000

10000

15000

Mean level of real GDP per capita (per year)

Figure 18.6 Relationship between number of attacks and GDP per capita, 1996–2008. Each bullet corresponds to one country-year observation. The upper category concerning attacks comprises countries with at least ten attacks per year. Source: authors’ calculations from IMB (1996–2008) and USDA macroeconomic indicators (2010).

PIRACY IN SHIPPING

number of attacks from 1996 to 2008, while Figure 18.7 presents results for countries aggregated in three groups (countries without attacks, countries with 1 to 5 attacks and countries with more than 5 attacks in a given year). The results presented in Figure 18.6 suggest that a strong inverse relationship exists between the economic development of a country, expressed in GDP per capita, and the number of attacks reported in a given year. This ﬁnding is further supported when the mean GDP for various countries where attacks are or are not taking place is calculated (Figure 18.7). The mean GDP from 1996 to 2008 is, for instance, US$10,885 per capita in countries without attacks,

363

around US$4,430 for countries with 1 to 5 attacks and US$1,836 for countries with more than 5 attacks for a given year. In terms of indicators on political rights, civil liberties and freedom status, and comparing the two extremes cases (mean for countries with more than 5 attacks and mean for those without attacks), a tendency exists to record attacks in countries in which political rights (mean score of 3.67 compared with 3.01 for a maximum of 7), civil liberties (3.96 compared with 3.02 for a maximum of 7) and freedom status (2.19 compared with 1.71 for a maximum of 3) are lower than in countries without attacks. To complement the former analysis, the last four ﬁgures – 18.8, 18.9, 18.10 and 18.11

10,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

5,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Real GDP per capita (2005 $)

15,000

Countries without attack

Countries with 1–5 attacks

Countries with more than 5 attacks

Figure 18.7 Real GDP per capita (in 2005 US$) and location of attacks, 1996–2008. Source: authors’ calculations from IMB (1996–2008) and USDA macroeconomic indicators (2010).

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M. Q. MEJIA, JR., P. CARIOU AND F.-C. WOLFF

1.5

1

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Real GDP per capita (/1000)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Attack (/100)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

.5

Political rights (/10) Civil rights (/10) Freedom status (/10)

Figure 18.8 Number of reported acts of piracy and armed robbery against ships and socio-political indicators in Indonesia (1996–2008). Source: authors’ calculations from IMB (1996–2008), USDA macroeconomic indicators (2010) and Freedom House indicators (2010).

– compare the evolution in the number of attacks (over 100), real GDP per capita (over 1,000), political right, civil liberties and freedom status (over 10) for the four main locations of attacks from 1996 to 2008 (Indonesia, Bangladesh, Nigeria and Somalia). In Indonesia (25.5% of all attacks from 1996 to 2008), a reduction in the number of attacks over time goes together with an increase in GDP per capita, as well as improvements in political rights, civil liberties and freedom status. This tends to conﬁrm the potential relationship between

the socioeconomic conditions of a country and its likelihood of recording acts of piracy. The situation in Bangladesh also stresses the potential negative relationship between economic development and piracy, while Nigeria offers a more mitigated answer, as economic indicators and number of attacks move together. Finally, Somalia, which has been subject to so much recent attention, represents a clear case of a country in which economic development, political and civil rights and freedom status stagnated from 1996 to 2008, while acts of piracy have skyrocketed in the last few years.

365

PIRACY IN SHIPPING

.6

.4

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Real GDP per capita (/1000)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Attack (/100)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

.2

Political rights (/10) Civil rights (/10) Freedom status (/10)

Figure 18.9 Number of reported acts of piracy and armed robbery against ships and socio-political indicators in Bangladesh (1996–2008). Source: authors’ calculations from IMB (1996–2008), USDA macroeconomic indicators (2010) and Freedom House indicators (2010).

18.6

Summary

The last three to four decades have seen a resurgence in the numbers of reported cases of piracy and armed robbery against ships collected and published by international bodies such as the IMO, ICC-IMB, and ReCAAP. The data available for the twelve years under consideration have shown not only an increase in the sophistication and organization of attacks, but also shifting patterns and trends in the location and modi operandi of piracy and armed robbery against

ships. These, more than simply the comparative absolute number of incidents reported, are telling indicators that piracy has returned in modern times not merely as an isolated threat, but as a global menace. While subsistence piracy is reported in all corners of the globe, speciﬁc areas are known to have become the locus for particular types of organized attacks. The phantom ship phenomenon was a worrying trend in 1990s Southeast Asia. Today, attacks against ships and crew in the waters off Somalia and Nigeria, involving ransom demands amounting to millions of dollars,

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.8

.6

.4

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Real GDP per capita (/1000)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Attack (/100)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

.2

Political rights (/10) Civil rights (/10) Freedom status (/10)

Figure 18.10 Number of reported acts of piracy and armed robbery against ships and socio-political indicators in Nigeria (1996–2008). Source: authors’ calculations from IMB (1996–2008), USDA macroeconomic indicators (2010) and Freedom House indicators (2010).

are causes for much alarm in the maritime industry. The link between the incidence of piracy and robbery against ships on the one hand and economic and socio-political instability on the other has long been postulated by a number of writers. This view is easily supported by connecting the rise and fall of reported attacks in speciﬁc locations with prevailing levels of poverty and political uncertainty in those areas. This chapter examined and conﬁrmed the potential relationship through a comparison of the data on attacks contained in the IMB’s annual

reports on piracy and armed robbery against ships from 1996 to 2008 with data relating to real GDP per capita provided by the US Department of Agriculture and to sociopolitical indicators made available by Freedom House. Nowhere is this relationship more apparent than in the current hotspot for piracy, Somalia. The country has had no central government since the regime of Siad Barre fell in 1991. It records a per capita GDP of US$600 (CIA 2010). In the preamble to a recent Assembly resolution (International Maritime Organization 2007), IMO recalls a

367

PIRACY IN SHIPPING

.8

.6

.4

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Real GDP per capita (/1000)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Attack (/100)

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

.2

Political rights (/10) Civil rights (/10) Freedom status (/10)

Figure 18.11 Number of reported acts of piracy and armed robbery against ships and socio-political indicators in Somalia (1996–2008). Source: authors’ calculations from IMB (1996–2008), USDA macroeconomic indicators (2010) and Freedom House indicators (2010).

UN Security Council statement that summarizes the problem of Somali piracy. The statement asserts “that piracy and armed robbery against ships in waters off the coast of Somalia . . . is caused by lack of lawful administration and the inability of the authorities to take afﬁrmative action against the perpetrators, which allows the ‘pirate command centres’ to operate without hindrance at many points along the coast of Somalia.” In fewer words, piracy is a landbased economic and socio-political problem manifesting itself at sea.

Acknowledgments The authors wish to acknowledge the assistance and cooperation of the International Maritime Bureau (IMB) in providing the statistics used in this study.

Note 1

It is worth noting, however, that the antipiracy campaign off Somalia suffers from a different afﬂiction altogether – one having to do with the (in)adequacy of the

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domestic law of the state of the ship that arrests the pirates applicable in the disposition of such cases. International law in this instance proves to be sufﬁcient; it is the implementation of UNCLOS in national law that is deﬁcient. The conclusions in Fink and Galvin (2009) are instructive in this regard.

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ReCAAP ISC (2010) Annual report: 1 January 2009–31 December 2009. Singapore: Regional Cooperation Agreement on Combating Piracy and Armed Robbery against Ships in Asia. Rubin, A. P. (1998) The Law of Piracy. 2nd edn. New York: Transnational Publishers. Sestier, J.-M. (1880) La Piraterie dans l’Antiquité. Paris: A. Marescq ainé. SIU (2009) ITF issues statement on combating piracy. November 23. www.seafarers.org/ HeardAtHQ/2009/Q4/ITFpiracystatement. xml (accessed June 7, 2010). Simpson, J. and E. S. C. Weiner (1989) The Oxford English Dictionary. 2nd edn. Oxford: Clarendon Press. Sundberg, J. W. F. (1999) Piracy. In M. C. Bassiounni (ed.), International Criminal Law. 2nd edn., pp. 803–17. New York: Transnational Publishers. Talley, W. K. and E. M. Rule (2008) Piracy in shipping. In W. K. Talley (ed.), Maritime Safety, Security and Piracy, pp. 89–101. London: Informa LLP. Thomson, J. E. (1994) Mercenaries, Pirates and Sovereigns: State-building and Extraterritorial Violence in Early Modern Europe. Princeton, NJ: Princeton University Press. Todd, P. (2003) Maritime fraud and piracy deﬁnitions in maritime contracts. Journal of International Commercial Law 2(2): 209–44. United Nations (1982) United Nations Convention on the Law of the Sea. United Nations (2005) Convention on the High

Seas 1958. Geneva: United Nations. http:// untreaty.un.org/ilc/texts/instruments/ english/conventions/8_1_1958_high_ seas.pdf (accessed May 14, 2011). USCG (2009) Guidance on self-defense or defense of others by US ﬂagged commercial vessels operating in high risk waters. Port Security Advisory (3-09), International Port Security Program, US Coast Guard. US Department of Agriculture (2010) Economic Research Service International Macroeconomic Data Set. www.ers.usda.gov/data/ macroeconomics (accessed June 7, 2010). Vitkus, D. J. and I. E. Matar (2001) Piracy, Slavery, and Redemption. New York: Columbia University Press. Wendell, P. (2007) State Responsibility for Interferences with the Freedom of Navigation in Public International Law. Heidelberg: Springer-Verlag. Xu, K. (2006) Piracy, seaborne trade and the rivalries of foreign sea powers in East and Southeast Asia, 1511 to 1839: a Chinese perspective. In G. G. Ong-Webb (ed.), Piracy, Maritime Terrorism and Securing the Malacca Straits, pp. 221–40. Singapore: ISEAS Publishing. Zou, K. (2009) Current legal developments: the United Nations Security Council. International Journal of Marine and Coastal Law 24(3): 583–95.

IV

Ship Economics

19

The Economics of Ships Harilaos N. Psaraftis, Dimitrios V. Lyridis and Christos A. Kontovas

19.1

Introduction

It is fair to say that the overall literature in the broad area of ship economics is immense, covering a vast array of topics, ranging from the economics of the various market segments to technoeconomic aspects of ship design, from shipping network design to legal-regulatory aspects of the markets, from ship routing and scheduling to safety and security, and from the economic impact of air emissions to port and terminal management, to name just a few. It is clearly impossible to cover all this material in this chapter, and the reader is referred to a number of seminal works, for instance McConville (1999), Grammenos (2002) and Stopford (2009). Rather, the purpose of this chapter is to focus on selected aspects of the economics of ships, and highlight a few issues that are important today and likely to be even more signiﬁcant in the years ahead, with no attempt at being encyclopedic. To that end, in addition to a review of the main criteria governing the economics of

ships, two distinct perspectives are developed: (1) considerations of how to optimize the economic performance of a ship, and (2) considerations on how to incorporate risk into the economics equation. To achieve this, the rest of this chapter is structured as follows. Section 19.2 discusses basic criteria. Section 19.3 discusses the optimization of a ship’s economic performance, with the main focus on speed optimization. Section 19.4 discusses the issue of risk management. Finally, Section 19.5 presents this chapter’s conclusions and discusses areas where further research is necessary.

19.2

Basic Criteria

Ships being investments like any other, the traditional set of criteria used to evaluate investments in any industry can also apply to ships. However, special considerations are warranted, so as to capture the special characteristics of the environment in which ships operate during their lifetime.

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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19.2.1

Net present value

Let us start with the traditional net present value (NPV) criterion, which is deﬁned as follows: NPV =

∑

N t =0

I (t ) − C (t ) (1 + i)t

2.

(1)

Where N = lifetime of ship (years) I(t) = Income generated by ship in year t (t = 0, . . . , N) C(t) = Expenditure spent on ship in year t (t = 0 . . . , N) i = shipowner’s cost of capital (assumed constant). I(t) and C(t) are supposed to include everything that will go into or out of the shipowner’s pocket during the entire ship construction, operation and scrapping cycle. These include the down payment for the ship’s contract, loan amounts received and paid, interest, taxes, all operating expenses paid for by the shipowner, amounts received when the ship is scrapped and, obviously, charter revenues. According to the NPV criterion, the ship or combination of ships that yields the maximum possible NPV is the best alternative for the shipowner. However, the apparent simplicity of this criterion is deceptive, mainly because of the signiﬁcant uncertainties associated with all elements in the NPV formula. For instance, 1.

The income stream I(t) is subject to the vagaries of the markets in which the ship will operate through its lifetime, and also depends on the way the ship will be utilized (which markets or

3.

trades it will serve, what cargoes it will carry). The cost stream C(t) is also uncertain, as it depends on variables such as fuel prices, which are not known with certainty, but also on uncertainties as regards repairs, maintenance and other costs. It also depends on how the ship will be utilized (what routes it will serve, what cargoes it will carry). Last but not least, the cost of capital i may not be known throughout a ship’s lifetime (let alone a constant), not to mention that N itself is also unknown.

Yet in spite of such uncertainties (of which more in Section 19.4), the NPV criterion is widely used and can be useful in maritime transport. To make it so, the utmost care should be exercised to compute all elements of the formula as well as possible, or, if this cannot be done, to perform a comprehensive sensitivity analysis. Also, some typical safeguards should be observed. These include the following: 1.

Avoid meaningless comparisons. For instance, it would not make much sense to compare a 50,000 DWT bulk carrier with one of 100,000 DWT (comparing two 50,000 DWT ships with one 100,000 DWT ship would make better sense). 2. Pay attention to different life cycle durations. It would not make sense to compare a ship for which N = 20 with a ship for which N = 30 (comparing three cycles of 20 years each with two cycles of 30 years each would make better sense). 3. Verify the independence of investments, or lack thereof. For instance, two identical ferries serving a particular market will not necessarily bring double

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the income of one ferry, if demand is split between the two. 2.

19.2.2

Required freight rate

A criterion closely related to NPV that is used very often in maritime transport is the required freight rate (RFR), deﬁned thus: If we assume that I(t) = FX(t), where X(t) is the cargo carried by the ship in year t and F is a constant freight rate, then the RFR of a ship is deﬁned as the freight rate F for which the NPV associated with the ship throughout its lifetime is zero. According to the RFR criterion, the ship whose RFR is the lowest in a group of ships is the best. RFR is a widely used criterion to compare ships from a cost-effectiveness viewpoint. Yet, it suffers from at least the same deﬁciencies and limitations as NPV. For instance, being a ratio, it cannot say anything about the scale of the investment. Yet it is known that larger ships will typically have a lower RFR than smaller ships because of economies of scale, which makes this criterion biased in favor of larger ships. Also, a constant freight rate F is seldom (if ever) experienced by any type of ship, an exception being a ship engaged in a very long-term charter in tramp trades. Last but not least, trying to predict X(t) is no less difﬁcult than trying to predict the market throughout a ship’s lifetime. In spite of all these, RFR is frequently used as a criterion, mainly to compare alternative designs or alternative investment choices. It is thus very important to avoid some pitfalls, if RFR is to be used at all. The following considerations are important in this respect: 1.

Make sure to compare ships of similar size. It would not make much sense to

3.

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compare the RFR of a 500-TEU feeder with that of the Emma Maersk. In addition to RFR, try also to compute the NPVs of the various alternatives. NPV is a more sound criterion, as a shipowner is more interested in what money he or she will make through a ship’s lifetime than what value a particular ratio will take on. Make a thorough sensitivity analysis.

19.2.3

Internal rate of return

In addition to NPV and RFR, other criteria are used in maritime transport. Among these, one can mention the internal rate of return (IRR), deﬁned as the interest rate i in equation (1) that produces an NPV of zero. According to this criterion, the ship that has the highest IRR among ship alternatives is the best. The following caveats are worthy of note if this criterion is used: 1.

Like RFR, IRR is a ratio, and, as such, ignores scale. Therefore, we have to make sure we compare ships of similar size. 2. The root of the equation NPV(i) = 0 may not be unique, and if this is the case IRR is ambiguous.

19.2.4

Who pays for what

The NPV equation (and, by extension, those for RFR and IRR) may be easy to write, but what should count in these equations is not necessarily unambiguous. For instance, fuel is paid for by the shipowner if the ship operates under a voyage charter, whereas it is being paid for by the charterer in the case of a time charter. Crew expenses

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are typically paid for by the owner, except in the case of a bareboat charter, when they are paid for by the charterer. Cargo-handling expenses in ports may be paid by either party (or by both), depending on the contract. For instance, container terminals typically charge the ship for cargo handling between the ship and the container yard, and the cargo owner for cargo handling between the yard and the gate, as well as storage. In this case we may have multiple parties, including the shipowner, the company that charters the ship and the cargo owner, not to speak of forwarders and other agents. It is of course impossible to know in advance how a ship will be utilized through its entire lifetime, part of which may be under voyage charter and part under time charter, among other uncertainties. So it is very important, whenever these formulae are used, to specify very clearly for whom they are being applied, and what the speciﬁc assumptions used in the calculations are.

protection and indemnity, other marine risks, etc. Cargo expenses These include, as applicable, cargo inspection, customs examination, documentation, stufﬁng, stripping, measuring/weighing, tallying. Terminal handling charges These include, as applicable, loading, unloading, receiving, delivery, transshipment, storage, overtime surcharge. Port charges Pilotage, towage, dockage, wharfage, harbor, tonnage, light, buoy and anchorage dues, mooring and unmooring, running lines, customs and quarantine fee, watchman agency, canal fees, etc. Administrative expenses Salaries and wages of employees, beneﬁts, rental expenses, ofﬁce expenses, communication expenses, dues and subscriptions, travel expenses, advertising, entertainment and solicitation, legal fees, taxes, etc.

19.2.5

19.2.6.1 Shipbuilding and scrapping The price of a ship when it is built enters NPV calculations directly, and so does the amount received when the ship is scrapped. Both prices vary widely, as functions of ship type and size and the state of the market at the time the transaction takes place. Needless to say, the scrapping price of a ship twenty years into the future is an unknown quantity, so best estimates from current values should be used.

Cost breakdown

Provided the issue of who is paying what is clariﬁed, a typical cost breakdown is the following: Capital costs Ship construction, ship retroﬁtting, ship major repairs (if applicable). Crew expenses Wages, overtime, pensions, accident–sickness insurance, traveling– repatriation, provisions, victualing and cabin stores, etc. Vessel expenses Fuel; stores/spares, lubricants, maintenance/minor repairs, annual survey, fresh water, communication charge; insurance: hull and machinery, war risks, freight demurrage defense,

19.2.6 Important additional considerations

19.2.6.2 Loans and interest In the NPV equation (and, by extension, in the equations to compute RFR and IRR), loans are treated like any other cash stream:

THE ECONOMICS OF SHIPS

positive for loan receipts (to ﬁnance part of ship construction costs), and negative for repaying capital and interest. The loan interest rate R is not necessarily equal to i, the shipowner’s cost of capital, and is the subject of negotiation between the lender and the shipowner. The loan payback scheme also depends on the terms that have been agreed between the lender and the shipowner. 19.2.6.3 Depreciation Caution should be exercised with regard to the treatment of depreciation. Depreciation is not a cost that enters NPV calculations directly, but accounting-wise it is a cost that enters the company’s books, and its connection with NPV is only indirect. The connection is only via the taxes that are paid, which typically take depreciation into effect (see below). There may be various depreciation schemes, concerning both the depreciation period, and the depreciation amounts per year, which may or may not be constant over time. The depreciation period is typically shorter than the economic lifetime of the ship. 19.2.6.4 Taxes Taxes are also treated in the NPV equation as an outgoing cash stream. The magnitude of taxes depends on the tax laws instituted by the ship’s ﬂag. Certain countries have a “tonnage” tax, taxes being functions of tonnage, and in others, tax is a function of taxable income. Typically, interest and depreciation costs are tax-exempt. Attention should be paid to how taxes are calculated in the RFR equation, as the freight rate that is computed by the NPV = 0 equation may not be possible to calculate in closed form but only by iterations.

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19.3 Optimizing Ship Economic Performance 19.3.1

Speed as a decision variable

Predicting streams of income and expenditures over a ship’s entire lifetime involves signiﬁcant uncertainties (of which more in Section 19.4). However, it is clear that both depend on the way the ship is utilized. This can have an important impact on NPV, RFR, IRR and other criteria. Among the many decision variables affecting ship utilization, a very important one is speed, for a variety of reasons. First, speed is the main determinant of fuel cost, a signiﬁcant component of a ship’s operational cost. Speed is also one of the main factors that determine how much throughput (expressed in tonne-km) is produced by the ship, something that is directly linked with its lifetime revenue.1 Here we highlight the main issues involved. For a variety of reasons, mainly (but not solely) related to the drive to reduce costs, speed reduction has become a popular measure, particularly in depressed markets such as those after mid-2008. A spokesman from Germanischer Lloyd (GL) has been quoted as follows: “We recommend that ship-owners consider installing less powerful engines in their newbuildings and to operate those container vessels at slower speeds” (Lloyd’s List 2008a). By “slower speeds” it is understood that the current regime of 24–6 knots would be reduced to something like 21–2 knots. But some trades may go as low as 15–18 knots, according to a 2006 study by Lloyd’s Register (Lloyd’s List 2008b), and perhaps even lower. GL executive board member Hermann Klein predicted that 14 knots, or perhaps even lower, would become the norm for container ships

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(Lloyd’s List 2009b). Det Norske Veritas’s Chief OO Tor Svensen has been quoted in saying that speed reduction and other measures could reduce emissions by 30% by 2030 (DNV 2009). However, in what may be a difference of opinion, Bureau Veritas’ chief Bernard Anne said “owners should retain as much ﬂexibility as possible, and continue with ships able to operate efﬁciently over a broad range of speeds” (Lloyd’s List 2009b). In practice, what is termed “super-slow steaming” has been pioneered by Maersk Line, the world’s largest container carrier, after trials involving 110 vessels at the beginning of 2007. Maersk Line’s North Asia Region CEO, Tim Smith, said that trials showed it was safe to reduce the engine load to just 10%, compared with the traditional policy of reducing the load to no less than 40–60% (see TradeWinds 2009). For container ships 10% engine load means sailing at about half of the design speed. Furthermore, in late 2009, China Ocean Shipping (Group) and its partners in the CKYH alliance – K Line, Yang Ming Marine and Hanjin Shipping – were also reported to be introducing super-slow steaming on certain routes (Lloyd’s List 2009a). Whatever the merits or demerits of speed reduction, it is clear that slow steaming can be realized at two levels: The ﬁrst level is truly operational, that is, have a ship that is designed to go at 26 knots sail at a lower speed, say 24, 20, or even 16 or 14 knots. Depending on what the slow steaming speed is, speed reduction may or may not entail reconﬁguring the engine so that it performs well under a reduced load. One of the main determinants of slow steaming speed is fuel price, owners being prone to reduce speed if fuel prices rise. Another determinant is the state of the market, owners being prone to reduce speed in a

market slump but increase it in a market boom. The second level of slow steaming is strategic: build future ships with smaller engines so they can only sail (say) 14 knots instead of 26. The main difference between the two levels is that the ﬁrst is reversible whereas the second is not. One can always conﬁgure back a “de-rated” engine, but installing a larger engine on a ship that has been built with a small engine is either very expensive or impossible. And if the ship with the smaller engine attempts to sail at a higher speed, its fuel consumption will likely be higher than if the engine were more powerful. Implementing a speed reduction scheme in a strategic setting would involve modifying the design of the ship, including its hull shape, installing smaller engines in future newbuildings, and modifying the propeller design and other features. Speed optimization is not a new idea. Ronen (1982, 2011) examined the impact of fuel prices on optimal speed. Perakis and Papadakis (1987) examined the issue in the context of ﬂeet deployment. Andersson (2008) considered the case of a container line which reduced the speed for each ship from 26 knots to 23 knots and added one more ship to maintain the same throughput. Total costs per container were reduced by nearly 28 per cent. Eefsen (2008) considered the economic impact of speed reduction of container ships and included the inventory cost. Cerup-Simonsen (2008) developed a simpliﬁed cost model to demonstrate how an existing ship could reduce its fuel consumption by a speed reduction in low and high markets to maximize proﬁts. Corbett, Wang and Winebrake (2009) applied fundamental equations relating speed, energy consumption and total cost to evaluate the impact of speed reduction.

THE ECONOMICS OF SHIPS

They also explored the relationship between fuel price and the optimal speed. Notteboom and Vernimmen (2009) examined bunker fuel costs, which are a considerable expense in liner shipping. Their paper assessed how shipping lines have adapted their liner service schedules to deal with increased bunker costs, which includes the examination of speed reduction scenarios. Last but not least, Psaraftis and Kontovas (2009, 2010) investigated trade-offs between ship emissions and operational costs. The wish for slow steaming may have many causes. The main incentives for speed reduction are: 1. 2.

3. 4. 5. 6.

higher or volatile bunker prices leading to increased fuel costs; higher bunker costs due to the obligation to use the more expensive Low Sulfur Fuel Oil, for example when operating in Sulfur Emission Control Areas (SECAs); savings in other running costs components (e.g., port dues and local taxes); overcapacity resulting in reduced freight rates; mandatory emission-related regulations; and voluntarily emission-related regulations, mainly adopted by companies that want to take responsibility for their impact on society.

The effect of high fuel prices on speed is not new. Ships (especially tankers) sailed at lower speeds during the oil crises of 1973 and 1979. In 1972 the price of crude oil was about US$3 per barrel. By the end of 1974 oil prices had quadrupled, to over US$12 per barrel. The second oil crisis came with the combination of the Iranian revolution and the Iran–Iraq war, which caused oil prices

379

to increase from US$14 in 1978 to US$34 per barrel in 1981. For a consideration of the impact of fuel prices on very large crude carrier (VLCC) spot rates, including a discussion of optimal VLCC speed as a function of fuel prices, see Devanney (2010). Even in non-volatile markets, fuel costs increase because of the need to use more expensive fuel, for example the need to use low sulfur fuel oil (LSFO) when sailing in (SECAs). The IMO unanimously adopted amendments to the MARPOL Annex VI regulations, and the main changes will see a progressive reduction in sulfur oxide (SOx) emissions from ships (IMO 2008a). Furthermore, the Californian Air Resource Board (CARB) has since July 1, 2009 enforced the use of marine diesel oils (MDO) or marine gas oils (MGO) in Californian waters. Last but not least, when at berth in EU ports, vessels must as of January 1, 2010 use marine fuels with a sulfur content not exceeding 0.1% by mass (EU directive 2005/33/EC, Article 4a), something that is expected to create a problem in the short run, as many vessels are not yet ready to implement the measure. In all the above cases “cleaner” fuel means “more expensive” fuel. High fuel costs will always make ship operators investigate possible ways to reduce fuel consumption. The easiest way to reduce fuel bills is to sail more slowly. In turn, the most likely result of such slow steaming is the shrinking of the ﬂeet capacity supply curve, which typically leads to higher freight rates, and (as a result) to proﬁts that may be higher than the extra costs due to more expensive fuel. This brings up an additional reason for slow steaming. Back in the early 1970s many tanker owners adopted drastic measures, including slow steaming, because of an

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over-tonnaged sector as a result of the newbuildings order book. The same is true today, and not only for tankers. It is not a coincidence that speed reductions are currently being observed within the container market. Container ﬂeet growth has been exceeding transportation demand. Fleet overcapacity has resulted in reduced freight rates. This has in turn enabled speed reductions, an effective means of shrinking the ﬂeet supply curve. It is known that many ships are to be delivered between 2010 and 2012, leading to an over-capacitated container market. However, it is not easy to guess the consequences of this oversupply, since we cannot predict the trend in demand. Lately, because of slow steaming, many companies had to add more ships to their routes to maintain throughput (note, for example, the additional ships deployed on the Far East–Northern Europe routes). This can lead to higher rates.

19.3.2

A simple model

To see the effects of speed reduction, let us examine a simple model. Assume that the daily fuel consumption F at sea at speed V is a cubic function of speed V. The cubic law follows from hydrodynamic principles and is a standard assumption in most analyses. If this assumption does not hold, a similar analysis can be made. Psaraftis and Kontovas (2009, 2010) investigated a simple logistical scenario. The scenario assumed a ﬂeet of N identical ships (N: integer), each of capacity (payload) W. Each ship loads from port A, travels to port B with known speed V1, discharges at B and goes back to port A in ballast (empty), with speed V2. Assume speeds are expressed in km per day. The distance between A and B is known and equal to L (km) and the total

time in port at both ports is TAB (days). Assume these ships are chartered on a term charter and the charterer, who is the effective owner of this ﬂeet for the duration of the charter, incurs a known operational cost of OC per ship per year. This cost depends on market conditions at the time the charter is signed; it includes the charter to the shipowner and all other non-fuel-related expenses that the charterer must pay, such as canal tolls, port dues and cargo-handling expenses. Not included in OC are fuel expenses, which are also paid by the charterer, and which depend on the actual fuel consumed by the ﬂeet of ships. The latter depends on how the ﬂeet is used. Assume that each ship’s operational days per year are D (0 < D < 365), a known input, and that the total daily fuel consumptions (including main engine and auxiliaries) are known and are as follows for each ship: f (tonnes per day) in port, and F1, F2 (tonnes per day) at sea for the laden and ballast legs respectively. As stated earlier, the effect of speed change on fuel consumption is assumed cubic for the same ship, that is, F1 = k1V13 and F2 = k2V23, where k1 and k2 are known constants (typically k1 > k2). In addition to the standard costs borne by the charterer, Psaraftis and Kontovas (2009, 2010) took into account cargo inventory costs. These costs are assumed equal to IC per tonne and per day of delay, where IC is a known constant. In computing these costs, it is assumed that cargo arrives in port “just-in-time”, that is, just when its ship arrives. Thus, inventory costs accrue only when loading, transiting (laden) and discharging. These costs are called “in-transit inventory costs.” Generalizing to the case where inventory costs due

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to port storage are also considered is straightforward. If the market price of the cargo at the destination (cost, insurance and freight – CIF – price) is P(US$/tonne), then one day of delay in the delivery of one tonne of this cargo will inﬂict a loss of PR/365 on the cargo owner, where R is the cost of the cargo owner’s capital (expressed as an annual interest rate). This loss is the income lost through the delay in selling the cargo. Therefore, it is straightforward to see that IC = PR/365. Let us now assume that the speed of all ships in the ﬂeet is reduced by a common amount ΔV ≥ 0. To keep annual throughput constant, we have to add more ships, assumed identical in design to the original N ones. If V1 = V2 = V (this may not mean that k1 = k2), the difference in total ﬂeet costs (costs after minus costs before) is equal to: Δ ( total fleet cost) = NLΔV − pD( 2V − ΔV )( k 1 + k 2 ) + 2

L + TAB V

IC WD + 2OC V ( V − ΔV ) (2)

The difference in fuel costs alone is equal to Δ( total fuel costs) pD( 2V − ΔV )( k 1 + k 2 ) (3) = −NLΔV L 2 + TAB V An interesting observation is that fuel cost differentials (and, by extension, total ﬂeet cost differentials) are independent of port fuel consumption f. This can be explained

381

by noting that the new ﬂeet string, even though more numerous than the previous one, will make an equal number of port calls in a year; therefore fuel burned while in port will be the same. It is also interesting to note that for ΔV ≥ 0 and for all practical purposes the differential in fuel costs is always negative or zero, as difference 2V − ΔV in (3) is positive for all realistic values of the speeds and of the speed reduction. This means that speed reduction cannot result in a higher fuel bill, even though more ships will be necessary. This result can be generalized to logistical scenarios that are more complex than the one examined here, for instance one that involves a ship which visits a set of ports and is less than full (which is typically the case for container ships). The core result from this analysis is that total fuel costs will always be reduced by slowing down, even though more ships would be used. The higher the speed, and the greater the speed reduction, the greater this emissions reduction will be. The theoretical maximum reduction will occur if we reduce speed all the way to zero, in which case both fuel costs and emissions will also be zero. Of course, such a scenario would not make any sense, as no cargo would be moved and hence cargo inventory costs and total costs would go to inﬁnity. By the same token, a scenario of super-slow speed may suffer from similar problems.

19.3.3 When is speed reduction cost-beneﬁcial? Even though Δ(total fuel cost) is always negative or zero, Δ(total ﬂeet cost) may be positive or negative, or may reach a minimum value other than zero, depending on the values of all the parameters involved.

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One can see that in-transit inventory costs and operational costs count positively in the cost equation. Both these costs would be increased by a reduction in speed, and this increase might offset, or even reverse, the corresponding decrease in fuel costs. High values of either IC or OC (or both) would increase the chances of this happening, and high values of the fuel price p would do the opposite. Psaraftis and Kontovas (2009) presented some examples to illustrate this approach, for tankers, bulk carriers and container ships. Of these, perhaps the most interesting was the one that investigated the effect of a speed reduction of just 1 knot (from 21 to 20) in a ﬂeet of 100 Panamax container ships. The example showed that if the sum of additional cargo inventory costs plus other additional operational costs of the (ﬁve) extra ships that would have to be used (including the time charter) is less than US$128,299 per extra ship per day, then speed reduction is overall cheaper. One would initially think that such a threshold would be enough. But it turns out that this is not necessarily the case if in-transit inventory costs are factored in. In that regard, we note that the unit value in US dollars per short ton2 of the top twenty containerized imports at the Los Angeles and Long Beach Ports in 2004 varies from 12,600 for furniture and bedding to 86,200 for optic, photographic and medical instruments (see CBO 2006). To compute in-transit inventory costs for the above example, we hypothetically assume that cargo carried by these vessels consists of high-value industrial products, similar to the top twenty imports mentioned above, and that its average value at the destination (CIF price) is US$20,000/ tonne. We also assume the cost of capital is

8%. This means that one day of delay of one tonne of cargo will entail an inventory cost of IC = PR/365 = US$4.38/tonne/day. Computing the in-transit inventory costs for this case gives a total annual difference of US$200,000,000 in favor of the case that moves cargo faster. This ﬁgure is signiﬁcant, of the same order of magnitude as the fuel cost differential. Assuming a time charter rate of US$25,000 per day (the typical charter rate for a Panamax container ship in 2007), the total other operational costs of the reduced-speed scenario are computed at US$958,125,000 per year for the reducedspeed ﬂeet ships (105 ships), versus US$912,500,000 for the ﬂeet of ships going full speed (100 ships). Tallying up we ﬁnd a net differential of US$11,478,741 per year in favor of not reducing the speed, meaning that for this scenario in-transit inventory and other operational costs can offset the positive difference in fuel costs. It should be realized that cargo inventory costs are borne by the owner of the cargo, whereas the other cost components are borne by the shipowner and the charterer of the vessel, their distribution depending on the type of contract. This means that whatever is good for one of these parties may not necessarily be good for the other. But on a total cost basis, the example above shows that speed reduction may not necessarily be cost-beneﬁcial overall (and note that possible freight rate increases due to reduced ship capacity, also borne by the cargo owner, are not taken into account in our model).

19.3.4

Optimizing ﬂeet operation

Speed optimization is only one of several decision variables within the broader spectrum of problems related to the optimiza-

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tion of a ship’s economic performance. The broader picture involves optimizing the operation of a ﬂeet of ships, or, by a further extension, of the entire intermodal chain, including ports. To see this broader picture, one would need to examine one or more of the problems in the following generic list (which is not exhaustive): • optimal ship speed • optimal ship size • routing and scheduling • ﬂeet deployment • ﬂeet size and mix • weather routing • intermodal network design • modal split • transshipment • queuing at ports • terminal management • berth allocation • supply chain management. Many of these problems methodologically fall under the disciplines of operations research – management science – transportation logistics problems, whose objective is to optimize one or more aspects of the operation of a ship, a ﬂeet, or a supply chain system. It is clearly outside the scope of this chapter to provide a complete bibliographic survey of this very broad variety of problems, except to state that the literature on these problems is rapidly growing. See, for instance, Christiansen, Fagerholt, Nygreen and Ronen (2007) for surveys of ship routing and scheduling problems, Brown, Graves and Ronen (1987) for the scheduling of crude oil carriers, Fagerholt (2004) for vessel ﬂeet scheduling, Thompson and Psaraftis (1993) for local search methods,

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Rana and Vickson (1991) for routing of container ships, and Agarwal and Ergun (2008) and Alvarez (2009) for optimization approaches in liner shipping. For terminal management problems, a branch and cut procedure is reported by Moccia, Cordeau, Gaudioso and Laporte (2006), and the socalled “double cycling” procedures for loading and unloading are described by Goodchild and Daganzo (2006). For reviews of the operations research literature of problems related to container terminal management the reader may refer among others to Vis and de Koster (2003) and Steenken, Voss and Stahlbock (2004). Also, a comprehensive literature survey, with some 157 related references, is presented in Stahlbock and Voss (2008). However, in spite of the growing literature, many of these problems are typically treated in isolation from one another, even though many of them are interconnected. For instance, the problem of optimal loading of a container ship is connected with the problem of optimal yard management, which in turn is connected with the problems of routing straddle carriers in the terminal, assigning cranes to ships when they berth, berth allocation, determining optimal queuing strategies, selecting which port should be a transshipment port, network design, and so on. All of these problems impact, directly or indirectly, the economics of ships (including the basic criteria of Section 19.2), but no good way to treat them holistically is yet known.

19.4

Risk Management

A very different but equally important dimension of ship economics deals with risk management. Here we are not talking

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about accident risk and the related subject of maritime safety, which also has economic implications, but about ﬁnancial risk. This is very important because of the high degree of uncertainty involved in most aspects of a ship’s economic performance (as alluded to in Section 19.2 above). The term “risk management” refers to situations which could lead to a decline in the value of a shipping ﬁrm, arising from events or various factor changes inﬂuencing expected cash ﬂows. Some basic classes (sources) of risk in ship economics can be identiﬁed (Alizadeh and Nomikos 2009; Kavussanos and Visvikis 2006). They are discussed below.

19.4.1

Price risk

19.4.1.1 Freight-rate or business risk Freight- rate risk is caused by the volatility of the earnings of a shipping company from the freight rates. This is the fundamental origin of risk in a shipping company. The notorious volatility of the Baltic Dry Index, for example, which is very common in the tramp sector of the shipping industry (where there is perfect competition), and the occurrence of catastrophic structural breaks in terms of the evolution of freight rates, force investors to use risk management strategies, such as time-chartering the vessels or contracts of affreightment (COAs). These classical approaches, however, imply other physical risks, and shipowners lose the control of their ship for the duration of the contract. Therefore, derivatives have recently become quite popular, as they mitigate market risk via a paper market, where one can open and close long/short positions much faster, more simply and at a lower cost. Derivatives also offer portfolio

management capabilities. What is more, positions in freight derivatives are viewed positively for a shipping company, in a similar manner to time charter, when a company negotiates a loan with a bank. Freight derivatives offer other advantages: ﬁxation of cash ﬂows for a time horizon of up to three years; the ﬂexibility to buy or sell positions prior to expiry; ease of closing out positions; and price discovery, as it may be assumed that freight derivatives discount future developments. Freight derivatives are purely ﬁnancial transactions, with no physical performance, that do not affect the physical operation of vessels, control of which is kept in the hands of the shipping company. There are no requirements with the physical operation; and control of the vessels is kept in the hands of the shipping company. Freight forward agreements (FFAs) are rather simple for someone to start trading, but a possible market manipulation has been shown to be possible, in practice. Another disadvantage is the lack of a secondary market for overthe-counter, i.e. customized, contracts, and furthermore, the closing out of a contract is difﬁcult in routes with low liquidity for the same settlement month. The problem of counterparty risk also exists, because private equity shipping ﬁrms are not obliged to publish accounting data. FFAs can create extremely high aggregate losses before they expire, in contrast to futures contracts, where there is a daily mark-to-market system. A typical FFA is considered to be a contract for difference (CFD) between two parties settling a freight rate for a given cargo volume per ship category, for one or a combination of the major trade routes in the dry-bulk/tanker sectors. The underlying assets in this derivative type are based

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on the Baltic Panamax Index (BPI), the Baltic Capesize Index (BCI), the Baltic Supramax Index (BSI) or the Baltic Handysize Index (BHSI) in the dry-bulk sector, for example. Each index is calculated as the weighted average of the freight rates of a number of important trading routes for a given cargo and vessel size. Generally, freight derivatives can be used as hedging instruments for shipping companies operating on given routes. This can happen not only because charterers have opposite interests and a preference for ﬁxing their shipment costs, but also because there exist market agents who have different views about the fair value of the derivatives contracts, or the future evolution of freight rates. On the other hand, sometimes the spread in the prices between two shipping lines and vessel sizes, which is (according to historical data) not justiﬁed, signals traders to get into speculative trading (statistical arbitrage). 19.4.1.2 Operating costs risk Operating costs are related to broking commission, canal fees, tug boat use, maintenance and repairs, stores and lubricants, administrative expenses and wages, but the most signiﬁcant factor is bunker costs. Besides freight-rate variability, volatility in terms of costs is a factor inﬂuencing the proﬁt margin of shipping companies. The most critical cost element is the price of bunkers for the vessel during a voyage. According to Stopford (2009) this accounts for approximately 50–60 percent of the total voyage costs, and spikes in bunker prices have repercussions on the proﬁtability of shipping companies and ship operators. Bunker prices depend on oil prices, stock levels, geopolitical events, weather conditions, reﬁnery practices,

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and bunker price competition between ports. Because of this high variability, it is vital that market participants manage their exposure to bunker market ﬂuctuations, in order to ensure positive net operating cash ﬂows. For this purpose specialized ﬁnancial derivatives have been developed, such as the over-the-counter (OTC) forward bunker agreements, where two parties (long/short side) decide on the delivery at an agreed price, quantity and quality of fuel, at a speciﬁed delivery location and time. Of course, oil futures contracts traded at International Exchange (ICE) and International Petroleum Exchange (IPE) may be used, allowing higher maximum leverage, ease in closing out positions (unlike forward contracts (OTC)), and ensuring no credit risk, due to a mark-tomarket system in clearing. What is more, bunker swap agreements, which are also traded OTC, have been introduced for hedging oil price risk, by exchanging a ﬂoating price for bunkers for a ﬁxed rate, over a given time period and for a given quantity. More sub-periods may be deﬁned in the contract and there is no physical delivery, but by combining it with purchases or sales of oil in the physical market, hedging can be achieved. Liner shipping companies can use surcharges, as a relatively small portion of the freight rate, but generally, the perfect competition in the tramp sector and to some extent in the liner sector (where ship managers operate under oligopolistic conditions) makes it difﬁcult for companies to pass on higher costs to higher freight rates. Thus, hedging at around 50 percent of a two-year exposure for shipping companies is very common, but incomplete elimination of the risk is popular, since there is a

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tendency to attempt to speculate on oil price market moves. 19.4.1.3 Interest rate risk Interest rate risk derives from ﬂuctuations in lending rates, which accentuate the ﬁnancial problems of shipping companies (already at a high leverage ratio, as is quite common in the industry) when interest rates increase and ﬁrms must reﬁnance their loans at a higher ﬂoating rate. In parallel, ﬁrms may also have exposure to currency risk if the currency of their revenue is other than the denomination of their debt or operating costs. Thus, swaps are used to mitigate interest rate risk; that is, they are agreements to exchange a series of cash ﬂows on periodic settlement dates over a certain time period (for example, quarterly payments over two years). In the simplest version of a swap, party A makes ﬁxed-rate interest payments on the notional capital, as agreed in the swap, in return for ﬂoating-rate payments from party B. When each settlement date comes, the two payments are netted so that only one payment is made to the party who expects to receive a positive overall inﬂow from the agreement. A swap can be analyzed as a string of forward rate agreements (FRAs) expiring at each settlement date. Swaps have several advantages, such as that no payment is required by any party at the beginning and that they can be terminated by a mutual agreement, an offsetting contract resale, or another ﬁnancial instrument. However, default risk exists in such an agreement. Swaps are customized, they are not traded in any secondary market, and they are mostly unregulated. What is more, so-called currency swaps can also be applied, in order to neutralize foreign exchange risk, where two parties exchange payments

denominated in different currencies. A notional principal is agreed upon, expressed in both currencies at the current exchange rate. They are exchanged at contract initiation and returned at the termination date of the contract in the exact initial amounts. 19.4.1.4 Asset price risk Asset price risk – the risk that comes from volatility in the price of the assets – arises from the constantly changing value of vessels. It hits the balance sheet value of a company as well as its credit rating, since ships are also collateral in shipping ﬁnance schemes. For this reason, all market agents, i.e. ship ﬁnance banks, shipowners and ship operators, closely watch ship price volatility and take these data into consideration in their investment processes. Alizadeh and Nomikos (2009) investigated volatility and return statistics for drybulk and tanker-ship prices for three different classes in terms of age (newbuildings, ﬁve-year-old second-hand vessels, and ships destined for scrap), for the period from February 1981 to May 2008, using data from Clarksons Research. They used three classiﬁcations for the major dry-bulk vessel sizes, Capesize, Panamax and Handysize. Standard deviations vary greatly, from 0.0921 to 0.24, in scrap prices for Handysize vessels. Similarly, in the tanker sector (four classes: VLCC, Suezmax, Aframax and Handysize), standard deviations ranged from 0.0791 (Newbuildings, Handysize) to 0.211 in scrap prices for Suezmax tankers. One of the major conclusions was that prices for larger vessels generally exhibit higher volatility than prices for smaller vessels, for all age groups. In the past, there were no derivatives for vessels and, as short selling of vessels is not possible (it is only possible for equities of

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listed shipping companies, and then only under certain conditions), one could only take advantage of expectations about an upcoming increase in prices only, in the past. What is more, the vessel market generally has low liquidity, so price discovery and market corrections are not easy. This led to the Sale and Purchase Forward Agreements (SPFA) for the dry bulk and tanker markets, which are traded OTC. They started in 2004 and are reported every week, and calculated in the same manner as the dry and tanker freight indices, by the Baltic Exchange. They are traded in lots (20 lots = 100 percent of a ship value), and agreed in terms of settlement period and maturity according to the wishes of the trader. 19.4.1.5 Credit risk Credit risk, which has to do with the ability of a counter-party to pay their obligations, is very important in shipping given the highly cyclical nature of the industry: the total leverage can be very high and the alternation of high proﬁts and catastrophic losses has led to excessive defaults of shipping companies for many decades. Credit risk arises as a serious issue in freight derivatives contracts, but also in business relations between shipyards and shipowners or bunker suppliers. Banks devised so-called credit enhancements, in order to mitigate credit risk in derivatives, for example. They can use master agreements, credit support documents offering protection against credit risk, credit rating collateralization of transactions, third-party guarantees, credit insurance, letters of credit, downgrade triggers (i.e. clauses closing out the contract if the credit rating falls below a certain level according to some predetermined formula), credit derivatives (in the form of credit

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default swaps, total return swaps or credit spread options), or payment netting. All these measures either have the character of a collateral/guarantee/insurance from third parties or improve credit conditions for the lender.

19.4.2

Operational risk

Operational risk is the risk of drop in the value of assets caused by physical damage, accidents and losses due to physical risks, technical failure or human error in the operation of the assets of a company, or the risk of legal responsibility for damages from corporate actions. For a shipping company, for instance, operational risk includes accidents or liabilities from oil or chemical spillage. Insurance contracts, in addition to better use of technology, are the only solution available to shipping companies that wish to mitigate the consequences of catastrophic events. Insurance and reinsurance companies can handle this risk much better since they minimize their exposure through diversiﬁcation of their portfolio.

19.4.3

Hedging and basis risk

As mentioned above, in the shipping business operators resort to the use of various ﬁnancial instruments called derivatives, in order to control the magnitude of the repercussions of various sources of price risk, such as freight rate levels, interest rate levels and foreign currency risk. The application of these “instruments” acts like insurance, as they offset any losses from price ﬂuctuations in the opposite position that the ﬁrm has taken. The establishment of such positions via derivatives in order to minimize exposure to unwanted price risk is called hedging.

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The basis in hedging is deﬁned as the difference between the spot price of the asset to be hedged and the price of the forward contract used for hedging. The basis convergence may take place as the expiration date of the contract approaches, but until that moment spot prices can be higher than futures prices, in which case we have a market in backwardation, or lower, when we have a market in contango. The basis risk is another source of risk for shipping companies, for various reasons. Operators do not know precisely when to proceed with the purchase or sale of contracts in the physical market when hedging; or they may be forced to close their position before the contract expires (e.g. in the event of a margin call when additional collateral is demanded by the broker); or the underlying asset of the derivative may be just a proxy and not exactly the target asset that they want to hedge.

19.4.4

Political risks

Any factors that affect the business which are caused by political events – wars, political turmoil in a region, canal closure, etc. – are included here. Political events have always affected international trade and shipping in parallel with global economic growth. Cases in recent history include World War II (1940–5), the Suez Canal closures (1956, 1967, 1973), and the Gulf Wars (1991, 2003).

19.4.5 Methodology for expressing exposure to risk: value-at-risk in shipping A modern risk assessment and measurement methodology is the estimated potential loss or the “value-at-risk” (VaR). Firms use VaR to estimate market risk exposure, by translating all risks into a single number

which can easily be presented to company management, shareholders, other stakeholders and regulators. The ﬁrst structure of VaR can be found back in 1922 when the application of the minimum capital requirements was established in the New York Stock Exchange. After a series of ﬁnancial disasters from derivatives transactions in banks, municipalities, corporations, etc., stricter rules after the second (and now the third) Basel Accord aimed to force ﬁnancial institutions to maintain minimum capital requirements, so that potential losses could not trigger crises. Thus, several risk-assessment procedures were invented and implemented to quantify and assess the overall risk of ﬁnancial institutions. In 1994, J. P. Morgan published the risk-assessment method RiskMetrics, the framework for calculating VaR, which was adopted by industry and researchers (Satchell and Christodoulakis 2008). In shipping, this quantitative methodology started to be used only very recently, as a result of the success of the FFAs market and the participation of shipping companies in taking position in FFAs. The calculation of VaR can be approached parametrically by computing the VaR of a portfolio (of risk factors such as freight rates, exchange and interest rates, and stock prices) on the basis of historical volatilities and correlations, by using Gauss distributions for all time series or non-parametrically by using a Monte Carlo or historical simulation.

19.5

Summary

This chapter has attempted to highlight a rather limited number of issues in ship economics that will be, in our opinion,

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important in the years ahead. We believe that research in these and related areas will grow further and will be useful from a practical perspective. Because of environmental concerns about air pollution from ships and the need to reduce it, it is imperative to improve the economic performance of ships to the greatest possible extent. Environmental criteria were not examined explicitly in this chapter, but as ship air emissions are directly proportional to fuel burned, it is clear that minimizing fuel consumption would also minimize emissions. To what extent this would also produce a win–win solution vis-à-vis other criteria is a subject that should be looked at. The IMO is currently looking at an array of technological, operational and marketbased measures with a view to reducing CO2 emissions. All of these measures will surely impact the economics of ships. For instance, building a new ship so that its so-called Environmental Efﬁciency Design Index (EEDI) is below a certain baseline value will impact decisions on ship geometry, size, propulsion, and other parameters such as design speed. Also, the adoption of market-based measures such as a fuel levy will impact operating speed and lead to technology investments aimed at producing a greener ﬂeet. Ideally, the external costs of ship air emissions should be internalized, and when this is taken on board the optimal ship may be different than one under a regime in which environmental criteria are absent. Therefore one would expect an increasing role for such criteria in the future. A related, but separate, area in which environmental criteria may come into play concerns the treatment of oil pollution. As oil pollution has a deﬁnite environmental cost, which can be quantiﬁed in economic

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terms, the question is what measures should be adopted at the design stage so that the environmental risk is minimized. The IMO uses techniques such as Formal Safety Assessment (FSA) for regulation formulation, and these incorporate a cost–beneﬁt step to assess the cost-effectiveness of proposed measures (see Kontovas and Psaraftis 2009). In a broader sense, in these difﬁcult economic times the treatment of risk, including ﬁnancial risk, is of paramount importance, and models that capture the risk dimension should be of signiﬁcant beneﬁt to the shipowner. The development of holistic models that attempt to link the various sub-problems and avoid suboptimal solutions is considered important.

Notes 1

2

Obviously another such important variable is ship size, usually expressed by payload, or deadweight. We shall not be dealing with the impact of ship size on ship economics, as the literature on this subject is rich (see, for instance, Cullinane and Khanna 2000; Gilmamn 1999; Talley 1990). 1 short ton = 0.9072 tonnes.

References Agarwal, R. and O. Ergun (2008) Ship scheduling and network design for cargo routing in liner shipping. Transportation Science 42(2): 175–96. Alizadeh, A. and N. Nomikos (2009) Shipping Derivatives and Risk Management. Basingstoke: Palgrave Macmillan. Alvarez, J. F. (2009) Joint deployment and routing of a ﬂeet of container vessels. Maritime Economics and Logistics 11(2): 186–208.

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Andersson, L. (2008) Economies of scale with ultra large container vessels. MBA assignment, Copenhagen Business School. Brown, G. G., G. W. Graves and D. Ronen (1987) Scheduling ocean transportation of crude oil. Management Science 33(3): 335–46. CBO (2006) The economic costs of disruptions in container shipments. US Congress, Congressional Budget Ofﬁce, Washington, D.C. Cerup-Simonsen, Bo (2008) Effects of energy cost and environmental demands on future shipping markets. MBA assignment, Copenhagen Business School. Christiansen, M., K. Fagerholt, B. Nygreen and D. Ronen (2007) Maritime transportation. In C. Barnhart and G. Laporte (eds.), Transportation, pp. 189–284. Handbooks in Operations Research and Management Science. Amsterdam: North-Holland. Christodoulakis, George and Stephen Satchell (eds.) (2008) The Analytics of Risk Model Validation. Amsterdam/Boston: Elsevier; and Burlington, MA: Academic Press. Corbett, J., H. Wang, and J. Winebrake (2009) The effectiveness and costs of speed reductions on emissions from international shipping. Transportation Research Part D: Transport and Environment 14(8): 593–8. Cullinane, K., M. Khanna (2000) Economies of scale in large containerships: optimal size and geographical implications. Journal of Transport Geography 8: 181–95. Devanney, J. W. (2010) The impact of fuel prices on VLCC spot rates. 3rd Symposium on Ship Operations, Management and Economics, SNAME Greek Section, Athens, October 7–8. DNV (2009) Shipping could by 2030 cut emissions by 30%, at zero cost. DNV press release, December 16. Eefsen, T. (2008) Container shipping: speed, carbon emissions and supply chain. MBA assignment, Copenhagen Business School. Fagerholt, K. (2004) A computer-based decision support system for vessel ﬂeet scheduling – experience and future research. Decision Support Systems 37(1): 35–47.

Gilman, S. (1999) The size economies and network efﬁciencies of large containerships. International Journal of Maritime Economics 1(1): 39–59. Goodchild, A. V. and C. F. Daganzo (2006) Double cycling strategies for container ships and their effect on ship loading and unloading operations. Transportation Science 40: 473–83. Grammenos, C. (ed.) (2002) The Handbook of Maritime Economics and Business. Maritime and Transport Law Library. London: LLP Professional Publishing. IMO (2008) Report of the Drafting Group on amendments to MARPOL Annex VI and the NOx Technical Code. MEPC 58/WP.9. Kavussanos, M. G. and I. D. Visvikis (2006) Derivatives and Risk Management in Shipping. Witherbys. Kontovas, C. A. and H. N. Psaraftis (2009) Formal safety assessment: a critical review. Marine Technology 46(1): 45–59. Lloyd’s List (2008a) IMO sulphur limits deal could see more freight hit the road. April 10. Lloyd’s List (2008b) An efﬁcient ship is a green ship, says GL. July 30. Lloyd’s List (2009a) CKYH carriers agree to super-slow steaming. November 16. Lloyds List (2009b) BV chief rejects rival’s view on slow steaming. November 23. McConville, J. (1999) Economics of Maritime Transport: Theory and Practice. London: Witherby. Moccia, L., J.-F. Cordeau, M. Gaudioso and G. Laporte (2006) A branch and cut algorithm for the quay crane scheduling problem in a container terminal. Naval Research Logistics 53, 45–59. Notteboom, T. E. and B. Vernimmen (2009) The effect of high fuel costs on liner service conﬁguration in container shipping. Journal of Transport Geography 17: 325–37. Perakis, A. N. and N. Papadakis (1987) Fleet deployment optimization models, part 1. Maritime Policy and Management 14(2): 127–44. Psaraftis, H. N. and C. A. Kontovas (2009) Ship emissions: logistics and other tradeoffs.

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In S. O. Erikstad (ed.), IMDC 2009: 10th International Marine Design Conference, vol. 2, pp. 904–21. Trondheim, Norway: Tapir Academic Press. Psaraftis, H. N. and C. A. Kontovas (2010) Balancing the economic and environmental performance of maritime transportation. Transportation Research Part D: Transport and Environment 15(8): 458–62. Rana, K. and R. G. Vickson (1991) Routing containerships using Lagrangean relaxation and decomposition. Transportation Science 25(3): 201–14. Ronen, D. (1982) The effect of oil price on the optimal speed of ships. Journal of the Operational Research Society 33: 1035–40. Ronen, D. (2011) The effect of oil price on containership speed and ﬂeet size. Journal of the Operational Research Society 62: 211–16. Stahlbock, R. and S. Voss (2008) Vehicle routing problems and container terminal operations – an update of research. In B. Golden,

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S. Raghavan and E. Wasil (eds.), The Vehicle Routing Problem: Latest Advances and New Challenges, pp. 551–89. New York: Springer. Steenken, D., S. Voss and R. Stahlbock (2004) Container terminal operation and operations research – a classiﬁcation and literature review. OR Spectrum 26: 3–49. Stopford, M. (2009) Maritime Economics. 2nd edn. London: Routledge. Talley, W. K. (1990) Optimal containership size. Maritime Policy and Management 17(3): 165–75. Thompson, P. M. and H. N. Psaraftis (1993) Cyclic transfer algorithms for multivehicle routing and scheduling problems. Operations Research 41(5): 935–46. TradeWinds (2009) Lindo shipyard played key role in design innovation. May 1. Vis, I. and R. De Koster (2003) Transshipment of containers at a container terminal: an overview. European Journal of Operational Research 147(1): 1–16.

20

Ship Finance: US Public Equity Markets Costas Th. Grammenos and Nikos C. Papapostolou

20.1

Introduction

Since World War II the shipping industry, one of the most capital-intensive, has utilized a wide spectrum of capital sources for ﬁnancing the acquisition of newbuilding vessels and the sale and purchase of second-hand vessels. A shipping company’s decision on how to ﬁnance its replacement and/or growth plans is very important to the success of the project. In shipping ﬁnance there are three main categories of capital sources: equity ﬁnance, mezzanine ﬁnance and debt ﬁnance. In the case of equity ﬁnancing, shipping companies mainly use the following types: the owner’s private equity; the company’s retained earnings; and equity offerings, public or private. The main types in the case of mezzanine ﬁnance are: preference shares; warrants; and convertibles. Finally, in the case of debt ﬁnancing shipping companies mainly utilize: bank loans; export ﬁnance; bond issues (public or private placements); and leasing.

Grammenos (1989) suggests that the dominance of bank ﬁnance (Grammenos 1979, 2010b) and capital markets as sources of ﬁnance for shipping companies may be explained by the pecking-order theory of capital structure (Myers 1984, 2001; Myers and Majiluf 1984); one has to take into account, however, the speciﬁc conditions of the shipping companies. According to the pecking-order theory, in an extremely compact form and at the risk of oversimpliﬁcation, a company prefers to ﬁrst use internally generated funds and safe debt that is reasonably close to default-risk-free to ﬁnance positive net asset value (NPV) projects. By doing so, the company avoids the cost of ﬁnancial distress and maintains ﬁnancial slack in the form of reserve borrowing power. In the case where external ﬁnance is required, the company will issue the safest security ﬁrst, for instance debt, convertible bonds and then equity.1 Hence, a close relation can be detected between how shipping companies seek ﬁnance and the pecking-order theory.

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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“The pecking-order theory can be rejected if we require it to explain everything” (Myers 1984). For example, there are shipping companies that have issued equity when they could issue debt; but when we look at the cumulative amount raised, the heavy reliance on internally generated funds and bank debt is clear. The peckingorder theory enjoyed a period of ascendancy in the 1990s, but it has recently fallen on hard times (Huang and Ritter 2009). Baker and Wurgler (2002) propose a new theory regarding capital structure, the socalled market timing theory, where companies issue securities depending on the relative costs of equity and debt; that is, equity is preferable when companies perceive the relative cost of equity as low, and they prefer debt otherwise. Huang and Ritter (2009) also argue that equity issues are not necessarily more expensive than debt issues when the equity risk premium is low; furthermore, their results suggest that companies may prefer to raise funds when the cost of equity is low in order to strengthen their internal funds; hence, a larger proportion of the ﬁnancing deﬁcit is funded by external equity. Regarding shipping companies and their decision to raise funds externally, through either equity or debt, it can be argued that the market timing theory is more applicable for the period 2003–10. For instance, during this period the ﬁnancial markets experienced a wave of initial public and secondary offerings by shipping companies, while at the same time the issuance of high-yield bonds also increased. This fact may indicate that the raising of external ﬁnance is purely dependent on the shipping company’s perception of the costs of equity and debt and which better suits each individual company, always taking into account the particulari-

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ties and needs of the economic and shipping cycles. As far as the above decision goes, we cannot disregard the world ﬁnancial crisis of 2008–9, when the availability of bank ﬁnance became very limited because of the lack of conﬁdence between banks; which was also reﬂected by the TED spread.2 As a result, a number of shipping companies were pressurized to seek alternative ways of ﬁnancing. According to Matt McCleery, the shipping ﬁnance market changed dramatically in 2009: “It is fair to say that the major trend in 2009 was the reduction of traditional debt and an increase in owner’s own equity, capital markets and export credit guarantees.”3 To sum up, when it comes to external ﬁnancing, one may argue that shipping companies have come through two stages of capital structure: in the 1990s the pecking-order theory seems to be dominant in explanations of the decision of external ﬁnancing, whereas from 2000 onwards the market timing theory seems to apply better. This chapter concentrates on the US equity capital market as a source of ﬁnance for shipping companies and gives an overview of this market, since it is the largest of its kind. In addition, it discusses important issues for the shipping companies that utilize this market for ﬁnancing and the investors who invest in shipping equities. Speciﬁcally, the chapter is structured as follows: Section 20.2 provides an introduction to the US shipping equity capital markets, the possible reasons that lead shipping companies to seek a public listing, the advantages and disadvantages of such a decision, and the importance of the underwriter. Section 20.3 provides an overview of shipping stocks issuance volume trends in the US for the period 1987–2010. The factors

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that may affect the pricing and long-run performance of shipping stocks are discussed in Section 20.4, and Section 20.5 deals with key issues regarding investors and shipping companies in the US equity capital markets. Section 20.6 concludes the chapter.

20.2 US Shipping Equity Capital Markets: Reasons to Go Public, Advantages and Disadvantages, and Underwriters An equity public offering is a sale of equity securities made available publicly by companies already listed or about to be listed on stock exchanges (initial public offerings).4 Most shipping companies start out by raising capital from the owner’s own funds and the banking sector. Over the years, equity capital markets have played a minor role in the ﬁnancing of the shipping industry, for a number of reasons, such as the reluctance of the owners of shipping companies to dilute control and disclose information, and the unattractiveness of the shipping industry to the investment community, often because of its inability to provide stable proﬁt and income streams. Nevertheless, this reluctance to enter the equity capital markets appeared to fade away during the stock and shipping bull markets of 2003–8; this is well documented by the increase in the number of shipping companies entering the US equity capital markets for the ﬁrst time, or by the secondary offerings of already listed companies (see Table 20.1). The need for capital markets, especially those of New York and London, as a source of ﬁnance for shipping companies was ﬁrst highlighted by Grammenos (1985).

In certain parts of the 1970s, the 1980s and late 2000, two of the major causes of oversupply were the liberal availability of debt ﬁnance for newbuildings from providers of credit, and the corresponding willingness of shipowners to become excessively geared. This policy proved successful for shipping companies in prosperous markets when the return on assets exceeded the cost of debt, and was reﬂected in rapid ﬂeet expansions, particularly in the 1967–73 and 2003–8 periods. However, the shipping crises of the 1970s, the 1980s, and to a certain extent 2008–9, resulted in severe debt-servicing difﬁculties and an erosion of the industry’s equity base. The importance of less traditional shipping ﬁnance sources – such as the capital markets – emerged in the second half of the 1980s and became apparent in the twentyﬁrst century. The main reasons are: (1) the temporary difﬁculty the banking system had in providing on time the necessary funds for newbuilding or second-hand purchases; this happened during the banking crisis of 1982–5 and the world ﬁnancial crisis of 20089; (2) the depletion of the equity base of shipping companies in the mid1980s; (3) the recent large-scale vessel replacement program; (4) high vessel prices in the 1999s and 2000s; (5) the emergence of a new generation of shipowners with a different academic background and a more liberal philosophy towards the ownership of the vessel; (6) the need to increase the size of shipping companies; and (7) the occasional ease of raising capital for the ﬁrst time once a project/story has been presented to the investment community by the sponsors/investment banks (who are familiar with the ﬁnancial and shipping markets) and attract its interest. The last reason gives the opportunity to shipping companies to

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

28,872.42 27,130.70 15,165.47 15,235.45 28,632.90 48,403.77 70,932.41 55,488.59 42,020.60 68,553.57 54,238.80 66,965.41 82,468.65 98,190.86

Amount raised ($million)

2.10 1.97 1.10 1.11 2.08 3.52 5.15 4.03 3.05 4.98 3.94 4.87 5.99 7.13

% of total amount raised

676 340 278 295 457 750 981 943 694 1,093 794 632 726 780

No. of issues

All US equity – IPOs

42.71 79.80 54.55 51.65 62.65 64.54 72.31 58.84 60.55 62.72 68.31 105.96 113.59 125.89

Average amount raised per issue ($million) 139.44 82.50 232.95 0.00 0.00 83.76 289.40 221.90 200.55 162.96 288.65 12.00 0.00 0.00

Amount raised ($million)

1.23 0.73 2.05 0.00 0.00 0.74 2.55 1.95 1.76 1.43 2.54 0.11 0.00 0.00

2 2 5 0 0 2 3 3 2 3 2 1 0 0

69.72 41.25 46.59 0.00 0.00 41.88 96.47 73.97 100.28 54.32 144.33 12.00 0.00 0.00

No. Average % of of amount total amount issues raised per issue raised ($million)

US shipping IPOs

31,692.16 19,866.69 33,165.70 24,577.48 45,800.55 48,989.48 65,501.71 58,046.09 79,450.60 110,704.32 123,293.94 144,465.35 161,889.89 197,255.60

Amount raised ($million)

1.16 0.73 1.22 0.90 1.68 1.80 2.40 2.13 2.91 4.06 4.52 5.30 5.93 7.23

% of total amount raised 554 430 548 434 702 743 952 804 863 1113 999 942 772 749

No. of issues

US shipping – secondary offerings

57.21 46.20 60.52 56.63 65.24 65.93 68.80 72.20 92.06 99.46 123.42 153.36 209.70 263.36

0.00 0.00 50.95 92.39 0.00 56.76 342.43 89.85 128.69 418.13 382.05 145.25 50.00 0.00

0.00 0.00 0.39 0.70 0.00 0.43 2.61 0.68 0.98 3.19 2.91 1.11 0.38 0.00

0.00 0.00 50.95 46.20 0.00 56.76 114.14 44.93 64.35 104.53 127.35 145.25 50.00 0.00

(Continued)

0 0 1 2 0 1 3 2 2 4 3 1 1 0

No. Average Amount % of Average of amount raised total amount raised per ($million) amount issues raised per issue raised issue ($million) ($million)

All US equity – secondary offerings

Table 20.1 US Initial Public Offerings and Secondary Offerings statistics 1987–2010 (as of March 2010)

3.50 3.92 3.74 7.55 5.59 6.62 9.75 4.01 3.78 0.49 43.89

56.11

100.00

772,186.11

1,376,294.85

% of total amount raised

48,235.39 53,952.51 51,505.82 103,887.21 77,002.22 91,123.16 134,241.50 55,256.98 52,018.76 6,771.70 604,108.74

Amount raised ($million)

12,307

3,648

199 250 180 473 393 383 549 201 187 53 8,659

No. of issues

All US equity – IPOs

(Continued)

Source: Thomson Reuters.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1987– 1999 2000– 2010 Total

Year

Table 20.1

111.83

211.67

242.39 215.81 286.14 219.63 195.93 237.92 244.52 274.91 278.18 127.77 69.77

Average amount raised per issue ($million)

11,367.80

9,653.69

304.25 257.88 0.00 1723.93 3353.69 1033.30 2012.59 315.00 0.00 653.05 1,714.11

Amount raised ($million)

100.00

84.92

2.68 2.27 0.00 15.17 29.50 9.09 17.70 2.77 0.00 5.74 15.08

76

51

3 3 0 8 17 6 9 2 0 3 25

149.58

189.29

101.42 85.96 0.00 215.49 197.28 172.22 223.62 157.50 0.00 217.68 68.56

No. Average % of of amount total amount issues raised per issue raised ($million)

US shipping IPOs

2,727,941.07

1,780,497.11

144,096.96 114,445.59 103,012.98 141,255.56 162,713.31 178,605.12 207,617.80 232,609.20 256,134.64 42,750.35 947,443.96

Amount raised ($million)

No. of issues

100.00 17,611

65.27 7,755

5.28 723 4.20 681 3.78 772 5.18 890 5.96 767 6.55 860 7.61 906 8.53 462 9.39 732 1.57 213 34.73 9,856

% of total amount raised

US shipping – secondary offerings

154.89

229.59

199.30 168.06 133.44 158.71 212.14 207.68 229.16 503.48 349.91 200.71 96.13

13,126.85

11,370.35

0.00 394.04 0.00 954.44 643.71 1740.35 3423.94 1342.03 1735.24 1136.60 1,756.50

100.00

86.62

0.00 3.00 0.00 7.27 4.90 13.26 26.08 10.22 13.22 8.66 13.38

121

101

0 5 0 7 7 12 29 9 19 13 20

108.49

112.58

0.00 78.81 0.00 136.35 91.96 145.03 118.07 149.11 91.33 87.43 87.83

No. Average Amount % of Average of amount raised total amount raised per ($million) amount issues raised per issue raised issue ($million) ($million)

All US equity – secondary offerings

SHIP FINANCE: US PUBLIC EQUITY MARKETS

increase their market share, improve their customer relations, utilize their ﬂeet better, improve their ﬁnancial ﬂexibility, have greater economies of scale, and ﬁnally reduce their overall cost of ﬁnance. Panayides and Gong (2002) have also outlined the importance of mergers and acquisitions directed at achieving the ﬁnancial, economic and strategic objectives of shipping companies, and their impact directly and immediately on the value of the company. Grammenos and Marcoulis (1996b) – in the ﬁrst-ever paper on shipping initial public offerings – document that during the period 1983 to 1995 the number and size of shipping companies entering the equity capital markets increased. According to the results of the study, companies entering the equity markets for debt repayment purposes appear to be on average larger than those entering the equity markets for vessel acquisition purposes. In addition, vessel acquisition appears to be the main purpose for going public (63%), followed by asset play (24%). Debt repayment (13%) constitutes another reason for going public, with only one company deciding to go public for trading activities. In the ﬁnance literature, the Initial Public Offering (IPO) decision as a strategic move to raise equity ﬁnancing for growth purposes has been highlighted by Chemmanur and Fulghieri (1999) and Maksimovic and Pichler (2001). Kim and Weisbach (2008) ﬁnd that funds raised by an IPO are used for several purposes in addition to ﬁnancing growth, such as rebalancing leverage and increasing cash balances. Furthermore, Brau and Fawcett (2006) examine four issues5 related to initial public offerings using a survey of 438 chief ﬁnancial ofﬁcers (CFOs), and ﬁnd that CFOs regard initial

397

public offerings as vehicles for funding the company’s growth and developing liquidity. In addition, CFOs are concerned with the direct costs of taking the company public, for example underwriting fees,6 but they are even more concerned with the indirect cost of loss of conﬁdentiality. So, what are the advantages and disadvantages of taking a shipping company public? The fundamental advantage of going public is the reduction of ﬁnancial risk by obtaining the ﬁnance required without the use of debt ﬁnance and the corresponding obligations it entails. In contrast to debt interest and principal repayments, the company has no obligation to pay shareholders’ dividends. In the case of shipping companies the importance of reducing the ﬁnancial risk should be emphasized, because, in a decreasing freight rate market environment, when the market risk increases the ﬁnancial risk may endanger the very existence of the shipping company. Additionally, equity ﬁnance through public offerings may pave the way for prudent injections of debt, since the equity raised results in lower gearing levels; Huyghebaert and Hulle (2005) argue that an IPO allows the company to enhance its ﬁnancial ﬂexibility by generating additional sources of capital to ﬁnance its growth and expansion. When a company prospers and needs additional capital, it may ﬁnd it desirable to go public by selling shares to a large number of diversiﬁed investors. Once the stock is publicly traded, this liquidity allows the company to raise additional capital on more favorable terms. Public offerings also enhance the share liquidity of the company, which, in turn, may positively inﬂuence the company’s market value (Amihud and Mendelson 1986). Sufﬁcient liquidity in the equity

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market can be a prerequisite for raising further capital. Indeed, an important explanation of why an active market can help in obtaining further ﬁnance is that the equity price acts as a signal of the company’s value. On the other hand, once the company gets a listing, listed shares may be used as collateral for future loans or incentives for employees; Bancel and Mittoo (2009) ﬁnd evidence that family-controlled companies view IPOs as vehicles to strengthen their bargaining power with creditors without relinquishing control. A successful7 public offering and stock exchange listing will also result in the company improving its reputation and gaining prestige (Bancel and Mittoo 2001), increased market coverage (Cook, Kieschnick and Van Ness 2006; Frieder and Subrahmanyam, 2005), and transfer of monitoring costs from the lenders to the stock exchange authorities. Mourdoukoutas and Stefanidis (2009) surveyed ten Greek shipping companies that are listed on a US stock exchange and found that a public listing has met and exceeded the Chief Executive Ofﬁcers’ (CEOs)8 expectations with regard to the following: broadening and diversifying capital ﬁnancing, improving the company’s image and prestige, strengthening its bargaining power with creditors, and enhancing its entrepreneurial opportunities. Finally, a stock exchange listing also results in tighter control over the company, which reduces the probability of fraudulent actions of management. Thus, it is no wonder that a number of shipping companies have shifted the emphasis of their ﬁnance from the traditional means of ﬁnancing, such as bank loans and equity investments by the owner, family members and private investors, to

the Anglo-Saxon style of capital market ﬁnancing. On the other hand, a major disadvantage of going public is the possibility that the company’s existing shareholders will lose managerial control of the company. Relevant information will have to be furnished regularly (Pagano and Roell 1998), and such information is likely to cover sensitive areas such as salaries and terms of vessels’ employment (Grammenos 1993/2010a). Similarly, the management’s job becomes onerous and less ﬂexible, because executives have to spend time on, for example, general shareholders’ meetings and road-show presentations. Furthermore, once the company’s shares are traded publicly, its market price is inﬂuenced by external factors which are out of the management’s hands, such as the performance of stock exchanges. In addition, there are substantial one-time costs9 associated with initial public offerings (Chen and Ritter 2000; Grammenos and Marcoulis 1996b; Hansen 2001), and the income generated by the listed company is shared with the new common shareholders, in contrast to the case of a private independent company. Nevertheless, Bancel and Mittoo (2009) ﬁnd that CFOs express less concern about the costs, and perceive the beneﬁts of going public to be signiﬁcantly higher than the costs. The ﬁrst step for a shipping company willing to enter the equity capital markets is to hire an underwriter, usually an investment bank. The underwriter’s primary role is to underwrite, price and distribute the issue. The underwriting function is to undertake the risk of adverse price ﬂuctuations during the issue distribution period, in return for a fee. Thus, the underwriter’s

SHIP FINANCE: US PUBLIC EQUITY MARKETS

reputation is at stake if the ﬂotation fails, and in the case of ﬁrm commitment method – which we discuss in the following paragraph – the underwriter may also incur a ﬁnancial loss. The reputation of the underwriter is of paramount importance to both the investment bank and the issuer. Investment banks invest in reputation because it facilitates the conduct of premarket activities and generates more business, hence higher fees. At the same time, issuers concerned about price adjustments prior to the offer date are willing to pay for the reputational service as they may beneﬁt from more efﬁcient premarket activities (Chang, Chung and Lin 2010; Logue, Rogalski, Seward and Foster-Johnson 2002). For large issues – in terms of the amount raised – the risk is normally spread through an underwriting syndicate (made up of ﬁnancial institutions and brokerage houses), which carries out the distribution function by selling through its own network of banks and stockbrokers. Regarding the issuing method, there are three different types of agreement. The ﬁrst one is the ﬁrm commitment, where the underwriter agrees to purchase the entire issue from the issuer and then re-offer it to the general public. With this type of agreement the underwriter has guaranteed to provide a certain amount of cash to the issuer and the risk of the issue falls entirely upon the underwriter. If the underwriter fails to sell the amount of the securities being purchased, the agreed sum of money still has to be paid to the issuer. The second type of agreement is known as a best efforts agreement; the underwriter agrees to sell the securities for the issuer but does not guarantee the amount of capital to be raised by the issue. Book-building, the third type

399

of agreement, is the most commonly used in shipping. It refers to the collection of bids from investors, which is based on an indicative price range, the issue price being ﬁxed after the bid closing date. The principal players involved in a book-building process are the Book Running Lead Manager (BRLM), the syndicate members, the shipping company and the potential investors. Syndicate members are appointed by the BRLM. The book-building process is undertaken basically to determine the investor’s appetite for the shares at a particular price range. It takes place before a public offering is made and helps to determine the issue price and the number of shares to be issued. In terms of experience, size and prestige, there is a wide range of underwriters. In order to ﬁnd the one best suited to its needs, the shipping company can turn for advice to lawyers and accountants. It is useful to ﬁnd an underwriter who has done previous initial and secondary public offerings of shipping companies.10 It is vital that the selected underwriter should be able to put together a strong syndicate: the desirable choice is to have a broad base of institutional and individual investors over many different capital cities (geographical spread). Furthermore, good underwriters support the stock for several weeks after the offering date and provide buying in the aftermarket to support the price – this is perfectly legal and is incorporated as part of the underwriting agreement. Finally, analysts’ coverage subsequent to the offering is important, as analysts maintain an information ﬂow about the company and the industry to the investing public; thus, it is beneﬁcial for all the major players in an IPO: the underwriters, the issuer and the investors.

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20.3 US Shipping Equities 1987–2010 At the beginning of the second half of the 1980s an interesting experiment took place. Seven newly established shipping companies raised funds in the US public capital markets. It was a period during which the capital base of shipping companies, as mentioned previously, had been depleted; banks were ﬁnancing a smaller percentage of the vessel’s market value – approximately 50–60 percent – while a number of banks had abandoned ﬁnancing the shipping industry altogether. These companies, some of which eventually became public growth companies in 1987–92, were established as limited life companies. This meant that a liquidation of the company would take place provided that the vessel’s market value had increased; otherwise, the life would be extended until the right time came. Their goal was to exploit the expected rise of the shipping market, materialize capital gains, and also make operational proﬁts, whereas the promoters (issuers of shares) and managers of these companies would be rewarded according to a distribution scheme (approximately one-third of the operating proﬁts and capital gains). Many of these companies failed because the anticipated shipping boom, mainly in the tanker sector, did not take place and, as a result, they could not meet the expected targets or returns of investors. In addition, the vessels’ repair and maintenance costs proved much higher than projected, while at the same time insurance premiums soared. However, this pioneering (for the shipping industry) method attracted the interest of a younger generation of shipowners who, at a later stage, between 1993– 7 and 2004–7, were to raise substantial funds

– through growth companies this time – from the international equity capital markets. As is evident from ﬁgure 20.1, equity offerings by shipping companies in the US experienced a strong period of initial public issuance during 2004–7, 2005 being the best year in the history of the shipping IPOs listed in the US. In total, shipping companies raised US$3.35 billion in that year by entering the equity capital markets for the ﬁrst time. Overall, for the period 1987–2010, shipping companies have raised US$11.37 billion by initial public offerings. Similarly, secondary offerings by shipping companies experienced a boost after 2004, 2007 being the best year. In total, secondary offerings by shipping companies reached US$13.12 billion during the period 1987–2010. Let us now have a closer look at the issuance trends that the US shipping equity capital markets have experienced. Table 20.1 is categorized by year, overall and shipping companies. It shows statistics for the initial and secondary public issues in the US equity markets in the period 1987– 2010. Shipping initial public offerings activity was at its highest levels during the years 2004 to 2007 – in percentage terms as well as in terms of the total amount raised; in particular, year 2005 accounts for 29.50% of the total amount raised by shipping companies through initial public offerings. Similarly, secondary offerings by shipping companies experienced a boom from 2006 to 2009, with 2007 accounting for 26.08% of the total amount raised through secondary offerings. Furthermore, when the sample is split into two periods, 1987–99 and 2000–10, we can observe that issuance activity for IPOs and secondary offerings in the second period accounts for 84.92% and 86.62% of the total, respectively.

401

SHIP FINANCE: US PUBLIC EQUITY MARKETS

4,000

14,000 IPOs – amount raised per year (SU$ million – left axis)

3,500 3,000

Secondary offerings – amount raised per year (US$ million – left axis)

12,000

IPOs – cumulative amount raised (US$ million – right axis) Secondary offerings – cumulative amount raised (US$ million – right axis)

10,000

2,500 8,000 2,000 6,000 1,500 4,000

1,000

2,000

500 0

0 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987

Figure 20.1 US shipping IPOs and secondary offerings 1987–2010 (as of March 2010). Source: Thomson Reuters.

The main reasons for the increased issuance activity in shipping initial and secondary offerings in 2004–7 were that: (1) the general investment sentiment was very good; the world economy had come out of the 2000–3 downturn and tapping the equity public markets was easier than before; (2) shipping market conditions – especially in the dry-bulk sector – were very good; (3) there was a need for funds to ﬁnance the overall ﬂeet expansion program (see Tables 20.2 and 20.3) due to the growing Chinese economy, which was expected to increase the demand for seaborne trade; and (4) the appetite of investment banks for gaining a fee-generating income by completing equity offering deals was good. If we compare the shipping initial public offerings with the overall US initial public offerings for the period 2004–7, we can

argue that the issuing activity coincides and ﬁts well with the hot issue puzzle. The hot issue puzzle arises where there is a cyclical pattern in the IPO market and was originally documented by Ibbotson and Jaffe (1975). Ritter (1984) extended this study and found that hot issue markets continue to exist. Hot and cold markets are deﬁned on the basis of the monthly IPO volume (Alti 2006; Bayless and Chaplinsky 1996; Helwege and Liang 2004), and it can be argued that the hot issue market phenomenon also applies in the case of shipping IPOs for the period 2004–7. Another observation is the increase in the average amount raised per issue – on a yearly basis – for the period 2004–7, for both shipping and overall equity initial public offerings, an observation that does not hold for shipping secondary offerings. The average amount per issue, for all categories

Table 20.2

Total world ﬂeet (DWT million), March 2010 Tanker

DWT (million) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

280,907 286,019 288,794 295,862 290,915 295,492 303,819 320,172 343,264 363,159 385,411 406,582 441,440

Y/Y %

1.82 0.97 2.45 −1.67 1.57 2.82 5.38 7.21 5.80 6.13 5.49 8.57

Dry-bulk DWT (million) 264,483 263,772 266,957 274,854 286,905 294,780 302,171 322,587 345,160 368,479 392,596 417,842 475,550

Y/Y %

−0.27 1.21 2.96 4.38 2.74 2.51 6.76 7.00 6.76 6.55 6.43 13.81

Container DWT (million) 49,281 55,049 57,748 63,404 71,054 78,524 85,511 93,883 106,161 123,720 140,612 158,411 171,790

Y/Y %

11.71 4.90 9.79 12.07 10.51 8.90 9.79 13.08 16.54 13.65 12.66 8.45

Total (tanker + drybulk + container) DWT (million) 594,670 604,840 613,498 634,119 648,874 668,795 691,501 736,641 794,585 855,357 918,619 982,834 1,088,780

Y/Y %

1.71 1.43 3.36 2.33 3.07 3.40 6.53 7.87 7.65 7.40 6.99 10.78

Source: Clarksons Shipping Intelligence Network.

Table 20.3

Total world orderbook (DWT million), March 2010 Tanker

DWT (million) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

42.49 46.10 37.03 51.01 61.24 58.18 76.78 86.94 87.16 150.69 168.76 182.89 140.71

Y/Y %

8.51 −19.67 37.73 20.06 −5.00 31.97 13.23 0.26 72.88 11.99 8.37 −23.06

Dry-bulk DWT (million) 69.07 70.45 70.71 86.66 85.40 90.34 132.60 155.72 162.70 255.16 421.78 506.98 434.87

Y/Y %

2.00 0.37 22.57 −1.46 5.79 46.78 17.44 4.48 56.83 65.30 20.20 −14.22

Source: Clarksons Shipping Intelligence Network.

Container DWT (million) 9.92 8.20 11.91 18.38 17.04 14.04 32.67 45.09 54.22 57.89 78.80 72.32 55.58

Y/Y %

−17.35 45.33 54.30 −7.27 −17.61 132.60 38.03 20.25 6.78 36.10 −8.21 −23.16

Total (tanker + drybulk + container) DWT (million) 121.47 124.75 119.65 156.05 163.68 162.56 242.04 287.75 304.08 463.74 669.34 762.19 631.15

Y/Y %

2.69 −4.08 30.42 4.89 −0.68 48.89 18.88 5.68 52.51 44.33 13.87 −17.19

SHIP FINANCE: US PUBLIC EQUITY MARKETS

and for the whole period 1987–2010, ranges between US$108 million and US$155 million, with shipping initial public offerings having an average of US$150 million and secondary shipping offerings an average of US$108 million. For all four categories, when we compare the two periods (1987–99 and 2000–10), we can observe a dramatic increase in the average of the amount raised; thus, we can argue that issues for the second part (2000–10) of our sample are larger in size. Overall, we can conclude that shipping equity initial and secondary offerings activity had a dramatic boost for the period 2004–7, and that on average the issues offered during this period were larger in terms of the amount raised; that is, shipping companies entering the US equity capital markets are larger in size, in terms of market capitalization. The higher volume of shipping IPOs can be attributed to the expansion of the ﬂeet and the orderbook during the same period. As can be observed in Table 20.2, there was a steady increase in the yearly growth of the ﬂeet after 2004; for example, the combined total ﬂeet of tanker, dry-bulk and container vessels increased by around 7 percent per year after 2004, whereas the growth rate before was around 3 percent per year. At the same time, shipping companies needed additional capital to ﬁnance their ﬂeet expansion, which is also evident from the large increase in the orderbook, especially for the periods 2004/5 and 2007/8 (Table 20.3). Furthermore, the increased appetite for secondary shipping equity offerings during 2004–2007 illustrates that, once listed, shipping companies continue to utilize this market as a source of funding. On the other hand, most of the secondary offerings taking place in 2008/9 were mainly for existing debt repayment purposes.

403

Finally, it appears that a new model for ﬁnancing vessel acquisitions is currently taking place. It seems that shipping companies are willing to ﬁnance their ﬂeet growth primarily through equity and internally generated cash ﬂow with no or limited debt. Examples of this are the IPOs of Baltic Trading Ltd. and Crude Carriers Corp. that took place in March 2010. In both cases, the companies stated in their prospectuses that “we expect to ﬁnance future vessel acquisitions primarily through future equity follow-on offerings and internally generated cash ﬂow.” This of course substantially reduces the ﬁnancial risk, particularly in periods of deteriorating freight rate markets when the market risk increases. From discussions that the authors have had with representatives of the younger generation of shipowners it seems that this equity ﬁnancing model is also in their minds; provided the market conditions are favorable, they may pursue this path at an increasing rate. Nevertheless, the world ﬁnancial crisis, which led to limited availability of bank ﬁnance, should always be kept in mind, and the fact that shipping companies prefer equity and internally generated cash ﬂow for vessel acquisition may be partially attributed to the unavailability of bank ﬁnance. Whether this model may constitute a further structural change in shipping ﬁnance remains to be seen.

20.4 Pricing and Long-Run Performance of an IPO The most researched pattern associated with initial public offerings is underpricing.11 There is extensive empirical literature documenting the underpricing phenomenon, due to its persistence in IPO deals and

404

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the fact that it has increased over time. Work on the underpricing phenomenon includes: Ibbotson (1975), who studies the initial performance of newly issued common stocks offered to the public during the 1960s and ﬁnds an average initial return of 11.4 percent; Ibbotson, Sindelar and Ritter (1988), who report an average underpricing of 21 percent for 2,259 ﬁrms during 1980–4; and Ritter and Welch (2002), who ﬁnd an average initial day return of about 19 percent; more recently, Ritter (2009) documents that for the period 1960–2009 the average initial day return for the US IPOs stood at 16.9 percent. The papers conclude that underpricing is a persistent feature of the IPO markets, that the magnitude of underpricing changes over time, and, ﬁnally, that undepricing exists in every stock market.12 Over the years, different theories have been developed to explain the underpricing phenomenon; they can be categorized as asymmetric or symmetric information theories (Ritter and Welch 2002).13 Theories based on asymmetric information include: (1) winner’s curse theory (Rock 1986), (2) information disclosure theory (Benveniste and Spindt 1989), (3) principal–agent theory (Baron 1982), and (4) signaling theory (Allen and Faulhaber 1989).14 Theories that rely on the symmetric assumption, on the other hand, include: (1) legal liability theory (Tinic 1988), and (2) prospect theory (Loughran and Ritter 2002).15 Grammenos and Marcoulis (1996b) investigates 31 international shipping IPOs for the period 1983–95, and the results seem to be in line with the then existing literature, as shipping stocks’ initial day returns are of the magnitude of 5.32 percent on average.16 Moreover, gearing is found to be the only explanatory factor and it positively

affects underpricing, while for a reduced sample that excludes seven limited life shipping funds the proportion of equity offered has also explanatory power over the crosssectional underpricing. Finally, the study gives evidence that the average direct cost of going public is approximately 8 percent of the amount raised. Cullinane and Gong (2002) investigated transportation IPOs in mainland China and Hong Kong and found evidence that freightrelated IPOs are subject to more severe underpricing than non-freight-related IPOs, 104.95 percent and 19.17 percent respectively. Merikas, Gounopoulos and Nounis (2009) investigated global shipping IPOs and found an average underpricing of 17.69 percent. In addition, this study examines factors that may explain ﬁrst trading day returns, and concludes that underpricing is positively related to the age of the ﬁrm, the reputation of the stock market, and the market conditions prevailing at the time of the issue; on the other hand, the reputation of the underwriter negatively affects underpricing. On a similar note, Merikas, Gounopoulos and Karli (2010) examine shipping initial public offerings in the US for the period 1987–2007 and ﬁnd an average underpricing of 4.4 percent. It is evident from the ship ﬁnance literature that underpricing for the US shipping IPOs is not that high; on a global scale it is much higher, with Asian shipping IPOs leaving the most money on the table for investors. Another pattern associated with initial public offerings is poor post-issue performance in the longer term compared to benchmark indices or stocks. Using a sample of 1,526 IPOs that took place in 1975–84, Ritter (1991) ﬁnds that, in the three years after going public, stocks signiﬁcantly underperform against a set of comparable stocks

SHIP FINANCE: US PUBLIC EQUITY MARKETS

matched by size and industry. Levis (1993) also reports that 721 IPOs in the UK (1980– 8) have an average ﬁrst day return of 14.3 percent and underperform against relevant benchmark indices during the ﬁrst 36 months of public trading.17 Furthermore, Ritter and Welch (2002) arrive at the same underperformance conclusion where the average market-adjusted 3-year buy-andhold return for the period 1980–2005 is −20.6 percent. In the case of shipping stocks, Grammenos and Arkoulis (1999) examine the long-run performance of 27 shipping IPOs issued in the stock exchanges of seven different countries in the period 1987–95. They ﬁnd that a portfolio of shipping IPOs underperforms the local stock market indices by 36.79% by the second anniversary of their public listing. However, no underperformance is documented when IPO returns are compared to the Morgan Stanley Capital International (MSCI) Shipping Index. Merikas, Gounopoulos and Nounis (2009) argue that, in the long run, shipping IPOs underperform after a 5-month holding period; speciﬁcally, using the buy-and-hold abnormal returns (BHARs) as a measurement of performance, the study ﬁnds an underperformance of 15.72 percent. Similarly, Merikas, Gounopoulos and Karli (2010) study the long-run performance of US shipping IPOs and conclude that holding these stocks for periods of one, two and three years offers returns of 7.50, 7.73 and 3.26 percent respectively, as measured by buy-and-hold abnormal returns. The factors that may affect the long-run performance of shipping IPOs are investigated by Grammenos and Arkoulis (1999). The study ﬁnds gearing to be positively related to the after-market performance, something that can be attributed to the

405

higher rates of return required by investors for taking more risk (normally 15–20% per annum), and to the lower ﬁnancial leverage of the companies in the secondary market, perceived as a positive signal. On the other hand, ﬂeet age is found to be negatively related to the share performance in the long run – a result not surprising, as operation of older vessels usually involves higher running costs in terms of maintenance and repairs, insurance and oil consumption. Merikas, Gounopoulos and Karli (2010) ﬁnd that the operating history of the company will positively affect its stock long-term performance, while a reputable underwriter will affect negatively the performance of the shipping stocks. Additionally, shipping stocks performance seems to be positively affected when these are listed in reputable stock exchanges and during hot periods. The factors that may inﬂuence shipping stocks’ returns in the longer term have also been investigated by a number of studies. Grammenos and Marcoulis (1996a) – in the ﬁrst-ever paper on shipping capital markets – ﬁnd that shipping shares’ returns are positively related to the ﬁnancial leverage when this is measured in book value terms (BV), and negatively related to the average age of the ﬂeet whether measured on a per vessel or a per deadweight basis.18 Stock market beta and the dividend yield are also explanatory factors but not as strong as the two mentioned before. Kavussanos and Marcoulis (2000a, 2000b) also investigate the US transport industry and detect explanatory power of industrial production and oil prices on stock returns. Grammenos and Arkoulis (2002) provide evidence about the relationships of global macroeconomic sources of risk with shipping returns internationally. The paper suggests that oil prices and laid-up tonnage19

406

COSTAS TH. GRAMMENOS AND NIKOS C. PAPAPOSTOLOU

are negatively related to shipping stock returns, and the exchange rate is found to be positively related to shipping stock returns. Finally, Drobetz, Schilling and Tegtmeier (2010) identify the world stock market index, currency ﬂuctuations against the US dollar, changes in industrial production and changes in oil prices as long-run systematic risk factors that drive expected shipping stock returns.

20.5 Key Issues: Investors and Shipping Companies The manner in which the shipping industry managed its relations with the international equity markets before the twenty-ﬁrst century was not very successful, and the main reason goes beyond the shortcomings of underwriters and the thin nature of many of the shipping deals. The main problem was that the great majority of publicly quoted shipping companies were too small and illiquid to be of interest to large international investment institutions. At the same time the knowledge of investors regarding the shipping industry was also

limited. Nevertheless, as has been mentioned in the previous section, there was a massive wave – compared to the past – of US shipping IPOs during 2004 to 2007. This resulted in the shipping industry gaining a higher proﬁle on the global investment stage, and at the same time China’s economic boom helped the industry to be a mainstream investment theme. Such exposure has made shipping companies a target of private equity and big institutional interest. Table 20.4 shows the institutional ownership for a sample of tanker, dry-bulk and container stocks. As can be observed, the number of institutional investors who hold shipping stocks in their portfolios is quite large (as of March 2010). For example, Overseas Shipholding Group has 387 institutional investors whose share in the company accounts for 88.82 percent. Other notable examples are Genco Shipping & Trading, Alexander & Baldwin Inc. and Horizon Lines Inc., where the holdings of institutional investors are 85.05, 76.42, and 90.90 percent respectively. Furthermore, in the years covered in Figure 20.2, the increase in the number of analysts covering shipping

25 19.5

20 15 10

12.0 11.8

19.0

13.0

12.5 9.8

8.3 6.3

5

2.3

0

Dry bulk sector

Tanber sechor 2005

2006

2007

2008

Figure 20.2 Average number of analyst coverage per share. Source: Norton (2008) and Bornozis (2010).

2009

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Table 20.4 Institutional ownership per sector (as of March 2010)

Tanker sector Overseas Shipholding Group (OSG) Teekay Corp. (TK) General Maritime Corp. (GMR) Tsakos Energy Navigation (TNP) Nordic American Tanker Shipping (NAT) Frontline Ltd. (FRO) Dry-bulk sector Genco Shipping & Trading Ltd. (GNK) Navios Maritime Partners LP (NMM) Eagle Bulk Shipping Inc. (EGLE) Diana Shipping Inc. (DSX) Navios Maritime Holdings Inc. (NM) Dryships Inc. (DRYS) Container sector Horizon Lines Inc. (HRZ) Alexander & Baldwin Inc. (ALEX) Seaspan Corp. (SSW) Euroseas Ltd. (ESEA)

Total number of holders

% of shares outstanding owned

387 297 219 175 253 426

88.82 45.19 36.16 29.05 20.41 19.83

386 80 281 322 166 382

85.05 41.89 37.78 34.45 28.39 23.02

212 330 293 85

90.90 76.42 24.68 18.71

Source: Thomson Reuters.

stocks may be another indication that shipping stocks and the shipping industry are increasingly regarded by investors as a mainstream investment opportunity, rather than as a niche sector for just a few specialized investors. These two facts – the increase of institutional investors interested in shipping stocks and their coverage by a larger number of analysts – constitute another major change for the shipping capital markets. As Grammenos (1993/2010a) notes, in 1989 there were no more than a dozen institutional investors seriously interested in shipping stocks and only a handful of analysts covering shipping stocks. Public shipping companies listed in the US strengthened and expanded the concept of corporate structure.20 They are large in

size, in terms of market capitalization and deadweight tonnage, because of their ﬂeet expansion, and in increased market value, because of their share price appreciation and also because of their growth strategies through mergers and acquisitions. The impact of mergers and acquisitions on the share price of shipping stocks, and hence on their market value, has been highlighted by Panayides and Gong (2002), who studied the share price reaction to mergers and acquisition announcements in liner shipping, and by Samitas and Kenourgios (2007), who investigated the case of tramp shipping companies. Both studies concluded that merger and acquisition announcements have a positive impact on the stock price of the companies, whence their size.

408 Table 20.5

All sectors Tanker Dry-bulk Containers

COSTAS TH. GRAMMENOS AND NIKOS C. PAPAPOSTOLOU

Deadweight and average age of US public shipping companies Total world DWT (mill) (tanker + drybulk + container)

Total US public shipping companies DWT (mill)

DWT of US public shipping companies as % of total world DWT

Average age of total world ﬂeet

Average age of US public shipping companies

1,088,780.00 441,440.00 475,550.00 171,790.00

96,622.18 63,283.93 23,192.45 6,619.12

8.87 14.34 4.88 3.85

11.23 9.00 14.40 10.30

10.35 9.96 9.43 14.63

Source: The Costas Grammenos International Centre for Shipping, Trade and Finance; data collected from Clarksons Shipping Intelligence Network. Sample includes 42 US publicly listed shipping companies (as of March 2010).

Table 20.5 shows that 8.87 percent of the total world deadweight tonnage (tanker, dry-bulk and container vessels) is controlled by companies that are listed on a US stock exchange, indicating their increased importance and the effect that may have in the shipping industry. In the case of the tanker sector, the ﬂeet of shipping public companies listed in the US is even larger in percentage terms of the total deadweight tonnage of the sector, standing at around 14 percent. On average, dry-bulk public companies operate a young ﬂeet in comparison with the sector’s average: the sector average ﬂeet age is 14.40 years and that of public companies 9.43 years. A major problem, in many cases of shipping stocks, is that the market value of a shipping company is close to, or sometimes below, the net asset value (NAV) of the company.21 This means that, according to analysts and investors, shipping does not require infrastructure and expertise, which creates goodwill. The low valuation given to shipping companies is also evident from the low multiples that shipping stocks carry. Overall, there are some areas regarding shipping stocks and the shipping industry in

general which need attention. These may include – apart from the modest valuation of shipping companies – the high gearing of shipping companies and the highly volatile proﬁtability from operations and sale and purchase .22 Addressing the aforementioned areas will help shipping stocks further by attracting more institutional investment support on a long-term basis, rather than trading funds which take advantage of a cyclical opportunity. For investors,23 the ﬂuctuation in returns was, and remains, a major disadvantage; and that is one of the reasons for the investor’s appetite, in the last couple of years, for higher and more stable dividends. According to Grammenos (1989) the inﬂuences on investors’ decisions to invest in shipping equity are both external and internal. External factors are related to the overall world economy, the development in ﬁnancial markets and seaborne trade. Internal factors are related to the speciﬁc shipping company, such as management, cash ﬂow and ﬂeet quality. Internal inﬂuences are related to the internal environment of the investor: the level of knowledge of – and familiarity with – the shipping industry, and

SHIP FINANCE: US PUBLIC EQUITY MARKETS

the comparison regarding risk and return between shipping and other investment sectors. Finally, large international institutional investors have a clear preference for very large or large – in terms of market capitalization – shipping companies with an emphasis on the quality of management, the company’s market standing and its operational quality; the ﬂeet should be relatively young and of good quality, the employment should be stable, and gearing should be more conservative, while the amount of public issue should be large. For the managers of a public company, ﬂuctuations in earnings are a challenge. Some of them, in the 1990s and in the twenty-ﬁrst century, focused on developing larger companies with operational efﬁciency, marketing appeal, concentration on speciﬁc markets and stable income ﬂow. This effort may also be evident from the recent mergers and acquisitions activity in the shipping industry, the appearance of longer-term time-charter contracts with ﬁrst class charterers and the size increase of public shipping companies in terms of market capitalization.24 All the above are important issues for the shipping industry and ones that can attract the interest of large institutional investors with a longerterm investment horizon.

20.6

Summary

The utilization of sources other than traditional bank ﬁnance has been illustrated by the growing importance of public offerings and private placements for the purposes of raising equity in the US capital markets over the second part of the 1980s, the 1990s and the twenty-ﬁrst century. In the early years of this century, robust shipping market con-

409

ditions, a growing demand for seaborne trade caused by the Chinese economic growth, the need to ﬁnance the ﬂeet replacement and expansion program and the new generation of shipowners and CFOs have been factors that contributed to the high issuance volume activity in the US equity market. Developments in the banking sector such as debt securitization, the deregulation of ﬁnancial markets, advances in technology and innovation, and the trend towards fee, as opposed to interest rate, banking income (particularly in conjunction with more stringent capital adequacy rules25) have also been – in the initial stage – major contributing factors. When it comes to external ﬁnancing, it seems that shipping companies have come through two stages of capital structure; in the 1990s the pecking-order theory seems to be dominant in explaining decisions about external ﬁnancing, whereas from 2000 onwards the market timing theory seems to be more applicable. Nevertheless, we cannot disregard the world ﬁnancial crisis of 2008–9, when the availability of bank ﬁnance became very limited, thus pressurizing shipping companies to seek alternative ways of ﬁnancing. Overall, shipping equity initial and secondary offerings issuance activity had a dramatic boost in the period 2003 to 2007, and on average the issues offered during this period were larger in terms of the amount raised. Another development is that the concept of the corporate structure has been strengthened versus single-vessel shipping companies, and the companies have become larger in size through increased proﬁtability, purchases of second-hand vessels and newbuildings, mergers and acquisitions which enhance their market value, and ﬂeet expansion. Their increase in size is also manifested

410

COSTAS TH. GRAMMENOS AND NIKOS C. PAPAPOSTOLOU

by their total ﬂeet – which is also quite young – in deadweight tonnage terms in relation to the total world ﬂeet, which accounts for approximately 9 percent, indicating in that way their importance in the shipping industry. Furthermore, the large number of institutional investors holding shipping stocks in their portfolios and the increase of analyst coverage of shipping stocks are indications that shipping stocks and the shipping industry are increasingly regarded by investors as a mainstream investment opportunity rather than a niche sector for just a few specialized investors. Finally, the new model of equity ﬁnancing for vessel acquisitions, which was introduced in March 2010, may initiate a new trend for companies that are able to utilize it; that remains to be seen. Since the ﬁrst paper on initial public offerings in 1996, a relatively small number of papers have been published, but the rate is increasing. The papers mainly focus on areas covering the underpricing phenomenon, the long-run performance of IPOs and the factors that inﬂuence their performance, mergers and acquisitions, and the reasons for going public. It seems that the increased activity of shipping companies in the US capital markets (and naturally elsewhere) has captured the attention of academics. There are a number of issues, including the capital structure and the valuation26 of public shipping companies, that should be further discussed and addressed in the future.

Notes 1

According to the pecking-order theory, a targeted debt–equity mix does not exist because there are two kinds of equity,

internal and external, one at the top of the theory and the other at the bottom. 2 The TED spread is the difference between the London Interbank Offered Rate (LIBOR) (the benchmark for the interest rate banks charge one another for loans) and the rate on comparable-term Treasury bills, usually 3 or 6 months. Because a Treasury bill is considered a risk-free security, the difference between it and LIBOR, which is a gauge of banks’ conﬁdence in each other, is a good measure of concern in lending markets, In normal times the median 3-month TED spread is about 50 basis points and it rarely rises higher than 100 points. In August 2007, the TED spread was routinely above 300 basis points, and in September/October 2008 even went over 460, reﬂecting substantial anxiety about credit risk. 3 This quotation comes from a private discussion between the authors and Matt McCleery (president of Marine Money International): “Commercial banks restricted capital, and syndicated loan volume fell from US$85 billion in 2008 to US$33 billion in 2009. At the same time, capital markets bridged some of the gap, with the public equity market contributing about US$12 billion of capital and the various global bond markets contributing about US$11 billion (much of this coming from Asia). The German KG market also saw new equity stall and dropped from US$3.2 billion of equity in 2007 to US$2.4 billion in 2008 to US$0.824billion in 2009.” 4 Different methods of tapping the US equity capital markets include the special purpose acquisition company method and the atthe-market method. A special purpose acquisition company (SPAC) is a pooled investment vehicle that allows public stock market investors to invest in private equitytype transactions, particularly leverage buyouts. SPACs are shell or blank-check companies that have no operations but go public with the intention of merging with

SHIP FINANCE: US PUBLIC EQUITY MARKETS

or acquiring a company with the proceeds of the SPAC’s initial public offering. SPACs can be industry-speciﬁc or general and typically have 18 months to complete an acquisition. If the attempt is not successful the remaining cash held in trust by the SPAC must be returned to investors. For practical purposes 80% of investors must approve a target acquisition. A SPAC is a fully reporting public company, generally listed on the Over-the-Counter Bulletin Board (OTCBB). However, when an acquisition is made, a listing application is ﬁled for listing on the American Stock Exchange (AMEX), the National Association of Securities Dealers Automated Quotations (NASDAQ) or the New York Stock Exchange (NYSE), as appropriate. Shipping companies that entered the equity capital markets via this type of method include International Shipping Enterprises, Freeseas Inc. and Star Maritime Corporation. An at-the-market (ATM) offering involves the sale by an issuer of equity securities into the market periodically over time, typically at the prevailing market price, through a placement agent, or designated broker– dealer. Pursuant to a distribution or sales agreement with the broker–dealer, the issuer maintains complete control over when securities are sold, the amount sold, and the minimum price at which they may be sold. The broker–dealer is paid a commission on the securities sold, and the issuer may stop the offering at any time. Because there is no lock-up period, the issuer is generally free to pursue a traditional deal if it desires, while still keeping the at-the-market program in place. Examples of this method are the Dryships Inc., Eagle Bulk, Paragon Shipping and Euroseas 2009 offerings. 5 (1) Why do ﬁrms go public? (2) Is CFO sentiment stationary across bear and bull markets? (3) What concerns CFOs about going public? (4) Do CFO perceptions correlate with returns?

6

411

Chen and Ritter (2000) present evidence that gross spreads on IPOs are clustering at 7%, with the concentration of 7% spreads increasing during the 1990s. They argue that a possible explanation for the clustering of spreads at 7% is collusion. If underwriters compete for business on the basis of the spreads that they charge, competition will drive the spread toward the cost of providing the services. On the other hand, if underwriters agree to form a cartel they can increase their proﬁts, and a pricing mechanism would be needed to decide how much to charge; an arrangement would be [needed?] to agree to always charge the same fees (7%), with the proﬁts shared among the syndicate. 7 Many factors play a role in an IPO’s success. The most important of these is the company’s expected market capitalization. However, even a highly anticipated market capitalization does not guarantee a successful IPO. Other factors that affect an IPO’s success include the corporation’s popularity in its industry, the timing of the offering in relation to ﬁnancial market activity, the competitiveness of the stock’s price to comparable stocks, the company’s growth potential, and the reputation and ability of the underwriter. 8 In most cases the survey questionnaire was ﬁlled in by the CEO of the company; only in three cases was it ﬁlled in by the CFO. 9 Grammenos and Marcoulis (1996b) have recorded that the direct costs of shipping companies going public are on average 7.89% of gross proceeds and that the indirect costs (underpricing) are 5.32% on average. The direct costs (deﬁned as the difference between net and gross proceeds of the issue reported in the prospectus – the overallotment option is not taken into account in these calculations) include the legal, auditing, advertising and road show expenses and underwriting fees. The indirect costs are the management time and effort devoted to conducting the offering,

412

10

11

12

13

14

COSTAS TH. GRAMMENOS AND NIKOS C. PAPAPOSTOLOU

and the dilution associated with selling shares at an offering price that is, on average, below the price prevailing in the market shortly after the IPO. This phenomenon is known in the ﬁnance literature as underpricing of the initial public offerings. An underwriter who has done other successful initial public offerings in the industry of the issuer is more familiar with the structure of the industry; pricing the issue should be easier, as selling the offering to a syndicate; and ﬁnally, the underwriter will have worked or be working with analysts covering the industry (Logue, Rogalski, Seward and Foster-Johnson 2002). Underpricing measures the realized return from the prospectus offer price to the closing price on the ﬁrst trading day. Academics also prefer to measure the amount of “money left on the table,” since this is the money actually gained by IPO investors. The “money left on the table” is deﬁned as the number of shares sold at an IPO multiplied by the difference between the ﬁrst day closing market price and the offer price. Ibbotson and Ritter (1995) argue that research on IPO underpricing can be traced back to 1963, when the US Securities and Exchange Commission (SEC) undertook a study. Ljungqvist (2006) has classiﬁed the theories into four categories: asymmetric information theories, ownership and control theories, institutional theories, and behavioral theories. Winner’s curse theory is based on informed vs. uninformed investors, and empirical research on this theory can be found in Keloharju (1993), and Lee, Taylor and Walter (1999). Information disclosure theory is based on the fact that underwriters can obtain information from informed investors during the IPO process; work on this theory includes Hanley (1993), Cornelli and Goldreich (2001, 2003) and Jenkinson

15

16 17

18

19

20

and Jones (2004). The principal–agent theory assumes that issuers are less informed than underwriters, whereas the signaling theory assumes the opposite – that issuers are more informed than underwriters (Ljungvist and Wilhelm 2003; Michaely and Shaw 1994; Welch 1989). Legal liability theory assumes that underpricing takes place in order to reduce possible future litigation from investors (Lowry and Shu 2002). Prospect theory argues that issuers permit underpricing because their wealth gain from the IPO is greater than the loss they incur from underpricing (Ljungqvist and Wilhelm 2005). Ritter (2009) has found an average initial day return of 8.1% for the same period. Other studies include Brav and Gompers (1997), Gompers and Lerner (2003) and Chan, Wang and Wei (2004). Regarding leverage, the paper made use of two measures. The ﬁrst is deﬁned as (BV of Total Assets – BV of Equity) / (MV of Equity) and proposed by Bhandari (1998). The second one (more traditional) is deﬁned as (BV of Total Assets – BV of Equity) / (BV of Equity) and proposed by several authors (see paper for references). Laid-up tonnage is used as a proxy for the shipping market, as it is closely related to the equilibrium of demand and supply for seaborne trade and hence to the determination of freight rates. According to Grammenos (2010b), “shipping companies may fall into two broad groups: corporate shipping companies; and single vessel companies. Under the ﬁrst group, the company owns, leases, charters and operates its vessels, and has a strong balance sheet, particularly with respect to liquidity and gearing. A single vessel company can do the same but only for the one vessel that it owns; and it is a separate legal entity from the other single vessel companies owned by the same shipowner.”

SHIP FINANCE: US PUBLIC EQUITY MARKETS

21

Net asset value is deﬁned as total assets minus total debt. 22 Regarding proﬁtability in terms of investment and divestment timing decisions in the sale and purchase market for ships, Alizadeh and Nomikos (2006, 2007) have introduced some trading strategies. 23 The main equity investors in shipping initial public offerings are often the initial shareholders (shipowners). In addition, institutional investors include pension funds, mutual funds, banks and investment managers (they often tend to own between 25% and 35% of the total shares outstanding, while there are a few notable exceptions who own more than 45 percent; see Table 20.3). 24 For example, the acquisition of OMI by Teekay and TORM, the ﬁrst public dry cargo company to execute a major ﬂeet acquisition and improve their cash ﬂow in a meaningful way, and the Quintana Maritime and Metrobulk deal. Other examples are the Stelmar Shipping and Maritrans acquisitions by Overseas Shipholdings, the Excel/Quintana acquisition, and many other deals. In addition, the appearance of longer, proﬁt-sharing time-charter contracts with ﬁrst-class charterers (a reﬂection of the early 1970s and 1980s negative experience of the oil companies) illustrates the trend towards a preference for income stability. 25 Central banks, under the auspices of the Bank for International Settlements (BIS), imposed the Capital Adequacy Rules in 1993; as time passed, weaknesses in the banking system required a reassessment of the old rules and the imposition of a new set of Capital Adequacy Rules in 2008. 26 A ﬁrst study on the valuation of public tanker companies relative to offshore companies was undertaken by Stevenson (2007) as part of his MSc dissertation under the supervision of C. Th. Grammenos.

413

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Brau, J. C. and S. Fawcett (2006) Initial public offerings: an analysis of theory and practice. Journal of Finance 61(1): 399–436. Brav, A. and P. A. Gompers (1997) Myth or reality? The long-run performance of initial public offerings: evidence for venture and nonventure capital-backed companies. Journal of Finance 52(5): 1791–1821. Chang, Shao-Chi, Tsai-Yen Chung and WenChun Lin (2010) Underwriter reputation, earnings management and the long-run performance of initial public offerings. Accounting and Finance 50(1): 53–78. Chemmanur, T. J. and P. Fulghieri (1999) A theory of the going public decision. Review of Financial Studies 12: 249–79. Chan, K., J. Wang and K. C. J. Wei (2004) Underpricing and long-term performance of IPOs in China. Journal of Corporate Finance 58: 409–30. Chen, Hsuan-Chi and J. R. Ritter (2000) The seven percent solution. Journal of Finance 55(3): 1105–31. Cook, D. O., R. Kieschnick and R. A. Van Ness (2006) On the marketing of IPOs. Journal of Financial Economics 82(1): 35–61. Cornelli, F. and D. Goldreich (2001) Bookbuilding and strategic allocation. Journal of Finance 56: 2337–69. Cornelli, F. and D. Goldreich (2003) Bookbuilding: how informative is the orderbook? Journal of Finance 58: 1415–43. Cullinane, K. and X. Gong (2002) The mispricing of transportation initial public offerings in the Chinese mainland and Hong Kong. Maritime Policy and Management 29(2): 107–18. Drobetz, W., D. Schilling and L. Tegtmeier (2010) Common factors in the returns of shipping stocks. Maritime Policy and Management 37(2): 93–120. Frieder, L. and A. Subrahmanyam (2005) Brand perceptions and the market for common stock. Journal of Financial and Quantitative Analysis 40: 57–85.

Gompers, P. A. and J. Lerner (2003) The really long-run performance of initial public offerings: the pre-NASDAQ evidence. Journal of Finance 58(4): 1355–92. Grammenos, C. Th. (1979) Bank Finance for Ship Purchase. Bangor Occasional Papers in Economics, 16. Cardiff: University of Wales Press. Grammenos, C. Th. (1985) Challenges and prospects in bank shipping ﬁnance. Europort Congress speech, Amsterdam. Grammenos, C. Th. (1989) Shipping investment in capital markets within a dynamic international environment. American Stock Exchange Shipping Conference. Grammenos, C. Th. (1993, 2010a) Capital markets as a source for shipping ﬁnance: equity and high yield bond markets. Shipping Investment and Finance, lecture notes, Cass Business School, City University London. Grammenos, C. Th. (2010b) Revisiting credit risk, analysis and policy in bank shipping ﬁnance. In C. Th. Grammenos (ed.), The Handbook of Maritime Economics and Business, 2nd edn., pp. 777–810. London: Informa Group. Grammenos, C. Th. and A. Arkoulis (1999) The long-run performance of shipping initial public offerings. International Journal of Maritime Economics 1(1): 71–93. Grammenos, C. Th. and A. G. Arkoulis (2002) Macroeconomic factors and international shipping stock returns. International Journal of Maritime Economics 4: 81–99. Grammenos, C. Th. and S. N. Marcoulis (1996a) A cross-section analysis of stock returns: the case of shipping ﬁrms. Maritime Policy and Management 23(1): 67–80. Grammenos, C. Th. and S. N. Marcoulis (1996b) Shipping initial public offerings: a crosscountry analysis. In M. Levis (ed.), Empirical Issues in Raising Equity Capital, pp. 379–400. Amsterdam: North-Holland. Hanley, W. K. (1993) The underpricing of initial public offerings and the partial adjustment

SHIP FINANCE: US PUBLIC EQUITY MARKETS

phenomenon. Journal of Financial Economics 34(2): 231–50. Hansen, R. S. (2001) Do investment banks compete in IPOs? The advent of the 7% plus contract. Journal of Financial Economics 59: 313–46. Helwege, J. and N. Liang (2004) Initial public offerings in hot and cold markets. Journal of Financial and Quantitative Analysis 39(3): 541–69. Huang, R. and J. R. Ritter (2009) Testing theories of capital structure and estimating the speed of adjustment. Journal of Financial and Quantitative Analysis 44(2): 237–71. Huyghebaert, N. and C. V. Hulle (2005) Structuring the IPO: empirical evidence on the portions of primary and secondary shares. Journal of Corporate Finance 12(2): 296–320. Ibbotson, R. G. (1975) Price performance of common stock new issues. Journal of Financial Economics 2: 235–72. Ibbotson, R. G. and J. F. Jaffe (1975) Hot issue markets. Journal of Finance 30: 1027–42. Ibbotson, R. G. and J. R. Ritter (1995) Initial public offerings. In R. A. Jarrow, V. Maksimovic and W. T. Ziemba (eds.), Finance, pp. 993–1016. Handbooks in Operations Research and Management Science, 9. Amsterdam: Elsevier. Ibbotson, R. G., J. L. Sindelar and J. R. Ritter (1988) Initial public offerings. Journal of Applied Corporate Finance 1(2): 37–45. Jenkinson, T., and H. Jones (2004) Bids and allocations in European IPO bookbuilding. Journal of Finance 59: 2309–38. Kavussanos, M. G. and S. N. Marcoulis (2000a) The stock market perception of industry risk and macroeconomic factors: the case of the US water and other transportation stocks. International Journal of Maritime Economics 2(3): 235–56. Kavussanos, M. G. and S. N. Marcoulis (2000b) The stock market perception of industry risk through the utilisation of a general multifactor model. International Journal of Transport Economics 27(1): 77–98.

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Keloharju, M. (1993) The winner’s curse, legal liability, and the long-run price performance of initial public offerings in Finland. Journal of Financial Economics 34: 251–77. Kim, W. and M. S. Weisbach (2008) Motivations for public equity offerings: an international perspective. Journal of Financial Economics 87(2): 281–307. Lee, P. J., S. L. Taylor and T. S. Walter (1999) IPO underpricing explanations: implications from investor application and allocation schedules. Journal of Financial and Quantitative Analysis 34: 425–44. Levis, M. (1993) The long-run performance of IPOs: the UK experience 1980–1988. Financial Management 22: 28–41. Ljungqvist, A. (2006) IPO underpricing. In B. Espen Eckbo (ed.), Handbook of Corporate Finance: Empirical Corporate Finance, vol. 1, pp. 375–422. Amsterdam: North-Holland. Ljungqvist, A. and W. Wilhelm (2003) IPO pricing in the dot-com bubble. Journal of Finance 23: 723–52. Ljungqvist, A. and W. Wilhelm (2005) Does prospect theory explain IPO market behaviour? Journal of Finance 60: 1759–90. Logue, D. E., R. J. Rogalski, J. K. Seward and L. Foster-Johnson (2002) What is special about the roles of underwriter reputation and market activities in initial public offerings? Journal of Business 75(2): 213–43. Loughran, T. and J. R. Ritter (2002) Why don’t issuers get upset about leaving money on the table in IPOs? Review of Financial Studies 15: 413–44. Lowry, M. and S. Shu (2002) Litigation risk and IPO underpricing. Journal of Financial Economics 65: 309–35. Maksimovic, V. and P. Pichler (2001) Technological innovation and initial public offerings. Review of Financial Studies 14: 459–94. Merikas, A., D. Gounopoulos and C. Karli (2010) Market performance of US-listed shipping IPOs. Maritime Economics and Logistics 12(1): 36–64.

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Merikas, A., D. Gounopoulos and C. Nounis (2009) Global shipping IPOs performance. Maritime Policy and Management 36(6): 481–505. Michaely, R. and W. Shaw (1994) The pricing of initial public offerings: test of adverse selection and signaling theories. Review of Financial Studies 7: 279–317. Mourdoukoutas, P. and A. Stefanidis (2009) To list or not to list: expectations versus reality for Greek shipping IPOs. South East European Journal of Economics and Business March: 125–34. Myers, S. C. (1984) The capital structure puzzle. Journal of Finance 39(3): 575–92. Myers, S. C. (2001) Capital structure. Journal of Economic Perspectives 15(2): 81–102. Myers, S. C. and N. S. Majiluf (1984) Corporate ﬁnancing and investment decisions when ﬁrms have information that investors do not have. Journal of Financial Economics 13(2): 187–221. Pagano, M. and A. Roell (1998) The choice of stock ownership structure: agency costs, monitoring and the decision to go public. Quarterly Journal of Economics 113(1): 187–225. Panayides, P. M. and X. Gong (2002) The stock market reaction to merger and acquisition announcements in liner shipping. International Journal of Maritime Economics 4: 55–80. Ritter, J. R. (1984) The hot issue market of 1980. Journal of Business 57(2): 215–40. Ritter, J. R. (1991) The long-run performance of initial public offerings. Journal of Finance 46(1): 3–27. Ritter, J. R. (2010) Some factoids about the 2009 IPO market. University of Florida. http://

bear.warrington.uﬂ.edu/ritter/ IPOs2009Factoids.pdf. Ritter, J., and I. Welch (2002) A review of IPO activity, pricing, and allocations. Journal of Finance 57(4): 1795–1828. Rock, K. (1986) Why new issues are underpriced. Journal of Financial Economics 15: 187–212. Samitas, A. G. and D. F. Kenourgios (2007) Impact of mergers and acquisitions on stock returns of tramp shipping ﬁrms. International Journal of Financial Services Management 2(4): 327–43. Stevenson, C. H., III (2007) Evaluation of public tanker companies relative to offshore companies. MSc dissertation, Costas Grammenos International Centre for Shipping, Trade and Finance, City University London. Tinic, S. M. (1988) Anatomy of initial public offerings of common stock. Journal of Finance 43: 1–19. Welch, I. (1989) Seasoned offerings, imitation costs, and the underpricing of initial public offerings. Journal of Finance 44: 412–49.

Further Reading Bornozis, N. (2010) Shipping and the capital markets. Capital Link, presentation given at Cass Business School, City University London, March. http://ﬁles.irwebpage.com/reports/ shipping/1YXekH1KyU/Cass_Business_ School_2010__July_20.pdf. Norton, H. (2008) Hot topics – capital markets. 21st Annual Marine Money Week Conference Proceedings, June 17–19, New York.

21

Ship Finance: US High-Yield Bond Market Costas Th. Grammenos and Nikos C. Papapostolou 21.1

Introduction

The high-yield debt market has been providing ﬁnance to non-investment-grade companies since the late 1970s, especially during the early part of the 1980s and the larger part of the 1990s. The major center for the high-yield bond market has been the United States, and in particular the ﬁnancial center of New York. Companies in need of capital, as well as domestic US and international institutional investors seeking higher yields, have fueled the rapid growth of this market, making it truly global. High-yield bonds are deﬁned as those bonds rated below investment grade by the rating agencies; that means BB+ or lower by Standard & Poor’s and Ba1 or lower by Moody’s Investors Service (see Table 21.3 for a description of credit ratings). These bonds are often issued by companies with a high degree of leverage, which makes the credit quality of their bonds questionable. The high yield in these bonds comes as compensation for the high risk undertaken by those who invest in them.

The starting point for the high-yield debt market was March 1977, when Lehman Brothers underwrote three single-B-rated issues, raising US$178 million. In April of the same year Drexel Burnham Lambert underwrote a further US$30 million of subordinated debentures for Texas International Inc. The era of high-yield debt commenced in this way during the late 1970s. For the ﬁrst part of the 1980s, the volume ranged between US$1.2 and 1.5 billion, and in 1986 new issuance volume reached a record for the time of US$34 billion. As reported by De Bondt and Marqués (2004), there was a peak for high-yield bonds, in terms of total amount outstanding above US$40 billion, in 1989. However, volume fell sharply in the following years as concerns about the status of the high-yield bond market and its participants increased. By 1990 the high-yield bond market had virtually disappeared, and one of its main participants, Drexel Burnham Lambert, declared bankruptcy.1 Nevertheless, since then the market has strengthened, and it constitutes a large source of ﬁnancing in the international

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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COSTAS TH. GRAMMENOS AND NIKOS C. PAPAPOSTOLOU

capital markets arena; in particular, it continued to expand in the ﬁrst years of the 21st century, beneﬁting from low interest rates and limited default rates (De Bondt and Marqués 2004). This chapter concentrates on the US high-yield bond market as a source of ﬁnance for shipping companies. In particular, the anatomy of the US shipping highyield bond market is described in Section 21.2, and the advantages and disadvantages of high-yield bonds for shipping companies are discussed in Section 21.3. Section 21.4 discusses the importance of credit ratings, the pricing of shipping high-yield bonds and their probability of default, and, Section 21.5 concludes our chapter.

21.2 The Anatomy of the Shipping High-Yield Bond Market, 1992–2010 The ﬁrst high-yield bond offer by a shipping company took place in 1992, when Sea Containers Ltd. issued US$125 million of subordinated debentures; since then, 83 issues have taken place and have raised US$16.6 billion as of June, 2011. A problem faced by shipping companies entering the high-yield bond market is that the shipping industry is characterized as highly cyclical, volatile, and often highly geared; this might be a setback for companies that have to make interest and capital repayments in a recessed shipping market. Because of this, shipping has incurred a bad reputation as a result of the heavy losses and the default of shipping bonds in the late 1990s. Several shipping companies (see Table 21.1) entered the high-yield bond market in 1997/1998, taking advantage of the prosperous market, and when the shipping

market conditions deteriorated in mid-1998 and 1999 their bond issues defaulted. Possible reasons for the default of these companies were their high gearing levels after they entered the high-yield market, their chartering policies, and the age and size of their ﬂeets.2 These speciﬁc characteristics for a number of shipping companies that defaulted in their debt obligations during 1999 can be found in Table 21.1. Another reason is associated with the investment bankers. As Grammenos (1994) noted, “we may have experienced a similar situation like in the 1970s and 1980s, when young, enthusiastic bankers – without shipping experience and knowledge – were wandering around, offering large loans to anyone who was prepared to listen to them. Similarly, in the case of shipping highyield bonds, the investment banking area, with some exceptions, is a candidate for mistakes.” Particularly in 1998, much of the global shipping industry experienced recessed market conditions, with freight rates and vessel prices falling dramatically in several shipping sectors. These market conditions led to a downturn in corporate credit quality in the shipping industry, which consequently led several companies to default on their high-yield bond issues. The Asian (1997) and Russian (1998) ﬁnancial crises – which were the main reason for the downturn in the shipping market – had an immediate and direct impact on trade, and hit several of the shipping sectors hard. This deterioration of the shipping market troubled many companies, especially those that were highly geared and operated their ﬂeet mainly in the spot market, and so could not maintain the high interest rate repayments. For instance, in 1999 alone, ten shipping companies defaulted on their high-yield bonds.

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SHIP FINANCE: US HIGH-YIELD BOND MARKET

Table 21.1 Characteristics of shipping companies that defaulted in 1999

Alpha Shipping plc Ermis Maritime Holdings Ltd Global Ocean Carriers Ltd Golden Ocean Group Ltd Paciﬁc & Atlantic Holdings Inc PanOceanic Bulk Carriers Ltd Pegasus Shipping Hellas Ltd TBS Shipping International Ltd Average

Gearing after offering (%)

Spread (bps)

Credit rating (S&P)

75 95

106.00 675.00

B− B

93

1390.00

97

No. of vessels

Age of ﬂeet (years)

Chartering policy

32 14

21.5 20.0

80% spot 79% spot

CCC+

13

19.3

85% T/C

705.00

B−

28

1.4

54% T/C

123

610.00

B

27

13.9

60% T/C

85

609.00

B

6

11.8

50% spot

94

677.50

B

10

18.2

50% T/C

91

564.00

B+

25

16.8

68% T/C

94

667.06

B

19.38

15.36

Source: Costas Grammenos International Centre for Shipping, Trade and Finance; data collected from the Offering Prospectuses.

An article in Lloyd’s Shipping Economist (2000) mentioned that “the overall public debt default rate by issuer in 1999 was 1.28% compared to the shipping public debt default rate of somewhere around 38%. Though shipping industry issuers represented less than 0.5% of the overall public debt by issuer outstanding as of January 2000, shipping industry defaults totalled nearly 9% of all defaults by issuer for 1999.” Grammenos, in a Lloyd’s List (2000) article, predicted that in spite of the battering shipping companies had taken in the high-yield bond market, it would present future opportunities for larger and highgrowth shipping companies with more stabilized cash ﬂow. Similarly, Leggate (2000) examined shipping high-yield bonds and how they are per-

ceived by the European shipping industry as a source of ﬁnance. She anticipated that in the next decade the European shipping companies would face large capital requirements, due to their ﬂeet replacement program and an increase in international trade. This need for capital will come at a time when the number of banks willing to ﬁnance the shipping industry will contract and, in general, there will be a tightening in credit facilities. The study concludes that the shipping high-yield bond market should continue to be an alternative way of ﬁnancing, and that it is largely dependent on the perception of the maritime industry by the investment community. Did we have an end of the shipping highyield bond market era, as many thought, after the bad period of 1999? Figure 21.1

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COSTAS TH. GRAMMENOS AND NIKOS C. PAPAPOSTOLOU

3,000

New high-yield bond issues–amount raised per year (US$ million–left axis) Cumulative amount raised (US$ million–right axis)

16,000 14,000

2,500

12,000 2,000

10,000

1,500

8,000 6,000

1,000

4,000 500

2,000 0

0 2010

2009

2008

2007

2006 2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994 1993

1992

Figure 21.1 US shipping high-yield bonds 1992–2010 (as of March 2010). Source: Thomson Reuters.

shows that there is a re-emergence of the high-yield bond market after 2002, when a number of more sophisticated companies3 tapped this market to satisfy their ﬁnancing needs. Other fundamental changes in comparison with the pre-2000 era are that the shipping companies entering the high-yield bond market are larger in size, they operate in the time-charter market to a larger degree, and their managements comprise a young generation who have familiarized themselves with more sophisticated ﬁnancial techniques, and have deeper expertise and knowledge of capital markets. Similarly, the investment banks that underwrite the shipping bonds and the credit-rating agencies have gained better knowledge and expertise of the shipping industry and have developed their models to assess shipping companies; for those reasons they are considered better equipped than in the past. Speciﬁcally, as we can observe in Table 21.1, there was an increased interest in the highyield bond market from shipping companies in the periods 2003–4 and 2009. Table 21.2 displays the characteristics of 74 US shipping high-yield bond issues

(1992–2010) by year of issuance, as well as average coupon, average yield, average spread and average credit rating. It can be seen that a total of US$13,707 million was raised by shipping companies in the speculative-grade bond sector during the period 1992 to 2010, with an average coupon of 9.74%, an average yield of 9.90%, and an average spread of 483 basis points.4 Furthermore, the average amount per issue raised during this period was US$185.23 million and had an average credit rating of BB-. Another observation is the low average credit rating, hence higher credit spread, assigned to issues during high issuance activity years (with the exception of 1993). In particular, during 1997/8, 2003/4 and 2009 the average credit rating was B+/B compared to an overall average of BB-. When the issues are separated into two periods, 1992–2000 and 2001–10, we can observe that the number of issues is almost equal for both periods, 38 and 36 issues respectively; on the other hand, as in the US public equity shipping market, the total amount raised in the 2001–10 period is larger, with the average amount per issue

421

SHIP FINANCE: US HIGH-YIELD BOND MARKET

Table 21.2 Shipping high-yield bond offerings according to year of issuance (as of March 2010) Total amount No. of raised ($m) issues 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1992–2000 2001–2010 Total

125.00 985.50 175.00 175.00 490.00 849.00 2,728.00 115.00 0.00 425.00 650.00 1,596.62 1,313.00 75.00 585.00 520.00 0.00 2,200.00 700.00 5642.5 8064.62 13,707.12

1 8 1 1 3 6 17 1 0 2 3 8 8 1 3 2 0 7 2 38 36 74

Average amount raised ($m) 125.00 123.19 175.00 175.00 163.33 141.50 160.47 115.00 – 212.50 216.67 199.58 164.13 75.00 195.00 260.00 – 314.29 350.00 148.48 224.01 185.23

Average Average Average Average coupon (%) yield (%) spread (bps) credit rating 12.50 9.44 11.25 10.50 9.61 10.17 10.11 10.75 – 9.75 9.58 9.58 8.27 6.13 11.17 6.00 – 10.96 9.69 10.05 9.40 9.74

12.50 9.43 11.25 10.50 9.63 10.35 10.27 11.00 – 9.94 9.75 9.62 8.34 6.23 11.79 6.09 – 11.46 9.87 10.16 9.62 9.90

500.00 357.00 325.00 480.00 352.67 623.60 447.94 475.00 – 483.50 443.00 383.38 429.25 195.00 709.67 203.50 – 845.00 643.50 448.70 520.27 483.52

BB− BB− BB BB− BB− B B+ BB− – B+ BB− B+ B+ BB− B− BB− – B B+ BB− B+ BB−

Source: Thomson Reuters.

standing at US$224.01 million compared to US$148.48 million for the 1992–2000 period. With respect to the coupon and yield there are no notable differences between the two periods. Finally, as appears in Table 21.2, the average spread for the 2001–10 period is slightly higher than in the 1992–2000 period (520 basis points compared to 448 basis points) while the average credit ratings stand at BB- and B+ respectively. In terms of issuing activity, it is clear that there is high activity concentrated in 1993 (8 issues), 1997–8 (23 issues), 2003–4 (16 issues) and 2009 (7 issues). In 1993, interest

rates were at low levels, and as a result the bond market as a whole and the high-yield bond market in particular were very popular. For the period 1997 to 1998 the main reasons for the high issuance levels were debt repayment/restructuring and replacement of the ﬂeet: most of the companies entering the high-yield bond market at that period appear to have had very high gearing levels and old ﬂeets (see Table 21.1). In 2003–4, the orderbook for newbuilding vessels had already started to increase because of the emerging Chinese economy, which was perceived as a boost for the

422

COSTAS TH. GRAMMENOS AND NIKOS C. PAPAPOSTOLOU

demand of seaborne trade, while interest rates were set at very low levels, hence the increased activity in the shipping high-yield bond market. Finally, in 2009, the shipping market had just come out of a crash in the dry-bulk freight rates, and in the tanker freight rates during the ﬁrst half of 2009. In addition, bank lending had dried up because of the world ﬁnancial crisis, and many shipping companies, as in 1997/98, had to restructure/repay existing loans in order to replace or expand their ﬂeet. In fact, all the offering prospectuses of the 2009/2010 issues state that the proceeds will be used to repay existing debt and, in some cases, to acquire new vessels. This explains the renewed interest in the shipping high-yield bond market. The high-yield bond market emerges as a source that offers ﬁnancial ﬂexibility to shipowning companies under conditions of tight banking liquidity. This trend is further illustrated by the annual volume of shipping syndicated loans, a ﬁnancial source roughly comparable to high-yield bonds. It was at a record low of US$32.9 billion in 2009, far below 2008’s ﬁgure of US$85 billion (Marine Money: Freshly Minted 2010), and reﬂects the aftermath effect of the 2008–9 world ﬁnancial crisis. Investment banks that beneﬁt from the hefty fees for completing high-yield bond deals and also from the high coupon that the shipping high-yield bonds pay – while at the same time shipowners meet their ﬁnancing needs but at a higher cost – may also constitute a contributing factor in the issuance of highyield bonds. In particular, shipping companies that had already committed themselves to acquiring newbuilding vessels, but had not closed a deal for a bank credit facility, may have faced difﬁculties in receiving the necessary funds from a bank after interbank

liquidity dried up during the 2008/9 world ﬁnancial crisis. As a result the high-yield bond market was considered as an alternative ﬁnancing option.

21.3 Advantages and Disadvantages of High-Yield Bonds A survey of managers in shipping companies indicated several advantages to using the bond market (Grammenos, Biniaris and Mantis 1998). First, the principal is repaid on the date of maturity; hence the bond issuer is obliged only to pay the interest for the duration of the bond, thereby allowing it to divert substantial resources into further expansion if the market conditions allow it, and/or to other projects. Second, the longterm maturity of bonds matches the duration of vessel life better than does that of bank loans. Last, but not least, shipping companies that have long-term plans to make equity offerings regard the bond market as an opportunity to gain experience in modern ﬁnancial-market techniques. Other advantages of raising capital through the high-yield bond market that make it attractive to shipowners are: access to funds is relatively quick, as it normally takes about three months for a deal to be completed and the company to have the funds at its disposal; it provides the company with a diversiﬁed source of capital and access to US capital market funds; the shipping company has fewer disclosure requirements than in an equity initial public offering; it is a company’s ﬁrst exposure to investors, and so forces a considerable amount of discipline on the company; a successful high-yield bond issue contributes to the company’s credibility and publicity in

SHIP FINANCE: US HIGH-YIELD BOND MARKET

the market; and ﬁnally, the covenant restrictions are minimal in comparison with those of bank syndicated ﬁnance. The high-yield bond market has drawbacks as well as beneﬁts. It is a very expensive form of ﬁnancing in terms of expenditure and time. These expenses include both the initial outlay of capital to complete the bond issue (issuance costs such as underwriting, legal fees, accounting fees, rating and printing) and the high interest payments – in the form of coupons – applied on the total amount of the bond issue and paid till maturity, in contrast to syndicated bank loans, where interest is applied on the outstanding balance. Another concern for the shipping company is that the amount raised through the bond issue has to be invested rapidly, as the interest paid is very high in comparison to the commitment fee paid for the undrawn facility amount in the case of a standby bank loan. Additionally, shipping companies come under closer Securities and Exchange Commission (SEC) scrutiny. Other disadvantages of raising capital in the high-yield bond market are: the loss of ﬂexibility and lack of personal interface; lack of a public or organized market for the trading of bonds issued in the high-yield market, as these bonds are usually available only to Qualiﬁed Institutional Buyers5 (QIBs); and ﬁnally, prepayment is costly.

21.4 Credit Ratings, Yield Premiums and the Probability of Default The main tool for identifying the credit quality of an issue is the rating awarded to the issuer by credit rating agencies. Standard & Poor’s and Moody’s are the two major US

423

rating agencies; Fitch is another established rating agency. Credit ratings are meant to be indications of the likelihood that a company will repay its debt on time, i.e. a measure of credit risk. They are opinions of future relative creditworthiness and provide objective, consistent and simple measures. As such, ratings improve the ﬂow of information between lenders (institutional investors or wealthy individuals) and borrowers (issuers). Generally, there is some “information asymmetry” between the borrowers and the lenders because the borrowers know more about their companies than their lenders; ratings agencies help reduce this asymmetry of information. The investors’ cost of gathering, analyzing, and monitoring the ﬁnancial positions of the borrowers is also reduced. Accordingly, the overall market efﬁciency is improved for both borrowers and lenders. Table 21.3 gives a brief description of the rating scales used by Moody’s and Standard & Poor’s. In order to arrive at an opinion as to the credit quality of a shipping company and/ or its debt, rating agencies will cover areas of analysis along the lines of 6 Cs of credit analysis (Grammenos 1979, 2010). Speciﬁcally, when assessing shipping issues in order to assign a rating, the major creditrating agencies take into consideration the ﬁnancial position, operating position, company structure, industry outlook, management quality, sovereign/macroeconomic issues and issue structure (Kindahl 2008; Moody’s Global Corporate Finance 2009). Assigning a rating is an ongoing analysis that provides for the possibility of upgrading or downgrading in line with the company’s performance and changing market conditions. They are important in pricing debt securities (Fridson and Garman 1998;

424 Table 21.3 Moody’s

COSTAS TH. GRAMMENOS AND NIKOS C. PAPAPOSTOLOU

Brief description of rating standards S&P

Characteristic

Class

Aaa Aa A Baa

AAA AA A BBB

Highest grade High grade Upper medium Medium grade

Investment grade

Ba B Caa Ca CC C

BB B CCC CC C D

Moderate protection Potentially undesirable Danger of default In default or likely to default Lowest class Lowest grade

Speculative grade

NR

NR

Not ranked

Moody’s applies numerical modiﬁers 1, 2 and 3 in each generic rating classiﬁcation from Aa through Caa. The modiﬁer 1 indicates that the obligation ranks in the higher end of its generic rating category; the modiﬁer 2 indicates a mid-range ranking; and the modiﬁer 3 indicates a ranking in the lower end of that generic rating category. Standard & Poor’s applies the plus (+) or minus (−) signs from AA through CCC to show relative standing within the major rating categories. Source: The Costas Grammenos International Centre for Shipping, Trade and Finance.

Gabbi and Sironi 2002; Garman 2000) and assisting investors in their management of credit risk by providing a low-cost supplement to an investor’s own credit assessment. Ratings are not predictions of a speciﬁc or absolute level of credit risk. Their purpose is to provide the investors with an indication of the comparative credit risk of any two investments within the universe of rated instruments. Additionally, ratings keep investors informed in a timely and objective manner of the relative risk of credit loss potential on particular instruments. It should be noted that ratings are intended to measure credit risk, not other forms of investment risk such as prepayment, liquidity, interest rate or currency risk. Moreover, they are applied to all debt- and credit-related obligations with initial maturities longer than one year. For short-term debt and related securities (commercial paper, bank deposits, and other

money market instruments) a separate rating system is used. Generally, the shipping industry’s risk proﬁle, rated as BB (Kindahl 2008), can be characterized as speculative-grade because of its economic sensitivity, capital intensity and competitive factors, all of which lead to extremely volatile pricing swings in both freight rates and asset values. Table 21.4 provides evidence on the credit ratings assigned to shipping highyield bond issues for the period 1992–2010. It can be noted that most shipping highyield bonds are assigned a credit rating of BB-. Theoretically, bonds with higher default risk should reward the holder with higher returns. Therefore, the yield on bonds with higher default risk must be higher than those with less or no default risk. In general, the lower the rating, the higher the probability of default, and hence the higher the spread that the high-

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Table 21.4 Shipping high-yield bond offerings according to Standard & Poor’s credit rating classiﬁcation, 1992–2010

BB+ BB BB− B+ B B− CCC+ Total

No. of issues

Total amount raised ($m)

Average amount raised per issue ($m)

Average coupon (%)

Average yield (%)

Average spread (%)

7 7 27 10 14 7 2 74

960.00 1,640.00 4,496.12 1,975.00 2,981.00 1,341.00 286.00 13,707.12

137.14 234.29 166.52 197.50 212.93 191.57 143.00 185.23

8.52 8.87 9.23 10.45 10.78 10.79 9.63 9.74

8.61 8.89 9.28 10.79 10.99 11.23 9.75 9.90

321.14 336.57 361.89 590.80 614.32 687.86 1,041.00 483.52

Source: Thomson Reuters.

yield instrument should carry. This can be seen clearly in Table 21.4, which shows the average spread for the shipping highyield bonds over the period 1992 to 2010 against the rating awarded. It can be observed that higher ratings are associated with lower spreads, on average. This is anticipated, as lower-grade bonds carry more risk in terms of default than bonds with higher ratings. The determinants of the pricing of new high-yield bond offerings of shipping companies are investigated by Grammenos and Arkoulis (2003); this is also the pioneer research paper on shipping high-yield bonds. The results of the study indicate that credit rating is the major pricing determinant, whereas gearing and laid-up tonnage (a proxy for shipping market conditions) also account for a signiﬁcant part of price variability. These results support the idea that the market and/or investors undertake their own credit analysis to assess and price high-yield bonds offered by shipping companies; it seems that the statistical signiﬁ-

cance of all three variables in the model points towards a different perception of leverage and market conditions by investors/ market and credit-rating agencies. Hence, there may be an agency problem related to conﬂicting interests between rating agencies and their customers, the shipping companies, who are the issuers of the high-yield bonds. Once a shipping high-yield bond is issued, its yield premium may change according to several factors that can be categorized as company-speciﬁc, industry-speciﬁc or macroeconomic. Modeling yield premia, in both aggregated and desegregated forms, involves identifying these factors and measuring their impact on the dynamics of yield premia. Although there have been several studies on the determinants of yield premia on bonds in other industries or markets (Alessandrini 1999; Bedendo, Cathcart and El-Jahel 2004; Collin-Dufresne, Goldstein and Martin 2001), there has been only one study on the dynamics of yield premia on shipping high-yield bonds.

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Grammenos, Alizadeh and Papapostolou (2007)6 investigate the dynamics of seasoned shipping high-yield bonds. The results of the study suggest that the yield premia of shipping high-yield bonds will be wider – all other things being equal – the lower the credit rating and the lower the shipping market earnings are. The statistical signiﬁcance of credit rating and shipping earnings at the same time – which is in line with the Grammenos and Arkoulis (2003) study7 – may be explained in two different ways. Hand, Holthausen and Leftwich (1992) and Kisgen (2006) suggest that credit ratings may respond slowly to new information, but are clearly a focal point for ﬁnancial markets; similarly, we can argue that credit ratings are not normally adjusted to immediately reﬂect shipping market changes and that investors do look at the shipping market closely even though it is incorporated in the credit ratings. Another explanation may be the importance that investors place on the cash ﬂow stability of the company, hence the need to constantly monitor the shipping market. The yield premia of shipping high-yield bonds will also be wider throughout the passage of time until maturity (Grammenos, Alizadeh and Papapostolou 2007), a result that contradicts Fons (1994), who argues that the longer a speculative company has been in the debt market, the lower the yield premium its bond issue should carry, but is in line with the study of Helwege and Turner (1999). A possible reason for this may be the highly cyclical nature of the shipping industry; for instance, the weak shipping market conditions of 1998/9 led a number of shipping bonds to default, and, as a result, higher yield premia may also be the outcome of a slow process of regaining the conﬁdence of investors

and credit-rating agencies. Finally, changes in the yield of ten-year Treasury bonds and the yield on the Merrill Lynch single-B index appear to positively affect the yield premia on seasoned shipping high-yield bonds. According to Moody’s Investors Service (1995), long-term ratings are intended to forecast the probability of default as well as the likely severity of loss if default occurs.8 The probability of default is the likelihood that there will be any difference at all between what investors were promised and what they receive.9 In addition, the deﬁnition includes “forced exchanges,” in which the issuer of the bond or other instrument has offered security holders a new instrument or package of securities containing a diminished ﬁnancial obligation (i.e. preferred or common stock or debt with a lower coupon or par amount). Overall, long-term ratings can also be viewed as forecasts of the relative degree of protection that an investor in a particular obligation will enjoy should the issuer face poor economic conditions and other plausible stress situations in the future. A study by Grammenos, Nomikos and Papapostolou (2008) provides evidence that the probability of default of a shipping high-yield bond portfolio may be reduced on average if one selects only high-rated bonds. Table 21.5 shows the credit ratings for the ﬁfty issues considered in the study. The issues are categorized as defaulted or nondefaulted. As can be observed, most of the new issues of shipping high-yield bonds were assigned a credit rating of double-B when entering the market, with fewer receiving a credit rating of single-B. Moreover, Table 21.5 indicates that 8.82 percent of the double-B-rated bonds (BB+,

SHIP FINANCE: US HIGH-YIELD BOND MARKET

Table 21.5

427

Descriptive statistics for shipping high-yield bonds ratings

Publisher's Note: Table not available in the electronic edition

BB and BB−) in the sample defaulted, compared to 53.30 percent of single-B-rated bonds (B+, B and B−). This indicates that choosing only the higher-rated bonds in a shipping high-yield bond portfolio may ensure that the probability of default is reduced on average; nevertheless, on an individual issue basis the same assumption may not hold. The same study used a binary logit model to predict the probability of default for high-yield bonds issued by shipping companies.10 The estimated results11 of the model indicated that higher gearing levels12 are associated with higher probabilities of default; and the marginal effect of gearing on the likelihood of default is higher when the ratio is 65 percent and above. Similarly, when companies raise an amount that exceeds their total assets by 80 percent or more, then the probability of default will also be high. On the other hand, shipping market conditions, working capital over total assets, and retained earnings over total

assets are negatively related to the probability of default. Therefore, the results outline the importance of leverage and cash ﬂow stability; thus shipping companies may be better off if they focus on their income stability – achieved by offering better quality of services in order to attract ﬁrst-class charterers and longer chartering contracts – which would consequently be adequate to service their debt obligations during bad shipping market conditions.

21.5

Summary

The US shipping high-yield bond market commenced in 1992. In 1998/99 a number of shipping companies defaulted on their bonds, which led to a sharp decline in volume activity for the next couple of years. However, the recent re-emergence of the high-yield bond market, which began in 2009 and continues today, highlights the importance of this market as an alternative

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source that offers ﬁnancial ﬂexibility to shipowning companies. This ﬁnancial ﬂexibility comes with some advantages, such as longer repayment horizons and less strict covenants than a high-yield bond issue might entail. Investment banks may constitute another contributing factor in the recent issuance of shipping high-yield bonds. They beneﬁt from hefty fees for completing high-yield bond deals and also from the high coupon that the shipping high-yield bonds pay, while at the same time shipowners meet their ﬁnancing needs, but at a much higher cost. Finally, we cannot disregard the fact that interest rates in the US have been at very low levels, which supports the issuance of bonds. While the 2009 statistics for syndicated bank ﬁnance show a substantial decrease in the overall annual volume of shipping syndicated loans, bank ﬁnance is expected to continue to be the major source of capital for shipping companies. It is a low-cost, ﬂexible, and often innovative, source, adaptable to changing market conditions. A bank may be supportive towards a shipping company during lean and fat years of the shipping cycle. However, what may have changed after the world ﬁnancial crisis is that banks have become more selective in their clientele: they are after medium-sized and larger shipping companies with a proven proﬁtability track record, while smaller shipping companies and newcomers face funding problems. Finally, research on shipping high-yield bonds has highlighted the importance of cash ﬂow stability, which can be achieved by offering better-quality services and longer time-charter contracts with ﬁrstclass charterers. Gearing and shipping market conditions – among others – are also

important factors for high-yield bonds issues offered by shipping companies. To date, there are only four studies on shipping high-yield bonds, which have examined their initial and secondary pricing, and their probability of default. We are conﬁdent that, henceforward, more studies will appear in the literature that address different issues regarding shipping bonds in general, including chartering policy and its impact on shipping bonds. High-yield bonds re-emerged in the twenty-ﬁrst century and will remain an alternative source of capital to be tapped by some shipping companies, though not by all, under the appropriate conditions.

Notes 1

In the late 1980s, Drexel Burnham Lambert accounted for about 60 percent of all underwriting in the US high-yield bond market (Kricheff and Strenk 1999). In 1989, the company was under investigation for insider trading and the economy was already slowing down. In February 1990 the company was forced into bankruptcy by its involvement in illegal activities in the junk bond market, driven by its employee Michael Milken. 2 In favorable market conditions, when a company’s cash ﬂow situation is strong the company’s probability of default is low; whereas in unfavorable market conditions, when cash ﬂow is tight and the company’s gearing is high, the probability of default – the company not meeting its payment obligations – is high. 3 General Maritime Corporation, Teekay Shipping Group, Overseas Shipholdings and OMI are among these. 4 The difference between the yield to maturity of the high-yield bond and the yield to maturity of a government bond, which is

SHIP FINANCE: US HIGH-YIELD BOND MARKET

5

6

7

8

considered riskless, is deﬁned as yield premium/credit spread/spread. In April 1990 rule 144A, adopted by the SEC, enlarged the investor base and created a secondary market for high-yield bonds. This secondary market was open only to Qualiﬁed Institutional Buyers (QIBs). There are three categories of QIBs. The ﬁrst consists of institutional investors, which must own and invest on a discretionary basis at least US$100 million in securities of issuers that are not afﬁliated with the entity. The second category consists of banks and savings and loans associations regulated by state or federal law, which in addition to the US$100 million portfolio must meet a US$25 million net asset requirement. The last category consists of security dealers, which are registered under the Exchange Act, and are required to have a portfolio of securities worth above US$10 million. These categories of investors are allowed to resell or transfer the securities within three years of the issuance of a security, to the issuer, other QIBs, accredited investors or foreign investors. The secondary trade takes place in the Private Offerings Resale and Trading through Automated Linkages (PORTAL) for trading unregistered securities. Grammenos, Alizadeh and Papapostolou (2007) is complementary to the Grammenos and Arkoulis (2003) study; the 2007 study examines the dynamics of yield premiums for seasoned shipping issues, whereas the 2003 study investigated the spread on the primary pricing only. The difference is that the Grammenos and Arkoulis (2003) study uses laid-up tonnage as a proxy for the shipping market conditions and is based on data at the time of the issue, whereas the Grammenos, Alizadeh and Papapostolou (2007) study is based on a dynamic environment. According to Moody’s Investors Service (1995), the seniority of bondholders regarding their claims in the event of the issuer

429

defaulting on its debt obligations is of importance, as it will determine the degree of recovery in such an event. The seniority scale is as follows: (1) Senior secured, collateralized by some type of asset – in the case of shipping companies, the vessels; the bondholder has the right to foreclose on the collateral and either liquidates it or transfers it to the bondholder’s name; (2) Senior unsecured, not backed by assets; unsecured debt is subordinated, in terms of debt claims, only to senior secured debt. Senior debt, both secured and unsecured, has a claim prior to subordinated debt. Subordinated debt is repayable only after any other debt with a higher claim has been satisﬁed. (3) Senior subordinated, referring to non-collateralized debt subordinated in right of payment to senior secured and senior unsecured debt. (4) Structural subordinated usually refers to a senior bond of a pure holding company. In this case the bondholder is dependent on the company’s dividends from its subsidiaries, which are junior to any senior claims at those entities. In the event of the subsidiary being a bond issuer, the senior bondholder of the holding company becomes, in effect, subordinated to the subsidiaries’ bondholders. (5) Junior subordinated is ranked below all the above debentures in terms of claim. For instance, subordinated (or junior) debt holders have a secondary claim on the assets of an issuer in the case of insolvency. As a result, subordinated securities will normally be rated one or two rating categories below senior debt securities to account for the higher expected credit loss after default occurs. Conversely, a secured obligation may be rated one or more rating categories higher than the company’s senior/unsecured rating level. 9 Any missed or delayed disbursement of interest or principal, including late payments made within a grace period (speciﬁed in the legal documentation associated with the obligation), is deﬁned as default.

430 10

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Altman’s (1968) study was the ﬁrst one to use multivariate discriminant analysis to explain the interaction of ﬁnancial ratios in predicting bankruptcy. Other studies that used the logit analysis approach include Santomero and Visno (1977), Martin (1977) and Estrella, Park and Peristiani (2000), which tried to estimate the probability of failure for banks and the banking system. Studies using accounting ratios to predict bankruptcy for corporate companies include Collins (1980), who also made a comparison between discriminant analysis and linear probability models, Platt and Platt (1990) and Bernhardsen (2001), who used logit analysis, and Saretto (2004), who applied a simple piece-wise constant hazard model. Finally, Huffman and Ward (1996) have established a logit model for the prediction of default for high-yield bonds at the time of issuance. 11 In- and out-of-sample tests were also performed in order to further test the robustness of the model; they indicated that the predictive ability of the model was signiﬁcant, since the model could correctly predict 97.30 percent of the non-defaulted bonds and 92.31 percent of the defaulted bonds. 12 One of the most important factors affecting the probability of default is the gearing level. Pre-issue gearing is deﬁned as the ratio of long-term debt over the long-term debt plus shareholders’ equity. It shows at a glance the debt of a company, and is a measure of the company’s ability to survive in income recession periods. A rising gearing will indicate an increasing reliance upon bank money or other forms of debt for vessel acquisitions, and this may create problems with paying interest and repaying capital if the market conditions deteriorate. Shipping companies with high gearing ratios and unstable income generation faced survival problems in the early 1980s, while others defaulted

on their high-yield debt obligations in 1998/9. However, during high-income periods such as the second part of the 1980s and in 2003/8, highly geared companies substantially increased their revenues and expanded. Naturally, companies operating in the time-charter market may have no difﬁculties in paying out interest to the bondholders, while companies operating in the spot or in the short-term timecharter markets may face severe difﬁculties in paying them interest, as happened in 1998/9.

References Alessandrini, F. (1999) Credit risk, interest rate risk, and the business cycle. Journal of Fixed Income 9(2): 42–53. Altman, E. I. (1968) Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance 23(4): 589–609. Bedendo, M., L. Cathcart and L. El-Jahel (2004) The shape of the term structure of credit spreads: an empirical investigation. Tanaka Business School Discussion Papers TBS/ DP/04/11. Imperial College London. Bernhardsen, E. (2001) A model of bankruptcy prediction. Norges Bank Working Paper ANO 2001/10. Financial Analysis and Structure Department, Oslo. December 5. Collin-Dufresne, P., R. S. Goldstein and J. S. Martin (2001) The determinants of credit spread changes. Journal of Finance 56(6): 2177–2207. Collins, R. A. (1980) An empirical prediction on bankruptcy prediction models. Financial Management 9(2): 52–8. De Bondt, G. and D. Marqués (2004) The highyield segment of the corporate bond market: a diffusion modelling approach for the United States, the United Kingdom and the Euro area. European Central Bank Working Paper Series no. 313. February.

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Estrella, A., S. Park and S. Peristiani (2000) Capital ratios and credit ratings as predictors of bank failures. FRBNY Economic Policy Review 6(2): 33–52. Fons, J. S. (1994) Using default rates to model the term structure of credit risk. Financial Analyst Journal September/October: 25–32. Fridson, M. S. and C. M. Garman (1998) Determinants of spreads on new high-yield bonds. Financial Analyst Journal March/April: 28–39. Gabbi, G. and A. Sironi (2005) Which factors affect corporate bonds pricing? Empirical evidence from eurobonds primary market spreads. European Journal of Finance 11(1): 59–74. Garman, C. M. (2000) Pricing European highyield new issues. Journal of Fixed Income 9(4): 35–42. Grammenos, C. Th. (1979) Bank Finance for Ship Purchase. Bangor Occasional Papers in Economics, 16. Cardiff: University of Wales Press. Grammenos, C. Th. (1994) Financing the international ﬂeet. Nautical Institute Annual Lecture, Royal Society of Arts, London, May 20. Grammenos, C. Th. (2010) Revisiting credit risk, analysis and policy in bank shipping ﬁnance. In C. Th. Grammenos (ed.), The Handbook of Maritime Economics and Business, 2nd edn., pp. 777–810. London: Informa Group. Grammenos, C. Th., A. H. Alizadeh and N. C. Papapostolou (2007) Factors affecting the dynamics of yield premia on shipping seasoned high yield bonds. Transportation Research Part E: Logistics and Transportation Review 43(5): 549–64. Grammenos, C. Th. and A. G. Arkoulis (2003) Determinants of spreads on the new high yield bonds of shipping companies. Transportation Research Part E: Logistics and Transportation Review 39(6): 459–71. Grammenos, C. Th., K. Biniaris and E. Mantis (1998) Debt ﬁnancing of the oil tanker market: 1982–1997. Mimeo. Cass Business School, City University London.

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Grammenos, C. Th., N. K. Nomikos and N. C. Papapostolou (2008) Estimating the probability of default for shipping high yield bond issues. Transportation Research Part E: Logistics and Transportation Review 44(6): 1123–38. Hand, J., R. Holthausen and R. Leftwich (1992) The effect of bond rating agency announcements on bond and stock prices. Journal of Finance 47: 733–52. Helwege, J. and C. M. Turner (1999) The slope of the credit yield curve for speculativegrade issuers. Journal of Finance 54(5): 1869–84. Huffman, S. P. and D. J. Ward (1996) The prediction of default for high yield bond issues. Review of Financial Economics 5(1): 75–89. Kindahl, A. (2008) The credit crisis – will shipping stand the test? Presentation given at the German Ship Finance Forum, February 28. Standard & Poor’s. Kisgen, D. (2006) Credit ratings and capital structure. Journal of Finance 61: 1035–72. Kricheff, B. and V. Strenk (1999) The high yield market. In T. M. Barnhill, W. M. Maxwell and M. R. Shenkman (eds.), High-Yield Bonds: Market Structure, Portfolio Management and Credit Risk Modeling, pp. 3–16. New York: McGraw-Hill. Leggate, H. K. (2000) A European perspective on bond ﬁnance for the maritime industry. Maritime Policy and Management 27(4): 353–62. Lloyd’s List (2000) Grammenos predicts return to high yields. May 13. Lloyd’s Shipping Economist (2000) Junk bonds: a high price to pay? June, pp. 17–18. Marine Money: Freshly Minted (2010) The world tilts East. January 14. Martin, D. (1977) Early warning of bank failure. Journal of Banking and Finance 1: 249–76. Moody’s Global Corporate Finance (2009) Global shipping industry: rating methodology. Moody’s Investors Service (1995) Global Credit Analysis, ed. D. Stimpson. London: IFR.

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Platt, H. D. and M. B. Platt (1990) Development of a class of stable predictive variables: the case of bankruptcy prediction. Journal of Business Finance and Accounting 17(1): 31–51. Santomero, A. M. and J. D. Visno (1977) Estimating the probability of failure for

commercial banks and the banking system. Journal of Banking and Finance 1(2): 185–206. Saretto, A. A. (2004) Predicting and pricing the probability of default. UCLA Research Paper.

22

Ship Finance: Hedging Ship Price Risk Using Freight Derivatives Amir H. Alizadeh and Nikos K. Nomikos

22.1

Introduction

Volatility in ship prices has always been an issue of concern for banks, shipyards and shipping companies, because ﬂuctuations in ship prices over short periods of time have signiﬁcant impact on the proﬁtability and viability of shipping ventures. Volatility of ship prices is an important factor for shipowners, not only because it affects the balance sheet value of their company, but also because a reduction in the value of a ship may affect the creditworthiness of shipowners and their ability to service their debt obligations, since ships are used as collateral in ship ﬁnance transactions. For this reason, banks ﬁnancing ships, investors providing equity to shipowners and operators, shipyards building new ships and asset players in shipping markets all tend to monitor the volatility of the market for ships and to incorporate such information in their lending, investment, portfolio construction and divestment decisions. From the practical point of view, investors and ﬁnanciers pay particular attention

to the volatility of ship prices in order to design and set terms of credit for ship ﬁnance, and asset players monitor changes in ship price for investment timing and portfolio management, while shipyards follow conditions in the market for ships in order to judge whether to expand or contract production, or to offer deals in order to attract new clients and secure contracts. From the academic point of view, several studies have examined the issues of modeling and forecasting the volatility of ship prices, while others have focused on the importance of ship price volatility in the decision making of market participants, as well as in the pricing of assets and derivatives. For instance, Kavussanos (1997) investigates the dynamics of volatility in the price of secondhand dry-bulk carriers and argues that there is a positive relationship between price volatility and vessel size. Alizadeh and Nomikos (2003) examine the relationship between ship price volatility and trading activities in the sale and purchase market for dry bulk carriers, and ﬁnd that volatility of ship prices is inversely related to trading volume

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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in the sale and purchase market. Alizadeh (2001) and Kavussanos and Alizadeh (2002) suggest that there is a direct relationship between price volatility and investment returns in the dry-bulk sector, and that the market for ships is efﬁcient in the sense that proﬁt-making opportunities, in excess of what is implied by the market according to the level of risk taken, are limited or do not exist. Cullinane (1991) was the ﬁrst study to use the investor’s utility function to investigate the risk and return relationship in shipping investments; it argues that attitudes towards risk should be considered when examining shipping investment decisions. Alizadeh and Nomikos (2006, 2007) investigate the proﬁtability of tactical trading strategies in shipping investments, using models to optimize risk and return on shipping investment strategies. Finally, Bendall (2002) and Bendall and Stent (2003) investigate the suitability of real option analysis in shipping investment and argue that volatility in shipping variables, as well as managerial and operational ﬂexibility in shipping, should be considered in shipping project valuations. One particular aspect of the market that has yet to be examined in a systematic way is that of managing ship price risk. Traditionally, shipowners and asset players in shipping markets employed physical asset diversiﬁcation methods to manage ship price risk and the ﬂuctuation in the value of their portfolio of assets. This usually involves holding portfolios of ships that are well diversiﬁed in terms of size, type or age. However, this method of risk management can have a limited effect because of the positive correlation between prices of different vessel types, as is shown by Alizadeh and Nomikos (2009). In addition, this method of diversiﬁcation, although

theoretically sound, may not be economically and practically applicable to the market for ships because of lack of liquidity and market depth, high transaction costs and brokers’ commissions, and the length of time required to complete a Sale and Purchase transaction due to inspection, survey, preparation of documentation, etc. Another important issue, which is raised by some owners who are against ﬂeet diversiﬁcation and portfolio optimization, is the case of specialization and operational expertise; for instance, tanker operators do not have the specialist knowledge, the market know-how or even the market contacts to diversify their operations in the dry-bulk sector. An alternative method used by ship operators is to eliminate ship price risk from the portfolio altogether by not owning ships, but leasing or chartering them on a longterm time-charter or bareboat charter basis. The downside of this method is that investors in these companies cannot beneﬁt from any capital gain or ship price appreciation. More recently, we have seen the development of derivative contracts on ship values, known as forward ship value agreements (FOSVAS), which enable investors not only to manage the asset price risk of their ﬂeet but also to speculate when market prices fall, by selling these contracts. Despite the fact that these contracts are theoretically appealing, the lack of liquidity and market transparency, and the large contract size and credit risk, are some important obstacles in the development of the market and, this being so, the market has yet to prove popular with investors; see also Alizadeh and Nomikos (2009) for a review of this market. However, a viable alternative to these contracts is to use Forward Freight Agreement (FFA) contracts to hedge ﬂuctuations in ship prices. The use of FFA

SHIP FINANCE: HEDGING SHIP PRICE RISK USING FREIGHT DERIVATIVES

contracts is theoretically justiﬁed on the grounds that the price of a vessel is equal to the discounted present value of her expected earnings, and thus the correlation between ship prices and earnings is quite strong. In addition, FFA contracts are relatively liquid and trade in transparent markets, and the majority of the trades are cleared through one of the clearing houses that are available in the market, which means that their use overcomes the problems that have been identiﬁed regarding the use of the FOSVAS. Therefore, the aim of this chapter is, ﬁrst, to discuss how ship prices are determined and what their relation to FFA prices is. In particular, we describe the theoretical link between ship prices and forward contracts for freight rates, and then show how that link affects the causal relationship between ship prices and FFA rates for Capesize, Panamax and Supramax vessels. Finally, we examine how ship price risk can be managed using FFA contracts and review the effectiveness of this strategy. The structure of this chapter is as follows. Section 22.2 presents the theoretical model that links forward freight rates with ship prices. Section 22.3 presents the statistical properties of the ship price indices and FFA contracts. Sections 22.4–7 present the empirical results for the causality tests between ship prices and forward rates and the methodology for estimating the optimum hedge ratio. Finally, section 22.8 concludes the chapter.

22.2 Formation of Ship Prices: The Link between Ship Prices and Forward Rates Traditional approaches for modeling ship prices are based on general and partial equi-

435

librium models, which explain ship prices in terms of structural relationships between a number of variables, such as order book, newbuilding deliveries, scrapping rates, freight rates and bunker prices (see for example Beenstock and Vergottis 1989; Strandenes 1984; Tsolakis, Cridland and Haralambides 2003). More recent studies have applied real options analysis for determining ship prices. This valuation framework explicitly takes into account the operational ﬂexibility in ship management, in terms of choosing between entry and exit from the market, spot and period timecharter operations, and switching between lay-up and trading modes (see for example Bendall and Stent 2003; Dixit and Pindyck 1994; Tvedt 1997). The price formation in the second-hand market for ships has also been examined to determine whether markets for ships are efﬁcient and whether prices are formed rationally. For example, Hale and Vanags (1992), Glen (1997) and Kavussanos and Alizadeh (2002) test the validity of the efﬁcient-market hypothesis (EMH)1 in the formation of second-hand dry-bulk prices. These studies argue that the failure of the EMH may either be attributed to the existence of time-varying risk premiums or reﬂect arbitrage opportunities in the market. The latter suggests that, if prices for vessels are found to deviate consistently from their rational values,2 trading strategies can be adapted to exploit excess proﬁt-making opportunities. For example, when ship prices are lower than their fundamental values, buying and operating these vessels may be proﬁtable, since they might be underpriced compared to their future profitability (i.e. the earnings from freight operations). On the other hand, when prices are higher than their corresponding rational

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AMIR H. ALIZADEH AND NIKOS K. NOMIKOS

values, it may be more proﬁtable to charter in vessels than to buy and operate them, since they might be overpriced in comparison to their expected future proﬁtability. Investors in the shipping industry, like investors in any other sector of the economy, are interested in the rate of return that is generated by the assets they own. Thus they measure the performance of their investment in terms of the income generated from the day-to-day operation of ships as well as from the gains from capital appreciation in the value of the vessels. Therefore, from the investors’ point of view, the expected one-period return, Etrt+1, on shipping investments is equal to the expected one-period capital gains between times t and t + 1, (EtPt+1 − Pt)/Pt, plus the expected return from operation, EtΠt+1/Pt, where EtPt+1 is the expected ship price at time t + 1 and EtΠt+1 is the expected operating proﬁt between periods t and t + 1. Mathematically, ⎛ E t Pt +1 − Pt + E t Π t +1 ⎞ E t rt +1 = ⎜ ⎟⎠ ⎝ Pt

(1)

Equation (1) can be rearranged to arrive at a present-value model, where the current ship price, Pt, is expressed in terms of the expected price of the vessel, the expected operational proﬁts and the expected rate of return, in the following expression. ⎛ E P + E t Π t +1 ⎞ Pt = ⎜ t t +1 ⎝ 1 + E t rt +1 ⎟⎠

(2)

Through recursive substitution and some algebraic manipulation, Pt can be written as the sum of the present values of the future proﬁts plus the present value of the expected terminal or resale price, Psct+n of the asset, assuming a discount rate equal to the required rate of return. Mathematically,

n

Pt =

∑ i =1

Et Πt + i E t Ptsc+ n + (1 + ri )i (1 + rn )n

(3)

Equation (3) is in fact a discounted presentvalue model which explains the price of a ship in terms of her expected operational earnings and resale value, which could be the terminal or scrap value or the secondhand value of the ship if sold as secondhand. This model can thus be regarded as the theoretical price of the vessel at time t, based on assumptions about her expected operating revenue, discount rate and expected resale value. It can be seen that in the formation of ship prices, any error in expected values can lead to potential mispricing, and when uncertainty about future freight market condition and resale value of the vessel increases, so does the potential pricing error. In practice, when the discounted present-value model is used for asset pricing, uncertainty about the future income generated by the asset and its resale value is incorporated in the discount factor as a risk premium. Thus, the discount factor, ri, is adjusted in such a way as to reﬂect the risk involved in holding the asset as ri = rf +r p, where rf is risk-free rate and r p is risk premium. Therefore, ri is in fact the rate of return required by the investor to hold the asset. Future earnings can be proxied by the forward freight rates covering the same period, as these contracts directly measure the operating earnings of the vessel. This is also convenient because the unbiasedness hypothesis of forward freight rates, examined by Kavussanos, Visvikis and Menachof (2004), postulates that forward freight rates are unbiased predictors of futures freight rates. Therefore, assuming that the unbiasedness hypothesis holds, we can substitute

SHIP FINANCE: HEDGING SHIP PRICE RISK USING FREIGHT DERIVATIVES

future expected earnings with forward rates, because Ft,t+i = EtΠt+i, and write equation (3) as n

Pt =

∑ i =1

Ft ,t + i E t Ptsc+ n + (1 + ri )i (1 + rn )n

(4)

The above model represents the theoretical link between ship prices and FFA rates which indicates that FFA rates are in fact the most important determinant of ship values and that the two variables should be highly correlated. Therefore, given the liquidity of FFAs and the transparency of the FFA market, these contracts can be good candidates for managing the risk associated with ship prices. The only issue is that in equation (4) ship values are deﬁned as the discounted present value of a series of FFA contracts, with maturities which are spread over n periods, whereas in practice FFA contracts are only traded for speciﬁc maturities of up to ﬁve years; in addition, not all of these maturities are traded on any given date, and so liquidity concentrates on contracts with maturity of up to two years. Therefore, in order to investigate whether FFAs can be used for hedging ship prices and to determine the optimum hedge ratio, we select the FFA contracts with maturity of two years, known in the industry as the 2nd nearest calendar FFA contracts.

22.3

Data and Methodology

In order to investigate the appropriateness of forward freight agreements for hedging ship values in the dry-bulk sector, we collect the weekly ship value assessments and FFA rates for the three sizes of dry-bulk carriers published by the Baltic Exchange. The data

437

set covers the period March 21, 2005 to February 14, 2010 (251 weekly observations). FFA price series are for the 2nd nearest calendar FFA contract reﬂecting the freight rates of the average of the four trip-charter routes for the Capesize and Panamax vessels and the average of the six trip-charter routes for the Supramax vessels, known as 4TC and 6TC respectively.3 Second nearest calendar FFA series are used because they seem to show a high correlation with ship values, which is an important factor in hedging. In addition, these contracts are liquid enough and can be rolled over to construct a continuous series for assessing the effectiveness of the proposed hedging strategy. The descriptions of the Baltic ship value assessment (Baltic Sale and Purchase Assessment, BSPA) as well as the calendar FFA contracts are given in Table 22.1. Descriptive statistics of the variables are reported in Table 22.2. The daily FFA rates are annualized to reﬂect the size of the contracts. For instance, the US$20,000/day for Capesize 4TC FFA rate is multiplied by the number of calendar days in a year to yield the annualized value of the contract (US$7,300,000). The average price assessment and calendar FFA for each type of ship, reported in the ﬁrst row, indicates that on average prices and freight rates for larger ships have been higher than smaller ones, as expected. Furthermore, the ratios of average price to average FFA rates are 5.67, 6.16 and 6.07, for Capesize, Panamax and Supramax vessels respectively. This ratio means that the vessel value is on average about six times that of her earnings in one year. Average weekly percentage price changes (returns) are close to zero for both prices and FFA rates, while weekly standard

438 Table 22.1

AMIR H. ALIZADEH AND NIKOS K. NOMIKOS

Baltic FFA and Sale and Purchase assessments Size of vessel (dwt, tonnes)

Description

Capesize 4TC average

172,000

Panamax 4TC average

74,000

Supramax 6TC average Baltic BSPA Capesize

52,000

Equally weighted average of Trip-Charter rates in four Baltic Exchange Capesize routes, namely: C8_03, C9_03, C10_03, and C11_03 Equally weighted average of Trip-Charter rates in four Baltic Exchange Panamax routes, namely: P1A_03, P2A_03, P3A_03, and P4_03 Equally weighted average of Trip-Charter rates in six Baltic Exchange Supramax routes, namely: S1A, S1B, S2, S3, S4A and S4B. “Built in ﬁrst-class competitive yard,” 190,000 cbm grain, max. loa 289 m, max. beam 45 m, draft 17.75 m, 14.5 knots laden, 15.0 knots ballast on 56 mts fuel oil, no diesel at sea; Non-coated. Not ice-classed. Five years old. Special survey passed. Delivery prompt (2/3 months), charter free. 2% total commission. “Built in ﬁrst-class competitive yard,” 89,000 cbm grain, max. loa 225 m, draft 13.95 m, 14.0 knots on 32/28 fuel oil laden/ ballast and no diesel at sea. Non-coated Not ice-classed. Five years old. Special survey passed. Delivery prompt (2/3 months), charter free. 2% total commission. “Built in ﬁrst-class competitive yard,” “European standard B&W main engine,” 66,500 cbm grain, loa 190 m, beam 32.26 m, draft 12.02 m, 14.8 knots on 30.0 mt 390 at sea, 5 holds/5 hatches, 4 × 30 t cranes; not ice-classed. Five years old. Special survey passed. Delivery prompt (2/3 months), charter free. 2% total commission.

172,000

Baltic BSPA Panamax

74,000

Baltic BSPA Supramax

52,000

Source: Baltic Exchange.

deviations of prices for Capesize, Panamax and Supramax ships are 0.0318, 0.0338 and 0.0291 respectively. At the same time, weekly standard deviations of FFA rates for the same vessels, 0.0784, 0.0678 and 0.0556, indicate that the volatility of FFAs is almost twice that of ship values. The estimated coefﬁcient of skewness indicates that all series are negatively skewed, more so in case of prices. Estimated coefﬁcients of kurtosis, as well as Jarque–Bera test statistics,

suggest that distributions of weekly changes in prices and FFA rates for all vessel types are not normal. Estimated Ljung–Box statistics for testing the existence of 1st- to 10th-order autocorrelation in returns and squared returns reveal signiﬁcant autocorrelation in levels and squared returns of all ship prices and FFAs. Finally, the results of Augmented Dickey–Fuller and Phillips–Perron unit roots tests reveal that while log prices and

SHIP FINANCE: HEDGING SHIP PRICE RISK USING FREIGHT DERIVATIVES

log FFA rates are non-stationary, their ﬁrst differences are stationary. The unit root test results support the use of cointegration technique in analyzing the co-movement of prices and FFA rates.

22.4 Long-Term and Short-Term Correlation The most important element when it comes to risk management and hedging is to ﬁnd a derivative instrument which has a high correlation with the underlying asset, ship prices in this case. Once the theoretical relationship between ship prices and FFAs is established, the next step is to test whether this relationship results in a high degree of correlation between ship values and FFA prices. The correlation between two variables can be estimated in levels as well as returns. If levels are used, long-run correlation is calculated; if changes in variables are used, short-run correlation is calculated. Long-run correlation reﬂects the longterm co-movement and the relationship between variables, while short-run correlation reveals information on the comovements between the two variables in the short term. In general, short-run correlation between variables is less than longrun correlation, as variables tend to follow a common trend in the long run, but may deviate more often in the short term, due to noise or changes in market conditions. Historical values of BSPA and 2nd nearest calendar FFA rates for three sizes of drybulk carriers, namely Capsize, Panamax and Supramax, are plotted in Figures 22.1, 22.2 and 22.3 respectively. A visual inspection of these graphs indicates a high degree of correlation between FFA rates and ship price for all three vessel sizes. This is conﬁrmed

439

by the correlation coefﬁcients reported in Table 22.2. For all three types of ship, the level and the year-on-year changes in Baltic ship value assessment seem to be highly correlated with level as well as yearly changes in FFA rates. For instance, in the Capesize market, the long-run and year-onyear change correlation coefﬁcients between vessel values and FFA are 92.2% and 93.0%, respectively. In the Panamax sector, the estimated correlation coefﬁcient between price level and calendar FFAs is 94.0%, while correlation between annual returns is 95.1%. Finally, the coefﬁcient of long-run correlation between vessel value and 2nd year FFAs for Supramax ships is 96.0%, and the coefﬁcient of correlation between annual returns of the same variables is 96.5%. The existence of a high degree of correlation between ship prices and FFAs is in line with the theory of ship price determination presented in Section 22.2.

22.5

Cointegration and Causality

To investigate the co-movement between vessel values and forward freight rates we analyze the cointegrating relationship between these two variables. In order to establish the existence of cointegration between second-hand prices and forward freight rates, we use the Johansen (1988) reduced-rank cointegration technique and estimate the following vector error correction model (VECM). q

Δz t = A 0 +

∑ A Δz i

t −i

+ Gz t −1 + e t (5)

i =1

where z′t = [Δpt Δft ], and A0 and Ai are vector of constants and matrix of

40 35 30 25 20 15 10 5 0

200 150 100 50

SH Price (right axis $m)

Nov-09

Jul-09

Mar-09

Nov-08

20 15 10

Nov-09

Jul-09

Mar-09

Nov-08

Jul-08

Mar-08

Nov-07

Jul-07

Mar-07

Nov-06

Jul-06

Mar-06

Nov-05

5

SH Price (right axis $m)

Figure 22.2

Jul-08

25

Jul-05

140 120 100 80 60 40 20 0

FFA Cal2 (left axis $m)

Plot of second-hand ship values and Cal2 4TC FFA in the Capesize sector.

Mar-05

Figure 22.1

Mar-08

Nov-07

Jul-07

Mar-07

Nov-06

Jul-06

Mar-06

Nov-05

Jul-05

Mar-05

0

FFA Cal2 (left axis $m)

Plot of second-hand ship values and Cal2 4TC FFA in the Panamax sector.

SH Price (right axis $m)

Nov-09

Jul-09

Mar-09

Nov-08

Jul-08

Mar-08

Nov-07

Jul-07

Mar-07

Nov-06

Jul-06

Mar-06

Nov-05

Jul-05

Mar-05

100 90 80 70 60 50 40 30 20 10 0

Figure 22.3

0

18 16 14 12 10 8 6 4 2 0

FFA Cal2 (left axis $m)

Plot of second-hand ship values and Cal2 6TC FFA in the Supramax sector.

441

SHIP FINANCE: HEDGING SHIP PRICE RISK USING FREIGHT DERIVATIVES

Table 22.2 Descriptive statistics of vessel values and 2nd nearest calendar FFA prices Capesize

Mean ($m) Return (%) St. dev. (%) Skewness Kurtosis Jarque–Bera LB-Q (10) ADF (level) ADF (diff.) PP (level) PP (diff.) Price to FFA Correlations Level Yearly change

Price

FFA Cal2

83.89 −0.0011 0.0318 −4.275 35.561 11806 [0.000] 373.89 [0.000] −1.649 −4.804 −1.308 −6.937 5.67

14.79 −0.0011 0.0784 −1.236 8.359 363 [0.000] 21.29 [0.019 −1.235 −16.776 −1.557 −17.035

Panamax Price

FFA Cal2

49.43 8.03 −0.0011 −0.0003 0.0338 0.0678 −5.222 −1.428 41.531 8.517 16601 402 [0.000] [0.000] 314.98 18.54 [0.000] [0.046] −1.684 −1.235 −5.108 −9.829 −1.408 −1.426 −8.138 −17.160 6.16

0.922 0.930

0.940 0.951

Supramax Price

FFA Cal2

41.93 6.91 0.0003 −0.0007 0.0291 0.0556 −4.824 −2.532 35.072 15.873 11684 1993 [0.000] [0.000] 375.65 230.05 [0.000] [0.011] −1.535 −1.153 −4.943 −16.046 −1.263 −1.439 −6.880 −16.479 6.07 0.960 0.965

The table shows descriptive statistics for log-differences of ship values and 2nd nearest calendar FFA rates in three dry-bulk sub-sectors. Data are weekly over the period March 21, 2005 to February 14, 2010 (251 weekly observations). Skewness and kurtosis are estimated centralized third and fourth moments of the data. The Jarque–Bera (1980) test for normality is distributed as χ2(2), with critical 5% value of 5.99. LB-Q(10) is the Ljung–Box (1978) Q statistics on the ﬁrst ten lags of the sample autocorrelation function of the return series, which follows a χ2(10) under the null of no serial correlation and 5% critical value of 51.48. ADF and PP are the Augmented Dickey–Fuller (1981) and the Phillips and Perron (1988) unit root tests, respectively. The ADF regressions include an intercept term and the lag-length is determined by minimizing the SBIC. The 5% critical value for the ADF and PP tests is −2.873.

coefﬁcients, respectively. Γ is the matrix containing the coefﬁcients-of-cointegration relationship. Johansen (1988) proposes a reduced-rank cointegration method to establish the cointegration relationship between variables in the VECM. This method involves assessing the rank of the long-run coefﬁcients matrix, Γ, through the λmax and λtrace statistics. The rank of Γ in

turn determines the number of cointegrating relationships; for instance, if rank of Γ is one, then there is a single cointegrating vector describing the long-run equilibrium relationship between the variables. In this case, Γ can be factored as Γ = γθ′, where γ and θ are 2 × 1 vectors, γ = [γ1 γ2] and θ = [1 θ1 θ0].4 Using this factorization, θ′ represents the cointegrating vector containing

442

AMIR H. ALIZADEH AND NIKOS K. NOMIKOS

cointegrating parameters, and γ is the vector of error correction coefﬁcients measuring the speed of convergence to the longrun steady state. The above VECM model can be used to examine the cointegrating relationship between log prices and log FFA rates. The important element of the cointegration relationship is the error correction term (ECT) which is the product of the cointegrating vector, θ, and the vector of variables, zt, (θzt). The ECT is in fact the difference between log prices and log FFA rates (pt−1 − θ1ft−1 − θ0) or the long-run relationship between ship prices and FFA rates. The constant term in the error correction term, θ0, represents the long-run equilibrium log price difference between the two variables. The VECM model of equation (5) also provides a framework for testing the causal linkages between ship prices and earnings. According to the Granger Representation Theorem (Granger 1986), if two variables are cointegrated, then at least one variable should Granger-cause the other.5 Since ship prices are determined through the discounted present value of expected earnings and the latter are determined exogenously, through the interaction between the supply and demand schedules for shipping services, we expect the causality to be unidirectional; that is, we expect earnings to Granger-cause ship prices but not the other way round. Hence, any change in earnings should affect the spread between log prices and log earnings and result in a change in ship prices over the next period. Therefore, in this case one can argue that FFA prices contain information on future changes in ship prices, which can be used for forecasting as well as hedging ship prices.

22.6 Minimum Variance Hedge Ratio Ederington (1979) derives hedge ratios that minimize the variance of returns on the hedged portfolio according to the principles of portfolio theory. Let Δpt and Δft represent changes in ship prices and FFA rates between period t and t − 1. Then the variance-minimizing hedge ratio is the ratio of the unconditional covariance between ship prices and FFA rates to the variance of FFA price changes; this is equivalent to the slope coefﬁcient, β, in the following regression: Δpt = α + βΔf t + ε t ; ε t ~ iid ( 0, σ 2 ) (6) Within this speciﬁcation, the slope coefﬁcient measures the percentage of the value of a ship that needs to be hedged using FFAs, and the R2 of the regression measures the effectiveness of the minimum-variance hedge, i.e. the percentage of the variability of spot prices that is eliminated through hedging. Examples of empirical studies involved in estimating minimum risk hedge ratios for the shipping markets are Kavussanos and Nomikos (2000a, 2000b). The frequency of the time series used for estimating equation (6), i.e. the distance between t − 1 and t, reﬂects the hedging interval over which ship price risk will be hedged. In practice, given the long-term nature of investments in ships, liquidity issues, and the time required to complete a Sale and Purchase transaction, it makes sense to assume that ship price volatility will be hedged over longer intervals, for example a year. Therefore, to assess the effectiveness of hedging ship values using

SHIP FINANCE: HEDGING SHIP PRICE RISK USING FREIGHT DERIVATIVES

FFA contracts on an annual basis (a calendar year of 52 weeks), one needs to look at yearly changes in ship values and FFA rates as indicated in equation (7) Δ 52 pt = α + βΔ 52 f t + ηt

443

estimated using the simulated returns, and hedge ratio and hedging effectiveness are estimated as slope and R2 of the regression.

(7)

where Δ52pt = pt − pt−52, Δ52ft = ft − ft−52. The main issue in equation (7) is that, because of the overlapping observations in dependent and explanatory variables, the error term ηt follows an MA process of 51 order, i.e. ηt = εt + . . . + εt−51. The presence of an MA error process in equation (7) implies that OLS estimates of parameters will still be unbiased and consistent; however, their standard errors will not be efﬁcient, and the R2 of the regression, which reﬂects the degree of hedging effectiveness, will not be correct. One way of overcoming the problem of overlapping observations is to use non-overlapping series. However, given the sample size of 251 observations, we can only have ﬁve non-overlapping yearly returns for ship prices and FFA rates, which is too small a sample to reliably estimate the non-overlapping hedge ratio. In order to address the problem of overlapping observations when estimating hedge ratios and measuring hedging effectiveness, we use the stationary bootstrap technique of Politis and Romano (1994) to regenerate random paths that ship prices and FFA rates might have followed over a year (52-week period), based on block draws of random size, with replacement, from the actual series. We then calculate the percentage return of the simulated ship value and FFA rates over the 52-week period. Repeating this process 10,000 times, we generate 10,000 yearly non-overlapping returns for ship prices and FFAs (see Appendix for technical details). Finally, equation (7) is

22.7

Estimation Results

Having identiﬁed that ship prices and FFA rates are I(1) variables, we next use cointegration techniques to examine the existence of a long-run relationship between these series. The lag length in the VECM of equation (5) is chosen on the basis of the Schwarz Bayesian Information Criterion (SBIC) (Schwarz 1978) for each size vessel; that is, q = 2 for Panamax and Supramax, and q = 4 for Capesize vessels. Likelihood-ratio tests indicate that an intercept term should be included in the long-run relationship.6 Johansen’s (1988) reduced-rank cointegration method is then used to establish the cointegration relationship between ship prices and 2nd calendar average TC FFA rates. Results from these tests are reported in Table 22.3. The λmax and λtrace statistics indicate the existence of one cointegrating vector between ship prices and FFA rates for the Panamax and Handysize markets; for the Capesize market, on the basis of the λtrace test, the null hypothesis of no cointegration is marginally accepted at the 95% level, although the same hypothesis is rejected on the basis of the λmax test. Overall, given this weak evidence, it is also safe to conclude that Capesize prices and FFA rates are cointegrated. Overall, these tests indicate that second-hand ship prices and FFA rates are linked through a unique long-run relationship and that any deviation from this equilibrium is restored through the short-term adjustment of these variables.

444

AMIR H. ALIZADEH AND NIKOS K. NOMIKOS

Table 22.3 Result of Johansen’s reduced-rank cointegration test of log-prices (p) and log calendar TC FFA ( f ) q

Δz t = A 0 +

∑ A Δz i

t−i

+ Gz t −1 + e t

i =1

Pair of variables

Lags

λmax H0 HA

λmax

Capesize lnP and q = 2 r = 0 r ≥ 1 16.50 lnFFA r ≤ 1 r = 2 3.076 (p and f) Panamax lnP and q = 2 r = 0 r ≥ 1 31.91 lnFFA r ≤ 1 r = 2 2.469 (p and f) Supramax lnP and q = 2 r = 0 r ≥ 1 34.55 lnFFA r ≤ 1 r = 2 3.181 (p and f)

λmax 95% λtrace H0 HA CVs

λtrace

λtrace 95% CVs

Normalized coin vector [1 θ θ0 ] [1 −0.919 −1.966]

15.89 9.16

r = 0 r = 1 19.58 r ≤ 1 r = 2 3.076

20.26 9.24

15.89 9.16

r = 0 r = 1 34.37 r ≤ 1 r = 2 2.469

20.26 9.24

[1 −0.921 −1.985]

15.89 9.16

r = 0 r = 1 37.73 r ≤ 1 r = 2 3.181

20.26 9.24

[1 −0.968 −1.862]

Sample period: Weekly data from March 21, 2005 to February 14, 2010. Johansen’s (1988) reduced-rank cointegration tests for each pair are estimated using a model with a constant in the cointegrating vector and no trend. The appropriate number of lags in each case is chosen by minimizing SBIC. λ max (r ,r + 1) = −T ln(1 − λˆ r +1 ) tests the null hypothesis of r cointegrating vectors against the alternative of r + 1. n λ trace = −T ∑ ln(1 − λˆ i ) tests the null hypothesis that there are at most r cointegrating vectors against the i = r +1

alternative that the number of cointegrating vectors is greater than r, where n is the number of variables in the system (n = 2 in this case). CVs represent critical values from MacKinnon, Haug and Michelis (1999).

The estimated cointegrating vectors, i.e. [1 θ1 θ0] from equation (5), are presented in the same table. These unrestricted cointegrating vectors are then used in the estimation of the VECM model; estimation results for the models are presented in Table 22.4. Residual diagnostics indicate that autocorrelation and heteroskedasticity are present in the residuals of all the regressions. Consequently, a Newey–West (1987) correction for serial correlation and heteroskedas-

ticity is applied to the standard errors of the regressions. Examination of the vector of error correction coefﬁcients, γ, provides insight into the adjustment process of the different variables towards equilibrium. Consider ﬁrst the system of equations for the Capesize market. The cointegrating vector, θ, is signiﬁcant in the equation for ship prices, and the sign of the speed of adjustment coefﬁcient (negative) is consistent with the convergence of ship prices and

Table 22.4 Result of VECM for three sizes of dry bulk carrier q

Δpt =

∑

q

α1,i Δpt − i +

i =1

∑

2, i

Δf t − i + γ 1 ( pt −1 − δ f t −1 − δ 0 ) + ε1,t

i =1

q

Δf t =

∑α q

β1,i Δpt − i +

i =1

∑β

2, i

Δf t − i + γ 2 ( pt −1 − δ f t −1 − δ 0 ) + ε 2,t

i =1

Capesize Δpt γi i = 1,2 Δpt−1 Δft−1 Δpt−2 Δft−2 Δpt−3 Δft−3 Δpt−4 Δft−4

R2 Causality test Δft → Δpt Δpt → Δft

Δft

0.068 −0.044 (0.013) (0.053) [1.288] [−3.552] 0.308 −0.447 (0.060) (0.253) [5.163] [−1.766] 0.053 −0.005 (0.018) (0.078) [2.892] [−0.064] 0.107 0.318 (0.061) (0.257) [1.769] [1.237] 0.033 0.223 (0.018) (0.078) [1.772] [2.852] 0.289 0.148 (0.060) (0.255) [4.786] [0.578] 0.038 0.158 (0.019) (0.079) [2.049] [2.013] −0.189 −0.008 (0.055) (0.233) [−3.443] [−0.033] 0.064 0.166 (0.018) (0.074) [3.660] [2.245] 0.677 0.045 Statistics p-value DF 20.42 {0.001} 4 4.290 {0.381} 4

Panamax Δpt −0.076 (0.014) [−5.643] 0.273 (0.056) [4.855] 0.067 (0.024) [2.824] 0.354 (0.053) [6.717] 0.029 (0.023) [1.215]

Δft 0.026 (0.041) [0.625] −0.118 (0.171) [−0.687] −0.049 (0.073) [−0.678] 0.280 (0.161) [1.746] 0.177 (0.071) [2.482]

0.578 0.030 Statistics p-value DF 8.169 {0.017} 2 3.256 {0.196} 2

Handysize Δpt −0.066 (0.014) [−4.890] 0.333 (0.060) [5.517] 0.091 (0.025) [3.699] 0.288 (0.055) [5.238] 0.022 (0.024) [0.901]

Δft 0.017 (0.041) [0.339] 0.054 (0.184) [0.294] −0.016 (0.074) [−0.213] 0.107 (0.167) [0.639] 0.129 (0.073) [1.756]

0.611 0.010 Statistics p-value DF 13.692 {0.001} 2 1.279 {0.528} 2

Sample period is March 21, 2005 to February 14, 2010. Standard errors, in (), are corrected for serial correlation and/or heteroskedasticity using the Newey–West (1987) method. Figures in [] and {} are t-statistics and p-values, respectively.

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FFA rates towards their long-run relationship. For instance, in response to a positive deviation from their long-run relationship at period t − 1, i.e. pt−1 − θ1ft−1 − θ0 > 0, ship prices in the following period will decrease, thus restoring equilibrium to the market. This is also the mechanism that we expect to prevail in the market. Theoretical ship prices depend on the value of the expected freight income, and hence any decrease in the level of freight rates, and thus an increase in the value of the cointegrating vector, will result in a corresponding decrease in the value of the ship, since its earning capacity is now reduced as a result of the lower level of income. The same pattern is also evident in the Panamax and Handysize markets. More rigorous investigation of the interactions between the variables can be obtained by performing Granger causality tests, which are presented in the same table. According to the Granger (1986) representation theorem, if two price series are cointegrated, then causality must exist in at least one direction. Theoretically, we expect FFA rates to Granger-cause ship prices. We test such causality between the variables by imposing the appropriate restrictions on the VECM model. Tests for the joint signiﬁcance of the lagged cross-market returns and error correction coefﬁcients conﬁrm the conjecture that FFA rates Granger-cause ship prices. On the other hand, ship prices do not Granger-cause FFA rates at conventional levels of signiﬁcance. Again this is expected, since the value of a ship depends directly on her capacity to earn freight income, and hence higher freight rates will result in higher ship prices. Therefore, ship prices do not Granger-cause FFA rates, because freight rates are determined exogenously and primarily depend on the

demand for seaborne trade, which follows developments in the world economy. The discussion indicates the close linkages between ship prices and FFA rates, and also suggests that possibly one could use FFA rates to hedge ﬂuctuations in ship prices. To examine whether this is the case, we estimate the minimum variance hedge ratios using equation (7). Results from estimating the regression model are presented in Table 22.5. Since yearly returns of ship prices and FFA rates are sampled at weekly intervals, this creates overlapping observations of ship prices and FFA rates, which induces serial correlation in the residuals of the regression model. Thus, the reported standard errors are corrected for serial correlation using the Newey–West (1987) correction. The results indicate that using the FFA rates to hedge ship price risk results in very good hedging performance. For instance, in the Capesize market, if one hedges 85% of the value of a ship using FFA contracts, one would have reduced the variability of one’s hedging position by as much as 86.5%. Results for the Panamax and Supramax markets are also similar. However, as already discussed, the estimation results, and in particular the R2 from the regression, may overestimate the performance of the hedge because of the presence of overlapping observations. In order to discount this possibility, and to ensure that the results are robust to model misspeciﬁcation, we generate 10,000 nonoverlapping returns of ship prices and FFA rates, using the stationary bootstrap procedure of Politis and Romano (1994), and then use these series to estimate the hedge ratio regression. These results are also presented in Table 22.5, under the column heading “bootstrap.” We can see that the hedge ratios are almost the same as the

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Table 22.5 Estimates of OLS hedge ratios for three sizes of dry bulk carriers Δ 52 pt = α + βΔ 52 f t + ηt Capesize

α β

R-bar-sqr LB-Q(10) test White test

Panamax

Supramax

Actual

Bootstrap

Actual

Bootstrap

Actual

Bootstrap

−0.0397 (0.0338) [−1.176] 0.8490 (0.0541) [15.689] 0.8649 653.54 {0.000} 22.884 {0.000}

−0.0165 (0.0021) [−7.325] 0.8509 (0.0035) [241.06] 0.8733 12.094 {0.279} 18.113 {0.000}

−0.0427 (0.0138) [−3.087] 0.9299 (0.0216) [43.123] 0.9033 417.03 {0.000} 15.422 {0.000}

−0.0181 (0.0020) [−9.120] 0.9185 (0.0035) [264.42] 0.8999 5.1550 {0.881} 55.913 {0.000}

−0.0377 (0.0111) [−3.398] 0.9664 (0.0186) [52.033] 0.9315 453.31 {0.000} 14.250 {0.001}

−0.0160 (0.0015) [−10.40] 0.9655 (0.0029) [333.45] 0.9321 9.4833 {0.487} 30.181 {0.001}

Sample period for the actual series is March 21, 2005 to February 14, 2010 (250 observations). The bootstrap series is constructed by 10,000 realizations of non-overlapping 52-week returns based on the stationary bootstrap of Politis and Romano (1994). Standard errors, in (), are corrected for serial correlation and/or heteroskedasticity using the Newey–West (1987) method. Figures in [] and {} are t-statistics and p-values, respectively.

hedge ratios estimated using the historical ship values and FFA rates, which reﬂects the fact that estimators are consistent and unbiased, and hence that overlapping observations do not affect the magnitude of the coefﬁcient estimate; standard errors, on the other hand, are noticeably smaller, because of the larger sample size of the bootstrap series. Finally, looking at the R2 of the regression, we can see that it is also very similar to the value estimated using the realized series. Overall, these results provide further evidence for the robustness of the ﬁndings and indicate that the results presented in the paper are not biased by the presence of overlapping observations in the series.

22.8

Summary

In this chapter we have examined the possibility of hedging ship price risk using forward freight agreements. Managing ship price risk is an important factor for shipowners, not only because it affects the balance sheet value of their company, but also because a reduction in the value of a ship may affect the creditworthiness of a shipowner and his or her ability to service his debt obligations, since ships are used as collateral in ship ﬁnance transactions. As such, participants in shipping markets tend to monitor the volatility of ship prices and incorporate such information in their decisions.

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Using a data set of dry-bulk ship values and forward freight agreements for the same type of vessel, we investigate the effectiveness of FFAs in hedging ship values. We develop a theoretical model that links ship values and FFA rates and show the statistical link and causal ﬂow between the prices of ships and FFA rates. Then we estimate the minimum variance hedge ratio, which reﬂects the proportion of the value of a ship that needs to be hedged using FFA rates. The results indicate that using FFA rates to hedge ship price risk results in very good hedging performance. For instance, in the Capesize market, if one hedges 85% of the value of a ship using FFA contracts one would have reduced the variability of one’s hedging position by as much as 86.5%. In order to discount the possibility that these results may be biased by the presence of overlapping observations in the original series, we generate 10,000 non-overlapping returns of ship prices and FFA rates, using the stationary bootstrap procedure of Politis and Romano (1994), and recalculate the hedge ratio regression. These results are consistent with the results based on the original series and indicate that the results presented in the chapter are not biased by the presence of overlapping observations in the series. Appendix The bootstrap, introduced by Efron (1979) and Efron and Tibshirani (1993), is a databased simulation method that uses the empirical distribution of the statistic of interest, rather than the theoretical distribution implied by statistical theory, to conduct statistical inference. Its main attraction is that it can approximate the sampling distribution of the estimator of interest, even

when this is very difﬁcult, or impossible, to obtain analytically and only an asymptotic approximation is available. The stationary bootstrap procedure proposed by Politis and Romano (1994) is based on re-sampling blocks of random length, where the length of each block follows a geometric distribution. This procedure generates random samples, which preserve the serial dependence property of the original series as well as the empirical correlation between the two series. Here we present the algorithm that is used to implement the stationary bootstrap re-sampling technique of Politis and Romano (1994). The description of the algorithm here follows from Appendix C of Sullivan, Timmermann and White (1999). The stationary bootstrap is calculated as follows: Given the original sample of n observations, Xt t = {1, . . . , T}, we start by selecting a “smoothing parameter,” q = qn, 0 < qn <= 1, nqn → ∞ as n → ∞, and then form the bootstrapped series, Xt*, as follows: At t = 1, select X1*, at random, independently and uniformly, from the original n observations from {1, . . . ,T}, so that X1* = X(I1). 2. Increment t by 1. If t > T, then stop. Otherwise draw a standard uniform random variable U independently of all other random variables, a. if U < q, then select X*2 at random, independently and uniformly, from {1, . . . ,T}; b. if U > q, then expand the block by setting X*2 = X(I1 + 1), so that the X*2 is the next observation in the original series following X(I1). 3. Repeat step 2 until we reach X*T. 4. Repeat steps 1–3 10,000 times.

1.

SHIP FINANCE: HEDGING SHIP PRICE RISK USING FREIGHT DERIVATIVES

Therefore, the stationary bootstrap resamples blocks of varying length from the original data, where the block length follows a geometric distribution, with mean block length 1/q. In general, given that Xi* is determined by the Jth observation X( J) in the original series, then Xi+1* will be equal to the next observation in the block X( J + 1) with probability 1 − q and picked at random from the original observations with probability q. Regarding the choice of q, a large value of q is appropriate for data with little dependence, a smaller value of q for data that exhibit more serial dependence. The value of q chosen in our experiments is 0.01, corresponding to a mean block length of 3. This follows other studies in the literature, most notably Sullivan, Timmermann and White (1999). Furthermore, we also perform sensitivity tests with different values of q, and ﬁnd that the results presented here are not sensitive to the choice of q.

Notes 1

2

The concept of market efﬁciency has been used in several contexts to characterize a market in which rational investors use all the relevant information to evaluate and price assets traded in that market and arbitrage away any excess proﬁt-making opportunities. This deﬁnition of the efﬁcient market implies that prices fully and instantaneously reﬂect all the relevant information. As a result, there is no opportunity for agents to make proﬁts in excess of what the rational investors expect to make, considering the level of risk and transaction costs involved. Here, by fundamental or rational value of the asset, we mean the discounted present value of the expected stream of income that the asset generates over its lifetime.

449

3

The Baltic Exchange redeﬁned the Handymax vessel size and reported the 6TC of Supramax vessel instead of the 6TC of Handymax vessel at January 1, 2006. Therefore, the Supramax FFA data consist of Handymax 6TC FFA rates from March 21, 2005 to December 31, 2005 and Supramax 6TC FFA since January 1, 2006. 4 Similarly, if rank(Γ) = 0, Γ is a 2 × 2 null matrix and the VECM is reduced to a VAR model in ﬁrst differences. Finally, if rank(Γ) = 2, then all variables in Xt−1 are I(0) and a VAR model in levels is appropriate. 5 A time series, ft, is said to Granger-cause another time series, pt, if the present value of pt can be predicted more accurately by using past values of ft than by not doing so, considering also other relevant information including past values of pt (Granger 1969). Therefore, the criterion for Granger causality is whether or not the variance of the predictive error of pt is reduced when past ft values are included in its prediction. In terms of the VECM of equation (5), ft Granger causes pt if some of the αi coefﬁcients i = 1, 2, . . . , q are not zero and/or γ1, the error correction coefﬁcient in the equation for ship prices, is signiﬁcant at conventional levels. 6 Johansen (1991) proposes the following statistic to test the appropriateness of including an intercept term in the cointegrating vector against the alternative – that there are linear trends in the level of the series – n

T ∑ [ln(1 − λˆ * i ) − ln(1 − λˆ i )] ~ χ 2 (n − r ) i = r +1

where λˆ * i and λˆ i represent the i smallest eigenvalues of the model that includes an intercept term in the cointegrating vector, and an intercept term in the short-run model, respectively. Acceptance of the null hypothesis indicates that the VECM in equation (5) should be estimated with an intercept term in the cointegrating vector. These results are not presented here and are available from the authors.

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References Alizadeh, A. H. (2001) Econometric analysis of shipping markets: seasonality, efﬁciency and risk premia. PhD thesis, City University London. Alizadeh, A. H. and N. K. Nomikos (2003) The price–volume relationship in the sale and purchase market for dry bulk vessels. Maritime Policy and Management 30(4): 321–37. Alizadeh, A. H. and N. K. Nomikos (2006) Trading strategies in the market for tankers. Maritime Policy and Management 33(2): 119–40. Alizadeh, A. H. and N. K. Nomikos (2007) Investment timing and trading strategies in the sale and purchase market for ships. Transportation Research: Part B 41(1): 126–43. Alizadeh, A. H. and N. K. Nomikos (2009) Shipping Derivatives and Risk Management. Basingstoke: Palgrave Macmillan. Beenstock, M. and A. Vergottis (1989) An econometric model of the world market for dry cargo freight and shipping. Applied Economics 21: 339–56. Bendall, H. B. (2002) Valuing maritime investments using real options analysis. In C. Th. Grammenos (ed.), The Handbook of Maritime Economics and Business, pp. 623–41: London: Informa. Bendall, H. B. and A. F. Stent (2003) Investment strategies in market uncertainty. Maritime Policy and Management 30(4): 293–303. Cullinane, K. (1991) The utility analysis of risk attitudes in shipping. Maritime Policy and Management 18(3): 157–69. Dickey, D. and W. Fuller (1981) Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica 49: 1057–72. Dixit, A. K. and R. S. Pindyck (1994) Investment under Uncertainty. Princeton, NJ: Princeton University Press. Ederington, L. H. (1979) The hedging performance of the new futures markets. Journal of Finance 34: 157–70.

Efron, B. (1979) Bootstrap methods: another look at the jackknife. Annals of Statistics 7: 1–26. Efron, B. and R. J. Tibshirani (1993) An Introduction to the Bootstrap. New York and London: Chapman & Hall. Glen, D. (1997) The market for second-hand ships: further results on efﬁciency using cointegration analysis. Maritime Policy and Management 24: 245–60. Granger, C. (1969) Investigating causal relations by econometric models and cross spectral methods. Econometrica 37: 424–38. Granger, C. (1986) Developments in the study of cointegrated variables. Oxford Bulletin of Economics and Statistics 48(3): 213–27. Hale, C. and A. Vanags (1992) The market for second-hand ships: some results on efﬁciency using cointegration. Maritime Policy and Management 19(1): 31–140. Jarque, C. M. and A. K. Bera (1980) Efﬁcient test for normality, homoscedasticity and serial dependence of regression residuals. Economics Letters 6: 255–9. Johansen, S. (1988) Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control 12(2/3): 231–54. Johansen, S. (1991) Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica 59(6): 1551–80. Kavussanos, M. G. (1997) The dynamics of timevarying volatilities in different size secondhand ship prices of the dry-cargo sector. Applied Economics 29: 433–44. Kavussanos, M. G. and A. Alizadeh (2002) The expectations hypothesis of the term structure and risk premiums in dry bulk shipping freight markets. Journal of Transport Economics and Policy 36(2): 267–304. Kavussanos, M. and N. Nomikos (2000a) Constant vs. time-varying hedge ratios and hedging efﬁciency in the BIFFEX market. Transportation Research 36: 229–48.

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Kavussanos, M. and N. Nomikos (2000b) Dynamic hedging in the freight futures market. Journal of Derivatives 8(1): 41–58. Kavussanos, M. G., Visvikis, I. D. and Menachof, D. A. (2004) “The unbiasedness hypothesis in the freight forward market: evidence from cointegration tests. Review of Derivatives Research 7, No. 3, pp. 241–266. MacKinnon, J. G., A. A. Haug and L. Michelis (1999) Numerical distribution functions of likelihood ratio tests for cointegration. Journal of Applied Econometrics 14: 563–77. Newey, W. K. and K. D. West (1987) A simple positive deﬁnite heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica 55(3): 703–8. Phillips, P. and P. Perron (1988) Testing for a unit root in time series regressions. Biometrica 75: 335–46. Politis, D. N. and J. P. Romano (1994) The stationary bootstrap. Journal of the American Statistical Association 89(428): 1303–14.

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Schwarz, G. (1978) Estimating the dimension of a model. Annals of Statistics 6: 461–4. Strandenes, S. P. (1984) Price determination in the time-charter and second-hand markets. Working Paper No 06, Center for Applied Research, Norwegian School of Economics and Business Administration. Sullivan, R., A. Timmermann and H. White (1999) Data-snooping, technical trading rule performance, and the bootstrap. Journal of Finance 54(5): 1647–91. Tsolakis, S. D., C. Cridland and H. E. Haralambides (2003) Econometric modelling of second-hand ship prices. Maritime Economics and Logistics 5: 347–77. Tvedt, J. (1997) Valuation of VLCCs under income uncertainty. Maritime Policy and Management 24: 159–74.

23

Marine Insurance Stanley Mutenga and Christopher Parsons

23.1

Introduction

Marine insurance provides an efﬁcient way of protecting the large amounts of capital which are locked up in ships and their cargoes. It thus plays a signiﬁcant role in ﬁnancing world trade. The need to safeguard major investments in maritime adventures was appreciated from the earliest times, and evidence of marine insurance – or, at least, devices for spreading risk akin to insurance – is found in some of the earliest historical records. For example, we know that Chinese merchants trading on dangerous reaches of the Yangtze River in the third millennium BC spread risk by dividing their shipments among several vessels rather than placing all their goods in one ship. Again, there are records of bottomry (and respondentia) bonds – loans secured on a ship (or its cargo) which were forgiven if the vessel was lost – going back to classical times.1 Marine insurance in a form recognized today was well established in Europe by the fourteenth century, the earliest known policy being issued in Genoa in 1347.

Insurance techniques spread from what is now Italy to other European states, so that marine insurance could be obtained in England, Flanders, France and Spain as well as in Italy by the end of the ﬁfteenth century. There is also evidence of legal codes regulating insurance from a number of cities in the ﬁfteenth and sixteenth centuries, including London, Barcelona, Venice, Florence and Dubrovnik. Relatively sophisticated insurance markets – places where one could ﬁnd many insurance underwriters and supporting services – developed in the seventeenth century in a number of North European cities, including Antwerp, Amsterdam, Hamburg and London. However, from the early eighteenth century London began to pull ahead, attracting a substantial amount of international business.

23.2 The Rise of Lloyd’s and the London Insurance Market An English Act of 1601 said that insurance had been “time out of mind an usage among

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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MARINE INSURANCE

merchants” and by the 1660s such insurance activity in England was based at the Royal Exchange in London. Someone who wished to insure his ship or cargo had to ﬁnd a number of insurers, and get them to sign a policy embodying the transaction. If a loss occurred the claimant had to notify all the insurers and collect the fraction of the claims cost due from each of them. This role came to be fulﬁlled by specialist insurance brokers. The London insurance market was centered at Lloyd’s Coffee House in Tower Street from around 1688 (when it was ﬁrst mentioned in print). This place attracted a clientele connected with the sea, so the insurers began to gather there. For nearly a century Lloyd’s was simply a coffee house where insurers congregated, but in 1771 underwriters formed a committee to run Lloyd’s as a specialist insurance business. This business was transferred to rented rooms in the Royal Exchange in 1774, although it was still known as “the Coffee House” well into the nineteenth century. In the early years marine insurance was provided not by corporations but by individual underwriters, operating singly (or in syndicates, especially for large risks). However, marine insurance was believed to be highly proﬁtable and companies began to be formed in England to transact it. The Bubble Act 1720 conferred on two companies, the Royal Exchange Assurance and the London Assurance, an exclusive right to transact marine insurance as companies without prejudice to the right of individuals to act as insurers. These companies insured only small amounts, so the individual underwriters continued to prosper. It was not until 1824 that other companies were allowed to compete for marine business in England.

23.3 The Marine Insurance Market Today Worldwide premiums for marine insurance (including offshore energy risks) amounted to over US$25 billion in 2008 (International Union of Marine Insurance 2009), which is around 15% of all non-life insurance premiums. Marine insurance is provided by a number of different types of organization, including the following.

23.3.1

Lloyd’s of London

The historical signiﬁcance of Lloyd’s has been discussed earlier. The modern Lloyd’s, together with a number of specialist “London Market” insurance companies, still writes about 15% of all marine business, 27% of world aviation insurance and nearly 58% of all offshore energy business (including oil rigs and similar marine structures). Lloyd’s is not an insurance company; rather it is a society of underwriters and a market place where risks are insured by around eighty syndicates of Underwriting Members (“Names”), which are controlled in turn by managing agents, or underwriting ﬁrms (51 at present). Syndicates were originally capitalized by individual Names who pledged their capital and personal assets to support the underwriting of insurance risks with unlimited liability. Nowadays, only about 5% of Lloyd’s capital is raised in this way: 9% comes from individual Names trading with limited liability and the remaining 86% from corporate investors, most of which are insurance companies. Marine business (and nearly all other business) is brought to Lloyd’s by 180 or so accredited Lloyd’s brokers.

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23.3.2 Protection and indemnity associations (P&I “clubs”) P&I “clubs” are independent, non-proﬁtmaking mutual insurance associations, providing cover for their shipowner and charterer members against risks which are not insured (or only partly insured) in the rest of the marine insurance market. For example, cover for claims by other ships and for collision damage traditionally extended to only 75 percent of such damage and was limited in amount. The ﬁrst protection association, the Shipowners’ Mutual Protection Society, was formed in 1855 to cover these uninsured collision risks and also liabilities for loss of life and personal injury. More such associations were subsequently formed in the UK, and in Scandinavia, the USA and Japan. Thirteen of these clubs are members of an International Group which provides cover for over 90 percent of ocean-going ships. Some larger risks are pooled by the thirteen members rather than insured individually. Following the grounding of the Torrey Canyon in 1967, cover for the liabilities arising from oil spills and other forms of pollution has become an important aspect of P&I insurance. P&I clubs accounted for US$2.91 bn in premiums in 2008, or about 13 percent of the total for all marine insurance (International Union of Marine Insurance 2009, note 2).

23.3.3

plus many other ordinary lines, including motor, property and liability. The majority are joint stock (shareholding) companies, but some adopt the mutual form of organization.

23.3.4

Reinsurance and reinsurers

To reinsure means to insure again, so a reinsurance contract is simply an insurance against losses on an insurance policy, or an insurance upon an insurance. Reinsurers provide a market to which insurers of all types can transfer some of the risks they take on. The market includes specialist (“professional”) reinsurance companies, ordinary (“direct” or “primary”) insurance companies that also write reinsurance business, and Lloyd’s syndicates. Insurers buy reinsurance in order to lay off portions of very large risks which they do not wish to keep wholly on their own books, and to protect themselves against large individual claims (or accumulations of claims from one event) which might destabilize their cash ﬂows. Reinsurance is especially valuable in relation to very large or extrahazardous risks and, since many marine insurance exposures fall into this category, marine insurance portfolios are often heavily reinsured.2 Sometimes reinsurers themselves pass on a portion of their risks to other (re)insurers. London is the main market for this “retrocession” business.

Insurance companies

In addition to Lloyd’s and the P&I Clubs, hundreds of insurance companies worldwide write marine insurance. Some, such as the London Market companies mentioned earlier, specialize in marine insurance (often along with aviation and large industrial risks), while others write marine insurance

23.4

Principles of Insurance Law

Here we look brieﬂy at some important legal principles governing marine insurance policies. A clue to understanding them lies in the fact that early marine insurers, who were typically individuals based in a London

MARINE INSURANCE

coffee house or somewhere else in a major European city, had no means of getting detailed information about the ships and cargoes they were asked to insure (which might be anywhere in the world) other than from the person who asked them for insurance. For this reason, insurance contracts came to be regarded as contracts uberrimae ﬁdei (of the utmost good faith), which meant that the person applying for insurance had to honestly disclose to the underwriters, even if not asked, everything which was material to the risk. Equally, underwriters could not actively control the use and management of ships by their owners and masters, so the law allowed insurers to insert relatively strict rules (e.g. “warranties,” discussed below) in insurance contracts, forbidding the insured to engage in speciﬁed hazardous activities or requiring certain safety precautions to be taken. There is no uniform “international” insurance law.3 Some of its principles have very ancient origins,4 but they have been supplemented, extended and modiﬁed by court decisions (especially in common law countries), arbitration ﬁndings, and a variety of national codes and statutes. Thus, although the fundamental principles are common to all countries, there are differences in detail from one jurisdiction to another. Among all these different systems English common law has been particularly inﬂuential, partly as a consequence of the early evolution and subsequent prominence of the London insurance market where, as we have seen, a large proportion of marine insurance is still written. Besides the ancient laws of the sea, English law has its roots in the “Law Merchant” (Lex Mercatoria), a body of rules and principles based on usages and customs common to merchants and

455

traders in Europe, but with some local differences. The application of these rules to marine insurance was developed by court decisions over a period of around two hundred years5 and ultimately codiﬁed in the Marine Insurance Act 1906.6 The law has continued to develop through case law up to the present day.

23.4.1 Utmost good faith and the duty of disclosure In any contract the parties concerned have a duty to give honest answers to questions which are put to them, that is, not to misrepresent matters relating to the agreement. However, in insurance there is a positive duty of disclosure going beyond a mere duty not to misrepresent the matters which are in fact disclosed. In the event of nondisclosure (or indeed misrepresentation) by the insured, the insurers are entitled to avoid the whole contract ab initio, i.e., to cancel it retrospectively. The origin of this duty, or at least the ﬁrst clear expression of it in English law, is found in the classic judgment of Lord Mansﬁeld in Carter v. Boehm (1766):7 Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the underwriter trusts to his representation, and proceeds upon the conﬁdence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risk as if it did not exist.

Lord Mansﬁeld’s judgment assumes that an insurer will not be able to discover the full facts about a risk unless the proposer (person

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seeking insurance) volunteers the necessary information. This was certainly true in the early days of marine insurance when communications were poor, but it is rather less true now, because travel is easy and information is abundant and easily transferred by electronic means. On the other hand, it still takes time and money to collect information, and both can be saved by getting details of the risk directly from the person who applies for insurance. All this has led to some debate as to what the extent of a proposer’s duty should be, and some pressure for reform of the law. The question of reform, and the alternative approach in some other legal systems is discussed brieﬂy below. A proposer’s basic duty is to disclose all facts or circumstances that are material to the risk. The standard deﬁnition is that provided by s.18(2) of the Marine Insurance Act 1906: Every circumstance is material which would inﬂuence the judgement of a prudent insurer in ﬁxing the premium or determining whether he will take the risk.

It should be noted that the Act deﬁnes material facts only in terms of what an insurer, rather than an insured, would wish to know, whereas the duty is in fact reciprocal and rests on the insurer also.8 Again, although the term “prudent insurer” suggests a rather cautious individual, the courts have held that it has the same meaning as “reasonable insurer.” There has been much debate, and litigation, about the words “inﬂuence the judgement.” However, it is now clear that insurers do not have to prove that knowledge of that fact in question would have changed the decision of a reasonable insurer. The courts

have held that the words “inﬂuence the judgement” simply mean that the fact must be one which a typical, reasonable underwriter would have wanted to know about when forming his opinion of the risk. It need not necessarily be a decisive fact which would have caused such an underwriter to act differently (e.g. ask for more premium or refuse the risk) if he had known about it.9 More recently, the courts have ruled that, in order for insurers to avoid the contract, it is not enough to show that a material fact was not disclosed. It is also necessary to show that the particular underwriter involved was induced by the nondisclosure into entering the contract on the relevant terms. This test, known as the “actual inducement” test, introduces a subjective element: would the underwriter in question have entered the contract on the same terms if he had known the material fact?10 We should bear in mind that marine insurance is commonly arranged by a broker acting for the insured. In this case it is the broker who supplies the necessary information about the risk to the insurer. If the broker gives information which is inaccurate, or fails to disclose things which are material (such as previous losses suffered by the insured or unusual features of the vessel or cargo), the insurers may elect to avoid the contract and deny any claim. However, in this case the insured may well be able to bring an action against the broker and claim damages equivalent to the uninsured loss, assuming, that is, that the fault lies with the broker rather than the insured himself. Finally, we should note that the English courts have recently decided that the duty of good faith is not just conﬁned to the negotiations leading up to the issuing of the policy but continues during the term of

MARINE INSURANCE

contract. In particular, fraud by the insured in the course of making a claim may amount to a breach of good faith, allowing the insurers to avoid the contract.11

23.4.2

Warranties and other terms

In addition to the standard insurance clauses (discussed below), insurers often include special terms in the insurance policy which prohibit the insured from carrying out hazardous activities which increase the risk or require the insured to take speciﬁed precautions in order to reduce it. The law governing these terms is complex, but in some cases they will take effect as warranties. A warranty is essentially a promise made by the insured relating to facts or to something which they agree to do. A warranty may relate to past or present facts or, more signiﬁcantly, it may be a continuing warranty, in which the insured promises that a state of affairs will continue to exist or that they will continue to do something.12 In English law the effect of a breach of warranty by the insured can be drastic. As the law stands, a breach of warranty terminates cover automatically from the date of breach and, to all intents and purposes, terminates the insurance policy.13 A warranty must be exactly complied with, so that even a relatively trivial breach will end cover. Furthermore, if a warranty is broken, cover terminates even if the breach did not cause or contribute to a loss and even if the breach has been remedied by the time a loss occurs.14

23.4.3

Proximate cause

Occasionally there is a dispute under a marine policy about the true cause of a loss

457

and whether or not it arose from a peril insured by the contract. The Marine Insurance Act 1906, 55(1) states on his point: unless the policy otherwise provides, the insurer is liable for any loss proximately caused by a peril insured against, but . . . he is not liable for any loss which is not proximately caused by a peril insured against.

This doctrine is easy to state but sometimes hard to apply in practice, especially when there is a complex sequence of events with more than one potential cause of loss. The decision of the House of Lords in Leyland Shipping v. Norwich Union Fire Insurance Society Ltd (1918)15 is a leading authority on this point. Many earlier cases had been decided on the basis that where there was a “chain of events” the last event to occur was the proximate cause, but the Leyland Shipping case put an end to this theory in English law. The ship in question, the Ikara, was insured under a policy which covered perils of the seas, but excluded war risks. She was hit by an enemy torpedo and, despite being badly holed and in danger of sinking, reached the port of Le Havre, where repair work was started. When a storm blew up the harbor master ordered the ship to an outer berth to save the harbor from being blocked if she sank, which she did after she left port. The House of Lords had to decide whether the proximate cause of the loss was the torpedo (a war risk which was excluded) or the storm, which was the last event to happen, and was insured as a peril of the sea. Under the “old” approach the storm would undoubtedly have been regarded as the proximate cause of the loss, as it was the last cause, but the court held that the torpedo was the proximate cause of the loss because the

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damage it caused had been effective throughout. Sometimes when there is a claim, extra damage is caused by steps which have been taken to reduce loss, the most obvious example being water damage arising from attempts to put out a ﬁre. Provided the steps taken are reasonable efforts to prevent or limit the operation of an insured peril the insurers are liable for any damage to the subject matter that results, this action being regarded as part of the insured peril itself.16 Occasionally two or more perils operate concurrently (i.e. at the same time) to bring about a loss. Where the perils are independent (in the sense that one did not lead to the other) and either one would have caused some loss without the other, the insurers are simply liable for that part of the loss attributable to whichever peril is insured. In other cases the perils may be not only independent (i.e. one did not lead to the other) but also interdependent, in the sense that neither peril would have caused damage on its own. According to the traditional view, there could never be two proximate causes of a loss and in such a case one of the perils would have to be chosen as the proximate cause. It is now accepted, however, that two causes might be equally powerful in their effect, so that each is a proximate cause. If this happens the insurers will not be liable if one of the perils is speciﬁcally excluded but will be liable in full if one peril is insured and the other is not speciﬁcally excluded.17

23.4.4

Reform of insurance law

English insurance law is often regarded as being weighted too heavily in favor of the insurer, especially with regard to the heavy burden of disclosure which the duty of utmost good faith places on the insured,

and the law of warranties, where even a trivial and inconsequential breach (in terms of bringing about a loss) can have drastic effects. A full discussion of these points is beyond the scope of this book, but it is worth noting that in some jurisdictions outside England (including a number of common law countries) the law is rather more favorable to the insured. In a number of cases the law of disclosure is less strict and, with regard to a breach of warranty, a causal connection must often be established between the breach and the loss.18 As mentioned earlier, English insurance law is currently under review, and may eventually move in this direction.19

23.5

Hull Insurance

Marine hull insurance cover differs across the globe. This is because different contract wordings or forms are used by marine underwriters in different jurisdictions. Contract wordings are based on standard clauses drafted by underwriting associations. These clauses are used to set the terms and conditions of marine insurance contracts. The language and provisions of these clauses are mainly inﬂuenced by the law prevailing in the jurisdiction of the drafting association. Other factors, such as international trends and legal precedents set by the courts, also play an important role in the way in which the clauses evolve and are updated from time to time.20 The most widely used hull clauses are the International Hull Clauses (IHC), American Institute Hull Clauses (AIHC), Institute Times Clauses Hull (ITCH), Norwegian Insurance Plan (NIP), and German DTV. All these offer different terms and conditions to clients, but in recent years the differences

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have become more subtle. Newer clauses emanating from growth in international trade include the Chinese Hull conditions, which are based on the English clauses. Despite similarities in their major terms and conditions, standard marine clauses across the globe are still a distant dream as their enforcement remains within the remit of the local jurisdiction.21 However, with globalization and growth in international trade, underwriting associations are seeking to minimize the remaining differences so as to offer a more standard and complete cover across the globe.

23.5.1

The cover

This section focus on the main provisions of marine hull insurance clauses. The IHC (LMA and IUA 2003) and the AIHC (AIMU 2009a) are used as our main point of reference. These clauses, like others, deﬁne the subject matter of marine hull insurance as a named vessel. If a ﬂeet is insured, each vessel is deemed to be separately insured. Insurance coverage is limited to a vessel’s hull, launches, lifeboats, rafts, furniture, bunkers, store, supplies, tackle, ﬁttings, equipment, apparatus, machinery, boilers, refrigerating machines, insulation, motor generators and other electrical equipment. It also extends to cover leased equipment ﬁtted for use on the vessel. However, items such as cargo containers, barges and lighters are not covered, as they do not form part of the ship and should be insured separately. Like any other contract of insurance, the underwriters’ liability on leased equipment is limited to (1) the amount the underwriter would pay if the leased equipment were owned by the insured and (2) the insured’s contractual liability with leasers. Sometimes owned or leased equipment is removed

459

from the vessel for either repair or servicing. Marine hull clauses automatically extend cover when owned or leased parts are temporarily removed from the vessel in this way, provided they are not removed for more than 60 consecutive days. This automatic extension is vital, as it covers land risks which are not covered by the policy in its basic form. Marine hull insurance contracts are for a ﬁxed period, usually one year. Cover can be extended beyond the ﬁxed period under certain circumstances. For example, an extension in cover becomes necessary if the vessel is distressed just before expiry, and the distress continues into the new policy term. Since, in insurance terms, a distress which occurs before cover attaches is treated as a pre-existing condition, the insured might otherwise be left uncovered during the period of distress. Underwriters on cover when the ship becomes distressed offer to extend cover on condition that notice is given them of such an event and an additional pro-rata premium is paid. The extended cover will remain in place until the vessel is moored safely in a port of refuge. Such clauses are very important as they help eliminate gaps in cover and ensure that the insured is protected at all times. Marine insurance, like other types of insurance, is subject to problems of moral hazard and adverse selection. Underwriters try to control moral hazard and adverse selection by limiting cover through the use of deductibles. Individual and aggregate deductibles are applied when a loss takes place, with the effect that the insured bears the ﬁrst part of the loss up to an agreed limit. Unlike in other insurance contracts, the application of deductibles in marine hull insurance contracts is not uniform. It depends on the size of the loss and the cir-

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cumstances surrounding the loss. Certain clauses change the application of deductibles when pre-speciﬁed conditions are triggered. For example, all clauses across the globe absolve the insured from paying the ﬁrst part of the loss if an accident results in a total loss to the vessel. Other clauses also treat losses resulting from a sequence of events or from weather or ﬂoating ice damage during a single sea passage as a single loss when it comes to the application of the deductible. In this case one rather than a number of deductibles is applied. In any event, the contract limits the amount recoverable by the insured or anyone claiming on the policy to the difference between the agreed value and the deductible, where applicable. Loss payment to third parties is made according to conditions set in the collision liability clause. Collision liabilities arise when the insured ship comes into contact with any other vessel. The vessel at fault is liable to pay: • • •

loss of or damage to any other vessel or property thereon; consequential loss; general average of, salvage of, or salvage under contract of, any such other vessel or property thereon.

An insurer’s liability is limited to the insured value of the ship. If both vessels are to blame for the collision the indemnity is calculated on the principle of cross-liabilities. The apportionment of liability under the IHC is governed by clause 6, which limits the insurer’s liability to 75% of the vessel’s insured value. One hundred percent insurer’s collision liability is standard under the Norwegian Plan (Cefor 2010) and the AIHC. The insured can either “buy back” the remaining 25% of liability under clause 38

or insure it with the P&I clubs. Additional cover for excess liability or top-up cover is necessary if the value of the insured ship is small compared with that of a high-valued ship with which it might collide. Indemnity under collision liability is in addition to indemnity provided by other terms and condition of the cover. Legal costs incurred in contesting or limiting liability are also paid according to the 75% rule. These costs are limited to 25% of the insured value of the vessel, but there is no such explicit limit under the ITCH (LMA and IUA 1995) and other clauses. However, written consent should be obtained from the insurers before such costs are incurred. The insured can also waive their subrogation rights under the policy against afﬁliated, subsidiary or interrelated companies. In any event, the insured cannot waive their rights in the event of a collision loss against which such companies are insured. All clauses in use across the globe adopt similar wordings on towage liabilities. They stipulate that an insured vessel can only be towed as is customary or when in need of assistance. A covered vessel is not allowed to assist, tow or salvage other ships. Neither is it allowed to engage in loading or discharging of cargo at sea to or from another ship except for barges, lighters or small crafts used in harbors or inland waters. The limitation on loading and discharging includes the period during which the vessel is approaching, leaving or alongside another ship. Limitations set by insurers in these clauses help reduce the possibility of accidents during the towage. They also encourage insureds to use only those ships specially equipped for such services. Insurers provide coverage only for normal voyages, not for other adventures, as the latter may present greater risk. The insured has to meet the

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following conditions in order for these adventures to be covered: (1) they have to notify the insurers immediately on receipt of such information, and (2) the insured must accept any amendments to the terms of the cover required and any additional premiums proposed. Since these are special risks which deviate from normal voyage risks, insurers generally wish to reassess the risk and re-price it accordingly. However, there is no need to include these adventures in the main cover, since vessels do not normally engage in rescue services in their dayto-day operations.

23.5.2

Perils covered

A peril is deﬁned as a loss-causing event. Cover for marine hull insurance depends on the form used. It can be transacted on either a named-perils or an all-risks basis. Under an all-risks contract, a peril is covered unless explicitly excluded. In contrast, under a named-perils policy a peril is not covered if it is not listed in the policy. The onus of proof under a named-perils policy lies with the insured. The insured also has to prove the extent of the covered loss. By contrast, in the case of an all-risks policy the insured need only prove that an accidental loss has occurred. The burden then lies with the insurers to prove that an excluded peril applies. Although all-risks policies offer greater protection to the insured, only a handful of Marine Insurance Underwriting Associations offer coverage on this basis. The Norwegian Plan offers cover on an allrisks basis, but all the other major clauses, including the IHC, ITCH, Chinese Hull Conditions and AIHC, offer cover only on a named-perils basis. Coverage under namedperils policies divides into two parts. The ﬁrst part provides basic cover for well-

461

established perils, while the second part, which offers cover for due diligence risks, is supplementary. For example, the IHC 2003 lists the following perils under the basic cover: Perils of the seas, rivers, lakes or other navigable waters, ﬁre, explosion, violent theft by persons from outside the vessel, jettison, piracy, contact with aircraft or similar objects, or objects therefrom, land conveyance, dock or harbour equipment or installations, earthquake, volcanic eruption, lightning, accidents in loading, discharging or shifting cargo and contact with other objects.

The basic cover is intended for general use and is limited to the named perils. However, different clauses rarely list the same perils as covered. For example, the AIHC 2009 lists piracy as a covered risk but exclude the same risk elsewhere in the cover. Other clauses, such as the IHC and ITCH, cover it outright. Although some of the differences in the nature of perils covered are subtle, it is still very difﬁcult to obtain identical cover across the globe. Another example is found in the AIHC 2009, which retain “breakdown of or accident to nuclear installations or reactors” as a covered peril, whereas the IHC 2003 dropped this risk from the list of covered perils. The rationale for dropping it in the IHC 2003 wording is that, since ships are not ﬁtted with nuclear reactors because of safety concerns, it is now viewed as an unnecessary cover. It should be noted, however, that although the AIHCs cover this peril, it is conditional on the installations being outside the insured vessel. The supplementary part to the IHC covers additional perils, including:

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STANLEY MUTENGA AND CHRISTOPHER PARSONS

bursting of boilers or breakage of shafts; latent defects in the machinery or hull; negligence of Master, Ofﬁcers, Crew, repairers, or charterers; and barratry.22

As mentioned above the purpose of this second part is to supplement the basic cover, so that the insured is covered on an anyaccident basis. Since cover under the second part is intended to indemnify for actions taken by the owners, ofﬁcers and other third parties, cover is subject to inner limitations. These limitations are necessary because it is difﬁcult for insurers to monitor behavior after the policy is purchased. They are put in place to control moral hazard and encourage the owners not to overlook their duty of care. Insurers might decline to pay if it can be proved that the insured’s lack of due diligence contributed to the loss. Among the due diligence risks covered, the “bursting of boilers or breakage of shafts” is given without any qualiﬁcation, as long as the event causes loss or damage to the vessel. Cover for damage caused by error in design of faulty material is limited to latent defects only. However, cover for damage caused by error in design of faulty material is not standard across the globe. For example, the Norwegian Plan excludes latent defects outright, while the other clauses cover them with some qualiﬁcations. The IHC, AIHC and ITCH, which all cover latent defects, exclude the cost of correcting latent defects when losses arise from them. However, we should note that under English law shipowners might ﬁnd it difﬁcult to recover for damage caused by latent defects if the “Nukila Test”23 is applied. Latent defects are insured as a peril. Therefore, in order to recover a loss under an insurance contract, the latent defects should cause damage to

parts of the vessel other than itself. Note that since latent defects are insured as a peril, only consequential damage to the vessel is covered and not damage to the part itself.24 Insureds can buy back these exclusions under the additional perils clause in the IHC or from P&I clubs.

23.5.3

Exclusions

In insurance contracts, exclusions specify the perils which the insurer does not cover. Their purpose is to limit cover where the insurer feels that the hazard is excessive. A closer look at the main clauses shows that different Marine Underwriting Associations list comparable perils in their exclusions. The differences lie mainly in the wordings and the qualiﬁcations to them. The IHC 2003 is used to provide an outline of the main exclusions found in marine hull insurance contracts. Clause 6 of the IHC absolves insurers from liability for: (1) removal or disposal of obstructions, wrecks, cargoes or any other thing whatsoever; (2) any real or personal property or thing whatsoever except other vessels or property on other vessels; (3) the cargo or other property on or the engagements of the insured vessel; (4) loss of life, personal injury or illness;25 and (5) pollution or contamination or damage to the environment26 except for the money spent in respect of salvage remuneration. In addition to the exclusions detailed above, all clauses also exclude warand strikes-related risk. Shipowners have to read different clauses carefully, as some clauses offer more restrictive cover than others. They can buy back war and strikes cover from a separate Hull War and Strikes Clauses form (AIMU 2009b). These and other exclusions can also be bought from the P&I clubs.

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23.6

Cargo Insurance

Under the marine hull clauses, cargo on board a vessel is excluded as it does not form part of the vessel. Furthermore, since different cargoes present different risks from those covered under marine hull contracts, they need to be assessed and priced separately. The wordings governing the insurance of marine cargo are also drafted by underwriting associations in different jurisdictions. Coverage for marine cargo varies not only from jurisdiction to jurisdiction, but also with respect to the insurance form used. For example, under the Norwegian and English jurisdictions cargo insurance can be obtained under six major forms, namely the Institute Cargo Clauses (ICC) (A), (B), (C), (Air), War Cargo and Strikes Cargo (LMA and IUA 2009a).27 In practice, marine cargo insurance is deemed to be based on “A” clauses unless otherwise stated. The “A” clauses are essentially the same as the American Institute All Risk Cargo Clauses (AIMU 2004). They cover all risks of loss or damage to the subject matter insured unless speciﬁcally excluded. The “B,” “C,” War Cargo and Strikes Cargo clauses offer more restrictive cover. Cover under these clauses is on a named-peril basis. The purpose of the clauses is to cover special risks. For example, the “B” and “C” clauses cover risks to insured goods when the carrying vessel have collided, struck an object, sunk, capsized or suffered a similar serious accident. The “B” and “C” clauses are necessary as they can be used to buy protection for insured goods on board a distressed ship when the original cover is suspended. For example, “A” clauses exclusions suspend insurance if the means of transport on which the goods are loaded suffers a casualty or disappearance or has

been abandoned. Therefore, the “B” and “C” clauses offer more restrictive cover for listed perils when the vessel or means of conveyance is exposed to greater risk due to an accident. They are designed to reduce the level of cover offered under “A” clauses when the condition of the vessel increases the possibility of a loss occurring.

23.6.1

Cover

Cargo insurance provides cover for total losses, shortages and damage. In addition, it covers salvage charges, general average contribution, litigation charges, claim settlement charges and charges related to provision of security. Under clauses B and C the insurance also covers general average sacriﬁce for losses which are not caused by a risk covered by the insurance, unless the risk is explicitly excluded. The insured can only recover for losses which occur during the period of insurance. Under the “A” clauses, the “period of insurance clause” puts the insurer on risk when the goods are placed in a warehouse ready for immediate loading. This clause differs from the AIMU all-risks cargo clauses in that the latter clauses attach cover from the time the insured property leaves the warehouse for the commencement of transit. Therefore, the insurance does not extend to cover temporary storage prior to transit. Cover terminates on completion of unloading. If the goods remain in the carrying vehicle and the insured or their ofﬁcers elect to use it for storage other than in the ordinary use of transit or upon expiration of 60 days after completion of discharge from the vessel, whichever occurs ﬁrst, cover will be terminated. Cover can also be cancelled when the contract of carriage is terminated

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or the voyage has changed. Under section 44 of the Marine Insurance Act 1906, a risk does not attach if the vessel sails for any other destination than the one speciﬁed in the policy. Relaxations of section 44 by more recent clauses require the insured to have prior knowledge of the change of voyage, before cover can be canceled. The insured should promptly inform the insurers on acquiring knowledge of such a change in voyage and the insured must agree to the rates and terms proposed by the insurers. On the other hand, the change of voyage is held covered under the AIMU clauses without any restrictions. The AIMU clauses also offer wider scope of cover with regard to termination in that these clauses extend to cover returned or refused shipments, consolidation or deconsolidation and requirement for a surveyor’s inspection. This extended coverage is not elaborated in the other clauses. The contract wording on conditions for attachment and termination of cover can be modiﬁed where appropriate. This can be done in order to meet the coverage needs of both parties.28 Insurers require the vessel or means of conveyance to be seaworthy. This is to reduce moral hazard, and means that the insured must exercise due diligence when choosing the vessel. While under the ICC the seaworthiness condition operates as a warranty (see section 23.4.2 above), the AIMU clauses adopt a more ﬂexible approach in that they offer coverage for misconduct of the carrier where the cargo owner is innocent. Other conditions unique to the AIMU clauses are restrictions on cover for cargo originating from countries subject to economic and trade sanctions restrictions. These restrictions are necessary as they bring these clauses into line with US public policy. The London clauses make no

mention of these restrictions. In spite of this restriction, the AIMU clauses offer broader coverage and provide more extensive clariﬁcation on conditions than the other major clauses.

23.6.2

Exclusions

This section focuses on exclusions commonly found in cargo insurance contracts. The main exclusions are ordinary leakage, wear and tear, willful misconduct, inherent vice, insolvency of owners, charters or operators, insufﬁcient or unsuitability of packaging, war and strikes. The “ordinary leakage” exclusion is used to exclude natural loss in weight or volume from the cover. Since ordinary loss of weight and wear and tear are not fortuitous events, insurers exclude these risks. On the other hand, the “packaging” exclusion places responsibility on the insured and their employees to properly prepare and carry out the packaging prior to the attachment of risk. Failure to comply with the packaging requirement will absolve insurers from liability. The “willful misconduct” exclusion clause in the ICC “A” is based on section 55 of the Marine Insurance Act 1906. Willful misconduct was deﬁned as something beyond gross negligence in Thomas Cook v. Air Malta (1997).29 Although negligence is covered, deliberate acts are excluded. Other exclusions, as in hull insurance, relate to losses arising from war- and strikes-related risks. Exclusions under the war-risk and strikes clauses have changed with time as the nature of weapons of war and terrorism risk has evolved. Different underwriting associations have changed the transit termination clause (terrorism)30 to capture these changes. Most recent clauses have been modiﬁed to include actions by people acting

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from an ideological or religious motive in the deﬁnition of terrorism.31 These clauses offer broader exclusions than their predecessors, which deﬁned terrorism from a political viewpoint. Another risk of interest is piracy. Under the “A” clauses, while capture, seizure, arrest and detainment are excluded, piracy is covered. Therefore, any loss, whether it is with respect to physical damage or the payment of ransom as general average, is covered under the “A” clauses but not under the “B” and “C” clauses. War and strikes exclusions in the main coverage can be bought back under the war cargo clauses and strikes cargo clauses respectively.

23.7 23.7.1

Conditions General average and salvage

General average is an ancient doctrine of maritime law32 under which parties are required to share a proportion of the loss resulting from the voluntary sacriﬁce of part of a ship or cargo in order to save the entire venture in a crisis. The doctrine was ﬁrst codiﬁed under the York–Antwerp Rules in 1890 and ﬁrst used by American underwriters in 1949. General average after an accident is payable as provided in the contract of shipment and at insured’s election, either in accordance with the York–Antwerp Rules 2004 or as agreed. The York–Antwerp Rules (Comité Maritime International 2004) stipulate the amount the insured bears to the contribution value. Contribution is limited to the proportion of the total contribution from the ship when contributory value of the ship is greater than the insured value.33 Similar rules also apply for salvages and salvage charges. Claims are payable

without application of the deductibles and deductions for “new for old,” and there is no reduction where the vessel is underinsured under the IHC and Norwegian Plan. On the other hand, the ITCH and AIHC reduce claim payments if the vessel is underinsured and they do not have an optional general average absorption clause. The general average absorption provision countermands section 73 of the Marine Insurance Act 1906, where offered under the IHC.34 It gives an insured the option of claiming the total general average, salvage and special charges up to an amount expressly agreed by underwriters, without recourse to any property interests not owned by the insured on board the vessel. If salvage, towage or assistance is rendered to a ship, the value of the service has to be ascertained by arbitration according to the collision liability clause.

23.7.2

Constructive total loss

In marine insurance a constructive total loss arises only when the cost of recovering and repairing a vessel after an accident is greater than the insured value. Under the Norwegian Plan, IHC and other Civil Codes the cost only has to exceed 80 percent of the insured value in order to be considered a constructive total loss. This is not the case under the AIHC, where the cost of repairing a vessel has to exceed the agreed value. When it is determined whether a loss is a constructive total loss, the repair value only is taken into account. The insurers will only consider those expenses that are directly incurred as a result of the accident or of a sequence of events from the same accident. If there is a subsequent total loss during the period covered, the insurers are not liable for any unrepaired damage. The policy is termi-

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nated on payment by the insurer for the total loss of the vessel.

23.7.3 Duties of the insured and underwriters Clauses which govern the behavior of both the insured and the insurer are important, as they either control moral hazard or protect the parties mutually against any misrepresentation of information. As is the case with any insurance contract, the insured is required to pay premiums on attachment of cover. Insurers offer discretionary credit periods within which premiums can be paid. If premium payment is not made within that period, the underwriter has a right to tender a notice of cancellation and the earned premium for the expired period of cover becomes due. In the event that an accident causes a total loss to the vessel, the insured is required to pay the full annual premium immediately, which will be considered earned. Premium is also returned on a proportional basis in the event of termination under the change of ownership clause. Underwriters are not obliged to return premiums if (1) a total loss has occurred, (2) the vessel is used as a storage ship or for lightering purposes, (3) the vessel is laid up in port for repair due to loss resulting from an insured peril, and (4) the lay-up is not in protected waters. Return premium for a lay-up period will be based on the insured’s elected 30-day consecutive period under the AIHC. The vessel must be classiﬁed with an agreed society in order to be covered. This means that the owners should comply with class recommendations as to seaworthiness. The insured should supply the documentation from the classiﬁcation society to the insurer upon reasonable request, or the

insurer should be able to obtain such information direct from the classiﬁcation society. Insurers will terminate cover on loss or change of class, except where the vessel is at sea or the loss of class is a result of an insured loss or damage. In addition, if a vessel is laid up for more than 180 consecutive days, it cannot leave its lay-up berth under its own power or navigate until it is examined and all the requirements set out by the classiﬁcation society or surveyor chosen by the insurer are complied with. The same conditions of automatic termination of cover also apply on change of ownership or sailing on a scrap voyages. While other clauses, such as the Norwegian Plan and the AIHC, are silent on scrap voyages, the IHC reduces cover to scrap value, except for general average losses.35 Under the sue and labour clauses, insurers are only liable to pay the proportion of the expenses properly and reasonably incurred by the insured or servants to avert or minimize a loss. The measures taken by the insurers and the insured with the aim of recovering, protecting or saving the subject matter shall not prejudice abandonment rights of either party. Depending on the jurisdiction under which the cover is bought, claims may be subject to reduction where there is underinsurance.36 The insured is not entitled to recover any expenses with respect to special compensation to their employees when a partial loss is incurred. However, in the case of a total loss the excess expenses are shared proportionally. With regard to loss payments, the insured is required to give prompt notice of claims to the insurers. All the major clauses have a time bar on the period under which the insured has to report claims in order to be covered. The AIHC, the IHC and the Norwegian Plan require claims to be

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notiﬁed to the insurer within six months of the insured, owners or managers becoming aware of the possible liability. In addition the Norwegian Plan has a time bar of two years for casualty claims of which the insured is aware, other than for underwater damage. All clauses limit the time in which a loss should be reported to ten years. Insurers also impose navigation limits on waters where the possibility or incidence of losses is high. In the past, navigation provisions were expressed as warranties under the main clauses. This meant that any breaches would render the contracts void from the moment of breaching the navigation limits, even if the breach had been corrected. This is still the case under the ITC. Under the IHC the insurers are not liable for any losses incurred during the period of breach, but cover resumes after the breach. The Norwegian Plan allows underwriters to pay only a fourth of a claim when damage is sustained outside navigation limits and no notice is given to the underwriters. In general, the insured must obtain prior permission from the underwriters and agree to any amendments in terms of cover and any additional premium required if they are to be covered for voyages outside the navigation limits.

23.8

Summary

Ship or cargo owners, or their advisors, should read the clauses carefully in order to understand the perils that are covered or excluded under each insurance contract. They should also compare the extent of cover granted under different clauses, as some of the insurance forms offer more restrictive covers than others. When making the choice of the insurance form to use, the

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insured should also have a good understanding of the laws applying in the jurisdiction of the underwriting association drafting the clauses. This is important because different legal precedents set in these jurisdictions also affect how loss recoveries are determined and apportioned. However, as we have seen, the wordings of the major clauses are tending to converge over time and differences in cover offered under them are becoming more subtle than before. Perhaps the world of marine insurance will eventually offer uniform, universally accepted coverage for both hull and cargo insurance. Objections might be raised to this on competition grounds, but universally accepted clauses would at least help global traders to secure cover from wherever they choose without having to worry about possible gaps in cover.

Notes 1

For example, in the famous code of the Babylonian King Hammurabi (c.1750 BC), and in early references to the shipping loan (foenus nauticum) of Greek and Roman origin (384–322 BC). 2 Swiss Re (2003: p. 25) quote an average cession rate worldwide of 20% for non-life insurance in 2001 (including cessions to afﬁliated companies), meaning that insurers spent about 20% of the premiums they received on buying reinsurance protection in that year. However, the authors note that the average cession rate for marine insurance was much higher, at 39% (and as high as 72% for aviation and space risks). 3 The Comité Maritime International (CMI) has examined marine insurance law with a view to harmonizing controversial areas such as good faith and the duty of disclosure, the use of warranties, and alteration

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4

5

6

7 8

9

10

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of risk, but little progress has been made to date. For example, in the Rhodian and Phoenician maritime laws of the ninth and seventh centuries BC, which cover amongst other things general average – an extraordinary sacriﬁce or expenditure made for the common good of a marine adventure and therefore shared equitably by all the interests involved. And especially by Lord Mansﬁeld, Lord Chief Justice in his day and commonly regarded as the founder of commercial law in the eighteenth century. An Act to codify the Law relating to Marine Insurance [December 21 1906]. www.jus. uio.no/lm/england.marine.insurance. act.1906/. (1766) 3 Burr 1905. Although the English courts have held that in the event of non-disclosure by an insurer, the insured’s only remedy is to avoid the contract and recover his premium. There is no claim for damages: see Banque Financière de la Cité SA v. Westgate Insurance Co Ltd [1991] 2 AC 249. In Container Transport International Inc. v. Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476. Pan Atlantic Insurance Co. v. Pine Top Insurance Co. [1995] 1 AC 501. The effect of the “actual inducement” test is that the insured is allowed to argue that, although the nondisclosed fact was material, the particular underwriter would have offered cover on the same terms in any event. However, in Pine Top Lord Mustill expressed the view that once the court had decided that a fact was material the insured would “have an uphill task” in persuading the court that the non-disclosure had made no difference, implying that there will usually be a presumption of inducement. Manifest Shipping Co. v. Uni-Polaris Shipping Co. (the Star Sea) [2001] 1 Lloyd’s Rep 389.

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For example, navigation warranties which restrict the use of the ship to certain deﬁned waters, towing warranties which prohibit the ship from towing other vessels, or warranties requiring that goods should be professionally packed. Section 39 of the Marine Insurance Act 1906 also carries automatically into every policy of marine insurance an implied warranty that the vessel is seaworthy at the commencement of the voyage, although this is often overridden by an express warranty to the effect that seaworthiness is admitted (i.e. will not be questioned by the insurers). Bank of Nova Scotia v. Hellenic Mutual War Risks Association (Bermuda) Ltd (The Good Luck) [1992] 1 AC 233. These points are shown in a startling way by the old case of De Hahn v. Hartley (1786) 1 TR 343, where the insured had warranted that the ship sailed from Liverpool to the West Indies via Africa with 50 hands on board. In fact, it sailed with only 46 hands but took on six extra men in Anglesey, shortly after it left Liverpool. The insurer was allowed to avoid all liability for breach of warranty, even though the breach had been “cured” and could have no connection with the subsequent loss. [1918] AC 350. A good example is found in Canada Rice Mills v. Union Marine and General Insurance Co. [1941] AC 55. The master of a ship which was carrying rice in stormy seas ordered the ventilators to the holds to be closed to stop seawater getting in, and the lack of ventilation to the holds caused damage to the rice. The Privy Council held that this loss was covered because the proximate cause was the heavy weather, a peril of the sea that was insured by the policy. The leading case is J. J. Lloyd (Instruments) Ltd. v. Northern Star Insurance Co. Ltd. [1987] (The Miss Jay Jay) 1 Lloyd’s Rep 32. In this case damage to a yacht was caused by two concurrent proximate causes. First, heavy

MARINE INSURANCE

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weather (a peril of the sea which was insured) and, second, defective design (which was an “uninsured” peril – neither insured not excluded). Neither cause would have brought about the loss on its own. Since the former was insured and the latter was not excluded, the insurers were liable in full. This is the case in the USA following Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 US 310 (1955). A houseboat was destroyed by ﬁre but the claim was denied because the insured had not observed a warranty requiring the boat to be used only for pleasure purposes. The Supreme Court held that the breach had not “contributed” to the loss as required by a Texas ﬁre insurance statute, and the defense failed. Although there has been no legislation as yet, the Law Commission and the Scottish Law Commission have proposed some signiﬁcant changes to the duty of disclosure and good faith, including a change in the test for materiality from the (subjective) view of a “prudent insurer” to an objective test based on the view of a “reasonable insured.” They also propose reform in the law of warranties which would prevent insurers from denying cover in cases where the breach of warranty did not cause or contribute to the loss. These clauses have evolved over time as perils covered have also changed. The IHC and the Norwegian clauses were updated in 2010, whilst the latest version of the AIHC dates from September 2009. The original Norwegian Insurance Plan (Clauses) was produced in 1871. It was revised and replaced by the plans of 1881, 1894, 1907, 1930, 1964 and, ﬁnally, the Plan of 1996, Version 2007 (NSPL) and associated commentary. While the Norwegian Insurance Plan is more restrictive in terms of the applicable

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law, the IHC and ITCH, although exclusive to English jurisdiction, can easily be changed. The AIHC clauses are silent on the law that should be applied to enforce the contacts. Barratry is deﬁned as an illegal practice by the Master, Ofﬁcers and Crew that harms the owner (e.g. seizing the ship). Promet Engineering PTE Limited v. Sturge and Others (the Nukila) [1997] 2 Lloyd’s Rep. 146 involved a jack-up rig that sustained severe fracturing to all three legs as a result of poorly proﬁled welds, which were agreed to constitute a latent defect. The insurers refused to pay claims on the basis that they were only liable to pay if consequential damage was sustained by a separate part. Since the damage was limited to the legs which contained the latent defect, they argued that there was no consequential damage. In the court of appeal Hobhouse LJ rejected the separate part concept by analyzing the wording of ITCH 83 Clause 6.2.2. The judge concluded that the damage was caused by the condition of the Nukila at the commencement of the period, that is to say by the latent defects he had identiﬁed. Therefore, there was no recovery. Under UK law, despite the precedent set by the Nukila case, the insureds are still covered for latent defects that have simply become patent, as illustrated in precedents set in these cases: Oceanic v. Faber [1906] 11 Com. Cas. 179 KB, [1907] 13 Com. Cas. 28; Hutchins Bros. v. Royal Exchange Assurance [1911] 2 KB 398; and Scandia Steamship v. London Assurance [1936] 56 L1.L Rep. 136 KB. According to Hobhouse LJ in the Nukila case, “the assured has to prove some change in the physical state of the vessel.” This includes also personal injury to or illness or loss of life of crew members, of stevedores, of passengers and others All clauses cover for damage to or destruction of the vessel caused by governmental

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authorities trying to limit environmental hazard. Insurers are only liable when such hazard is a result of perils covered under the policy. If it is a result of excluded perils it is not covered. The latest English clauses were updated in 2009, but those used in the US and Norway were updated in 2004 and 2010 respectively. For more detail refer to the Wünsche Handelsgesellschaft International mbH v. Tai Ping Insurance Company Limited and Prudential Assurance Company Limited [1998] EWCA Civ 388 case, where there was confusion over “ex-factory” and “exwarehouse” terms with regard to the duration of cover. Thomas Cook Group Ltd & Ors v. Air Malta Ltd [1997] 2 Lloyd’s Rep 39. The Termination of Transit Clause – Terrorism (LMA and AIU 2009b) is paramount and overrides anything contained in the insurance contract. Changes to the Institute Cargo Clauses – Cargo (LMA and AIU 2009a) are meant to give back-to-back cover. Cover is only in respect of physical loss or damage and not for losses incurred because a shipment is delayed by a terrorist attack or by strike action (Richards Hogg Lindley 2009). See section 23.4 and note 6 above. Amounts recoverable under particular average are ﬁrst deducted from the amount insured, and the underwriter is liable for the portion which the net amounts bears to the contributory values. It is also offered under the Norwegian Plan and is closely modeled on the Baltic and International Maritime Council (BIMCO) standard clauses (BIMCO 2002). This is found in clause 4.1 of the 1995 Institute Time Clauses (ITC). Under the IHC and the NIP, claims are not subject to reduction when underinsured, but they are under the ITC and AIHC. Under the NIP no deductible is applied.

References AIMU (2004) American Institute Cargo Clauses – All Risks. January 1. American Institute of Marine Underwriters. AIMU (2009a) American Institute Hull Clauses. September 29. American Institute of Marine Underwriters. AIMU (2009b) American Institute Hull War Risk and Strikes Clauses. September 29. American Institute of Marine Underwriters. BIMCO (2002) Standard General Average Absorption Clause. BIMCO Special Circular No. 2, August 14. Cefor (2010) Norwegian Marine Insurance Plan 1996, version 2010. The Nordic Association of Marine Insurers. Comité Maritime International (2004) The York–Antwerp rules. Copenhagen, July 19. International Union of Marine Insurance (2009) Global Marine Insurance Report. LMA and IUA (1995) Institute Time Clauses, CL284, CL285, CL286, CL287, CL289, CL291, CL292, CL294 and CL295. Lloyd’s Market Association and International Underwriting Association of London. LMA and IUA (2003) International Hull Clauses, CL600, CL601, and CL603. Lloyd’s Market Association and International Underwriting Association of London. LMA and IUA (2009a) Institute Cargo Clauses 1/1/2009, CL382, CL383, CL384, CL385, CL386 and CL387. Lloyd’s Market Association and International Underwriting Association of London. LMA and IUA (2009b) The Termination of Transit Clause (Terrorism), 1/1/2009. Lloyd’s Market Association and International Underwriting Association of London. Richards Hogg Lindley (2009) Institute Cargo Clauses 2009: A Comparison of the 1982 and 2009 Clauses with additional commentary. Swiss Re (2003) Reinsurance – a systemic risk. sigma 5/2003. Swiss Re, Economic Research & Consulting.

V

Port Economics

24

Ports in Theory Wayne K. Talley

24.1

Introduction

A port is a place where cargoes and passengers are transferred to and from vessels and to and from shores and waterways. Thus, a port provides interchange services; i.e., received cargoes and passengers are passed through to departing vessels and vehicles. Cargo ports are described by the prominent type of cargo handled; for example, container ports and break-bulk ports handle mostly container and breakbulk cargoes, respectively. Passenger ports are described by the prominent type of passenger vessel that calls at the port; for example, cruise and ferry ports are prominently served by cruise and ferry vessels, respectively. A port may have one or more marine terminals – distinct infrastructures within a port for the transfer of cargoes and passengers to and from vessels. Cargo marine terminals are described by the prominent type of cargo handled. Passenger marine terminals are described by the prominent type of vessel that calls at the terminals.

Ports and marine terminals may be common-user or dedicated. Common-user ports and marine terminals accept vessel calls from all shipping lines (subject to government regulations). Alternatively, dedicated ports and marine terminals restrict vessel calls to those of certain shipping lines. Further, they may be owned or leased by shipping lines. If so, these shipping lines will restrict vessel calls to its own vessels or the vessels of shipping lines with which they have formed alliances. Ports and marine terminals are nodes in transportation networks and thus are used by transportation carriers in the provision of transportation services (see Chapter 5, “Maritime carriers in theory”). A transportation network is a spatial system of nodes and links over which cargoes and passengers are transported. Nodes are centers of activity in transportation networks from which cargo and passenger movements emanate. Links between nodes are the ways (e.g. waterways, railways and highways) over which vessels and vehicles travel in the movement of cargoes and passengers.

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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The users of port services include shippers, passengers and transportation carriers, maritime and surface carriers (railroad and truck). Also, there are providers of port services. The primary port service provider is the port (or terminal) operator that provides interchange service to and from shores and waterways for the cargo and passengers received. A container port, for example, provides interchange service for the TEUs (twenty-foot equivalent units) that it receives; that is, import TEUs received from ocean vessels are interchanged with domestic vessels and land vehicles, and vice versa for export TEUs; transshipment TEUs are interchanged between vessels. Other port service providers include: (1) the stevedore, (2) the ship agent, (3) the pilot, (4) the towage company, (5) the customs broker and (6) the government. A stevedore company is hired by a shipping line to load and unload cargo to and from its ships while they are in port. A ship agent looks after the interest of a ship while it is in port on behalf of the shipowner. The pilot provides assistance to the ship’s master when the ship is entering and leaving a port. A towage company uses a tugboat for the berthing and unberthing of ships to and from the port’s wharf (or quay). A customs broker clears cargo through customs at a port on behalf of cargo importers. Government provides: port navigational aids for port harbors, customs services, vessel trafﬁc service systems, and construction and maintenance of harbor channels. This chapter describes a port from a microeconomic theory perspective. Section 24.2 addresses port interchange services and the related topics of port resources, port production functions, port interchange service measures, port operating options

and port resource functions. Section 24.3 discusses the costs of port interchange service: long-run and short-run cost functions of single-service and multi-service ports in providing cost-efﬁcient port interchange service in the long run and the short run are discussed as well as port non-shared versus shared costs and internal versus external costs. Section 24.4 follows with a discussion of the demand for port interchange services from shippers, passengers and carriers with respect to the full prices for these services. The effectiveness of ports in providing interchange service, for example in maximizing proﬁts, is discussed in Section 24.5. Finally, Section 24.6 provides a summary of the discussion.

24.2 24.2.1

Port Interchange Services Port resources

The resources used by a port in the provision of port interchange services may be classiﬁed into six categories: (1) labor, (2) energy (fuel), (3) harbor waterway, (4) berth, (5) infrastructure and (6) mobile equipment. Port labor resources (Lp) include labor who are directly involved in the physical movement of cargo within the port (for example dockworkers who move cargo to and from vessels) and management labor who coordinate, plan and supervise the physical movement of cargo within the port. Port energy resources (Ep) include fossil fuels used in the engines of port equipment. The harbor waterway (Wp) is a body of water adjacent to the land area of a port, which vessels traverse in order to reach a port’s berth(s), reach an open waterway (e.g. a river or an ocean) or drop anchor.

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The berth (Bp) is the water area alongside a port’s wharf (or quay), where a vessel sits for its cargoes and passengers to be unloaded and loaded. A port’s infrastructure (Ip) includes its physical structures, for example a wharf (or quay), an apron, a yard and gates. The wharf (or quay) is a structure alongside a harbor waterway at which vessels are moored for the unloading and loading of cargoes and passengers. The apron is an area of the wharf (or quay) where cargoes and passengers are assembled before loading on or after unloading from a vessel. The yard consists of (1) a land area for the storage of cargo and equipment, (2) roadways and pathways for the movement of cargoes, passengers and port equipment, and (3) buildings for administrative activities, the storage of cargoes and waiting by passengers. Gates are entry and departure gates at which freight vehicles (e.g. railroad cars and trucks) enter and depart and passenger vehicles (e.g. autos and buses) enter and depart the port, transporting port cargoes and passengers. Port mobile equipment (EQp) includes port vehicles and other equipment directly involved in the physical movement of cargoes and passengers within the port. Examples of such equipment for a container port include ship-to-shore gantry cranes, straddle carriers, yard gantry cranes, and automated guided vehicles (Talley 2009).

24.2.2

Port production functions

A port provides interchange service to received cargoes, passengers, maritimecarrier vessels and surface-carrier vehicles. In order for port interchange service to occur, at least two parties must be in agree-

ment. If either party is not in agreement with the other, no port interchange service will occur. For example, shippers must be willing to provide their cargoes and individuals themselves as passengers, to a port, and the port must be willing to accept the cargoes and passengers for provision of interchange service. Similarly, maritime carriers and surface carriers must be willing to provide their vessels and their vehicles respectively to a port (i.e., to call at the port), and the port must be willing to accept the vessels and vehicles for provision of interchange service. The amount of interchange service that a port can provide will depend upon the amount of resources it utilizes in the provision of the service and upon the amount of cargoes and the number of passengers, maritime-carrier vessels and surface-carrier vehicles received for interchange service. If the amount of interchange service provided is the maximum amount that can be provided, given the amount of resources utilized and the amount of cargoes and the number of passengers, maritime-carrier vessels and surface-carrier vehicles to be interchanged, then this relationship may be described as the port’s production function in the provision of port interchange service. If the port adheres to its production function in the provision of port interchange service, the port is technically efﬁcient in the provision of the interchange service.1 Port interchange production functions for freight, passenger, vessel and vehicle interchange services may be expressed as: PFIS = g f (L p, E p, Wp, B p, I p, EQ p; Cargoes) (1) PPIS = g pa (L p, E p, Wp, B p, Ip, EQp; Passengers)

(2)

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PVIS = g v (L p, E p, Wp, B p, I p, EQ p; Vessels) (3) PHIS = g h (L p, E p, Wp, B p, Ip, EQp; Vehicles)

(4)

where, PFIS, PPIS, PVIS and PHIS represent port freight, passenger, vessel and vehicle interchange services, respectively.

24.2.3

Port interchange service measures

24.2.3.1 Throughput Traditionally, cargo and passenger ports have measured the amounts of freight and passenger interchange services that they provide by the amounts of cargoes (in tons or TEUs) and passengers (in number) that they receive and pass through the ports, i.e., by cargo and passenger throughputs. Also, port throughput has been used as a measure of port output in the investigation of technical and cost inefﬁciencies of ports.2,3 However, port cargo and passenger throughputs do not reﬂect the interchange service provided by ports, since the physical structure of received cargoes and passengers is not altered when they pass through ports; that is, the physical structure of cargoes and passengers that pass through a port remains the same as when they entered the port (unless damaged or injured from the pass-through process). Is port throughput a measure of port output in port production functions? In the investigation of this question, Talley (forthcoming) concludes that the answer to this question is no. The proof for this conclusion is as follows. Assume that a port provides container freight interchange service; further, that it is technically efﬁcient and therefore adheres to production function (1). Assume that TEU throughput is the

measure of TEU interchange service or output in production function (1). Substituting TEU throughput for PFIS in production function (1) and rewriting, it follows that: TEU Throughput = g f (L p, E p, Wp, B p, Ip, EQp; Cargoes) (1A) Replacing Cargoes in function (1A) with TEUs Provided by Carriers and rewriting, it follows that: TEU Throughput = g f (L p, E p, Wp, B p, Ip, EQp; TEUs Provided by Carriers) (1B) Since TEU Throughput = TEUs Provided by Carriers, a problem arises. That is to say, a variable (such as TEU Throughput) cannot be a function of itself. Thus, function (1) cannot remain a port production function if port freight interchange service is measured as cargo throughput. 24.2.3.2 Throughput ratio A measure of port interchange service that does reﬂect the role of the port and the cargoes and passengers to be interchanged in creating this interchange service is the amount of cargoes (number of passengers) that passes through the port per unit of time in port. For a container port, this measure is the TEU Ratio, i.e., the number of TEUs that pass through that port (or are interchanged) divided by the total time that these TEUs are in port. Note that the numerator of this ratio is TEU throughput. Thus, the TEU Ratio may also be referred to as TEU throughput per unit of TEU time in port. In addition to cargoes and passengers, maritime-carrier vessels and surface-carrier

PORTS IN THEORY

vehicles pass through or are interchanged at ports. Hence, the numbers of vessels and vehicles that pass through the port may be described as the port’s vessel throughput and vehicle throughput, respectively. However, these descriptions are not normally used by ports, but rather the numbers of vessel and vehicle calls at the port. As for cargo and passenger throughput, vessel and vehicle throughput per se do not reﬂect the port’s role in the interchange of this throughput. A measure that does so is the number of vessels (vehicles) that pass through the port per unit of time in port, i.e., the number of vessels (vehicles) that pass through the port (or are interchanged) divided by the total time that the vessels (vehicles) are in port, i.e., Vessel (Vehicle) Ratio. The Throughput (in terms of cargo tons or TEUs, number of passengers, number of vessel calls, and number of vehicle calls) Ratio has the desirable property that an increase in its value also indicates a decrease in the port’s technical inefﬁciency – where a port’s technical inefﬁciency declines when the percentage change in interchange resources utilized by the port is less than the percentage change in the port’s throughput. As noted below in the proof of Proposition 1, the latter is also synonymous with an increase in a port’s Throughput Ratio, where the TEU ratio is used as an example of the Throughput Ratio. By deduction, it follows that an increase in a port’s Throughput Ratio is synonymous with a decrease in its technical inefﬁciency. Proposition 1 A container port’s TEU Ratio will increase if the percentage change in interchange resources utilized by the port is less than the percentage change in the

477

number of TEUs interchanged by the port, all else held constant. Proof: Proposition 1 will hold if a container port’s TEU Ratio increases for all possible scenarios for which the percentage change in interchange resources utilized by the port is less than the percentage change in the number of TEUs interchanged by the port. It is assumed that the utilization of a port’s interchange resources can be measured by their time incurred in providing TEU interchange service. This utilization is measured by the total time that TEUs are in port. Further, it is assumed that there are no improvements in the technology for port interchange service. All possible scenarios for which the TEU Ratio can increase are listed below: 1.

2.

3.

4.

5.

TEU throughput increases and there is no increase in the total time that TEUs are in port; TEU throughput increases and there is a decrease in the total time that TEUs are in port; TEU throughput increases by a greater percentage than the increase in the total time that TEUs are in port; TEU throughput does not change but there is a decrease in the total time that TEUs are in port; and Both TEU throughput and the total time that TEUs are in port decrease, but the percentage decline for the latter is greater than that for the former.

Since for every possible scenario for which the TEU Ratio can increase, the percentage change in interchange resources utilized by the port is less than the percentage change in the number of TEUs interchanged by the port, Proposition 1 holds.

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The measure of container port interchange service, the TEU Ratio, is consistent with a number of measures utilized by container ports heretofore for investigating reductions in the technical inefﬁciency at their ports. For example, container ports often quote ship loading and unloading service rates (TEUs loaded on and off ships per unit of time). Note that increases in these service rates result in increases in container ports’ TEU Ratios, all else held constant. Container ports also seek to reduce the dwell times of port containers, i.e., storage time per TEU stored. Reductions in the latter will result in increases in TEU Ratios, all else held constant, since the reciprocal of storage time per TEU stored (or TEUs per unit of storage time) increases when storage time per TEU stored declines. 24.2.3.3 Throughput time in port In order to determine a port’s Throughput Ratio, information on the amount of the port’s throughput and the time that the throughput is in port are needed. The time that container throughput, for example, is in port can be obtained from RFID (Radio Frequency Identiﬁcation) sensors that are attached to containers. An import container’s time in port begins when the oceangoing vessel it is on board is berthed at the port and ends when the container leaves the port on board a domestic vessel, a land vehicle or another ocean-going vessel (for a transshipment container port). An export container’s time in port begins when it arrives at the port on board a domestic vessel, a land vehicle or an ocean-going vessel (for a transshipment container port) and ends when the ocean-going vessel it is on board is unberthed at the port. A container’s time in port consists of three types: movement time, storage

waiting time and other-than-storage waiting time. Movement time is the time during which a container is being transported from one area to another within the port; storage waiting time is the time a container is in a designated storage area of the port; and other-than-storage waiting time is the time (not in storage) that a container is waiting to be moved to another area in the port. The latter time may be the time that a container is on board a vessel and waiting to be unloaded, at the wharf waiting to be loaded on a vessel, and on board a truck or rail car waiting to depart the port. The sum of port movement, storage waiting and other-thanstorage waiting times for a given container is the total time that the container is in port. In addition to TEUs, container throughput per unit of container time in port can be computed for other types of port containers (e.g., 40-foot, 45-foot, 53-foot, import, export and transshipment containers). Consequently, the TEU Ratio need not be computed for containers other than 20footers, i.e., for containers whose lengths would have to be converted into TEU units. Container (as opposed to TEU) ratios for different types of containers could be used by ports to investigate technical inefﬁciencies among types of container throughputs, for example by comparing a port’s 40-foot container throughput per unit of 40-foot container time in port to a port’s 20foot container throughput per unit of 20foot container time in port, or by comparing a port’s import container throughput per unit of import container time in port to a port’s export container throughput per unit of export container time in port. By doing this, port operators avoid having to convert container throughput for types of containers other than 20-foot containers into TEU throughput.

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Rather than by type of container and its total time in port, comparisons could also be made by type of container and its type of time (movement, storage waiting and other-than-storage waiting) in port, for example TEU throughput per TEU movement time in port. Each type-ofcontainer throughput per unit of type-ofcontainer time in port could also be described as a distinct interchange service provided by the port. Consequently, a container port may be viewed as a multi-output port, providing a number of container interchange services. Further, the microeconomic theory of multi-output ﬁrms could be used as a basis for evaluating container ports, especially from the perspective of costs, for example with respect to economies of scope.

24.2.4

Port operating options

A port’s operating options are the means by which it can differentiate the quality of its interchange service. The operating options of a port are similar to those of the carrier for differentiating the quality of its transportation service (see Chapter 5 and Talley 2006). Operating options for the port that are analogous to speed of movement for the carrier are the port operator’s loading and unloading service rates, i.e., cargo loaded and unloaded per unit time by the port to and from vessels, inland carrier vehicles and port equipment. Port operating options that are analogous to the reliability and spatial accessibility operating options of carriers include: departure gate reliability (percent of time that the port’s departure gate is open for vehicles), entrance gate reliability (percent of time that the port’s entrance gate is open for vehicles), berth reliability

(percent of time that the port’s berth is open to the berthing of vessels), harbor waterway reliability (percent of time that the port’s harbor waterway is open to navigation), berth accessibility (percent of time that the port’s berth adheres to authorized depth and width dimensions), and harbor waterway accessibility (percent of time that the port’s harbor waterway adheres to authorized depth and width dimensions). Port operating options that are analogous to the susceptibility to loss and damage operating options of carriers include: port cargo, passenger property, vessel property, surface-carrier vehicle property and equipment property theft; port cargo, passenger property, vessel, inland carrier vehicle and port equipment damage; and port passenger injuries.

24.2.5

Port resource functions

A port’s resource function for the sth type of resource (Rs) relates the minimum amount of this resource to be employed by the port to the levels of its operating options and amounts of cargoes, number of passengers, number of maritime-carrier vessels and number of surface-carrier vehicles received (Talley 1988); that is, R s = R s (OPTION n; Cargoes, Passengers, Vessels, Vehicles) s = 1, 2, … S; n = 1, 2, … N

(5)

where OPTIONn is the nth operating option of the port. If no unused (or excess) capacity exists for the resources utilized by a port in providing a port’s interchange service, then changes in the levels of the port’s operating

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options for the purpose of increasing the quality of the service will require that additional resources be utilized by the port. That is to say, if no excess capacity exists for resource Rs, then an increase in the improvement level of operating option OPTIONn will require that the port utilize a greater amount of resource Rs, i.e., ∂Rs/∂OPTIONn > 0. Also, if no excess capacity exists for resource Rs, then an increase in Cargoes, Passengers, Vessels and Vehicles received and passed through the port will result in an increase in the amount of resource Rs utilized by the port, i.e., ∂Rs/∂Cargoes > 0, ∂Rs/∂Passengers > 0, ∂Rs/∂Vessels > 0 and ∂Rs/∂Vehicles > 0.

24.3 Port Interchange Service Costs A port will be cost-efﬁcient in the provision of port interchange service if it provides the service at the least cost, given the prices it pays for the resources employed. In order for a port to be cost-efﬁcient in the provision of port interchange service, it is necessary that the port be technically efﬁcient in the provision of this interchange service. If a port is technically inefﬁcient, it could provide the same amount of interchange service with a lesser amount of at least one resource and thereby incur lower cost in providing this interchange service (for given resource prices).

24.3.1 Long run cost: a single-service port To be cost-efﬁcient in the provision of port freight interchange service (PFIS), a port will minimize the cost that it incurs in the provision of the technically efﬁcient PFIS

service; that is, it will minimize its cost (C) subject to production function (1) and resource function for the sth type of resource Rs (5) considering only cargoes: Minimize C = PLp L p + PEp E p + PWp Wp + PBp B p + PIp I p + PEQp EQp subject to PFIS = g f (L p, E p, Wp, B p, Ip, EQp; Cargoes) (6) R s = R s (OPTION n; Cargoes) s = 1, 2, … S; n = 1, 2, … N where, PLp, PEp, PWp, PBp, PIp and PEQp are the prices of the resources Lp, Ep, Wp, Bp, Ip and EQp, respectively. If the port were producing a physical product as opposed to providing a service, the port would select and employ those amounts of the resources for which C is minimized subject to the production function constraint. That is to say, the resource variables would be the choice variables for the optimization of equation (6). However, the port is providing a service. As a consequence, the port’s operating options will be the choice variables for the optimization of equation (6). That is to say, the port will select values of its operating options which in turn, via its Rs resource function, will determine the amounts of resources to be employed for which C is minimized subject to the production function constraint. Consequently, to determine the amounts of resources to be employed by the port in providing a given quality of interchange service for the amounts of cargoes received, the resource function (5) for each resource (where only cargoes are considered) is included in equation (6). In the optimization of equation (6), where the amounts of all resources

PORTS IN THEORY

employed can be varied, i.e., in the long-run time period, the port’s long-run cost function for freight interchange service can be derived, where the port’s long-run cost (LTCfp) is a function of its resource prices, cargoes received for interchange service and freight interchange service provided by the port; that is, LTCfp = LTCfp (PLp, PEp, PWp, PBp, PIp, PEQp, PFIS, Cargoes)

(7)

Since the levels of all resources can be varied in the long run, no ﬁxed costs appear in long-run cost function (7). The long-run average total cost (LATCfp) for a port in the provision of PFIS amount of interchange service is found by dividing LTCfp by PFIS, i.e., LATCfp = LTCfp/PFIS. The port’s long-run marginal cost is the addition to the port’s long-run total cost in providing an additional unit of PFIS, i.e., LMCfp = ∂LTCfp/∂PFIS. If LATCfp decreases as PFIS increases, then the port exhibits “economies of scale” in the provision of PFIS interchange service; that is, the percentage increase in PFIS will result in a smaller percentage increase in the port’s long-run total cost. If LATCfp increases as PFIS increases, then the port exhibits “diseconomies of scale” in the provision of PFIS interchange service; that is, the percentage increase in PFIS will result in a greater percentage increase in the port’s long-run total cost. If the port exhibits “constant returns to scale,” then a percentage increase in PFIS will result in the same percentage increase in the port’s long-run total cost. Alternatively, economies of scale exist if S = LATCfp/ LMCfp = LTCfp/PFIS*LMCfp > 1; if S < 1, diseconomies of scale; and if S = 1, constant returns to scale.

481

In order for a single-service port to be cost-efﬁcient in the provision of passenger interchange service (PPIS), the port will minimize cost that it incurs in the provision of technically efﬁcient PPIS service; that is, it will minimize its cost (C) subject to production function (2) and resource function for the sth type of resource Rs (5) considering only passengers: Minimize C = PLp L p + PEp E p + PWp Wp + PBp Bp + PIp Ip + PEQp EQp subject to PPIS = g pa (L p, E p, Wp, B p, Ip, EQp; Passengers) (8) R s = R s (OPTION n; Passengers) s = 1, 2, … S; n = 1, 2, … N where PLp, PEp, PWp, PBp, PIp and PEQp are the prices of the resources Lp, Ep, Wp, Bp, Ip and EQp, respectively. To ensure that minimum amounts of resources are employed by the port in providing a given quality of interchange service for the number of passengers received, the resource function (5) for each resource (where only passengers are considered) is included in equation (8) prior to its optimization. In the optimization of equation (8), where the amounts of all resources employed can be varied and for which the port’s operating options are the choice variables, it follows that the port’s long-run total cost (LTCpap) function in the provision of PPIS can be derived as: LTCpap = LTCpap (PLp, PEp, PWp, PBp, PIp, PEQp, PPIS, Passengers) (9) The port’s long-run average total cost (LATCpap) in the provision of PPIS amount of interchange service is LATCpap = LTCpap/

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PPIS and its marginal cost in providing an additional unit of PPIS is LMCpap = ∂LTCpap/∂PPIS. In using the procedure that was used in deriving long-run total cost functions (7) and (9) in the provision of port freight and passenger interchange services, respectively, the following port long-run cost functions in the provision of port vessel and port vehicle interchange services, respectively, can be derived: LTCvp = LTCvp (PLp, PEp, PWp, PBp, PIp, PEQp, PVIS, Vessels) (10) LTChp = LTChp (PLp, PEp, PWp, PBp, PIp, PEQp, PHIS, Vehicles) (11) The port’s long-run average total costs LATCvp and LATChp in the provision of PVIS and PHIS are LATCvp = LTCvp/ PVIS and LATChp = LTChp/PHIS, respectively. The corresponding marginal costs are LMCvp = ∂LTCvp/∂PVIS and LMChp = ∂LTChp/∂PHIS.

24.3.2 Long run cost: a multi-service port To be cost-efﬁcient in the provision of PFIS, PPIS, PVIS and PHIS services in the long run, a multi-service port will seek to minimize its long-run cost in the provision of PFIS, PPIS, PVIS and PHIS technically efﬁcient interchange services (subject to resource function 5) in deriving its long-run multi-service total cost function: LTCfpavhp = LTCfpavhp (PLp, PEp, PWp, PBp, PIp, PEQp, PFIS, PPIS, PVIS, PHIS, Cargoes, Passengers, Vessels, Vehicles) (12)

The four-interchange-service port’s longrun marginal cost for freight interchange service is the addition to the port’s long-run total cost LTCfpavhp in providing an additional unit of PFIS; i.e., LMCffpavhp = ∂LTCfpavhp/∂PFIS. The port’s additional long-run total cost LTCfpavhp in providing an additional unit of PPIS passenger interchange service is LMCpafpavhp = ∂LTCfpavhp/∂PPIS. Similarly, the long-run marginal costs for PVIS and PHIS are LMCvfpavhp = ∂LTCfpavhp/∂PVIS and LMChfpavhp = ∂LTCfpavhp/∂PHIS, respectively. A four-interchange-service port will exhibit “economies of scale” (“diseconomies of scale”) in the provision of PFIS, PPIS, PVIS and PHIS if the percentage increase in PFIS, PPIS, PVIS and PHIS will result in a smaller (greater) percentage increase in the port’s long-run total cost LTCfpavhp. Alternatively, “economies of scale” are exhibited if Sfpavhp = LTCfpavhp/[PF IS*LMCffpavhp + PPIS*LMCpafpavhp + PVIS*L MCvfpavhp + PHIS*LMChfpavhp] > 1 and “diseconomies of scale” if Sfpavhp < 1. If Sfpavhp = 1, the four-interchange-service port will exhibit constant returns to scale. The long-run average total cost for interchange service for the four-interchangeservice port cannot be determined by dividing the port’s long-run total cost by the amount of this service, since some of the long-run cost is shared among the four interchange services. However, the unit cost for each service of the four-interchangeservice port can be computed as the longrun average incremental total cost (LAITC) for each service (Talley 1988). The long-run average incremental total cost (LAITCffpavhp) for PFIS freight interchange service provided by the four-interchange-service port may be expressed as:

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LAITCf fpavhp = [ LTCfpavhp (PLp, PEp, PWp, PBp, PIp, PEQp, PFIS, PPIS, PVIS, PHIS, Cargoes, Passengers, Vessels, Vehicles) − LTCfpavhp (PLp, PEp, PWp, PBp, PIp, PEQp, 0, PPIS, PVIS, PHIS, 0, Passengers, Vessels, (13) Vehicles)]/PFIS where LTCfpavhp(PLp, PEp, PWp, PBp, PIp, PEQp , PFIS, PPIS, PVIS, PHIS, Cargoes, Passengers, Vessels, Vehicles) – LTCfpavhp(PLp, PEp, PWp, PBp, PIp, PEQp , 0 , PPIS, PVIS, PHIS, 0 , Passengers, Vessels, Vehicles) is the longrun incremental cost for PFIS, given the amount of interchange services PPIS, PVIS and PHIS and the number of Passengers, Vessels and Vehicles. The long-run average incremental total cost (LAITCpafpavhp) for PPIS passenger interchange service provided by the fourinterchange-service port may be expressed as: LAITCpa fpavhp = [ LTCfpavhp (PLp, PEp, PWp, PBp, PIp, PEQp, PFIS, PPIS, PVIS, PHIS, Cargoes, Passengers, Vessels, Vehicles) − LTCfpavhp (PLp, PEp, PWp, PBp, PIp, PEQp, PFIS, 0, PVIS, PHIS, Cargoes, 0, Vessels, Vehicles)]/PPIS (14) Similarly, the LAITCs for PVIS and PHIS can be derived.

Economies of scope will exist for the four-interchange-service port if it can provide its interchange services at less cost than the sum of the costs of each service (at the same level) being provided by singleinterchange service ports. That is to say, the four-interchange-service port will exhibit economies of scope if: LTCfpavhp (PLp, PEp, PWp, PBp, PIp, PEQp, PFIS, PPIS, PVIS, PHIS, Cargoes, Passengers, Vessels, Vehicles) < LTCfpavhp (PLp, PEp, PWp, PBp, PIp, PEQp, PFIS, 0, 0, 0, Cargoes, 0, 0, 0) + LTCfpavhp (PLp, PEp, PWp, PBp, PIp, PEQp, 0, PPIS, 0, 0, 0, Passengers, 0, 0) + LTCfpavhp (PLp, PEp, PWp, PBp, PIp, PEQp, 0, 0, PVIS, 0, 0, 0, Vessels, 0) + LTCfpavhp (PLp, PEp, PWp, PBp, PIp, PEQp, 0, 0, 0, PHIS, 0, 0, 0, Vehicles) (15) If the inequality sign is reversed, i.e., “>,” then diseconomies of scope exist. That is to say, the four-interchange-service port provides its interchange services at greater cost than the sum of the costs of each service (at the same level) provided by singleinterchange service ports.

24.3.3

Short-run cost

The short-run time period is a period of time that is sufﬁciently short in duration to prevent a port from being able to vary the amount of every resource (unlike the longrun time period). Consequently, the port will incur ﬁxed costs for those resources for which it is unable to vary their amounts within the short-run time period. Suppose a freight single-service port incurs ﬁxed costs related to the resource,

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infrastructure (Ip), in the provision of freight interchange service PFIS. Hence, in the optimization of function (6) for which Ip is the ﬁxed resource, it can be shown that the port’s short-run total cost (STCfp) function, representing cost efﬁciency in the provision of PFIS by the port in the short run, can be derived as follows: STCfp = SFCfp + SVCfp (PLp, PEp, PWp, PBp, PEQp, PFIS, Cargoes, Ip ) (16) where SFCfp is the port’s short-run total ﬁxed cost, i.e., SFCfp = PIpIp, that does not vary with the amount of freight interchange service PFIS provided by the port. SVCfp is the port’s short-run variable cost that does vary with the amount of PFIS provided. SVCfp is a function of the prices of the port’s resources (except for the price of the ﬁxed resource Ip), PFIS, Cargoes, and the amount of the ﬁxed resource Ip. The port’s short-unit costs are obtained by dividing STCfp = SFCfp + SVCfp by the amount of freight interchange service provided (PFIS) to obtain SATCfp = SAFCfp + SAVCfp, i.e., the port’s short-run average total cost SATCf in the provision of PFIS is STCfp/PFIS, the shortrun average ﬁxed cost SAFCfp is SFCfp/PFIS, and the short-run average variable cost SAVCfp is SVCfp/PFIS. The additional shortrun variable cost incurred by the port in providing an additional unit of PFIS service is the port’s short-run marginal cost SMCfp, i.e., SMCfp = ∂SVCfp/∂PFIS. Similarly, the short-run cost function for a passenger single-service port (STCpap) that denotes cost efﬁciency in the provision of PPIS by the port in the short run can be expressed as: STCpap = SFCpap + SVCpap (PLp, PEp, PWp, PBp, PEQp, PPIS, Passengers, I p ) (17)

where SFCpap is the port’s short-run total ﬁxed cost, i.e., SFCpap = PIpIp, and SVCpap is the port’s short-run variable cost that is a function of the prices of the port’s resources (except for the price of the ﬁxed resource Ip), PPIS, Passengers, and the amount of the ﬁxed resource Ip. Suppose a four-interchange-service port exists that has the same ﬁxed resource (as in the above discussion) and provides freight, passenger, vessel and vehicle interchange services in the amounts of PFIS, PPIS, PVIS and PHIS, respectively. It can be shown that the port’s short-run total cost function can be expressed as: STCfpavhp = SFCfpavhp + SVCfpavhp (PLp, PEp, PWp, PBp, PEQp, PFIS, PPIS, PVIS, PHIS, Cargoes, Passengers, (18) Vessels, Vehicles, I p ) where SFCfpavhp is the port’s short-run ﬁxed cost, i.e., SFCfpavhp = PIpIp, and SVCfpavhp is the port’s short-run variable cost that is a function of the prices of the port’s resources (except for the price of the ﬁxed resource Ip), PFIS, PPIS, PVIS, PHIS, Cargoes, Passengers, Vessels, Vehicles and the amount of the ﬁxed resource Ip.

24.3.4

Other types of costs

As for maritime carriers (see chapter 5), the costs incurred by ports in the provision of interchange service, in addition to long-run versus short-run costs, may be classiﬁed as non-shared versus shared costs and internal versus external costs (Talley 2001). Port costs that can be traced to a particular port interchange service are its non-shared costs, e.g., the cost incurred by the port in checking in a container at its entrance gate. Costs

485

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that cannot be traced to a particular port freight or passenger interchange service and thus are borne (or shared) by two or more port freight or passenger interchange services are port shared costs. A port incurs a joint (common) shared cost when one port interchange service unavoidably results (does not unavoidably result) in the creation of another port interchange service. Suppose a container is moved from a container port’s storage area to its apron (the area of the quay where containers are staged, i.e., assembled before loading on a ship or after their unloading from a ship) by a straddle carrier, but then the straddle carrier must return to the storage area. The straddle carrier’s roundtrip cost is a joint cost to be shared between the straddle carrier’s front-haul and backhaul trips. The cost of a container port’s apron that is shared by containers is a common cost, since the use of the apron by one container does not unavoidably result in the use of the apron by another container. Port internal (external) costs are costs generated by the port in the provision of interchange service; they are borne (not borne) by the port and enter (do not enter) into the port’s decision-making processes. Examples of port internal costs include those incurred by the port in the hiring and purchasing of resources for the provision of interchange services. Examples of port external costs incurred in the provision of interchange services include water, air, noise and esthetic (appearance) pollution costs.

24.4

Port Demand

Ports provide interchange services to their users – shippers, passengers and carriers. Thus, port interchange services are

demanded by shippers, passengers and carriers.

24.4.1

Port shipper demand

In order for a port freight interchange service to occur, the shipper must be willing to provide cargo to the port and the port must be willing to receive and interchange this cargo. Since the shipper and the port are involved in creating port freight interchange service, there will be two prices for this service – a money price (per unit of port freight interchange service) that is charged by the port to the shipper for the freight interchange service and a time price (per unit of port freight interchange service) that is incurred by the shipper’s cargo while in port (Talley 2006). This time price is the product of the cargo’s value (or cost) of time per unit of time in port and the time that the cargo was involved in the provision of a unit of port freight interchange service. An example of cargo value of time in port is the inventory cost incurred by port cargo. Examples of port freight interchange services include the stufﬁng and stripping (to and from) containers of shippers’ cargoes. In Figure 24.1, shipper demand for port freight interchange service is represented by demand curve DFIS. The full (or total) price PPFIS per unit of port freight interchange service for a shipper is the sum of the port money price PSH and the shipper time price PSHT per unit of port freight interchange service. At higher full prices, less port freight interchange service is demanded by shippers, and at lower prices more service, all else held constant.

24.4.2

Port passenger demand

In order for a port passenger service to occur, an individual must be willing to

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PPPIS = PPA + PPAT

PPFIS = PSH + PSHT

DPIS

DFIS

PPIS Port passenger interchange service

PFIS Port freight interchange service

Figure 24.1 Shipper demand for port freight interchange service at full prices.

Figure 24.2 Passenger demand for port passenger interchange service at full prices.

provide herself/himself as a passenger at the port and the port must be willing to provide passenger interchange service to this individual. Since the individual and the port are involved in creating port passenger interchange service, there will be two prices for this service – a money price (per unit of port passenger interchange service) that is charged by the port to the individual for the port passenger interchange service, and a time price (per unit of port passenger interchange service) that is incurred by the passenger while in port (Talley 2009). This time price is the product of the passenger’s value of time per unit of time in port and the time that the individual was involved in the provision of a unit of port passenger interchange service. A passenger’s value of time per unit of time in port is the passenger’s opportunity cost minus the money equivalent of her/his direct level of satisfaction while in port per unit of time in port. Examples of port passenger interchange services include the loading to and unloading from passenger vessels of passenger baggage.

In Figure 24.2, passenger demand for port passenger interchange service is represented by demand curve DPIS. The full (or total) price PPPIS per unit of port passenger interchange service for a passenger is the sum of the port money price PPA and the passenger time price PPAT per unit of port passenger interchange service. At lower full prices, more port passenger interchange service is demanded by passengers, and at higher prices less service, all else held constant.

24.4.3

Port carrier demand

In order for a port carrier service to occur, the maritime (surface) carrier must be willing to have one of its vessels (vehicles) call at the port and the port must be willing to receive and service these vessels (vehicles). Since the carrier and the port are involved in creating a port carrier service, there will be two prices for this service – a money price and a time price. For the cost that the port incurs in providing port carrier service, the port will charge a money price

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PPVIS = PMC + PMCT

PPHIS = PSC + PSCT

DHIS

DVIS

PHIS Port vehicle interchange service

PVIS Port vessel interchange service

Figure 24.3 Maritime-carrier demand for port vessel interchange service at full prices.

Figure 24.4 Surface-carrier demand for port vehicle interchange service at full prices.

(per unit of port carrier service) to the carrier (Talley 2006). The carrier will also incur a time price (per unit of port carrier service) related to its vessel or vehicle that was involved in the provision of the port carrier service. This time price is the product of the vessel’s (vehicle’s) value or cost of time per unit of time in port and the time that the vessel (vehicle) was involved in the provision of a unit of port carrier service. Examples of vessel (vehicle) time costs include vessel (vehicle) insurance and depreciation costs. Examples of port carrier services include loading and unloading cargo to and from vessels and vehicles and vessel berthing and unberthing. In Figure 24.3, maritime-carrier demand for port vessel interchange service is represented by demand curve DVIS. The full (or total) price PPVIS per unit of port vessel interchange service is the sum of the port money price PMC and the maritime-carrier time price PMCT per unit of port vessel interchange service. At higher full prices, less port vessel interchange service is demanded

by maritime carriers, and at lower prices more service, all else held constant. In Figure 24.4, surface-carrier demand for port vehicle interchange service is represented by demand curve DHIS. The full (or total) price PPHIS per unit of port vehicle interchange service is the sum of the port money price PSC and the surface-carrier time price PSCT per unit of port vehicle interchange service. At lower full prices, more port vehicle interchange service is demanded by surface carriers, and at higher prices less service, all else held constant.

24.5

Port Effectiveness

A port, especially facing competition, is concerned not only with whether it is technically and cost-efﬁcient, but also with whether it is able to optimize its overall operating objective, e.g., to maximize proﬁts, maximize throughput subject to a minimum proﬁt constraint, or minimize losses subject to a government subsidy

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constraint (in order to increase market share). If a port is able to optimize its overall operating objective, it will be described as effective. Thus, a port has efﬁciency and effectiveness operating objectives. Port efﬁciency operating objectives include the technical efﬁciency objective of maximizing port interchange service in the employment of a given level of resources (exhibited by the port’s production function) and the cost efﬁciency objective of minimizing cost in the provision of a given level of port interchange service (exhibited by the port’s cost function). Port effectiveness is concerned with how well the port provides service to its users – shippers, passengers and carriers. In order for a port to be effective, it must be efﬁcient. Speciﬁcally, it must be cost-efﬁcient, which in turn requires that it must be technically efﬁcient. That is to say, a necessary condition for a port to be cost-efﬁcient is that it be technically efﬁcient. A necessary condition for a port to be effective is that it be costefﬁcient. A cargo port’s proﬁt function with respect to the port providing freight, vessel and vehicle interchange services may be speciﬁed as: Profit fvhp = PSH PFIS + PMC PVIS + PSC PHIS − STCfvhp

(19)

where PSHPFIS (PMCPVIS) represents the total revenue received by the cargo port in providing PFIS (PVIS) port freight (vessel) interchange service at a money price of PSH (PMC) per unit of port freight (vessel) interchange service. PSCPHIS represents the total revenue received by the cargo port in providing port vehicle interchange service at a money price of (PSC) per unit of port vehicle interchange service. STCfvhp is the short-run

total cost incurred by the port in providing freight, vessel and vehicle interchange services. Necessary conditions for the port to maximize proﬁts in the provision of freight, vessel and vehicle interchange services are that the levels of these services provided by the port be such that their marginal proﬁts equal to zero, i.e., ∂ Proﬁtfvhp/∂PFIS = 0, ∂Profit fvhp/∂PVIS = 0 and ∂Profit fvhp/∂PHIS = 0.

24.6

Summary

A port is a place where cargoes and passengers transfer to and from vessels and to and from shores and waterways. A port may have one or more marine terminals and may be common-user or dedicated. Ports are also nodes in transportation networks and thus are used by transportation carriers in the provision of transportation services. The resources used by a port operator in the provision of port interchange services may be classiﬁed as: (1) labor, (2) energy (fuel), (3) harbor waterway, (4) berth, (5) infrastructure and (6) mobile equipment. Port production functions relate the maximum amounts of interchange services that ports can provide, given the amounts of resources utilized and the amounts of cargoes, number of passengers, number of vessels and number of vehicles received by the port. If a port adheres to its production function in providing interchange service, it is technically efﬁcient. Measures of port interchange services that reﬂect the role of the port in interchanging cargoes, passengers, vessels and vehicles are the amounts of cargoes and numbers of passengers, vessels and vehicles that pass through the port per unit of time in port.

PORTS IN THEORY

A port’s operating options are the means by which it can differentiate the quality of its interchange services. A port’s resource function for a given resource relates the minimum amount of the resource to be employed by the port to the levels of its operating options and the amounts of cargoes and numbers of passengers, vessels and vehicles received. The long-run total cost function for a multi-service port relates the minimum costs incurred by the port over the long run to the resource prices paid by the port, the amounts of freight, passenger, vessel and vehicle interchange services provided by the port, and the amounts of cargoes and number of passengers, vessels and vehicles received by the port. Shippers, passengers and carriers incur two prices for port interchange service. Shippers and passengers incur a money price that is charged by the port for the service and a time price related to their cargoes and themselves while in port. Carriers incur a money price that is charged by the port for the carrier interchange service and a time price related to their vessels and vehicles while in port. In order for a port to be effective with respect to its overall operating objective, namely maximizing proﬁts, it must be cost-efﬁcient. A necessary condition for a port to be costefﬁcient is that it be technically efﬁcient.

Notes 1

For a discussion of technical efﬁciency and ports, see Cheon, Dowall and Song (2010), Cullinane (2002), Song, Cullinane and Roe (2001), Talley (2006, 2009), Wang, Cullinane and Song (2005), Rodriguez-Alvarez, Tovar and Trujillo (2007), and Yan, Sun and Liu (2009).

2

3

489

Port cargo throughput as a measure of port output is found in empirical port economic production studies by Chang (1978), Kim and Sachish (1986), Bendall and Stent (1987), Dowd and Leschine (1990), Liu(1995), Tongzon (2001), Cullinane, Song, Ji and Wang (2004) and Cullinane and Song (2006). Port cargo throughput as a measure of port output is found in empirical port economic cost studies by Jara-Diaz, Martinez-Budria, Cortes and Basso (2002), Jara-Diaz, Tovar and Trujillo (2005) and Tovar, Jara-Diaz and Trujillo (2007).

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Economics, pp. 85–115. Research in Transportation Economics, 16. Amsterdam: Elsevier. Dowd, T. and T. Leschine (1990) Container terminal productivity: a perspective. Maritime Policy and Management 17: 107–12. Jara-Diaz, S., E. Martinez-Budria, C. Cortes and L. Basso (2002) A multioutput cost function for the services of Spanish ports’ infrastructure. Transportation 29: 419–37. Jara-Diaz, S., B. Tovar and L. Trujillo (2005) Marginal costs, scale and scope for cargo handling ﬁrms in Spain. Transportation 32: 275–91. Kim, M. and A. Sachish (1986) The structure of production, technical change and productivity in a port. Journal of Industrial Economics 35: 209–23. Liu, Z. (1995) The comparative performance of public and private enterprises: the case of British ports. Journal of Transport Economics and Policy 29: 263–74. Rodriguez-Alvarez, A., B. Tovar and L. Trujillo (2007) Firm and time varying technical and allocative efﬁciency: an application to port cargo handling ﬁrms. International Journal of Production Economics 109: 149–61. Song, D.-W., K. Cullinane and M. Roe (2001) The Productive Efﬁciency of Container Terminals: An Application to Korea and the UK. London: Ashgate. Talley, W. K. (1988) Transport Carrier Costing. New York: Gordon and Breach Science Publishers.

Talley, W. K. (2001) Costing theory and processes. In A. M. Brewer, K. J. Button and D. A. Hensher (eds.), Handbook of Logistics and Supply Chain Management, pp. 313–23. Amsterdam: Elsevier. Talley, W. K. (2006) An economic theory of the port. In K. Cullinane and W. K. Talley (eds.), Port Economics, pp. 43–65. Research in Transportation Economics, 16. Amsterdam: Elsevier. Talley, W. K. (2009) Port Economics. Abingdon, Oxon: Routledge. Talley, W. K. (forthcoming) Is port throughput a port output? In E. P. Chew, L. H. Lee and L. C. Tang (eds.), Advances in Maritime Logistics and Supply Chain Systems. Singapore: World Scientiﬁc. Tongzon, J. (2001) Efﬁciency measurement of selected Australian and other international ports using data envelopment analysis. Transportation Research Part A 34: 107–22. Tovar, B., S. Jara-Diaz and L. Trujillo (2007) Econometric estimation of scale and scope economies within the port sector. Maritime Policy and Management 34: 203–23. Wang, T.-F., K. Cullinane and D.-W. Song (2005) Container Port Production and Economic Efﬁciency. Basingstoke: Palgrave Macmillan. Yan, J., S. Sun and J. Liu (2009) Assessing container operator efﬁciency with heterogeneous and time-varying production frontiers. Transportation Research Part B 43: 172–85.

25

Port Governance Mary R. Brooks and Athanasios A. Pallis

25.1

Introduction

Over the last thirty years, port governance issues have became central to the agendas of many governments. A changing economic environment produced by the globalization of production and distribution, changing forms of cargo transportation, technological breakthroughs, and many more issues, ended a long period of stable, state-controlled (public) port governance models in most countries. To adapt to the new context, many governments entered a period of port reform, changing applicable governance structures. Most reforms devolved management responsibilities and, to a lesser extent, transferred responsibilities associated with port ownership to newly created or existing corporate entities. However, the absence of consensus on appropriate governance models led to varied outcomes. Those endorsing new public management principles (e.g., Manning 2000; Osborne and Gaebler 1992) identiﬁed that there was no “one best way” and that governments should not be both

“rowing and steering.” Practice also conﬁrmed the seminal work of Caves, Christensen, Swanson and Tretheway (1982) and Boardman and Vining (1989), who had already demonstrated that private sector involvement in public transportation operations does not necessarily provide a better performance outcome. This is not to say that generic governance models have not been advanced. The World Bank undertook to address this interest and focused on the development of a generic port model, the Port Reform Tool Kit ([2005]),1 building on the work of Goss (1990), de Monie (1994) and others. Concurrently, the debate about what were the appropriate models for port governance, and in particular the issue about public goods and their delivery by private corporations, stimulated the interest of the academic community. Studies aimed at understanding the endorsed models, and more importantly at evaluating their effectiveness in achieving governments’ intentions, followed. One example of this scholarly effort to examine governance

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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structures (i.e., to not only document the experiences of ports in fourteen different countries but to also evaluate the initial effectiveness of the reform programs) culminated in the publication by Brooks and Cullinane (2007a). They concluded that there was considerably more work to do the fully understand what models are in place, and which of them are the most effective in delivering the objectives sought. This chapter discusses the most recent wave of port governance developments, providing an update on what has taken place in the last two decades. Using the ﬁndings of a survey sent to the 125 largest ports, we examine the state of practice in port governance and discuss what it means for future port governance research. Throughout the chapter we use port governance terminology in a very speciﬁc way; we encourage the reader to review the deﬁnitions found in the Appendix.

25.2 The Evolution of Port Reform In the 1990s, port reform was the trend of the day, as the “new public management” philosophy swept the world. Port reform was really a response to a broader agenda of streamlining government (as a means of dealing with burgeoning deﬁcits) and the result of a shift in macroeconomic thinking towards greater private sector involvement in public goods delivery. The reform process gained strength in the late 1980s and early 1990s, and when the full impact of the 1980s public sector reform in the UK and the US reached transport departments elsewhere, changing how bureaucrats and politicians saw the way forward on the governance of most transport activities, ports included.

The British experience has informed current thinking in port privatization. Port devolution in the UK often involved outright sale, even of regulatory functions; transfers were often at discounted prices and today there is no port regulator per se. Baird and Valentine (2007) concluded that there were two phases of port privatization in the United Kingdom, the ﬁrst involving the sale of state-owned ports and railway ports in 1979–83, and the second disposal of the major trust ports. The privatization of the British Transport Docks Board (BTDB), subsequently renamed Associated British Ports (ABP), came at the end of the ﬁrst wave of privatizations with a 51.8 percent listing on the stock exchange; the remainder of ABP was sold in the second wave, which occurred after the passage of the 1991 Ports Act. The deregulation of the port labor market, with the abolition of the National Dock Labour Scheme, was, Baird and Valentine argue, a critical factor in allowing UK ports to become more competitive. Furthermore, Baird and Valentine (2007) identiﬁed that privatization was used to unwind many nationalizations that had taken place during World War II, and that reform in the UK was really as much about reversing this hallmark of a government socialist philosophy as it was about selling companies that should not belong, under capitalist philosophy, in public hands. What made the UK reform model unique was that the privatizations of UK ports were the only true ones, because they included the sale of port land. The British case was all about selling ports (removing public ownership and accountability) rather than about creating new and improved port infrastructure and facilities, which was the goal in most other countries.

PORT GOVERNANCE

Does the fully privatized model work? According to Thomas (1994) and Saundry and Turnbull (1997), it is ﬂawed from a public interest/taxpayer perspective and, for a long time after, there was less investment than might have otherwise occurred (Baird 2000). Furthermore, when private interests responded to improved trade, and ﬁnancial institutions began to acquire infrastructure holdings, the loss of an oversight or monitoring role for government created discontent in the UK port industry, which proved unpalatable to other governments considering such an approach. As a result, no other government has copied the UK model in its entirety. Scholarly research over the past two decades has attempted to review port reform and “privatization” efforts in the 1990s (e.g., Cullinane and Song 2001; Everett and Robinson 1998; Hoffmann 2001), and developed specialized matrices for describing these activities (Baird 2000). Ex post assessments of these reforms have questioned the effectiveness of the actual developments; such criticism includes earlier models such as UNCTAD’s “port generation model” formed in 1990 (e.g., Beresford, Gardner, Pettit et al. 2004), the details of the relevant legislation that accompanied reforms (Everett 2007; Everett and Pettitt 2006), and empirical evidence that corporatization does not a priori result in improved ﬁnancial performance (Pallis and Syriopoulos 2007). Academic research has followed ﬁeld developments while the search for a perfect model has led to the continuation of reform activities by governments. The most illustrative example of this continuation is the case of the World Bank and its phenomenal effort in developing its World Bank Port Reform Tool Kit (WBPRTK) for developing

493

countries. The WBPRTK remains the most widely mentioned, and the most widely reviewed by governments. Beyond the process of reform, the WBPRTK focuses on the role (landlord, tool, service or private) and activities of port authorities (PAs) as a core theme of port governance, but not on the lines of accountability, appropriate governance structures or ﬁduciary responsibilities. Neither does the WBPRTK provide any evidence as to what governance models result in better performance outcomes or how ports themselves may respond to a government-imposed governance reform, and so its use is limited by its content. With the passage of time since the publication of the early taxonomies of port governance (e.g., Baird 2000; World Bank [2005]), the usefulness of these has eroded. These early approaches discussed the extent to which public and private actors were involved in the port sector, without examining whether the balance of responsibilities between them was right, for example whether it resulted in an effective performance in delivering the objectives sought by government. While such taxonomies might be useful to regulators, they provide little guidance for those who need it most for effective port operations – port managers (Brooks 2004). In other words, they served the public master poorly and the port authority not at all. Today, the restructuring of national port systems continues, as does the quest to identify the most appropriate allocation of responsibilities and governance structures. Current issues in port governance include (1) appropriate models for optimum performance outcomes within the port conﬁnes, (2) how best to execute such models to lower entry barriers in order to acquire the beneﬁts of intra-port competition (see

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de Langen and Pallis 2006, 2007), (3) how to reform port labor to improve performance outcomes, and (4) how best to engage local stakeholders in efforts to improve port hinterland access. Given these interests, an update on contemporary port governance structures is undoubtedly warranted.

25.3 Port Governance Structures: Update and a Survey 25.3.1 Port reform purpose and port objectives How well ports perform and the governance structures in place have been discussed widely and the ﬁndings consolidated in a book on the topic (Brooks and Cullinane 2007). Following up on this work, Brooks and Pallis (2008) proposed that models imposed be revisited, in order to ﬁx any misalignment in the framework imposed or to ﬁt to changing economic circumstances, but also to incorporate feedback from the port itself or perhaps its political masters as experience with port reform unfolds. It is now more than ten years since the major reform agenda of the 1990s was implemented, and many governments, as part of their review of the impact of the global economic crisis, are taking a second look at the results of those reform experiments and the models we see today. Some countries have attempted to streamline the governance models they impose. For example, in Europe the reforms that took place in all four Mediterranean European countries (Spain and Italy in the 1990s, France and Greece in the 2000s) followed distinctive approaches for “ports of national interest” (e.g., corporatization) and for “peripheral ports” (for example, they

were granted a certain degree of autonomy but within a public framework). The devolution of smaller ports involves very different conditions and challenges than those that confront the major international ports, so that the models are not directly comparable; even in the case of the secondary or peripheral ports, the extent of devolution is not similar (Debrie, Gouvernal and Slack 2007). Canada streamlined its models to three, developing a divestiture program to privatize one group (local and regional ports), commercializing the major ports important to the national economy, and retaining its public service obligations to the third group (remote ports); the outcome varied considerably between ports as the negotiation process for divestiture was lengthy and each port had its own peculiarities; the reality is that each model type has its variants. The “perfect model” is a myth, unable to address the variety of public service obligations, geographical constraints and economic development aspirations of citizens. The 1990s were marked by the desire to involve private actors more than before but there were almost as many models as there were ports (Cullinane and Brooks (2007), and implementation of port reform proved to be excessively challenging for most governments. Evidence ranging from Singapore (Airriess 2001) and Dubai ( Jacobs and Hall 2007) to Baltimore (Hall 2003) and Los Angeles/Long Beach ( Jacobs 2007) suggests that institutional conditions restrict port governance choices and lead to diversiﬁed outcomes and development trajectories. Investigating some recent port corporatization processes in Asia (Busan) and Europe (Rotterdam, Piraeus), Ng and Pallis (2010) conclude that the newly established seaport governance structures follow a path largely

PORT GOVERNANCE

affected by the characteristics of local/ national institutional frameworks and the political traditions in place; path-dependent decisions preserve the system as much as possible, resulting in implementation asymmetries, even when different governments seek the same generic port governance solution. The problems with port reform are most evident in the objectives of the port: should the governance model serve the aims and purposes of the national government, the local community or the port itself and its customers? Brooks (2005) noted that every port in a post-reform environment faces an identity crisis in determining its objectives, given the conﬂicts between its government regulators (or owners), its customers, its local community stakeholders, and its managers (or shareholders). She argued that strategic objectives drive the port governance model chosen. Strategic objectives that ports may follow include: maximizing proﬁts for shareholders; maximizing return on investment for government; maximizing trafﬁc throughput; maximizing trafﬁc throughput subject to a maximum allowable operating deﬁcit; and optimizing economic development prospects, be they local or national. The last objective is the one most frequently chosen (Baltazar and Brooks 2007); it is also frequently chosen by small ports with ambitions to grow and by US public ports which see local interests as paramount. In considering reform options, national governments, for example, may limit the reform to decentralization when they seek local responsiveness, as it means no loss of ownership. Seeking to understand the current state of port reform, we have undertaken a study to examine port reform and port governance approaches today. We approached the

495

largest 125 ports around the world, based on 2007 data, and requested information on their existing governance practices and their port reform history. We have collected empirical evidence from ﬁfteen ports, of which two are from Asia, nine from Europe, and three from the Americas (all from the US). Three of the European replies were from UK ports. In addition, we evaluated the websites and annual reports of the remaining 110, seeking answers to the survey questions. In total, we found 57 relevant port websites available in English, with these websites containing some but not all the information required; hence, the data reported in this chapter are a subset of the maximum possible, i.e. 72. A summary of the ports approached and the response rate appears in Table 25.1. We collected mission statements and objectives as seen by the ports themselves. A content analysis of these reveals that ports are still as much interested in economic development as they are in serving commercial and trading interests, conﬁrming the ﬁndings of Baltazar and Brooks (2007). The full gamut of objectives, from commercial proﬁtability and customer satisfaction to strategic national interest to sustainable, local economic development, can be found. It is not surprising that ports owned and managed by government may seek “to the enhance the contribution of the port and shipping related activities to Hong Kong’s economy” or “to advance and safeguard Singapore’s strategic maritime interests.” Neither is it unexpected that private ports will focus “on sale and development opportunities” or “ﬁnancial value for our shareholders,” but it is surprising when even private ports consider the “economic value” they may generate for their local community. As Baltazar and Brooks

496

MARY R. BROOKS AND ATHANASIOS A. PALLIS

Table 25.1

Responses and other sources

Location Asia Europe North America Australia Africa N=

Number in the top 125 portsa

Questionnaire replies

Ports for which website information is usedb

53 34 28 5 4 124

2 9 3 1 0 15

8 23 19 4 3 57

a

The total is only 124 as two ports on the list merged between the data year and the time of the survey. The relevant websites contain some but not all the information searched; thus the total of data available in each question is a subtotal of the maximum 72. b

(2007) found, most ports see their roles as complex, with multiple objectives, and as having not only national but also regional and local impacts. They serve more than just their customers, or their communities, and are in the business of balancing multiple roles and expectations. How are they structured to do this is therefore generally not simple.

•

•

25.3.2 model

Ownership in the governance

Baltazar and Brooks (2007) identiﬁed that there are, generally speaking, ﬁve types of port governance associated with port reform approaches, moving from most centralized public ownership and management to most private sector-oriented (the following examples are our choice to illustrate the types): •

•

Central government-owned with central government management and control (examples: National Harbours Board ports in Canada pre-1982; Spain pre1992; Italy pre-1994; Greece pre-1999) Government-owned but management and control decentralized to a local

•

government body (examples: many US ports; Spanish ports in Europe) Government-owned (national, regional or municipal) but managed and controlled by a corporatized entity (examples: Melbourne, Sydney and Newcastle in Australia; Rotterdam, Antwerp, Hamburg, Amsterdam and Zeebrugge in Europe) Government-owned but managed by a private sector entity via a concession or lease arrangement, or owned and managed via a public–private partnership agreement (examples: many ports in developing countries; Long Beach) Fully privately owned, managed and controlled (examples: many UK ports).

We sought to assess ports’ governance according to the Baltazar and Brooks (2007) typology of ownership and management combinations. Our ﬁndings are rather inconclusive as we have data from only 44 ports for this assessment. The regional groupings using that typology appear in Table 25.2. What can we conclude? Very few ports are fully privatized and listed on stock exchanges. In Europe, among the top 125

497

PORT GOVERNANCE

Table 25.2 Current governance structure Objective and region Central government-owned; central government management and control Government-owned; management and control decentralized to a local government body Government-owned (federal, regional or municipal); managed and controlled by a corporatized entity Government-owned; managed by a private sector entity via a concession or lease arrangement, or owned and managed via a public–private partnership agreement Fully privately owned, managed and controlled N=

Europe

Africa

2

3

North America

10

1

11

1

1

1

6 31

3

3

Asia

Australia

n=

4

9

11

1

13

2

4

1

7

3

5

44

The total of 44 includes the 15 ports that answered the survey and 29 that were allocated to categories according to information on their websites. One from which no reply was received is not included.

ports, we found that only UK ports have indicated stock exchange listings. One of the UK ports, currently owned by a portrelated ﬁnancial institution, is still listed, while three others were listed from 1983 to 2006, but delisted in 2006 because of acquisitions by new owners who took them private (discussed in more detail below). In a number of cases, corporatization has taken place, with the issuance of share capital, but the government has retained a majority of the shares, and the issuance has not been accompanied by public listing. The corporatization of some ports not in the top 125 has been accompanied by a listing on a stock exchange (e.g., Piraeus and Thessaloniki), but these are few and far between. In some cases, government own-

ership means that there is no port authority per se but a government department with responsibility for the port. In contrast, the Government of South Africa has created a single port authority – the South African National Ports Authority – as custodian of eight major seaports, and there is no portlevel port authority. A case of a single private entity governing several ports is also observed in Romania. In conclusion, government ownership is still a dominant feature of port governance, with few fully privatized ports amongst the world’s largest. As a result, the majority of the largest ports have commercialized or corporatized governance structures, or have found other ways to increase the participation of the private sector via the provision

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MARY R. BROOKS AND ATHANASIOS A. PALLIS

of these public activities, for example infrastructure development through buildoperate-transfer schemes, or the operation of terminal facilities through concession agreements. Mixed governance models incorporating contracted management of this type are readily found and are discussed in subsection 25.3.6, “Injecting private sector management into public governance: the use of concessions.” Many ports, however, remain government-owned and -managed, although they may have been decentralized.

25.3.3 The US approach to port governance: a special case One model that spurs the interest of port authorities with ﬁnancial challenges is the US model. From a distance, ports in the US appear to have access to funds not available to ports in other countries. It is important to have context here – the only federal role for ports in the US is channel and navigational aid maintenance; the Department of Homeland Security governs security rule setting. US ports have access to funds through a variety of means, but we must remember that they are primarily public ports and did not participate in the reform movement that raced through the rest of the world. The framework of port governance in the US is “complex and fragmented” with a web of public and private organizations involved in management at national, regional and local levels, each with differing priorities, requirements and procedures (Newman and Walder 2003). The multitude of jurisdictional forms has led to intense competition among ports and within ports in the US – not what is needed in many small ports, who may be better off using

cooperative strategies. US ports are heavily dependent on government (loans, grants and taxes) and tax-exempt revenue bonds for their revenue. Tax-exempt revenue bonds are not allowed in many other jurisdictions. Furthermore, the US model is considered highly inefﬁcient (Helling and Poister 2000). Many US ports do not easily ﬁt our governance classiﬁcation approach (based on Baltazar and Brooks 2007), and so require special mention and their own discussion. As noted by Fawcett (2007), there is no national US ports policy, and the majority of US ports are publicly owned and managed in a myriad of ways that is more an accident of local history than a planned outcome. For reasons well detailed by Fawcett, the US port system has evolved unlike any other internationally, although Australia’s “statesled” approach to port governance may be considered a close approximation. Sherman (2002) has provided a description of the US port governance system for those unfamiliar with its complexity. For those with a strong interest in US port governance, his summary plus Fawcett’s history provides the clearest analysis. In an attempt to simplify it further here, we use the US Department of Transportation Maritime Administration (2008) typology and summarize the current level of responsibilities the largest US public ports provide in two tables (25.3 and 25.4). Table 25.3 presents the Maritime Administration’s typology of US public ports as one of three categories: non-operating, operating, or limited operating. In an effort to collect data on US public port expenditures, they noted that these public ports do not even have common ﬁnancial years of data collection for consistency in their planning activities, which are detailed in Table 25.4. (Table 25.4

Table 25.3 US Port governance and management deﬁnitions Category Non-operating ports (Non-Op) Operating ports (Op)

Limited-operating ports (Ltd Op)

Deﬁnition Basically landlord ports with all port facilities generally leased or preferentially assigned with the lessee or assignee responsible for operating the facilities. Generally provide all port services except stevedoring with their own employees including, but not limited to, loading and unloading of rail cars and trucks and the operation of container terminals, grain elevators, and other bulk terminal operations. Lease facilities to others, but continue to operate one or more facilities with port employees. These operated facilities may be specialized terminals, such as grain elevators, bulk terminals, container terminals, etc.

Source: US Department of Transportation Maritime Administration (2008), p. 3.

Table 25.4 US public seaports governance and responsibilities Port

Planning activities

Category

Type

Strategic planning

Marketing

Finance

Development

Maryland Port Administration (Baltimore) Virginia Ports Authority Alabama State Port Authority Greater Baton Rouge Port Commission Lake Charles Harbor & Terminal District Port of Corpus Christi Authority Port of Houston Authority Port of New Orleans Port of South Louisiana

Op

X

X

X

X

State

Ltd Op Ltd Op

X X

X

X

X X

State State

Non-Op

X

X

Op

X

X

X

X

State

Ltd Op

X

X

X

X

Ltd Op

X

X

X

X

Non-Op Ltd Op

X

X

X X

X

Port of Long Beach Port of Los Angeles

Non-Op Non-Op

X

X

X

X

Special purpose Special purpose State Special purpose Municipal Municipal

State

Source: US Department of Transportation Maritime Administration (2008), extracted from the tables.

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MARY R. BROOKS AND ATHANASIOS A. PALLIS

contains only those ports that responded to the Maritime Administration survey on ﬁnancing arrangements for the ﬁscal year ending in 2006 and that also appear on the list of top 125 ports in the world by tonnage in 2007.) While US ports are predominantly publicly owned, the public authority is often not involved in operating activities (Table 25.4). The governance type is predominantly nonoperating or limited-operating, and most restrict their activities to planning. For some, even planning is not part of their mandate. In addition to those presented in Table 25.4, our survey can report on two more. The authorities of the ports of Tampa and Plaquemines did not respond to the Maritime Administration survey but did reply to us. As the role of the former includes both planning supporting infrastructure through “customer-driven, strategic business focus in working with stakeholders” and terminal management and operations, and the role of the latter is limited to the planning and regulation of Lower Mississippi trafﬁc, these additional data conﬁrm the complex and fragmented character of US port governance. Furthermore, although public ownership is the primary governance mechanism for the US port system, private sector involvement is signiﬁcant. Many US ports are non-operating landlords and all terminal activities in these ports are arranged through management leases or other contractual arrangements. For example, while the Port of Long Beach is a municipal port, as illustrated in Table 25.4, and takes responsibility for the management activities of the port on behalf of its municipal masters, its offering on container services is clearly undertaken by private companies. This pattern of private sector activity is common; global

container terminal operating companies (GTOs) dominate the management of container terminals. In terms of 2003 TEU throughput, for example, Drewry Shipping Consultants reported that GTOs held a market share of 61.7 percent of North American throughput, compared with a 56.9 percent share globally. Furthermore, they identiﬁed that the 2003 top 10 private sector container terminal operators in the US and Canada managed terminals accounting for 72.1 percent of terminal throughput. To summarize, while port ownership and governance in North America is ﬁrmly of the public ownership type, there is strong participation by the private sector in delivering port services. The US never had a port reform movement on the scale seen elsewhere, but when DP World sought to purchase the US terminal operating activities of P&O Ports, US congressmen argued that ports could not be allowed to fall into foreign hands, as if ownership and not operating activity was at stake. Ports in the United States ﬁrmly remain public entities, private ports playing a limited role in the economic activity of the nation.

25.3.4 European governance models: a complex picture A more complex port governance picture exists in Europe. The presence of different traditions, ranging from privatized ports in the UK to the landlord ports in Northern Europe and the state-owned,-governed andoperated ports in Southern and Eastern Europe, has resulted in distinctive port governance regions. Progress in separating the governance of the port from operations (services provision) was discussed over the period 2001–6 within the EU but was never

PORT GOVERNANCE

endorsed (Pallis and Verhoeven 2009). In most of the recent port governance reforms (Sweden, 2009; France, 2008; Greece, ongoing), this target has been evident. In Northern Europe, the core of the model commonly called “Hanseatic” or “landlord” has remained untouched. Reform of the corporate structures of port authorities has taken place, leading the PAs well beyond the landlord function. The most illustrative case is that of the biggest port in Europe, Rotterdam. In 2004, the Rotterdam Port Authority was formally detached from the Rotterdam’s Municipal Port Management to form a public corporation, with major responsibilities for commercial and ﬁnancial affairs, investments in new development projects, mid-term business planning and implementation, and autonomous setting of long-term objectives. The Rotterdam municipal government became its largest shareholder and the owner of its land. The purpose is to formalize substantial changes to the landlord function to enable adjustments to globalization, such as the need for further investment capital mobilization or the accommodation of increased trafﬁc via the coordination of different supply chain actors. Issues of land scarcity, the oligopoly in terminal operations, and negative externalities of port development projects (whose beneﬁts often extend far beyond the port-city perimeter), led to the need for a more active coordinating role by the previously “passive” landlord port (Verhoeven 2009). A second example is another of the 125 major ports, Göteborg. Its new corporate structure divides operations previously managed by the City of Göteborg between a port authority that acts as landlord (assuming responsibility for the infrastructure) and

501

three terminal companies run by private operators. The fact that the port authority remains an entity controlled by the City Council, but assumes similar responsibilities to those held by Rotterdam, highlights the continuing interest in new public management principles without the loss of ownership. The truly privatized ports of the UK did not remain as originally planned. In particular, the “ﬁnancialization” trend that emerged in the decade that preceded the 2008 economic crisis (Rodrigue, Notteboom and Pallis 2010) resulted in ownership transfer rather than model change. Over a period of three years (2003–6), the ownership of a number of UK ports moved into the hands of foreign ﬁnance and investment companies. PD Ports, the owner of the Tees and Hartlepool ports, was purchased by an Australian investment fund, Babcock & Brown Infrastructure, in 2005. A consortium of four partners (Americanbased Goldman Sachs; GIC, the Singapore Government investment company; Canadian pension fund Borealis; and the infrastructure arm of the UK’s Prudential) acquired Associated British Ports Holdings plc in August 2006. Simon Group, the owner of two UK ports, was acquired by Montauban SA (a ﬁnancial company based in Belgium), and the property company, Peel Holdings, bought Mersey Docks & Harbour Company in June 2005. Major governance changes also happened in Southern Europe. In the 1990s, Spain (1992), Italy (1994) and Greece (1999) abandoned the “Latin tradition” and devolved power to newly established, autonomous public entities. In all cases, an umbrella organization was created as a platform for collective action of port governors, with varying degrees of success. The

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MARY R. BROOKS AND ATHANASIOS A. PALLIS

Spanish organization, Puertos del Estados, remains active, but the Italian one plays a less important role in port planning than projected, while the Greek organization has been subject to three restructurings, each with limited success. In 2008, the French government transferred responsibility for terminal operations from the public to the private sector; the larger ports of France (Grands Ports Maritimes) now too subscribe to the landlord port governance model. Finally, the introduction of concessions in Greece in October 2009 marked the end of an era when the state-appointed and -controlled public port authorities owned and maintained the infrastructure and superstructure, and provided all port services.

25.3.5

Other governance models

The global economic crisis has made funds for port investment more difﬁcult to ﬁnd, and port trafﬁc itself has declined in doubledigit terms. This forces those rethinking their governance model to contemplate a more collaborative approach, as one option, or increasing the participation of users, as another. As an example of the latter, one of the more interesting models of governance, which has been debated widely in the airline industry and those interested in privatization, is the NavCanada model for the governance of air navigation services (ANS). (Under our deﬁnition, this is not a true privatization, but it illustrates a broader user participation model.) Sometimes touted as one of the best in the world, as it is more responsive to the interests of users, e.g. those who pay for its services, NavCanada was created primarily through the collaborative efforts of employees, unions, pilots,

airlines, government ofﬁcials, and other members of the aviation sector who shared concerns over the ability of Canada’s air navigation system to meet the challenges of the next decades. Service charges recover all costs but users do not pay more than their representatives agree they should pay; while this can mean that charges go up when trafﬁc is down (and therefore at what is possibly the worst time), the Board has a ﬁduciary responsibility for safety to meet but the users have a means of inﬂuencing the charging mechanism for services. To illustrate its user focus, NavCanada is governed by a ﬁfteen-member board of directors, structured as follows: ﬁve directors appointed by airlines, business and general aviation; three directors appointed by government; two directors appointed by the unions; four independent, unrelated directors chosen by the board; and the Chief Executive Ofﬁcer. It therefore represents a high degree of user participation on the board but only one management director, the CEO. What is perhaps more interesting is that it has a second governance structure, the Advisory Committee, which can identify and research pertinent issues at the request of the board or of its own initiative. What makes this model of interest to governance watchers is that it is a hybrid of capitalist and socialist thinking. The directors have all of the ﬁduciary responsibilities of a corporate board, but are user-dominant with labor participation. Here, the users who pay for ANS get to make the corporate decisions that affect them, albeit through appointed representatives. Today, a world-class governance model is one that is open and transparent, has key decision makers in the room, practices community consultation, is responsive and inclusive, and plans to deal with environ-

503

PORT GOVERNANCE

The world beyond

Stakeholders

Local community

Governance

Landside access and suppliers

Operations

Port

Figure 25.1 A broader view of governance.

mental concerns and social and economic sustainability in the future, all to the beneﬁt of the community. The key to achieving such world-class governance is the structures set in motion to conduct activities within these guidelines. A governance model for a port seeking to optimize economic development prospects indicates that a broader stakeholder engagement model is appropriate (see Figure 25.1) and may be achieved by thinking about those who need to be engaged, particularly where the groups overlap, as illustrated in Figure 25.2. This may lead to an even broader governance structure, where the port has more formal governance connectivity with regional infrastructure interests or a regional transportation authority (see Figure 25.3). Such an approach to port governance is often proposed when reform models are discussed; those interested in reform often present the multimodal model seen in Boston at Massport or at the Port of New York New Jersey (PNYNJ). Both of these entities are very much governmentcontrolled, and incorporate into the port governance structure much more than just

Figure 25.2 The multi-modal governance vision.

Port

Regional authority

Airport

Industrial parks

Figure 25.3 The local infrastructure or transportation governance structure.

port operations; PNYNJ, for example, includes many bridges and tunnels, three airports, and the site of the ill-fated World Trade Center towers. In these cases, the port is only one player among several and

504

MARY R. BROOKS AND ATHANASIOS A. PALLIS

may not have the undivided attention to its own activities that would be seen in a more port-focused authority structure. A second critical problem with such a broader governance approach is that it is so amorphous that it often has challenges with community engagement and becomes more political. So while these types of models may appeal superﬁcially, in that they include many, if not all, regional transport assets, their decision-making processes often become entirely political and the model degrades to a nineteenth-century approach to governance.

25.3.6 Injecting private sector management into public governance: the use of concessions Reform of port governance via concessions is a trend that has been accelerated by the advent of containerization and the development of container terminals (Olivier, Parola, Slack and Wang 2007). In most cases, concessions are granted for speciﬁc terminals. Public port authorities (or occasionally other public agencies) generally develop a port master plan (detailing the layout of port development, such as breakwaters and terminal areas) and invest in general port infrastructure (port land, access roads and rail tracks). These port authorities grant private terminal-operating companies concessions to operate a terminal, and receive a concession fee. The responsibility for investment differs between concessions: in some cases, the public PA invests in quays and terminal area, while in other cases the private terminal operator has to make these investments. In such cases, the government usually still determines the main terminal characteristics, such as size, location, and waterside and landside access. Consequently,

modern port authorities face a dilemma: “the delivery of local beneﬁts desired of the authorities by government may not match the objectives of those who win terminal concession rights” (Brooks and Cullinane 2007b: 637). It is worth considering that this dilemma has become more acute, as consolidation of terminal operations has continued unabated since those words were written. Financial infrastructure funds continued, until the global ﬁnancial crisis, to acquire terminal operations not already purchased by the largest of the global terminal-operating companies; such ﬁnancial focus on the business of terminal operations set the interests of governments and of private sector managers of terminaloperating companies in divergent directions. Ownership by global ﬁnancial interests divorced terminal operations from the local/regional community and focused their interests on delivering returns (Rodrigue, Notteboom and Pallis 2010) at a time when governments were seeking even greater social returns. It is clear that the future research frontier is the topic of concessions – how they are structured and the governance mechanisms that their public sector overseers put in place to ensure that local interests or national interests, as may be appropriate, are met. Existing port governance practices of terminal concessioning have boosted rather than limited the consolidation and dominance of a few private interests in terminal operations (Pallis, Notteboom and de Langen 2008). Our conclusion – that most ports in the world are of a mixed nature, neither fully public nor fully private – raises the need to discuss how government-owned ports can improve participation of the private sector in port planning and delivery of services. Even those port authorities where there is

PORT GOVERNANCE

strong government control have moved towards a mixed approach, recognizing that local economic development agendas may require a publicly controlled model to deliver the economic development beneﬁts sought from the public good part of a port but that a private sector management model may deliver the best from concession strategies. The extent of concessioning differs according to the type of trafﬁc; it is most common for the management of container terminals. This is perhaps a result of the fact that bulk terminals often serve captive users, and competition policy concerns are in play. Looking in more detail in European ports, we ﬁnd that empirical data from 125 container ports in 33 European countries (i.e., all those reported in Containerisation International 2009) demonstrate that in 18 different countries operation is undertaken by terminal-operating companies (TOCs) only. In most of the ports where PAs are involved in container terminal operations (a total of 39 terminals in 29 ports), they do that without any TOC being present at the port. It is only occasionally (ﬁve cases) that the port has mixed provision and the PAs operate a port terminal in competition with a TOC (see Table 25.5). In the remaining 91 ports, private TOCs operate 157 terminals, the authorities restricting themselves to the role of the overseer that initiates and/or monitors the operator’s activities. The picture in North America is rather different (Table 25.6). In Canada, PAs have embraced the landlord role, whereas in the 38 US ports for which data are available, the PAs have a remarkably active role: they provide operations in 20 ports, and in ﬁve more they operate in competition with at least one TOC; in the remaining 13 ports only TOCs are involved in terminal operations.

505

Port authorities themselves, in many cases, no longer feel bound to engage only in developmental activities within their port boundaries but are engaging in a variety of coordination or cooperation activities within their geographic regions, or even beyond (Brooks, McCalla, Pallis and Vanderlugt 2009). Investment and ﬁnancing issues impose limits on the best options available to ports in any community; with cost recovery, port users almost always want to be involved in port development. This raises the questions of whether ports are governed by boards of directors in an arm’s-length manner, and whether user participation in such boards occurs.

25.3.7 Board composition and accountability In other industries, there is considerable debate about the relationship between board of director composition and organizational success in reaching reform objectives, but that debate has not really occurred within the port reform movement. In fact, it has only been previously noted, albeit obliquely, by Brooks (2005: 116–17): It can only be concluded that governments, by the way they establish boards, set them up for success or failure. If a board appointment is seen as a plum or reward, as happens in cases of political patronage (government-appointed boards), effectiveness will be compromised. The board member who is more interested in fees than outcomes, in ego than results, and in political gain than community service or improving shareholder value, can derail a community-driven board quite effectively. There is no place for political patronage if boards are to be effective.

Table 25.5

Entities operating container terminals in non-UK European seaports

Country

Ports

Ports where the PA operates the terminal(s)

Where only TOC operates terminal

Mixed provision (both the PA and one or more TOCs operate terminal(s))

Number of container terminals

Number of terminals by TOC

Azores Belgium Bulgaria Canary Is. Croatia Cyprus Denmark Estonia Finland France Georgia Germany Greece Hungary Iceland Ireland Italy Latvia Lithuania Malta Montenegro Netherlands Norway Poland Portugal Romania Russia Slovakia Slovenia Spain Sweden Turkey Ukraine TOTAL

1 2 2 5 1 1 3 1 4 8 2 11 4 1 1 4 14 2 1 2 1 4 3 3 3 1 7 1 1 13 6 9 3 125

1 0 2 1 1 1 1 0 0 2 0 2 3 0 0 1 0 0 0 0 1 0 0 0 0 0 0 0 0 4 5 3 1 29

0 2 0 3 0 0 2 1 3 6 2 8 0 1 1 3 14 2 1 2 0 4 3 3 3 1 7 1 1 9 1 5 2 91

0 0 0 1 0 0 0 0 1 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 5

1 7 2 6 1 1 5 1 6 14 2 22 5 1 1 5 19 2 2 2 1 14 4 5 6 4 13 1 1 20 6 13 3 196

0 7 0 4 0 0 3 1 5 10 2 19 1 1 1 4 19 2 2 2 0 14 4 5 6 4 13 0 0 16 1 9 2 157

Source: Authors’ compilation from data included in Containerisation International Yearbook 2009, with changes that took place in 2009 added by the authors.

507

PORT GOVERNANCE

Table 25.6

Entities operating container terminals in North America

Country

Ports

Ports where the PA operates the terminal(s)

Where only TOC operates terminal

Mixed provision (both the PA and one or more TOCs operate terminal(s)

Number of container terminals

Number of terminals by TOC

Canada US Total

7 38 45

0 20 20

7 13 20

0 5 5

14 85 99

14 58 72

Source: Authors’ compilation from data included in Containerisation International Yearbook 2009, with changes that took place in 2009 added by the authors.

From the perspective of this chapter, it is important to identify if ports today, with their focus on a myriad of objectives, have been structured for success; do they have a preponderance of political appointees on the board of directors, or, at the other extreme, is management itself excessively present? Boards tend to be at their most effective if directors do not feel that they must present the interests of those who appoint them but are free to serve the best interests of the entity itself. The issues of ﬁduciary responsibility and accountability are at the core of board effectiveness, whether the board manages a port or some other entity. A review of the recent literature on board composition and corporate performance provides very little guidance on what port board structures would work best. One of the areas of focus of this literature is the issue of director independence. For example, in Australia, the ASX Corporate Governance Council’s March 2003 recommendations on principles of good corporate governance and best practice included the recommendation that the majority of the board should be independent directors,2 and Kang, Cheng and Gray (2007) have found this to be so in their study of leading Australian compa-

nies. A meta-analysis by Kiel and Nicholson (2003) found, however, a general lack of consistent evidence of any signiﬁcant relationship between board composition and corporate performance. Prevost, Rao and Hossain (2002) noted that most research on optimal governance structures, board composition and organizational performance is primarily US-based and generally inconclusive. Since then, there has been no shortage of research across a large number of countries, but we are no closer to deﬁnitive conclusions, by groups of countries or by industries, on the linkage between board composition and performance. Furthermore, there is the question of board size. Smaller boards are the norm in the Continental European model of governance, while larger boards are the AngloAmerican practice. Since board size became an issue in the 1990s, there has been a trend towards smaller boards in both of these governance types, along with a greater independence of directors (Chhaochharia and Grinstein 2007; Ooghe and Langhe 2002). More important, Kiel and Nicholson (2003) concluded that no single theory offers a complete explanation of the corporate governance–corporate performance relationship, but their ﬁndings suggested that a

508 Table 25.7 Region Americas Africa Asia Australia Europe Total

MARY R. BROOKS AND ATHANASIOS A. PALLIS

Board structure Data available for n ports

Has a board of directors

17 4 12 5 31 69

17 1 11 5 29 63

balance of independent and management directors is supported. This leads us to consider the question: what is the board structure we see in the largest PAs? How large are the boards and do we see independence of directors or greater presence of management directors? To start, the majority of ports we examined appear to have adopted the board model of governance and accountability. However, although 63 of 69 ports (Table 25.7) had “boards,” what these boards do is not entirely clear. They may be classic boards of directors, as found in commercial corporate governance, or they may be boards of advice, with no ﬁduciary responsibilities for the management and strategy of the port entity but whose purpose is to provide advice to the day-to-day port authority “managers” who guide and direct the operations. More telling is the absence of information on the board composition. One would expect a small number of management directors to be on commercial boards, as key ofﬁcers of the corporation attend meetings in either voting or ex ofﬁcio roles to ensure a connection between the creation of the mission and vision for the port and its execution. The presence of management directors on European boards (Table 25.8)

and not on North American boards is surprising, as this is a feature of North American-style corporate governance. Given that port website information has been extensively used, it may have something to do with the fact that many of the columns containing independents, management directors and political appointees do not add to the total number of directors when they should. It is not unexpected that local political appointments should feature so prominently in the US model (as that is its very nature). The small number of independent directors is discouraging: it is often argued that independents on boards are a key to success, as their presence encourages critical thinking and innovation by directors. Likewise, given that Continental European governance models favor smaller boards, the large number of directors in Spanish ports is also discouraging; why are so many required when the norm is closer to eight? Do the high numbers result in excessive debate and hamper consensus building? These questions cannot be answered without speculation. A governance model (1) identiﬁes the strategic objectives of the entity (for proﬁt, not for proﬁt, and so on), and (2) denotes who assumes the risks of the enterprise and the lines of accountability. Furthermore, most governance models identify the particular set of operating principles for the entity, and how transparent the entity is required to be to those with an interest in its activities. (Brooks 2005 detailed the many differences in corporate governance of ports and the accountability mechanisms of such boards.) While many of these principles may be detailed in regulations applicable to the ports, practice varies considerably from one country to the next. For example, in locales

Table 25.8 Board composition Region and port Directors Independent National governmentLocal/regional Management appointed government-appointed directors Europe Estonia_1 France_1 France_2 Germany_1 Germany_2 Germany_3 Italy_1 Netherlands_1 Romania_1 Russia_1 Spain_1 Spain_2 Spain_3 Spain_4 Sweden_1 UK_1 UK_2 UK_3 UK_4 UK_5 North America Canada_1 US_1 US_2 US_3 US_4 US_5 US_6 US_7 US_8 US_9 US_10 US_11 US_12 US_13 US_14 US_15 Asia China_1 China_2

8 6

13 7 5 10 7 25 26 26 26 22 8 13 11 13 6 1 7 7 9 5 7 7 5 9 8 9 12 15 7 7 7 9 9

5 2 5

4

4 2

7 9 4 5

7

3 3

6 3 3 9

4 2 2 1

6 7 7 12 1

7 3 10 1 7

1

2

1

3 2

3 7 7 8 7 5

5

3 3

9 12 15 2 5 6 3

(Continued)

510 Table 25.8

MARY R. BROOKS AND ATHANASIOS A. PALLIS

(Continued)

Region and port Directors Independent National governmentLocal/regional Management appointed government-appointed directors India_1 India_2 Malaysia_1 Malaysia_2 Sinapore_1 Sri Lanka_1 UAE_1 Australia Australia_1 Australia_2 Australia_3 Australia_4 Australia_5 Average

15 10 11 8 12 9 7 8 5 7 6 5 10.9

0

10

11

1 1

5

6

0

0

7 0

4.7

4.6

6.1

4.3

where ports are publicly owned but terminals are operated by concession, the port authority may be required to publish an annual report on the volume of trafﬁc handled, by facility, the basic terms of any concessions granted or its tendering practices, but its ﬁnancial accounts could be hidden from public scrutiny in the general revenue statements of the government. The level of transparency in public ports is set by the government of the day; it is neither subject to the rules about reporting that apply to publicly traded shareholding enterprises, nor always free from complaints about political patronage or process management. Conﬂict of interest guidelines may be strict or loose, and stakeholders may be less than satisﬁed with the decisions they see. As an additional layer, corporatized ports are usually required to be compliant with legislation applicable to companies operating in the country and with the by-laws or letters patent governing their establishment, and possibly even to consult regularly

with community stakeholders about capital plans, charging mechanisms, environmental practices, and so on. They may have the right to borrow money from ﬁnancial institutions or, as corporatized entities, be able to apply for a bond rating for the issuance of debt. Our research has indicated that, of 15 ports examined, 13 have the right to borrow funds from commercial ﬁnancial sources and eight have been granted a bond rating from a bond-rating agency. Over the past twenty years, there has been considerable interest, in countries where Anglo-American models of governance dominate, in the concept of wider stakeholder management, even if users are not consulted about charging mechanisms or rates. As a result, ports may choose to hold regular meetings with the community or its stakeholders, and report on performance metrics or their environmental practices. Again, our research has found that, of the ports we examined, most indicate that they do hold such meetings; this suggests

PORT GOVERNANCE

that stakeholder management has been quite widely adopted, in particular by ports in Europe, North America and Australia.

25.4

Summary

The widespread move towards devolution of ports observed in the1990s continues, but not in a uniform way. Our research documents the “myth of the perfect model.” Governance approaches have been more about national or regional approaches than continental or global ones. The privatization that is touted to have happened is, in many cases, “smoke and mirrors.” Ownership by government remains ﬁrmly entrenched in many countries, but there has been widespread adoption of concessions to bring greater private sector management into the provision of port services. Corporatization has continued to be a solidly acceptable governance option for governments to consider. More recently, investment and ﬁnancing issues have imposed limits on options available to government, and institutional traditions and political practices continue to contribute to the local/national/regional variance in port governance models observed. By focusing on the major international ports, however, this study revealed that some general trends exist, responding to the core elements of the dynamic economic environment. First, there is a common denominator in many cases, namely the involvement of private interests in terminal operations and the implementation of new public management principles that see the separation of regulatory oversight from operating activities by PAs. This is a step towards more effective and efﬁcient management which also enables the injection of

511

private capital into the sector. However, this is not observed in all port regions. Second, there is a trend for port authorities to go beyond their traditional functions. Third, policy makers’ efforts to streamline the governance models they impose recognize that the economic context has not had the same inﬂuence in all ports. Fourth, a “normalization” of the corporate structures of port governing bodies is taking place, the newly established corporatized port entities increasingly being required to comply with the legislation that applies to any company operating in the country, such as the regulations that apply to boards’ ﬁduciary responsibilities. Notably, all models, including the rare true privatization, have evolved as the wave of reform begun in the 1980s continues to play out. In the case of the privatized UK ports, ﬁnancial markets have driven the port industry into heavy consolidation, closer than ever to being able to impose monopolistic practices, and without a port policy in place to harness or redirect the outcome. As ports have evolved under the various approaches to governance implemented via port reform, governments have witnessed the difﬁculty ports face in addressing issues with their hinterlands, such as congestion and infrastructure investment beyond the traditional boundaries of the port. This has spurred, in some cases, interest in broader and more community-based governance models. It has not yet spurred a policy reversal that would return ports to public management. With the globalization of trade ﬂows, shipping lines and cargo customers have become more concerned about the performance of the entire logistics supply chain ( Joint Transport Research Centre 2008). This includes the performance of

512

MARY R. BROOKS AND ATHANASIOS A. PALLIS

ports, which can no longer be seen as isolated from their supply chain partners. Port governance must be structured to optimize port performance within a supply chain. The future also requires greater cooperation and community consultation. As those seeking to use waterfronts for community purposes or privately owned housing gain a louder voice, ports have come under pressure to justify their current uses and business models. With cost recovery, however, users want to be involved in port development or port adaptation. There continues to be little consensus on what governance models are most appropriate. The allocation of responsibilities for “public goods” and what ports should provide to all those who seek their services remain unclear, and a ripe area for future research. As well, we conclude that while there are numerous studies on board composition and performance, there is little guidance available from them. It seems to us that there is considerable scope for a research agenda looking at board structure and port performance as measured by more than just port throughput. These two areas for future research deserve the attention of the scholarly community.

Appendix: Key Deﬁnitions

between governments and their voters and taxpayers, between public/private agencies and their stakeholders, or between organizations and those who establish them to undertake activities on their behalf. In the case of ports, governments, or other relevant policy makers, usually impose governance structures with particular national or regional policy objectives in mind. As economic circumstances changed, so changes were made, albeit lagged, to port governance structures (Brooks and Pallis 2008). The scope of governance change is to adjust strategies and corporate goals in order to align with the contextual economic environment.

Privatization This governance change might go as far as privatization. True privatization is the full transfer of ownership of assets (including land and harbor bed) to a publicly traded or privately owned for-proﬁt entity. Privatization is not just a transfer of temporal management rights, however long-lived. The retained government role is to regulate the transferred entity. In the case of ports and port reform, the term “privatization” is commonly used, but seldom understood. This chapter conﬁrms that few countries have a truly privatized port governance system.

Governance Governance is the adoption and enforcement of rules governing conduct and property rights. It may be imposed by governments or adopted voluntarily by groups or associations. While governance principles are applicable to all relationships between businesses and their shareholders, they can also be applied to relationships

Commercialization Commercialization means that government withdraws from the operation of transportation infrastructure while retaining ownership of it. It may include transfer of the ownership to a local government entity. In the course of this chapter, we demonstrate that a few countries have

PORT GOVERNANCE

chosen to either commercialize or decentralize their port infrastructure; many, however, have moved towards more commercial approaches by adopting concessions to manage stevedoring operations for container terminals. Concessions are a form of commercialization.

513

in acquiring the data is much appreciated. The research assistance of Aimilia Papachristou, doctoral student at the Department of Shipping, Trade and Transport, University of the Aegean, in acquiring the data and press reports is much appreciated.

Decentralization Commercialization may be accompanied by the decentralization of oversight responsibility from the national to the local level, increasing local responsiveness and ﬂexibility. Decentralization is merely a reallocation of responsibility within the public sector and not a form of privatization.

Notes 1

2

Corporatization Corporatization is a particular form of commercialization that involves the creation of a separate legal entity – a corporate form, which takes on legal responsibility to provide the functions or activities mandated in its charter or by-laws. The distinguishing feature of corporatization is the creation of a legal entity with share capital. Corporatization was a key governance model imposed in a number of countries. In the scholarly literature, there is already considerable debate about whether corporatization, through either the issuance of share capital (as in some UK privatizations) or the creation of purpose-driven entities for the state (as in Australia; see Everett 2007), has been particularly successful.

Acknowledgments The research assistance of Stephen MacNeil, Dalhousie University MBA candidate 2010,

The World Bank originally posted the Port Reform Toolkit to its website well in advance of 2003 as a work in progress; while the ﬁrst edition was continuously being revised and so is undated, the site currently notes that it is in its second edition (2005). They adopt the ASX deﬁnition of independence of directors as “being independent of management and free of any business or other relationship that could materially interfere with – or could reasonably be perceived to materially interfere with – the exercise of their unfettered and independent judgement.”

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frameworks: generic solutions, implementation asymmetries. Environment and Planning A 42(9): 2147–67. Olivier, D. F., F. Parola, B. Slack and J. J. Wang (2007) The time scale of internationalisation: the case of the container port industry. Maritime Economics and Logistics 9: 1–34. Ooghe, H. and T. de Langhe (2002) The AngloAmerican versus the continental European corporate governance model: empirical evidence of board composition in Belgium. European Business Review 14: 437–49. Osborne, D. and T. Gaebler (1992) Introduction: an American perestroika. In Reinventing Government: How the Entrepreneurial Spirit is Transforming the Public Sector, pp. 1–24. Reading, MA: Addison-Wesley. Pallis, A. A., T. E. Notteboom and P. W. de Langen (2008) Concession agreements and market entry in the container terminal industry. Maritime Economics and Logistics 10: 209–28. Pallis, A. A. and T. Syriopoulos (2007) Port governance models: ﬁnancial evaluation of Greek port restructuring. Transport Policy 14(3): 232–46. Pallis, A. A. and P. Verhoeven (2009) Does the EU port policy strategy encompass “proximity”? In T. E. Notteboom, P. W. de Langen and C. B. Ducruet (eds.), Ports in Proximity: Essays on Competition and Coordination among Adjacent Seaports, pp. 99–112. Aldershot: Ashgate. Prevost, A. K., R. P. Rao and M. Hossain (2002) Board composition in New Zealand: an agency perspective. Journal of Business Finance and Accounting 29: 731–60. Rodrigue, J.-P., T. E. Notteboom and A. A. Pallis (2010) The ﬁnancialization of the terminal and port industry: rediscovering risk. Paper presented at the annual conference of the International Association of Maritime Economists (IAME), Lisbon, July 7–9, 2010. Saundry, R. and P. Turnbull (1997) Private proﬁt, public loss: the ﬁnancial and economic performance of UK ports. Maritime Policy and Management 24: 319–34.

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Sherman, R. B. (2002) Seaport governance in the United States and Canada. American Association of Port Authorities. www.aapaports.org/ﬁles/PDFs/governance%5Fuscan. pdf (accessed February 10, 2010). Thomas, B. J. (1994) The privatization of United Kingdom seaports. Maritime Policy and Management 21: 135–48. US Department of Transportation Maritime Administration (2008) FY 2006 Public Port Finance Survey, December. www.marad. dot.gov/documents/REVISED_1-13-09

___2006_Port_Finance_Survey_(ﬁnal)_-_ PRINT_ON_LEGAL_PAPER.pdf (accessed February 10, 2010). Verhoeven, P. (2009) A review of port authority functions: towards a renaissance? Paper presented at the annual conference of the International Association of Maritime Economists (IAME), Copenhagen, June 24–6, 2009. World Bank ([2005]) World Bank Port Reform Toolkit, http://go.worldbank.org/ MYGIJOHTE0 (accessed June 3, 2011).

26

Port Labor Peter Turnbull

26.1

Introduction

Who works on the waterfront in the twentyﬁrst century? How and why has the employment of port labor changed over the past century or more? What are the implications of these changes for the efﬁciency of port operations and the competitive performance of different ports? Today in the port of Valencia (Spain), more than one in ten dockworkers are women. As the director of the Estiba, the port labor pool, observed, the focus of the job has changed “from the sack to the machine” and women can drive equipment just as well as men (Turnbull, Fairbrother, Heery et al., 2009). When three thousand longshore workers were recently hired at the West Coast ports of Los Angeles–Long Beach, they mirrored the gender and ethnic composition of the local population. Instead of “sons following fathers,” workers were selected through a lottery to avoid any claims of nepotism or discrimination. In other ports, in contrast, there no longer appears to be any labor at all. At the

Altenwerder Container Terminal in Hamburg, for example, automated guided vehicles glide across the terminal moving boxes from the gantry crane to the stack with not a dockworker in sight, unless the eye is cast high towards the cabin of shipto-shore gantry cranes that reach out across the decks of massive 12,000 TEU (twentyfoot equivalent unit) container vessels. At the Pasir Panjang terminal in Singapore, the cabins of the gantry cranes are equipped with air conditioning, a mini-fridge, microwave and toilet. The drivers even eat their lunch in the cabin during a continuous eight-hour shift. Their only communication with other workers is via a radio or the computer screen that ﬂashes instructions throughout the shift. The modern-day port is a far cry from the days when dock work was a labor-intensive and almost exclusively male occupation, where unions often controlled entry to the industry and ports teemed with workers in cramped and seemingly chaotic conditions, both on ship and on shore. Typical dock labor, wrote Charles Booth (1889: 16), was

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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“work that any mortal possessed of will and sinew can undertake,” often attracting the “dispossessed” from other industries. As Sir James Sexton (1936: 226) noted in his autobiography, many of the world’s great cityports resembled a “Saragossa Sea of all the ﬂotsam and jetsam of industry, so congested with debris that when work was slack, the genuine docker’s chance of getting work was small indeed.” The casual hiring system that deﬁned port employment from the mid-nineteenth century until well into the twentieth century carried with it “a whole train of evils which demoralize the worker and ruin his domestic life” (Hamilton Whyte 1934: 11). Where there was a constant inﬂux of excess labor, ports became a breeding ground for corruption and crime, none more so than the port of New York where the ignominious “shape-up” system of hiring was exploited by gangsters and union bosses (Davis 2003; Kimeldorf 1988). As Daniel Bell (1965: 175) observed, Rimmed off from the rest of the city by a steel-ribbed highway and a wall of bulkhead sheds is the New York waterfront, an atavistic world more redolent of the brawling moneygrubbing of the nineteenth century than the smooth-mannered business transactions of the twentieth. Cross the shadow line and you are in a rough, racket-ridden frontier domain, ruled by the bull-like ﬁgure of the “shaping boss.” Here brawn and muscle, sustained where necessary by baling hook and knife, enforce discipline among a motley group of Italian immigrant, Slavic, and Negro workers and a restless and grumbling group of Irish. Here one ﬁnds kickbacks, loan-sharking, petty extortion, theft and pilferage – and murder – a commonplace of longshore life.

With or without organized crime, working conditions on the waterfront were “notori-

ous in all countries” ( Jensen 1964: xi) and “it seemed almost incredible that the ‘degraded dockers,’ recruited as they were from the failures and off-scouring of other industries, would ever be capable of united action” (Lascelles and Bullock 1924: 65). But capable they were, and still are. In fact, it was precisely the intense competition for work, and the uncertainty of their working lives, that fostered strong bonds of solidarity between dockworkers, especially within work gangs. These bonds were bolstered by communal, kinship, ethnic and other sources of allegiance. Herein lay both the cause and the capacity for strike action on the waterfront: “The common adage ‘one out, all out’ was no ideological invention; it was a product of necessity if the men were to hold any standards or preserve even the meagerest conditions of work. That they seized and exploited opportunities whenever they arose, or forced a hard bargain whenever they found a vulnerable employer, is understandable” ( Jensen 1964: xi). Far more than in most industries, union organization and industrial conﬂict have shaped the contours of waterfront labor markets, as well as the organization and efﬁciency of work. If casual employment deﬁned port work as recently as the mid-twentieth century, containerization transformed it thereafter. The simple metal container box “made shipping cheap, and by doing so changed the shape of the world economy . . . almost everyone save the dockworkers’ unions thought that putting freight into containers was a brilliant concept” (Levinson 2006: 2, 274). Just as ports around the world realized the necessity to restructure and regulate the dockland labor market to minimize the demoralizing impact of casual labor, by the late 1960s they increasingly recognized

PORT LABOR

that containerization implied new forms of work organization, very different skills, and a massive reduction in labor requirements (Betcherman and Rebne 1987; Couper 1986; Evans 1969; Ross 1970). For dockworkers, the prospect of occasional underemployment was replaced by the far more pernicious threat of permanent unemployment, which led to heightened tensions between management and labor and prolonged industrial disputes in many countries (Turnbull and Sapsford 2001). In the USA, on both the Atlantic and Paciﬁc coasts, the outcome was some of “the most unusual, and most controversial, labor arrangements in the history of American business” (Levinson 2006: 124). But for all its revolutionary potential, containerization did not negate all the labor agreements of the past, nor would dockworkers allow it to do so. History has a tendency to “cast its shadow forward” on the waterfront (AldingtonJones 1974: 8) and the “occupational inheritance” passed from father to son gave dockworkers an historical perspective that went back two generations or more (Dash 1969; Hill 1976). Fear of the future and resistance to change are commonplace in the world’s ports – “Dockers, it has often been said, dislike change, even for the better” (Devlin 1965: 106) – creating a rich texture of old and new. Women might work in the ports of Valencia and Long Beach, but they are engaged through a “labor pool” or “hiring hall” that owes its conception to the evils of casual employment and the birth of militant trade unionism on the waterfront. If the latter part of the twentieth century was dominated by containerization, the contemporary era is marked by the commercialization of port activities, creating new challenges for port labor. In particular,

519

cargo handling and the employment of port labor are increasingly concentrated in the hands of just a handful of global terminal operators (GTOs) such as PSA International, Hutchison Port Holdings, APM Terminals, DP World and Eurogate. In Europe, the six leading operators handled nearly 70 percent of total European throughput in 2002, compared to 53 percent in 1998 (ESPO & ITMMA 2004). As a result, conﬂict between capital and labor is no longer conﬁned to the port or even the nation-state, but now extends to the global economy. In some situations, such as the 1998 “waterfront war” in Australia or the 2002 lock-out on the West Coast of the United States, industrial action by dockworkers has taken the form of international solidarity action (e.g. blacking vessels diverted from strike-bound ports). More recently, during 2001–3 and 2004–6, port workers in Europe organized coordinated campaigns of industrial and political action to defeat two attempts by the European Commission, strongly backed by international shipping lines and shippers, to open up the market to greater competition through a proposed directive that stipulated a minimum of two service providers for each category of cargo-handling and other port services such as pilotage, stowage, mooring and passenger services (Turnbull 2006b, 2007, 2010; Van Hooydonk 2005). A key proposal in the “ports package” was to liberalize the dockland labor market through provisions for “self-handling,” deﬁned as “a situation in which a port user provides for itself one or more categories of port services” (CEC 2001: 28), which implied “the right to employ personnel of his own choice to carry out the service” (ibid.: 29, emphasis added). This would allow shipping lines, for example, to employ seafarers on cargo-handling activities while the ship

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is in port (e.g. to (un)lash containers on deep-sea services or (un)lash roll-on/rolloff vehicles on short-sea services) or allow shipping lines and terminal operators to hire non-recognized dockworkers from employment agencies or other sources of labor supply. Once again, collective action by port workers has diverted the course of industrial reorganization. To fully explain the transformation of port work and the employment of port labor during each of these historical and spatial (r)evolutions – casualism, containerization and commercialization – demands attention to social, political and cultural factors (e.g. ethnicity and race), as well as the battlegrounds where the regulation of employment was contested, such as the workplace, the organizations of employers and trade unions, the communities in which dockers worked and lived, and the agencies of the state (Davies, Davis, de Vries et al. 2000; Turnbull 2001). While these factors are certainly not overlooked in this chapter, the principal focus is on the socioeconomics of port labor and the regulation of the dockland labor market, which proved to be “the most contested terrain in the ports all over the world. It became the main theatre for employers’ and governmental social policy and a test case for the quality of corporate ways to solve industrial conﬂicts” (Weinhauer 2000: 602). It is no coincidence that ports with the most effective forms of labor market regulation are also those with the lowest strike incidence and the highest productivity rates (Turnbull and Sapsford 2001). In what follows, we consider how conﬂict on the waterfront has shaped the historical development of the industry. The chapter is organized in three parts in order to identify the ways in which commercialization overlays the employment arrange-

ments and agreements negotiated during the process of containerization, and how technological developments in their turn transformed the casual system of employment. While each of the three transformations of port labor overlap and interact, they are considered separately and sequentially for ease of exposition.

26.2

Casualism

On the Melbourne waterfront in the 1930s, men assembled in the “Compound” – a huge galvanized-iron shed with a concrete ﬂoor – waiting for work. The Compound was divided into four parts – one for members of the Waterside Workers’ Federation (WWF), one for the “Jacks,”1 one for “Second Preference” men, and one for the “Blanks.” Anyone could register for a Blank License to work at the Waterside Workers’ Labour Bureau (the Compound). Jobs were allocated ﬁrst to the Federation men and the Jacks, in a ratio of 60:40, before any work was offered to Seconds and ﬁnally the Blanks. John Morrison, who worked on the Melbourne docks in the late 1930s and 1940s, likened hiring in the Compound to “feeding-time in a zoo as the keeper goes from one cage to another with his truckload of meat” (Morrison 1984: 9). On his ﬁrst day in the Compound, standing with the Blanks, all desperate for work as a solitary foreman approached with only a handful of jobs, Morrison recalled his [d]ark Italian eyes, smiling patiently at your anxiety, pityingly. You feel he wishes he had more to offer. He seems embarassed . . . You’ve got your Licence out, but you just can’t hold it up. You just can’t. Not that. And not because it would look so new among all

PORT LABOR

these battle scarred veterans. There is something else. A point beyond which human dignity refuses to be driven. A sickening of the heart. A shame that makes you want to run away and hide yourself. You put your hands in your pockets. You keep your head down. And not even the thought of an anxious woman’s face will make you look that man in the eyes. (Morrison 1984: 10–11)2

Dockworkers from around the world have similar stories to tell, as the contributions to Davies, Davis, de Vries et al. (2000) from ports in Canada, China, Denmark, Finland, France, Germany, India, Israel, Kenya, the Netherlands, New Zealand, Tanzania, the UK and the USA serve to testify. The one fact that dominated employment on the waterfront around the world at the beginning of the twentieth century was the unpredictability of work. This was perhaps inevitable, given the marked ﬂuctuations in shipping attributable to the business cycle, seasonal trades, and the daily ebb and ﬂow of trafﬁc that was regularly disrupted by “wind and wave.” Some labor might be hired for the duration of the vessel’s stay in port, others would be hired on a daily or even an hourly basis as the workload dictated. Some workers had specialist skills that ensured more regular work, others might be friends with the foreman or hiring boss, although favoritism usually “gave a man an edge over his equals but not over his superiors” (Hill 1976: 23). The work itself was “rarely anything but strenuous, always dirty, often unhealthy, and sometimes decidedly dangerous” (Morrison 1984: viii). Despite all this, basic amenities were rarely provided.3 In his study of the Economics of Casual Labor, Morewedge (1970) notes that port

521

transport is the only industry that embraces, at one and the same time, the three main elements that together characterize casual employment: (1) the continuity of irregular demand as vessels come and go, (2) the attachment of both employer and worker to the market, because work is always possible, if not always likely, and (3) the frequency of short-term engagements. This led to chronic unemployment amongst the group of “casuals by birth” (who typically displayed “an unconquerable distaste or incapacity for regular work”) and underemployment amongst the “casuals by necessity” (who usually sought more regular work with a particular foreman or ﬁrm) and the “casuals by inclination” (whose skills and/or membership of a highly productive gang often enabled them to “play the market” and boost their wages through a process of “spot contracting”) (ibid.: 17). As Morewedge (1970) and many other observers before him have noted, decasualization in the strict sense of the word was seen to be impossible: “If ships are to be ‘turned’ without delay, as they arrive, employment must ﬂuctuate, and there must be a margin of labour available to meet all requirements . . . The problem then is not how to abolish casual labour, but how to remedy the evils of underemployment” (Lascelles and Bullock 1924: 120). Left unchecked, excess labor supply will become chronic, which may in turn “produce labor unrest and force public control of the free market system” (Morewedge 1970: 75; Ross 1970). Such controls focused on the many different manifestations of insecurity on the waterfront, namely: •

labor market insecurity caused by surplus labor;

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•

employment insecurity arising from the employer’s ability to dismiss/lay off workers with impunity or at least with no great cost to the company; • job insecurity where an employer can shift employees from one job or task to another at will, or where the content of the job can be changed with ease; • work insecurity or “working at risk” in an unregulated environment that is polluted, unhealthy or dangerous; • income insecurity where earnings are unstable or when transfer or contingency pay is not guaranteed (Standing 1986). Measures to limit total labor supply are “the beginning and sine qua non of all controls of dock industry labor markets” ( Jensen 1964: 294), thereby mitigating labor market insecurity. These might take the form of work being restricted to union members or the instigation of a state registration scheme to identify bona ﬁde dockworkers. Employment and job insecurity might be countered through statutory employment rights, either nationally based or industry-speciﬁc, and a union-controlled hiring hall or staterun employment center, combined with relevant provisions in collective labor agreements. Statutory health and safety legislation might also address work insecurity, and it was not uncommon for collective agreements to place restrictions on “onerous workloads” or unsafe working practices. Finally, a system of “work or maintenance” would address the issue of income insecurity by guaranteeing the dockworker either gainful employment or ﬁnancial compensation when he was available for work but no job was on offer. This might take the form of “attendance payments” and/or a minimum weekly wage if any earnings

(plus attendance pay) fell below an agreed level of subsistence. Table 26.1 provides a summary of different controls on the free market system, typically referred to as “dock labor schemes,” developed to ameliorate the deleterious effects of casual employment. Different systems for controlling labor supply are reported in the ﬁrst column, ranging from union hiring halls (e.g. US West Coast) to worker cooperatives (e.g. Italy) and statemandated registration schemes (e.g. Belgium). In the early 1950s, the longshore labor force in New York was over 40,000, far in excess of daily employment, which seldom reached 20,000 (the average labor requirement was around 15,000 longshoremen). The Waterfront Industry Commission, established in 1953, reduced the total labor force by ﬁrst setting minimum attendance/ work periods (many “occasional” longshoremen worked less than 700 hours per annum) and then progressively tightening the qualifying period. After twenty-one successive revisions to the qualifying period, the total workforce had been reduced to less than 24,000 by 1965. The second column summarizes labor market regulations designed to minimize both structural and frictional unemployment. In a geographically dispersed port, such as London, it is possible, indeed probable, that some employers will have a shortage of labor while others, elsewhere in the port, have a surplus. Even where there are sufﬁcient general laborers available, certain skills may be in short supply. Measures to improve the availability and mobility of labor include centralized hiring from a single or limited number of designated hiring centers, as well as the (collective) provision of training to extend the skills of the workforce. By the early 1960s there were

“Dock work,” as legally deﬁned, is restricted to “dock workers” in the “port zone,” under the joint control of employers and the unions.

All dockers are registered and permanently employed. Legislation provides a national framework for the industry, with extensive joint regulatory bodies at the port level. Dockers have no special legal or other status, but are covered by terms and conditions similar to other port workers’. Joint supervisory boards at the local level.

“Dock work” was legally deﬁned and restricted to registered dockers. De jure control of labor supply by the BCMO (state labor ofﬁce), de facto control by the union. Dock work is restricted to workers on the registers of the port companies. These companies are associations of workers (cooperatives), which are set up, merged or liquidated by the port authority.

Belgium

Netherlandsa

Franceb

Italyc

Germany

Control of labor supply

Country

Dockers are employed either directly by port operators or by the labor pool (SHB), which is used to accommodate ﬂuctuations in demand. Extensive training to ensure ﬂexibility. Most dockers (84%) are permanently employed, while the rest are employed by the port labor pool (GHB) on similar pay and conditions. The pool is ﬁnanced by the employers, with the allocation of men on a numerical (rota) basis. Extensive training to ensure ﬂexibility. All dockers were casuals with preference given to “professionnel” over “occasionnel.” Labor was allocated through the BCMO in each port. Some ports used a rota, others a “free call” system of hiring. Labor is provided by the worker cooperatives, which either provide labor to port undertakings or carry out un/loading operations directly.

All dockers are “casuals,” but many work on a regular basis for the same employer. Extensive training to ensure ﬂexibility.

Availability and mobility of labor

Table 26.1 Dock labor schemes in Europe, North America and Australasia

(Continued)

Professional dockers were guaranteed 300 half-day shifts (4 hours) per annum, ﬁnanced by a levy on the employers’ wage bill. Dockers receive a daily guarantee of up to 80% of their pay, which is ﬁnanced via a levy added to port charges.

Guaranteed monthly income, based on guaranteed payment for the ﬁrst shift of any day, ﬁnanced by employers and port users.

Not less than 65% of basic salary (usually 70–80%), paid from state beneﬁts (75%) and employer contributions (25%) ﬁnanced via a levy on gross wages. Full pay at all times, ﬁnanced by state beneﬁts (55%) and employer contributions (45%).

Maintenance/guaranteed income

USA – West Coast

Britaine

Only union (ILWU) members can perform dock work. Class A (fully registered) men are given preference over Class B (registered casuals).

Dockers are registered with the Port Workers’ Organization (PWO), an autonomous state agency working under the Ministry of Labor. Dock work is restricted to port workers who hold a “carteira professional” and are registered with either the port work coordinating center, a port-based joint management organization, or the port authority. The NDLS provided a legal deﬁnition of dock work and dockers (and employers) were registered with the NDLB. The National and Local Boards were jointly controlled by the employers and the unions.

Spaind

Portugal

Control of labor supply

Country

Table 26.1 (Continued)

Labor is allocated through the union hiring hall on the basis of “low-man-out” hiring (the man with the lowest accumulated number of hours has ﬁrst choice of work), except in the ports of San Francisco and Los Angeles where “steady” men are employed by most operators.

Before 1967, dockers were casuals. Most were allocated by the Port Labour Ofﬁce, but London retained a “free” call. After 1967 all registered dockers were permanently employed by operating companies.

Private companies can employ dockers on either a permanent or a casual basis. Dockers are allocated on a rota basis by the PWO. Dockers are employed either directly by port companies or by a labor pool (the size of which is determined by the Minister).

Availability and mobility of labor

Attendance payments and a guaranteed weekly wage (set nationally) applied until 1980 (replaced by port or company guarantees). Payments were ﬁnanced by a levy on the employers’ wage bill. Pay Guarantee Plan (under the 1960 Mechanization and Modernization Agreement) provided 35 hours pay per week, ﬁnanced via an assessment on hours (paid by the operational employers) and tonnage (paid by the shipping companies).

Pool workers have a guaranteed salary of 75% of the basic monthly salary, ﬁnanced by the employers and, in the case of any shortfall of funds, the state.

Casual dockers receive a guaranteed wage.

Maintenance/guaranteed income

Dock work is restricted to members of the Waterside Workers’ Federation (WWF) (a pre-entry closed shop). Employment is jointly regulated by the union and the employers. Dock work was deﬁned by statute and was under the control of the Waterfront Industry Commission (WIC). The size of the register was determined by joint agreement between employers and the union.

Australiaf

Labor was allocated by the WIC on a casual basis, with “low-man-out” hiring to equalize hours. Dockers on container terminals could be allocated for up to 5 months.

All dockers are permanent employees of the companies, with provisions for intercompany transfers in the event of surpluses/shortages.

Most dockers are employed as “list” (regular) workers with a particular company. The rest are allocated from a hiring hall, which is regulated by the Waterfront Commission. Allocation is based on seniority.

Availability and mobility of labor

Idle-time payments were paid from a National Administration Fund, ﬁnanced by a levy on the employers’ wage bill and a supplementary charge on container trafﬁc. Guaranteed weekly wage equal to 40 hours (time rate).

A Guaranteed Annual Income (GAI) scheme (introduced in 1964) provided up to 1,900 hours per annum guaranteed pay (at the straight time rate), ﬁnanced via a levy on cargo. Idle-time payments are ﬁnanced by a levy on all employers.

Maintenance/guaranteed income

b

In the wake of the global ﬁnancial crisis, SHB was declared bankrupt in January 2009. The 1947 Act which established the French dock labor scheme was abolished in 1992, allowing employers to enter direct contracted arrangements (permanent employment) with dockers. Some dockers retained their casual status. c Following a ruling in the European Court on competition and monopoly in Italian ports, dockers are increasingly employed by the operating companies, rather than by worker cooperatives. d The Spanish dock labor scheme was reformed in the mid-1980s (see section 26.3). e The NDLS was abolished in 1989 and these regulations no longer apply. Employers now use direct employment and casual labor. f This was the situation prior to the implementation of extensive reforms between 1989 and 1992. Wharﬁes are now covered by Enterprise Based Agreements. g These arrangements were terminated in 1989 in favor of direct employment by the operative companies.

a

New Zealandg

Dockers are registered with the Waterfront Commission, and only registered dockers can perform dock work.

Control of labor supply

USA – New York

Country

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seven training schools operating in UK ports, which had the desired effect of “bringing into the docks men with a general knowledge of the industry and some technical ability in safe and efﬁcient methods of cargo handling and the operation of mechanical equipment” (NDLB 1961: para. 44). These men were allocated to work from a limited number of designated “control centers” in each port. The ﬁnal column in Table 26.1 outlines provisions for maintenance or guaranteed payments. These payments were ﬁnanced through a variety of mechanisms (e.g. an additional charge on the cargo, a levy on the employer’s wage bill, or state unemployment beneﬁts) and differed markedly in terms of the level of payments to dockworkers. In Antwerp, for example, the indemnité de sécurité d’existence (livelihood indemnity) provided a generous supplement to unemployment beneﬁts, giving the typical dockworker around two-thirds of his salary when no work was available. In the UK, in contrast, the guaranteed weekly wage was typically less than 50 per cent of average earnings and for much of the postWorld War II period was below the level of state unemployment beneﬁts. In France, the guarantee was paid only to “professionnel” and not to “occasionnel” dockers, making it relatively inexpensive for employers and the state to maintain a reserve of extra men. The effectiveness of these different labor market regulations can be judged in terms of their impact on worker (in)security and the extent to which they meet the needs of operating employers, who must provide an efﬁcient and cost-effective service to port users. In addition, the state has a keen commercial interest in the peaceful and efﬁcient working of the nation’s ports, “perhaps more so than any other industry” (Devlin

1956: 48), because “dockers largely regulate the pulse of external trade on the steadiness of which the country’s health, in terms of competitive power and living standards, so much depends” (Knowles 1951: 266; see also Hudson 1981; Oram and Baker 1971; Phillips and Whiteside 1985). When the Port of New York stopped work for nineteen days in October–November 1951, it was without hyperbole that the State of New York (1952: ii) proclaimed that the dispute “not only endangered the welfare of this State, but also posed a threat to the economy of the whole free world.” Just three years earlier, a 95-day strike had paralyzed the US West Coast ports. Between 1934, when the union hiring hall was established (see Table 26.1), and 1948, there were more than twenty major port strikes on the West Coast, more than three hundred days of coast-wide strikes, around 1,300 local “job action” disputes, and approximately 250 arbitration awards. This period was “among the stormiest in US labor history” (Kossoris 1961: 1), but thereafter the West Coast acquired a reputation for responsibility and stability, in marked contrast to the US East and Gulf Coast ports where the “turbulence of labor relations . . . had no industrial counterpart” (Ross 1970: 397). Conﬂict on the American waterfront, and indeed in ports around the world, depended ultimately on the propriety of labor market regulation, most notably the operation of the different dock labor schemes summarized in Table 26.1 (Turnbull and Sapsford 2001). Take, for example, the statutory National Dock Labour Scheme (NDLS) 1947, which initially covered eighty-four British ports. Both employers and dockworkers were registered under the Scheme and only registered employers were allowed to hire

PORT LABOR

registered dockworkers to perform “dock work” (as deﬁned by the Scheme). The NDLS was administered by a National and twenty-two local Dock Labour Boards, with equal representation of employers and unions.4 The size of the registered labor force was reviewed every six months by the National and Local Boards in order to minimize any surplus/shortage of labor, hiring took place at designated “controls” managed by the relevant Local Dock Labour Board in each port, basic and increasingly more advanced training was provided by the Board, and dockers received attendance payments and a guaranteed weekly wage if their earnings (wages plus attendance pay) fell below an agreed minimum.5 To outside observers it appeared that the Scheme “confers upon dock workers remarkable beneﬁts. From being among the least secure of occupations dock work becomes among the most secure” (The Times, Editorial, June 21, 1947). Commenting on the employment conditions of dockworkers, The Economist (May 1950) proclaimed that “the curse of casual labour has been lifted from them.” In reality, however, the 1947 Scheme constituted only a measure of decasualization (Devlin 1965). It had certainly not eradicated insecurity on the waterfront. First and foremost, there was still a surplus of labor. Nationally, the surplus labor rate6 ﬂuctuated between 5 and 15 per cent from one year to the next, but aggregate ﬁgures concealed more than they revealed. In the Wash ports of Eastern England, for example, the (mean) average surplus labor rate was around 20 per cent during the ﬁrst six months of 1959, fell to just 2 percent in the third quarter, and then increased to 7 percent in the ﬁnal three months of the year. As the National Dock Labour Board (NDLB) noted, “it happened

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frequently that just when on a long term view it would appear that labour was redundant, the port experienced a busy period. Such a reversal of expectations is not unusual in the industry, and cannot usually be foretold with any certainty” (NDLB 1950: 19). Moreover, labor market insecurity was not equally felt by all. In 1947 around 14 per cent of all registered dockworkers were hired on a weekly basis by the same employer, a proportion that increased steadily to around 25 per cent by the mid1960s. All other dockers were hired on a daily basis for the “turn” (8 a.m.–12 noon and 1–5 p.m.) and had to report for eleven of the twelve “turns” each week (Monday to Saturday) in order to qualify for attendance pay and the guaranteed weekly wage. Employment insecurity for these dockworkers was heightened by the practice of allowing a “free call” at the control centers in each port, whereby foremen would hire their preferred workers before any allocation of the remaining jobs by ofﬁcials of the Dock Labour Board.7 The foreman’s “top six,” or “blue-eyed boys,” enjoyed more regular work than the “drifters” who were usually only selected to make up a gang when labor was short. In contrast, the “ﬂoaters” would seek out the foreman with the most attractive jobs on offer, conﬁdent that their physical strength, skills and membership of a regular gang would allow them an element of choice. Income (in)security varied accordingly, as did the insecurity of work. A study of Manchester dockers in the mid-1950s, for example, found that the foreman’s “top six” could earn double the wage of the “drifters,” who also endured much greater variation in their pay from one week to the next (Liverpool University 1954). In the mid-1960s, the earnings ratio of the “blue-eyed boys” compared to the “drifters”

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was four-to-one (£40 versus £10) in the port of London (Devlin 1965). Whereas the ﬂoaters would typically refuse dirty or dangerous jobs, or alternatively drive a hard (spot) bargain in the form of extra compensation for work insecurity, regular workers were usually prepared to accept occasional bad jobs in order to retain the favor of their foreman. The drifters usually had no choice if they were to secure any work at all. As the NDLS could not completely alleviate all the different forms of insecurity on the waterfront, dockworkers imposed their own controls on the job. One example was the “continuity rule,” which stipulated that any workers assigned to a particular job should work continuously until the cargo was un/loaded (rather than report to the Board’s control center for the next turn). Initially, this was a “protective practice” to combat job insecurity, but over time the continuity rule became increasingly “restrictive.” For example, the “job” was drawn ever tighter until transfers between hatches on the same ship were banned in the same work period. These restrictions on labor mobility were estimated to cost around 5–6 percent of the employers’ wage bill by the mid-1960s (Wilson 1972). Another form of (counter-)control exercised by dockers was the refusal to replace any man placed on a disciplinary charge by the employer. For example, if a dockworker refused to handle a dirty or dangerous cargo, or no agreement could be reached on a compensating payment (e.g. “dirt money” or a higher piece rate), then the employer might “dismiss” the worker (i.e. return the docker to the Board’s control) and request alternative labor to be allocated by the Local Dock Labour Board. Almost regardless of the original cause, if dockers were placed on a disciplinary charge by the Board then

all other men would refuse the job (see McKelvey 1953; NDLB 1950). By the early 1950s, around 15,000 registered dockworkers (18 percent of the total workforce) appeared annually before joint disciplinary committees (Devlin 1956) and it was not uncommon for “individual insubordination” to escalate into a collective (mass) dispute if the Board tried to insist on replacement labor (Turnbull and Sapsford 1992). Soon after the introduction of the NDLS 1947, dockworkers became Britain’s most “strike-prone” workers, prompting a succession of ofﬁcial government inquiries into both speciﬁc disputes and more general causes of dissension. The most important of these inquiries, chaired by Lord Devlin (1965), attributed conﬂict in the industry to the casual system of employment, or more precisely a lack of security and “irresponsibility” on the part of dockworkers.8 This explanation was consistent with earlier (e.g. Kerr and Siegel 1954) and contemporaneous (e.g. Miller 1969) accounts that attributed conﬂict on the waterfront to industry-speciﬁc (within country) but universal (across country) characteristics of port labor. Kerr and Siegel (1954), for example, classiﬁed longshoremen alongside miners, sailors and loggers, as one of the “isolated masses” of society, workers with an “independent spirit” who perform dangerous, dirty and unpleasant work that inclines them to be more vigorous and combative. Miller (1969: 304–5) identiﬁed seven “widely prevalent conditions of dock work” that “combine to produce a universal dockworker subculture”: • •

the casual nature of employment the exceptional arduousness, danger and variability of work

PORT LABOR

• • • • •

the absence of an occupationally stratiﬁed hierarchy and mobility outlets the lack of regular association with one employer continuous contact with foreign goods, seamen and ideas the necessity of living near the docks, and the belief shared by dockers that others in the society consider them a low status group.

But if these features were indeed universal, why was the port of London hit by more than two strikes per month between 1947 and 1955, and almost weekly strikes between 1956 and 1967 (Turnbull, Morris and Sapsford 1996), whereas Antwerp experienced a series of wildcat strikes between 1946 and 1950 but then only one more strike (in 1961) over the same period (Turnbull and Sapsford 2001)? Comparative international analysis reveals that casualism did not cause strikes, rather it created a context in which strike action was more likely. In practice, where the dock labor schemes summarized in Table 26.1 “challenged established (casual) work practices without compensating beneﬁts for longshoremen or where (outmoded) work rules were preserved or extended to the detriment of operational efﬁciency and the consequent vexation of employers, then conﬂict was more prevalent” (ibid.: 239, original emphasis). By the 1960s, operational efﬁciency was driving a new agenda of modernization in ports around the world, epitomized by the ground-breaking agreements (1960 and 1966) negotiated by the International Longshoremen and Warehousemen’s Union (ILWU) and the Paciﬁc Maritime Association (PMA) on the US West Coast.

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Few industries have ever developed as comprehensive a set of restrictive work rules as were enforced in West Coast longshoring by the 1950s (Burke 1972; Killingsworth 1962). The origin of union control was the hiring hall, which enabled the ILWU to “transform West Coast longshoring from a secondary job market (characterized by low wages, poor working conditions, little job security, and the absence of due process for settling worker grievances) into a primary market” (Finlay 1987: 54). In 1948, the Waterfront Employers’ Association (WEA) challenged union operation of the hiring hall, sparking a 95-day strike that led to the reorganization of the employers9 and the negotiation of an unprecedented two-and-a-half year labor contract. Under the agreement, employers ﬁnally ceded full control of the hiring halls to the ILWU, while in return the union (formally) ceded control of the work process to employers without hindrance (except in cases of health and safety concerns). While economic conditions were certainly driving change on the West Coast – trafﬁc and employment had declined signiﬁcantly in the immediate post-World War II period – the leadership of both the ILWU and the PMA played a crucial role in the 1948 and subsequent negotiations. Under the new rapprochement, Harry Bridges, President of the ILWU, persuaded his members to focus on those who would be left in the industry, rather than “those who are, you might say, dispensable under the new order of things,” which he accepted would make him “awfully unpopular” (quoted by Hartman 1969: 82). The employers, who at last “discovered personnel administration” (Kerr and Fisher 1949: 20), were persuaded by Paul St. Sure, President of the PMA 1952–65, to concede to union demands

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rather than try to “bull through” as long as any concessions did not affect basic managerial prerogatives (Finlay 1988; Killingsworth 1962; Ross 1970). The importance of the 1948 agreement was that it paved the way for the Mechanization and Modernization (M&M) Agreement, which facilitated the subsequent introduction of new technology. Attempts to eliminate non-contract-based work rules10 through “conformance and performance” programs in the early 1950s had failed, and employers faced growing competition and the specter of government intervention if the industry did not improve. The ILWU was well aware that these restrictive work rules increased costs and drove away trafﬁc. Having discussed the problem, the leadership determined that it should “give up its holding actions and guerilla warfare provided it could participate in the resulting gains to the industry” (Kossoris 1961: 3). Negotiations on the M&M Agreement began informally in 1957, based on the principle of “exchanging concessions” rather than demanding moral or similar rights (Hartman 1969: 194). The Agreement was eventually signed in October 1960, effective from 1961 and to run for a period of ﬁve years. The ILWU agreed to give up all work rules that required multiple handling or the employment of “unnecessary men.”11 In return, the employers agreed to contribute $5 million per annum for ﬁve-and-a-half years (1961–6) into a fund for retirement at 65 years (with an option for early retirement at 62 years) and a minimum wage (Pay Guarantee Plan) of 35 hours per week at the basic straight time rate.12 This investment by the employers represented less than 5 percent of the total labor cost per worker-hour (Fairley 1979). After being stagnant for twenty to

thirty years, productivity began to increase year on year and by 1965 was 40 percent higher than in 1960 (Burke 1972; Hartman 1969). In practice, however, the M&M Agreement (1960) was more about the modernization of work rules (Hartman 1969) and the labor market (Betcherman and Rebne 1987) than about mechanization, although the Agreement was certainly prophetic as it opened the way for a technological revolution on the West Coast (Fairley 1979), and arguably in ports around the world (Levinson 2006), in the form of containerization.

26.3

Containerization

Although mechanization signaled a shift from labor-intensive to capital-intensive operations on the waterfront, the human element was still the basic, and decisive, factor that determines the speed, quality and cost of cargo handling (Evans 1969). By the mid- to late 1960s it was widely recognized that “there was no way that casual employment could provide the adequate, responsible and skilled workforce necessary to move cargo through a modern port using advanced equipment” (Couper 1986: 63). Opinions differed on the skill content of container versus break-bulk operations, with many dockworkers complaining that “stowing containers is only marginally more imaginative than stacking bricks of equal size,” whereas the stowage of general cargo “takes the form of a conceptual frame within which the dockworker weaves a fabric of cargo” (Connolly 1972: 560; see also Mills 1980). To be sure, container work could be repetitive and at times appear “sterile,” but it must always be performed with speed, dexterity, precision and delicacy

PORT LABOR

under conditions not so uniform as they may at ﬁrst appear (Finlay 1988). “Like musicians playing to the beat of a metronome, longshoremen working modern technology improvise on and around the tempo of the hook” (Wellman 1995: 165). Familiarity with the work, and regular employment with the same company, enhances the worker’s skill, knowledge and other attributes necessary to do the job, such as the ability to improvise and adapt to changing circumstances. Ceteris paribus, dockworkers who are familiar with the equipment, vessels, terminal layout, and standard operating procedures of the company in question record much higher productivity (Dally 1981). Even during the casual era, many employers recognized the advantages of engaging some men on a more permanent (weekly) basis. In some ports, such as Rotterdam, permanent employment was “forced” on the employers as a result of a severe labor shortage – by 1952 the number of permanently employed men in Rotterdam exceeded the number of casuals, and by the mid-1960s over 80 percent were “regular” men (Nijhof 2000) – and this encouraged ﬁrms to raise the status and invest in the training of their ﬁxed (as opposed to variable) human capital.13 With the onset of containerization, the massive investments needed in new terminals and equipment turned the advantages of permanent employment into an imperative. As Evans (1969: 41) discovered, “One of the essential features of any attempt to meet the situation arising from the introduction of new methods of cargo handling is . . . the provision of full-time regular employment.” In the absence of employment or income guarantees, “[l]ittle progress can be made in securing the workers’ consent to new

531

methods, and therefore making the best use of them” (ibid.; see also Couper 1986). Under casual employment arrangements, dockers “saw themselves as servants of the industry rather than of this or that employer” (Connolly 1972: 547), which suited most employers, who were happy to draw on a pool of general laborers as demand dictated. With containerization and the specialization of skills and terminal operating procedures, employers wanted “company men” not “servants of the industry,” consummate cooperation rather than perfunctory consent. On the US West Coast, employers initially used the M&M Agreement (1960) to speed up work, rather than innovate via the introduction of new technology or major new investments (Fairley 1979; Hartman 1969), but as containerization took hold the key contract issues shifted from restrictive work rules to the employment of “steady men.” While preferential hiring by employers was permitted under some port labor arrangements, such as the New York “shapeup” or the daily “call” in London, West Coast longshoremen were allocated on the principle of “low-man-out hiring,” whereby the worker with the lowest number of accumulated hours worked would be hired ﬁrst (via the union hiring hall) and those with the highest number of hours were hired last (see Table 26.1). As a result, all longshoremen shared in the good times as well as the bad. However, crane drivers belonging to the Union of Independent Engineers, who were absorbed by the ILWU in 1956, were permanently employed, creating a precedent for direct employment by the operating companies.14 The possibility of steady employment was explicitly recognized in the M&M Agreement negotiated in 1966, which also ran for ﬁve years, under clause

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9.43. Under the new contract, steady men reported directly to the job, rather than the union hiring hall, and they were guaranteed a monthly minimum of 173 hours’ paid employment. As containerization advanced, and the number of steady men increased, conﬂict within the Union15 and between the ILWU and the PMA intensiﬁed, erupting into a nine-month coastwise strike in 1971–2, the longest maritime strike in US history. Job security and greatly diminished work opportunities were at the heart of the dispute – longshore hours worked were only 80 percent of those worked ﬁve years earlier – as was the employment of steady men.16 The key to resolving the dispute was a new Pay Guarantee Plan (PGP) that guaranteed 36 hours’ pay per week for A class (fully registered) longshoremen and 18 hours’ for B class men (registered casuals who were only hired when all A class men had been allocated to work). The steady man issue was set aside for resolution through the grievance and arbitration procedure and was formally settled in 1978 with a formula to equalize work for crane drivers – for every steady man the employer must also hire a crane driver from the hall, and these special equipment operators (9.43 men) must cycle in/ out of the hall (two months steady, one month on dispatch from the union hiring hall) (Wellman 1995).17 Even today, the employment of steady men still irks many West Coast longshoremen, and some ports still preclude the employment of 9.43 men (e.g. Seattle). Nonetheless, the compromise between, or combination of, steady employment and daily employment allowed employers to draw on the skills and expertise of workers familiar with the company’s core operations – the key points of interchange between

ship and shore, quay and gate – and the ﬂexibility provided by the hiring hall to meet a constantly ﬂuctuating workload. In this respect, at least, it provides the “best of both worlds” (i.e. the casual and container worlds of port labor). Moreover, the PGP minimizes shirking as all longshoremen must work 50 per cent of average working hours and be available for any ﬁve of seven days each week in order to qualify for the guarantee. If longshoremen refuse a job or stop work they are disqualiﬁed from the guarantee during the week in question. In combination, the introduction of steady men and the PGP ensured the availability and higher productivity of labor on the West Coast, while at the same time minimizing the costs of ﬁnancing the Guarantee by placing the onus on longshoremen to be available for and not to refuse work. In addition, with attractive pension and early retirement beneﬁts on offer, accumulated and continued from the very ﬁrst M&M agreement, low-man-out hiring and the PGP acted to “encourage” older workers to leave the industry, thus ensuring a broad equilibrium between labor supply and (rapidly declining) labor demand (through a process of voluntary wastage). The contrast with New York is particularly instructive in this instance, as the introduction of a Guaranteed Annual Income (GAI) scheme, combined with the allocation of labor based on inverse seniority, so that older workers rarely had to work but could still draw the GAI, served to encourage older men to stay in the industry rather than retire.18 As the Chairman of the New York Shipping Association complained in 1971, “We are suffering from an unconscionable abuse of the guaranteed annual income and we will not be able to halt the ﬂight of maritime business to other ports

PORT LABOR

unless the malady is checked” (New York Times, April 3, 1971). In contrast to the “integrative” (win–win) bargaining that underpinned the M&M and subsequent agreements on the US West Coast, “distributive” (win–lose) bargaining in New York focused on the price of “buying out” excess labor from work gangs. Whereas the PGP cost the West Coast employers around $6–8 million per annum, the GAI cost over $20 million (Waters 1993). By the mid-1970s, surplus labor costs in the port of London were around £8 million (equivalent to approximately $16 million at the time), “which had no doubt to be reﬂected in port charges” (Couper 1986: 76). Like New York, the port of London experienced signiﬁcant competition from other ports and was beset by more than its share of labor disputes (Turnbull, Morris and Sapsford 1996). There was in fact a ban on handling containers in the port of London from January 1968 to April 1970, although the dispute “was not due to opposition to technological change. Improvements were wanted but equally for all” ( Jensen 1971: 65). In September 1967, all registered dockworkers had been allocated to a registered employer on a permanent basis – employers chose men and vice versa, which in London matched almost two-thirds of the workforce to their preferred employer (ibid.). This followed the recommendations of Lord Devlin’s Committee of Inquiry, which did not suggest that “all the factors of dissension and inefﬁciency . . . will disappear with normal and regular employment. But it is thought that if conditions in the docks can be made similar to those in industry generally, a beginning can be made; and that the excessive trouble that is a feature of the industry could thus be removed” (Devlin 1965: 4). It soon became apparent, however,

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that the forecasts made by the Devlin Committee, “that labour force reform would secure industrial peace and revive the economic position of British ports”, were “over-optimistic” (Phillips and Whiteside 1985: 267). The Devlin Committee failed on at least two important counts. First, the Committee failed to understand the concerns and aspirations of registered dockworkers: “The desideratum . . . was not a workforce permanently employed, but a system of union controlled worksharing” (Phillips and Whiteside 1985: 65). There is a world of difference between employment/labor market security and being conferred the contractual status of a full-time worker. The latter does not guarantee the former. Consequently, Lord Devlin’s reforms did not bring industrial peace to the waterfront – in fact, they marked the start of the most intense period of industrial conﬂict ever witnessed in Britain’s ports (Turnbull and Sapsford 1991). Secondly, the Committee failed to provide a blueprint for the introduction of new cargo-handling technology (Turnbull, Woolfson and Kelly 1992), even though “[i]mminent containerisation was implicit in the timing of the inquiry” (Wilson 1972: 290, original emphasis). This made the Committee’s commitment to “no redundancy” (Devlin 1965: 90), reiterating an earlier pledge made by the National Association of Port Employers (NAPE), all the more remarkable (if not totally incomprehensible). At the time, studies of containerization indicated a potential reduction of 90 percent in the number of dockworkers handling general cargo (e.g. McKinsey & Co., 1967) but Lord Devlin (1965: 90) was convinced that a “no redundancy” pledge was “not an unreasonable or costly one for [employers] to give.”

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The ﬁrst redundancy scheme was introduced in London in 1968, and was soon followed by a national severance scheme. Equally galling for Britain’s dockworkers was the employers’ ever-increasing resort to the Temporarily Unattached Register (TUR) as a “reserve pool” or “backdoor” method to dismiss surplus labor. Originally intended as a “transit park” for dockworkers changing employer, the TUR soon became “a permanent pasture for men who were offered little prospect of getting back into full-time employment” (Wilson 1972: 125). By mid1972, almost one in twenty registered dockworkers had been placed on the TUR, which precipitated a national strike that was only settled by the employers making a commitment to “no compulsory redundancies.” Henceforth, “[i]n the event of any port employer’s business failing . . . the men who would otherwise have been relegated to the TUR should be re-allocated to other employers” (Aldington-Jones 1972: 7). If port labor in Britain was an inherently variable cost in the casual era, it was now a decidedly ﬁxed cost in the age of containerization. The inﬂexibility of personnel costs in a labor market with 100 percent permanent employment and a commitment to no compulsory redundancies led to a succession of company closures due to high (ﬁxed) labor costs. Rather like a line of upright dominos, if one topples over the others soon follow. If a port company went out of business, any dockworkers who did not want to accept (voluntary) severance would be re-allocated to other port employers; this compounded their surplus labor costs created by containerization and other modern methods of cargo handling, more companies went out of business, any remaining labor was reallocated, the costs of surviving ﬁrms

increased, and so on. Following decasualization in 1967 there were 346 employers in the port of London; by 1970 there were just over two hundred, fewer than one hundred by 1975, less than ﬁfty by the early 1980s, and just twenty-ﬁve in 1989 when the 1967 Dock Labour Scheme was ﬁnally abolished. Not surprisingly, company closures provoked a succession of strikes in London and other British ports, which in turn drove more shipping away to private ports such as Felixstowe that had always remained outside the remit of the NDLS. But the 1967 Scheme and subsequent industrial agreements had a more pernicious effect on port efﬁciency as shipping lines were now reluctant to invest in the port of London or engage in cargo handling as they too would be saddled with excess labor. In fact, all the major shipping lines withdrew from stevedoring in 1967, in marked contrast to developments on the US West Coast (Finlay 1988). Instead of shipping lines or specialist stevedoring companies investing in new technology and bringing their considerable expertise to bear, public port authorities in the UK assumed an ever-greater role in cargo handling. By the late 1970s they collectively employed almost half the registered dock labor force in the ports covered by the NDLS (Turnbull, Woolfson and Kelly 1992). In 1975, the Port of London Authority (PLA) became a major stevedore when it agreed to take over the business of Scruttons Maltby. The following year, the PLA agreed to become the “employer of last resort,” willing to take on the registered dock labor of any other employer in London who went out of business. This permitted the PLA to levy port charges over and above conservancy needs to meet the costs of surplus labor, but this merely compounded the cost disadvantage of London compared to ports

PORT LABOR

such as Felixstowe, where containerization was now proceeding apace. By January 1988, surplus labor costs amounted to more than 17 percent of the PLA’s revenue. As a senior PLA manager explained, “one either paid for surplus manpower or paid for new facilities. The former won hands down because the business had no choice under the law” (quoted by Barton and Turnbull 2002: 147). Whereas containerization ushered in a period of fully permanent employment in London and other British ports covered by the NDLS, in Le Havre and other French ports the Fédération Nationale des Ports et Docks CGT refused to accept any permanent employment. Although there was some scope for preferential hiring through the Bureau Central de la Main d’Oeuvre (BCMO) (see Table 26.1), the union sought to equalize work opportunities and French dockworkers continued to defend their “right” to work whenever, for whomever, and on whatever cargoes they chose. As one stevedoring company manager admitted, “we tried to develop a strong relationship with our dockers and hire the same men whenever we could. But the union was still the real master of the game” (quoted by Barton and Turnbull 2002: 148). As a result, employers were unable to maximize the productive potential of containerization, especially as crane drivers were employed by the public port authority. This created a “dual” labor force and inevitable problems for stevedoring companies in terms of the coordination and discipline of labor.19 As in London and other British ports, shipping lines were reluctant to invest in Le Havre and other French ports. While trafﬁc levels stagnated in the ports of London and Le Havre in the 1970s and well into the 1980s, both total tonnage and

535

especially containerized trafﬁc grew exponentially in the port of Antwerp (Barton and Turnbull 2002). As in Le Havre and London pre-1967, dockworkers in Antwerp were predominantly (and de jure) casuals. By 1970, however, around one in six were (de facto) permanently employed by the major stevedoring companies. It is precisely because private operators have been able to employ specialist equipment operators on a permanent basis that they have been prepared to invest massive sums to equip the port of Antwerp (Suykens 1985). Additional dockworkers are hired from a statecontrolled labor pool, which gives employers the ﬂexibility they need to meet ﬂuctuating daily workloads. In practice, most of the port’s casual dockworkers are “quasi-permanent,” working for the same company on a regular basis and thereby developing a strong “psychological contract” with their preferred employer. Thus, although the port has four “calls” per day, held at a central hiring hall overseen by government ofﬁcials, only around a third of the port’s casual dockers work out of the hiring hall each day. The vast majority work on “repeat hiring” with a regular employer who will only return them to the hiring hall in the event of a prolonged period of unemployment. Antwerp’s employers recognize, and utilize, the preference that many dockworkers display for some combination of the “freedom of the casual” and the “security of the perm.” As the operations manager of the port’s leading stevedoring ﬁrm acknowledged, casual dockers, including some of the company’s crane drivers, “like the ‘freedom’ to go back to the hiring hall, even though they never do. Knowing they can leave makes them want to stay. But only because we look after them properly. So you

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can see why they are all highly motivated” (quoted by Barton and Turnbull 2002: 151). Moreover, while there is keen competition between Antwerp’s employers in the product market, they have embraced a cooperative approach to the labor market and labor relations, both with each other and with the three trade unions that are recognized in the port. All employers belong to Centrale der Werkgevers aan de Haven van Antwerpen (CEPA), the port of Antwerp employers’ association, which pays all wages and other beneﬁts, even for regular workers.20 If an employer breaks the Codex, a very detailed collective agreement negotiated by the unions and CEPA, the association imposes a ﬁne. In the words of its President, “CEPA reduces the costs of employment for its members and allows them to focus on what they do best – cargo handling” (quoted by Barton and Turnbull 2002: 151). For example, CEPA takes responsibility for port-wide training, ensuring very high levels of competency across the entire labor force. A study of dockworkers’ skills in Melbourne and Antwerp undertaken by Patrick Stevedores of Australia, which un/ loads exactly the same vessels as Hessenatie NV in the port of Antwerp, found that Belgian dockers had a knack of anticipating, avoiding and recovering from delays, which maintained the “rhythm” and “integrity” of cargo-handling operations. Moreover, Hessenatie NV achieved much higher crane rates as a result of faster spreader positioning time (i.e. greater precision in locating and locking the crane spreader on top of the container box prior to lifting), which is predominantly a function of the operator’s skill and aptitude (Lloyd’s List, March 18, 1996). Antwerp’s dock labor scheme, like other port labor arrangements around the world,

clearly has its origins in the casual era (e.g. centralized hiring from the labor pool), was adapted to the demands of containerization (e.g. permanent and quasipermanent employment), and has proven to be well suited to the demands of a more commercial operating environment in the twenty-ﬁrst century. To be sure, there are new (female) faces on Antwerp’s waterfront (Turnbull, Fairbrother, Heery et al. 2009), some of the “abuses” of the labor market have been addressed by a costconscious state,21 and the major employers in the port are now global terminal operators (PSA International and DP World) rather than the old (national) stevedoring ﬁrms. But in terms of its key features, Antwerp’s labor market remains relatively untouched by commercialization. The same cannot be said for other ports around the world.

26.4

Commercialization

According to the World Bank (2007: 7), “Port institutional models developed in the 19th and early 20th century today signiﬁcantly constrain ports from competing effectively on a service quality basis, limit their agility and market responsiveness in mobilizing resources, and constrain their ability to share risks with private sector partners.” The essence, and objective, of commercialization, is therefore “to make the port responsive to the market and thus satisfy clients’ needs” (UNCTAD 1995: 2). Whatever the speciﬁc forms of commercialization (e.g. private sector participation, terminal concessions, service quality programs), labor market reform typically goes hand in hand with product market reform (World Bank 2007). For example, if the port

PORT LABOR

is to be more responsive to the market, shift working (24/7), ﬂexible start and ﬁnish times, variable gang composition and the like might be required. By the mid-1990s, over two-thirds of port unions worldwide reported the introduction of greater ﬂexibility at work (Turnbull and Wass 1997).22 Once again, therefore, the dockland labor market has been at the heart of port developments. In most developed countries this has involved a further evolution of port labor arrangements, whereas in many newly industrialized economies commercialization has been a precursor or impetus to rapid containerization. When the Asian “tiger economies” roared to prominence in the latter part of the twentieth century, it was evident that port reform was vital to their economic prosperity and strategies of export-led growth. As these economies were ever more closely integrated into the new global economy, port investment opportunities arose for international shipping lines, global terminal operators and other transnational logistics companies to service the global commodity chains created by transnational producers (e.g. in the automotive and electronics industries) and transnational buyers (e.g. in the apparel and footwear industries). Shipping lines and port operators not only beneﬁt from globalization – as world output expands the volume of world trade increases at a much faster rate (UNCTAD 2003) – they also “act as a catalyst for reduced restrictions on international trade, promote new technologies and market them on a global basis, seek both national and international policy measures to support expanded transport investments, and often discourage regulatory measures to internalize the negative social and environmental costs associated with transport activities” ( Janelle and

537

Beuthe 1997: 200). Many of the regulatory measures they discourage, and the social costs they seek to avoid, originate in the dockland labor market. One of the earliest examples of commercialization in the developing world was at the Malaysian port of Klang. Following the introduction of a New Economic Policy (NEP) in 1971, with its emphasis on exportled growth, Port Klang failed to keep pace with Malaysia’s more rapid economic growth. As a result, the port suffered from congestion, low productivity, run-down infrastructure and a shortage of modern cargo-handling equipment, despite several attempts to reform the management of the port. In 1983, however, the Malaysian government embraced a policy of private sector participation, with Port Klang’s container terminal chosen as the ﬁrst candidate for commercialization. Employees were understandably fearful of any change of ownership – there had never been any retrenchment under state ownership – despite the fact that new Guidelines on Privatization issued by the government’s Economic and Planning Unit in 1985 stated quite clearly that “privatization should not lead to any displacement of workers . . . Employees are to be employed in the privatized ﬁrms under conditions not less favourable than those they enjoyed while working for the Government.” Ultimately, only the intervention of the prime minister, who met personally with the different trade union leaders from the port, allayed the fears of organized labour (Turnbull 2006a). After protracted negotiations between the port authority, the unions, and the management of the new company called Kelang Container Terminal (KCT) (a joint venture between Kontena Nasional and P&O Ports

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Australia Ltd), the workers were offered three choices: (1) redundancy, (2) remaining an employee of Klang Port Authority (KPA), or (3) resigning from KPA to join KCT. Just over eight hundred workers joined KCT, which at the time was estimated to be around 15 percent more labor than was required, and each worker enjoyed guaranteed employment for the next ﬁve years (Tull and Reveley 2002). KCT also made a commitment to income security via the payment of a 21-day bonus at the end of the ﬁrst year of operations, despite the company making a loss, in recognition of a signiﬁcant improvement in performance. Incentive pay was one of the key elements of KCT’s human resource management strategy. Employment costs doubled during the company’s ﬁrst ten years of operations, in large part as a result of improved performance and consequent incentive payments, but the company’s operating revenues increased by 130 percent over the same period. The most signiﬁcant change for the workforce, however, in addition to extensive retraining to upgrade their skills and improve health and safety procedures, proved to be the change of management. P&O Ports held only a minor share in KCT, but P&O managers became the catalyst for change and a new corporate culture, which according to one of the company’s employees was now “[b]ased on the desire to succeed. Previously, the whole attitude was to prevent failure” (quoted by Turnbull 2006a: 9). Most workers reported the change of management to be “a change for the better,” resulting in a more cooperative relationship between the social partners and better two-way communications (ibid.). Not all workers in developed economies have fared so well in the age of commercialization, as the transfer from various

forms of public sector employment to the private sector is often accompanied by job losses and a marked deterioration in dockworkers’ terms and conditions (Turnbull and Wass 1997, 2007). In the port of Kaohsiung (Taiwan), for example, all dockworkers were registered with the port authority, Kaohsiung Harbour Bureau (KHB), and were members of a local (portbased) union, the Kaohsiung City Dock Workers’ Union. Before commercialization their wages were paid from stevedoring charges collected by the port authority (typically 65–72 per cent of the charges were paid to labor) but the workers did not have a direct contract of employment with KHB, despite enjoying many of the beneﬁts of public sector employees. Understandably, this created supervisory and other problems, most notably a reluctance on the part of international shipping lines to commit signiﬁcant future investments in the port. To commercialize the port and the labor market, KHB determined to transfer all dockworkers to the existing private terminal operators, who were either shipping lines (e.g. Evergreen and Sea Land) or local stevedores contracted to major lines such as Wan Hai Lines. Although the union was opposed to the transfer, it was ultimately powerless to oppose the restructuring program or indeed a 40 percent pay cut imposed by the Kaohsiung International Shipowners’ Association, a new and united employers’ association that enjoyed the support of KHB and the state. In addition, many dockworkers were “dissuaded” from retaining union membership when they took up employment with their new private sector employer. As a group, dockworkers were guaranteed only six months employment security ( January to June 1998). In the twelve months after the guarantee expired

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more than one thousand dockworkers were declared redundant, in many cases to be replaced by contract or casual labor (Turnbull 2006a). In the absence of strong national and increasingly international trade union organization, dockworkers have found it difﬁcult to defend the labor market arrangements and collective agreements carried over from the days of casualism and containerization (Turnbull and Wass 2007). In the UK, for example, commercialization began with the Transport Act 1981, which brought about the privatization of the British Transport Docks Board (in 1983). Although this did not directly affect the system of employment regulation, which was still governed by the 1967 National Dock Labour Scheme (NDLS), Associated British Ports (ABP), the new private owner, introduced a more commercial (costconscious) approach to personnel management and vigorously renewed previous attempts to reform or abolish some of the “restrictive work practices” carried over from the past. For example, one of the ﬁrst measures introduced by ABP was to extend the period of rotation for workers across different terminals in the port of Southampton from just one week to ﬁfteen. Three-shift working (24/7) was introduced at Southampton Container Terminal (SCT) in 1985, and two years later SCT was “separated” from the rest of the port, employing a dedicated labor force and putting an end to job rotation (work sharing) across different terminals. Within speciﬁc terminals, dockworkers were now obliged to move from job to job and ship to ship as required during the course of any given shift (Turnbull 1993). When Mrs Thatcher’s government eventually abolished the NDLS in July 1989, ABP effectively withdrew

539

from cargo handling (although the company retained a ﬁnancial interest in some of the operators who took over different stevedoring contracts). ABP employed over 1,700 registered dockworkers immediately before the abolition of the NDLS but by the end of 1992 employed fewer than twenty. In total, almost 80 percent of the former registered dock labor force were dismissed following the abolition of the NDLS, under the provisions of a special redundancy program, the Dock Labour Compensation Scheme (DLCS), which ran from 1989 to 1992.23 Most port authorities in Britain, who collectively employed more than two-thirds of all registered dockworkers, simply dismissed their entire cargo-handling workforce and reverted to being landlords. In their haste to embrace a more commercial operating environment, and their determination to quell any organized resistance, many port authorities were prepared to pay dockworkers 12 weeks’ salary in lieu of notice, in addition to a £35,000 severance payment. Several port authorities subsequently paid further compensation to union activists and other dockworkers unfairly dismissed as part of their strategy to derecognize the union.24 The PLA, for example, paid out more than £1 million in compensation to union activists unfairly dismissed during the 1989 national dock strike that accompanied the abolition of the NDLS, as well as a further £3 million in legal costs in what proved to be the longest-running Industrial Tribunal case in British legal history.25 This was just one of many examples of the employers’ desire to destroy union organization and exorcise workers’ control over the labor process, whether by fair means or foul (Turnbull and Wass 1995).

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While the union movement has been marginalized in British ports as a result of commercialization – a fate that has befallen other formerly powerful port unions such as the Waterside Workers’ Union in New Zealand (Reveley 1997, 1999; Turnbull and Wass 2007) – many unions have worked in concert with management to adapt employment arrangements and collective agreements to modern-day requirements, most notably in the Hanseatic ports of Northern Europe. In Rotterdam, for example, commercialization signaled much greater competition for European Combined Terminals (ECT), formerly the port’s sole provider of container-handling services. For example, ECT now faces competition at its new Delta Terminals in the Maasvlakte where Maersk recently secured the lease to operate its own terminal. Likewise in Germany, the emergence of Eurokai as a major competitor to Hamburger Hafen und Lagerhausgesellschaft (HHLA), its subsequent merger with Bremer Lagerhaus Gesellschaft (BLG) to form Eurogate, and the company’s joint venture operation with Maersk (North Sea Terminal Bremerhaven) which led to the transfer of Maersk/Sealand trafﬁc from Hamburg to Bremerhaven, have all served to intensify competition both within and between the country’s major ports. Global operators now dominate the North European container business, with Hutchison Port Holdings taking a controlling interest in ECT, PSA International buying a strategic stake in Hesse-Noordnatie in Antwerp, and DP World acquiring the P&O Ports network. These companies have brought to European ports not only new forms of work organization, but a much stronger commitment to investment in human resources than their predecessors. Trade unions certainly report that global

operators are more likely than port authorities, local stevedores or the state to regard port work as “skilled” or “professional” work, rather than as “general laboring” (Turnbull 2009). These developments have only been made possible through the “commercialization” of (semi-)state operating companies and the old Hanseatic port authorities. BLG, for example, was able to operate as a fully commercial company from 1998, while changes to the legal status of the port authority in Rotterdam (in 1997) granted the port greater autonomy from the local state and allowed it to participate in public– private partnerships, joint ventures and other commercial activities both inside and outside of the boundaries of the port. As part of this reorientation to the market and client needs, North European ports have embarked on extensive programs of multiskilling. ECT, for example, spent up to 10 percent of its annual turnover on training to ensure that all its port workers can now undertake up to four different jobs on the container terminal, and the company’s collective agreement provides for “functional combinations” of two or three jobs to be performed within the same shift. These changes, in conjunction with increasing automation and the phasing out of noncontainer operations, enabled ECT to reduce wage costs from over 60 percent of its operating costs in 1996 to just over 50 percent by 2000. Around the same time, Rotterdam’s labor pool (see Table 26.1) was “privatized” when the state discontinued ﬁnancial support. By 1997, Stichting Samenwerkende Havenbedrijven (SHB), the new labor pool, was losing 1.2 million guilders per month and was effectively bankrupt. Port employers demanded largescale redundancies but SHB embarked

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on a major program of temporal and functional ﬂexibility. In June 1998, four new shift patterns were introduced (incorporating various combinations of day, evening and night shifts, weekend work, and “on-call” shifts), higher-skilled workers were now required to perform lower-skilled tasks, and new training programs were introduced to ensure that all pool labor is multi-skilled. As a result, more than 75 percent of the pool was classiﬁed as “multi-functional” by the end of the 1990s compared to less than 20 percent in the mid-1980s. Other European labor pools have also been “privatized,” most notably the Port Workers’ Organization in Spain (see Table 26.1), which was reconstituted as a nonproﬁt-making company, Sociedad Estatal de Estiba, in 1986.26 Unlike the broadly cooperative approach to labor market reform that characterizes the union movement in North European ports, the Coordinadora, the principal dockers union in Spain, has displayed a more adversarial approach to commercialization. For example, the union fought hard to limit direct (permanent) employment to only 10–15 per cent of the workforce and thereby retain the system of work rotation through the Estiba (Saundry and Turnbull 1999). In this respect, the union’s militancy has frustrated international shipping lines, global terminal operators and the state (ibid.; Turnbull and Wass 2007). To this list can now be added the European Commission, as Spanish dockworkers were in the vanguard of recent campaigns by European port workers to defeat two proposed directives (CEC 2001, 2004) designed to open up the port services market, and the dockland labor market, to more competition. The Spanish government was in fact at the heart of these proposed directives: Layola de Palacio, the

European Transport Commissioner at the time, had been a minister in the Spanish conservative government, and during its presidency of the European Union (EU) (in 2002) the Spanish government brokered a deal between the transport ministers of EU Member States at a time when the European Council was still divided on the proposed directive. Less than twelve months after the defeat of the ﬁrst ports package (CEC 2001) in the European Parliament, de Palacio issued a second ports package (CEC 2004) in what proved to be one of her last acts as European Transport Commissioner. But after the campaigns of industrial action that defeated the ﬁrst ports package, which Bill Milligan, Chief Executive of the Strike Club,27 acknowledged had “opened a new chapter in labour activism” (Lloyd’s List, October 24, 2004), neither the port employers nor the shipping lines had the appetite for further pan-European strikes or other forms of disruption (Turnbull 2007, 2010). The women who now work in Valencia, Antwerp and other major European ports stood shoulder to shoulder with their workmates throughout the union campaigns against the further commercialization of the dockland labor market, as did longshoremen and -women from the United States.

26.5

Summary

The economics of port labor – the variable costs of labor under a casual system of employment, the need to invest in (ﬁxed or quasi-ﬁxed) human capital with the onset of containerization, and the ﬂexibility demanded of port labor in a more commercial operating environment – have been at the very heart of port performance and the

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waves of industrial restructuring that have transformed the industry over the past century. Some ports have adapted their labor market far more effectively than others to the challenges of irregular trafﬁc, new technology, and the modern-day demands of the customer. In all ports, however, the transition from casualism to containerization to commercialization has been marked by conﬂict and dissension both within and between the principal actors (management, labor and the state) and with third parties (e.g. local communities, direct customers and wider business interests). In myriad ways, the commercialized world of modern-day ports is a world away from the days of casual labor. In the port of Valencia, for example, there will soon come a day when entire dock gangs, maybe even the entire complement of dockers working a vessel, will be women. Several women already possess supervisory qualiﬁcations and the law of probability dictates that work equalization through the Estiba will sooner or later place these women in charge of an all-female gang driving straddle carriers and ship-to-shore gantry cranes. As globalization gathers pace, and as GTOs come to dominate the industry, port workers are increasingly recognized as highly skilled if not professional workers (Turnbull 2009). And yet despite these changes, port labor still bears the hallmarks, and carries the memories, of a labor market once riddled with insecurity and frequently ruptured by industrial conﬂict. If history is not to cast its shadow forward and cloud the future of the industry, ports must continue to minimize insecurity and manage industry conﬂict without disruption to shipping and other value-added service that the modern-day port provides to an increasing variety of customers.

Notes 1

2

3

4

5

The Jacks, or “Scabs,” were members of the Permanent and Casual Waterside Workers’ Union. When the WWF was defeated in a major strike in 1928, the Jacks formed a union from the “volunteers” who came to the rescue of the shipowners. Preferential (union-based) hiring was found in ports around the world. In the port of Belfast (Northern Ireland), for example, Protestants who were members of branch 11/10 of the Amalgamated Transport & General Workers’ Union handled any cargo that was “hooked and swung.” Cargo that was “bagged and shovelled” was allocated to Catholics who belonged to branch 11/9 of the same Union. Blue Union buttons worn on the lapel indicated whether the docker was a member of branch 11/10 or 11/9. When all the Union men had been assigned, jobs were opened to Second Preference men whose red lapel buttons bore the initials “SP.” Only during peak demand could “outsiders,” locally referred to as “Arabs,” hope to secure any work. Former docker and award-winning novelist John Campbell provides a vivid account of the life and work of Belfast dockers (Campbell 1999, 2006). For example, it was 1957 before a washing unit was provided for ﬁsh lumpers in the port of Grimsby (UK). Even then, the running costs (e.g. to pay the wages of staff employed at the washing unit) were paid by the dockworkers via a weekly contribution from their wages. The National Dock Labour Board (NDLB) also had an independent chairman and vice-chairman, appointed by the government’s Minister of Labour. The chair and vice-chair held casting votes if there was an equal division between worker and employer representatives on the Board. The Guaranteed Weekly Wage was negotiated by employers and trade unions under

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6

7

8

9

10

11

12

13

the auspices of the National Joint Council for the Port Transport Industry. The “surplus labor rate” was deﬁned as the proportion of all registered dockworkers who “proved attendance” but were not gainfully employed. The exceptions to this practice were Southampton and the South Wales ports, where ofﬁcials of the Board allocated all jobs on the principle of “work sharing.” At the other extreme, the “free call” in London took place “on the stones” outside the Board’s control centers, in some places even outside the dock gates. This allowed much greater scope for unscrupulous hiring practices. According to Lord Devlin (1965: 8), “Casual labour produces a casual attitude,” making dockworkers more willing to strike than their counterparts in other industries. The WEA subsequently merged with the Paciﬁc American Shipowners’ Association to form the PMA. Thereafter, shipowners took a much keener interest in contract negotiations and restrictive work rules (the stevedores who constituted the WEA usually operated on a “cost-plus” contract and they often condoned, and were certainly complicit in, many restrictive work practices). For example, late starts/early ﬁnishes and “four on, four off,” where only half the gang works at any given time. The Agreement stated that employers were allowed to: (a) operate efﬁciently; (b) change methods of work; (c) utilize laborsaving devices; and (d) direct the work through Employer representatives. The ILWU also secured exclusive jurisdiction over all cargo handling in the West Coast ports and a guarantee of no dismissal except for just cause. Vocational training in the port of Rotterdam was introduced in 1949, and the 1962 contract recognized the function of stuwer (stevedore) as a skilled profession, which was

14

15

16

17

18

19

20

543 remunerated accordingly (Nijhof 2000: 419). A condition of these workers switching union was that their employment status remained unchanged. Moreover, employers were allowed to hire permanent replacements when necessary (e.g. in the event of retirement or voluntary quits) (Finlay 1987: 54–5). Steady employment for the few ran against the egalitarian principle of low-man-out hiring, causing bitter resentment within the Union’s ranks. Steady men were accused of being “company men” and not “working union” (i.e. they should think in terms of the group, rather than the individual), while steady men referred to longshoremen drawing the Pay Guarantee as being “on welfare” (Wellman 1995: 104, 305). The PMA sought “steady man rights” to guarantee the availability of trained workers to operate new technology (Betcherman and Rebne 1987: 84). In New Zealand the Waterside Workers’ Union (NZWWU) reached a similar agreement whereby watersiders were assigned to container terminals for a period of 3–5 months before returning to the Waterfront Industry Commission (see Table 26.1). Furthermore, as seniority was “pier-based” the GAI discouraged internal labor mobility as many older longshoremen preferred to draw the guarantee rather than transfer from declining berths to the new container terminals. This presented employers with both rising costs and labor shortages on some terminals (see Jensen 1974: 342–85). A similar situation prevailed on the New Zealand waterfront, where the parties agreed to “composite gangs” comprised of six watersiders (under the WIC) to every ship-to-shore gantry crane driver (public harbor board employees). A national law of July 17, 1985 obliges all port companies who employ dockworkers to join the relevant employers association

544

21

22

23

24

PETER TURNBULL

(CEPA for the port of Antwerp, CEPG for the port of Ghent, CEWEZ for the port of Zeebrugge, and CWD for the port of Ostend). For example, employers would previously “hoard” labor by recording workers as unemployed today, and therefore entitled to state beneﬁts (see Table 26.1), in order to ensure that the company had sufﬁcient (preferred) labor tomorrow. With a new electronic swipe card system it is now far more difﬁcult for employers to record workers as unemployed. Likewise, dockers who swipe their card to gain access to the hiring hall can no longer avoid bad jobs by “sneaking out” (if they are recorded as unemployed but jobs are available they are no longer entitled to the guarantee and will be subject to disciplinary action). This ﬁgure is based on a survey of thirty-six port unions afﬁliated to the International Transport Workers’ Federation (ITF), who collectively represented around two-thirds of all dockworkers afﬁliated to the Federation. Of these unions, more than half also reported a liberalization of competition in their nation’s ports and over 40 percent reported the privatization of various port services (Turnbull and Wass 1997: 133). The DLCS provided severance payments of up to £35,000 for dockworkers with a minimum of 15 years service, ﬁnanced jointly by the employer and the state (employers paid out £98 million under the DLCS and the state paid almost £132 million) (Turnbull and Wass 1995: 523). Although these payments attracted many “volunteers,” the vast majority of dockers reported being “forced” to leave the industry as the terms and conditions on offer in the commercialized world of port transport were “unacceptable” (Turnbull and Wass 1994: 496). Immediately after the abolition of the NDLS the National Association of Port

Employers was dissolved, which at a stroke put paid to almost seventy years of national collective bargaining in the industry, and one in ﬁve former Scheme port employers derecognized the union (Turnbull and Weston 1993: 186). 25 Although the PLA was judged to have unfairly dismissed union activists, the Authority refused re-employment. In addition to its own legal costs, the PLA was ordered to pay the union’s costs, which amounted to more than £1 million. 26 The Spanish state retained a 51 percent share in the Estiba and continues to pay the dockworkers’ guaranteed wage if unemployment (idle time) exceeds 15 percent of available shifts. 27 The Strike Club is the insurer of shipowners, charterers and vessel operators against strikes and other causes of delay to shipping.

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Standing, G. (1986) Unemployment and Labour Market Flexibility. Geneva: International Labour Organization. State of New York (1952) Final Report to the Industrial Commissioner, State of New York from the Board of Inquiry on Longshore Industry Work Stoppage, October–November 1951. New York: State of New York. Suykens, F. (1985) Administration and management at the port of Antwerp. Maritime Policy and Management 12(3): 181–94. Tull, M. and J. Reveley (2002) Privatisation of ports – an evaluation of the Malaysian experience. Economic Papers 21(4): 63–79. Turnbull, P. (1993) Docks. In A. Pendleton and J. Winterton (eds.), Public Enterprise in Transition: Industrial Relations in State and Privatized Corporations, pp. 185–210. London: Routledge, Turnbull, P. (2001) Rethinking dock work. Labour History Review 66(6): 367–80. Turnbull, P. (2006a) Social dialogue in the process of structural adjustments and private sector participation in ports: a practical guidance manual. Geneva: International Labour Ofﬁce. www.ilo.org/public/english/ dialogue/sector/papers/maritime/ports/ ports-socdialguidelines.pdf. Turnbull, P. (2006b) The war on Europe’s waterfront: repertoires of power in the port transport industry. British Journal of Industrial Relations 44(2): 305–26. Turnbull, P. (2007) Dockers versus the directives: battling port policy on the European waterfront. In K. Bronfenbrenner (ed.), Global Unionism: Challenging Global Capital through Cross-Border Campaigns, pp. 117–36. Ithaca, NY: Cornell University Press. Turnbull, P. (2009) Training and qualiﬁcation systems in the EU port sector: setting the state of play and delineating an ETF vision. Brussels: European Transport Workers’ Federation. www.itfglobal.org/ﬁles/ extranet/-75/17739/Final%20 report%20EN.pdf.

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Wellman, D. (1995) The Union Makes Us Strong: Radical Unionism on the San Francisco Waterfront. Cambridge: Cambridge University Press. Weinhauer, K. (2000) Power and control on the waterfront: casual labour and decasualisation. In: S. Davies, C. J. Davis, D. de Vries, L. Heerma van Voss, L. Hesselink and K. Weinhauer (eds.), Dock Workers: International Explorations in Comparative Labour History, 1790–1970, pp. 580–603. Aldershot: Ashgate. Wilson, D. F. (1972) Dockers: The Impact of Industrial Change. London: Fontana. World Bank (2007) World Bank Port Reform Tool Kit, Washington, D.C.: World Bank.

27

Port Competition and Competitiveness Theo Notteboom and Wei Yim Yap

27.1

Introduction

Ports are dissimilar in their roles, assets, functions and institutional organizations (Bichou and Gray 2005). Thus, many deﬁnitions exist for the port. They can range from a small quay for berthing a ship to a largescale center with numerous terminals and a cluster of industries and services. For the purposes of this study, the deﬁnition of Notteboom (2001) is used: “a logistic and industrial center of an outspokenly maritime nature that plays an active role in the global transport system [for containerized cargoes] and that is characterised by a spatial and functional clustering of activities that are directly and indirectly involved in ‘seamless’ transportation and information processes in production chains.” Container ports serve as important nodes in facilitating the efﬁcient ﬂow of containerized cargoes. Speciﬁcally, they provide the primary interface for demand and supply forces to interact, and function as important marketplaces where the physical exchange between buyers and sellers of containerized

shipping capacity can be consolidated and realized. The container port can be further distinguished by its function, which consists of serving primarily as a gateway port that acts as an interface between hinterland and deep-sea routings of containerized cargoes, or of serving primarily as a transshipment port that acts as an interface for interchange between deep-sea routings of containerized cargoes. The inﬂuence of container ports on the demand for the transport of containers by sea is exerted mainly through improvements to productivity, especially in areas related to cargo handling, providing excellent maritime and hinterland access, and ensuring that the pace of capacity expansion is adequate to meet anticipated demand. However, actualization of demand is dependent on container shipping services, for the decision to call at a port can bring additional cargo and result in beneﬁcial spin-offs for local as well as hinterland economies. In addition, the presence of inter-container port complementarity (see Notteboom 2009a) means

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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that such beneﬁts will be extended to other ports which complement the port in question. Conversely, the decision by shipping services to stop calling at a port will result in reduced connectivity, choice of service providers and container throughput, which may have a negative impact on the competitive potential of its local and hinterland economies. The negative impact will also affect other ports which are complemented by services connected to the port. Hence, the decision by a container shipping service to switch from one port-of-call to another can lead to signiﬁcant economic and commercial ramiﬁcations, for both ports and container ports which show less ﬂexibility in accommodating to the requirements of shipping lines may be circumvented, while ports that are able to complement and add value to the objectives of liner shipping companies will become preferred channels of containerized trafﬁc. Consequently, container ports that are competitive will become focal points for key arteries of trade in containerized cargoes. This means that ports may have to serve as collection and distribution points for hinterlands that extend far beyond their traditional boundaries, and deal with issues and challenges that are presented by the whole logistics chain. Furthermore, efﬁciency gains that are generated by container ports will have important implications for the comparative and competitive advantages of their hinterlands. In particular, container ports that are endowed with efﬁcient and modern infrastructure, and supported by competitive and reliable transportation services, can raise the level of welfare beneﬁts which extend beyond the container port community and transport users to the whole of society.

This chapter aims to unravel seaport competition and competitiveness by providing insight into the relations between container ports through the analysis of container shipping services. It will be demonstrated that the conﬁguration of liner services exerts a direct and immediate effect on inter-container port competition. The ﬁrst sections discuss deﬁnitions of and approaches to port competition and competitiveness. We then introduce a research methodology to analyze inter-container port competition and competitiveness by means of annualized slot capacity ﬁgures calling at container ports. The methodology is applied to the container ports along the Malacca Strait, the Pearl River Delta and the Antwerp–Hamburg range.

27.2

Deﬁning Port Competition

Port competition is not a well-deﬁned concept, partly because of its complex nature. Hence, the nature and characteristics of competition depend among other things upon the type of port involved (e.g. gateway port, local port, transshipment port) and the commodity (e.g. containers and liquid bulk). Heaver (1995) points out that terminals are the major focus of competitive strategy, not ports. In line with this perspective we argue that port competition essentially involves a competition for trades, with terminals as the competing physical units, transport concerns and/or industrial enterprises as the chain managers and representatives of the respective trades, and port authorities and port policy makers as representatives and defenders of the port sector at a higher level, engaged in offering good working conditions (e.g. infrastructure) to this sector. Following from Van de

PORT COMPETITION AND COMPETITIVENESS

Voorde and Winkelmans (2002), container port competition could unfold at three levels. At the ﬁrst level, intra-port competition takes place between terminal operators located within the given port. The competitive arena includes all aspects of the containerized trade, such as the trafﬁc routings, shippers and shipping lines concerned. For instance, competition could be focused on enticing major shipping lines and shippers to hub their operations at the terminal, or targeted at speciﬁc services operated by speciﬁc shipping lines in order to strengthen the level of connectivity on particular trade routes and to particular regions. Important shippers do not necessarily choose a port, but a logistics chain solution in which a port is merely a node. At the second level, terminal operators have to account for competition with terminal operators located in other ports. Termed “inter-port competition,” this can be played out at the national and regional levels. At the highest level, inter-port competition occurs between terminal operators located in different port ranges. The authors deﬁne a container port range to be a geographically deﬁned area with a number of ports that possess largely overlapping hinterlands and thus serve mostly the same customers. Progressive changes in regional economic performance and overlapping hinterlands, made possible by improvements in intermodal technology and organization, prompt shipping lines and shippers to frequently review the service schedules, trafﬁc routings and assets utilized in order to exploit changing trafﬁc density and achieve greater economies. As a single node in global value-driven chain systems, a container port continuously strives to capitalize on the factors that contribute to its competitive advantage in order to entrench

551

and enlarge its captive hinterland, and at the same time to erode that of its competitors. Analyses of container port competition in various container-handling regions in the world showed that ports compete not only with their immediate neighbors but also with other ports located in the wider region. In particular, competition was found to be more intensive between major load centers located within certain regions (Gouvernal, Debrie and Slack 2005; Yap and Lam 2006a). Marcadon (1999) also highlighted the trend for ﬁerce competition to cause ports to extend their hinterland into areas previously neglected; large hinterland coverage was thought to enhance container port attractiveness to shippers and carriers through the advantages of a larger choice of carriers, better connectivity and potential scale economies that can be reaped. However, Notteboom (2009b) suggested that the immediate hinterland continues to serve as the backbone of ports’ cargo base in interport rivalry.

27.3 Deﬁning Port Competitiveness The competitive position of a container port is determined by its competitive offering to the host of shippers and shipping lines for speciﬁc trade routes, geographical regions and other ports to which the container port is connected. However, at the broader dimension, the competitiveness of a container port is determined by the range of competitive advantages that are acquired or created by the port over time (Haezendonck and Notteboom 2002). Consolidating the list of factors drawn from

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various perspectives showed that a container port is likely to be more competitive if the port: •

•

• •

•

• •

•

•

• •

enjoys proximity to key centers of production and consumption, and major trade lanes; possesses excellent maritime and hinterland access and offers superior connectivity to markets; is able to reduce port costs for users through higher productivity; is able to persuade and entrench carriers and shippers in relation to their cargo routings by adding value to the business pursuits of these entities; is able to expand capacity in time to meet demand and has sufﬁcient space to cater to future development and capacity extensions; enables users to compete effectively with other transport modes; is able to cope with challenges posed by the new logistics business environment; is able to capitalize on the complementary and reinforcing effects of the port cluster; has greater involvement from the private sector at the level of terminal operations; is perceived to be a key driver of the local economy; and enjoys a long tradition of support from key stakeholders in the port area and the wider community.

The list of factors shown above reveals the complexity and difﬁculties inherent in deﬁning competitiveness. Further complication is involved if the wide spectrum and great diversity of industry and community players with their various objectives, means and

possible impacts are included in the analysis; then well-balanced stakeholder relations management is demanded (Winkelmans and Notteboom 2007). Hence, the speciﬁc meaning, perception, interpretation, measurement and implication of these factors are bound to be different for the various parties involved in the port business. Furthermore, the competitive offering will have to depend on what is presented by the entire port community, not just the container terminal operator. A variety of methods have been used to ascertain the magnitude and characteristics of container port competitiveness. These studies can also be categorized into those that utilize quantitative techniques and those that are descriptive in nature. Quantitative methods employed included those using integer linear programming (Aversa, Botter, Haralambides and Yoshizaki 2005), dynamic programming (Zeng and Yang 2002), the analytical hierarchy process (Guy and Urli 2006; Lirn, Thanopoulou, Beynon and Beresford 2004), stochastic frontier analysis (Notteboom, Coeck and Van den Broeck 2000; Tongzon and Heng 2005), data envelopment analysis (GarciaAlonso and Martin-Bofarull 2007; Trujillo and Tovar 2007), the logit model (Veldman, Bückmann and Saitua 2005), the structural equation model (Bichou and Bell 2007), the cointegration test and error correction model (Yap and Lam 2006a), the transport cost model ( Jara-Díaz, Cortés and Ponce 2001), the transport demand model (Luo and Grigalunas 2003), cluster analysis (De Langen 2002), shipping networks (Yap, Lam and Notteboom 2006), and the oligopolistic model (Yap and Lam 2006b). These methods generally focused on investigating explicit aspects of competition that are measurable and comparable across

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selected samples of container ports and terminals. These aspects include various operational, ﬁnancial and output indicators of container port performance which are related to efﬁciency of resource utilization, productivity achieved by assets employed, share of trafﬁc handled, and overall level of satisfaction with service provided and costs incurred by shippers and shipping lines. However, these investigation techniques are dependent on the correct speciﬁcation of the models, appropriate representation of variables and the adoption of a suitable unit of analysis. Although components that are quantiﬁable can potentially be used to ascertain competitiveness in an objective manner, the factors which determine competitiveness typically extend beyond these to include many that are qualitative in nature. These factors are generally covered by analyses which are descriptive in nature and associated with areas related to: •

container port development (Cullinane, Wang and Cullinane 2004; Notteboom and Rodrigue 2005; Slack and Frémont 2005); • container port competition (Notteboom 2002; Robinson 2002; Van de Voorde and Winkelmans 2002; Yap and Lam 2004); • container shipping lines (Heaver, Meersman, Moglia and Van de Voorde 2000; Slack, Comtois and McCalla 2002); and • the supply chain (Notteboom and Winkelmans 2001). As a whole, the variety of measurements and methodologies propagated show the extent and complexity of considerations related to container port competitiveness and competition.

27.4

Research Methodology

The preceding sections have shown that container shipping services are instrumental in inﬂuencing competitive relationships between container ports. Hence, the chapter examines the competitive relationships embedded within three major containerhandling regions of the world by analyzing the manner in which container shipping lines manage their container shipping ﬂeet by implementing new or removing existing service routings.

27.4.1

Annualized slot capacity (ASC)

For this purpose, container port competition is determined by gains made or losses incurred as a result of changes in the annualized slot capacity (ASC) that calls at container ports. Speciﬁcally, ASC can be derived from the actual vessel capacity deployed in liner services; the corresponding computation for an individual port “X” for an individual service can be obtained by the formula: n

∑V

kh xt

Txtk = 2GkxtFxtk where T

G

F Vh

h =1

n

= 2GkxtFxtk Wxtk

(1)

is the annualized slot capacity, measured in TEU, that called at port “X” for a particular service “k” in time period “t”; is the number of calls made at port “X” for the whole service loop; is the frequency of call in a year; is the capacity of vessel h for n vessels deployed; and

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THEO NOTTEBOOM AND WEI YIM YAP

W is the average capacity of vessels n

∑V

kh xt

deployed for Wxtk =

h =1

. n Multiplication by a factor of 2 presumes that the vessels are fully loaded and that all the containers will be unloaded and the vessels subsequently reloaded to their maximum capacity. Nonetheless, container vessels will be carrying containers that are destined for other ports as well. Hence, Txtk denotes the theoretical ASC limit for containers which can be handled at port “X.” In actual fact, the proportion of ASC allocated for the port will be much lower as a percentage of the total ASC deployed. The actual number of containers handled at the port for a given two-way vessel capacity will also be dependent on factors such as: •

the number of ports of call on the relevant side of the trade route. The higher the number of ports, the lower will be the average share of containers handled as a percentage of the ASC deployed per port of call. • the liner service network structure. A carrier may decide to route most of its cargo via one speciﬁc hub without abandoning the multiple-call system. In such a case, the hub will show a high share of containers handled as a percentage of the ASC deployed while other ports of call in the same service will have a low share. For example, the Mediterranean Shipping Company (MSC) concentrated most of its North European cargo at the MSC Home Terminal in Antwerp, but the liner services of MSC remain linebundling services with multiple calls in Northern Europe. • the cargo-generating effect of the port calls. For example, Notteboom (2007)

demonstrated that upstream ports in Northern Europe such as Antwerp and Hamburg typically have a higher share than coastal ports of containers handled as a percentage of the ASC deployed. Upstream ports need an elevated cargogenerating effect and good terminal productivity partly to compensate for the time lost when the vessel sails up and down the river. Calling at coastal ports often involves only a little deviation. Consider the example of the EU1 service operated by the Grand Alliance comprising Hapag-Lloyd, Malaysia International Shipping Corporation (MISC), Nippon Yusen Kaisha Line (NYK) and Orient Overseas Container Line (OOCL) (Informa Plc 2007). The computed ASC deployed on this service with reference to equation (1) which turns around in Southampton for the European end of the voyage will be 645,600 TEU, based on the service attributes depicted in Table 27.1. However, the same service that calls at Singapore will generate twice the amount of ASC, at 1,291,200 TEU, because the service calls at the port on both the eastbound and westbound legs of the voyage.

27.4.2 Assessing inter-port competition and competitiveness by means of ASC information The information on ASC can be used to analyze container port competition and assess port competitiveness. The argument for this approach stems from the fact that commercially driven shipping lines are assumed to always choose the best bundle of decisions that they can afford. Speciﬁcally, the deployment pattern of container shipping services in a particular geographical

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Table 27.1 Service attributes of the EU1 service of the Grand Alliance Service attribute type Port rotation

Trade route Service partners Service frequency Vessels employed Total vessel capacity employed Annualized slot capacity

Service attribute value Southampton–Amsterdam–Hamburg–Le Havre–Singapore–Kobe–Nagoya–Tokyo–Shimizu– Singapore–Southampton Europe–Far East Hapag-Lloyd, MISC, NYK, OOCL Weekly 8 (by NYK) 49,660 TEU 645,600 TEU

region can serve as a rough indication of port competitiveness, because a port which is deemed by shipping lines to be less competitive will attract fewer services than another port located in the same area. Hence, the basic framework of analysis aims to identify changes in liner service routings, and to deduce their impact on container port competition. After that, analyses will be conducted for ASC deployed by liner services that call at each pair of ports in a particular region, in order to identify changes in their connectivity to other trade routes as shipping lines adjust their service schedules to meet changing market conditions. This method of analysis is depicted by the schematic shown in Figure 27.1. ASC which calls at the two ports can be divided into three categories: category A calls exclusively at port “X”; category B calls at both ports; and category C calls exclusively at port “Y.” The presence, extent and development of container port competition can be established by examining variations in the ASC

A Port X

B

C Port Y

Figure 27.1 Framework for analyzing inter-container port relationships for the case of two ports.

handled in each of the categories. This can be illustrated by the scenarios presented in Figure 27.2. In the case shown in Figure 27.2(a), new container services operated by the shipping line will lead to an improvement in the ASC deployed under category “A,” which is an indication of competition between the two ports. Figures 27.2(b) and 27.2(c) show other indications of scenarios with the presence of port competition which will lead to higher share of ASC for category “A” at the expense of categories “B” and “C.” As for Figure 27.2(d), the situation will lead to an increase in ASC deployed under category “B.” However, this development can be seen as a sign of competition, as cargo that was

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THEO NOTTEBOOM AND WEI YIM YAP

X

Y

(a) Competitive – new services initiated which call only at port “X”

X

Y

(c) Competitive – services consolidate to call excusively at port “X”

Figure 27.2

X

Y

(b) Competitive – services switch to calling at port “X”

X

Y

(d) Competitive – services call directly at port “Y”

Analysis of changes in container shipping services for the case of two ports.

previously handled for port “Y” in port “X” is now handled directly by the former. As a whole, the framework shows that evaluation of container port relationships has to account for absolute changes in ASC deployed as well as for changes in market share experienced for the three categories (“A,” “B” and “C”). Hence, competition between two container ports is likely to see the more competitive port gaining market share. Furthermore, analysis of container port competition using liner services presents an objective and direct way of ascertaining the nature of such relationships, where they exist. Moreover, the information is publicly available through service schedules publicized by carriers in a variety of industry publications such as Containerisation International yearbooks and magazines, and in other regular reports in various maritime-related publications. The information has been processed to obtain the following information for the time period considered in this study: (1) ASC that called at the ports; (2) number of liner services that called at the ports; (3) number of

carriers that called at the ports; (4) number of vessels that called at the ports; and (5) number of trade routes connected to the ports, differentiated by the ASC, services and shipping lines involved.

27.4.3 Coverage of research: geographical region and time period This chapter covers the following regions: the Strait of Malacca in Southeast Asia, consisting of the ports of Singapore, Port Klang and Tanjung Pelepas; the Pearl River Delta in East Asia, with a focus on Hong Kong and Shenzhen; and the Antwerp–Hamburg range in Northwest Europe, with a focus on the four largest ports (Rotterdam, Hamburg, Antwerp and Bremerhaven). These ports accounted for 23.8% of the world’s total container throughput handled in 2007 (Informa UK Ltd 2008). The aim is to examine the nature of competition embedded within these major container-handling regions and provide comparisons where the situation permits. The research also covers the 12-year period from 1995 to 2006, which

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includes the scene before the formation of shipping alliances up to the latest major developments in the liner shipping industry, namely the acquisitions of P&O Nedlloyd by Maersk, Delmas by CMA-CGM, and CP Ships by Hapag-Lloyd.

27.5

Research Findings

27.5.1 Port competition and competitiveness in the Strait of Malacca

Average annual growth in 1000 TEU (three-year periods)

Container ports in Southeast Asia handled 64.0 million TEU in 2007, of which 63.3% was accounted for by the three largest container ports in the region, Singapore, Port Klang and Tanjung Pelepas (Informa UK Ltd 2008). Singapore remains the market leader in the region, but saw its market share in the port sample decrease from about 90% in the mid-1990s to around 70% at the end of the observation period. The Malaysian ports increased their joint market share (Figure 27.3).

In 2006, the three ports were connected to 21 trade routes, which saw 105.8 million TEUs of ASC deployed by 96 shipping lines in 344 shipping services. Most of the ASC that called at the selected container ports consisted of capacity deployed on east–west trade routes connecting Europe and the Mediterranean with East Asia. This was followed by the ASC deployed within Southeast Asia and then by that which plied between East Asia and the Middle East. Analysis of container port competition in Southeast Asia revealed that the greatest intensity of competition occurred between Singapore and Port Klang, followed by Singapore and Tanjung Pelepas (Table 27.2). Speciﬁcally, container terminal operators in these ports sought to position themselves as important links within value chains that connect Southeast Asia to other parts of the world, primarily East Asia and Europe. This led to container port competition in three areas., The ﬁrst focus was on attracting major carriers to hub their transshipment operations at the terminals, while the

2500 Singapore

2003-2006

Port Klang

2000

Tanjung Pelepas

1500 1995-1998

1000 500 2003-2006

0

1995-1998

1995-1998

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Average market share (three-year periods)

Figure 27.3 Evolution of market share and average annual growth based on annual throughput in TEU.

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Table 27.2 ASC affected by inter-port competition in the Malacca Strait Competing port pairsa SNG vs. PKL SNG vs. PTP PKL vs. PTP Total

Europe–Far East (’000 TEUs)

% share

Mediterranean–Far East (’000 TEUs)

% share

Intra-Southeast Asia (’000 TEUs)

% share

27,756 21,270 10,988 60,014

46.2 35.4 18.3 99.9

15,122 2,977 4,998 23,097

65.5 12.9 21.6 100.0

9,356 8,160 1,745 19,261

48.6 42.4 9.1 010.1

a PKL denotes Port Klang, PTP Tanjung Pelepas and SNG Singapore. Source: Authors’ computation.

second was on targeting speciﬁc services, operated by speciﬁc carriers or alliances, that aimed at strengthening the level of connectivity to speciﬁc trade routes and regions. This development resulted in inter-container port dynamics being inﬂuenced to a large extent by the hubbing decisions of mainline operators of container shipping alliances, as well as those of independent carriers which included Maersk Line, MSC, CMA-CGM, Evergreen and CSCL. The third objective was to encourage shippers located in southern Malaya to handle their containers through either of the ports. On the whole, the main objective is to capture the largest possible share of the transshipment trafﬁc, as such containers are seen to provide stronger growth opportunities than local containers. The impact of the emergence of Port Klang and Tanjung Pelepas as competitive alternatives to Singapore could also be seen in the share of ASC received by Singapore, which fell from almost 100% in the years before 2000 to 75.3% by 2006 (Figures 27.4(a) and 27.4(b)). In direct contrast to Singapore, Port Klang saw its share of ASC rise from 15.7% in 1995 to a peak of 36.8% in 2003, before declining to 33.3% in 2006. The rise in ASC was attributed to an increas-

ing number of shipping lines, such as members of the Grand Alliance, Hanjin, COSCO and Evergreen, which chose to schedule some of their capacity to call at both Port Klang and Singapore in the same service instead of calling exclusively at the latter. In addition, the decision by CMACGM and CSCL to relocate their operational hubs in Southeast Asia to Port Klang from Singapore contributed substantially to the increase in ASC received from 2001 onwards and helped to boost the port’s connectivity for the Europe–Far East and Mediterranean–Far East trade routes. As a whole, these developments had the effect of siphoning off cargo which would otherwise have been handled at Singapore. However, the decline experienced after 2003 was attributed to new services, initiated by MSC, PIL, the CHKY Alliance and New World Alliance, which chose to call only at Singapore. This development also caused the share of ASC that called at Tanjung Pelepas to dip in 2005. Nonetheless, the port quickly recovered and its share of ASC reached a new high at 18.1% in 2006 as the acquisition of P&O Nedlloyd by Maersk saw a majority of the former’s services reorganized to call at Tanjung Pelepas instead of Singapore.

(a) 120,000,000 Three ports

105.8m

Singapore Port Klang

100,000,000

98.3m 88.1m

Tanjung Pelepas 80,000,000

75.1m 67.7m 62.3m

60,000,000

40,000,000

20,000,000

79.7m 74.6m

68.5m 58.0m 54.3m 62.2m 51.2m 56.7m 54.8m 57.4m 46.6m 53.8m 41.2m 51.0m 36.6m 46.6m 35.2m 41.2m 31.4m 36.5m 27.6m 29.2m 21.0m 23.6m 19.1m 17.7m 15.2m 14.4m 14.6m 12.7m 12.3m 9.8m 9.8m 5.7m 8.0m 3.5m 4.8m

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 (b) 1.000 0.900

99.8% 99.9% 99.9% 99.7% 99.0%

0.800

Singapore Port Klang

0.700

Tanjung Pelepas

97.7% 88.0% 84.9% 82.9% 77.1% 75.9% 75.3%

0.600 0.500 0.400 0.300 24.8% 28.9%

0.200 0.100 0.000

15.7%

30.5%

33.7% 34.9%

19.5% 21.1% 14.4% 6.0%

38.8%

33.2% 32.0% 33.3%

18.1% 16.4% 17.2% 14.7%

7.7%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Figure 27.4 (a) Development of ASC which called at Port Klang, Singapore and Tanjung Pelepas. (b) Development in share of ASC connected to the selected ports.

560

THEO NOTTEBOOM AND WEI YIM YAP

Average annual growth in 1000 TEU (three-year periods)

In the case of Tanjung Pelepas, the decision by Maersk to invest in a 30 percent stake in the port resulted in the relocation of its hub from Singapore to the port, and the shift in capacity, which began at the end of 2000, was largely completed by mid2001. As Maersk Line operated several services which connected Singapore to many of the major east–west trade routes, the move led to a permanent reduction in the share of capacity accounted for by Singapore from 2001 onwards. The decision by Evergreen to emulate Maersk in 2002 saw the gap in market share widen, especially for trade routes connecting the Far East to Europe and the Mediterranean. In addition, Evergreen’s move to Tanjung Pelepas resulted in most of its mainline services being rescheduled to call at that port instead of at Port Klang. This development led to the signiﬁcant changes in ASC attributed to competition between Port Klang and Tanjung Pelepas. As a whole, hubbing decisions by mainline operators had a signiﬁcant inﬂuence on competition dynamics between major ports

in the Malacca Strait. While the beginning of the period in 1995 saw Singapore the dominant player, the end of the period in 2006 witnessed Port Klang and Tanjung Pelepas gaining competitiveness and becoming competitive alternatives for transshipment operations in the region.

27.5.2 Port competition and competitiveness in the Pearl River Delta The major ports located in this region are Hong Kong and Shenzhen. They handled 45.1 million TEUs in 2007 and accounted for 81.3% of total container throughput handled in the Pearl River Delta (Informa UK Ltd 2008). Till the early 1990s Hong Kong served as the only gateway to the Pearl River Delta. In the mid-1990s Shenzhen emerged as a new gateway. The market share of Hong Kong dropped from nearly 98% in 1995 to 56% in 2006 (Figure 27.5). Shenzhen’s port trafﬁc grew by 2.5 to 3 million TEUs per year in the last years of observation while Hong Kong’s growth reached “only” one million TEUs per year.

3500 3000

Hong Kong 2003-2006

2500

Shenzhen

2000 1500 1000 500

2003-2006 1995-1998

1995-1998

0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Average market share (three-year periods)

Figure 27.5 Evolution of market share and average annual growth based on annual throughput in TEU.

PORT COMPETITION AND COMPETITIVENESS

In 2006, the container ports of Hong Kong and Shenzhen saw 113.6 million TEUs of ASC deployed by 90 shipping lines in 314 shipping services. Unlike the scenario for Southeast Asia, which received a spread of ASC from east–west, north–south and intraregional services, the situation faced by Hong Kong and Shenzhen saw two-thirds of capacity that called at these ports accounted for by east–west trades. The largest of these was the transpaciﬁc trade with a share of 33.7%. This was followed by the Europe–Far East trade and Southeast Asia–Far East trade. As with the situation for the Strait of Malacca, Figures 27.6(a) and 27.6(b) also show that while the dominant port, Hong Kong, was able to attract 100% of the capacity at the beginning, its share began to decline from 1998 as more shipping lines chose to call direct at Shenzhen. This phenomenon was attributed to two major developments. First, the lack of investment in major container-handling facilities between the completion of Container Terminal 8 (CT8) in 1994 and that of CT9 in 2003 led to container terminals in Hong Kong becoming congested and expensive. For example, the terminal handling charge levied on a container by the Intra-Asian Discussion Agreement for Hong Kong rose from HK$600 in July 1992 to HK$1,200 in January 1995, and reached HK$1,800 by June 1998 (Drewry Shipping Consultants 2003). Capacity utilization for container terminals at the port also reached 95.8% in 2001 (Ocean Shipping Consultants Ltd 2003). Second, the presence of international terminal operators in Shenzhen contributed to improved conﬁdence on the part of port users and persuaded an increasing number of shipping lines to route more of their services to call there. These developments

561

resulted in Hong Kong’s share of capacity falling to 85.1% by 2006. Nonetheless, the port continued to receive the bulk of capacity that called in the region, with many of the services making parallel calls at Shenzhen in the same schedule. This development also contributed signiﬁcantly towards boosting the share of capacity received by Shenzhen from 5.3% in 1995 to 64.9% in 2006. Containers are handled mainly at six facilities, Kwai Tsing Container Terminals and River Trade Terminals in Hong Kong, and Yantian, Chiwan, Shekou and Mawan in Shenzhen. Examination of the terminals revealed several of the operators to be located in a number of facilities in both ports. For example, Modern Terminals Limited has a presence in Kwai Tsing, Shekou, Chiwan and Mawan, whereas Hutchison Port Holdings is simultaneously present in Kwai Tsing, River Trade Terminals and Yantian. The proximity of these terminals suggests the presence of a high level of inter- as well as intra-container port competition, where container terminal operators in the two ports actively sought to position themselves as important links for value chains that connect Southern China with major markets in other parts of the world. Table 27.3 shows that the amount of ASC affected by competition between the two ports was largest for the transpaciﬁc trade, followed by the Europe–Far East and Southeast Asia–Far East trades. Empirical evidence also showed that although Hong Kong dominated the container shipping scene by attracting, in most cases, more than 90% of ASC deployed to call exclusively at the port in 1995, the end of the period in 2006 saw the share of ASC received by Shenzhen for the transpaciﬁc and Mediterranean–Far East trade routes

(a) 120,000,000

113.6m 108.3m

Two ports Hong Kong

100,000,000

94.6m

Shenzhen

96.7m 95.5m 85.1% 88.2%

85.1m 76.8m

80,000,000

84.9m 81.2m 89.7% 95.3% 74.3m 73.8m 69.3m 96.7% 64.9% 56.7m 64.5m 52.1m 63.7m 99.4% 59.6% 46.6m 56.7m 99.3% 53.5m 52.1m 99.9% 56.5% 46.6m 100% 39.1m 100% 22.8m 45.9% 19.1m 32.6% 30.8m 12.3m 29.7% 40.0% 8.5m 21.7% 4.7m 16.3% 10.0% 69.7m

64.2m

60,000,000

40,000,000

39.4m

41.7m

41.7m 39.4m 100% 100%

20,000,000 2.1m 3.1m 5.3% 7.4%

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 (b) 1.000 100%

100% 100% 100%

0.900

99.9% 99.3% 99.4% 96.7% 95.3% 89.7%

Hong Kong

0.800

88.2%

85.1%

Shenzhen 0.700

64.9% 56.5%

0.600 0.500

59.6%

45.9% 40.0%

0.400 29.7%

32.6%

0.300 21.7% 16.3%

0.200 0.100

7.4%

10.0%

5.3%

0.000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Figure 27.6 (a) Development of total ASC which called at Hong Kong and Shenzhen (in TEU). (b) Development in share of ASC connected to the selected ports.

563

PORT COMPETITION AND COMPETITIVENESS

exceeding that which called at Hong Kong. Speciﬁcally, Shenzhen was receiving more capacity than Hong Kong for two of the three largest east–west trades connected to the region. This is an important achievement given that two-thirds of capacity that called at the region was generated from such trades. The basis for Shenzhen’s strong performance was attributed to the period between 1996 and 2001, which saw many carriers beginning to include the port in their port rotation in addition to Hong Kong. The norm was to pair Hong Kong up with one of the terminals in Shenzhen. This would be considered a positive development for

Table 27.3 ASC affected by inter-port competition in the Pearl River Delta Major trade routes Transpaciﬁc Europe–Far East Southeast Asia–Far East

HKG vs. SEZ (’000 TEUs)a 57,898 27,329 25,328

a HKG denotes Hong Kong and SEZ Shenzhen. Source: Authors’ computation.

Shenzhen, because users of the port would beneﬁt in terms of improved connectivity and a larger choice of shipping lines to choose from. Economies of scale and scope generated from higher trafﬁc volumes also led to lower cost per TEU handled, for both shippers and shipping lines. As a whole, a comparison of container shipping statistics for the two ports in Table 27.4 revealed that Hong Kong remained very much the focus of service schedules operated by major container shipping lines. While Shenzhen received calls from 153 container shipping services, operated by 41 shipping lines, comparative ﬁgures for Hong Kong were signiﬁcantly higher. There are fewer services where carriers will call only at Shenzhen, and the norm was to pair Hong Kong up with one of the terminals in Shenzhen. In fact, only 24 services called exclusively at Shenzhen, the rest making parallel calls at Hong Kong as well. By comparison, 158 shipping services called exclusively at Hong Kong. Nonetheless, most of those which called at Shenzhen were mainline services and tended to involve bigger vessels, thereby generating higher ASC. In fact, Table 27.4 shows that the average size

Table 27.4 Comparison of container shipping statistics between Hong Kong and Shenzhen (2006) Statistic

Hong Kong

Shenzhen

Container throughput (TEUs) Shipping services Shipping lines Ports connected to Annualized slot capacity (TEUs) Vessel capacity (TEUs) Vessels Average vessel size (TEUs)

23,539,000 290 90 268 48,359,870 4,691,223 1,361 3,447

18,468,900 153 41 193 36,887,300 4,102,802 948 4,328

Source: Informa Plc (2007).

564

THEO NOTTEBOOM AND WEI YIM YAP

of vessels received by Shenzhen was 25.6% larger than those calling at Hong Kong. However, empirical evidence had shown that Shenzhen was able to make strong gains on the major east–west trade routes. Speciﬁcally, the development of calling patterns at both container ports showed that most carriers called at both Shenzhen and Hong Kong in order to pick up direct cargo at the former, and direct with an increasing share of transshipment cargoes fed from surrounding regions at the latter. Hence, although Hong Kong was able to retain a sizable feeder network, which has supported its premier hub status in the Pearl River Delta thus far, it runs the risk of losing a signiﬁcant share of the feeder business should these services follow their mainline counterparts by relocating to Shenzhen.

27.5.3 Port competition and competitiveness in the Antwerp–Hamburg range

Average annual growth in 1000 TEU (three-year periods)

The ports of Rotterdam, Hamburg, Antwerp and Bremerhaven handled 33.8

1000 900 800 700 600 500 400 300 200 100 0 0%

million TEUs, or 59.3% of all containers handled in Northwest Europe in 2007 (Informa UK Ltd 2008). The period 1995– 2006 was characterized by a gradual decrease in Rotterdam’s market share, mainly caused by poor trafﬁc growth in the late 1990s (see Figure 27.7). Hamburg seems to have beneﬁted most from this situation, while Antwerp also improved its market position vis-à-vis its neighboring rival. Despite the later trafﬁc boom in Rotterdam of about 1 million TEUs per year, the main Dutch port was not able to increase its market share. In 2006, the four ports saw 64.1 million TEUs of ASC deployed by 162 shipping lines in 413 shipping services. The proﬁle of ASC deployed consisted mainly of capacity operating on the major east–west trades. Such capacity accounted for 35.5 million TEUs, or 55.4% of all ASC supplied. The remaining capacity was made up of shipping services connecting to various regions within Western and Northern Europe. The largest of the trades that called at the selected container ports was the Europe–

2003-2006

Antwerp

2003-2006

Rotterdam Hamburg

2003-2006

Bremerhaven 2003-2006 1995-1998 1995-1998 1995-1998 1995-1998

5%

10%

15%

20%

25%

30%

35%

40% 45%

Average market share (three-year periods)

Figure 27.7 Evolution of market share and average annual growth based on annual throughput in TEU.

PORT COMPETITION AND COMPETITIVENESS

Far East trade. This was followed by the intra-Europe and transatlantic trades. A number of operators of container terminal facilities located in the selected ports operate terminals in other ports. For example, Eurogate has facilities in Bremerhaven and Hamburg while PSA International has operations in Antwerp (and Zeebrugge) and operates a small container facility in Rotterdam. APM Terminals of the Maersk group operates large dedicated facilities in Bremerhaven and Rotterdam (and also in Zeebrugge), whereas MSC operates the MSC Home Terminal in Antwerp (joint venture with PSA) and a similar facility in Bremerhaven. In addition, DP World operates several terminals in Antwerp and is expected to start operations at Rotterdam’s Maasvlakte 2 in 2013. If we include new projects scheduled to come on-stream by 2013, the sample includes CMA-CGM (Antwerp and Rotterdam). Furthermore, the four largest European container shipping lines (Maersk, MSC, CMA-CGM and Hapag-Lloyd) are also found to have shareholding interests in these ports. Hence, the proximity of these facilities and operators suggests the presence of a high level of inter- as well as intra-container-port competition, where container terminal operators in these ports actively sought to position their facilities as important links within value chains that connect Europe and major markets in Asia and North America. With reference to Figures 27.8(a) and 27.8(b), examination of ASC that called at the selected ports revealed that the largest amount of capacity was received by Rotterdam, followed by Hamburg, Antwerp and Bremerhaven. However, while the beginning of the period saw Rotterdam receiving 82.5% of all capacity that called at

565

the four ports, its share had declined to 61.7% by 2006. As for the other ports, the same period saw the share of ASC received by these ports remaining fairly constant with those of Hamburg and Antwerp, ranging between 40% and 50%, whereas those of Bremerhaven ﬂuctuated between 27% and 34%. As a whole, Table 27.5 revealed that interport competition occurs mainly between Rotterdam and Hamburg and Rotterdam and Bremerhaven on the Europe–Far East trade, and between Rotterdam and Antwerp on both the Intra-Europe and transatlantic trades. The analyses also showed that leading carriers on the trades, which consist generally of the same entities that were Maersk, MSC, the Grand Alliance, CMACGM and Hamburg Sued, play an active part in shaping inter-port competition in the region. This was most evident because the majority of services operated by Maersk were deployed to call jointly at Rotterdam and Bremerhaven, where APM Terminals is present. The case for MSC also revealed that the carrier deployed most of its services to call at Antwerp, where the MSC has a 50 percent stake in the MSC Home Terminal. The carrier also scheduled a signiﬁcant portion of its capacity to call at Bremerhaven, where it has a 50 percent share in the MSC Gate terminal.

27.6

Summary

The above analyses have shown that container shipping services exert a direct and immediate effect on inter-container port competition as measured from the perspective of shipping capacity deployed by shipping lines. In the case of Southeast Asia, empirical evidence found that most of the

(a) Four ports

70, 000, 000

64.1m

Rorrerdam

60.5m

Hamburg

60, 000, 000

57.8m

Antwerp 50, 000, 000

50.7m

Bremerhaven

45.3m 41.9m 38.8m

40, 000, 000 30, 000, 000 26.5m

28.6m

21.9m 22.4m

20, 000, 000 10, 000, 000

39.2m

35.2m 37.2m 30.7m

40.5m 39.6m

35.8m

27.9m 29.1m 29.4m

30.2m

31.8m

25.3m

29.7m 30.0m 24.2m

20.8m

27.2m 26.0m

28.2m 28.9m

18.8m 22.5m 15.7m 15.9m 16.1m 21.2m 19.6m 18.2m 13.1m 13.7m 18.2m 19.0m 12.1m 14.9m 15.6m 14.3m 14.5m 11.7m 12.9m 12.9m 12.4m 12.3m 12.5m 13.2m 9.7m 8.2m 8.5m 8.5m

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 (b) 90.0 82.5%

82.3% 79.4% 78.1%

76.2%

80.0

75.8% 72.0%

Rotterdam 70.0

40.0 30.0

68.4% 67.0%

Hamourg

61.7%

Antwerp

60.0 50.0

70.1% 70.6%

Bremerhaven 45.7%

47.7% 42.7% 44.6%

44.2% 45.0% 42.9%

30.8% 29.5%

42.8%

44.8% 41.4% 43.3%

40.7%

27.5%

1997

1998

47.7%

43.3% 44.3%

47.6%

49.1% 46.8%

45.3% 48.7% 45.0%

40.0% 40.3% 33.3%

27.6%

46.0%

31.7%

29.7% 29.1% 28.6% 31.8% 31.4%

33.1%

20.0 1995

1996

1999

2000

2001

2002

2003

2004

2005

2006

Figure 27.8 (a) Development of ASC that called at the selected ports in Northwest Europe (in TEU). (b) Development in share of ASC connected to the selected ports.

567

PORT COMPETITION AND COMPETITIVENESS

Table 27.5 ASC affected by inter-port competition in the Antwerp–Hamburg range Competing port pairsa

Europe–Far East (’000 TEUs)

% share

Intra-Europe (’000 TEUs)

% share

Transatlantic (’000 TEUs)

% share

ROT vs. HMB ROT vs. ANT ROT vs. BMN HMB vs. ANT HMB vs. BMN ANT vs. BMN Total

13,677 8,982 12,790 6,938 3,297 6,965 52,650

26.0 17.1 24.3 13.2 6.3 13.2 100.1

6,174 7,209 5,006 2,769 5,304 3,276 29,738

20.8 24.2 16.8 9.3 17.8 11.0 99.9

6,096 11,550 7,017 8,186 4,863 6,431 44,143

13.8 26.2 15.9 18.5 11.0 14.6 100.0

a ANT denotes Antwerp, BMN Bremen/Bremerhaven, HMB Hamburg and ROT Rotterdam. Source: Authors’ computation.

competition occurs between Singapore and Port Klang, followed by Singapore and Tanjung Pelepas. While Singapore was found to remain the port which received most of the shipping calls in the region, the increasing competitiveness of Port Klang and Tanjung Pelepas saw both ports slowly gaining on the incumbent’s market share. In the Pearl River Delta, port competition saw Shenzhen being included in an increasing number of services that used to call exclusively at Hong Kong, which resulted in container trafﬁc being handled directly at the port. The presence of Hutchison Port Holdings and Modern Terminals Limited in a number of facilities in both ports could also contribute to interas well as intra-port competition, as these container terminal operators seek to position their facilities as important links in value chains that connect Southern China and major markets in the world. Turning to Northwest Europe, inter-port competition between Rotterdam, Hamburg, Antwerp and Bremerhaven caused the changes in ASC to be distributed fairly evenly rather than being concentrated on speciﬁc port pairs as in Southeast Asia (i.e.,

Singapore versus Port Klang, and Singapore versus Tanjung Pelepas). The analyses also showed that inter-port competition occurred mainly between different port pairs for different trades. Speciﬁcally, inter-port competition was found to occur mainly between Rotterdam and Hamburg and Rotterdam and Bremerhaven on the Europe–Far East trade, and Rotterdam and Antwerp on both the Intra-Europe and transatlantic trades. As a whole, although container port competition and competitiveness had formerly been analyzed from a variety of perspectives and in great detail, very few studies had attempted to integrate the liner shipping aspects of the business with the port. Hence, this chapter has attempted to address this by delving into the details of service schedules and port calls while investigating the competitive dynamics between container ports. Speciﬁcally, the research has shown that analyses of relationships between container ports should not be conducted at an aggregated level. As every market served by each port involves different decision makers, regions, routes, cargoes and shipping lines, it is unlikely that one port will compete with another across the

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whole spectrum of variables and sectors. Hence, the aim has been to draw decision makers’ attention to the need to identify the extensity and intensity of such relationships in order to craft and implement decisions with greater precision. The research ﬁndings presented were based primarily on evidence provided by container shipping services that called at the selected ports between 1995 and 2006. The merits of this approach have been discussed. However, the research ﬁndings can be complemented with other information and perspectives beyond the supply dimension to include capacity development and considerations from the demand side. Speciﬁcally, the analyses were conducted at the level of the container port. Thus, examination of inter-container port competition from the perspective of individual shipping lines and terminal operators for each container port may uncover greater insights into the market structure, the nature of relationships, and the level of competitiveness as differentiated by cost and price. Furthermore, future research could also take into account a larger sample size of ports. Hence, future research on this issue that is able to address these concerns should offer deeper insights into the dynamics of relationships between container ports and port competitiveness.

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28

Container Terminal Efﬁciency and Private Sector Participation Baris Demirel, Kevin Cullinane and Hercules Haralambides

28.1

Introduction

The capital-intensive nature of liner shipping, the continued development and growth in containerized transport, and the need for maximum capacity utilization in order to achieve adequate rates of return on investment, have all increased pressures on ports to further enhance productivity and operational efﬁciency (Haralambides 1997). Container shipping costs are fundamentally altered as the result of changes in port efﬁciency at both the global and the local levels. Decisions on the size, number and average speed of container ships deployed in liner services are, therefore, critically dependent on port productivity (Cullinane and Khanna 1999). The World Bank (2003) even suggests that the remarkable gains in productivity achieved in ocean transport over the past few decades have left ports as the last remaining component in improving the efﬁciency of logistics chains.

At a more macroeconomic level, the efﬁciency of ports has been found to be a critical factor for a country’s competitiveness and its trade prospects (Cullinane 2010; Park and De 2004; Tongzon 1995). Enhanced port efﬁciency is likely to bring about lower export prices, which, in turn, will help to ensure that a nation’s products are more competitive in global markets. As a result, governments are increasingly recognizing the importance of port efﬁciency to national economic well-being and are increasingly willing to take radical steps to improve the performance of their ports. In many parts of the world, governments have taken action, either direct or indirect, to ensure that new capacity and labor-saving cargohandling equipment has replaced outdated facilities, port worker training has been intensiﬁed, customs procedures have been simpliﬁed, information technology is more widely adopted, and management structures have been commercialized

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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(Haralambides 2002; Haralambides, Ma and Veenstra 1997). Public ports, as deﬁned by Baird (2002), are widely perceived to be deﬁcient because they are controlled by governmental hierarchies. They are deemed to suffer from, inter alia, any or all of: goal displacement, disincentivization, lack of clarity in corporate objectives and operational responsibility, and excessive ministerial intervention in operational decisions (Cullinane, Song and Wang 2005). While the role and contribution of public sector agencies do and will remain signiﬁcant in the port sector, greater private sector participation provides an opportunity to remove traditional, bureaucratic operating procedures and controls and to renew port facilities and equipment by accessing new ﬁnancing opportunities. In both theory and practice, greater private sector participation in the port sector is widely considered, therefore, an effective means of helping governments increase both port productivity and relative efﬁciency, so as to enhance the competitiveness of a nation’s port sector (Baird 2002; Tongzon and Heng 2005; World Bank 2003). The aim of this study is to assess the impact of private sector participation on container terminal efﬁciency by focusing on a case study of the Eastern Mediterranean region, with a particular emphasis on the situation in Turkey. Like many others, Turkey’s public port sector is perceived as highly inefﬁcient, and this has prompted a call for the implementation of a more wideranging port privatization policy than currently exists. Despite Turkey’s strategic location at the nexus of Asia and Europe, both Gunaydın (2006) and Oral, Kisi, Cerit et al. (2007) argue that its public ports have not been able to take full advantage of the nation’s advantageous geographical posi-

tion. They attribute this to the lack of a national port strategy, the fact that a single port authority is responsible for preserving both national and regional economic interests, poor infrastructure and superstructure facilities, management by a publicly owned company whose core business and priorities do not speciﬁcally cover port operations, complex bureaucratic procedures, an inﬂexible tariff structure that does not adapt well to changing market conditions, insufﬁcient draft in ports to accommodate increasingly large vessels, and generally inefﬁcient port operations. By providing a larger sample size for empirical testing, an analysis of the Turkish situation within the context of the wider Eastern Mediterranean region (an area where economic and social similarities prevail) facilitates greater diversity in the efﬁciency estimates derived. Similarly, because of the proximity of all the container terminals in the Eastern Mediterranean region, this wider geographical context has the additional beneﬁt of allowing the direct evaluation of the relative efﬁciency of Turkish terminals against those of its competitors. Efﬁciency estimation is performed using data envelopment analysis (DEA) and the impact of private sector involvement in container terminals is assessed by applying a Tobit regression model, with DEA efﬁciency estimates as the dependent variable. The main objective of this study is to investigate the relationship between private sector participation in container terminals and efﬁciency levels, speciﬁcally, to develop and assess the empirical evidence on whether or not public ports in Turkey and the Eastern Mediterranean region are less technically efﬁcient than their privately operated counterparts. The primary

CONTAINER TERMINAL EFFICIENCY

573

research question to be answered by this study is: Does greater private sector involvement in container terminal operations have a positive impact on terminal efﬁciency in Turkey and the Eastern Mediterranean? In the search for the answer, a number of potentially intervening variables might complicate the analysis and obfuscate the nature of the relationship under investigation. In an effort to control for these other potentially inﬂuential factors, a number of subsidiary research questions have been formulated, as follows:

ables for which data was collected. The results of the empirical analysis are presented in Section 28.5 for the DEA and in Section 28.6 for the subsequent Tobit regression analysis. Both sets of results are then discussed in Section 28.7, with a particular focus on seeking answers to the research questions posed. Section 28.8 draws conclusions and makes recommendations for future work in this ﬁeld.

1.

Since the turn of the century, many studies have applied DEA to the evaluation of port efﬁciency. One of the major reasons for doing so is to assess the existence, or absence, of any relationship between the efﬁciency of a port and the extent of private sector participation within it. These studies are predicated on the hypotheses embedded within property rights theory (as expounded by Coase 1937, De Alessi 1980 and Demsetz 1983) and public choice theory (see Downs 1967; Tullock 1976), namely that greater private sector participation in organizational ownership will lead to improvements in efﬁciency. Typically, such studies have utilized cross-sectional data to assess efﬁciency differences across ports or terminals where there is variation in the degree of private sector participation, or time series (panel) data to assess the impact of port reforms (invariably involving a move from less to more private sector participation) on dynamic changes in port or terminal efﬁciency. The ﬁndings of Liu (1995) in relation to the UK port sector suggest that there is no link between ownership structure and estimates of port efﬁciency. Notteboom, Coeck and van den Broeck (2000) also ﬁnd

Is the size or scale of a terminal positively related to its efﬁciency? 2. Are higher levels of technical efﬁciency associated with transshipment (hub) status for a terminal or port, as opposed to gateway status? 3. Do container terminals located at greater distances from trunk routes offer higher efﬁciency to compensate for the extra voyage time? 4. Does the efﬁciency of customs and border procedures have any positive relationship to terminal efﬁciency? Following this introduction, which speciﬁes the overall research objective and elaborates relevant research questions, Section 28.2 reviews the literature on the relationship between port efﬁciency and private sector participation. Section 28.3 outlines the methodology to be adopted in the analysis, comprising both data envelopment analysis (DEA) as the selected method for deriving efﬁciency estimates, and Tobit regression analysis as the basis for investigating the determinants of DEA efﬁciency estimates. Section 28.4 moves on to consider data collection issues such as sample size, sample speciﬁcation and the deﬁnition of the vari-

28.2

Literature Review

574

B. DEMIREL, K. CULLINANE AND H. HARALAMBIDES

no evidence that private sector participation is related to the efﬁciency of container terminals when they compare Asian and European ports. Similarly, Tongzon (2001) conﬁrms that ownership structure is not a determinant of port efﬁciency in his study of mainly Australian container terminals. Valentine and Gray (2003) use DEA to analyze data relating to a sample of container ports from the world’s top one hundred container ports for the year 1998. The main objective of the study is to compare the efﬁciency ratings derived from the application of DEA to the categorization of the sample ports into different forms of ownership and organizational structure. The study ﬁnds that ownership structure does not seem to have any signiﬁcant inﬂuence upon efﬁciency and that organizational structure is much more inﬂuential. In a similar study of a sample of 19 ports in North America and Europe, the same authors again ﬁnd that ownership structure does not have any signiﬁcant bearing on port efﬁciency (Valentine and Gray 2002). In their analysis of the relationship between efﬁciency and the ownership and administrative structures of Asian container terminals, Cullinane, Song and Gray (2002) ﬁnd the opposite – that a signiﬁcant relationship does indeed exist between greater private sector participation and higher levels of efﬁciency. This conclusion is also reached by Estache, Gonzalez and Trujillo (2002) in their time-series analysis of port reforms in Mexico. In contrast, Cullinane and Song (2002) ﬁnd no evidence for any relationship between these two characteristics. Barros (2003a) applies DEA to the Portuguese port industry in 1999 and 2000. The motivation for the analysis is to determine what relationship exists between the governance structure that has been

established for the Portuguese port sector, the incentive regulation promulgated under this structure, and the ultimate impact on port efﬁciency. The author concludes that extant incentive regulation has been successful in promoting enhanced efﬁciency in the sector, but that this could be improved upon by the implementation of recommendations aimed at redeﬁning the role of Portugal’s Maritime Port Agency, the regulatory body responsible for port matters. This time using data for 1990 and 2000, Barros (2003b) again applies DEA to the Portuguese port industry to derive estimates of efﬁciency that can then be utilized to determine the source of any inefﬁciency that may be identiﬁed. One of the results of the analysis is that while Portuguese ports have attained high levels of technical efﬁciency over the period covered by the analysis, the sector has generally not kept pace with technological change. The author concludes that the ﬁnancial aids to investment that form part of the EU’s Single Market Program have stimulated greater efﬁciency in the port sector, particularly as the result of the greater competition that is faced, a feature especially relevant for Portuguese ports located near the border with Spain. Through the application of Tobit regression analysis, it is also found that container ports are more efﬁcient than their multi-cargo counterparts (suggesting that there are diseconomies of scope in cargo handling), that efﬁciency is positively related to market share and, ﬁnally, that greater public sector involvement is negatively related to efﬁciency. This positive relationship between efﬁciency and private sector participation in container ports is also found by Cullinane and Song (2003) in their analysis of the Korean situation. Barros and Athanassiou (2004) apply DEA to the estimation of the relative efﬁ-

CONTAINER TERMINAL EFFICIENCY

ciency of a sample of Portuguese and Greek seaports. The broad purpose of this exercise was to facilitate benchmarking so that areas for improvement to management practices and strategies could be identiﬁed and, within the context of European ports policy, improvements implemented within the seaport sectors of these two countries. The authors conclude that there are economic beneﬁts from the implementation of this form of benchmarking, that economies of scale should be the principal target of adjustment for the sector, and that port privatization will facilitate productivity improvements in both countries. Estache, Tovar de la Fe and Trujillo (2004) support this last assertion by concluding from their analysis that Mexican port reforms have incentivized operators to innovate technologically and to increase efﬁciency. Cullinane, Ji and Wang (2005) empirically examine the relationship between privatization and relative efﬁciency within the container port industry. The sampling frame comprises the world’s leading container ports – ranked in the top thirty in 2001 – together with ﬁve other container ports from the Chinese mainland. DEA is applied in a variety of panel data conﬁgurations to eight years of annual data from 1992 to 1999, yielding a total of 240 observations. The analysis concludes that there is no evidence to support the hypothesis that greater private sector involvement leads to improved efﬁciency in the container port sector. In contrast, Tongzon and Heng (2005) deduce that there exists a positive relationship between technical efﬁciency and privatization and that the best ownership structure for container terminal efﬁciency is either a mixed public/ private organization or a purely private one. Cullinane, Wang, Song and Ji (2006) apply both DEA and SFA (stochastic fron-

575

tier analysis) to the same set of container port data for the world’s largest container ports and compare the results obtained. A high degree of correlation was found between the efﬁciency estimates derived from all the models applied, suggesting that results were relatively robust to the DEA models applied or the distributional assumptions under SFA. The results showed that high levels of technical efﬁciency were associated with scale, with greater private sector participation, and with transshipment, as opposed to gateway, ports. As is the case with applications to most economic sectors, the evidence on the relationship between private sector participation in ports and terminals and their observed levels of efﬁciency remains rather inconclusive. There appears to be only weak evidence that ports or terminals with greater private sector participation might perform better, or exhibit more competiveness, than their competitor ports. As a rather tentative general conclusion, however, it would seem that, at least for container terminals, there is an emerging body of evidence that port reforms which increase private sector participation do indeed lead to improved efﬁciency within the port(s) or terminal(s) affected. It is this fundamental hypothesis, therefore, which underpins the analysis of port efﬁciency in Turkey and the Eastern Mediterranean undertaken within this work.

28.3

Methodology

28.3.1 Data envelopment analysis (DEA) Data envelopment analysis (DEA) can be broadly deﬁned as a non-parametric method

576

B. DEMIREL, K. CULLINANE AND H. HARALAMBIDES

for measuring the relative efﬁciency of a decision-making unit (DMU), in this case a terminal. The method caters for multiple inputs to, and multiple outputs from, the DMU. It does this by constructing a single “virtual” output that is mapped onto a single “virtual” input, without reference to a predeﬁned production function. There has been a phenomenal expansion of the theory underpinning DEA, the methodology itself and applications of the methodology over the past few decades (Charnes, Cooper, Lewin and Seiford 1994; Forsund and Sarafoglou 2002; Sarafoglou 1998; Seiford 1996). The fundamentals of the approach have been very widely disseminated and so, in the interests of brevity, readers are referred for more detailed expositions to Charnes, Cooper, Lewin and Seiford (1994), Cooper, Seiford and Tone (2000, 2006), Cooper, Seiford and Zhu (2004) and Zhu (2003). One assumption that underpins the early DEA approaches, including the CCR model (Charnes, Cooper and Rhodes 1978), is that the sample under study exhibits constant returns to scale. A voluminous body of evidence suggests that this assumption is particularly inappropriate to the ports sector where, it is commonly asserted, economies of scale are quite signiﬁcant (Cullinane and Khanna 2000; Robinson 1978; Tabernacle 1995). In order to cater for such situations, where variable returns to scale may be more the norm, the CCR model has been modiﬁed so that scale efﬁciencies, for example, may be separated out from the pure productive (or technical) efﬁciency measure that the standard CCR model yields. The main modiﬁed forms of the CCR model that are utilized in practice are the Additive model and the BCC model (the

latter being named after its creators, Banker, Charnes and Cooper 1984). Accordingly, the efﬁcient frontiers that are estimated by these models are different from that of the CCR model. However, the Additive and BCC models are identical in terms of the efﬁcient frontiers that they estimate. The main difference between them is the projection path to the efﬁcient frontier that is employed as the basis for estimating the levels of relative (in)efﬁciency for those DMUs in the sample that are not located on the efﬁcient frontier. This different approach to projection determines the different relative efﬁciencies for different inefﬁcient DMUs. This is because the level of (in)efﬁciency for inefﬁcient observations is derived from the distance it is located from the efﬁcient frontier, a measure that is, of course, dependent upon the projection path that is utilized. Irrespective of which model is selected for application, the main advantages of utilizing a DEA approach to efﬁciency estimation can be summarized as follows: 1.

2.

3.

4.

Multiple outputs and multiple inputs can be analyzed simultaneously (Cooper, Seiford and Tone 2000); More extraneous factors that have an impact on performance can be incorporated into the analysis (such as those relating to the commercial and competitive environment of port operations, as well as other qualitative factors; Cook, Kress and Seiford 1996); The possibility of different combinations of outputs and inputs being equally efﬁcient is recognized and taken into account (Seiford and Thrall 1990); There is no necessity to pre-specify a functional form for the production

CONTAINER TERMINAL EFFICIENCY

function that links inputs to outputs, nor to give an a priori relationship (by pre-specifying the relative weights) between the different factors that the analysis accounts for (Cooper, Seiford and Tone 2000); 5. Rather than in comparison to some sample average or exogenous standard, efﬁciency is measured in relation to the highest level of performance within the sample under study (Cooper, Seiford and Tone 2000); 6. Speciﬁc sub-groups of those DMUs identiﬁed as efﬁcient can be ring-fenced as benchmark references for the nonefﬁcient DMUs (Homburg 2001). In the speciﬁc case of port efﬁciency, the ability to handle more than one output is a particularly appealing feature of the DEA technique. This is because there exist a number of different measures of port output that may be used in such an analysis, the selection depending upon what aspect of port operation constitutes the main focus of the evaluation. Surprisingly, however, this capability is rarely utilized in practice: there is a clear preference amongst empirical analyses for focusing on a single output, usually container throughput. In addition to providing relative efﬁciency measures and rankings for the DMUs under study, DEA provides results on the sources of input and output inefﬁciency, and identiﬁes the benchmark DMUs that are utilized for the efﬁciency comparison. This ability to identify the sources of inefﬁciency could be useful to port or terminal managers in inefﬁcient ports so that the problem areas might be addressed. For port authorities, too, they may provide a guide to focusing efforts on improving port performance.

28.3.2

577

Tobit regression analysis

An important shortcoming of DEA is that it does not identify the root causes of (in) efﬁciency, whereas the primary objective of this study is to establish the relationship between the possible factors or causes of inefﬁciency and the efﬁciency estimates derived from the application of DEA. In order to overcome the deﬁciency of DEA in this respect and to address each of the ﬁve research questions which this analysis seeks to answer, a positive relationship is hypothesized between DEA efﬁciency estimates and ﬁve explanatory variables: private sector participation (as evidenced in Cullinane, Ji and Wang 2005; Estache, Tovar de la Fe and Trujillo 2004; Gonzalez and Trujillo 2008); scale of operation (as evidenced in Cheon, Dowall and Song 2010; Cullinane, Song and Gray 2002; Tongzon and Heng 2005; Wang and Cullinane 2006); transshipment (hub) or gateway status (evidenced in Cullinane, Wang, Song and Ji 2006; Notteboom, Coeck and van den Broeck 2000; nautical distance from nearest trunk route (see Sanchez, Hoffmann, Micco et al. 2003; Yeo, Roe and Dinwoodie 2008, both of which imply that the negative consequences of deviation distance on transport costs and port competitiveness can be compensated for with a high level of port efﬁciency) and; the efﬁciency of customs and border procedures (as evidenced in Clark, Dollar and Micco 2004; Sanchez, Hoffmann, Micco et al. 2003). These hypothesized relationships are tested by using the Tobit regression model as a means of examining the determinants of efﬁciency in container terminals. A basic assumption of the ordinary linear regression model is that the dependent variable is normally distributed. The Tobit model, however, is applicable to situations

578

B. DEMIREL, K. CULLINANE AND H. HARALAMBIDES

where the dependent variable is censored or constrained in some way, so that it actually conforms to a truncated normal distribution (i.e., it is constrained at one end). However, the dependent variable in this analysis – DEA efﬁciency estimates – is actually constrained at both ends (i.e., between 0 and 1). Therefore, it is necessary to transform DEA efﬁciency estimates into truncated data so that values are constrained only on one side and the range of feasible values lies between zero and positive inﬁnity. This transformation is simply obtained by: Y=

( E1 ) −1

(1)

where E is the DEA efﬁciency estimate and Y is the newly transformed variable, possessing the characteristic that all observations are greater than or equal to zero (i.e., censored or truncated at zero). Following this transformation, there will exist a cluster of observations equal to zero, because efﬁcient observations will now take a value of zero and inefﬁcient observations have an unconstrained value which is greater than zero (up to inﬁnity for DEA efﬁciency estimates of zero). This new variable meets the criteria for applying the Tobit model, which in this context is speciﬁed as follows: ⎧ y i* yi = ⎨ ⎩0

if y i* > 0 if y i* ≤ 0

(2)

where is a latent variable deﬁned as: y i* = β x i + U i , U i ~ N ( 0, σ 2 )

28.4 28.4.1

(3)

Data Collection Sample size

In order to properly apply DEA, both the input and output variables, and the sample

of DMUs, should be appropriately speciﬁed and selected. As a necessary ﬁrst step, the minimum sample size should be determined. As a rule of thumb, in order to avoid the convergence problems associated with overspeciﬁcation, the minimum sample size should be at least twice the sum of the inputs and outputs. Some studies advise an even more conservative approach. For example, Cochrane (2008) suggests a minimum sample size for analysis of at least three, and preferably four, times the total number of input and output parameters. Cooper, Seifert and Tone (2000, 2006) provide a more formal recommendation regarding minimum sample size, as follows: N ≥ max [ m × s, 3 ( m + s )]

(4)

where N is the minimum sample size of DMUs, m is the number of inputs and s the number of outputs. As a general guide, because measures of technical efﬁciency are determined relatively, the use of as large a sample size as possible allows more meaningful generalization of the sample results to the population and also enhances the accuracy of the estimates derived for individual DMUs (Cullinane and Wang 2007).

28.4.2

Sample speciﬁcation

Except for a few ports handling containers in very small shares together with other cargo (dry and liquid bulk, general cargo etc.), all the container terminals in Turkey are included in the sample for analysis. Seven of the most important container terminals from countries in the Eastern Mediterranean region are also included in the sample. From a simple pragmatic perspective, this larger sample overcomes the

CONTAINER TERMINAL EFFICIENCY

problem that the number of container terminals in Turkey is insufﬁcient to allow meaningful DEA efﬁciency estimates to be derived; if DEA were applied to the Turkish sample alone, its small size would make it very likely that the majority of container terminals in the sample would be assessed as fully efﬁcient. From a much more substantive perspective, however, the inclusion of other container terminals from countries in the Eastern Mediterranean region facilitates a direct comparison of the efﬁciency of container terminals in Turkey with their counterparts within the region. In addition, in the subsequent Tobit regression analysis, partitioning the sample between Turkish and non-Turkish observations enables such a comparison to be made with respect to the ﬁve hypothesized explanatory factors (private sector participation, scale, hub or gateway status, distance from trunk route, and efﬁciency of customs and border procedures) and their relationship to average estimated efﬁciency levels. This has the signiﬁcant advantage of providing greater insight into the competitiveness of Turkish container terminals vis-à-vis competing ports in the region. Ultimately 16 container terminals were selected for inclusion in the sample as DMUs. They are: Izmir, Haydarpaşa, Mersin, Marport, Kumport, Gemport, Mardaş, Borusan and Evyapport in Turkey, Thessaloniki and Piraeus in Greece, Port Said SCCT and Damietta DCHC in Egypt, Haifa in Israel, Constanta CSCT in Romania, and Novorossisk in Russia. In order to minimize the impact on efﬁciency estimates of any port-speciﬁc occurrences within any given year (e.g. expansion, handover, labor strikes, etc.), the units under study should be observed over more than a single point of time. Therefore, data have been collected

579

for a period of analysis covering the three years 2006–8. The total number of observations for analysis is 47 (data for 2006 was not available for one small container terminal – Evyapport – but this requires no particular consideration as it has no effect on the analysis).

28.4.3

Variable speciﬁcation

As in the majority of studies investigating the efﬁciency of container ports or terminals, cargo throughput has been selected as the appropriate output variable for the DEA. The issue of transshipment activity then arises as a potential problem in the calculation of total container trafﬁc. According to Wang and Cullinane (2006), however, in the majority of cases this problem is largely mitigated because the amount of work associated with the handling of a transshipment container within a terminal does, in fact, equate very closely to that associated with an import or export container. In addition, the Tobit regression analysis which is performed within this work on the outputs from the DEA explicitly addresses the speciﬁc inﬂuence of transshipment on terminal efﬁciency estimates. Physical measures of port infrastructure are the most widely used input variables in applications of DEA to the container port sector. This is mainly for pragmatic reasons. In contrast to container throughput data, which is widely disseminated and easily accessible, it is not always possible to obtain all the terminal production inputs in terms of labor and capital factor endowments. In particular, data on labor is often restricted, not only because it is regarded as commercially conﬁdential but also because, in certain circumstances, it can be politically sensitive. Thus, in common with virtually

580

B. DEMIREL, K. CULLINANE AND H. HARALAMBIDES

all previous studies of port efﬁciency (as evidenced in the reviews by Cullinane 2010, Gonzalez and Trujillo 2009 and Panayides, Maxoulis, Wang and Ng 2009), the DEA conducted herein utilizes input variables that represent different aspects of the physical infrastructure within the container terminal. It should be noted, however, that some of the input variables, yard equipment for example, will be highly correlated with the size of the labor force working in the terminal (Cullinane and Wang 2006; De Neufville and Tsunokawa 1981; Notteboom, Coeck and van den Broek 2000). Thus, the omission of an input variable which relates speciﬁcally to labor is not so problematic, especially since the case study area is the Eastern Mediterranean, where the general level of technological sophistication in ports is largely comparable. The input variables for the DEA applied within this study cover most of the physical characteristics of a container terminal. The selected inputs are: quay length in meters, terminal area in square meters (a close

Table 28.1

proxy for yard capacity), the number of quay cranes (including both ship-to-shore and the mobile quay cranes used mainly by smaller container terminals), the number of pieces of yard equipment, and maximum draft in meters. Summary statistics for the data collected as input and output variables are provided in Table 28.1. Given that the analysis is based on a total of six variables, sample size can be deemed to comply with the earlier recommendations regarding minimum sample size. Together with the input and output variables for the DEA, in order to investigate the possible factors inﬂuencing the efﬁciency estimates produced as outputs from the DEA additional data are collected to facilitate the supplementary Tobit regression analysis. These data relate to: •

private sector participation in terminal operations – a dichotomous dummy variable simply deﬁned as “public” or “private”;

Summary statistics of variables for efﬁciency analysis

Mean Standard error Median Mode Standard deviation Kurtosis Skewness Range Minimum Maximum Count

Throughput (TEU)

Quay length (m)

Terminal area (m2)

Quay cranes (no.)

Yard equipment (no.)

Draft (m)

771,775.91 96,625.00 649,000 N/A 662,427.62 3.68 1.67 3,141,970 60,030 3,202,000 47

1,076.32 82.38 1,020 1,200 564.75 3.41 1.66 2,574 200 2,774 47

371,561.30 37,264.48 310,000 400,000 255,472.43 0.05 0.96 868,753 33,247 902,000 47

8.91 0.76 8 12 5.21 −0.51 0.59 18 2 20 47

102.62 8.13 89 53 55.71 −0.59 0.50 205 18 223 47

13.45 0.27 13 14 1.84 1.02 0.53 8 10 18 47

CONTAINER TERMINAL EFFICIENCY

•

transshipment ratios to be used for determining the status of the terminal. The data have been collected through internet sources – again, a dichotomous dummy variable deﬁning a terminal as “hub” or “gateway,” depending on a fairly arbitrary threshold value of 50 percent for the calculated transshipment ratio; • nautical deviation distance from the mainline east–west trunk route (as derived from proprietary nautical distance tables by taking the number of nautical miles from the geographical coordinates of the port to the geographical coordinates of the nearest access point to the mainline east–west route); and • the efﬁciency of customs and border procedures. Data have been sourced and ﬁltered from the sub-indices of the Logistics Performance Index (LPI) of the World Bank. LPI and its indicators provide cross-country assessment of the logistics gap among countries. For the purposes of this study, the “customs” indicator of the LPI has been selected for its likely or potential relevance to port operations and container dwelltime in terminals. This is speciﬁcally deﬁned by the World Bank as indicating the “efﬁciency of the clearance process (i.e. speed, simplicity and predictability of formalities) by border control agencies, including customs.”

28.5 28.5.1

Results Aggregate efﬁciency estimates

Both CCR and BCC models have been utilized to derive efﬁciency estimates for each

581

container terminal in the sample. Separating each of the three years contained within the panel data analyzed, the results are presented in Table 28.2. Summary statistics for the derived efﬁciency estimates are exhibited in Table 28.3. The mean efﬁciency score for the CCR model is 0.565, while the mean efﬁciency score for the BCC model is 0.788. The assumption of constant returns to scale that underpins the CCR model implies that efﬁciency estimates account for both technical and scale efﬁciency, while the variable returns to scale assumption of the BCC model identiﬁes only technical efﬁciency. It is only to be expected, therefore, that the BCC model will yield a higher level of mean efﬁciency. Applying a t-test for the difference of means in a paired sample, the efﬁciency measures obtained from applying each model are, however, found to be signiﬁcantly different. In contrast to some previous applications of DEA to port efﬁciency estimation (e.g. Cullinane and Wang 2007; Wang and Cullinane 2006), the correlation between the efﬁciency measures produced by the CCR and BCC models is found to be actually quite weak at 0.413. However, this is likely due to the limited sample size; while the BCC model produced many estimates of full efﬁciency, equivalent paired CCR estimates are often far from full efﬁciency. As one might expect, therefore, the two models also produce signiﬁcantly different distributions. The distribution of BCC model estimates is skewed towards higher efﬁciency, while the distribution of the CCR model estimates resembles a bimodal distribution around 0.4 and 1.0. Once again, however, it is important to reiterate and recognize that this difference is likely due to the size of the sample

582 Table 28.2

B. DEMIREL, K. CULLINANE AND H. HARALAMBIDES

Efﬁciency estimates of the container terminals in the sample 2006

Izmir Haydarpaşa Mersin Marport Kumport Gemport Mardaş Evyapport Borusan Constanta CSCT Haifa Thessaloniki Piraeus Novorossiysk Damietta DCHC Port Said SCCT

Table 28.3 estimates

2007

CCR efﬁciency

BCC efﬁciency

CCR efﬁciency

BCC efﬁciency

CCR efﬁciency

BCC efﬁciency

0.460 0.542 0.444 1.000 0.484 0.543 0.313 – 0.832 0.922 0.784 0.476 0.732 0.151 1.000 1.000

0.612 1.000 0.467 1.000 0.625 1.000 0.475 – 1.000 1.000 0.854 1.000 0.757 1.000 1.000 1.000

0.392 0.435 0.445 0.763 0.504 0.547 0.359 0.217 0.828 0.842 0.703 0.508 0.577 0.205 0.887 1.000

0.522 0.778 0.503 0.802 0.649 1.000 0.592 1.000 1.000 0.851 0.728 1.000 0.585 1.000 0.899 1.000

0.319 0.322 0.390 0.747 0.330 0.445 0.386 0.250 0.841 0.662 0.692 0.224 0.140 0.341 0.579 1.000

0.430 0.702 0.391 0.794 0.405 1.000 0.467 1.000 1.000 0.668 0.716 1.000 0.142 1.000 0.637 1.000

Summary statistics for efﬁciency DEA-CCR

Mean Standard error Median Mode Standard deviation Kurtosis Skewness Minimum Maximum Count

2008

0.565 0.037 0.508 1.000 0.255 −1.032 0.260 0.140 1.000 47

DEA-BCC 0.788 0.034 0.851 1.000 0.232 −0.410 −0.740 0.142 1.000 47

analyzed; it is invariably the case that, in previous studies where a high correlation has been found between the estimates produced by the two models, sample size has been signiﬁcantly larger.

28.5.2 Country-speciﬁc efﬁciency estimates The mean efﬁciency scores of 0.565 and 0.788 respectively from the CCR and BCC models imply that over the period of analysis, with the same inputs, the Eastern Mediterranean container terminals in the sample produced on average 77% and 27% less output (i.e. container throughput) than the level that was potentially possible. This provides a clear indication that there exists signiﬁcant inefﬁciency in container terminal operations in the Eastern Mediterranean region. The average efﬁciency levels of container terminals located in different countries are found to be signiﬁcantly different from each other. As can be seen in Table 28.4, the average efﬁciency of Turkish container terminals is found to be 0.495 and 0.749 for

CONTAINER TERMINAL EFFICIENCY

Table 28.4 Average efﬁciency estimates for each country in the sample Country

DEA-CCR

DEA-BCC

Turkey Greece Egypt Romania Russia Israel

0.50 0.44 0.91 0.81 0.23 0.73

0.75 0.75 0.92 0.84 1.00 0.77

583

efﬁciency obtained from applying the CCR model is 0.65 for 2006, but reduces to 0.58 and 0.48 in 2007 and 2008 respectively. This observed decrease in mean efﬁciency level may be attributable to the decline in container throughput experienced in some ports as the result of a downturn in the global economy and reduced international trade, especially in Greece, where a labor strike reduced operational capability for a period of time in 2008.

Table 28.5 Average efﬁciency estimates for each year in the sample Year

DEA-CCR

DEA-BCC

2006 2007 2008

0.65 0.58 0.48

0.85 0.81 0.71

CCR and BCC models respectively. Irrespective of whether they are public or private, container terminals in Turkey are found to be less efﬁcient than the average efﬁciency levels produced by CCR and BCC models. Greece is found to be the most similar country to Turkey in this respect, while the most efﬁcient terminals on average are to be found in Egypt. It should be recognized, however, that not all the container terminals in each country are included in the sample analyzed. In the cases of Russia, Romania and Israel, for example, only the single most important container terminal is included in the sample.

28.5.3

Time effects

Interestingly, in terms of changes in efﬁciency estimates over time, the average level of estimated efﬁciency per year exhibited a slightly decreasing trend, as indicated in Table 28.5. It can be seen that the mean

28.6 Assessing the Determinants of Terminal Efﬁciency 28.6.1

Background

The DEA methodology identiﬁes the slacks associated with the container terminals that have been measured as inefﬁcient, and so provides a reference set of speciﬁc recommendations for each terminal to improve efﬁciency. It does not, however, identify any possible root causes of the estimated (in) efﬁciency. Apart from the level of private sector participation in container terminals that provides the primary hypothesis for testing within this analysis, numerous other potential inﬂuences on the efﬁciency of a container terminal could be posited. These include the scale and market share of the terminal, transshipment ratio, nautical deviation distance from mainline route, customs and border procedures, level of economic growth in the terminal region, extent of port competition, geographical location, hinterland connections, labor costs and level of automation. However, the most important and relevant factors within the context of this study are the level of private sector participation, scale (throughput),

584

B. DEMIREL, K. CULLINANE AND H. HARALAMBIDES

hub or gateway status, nautical deviation distance and the efﬁciency of customs and border procedures at national level. The existence of a statistical relationship between efﬁciency and these ﬁve factors or potential inﬂuences is hypothesized, and an econometric methodology, Tobit regression analysis, is employed to examine them and to derive the determinants of container terminal efﬁciency. Efﬁciency estimates from the DEA-CCR model will be used as the dependent variable within the regression model.

28.6.2

Yij = β 0 + β1 ∗ PRINVij + β 2 ∗ SCALE ij + β 3 ∗ HUBij + β 4 ∗ DISTij (6) + β 5 ∗ CUSij + ε where: PRINVij

SCALEij HUBij

Tobit model speciﬁcation

As described above but repeated here as an aide-memoire, the Tobit model is applied to data that are censored or constrained in some way, so that it assumes a truncated normal distribution (i.e., constrained at one end). DEA efﬁciency scores are constrained at both ends (0 and 1). Therefore, efﬁciency estimates need to be transformed into truncated data that are constrained at zero, but can take positive values up to inﬁnity. The following transformation is applied to achieve this: ⎛ 1 ⎞ Yij = ⎜ ⎟ −1 ⎝ DEAij ⎠

(5)

where i corresponds to the container terminal, j is the year of observation, DEAij is the DEA estimate of terminal i in year j and Yij is the newly transformed variable taking values for terminal i in year j. This new variable meets the criteria for applying the Tobit model. The Tobit regression model to be used to determine the extent of the relationship between efﬁciency estimates and the ﬁve potential causal factors is as follows:

DISTij CUSij

28.6.3

is a dummy variable. If terminal i in year j is operated by the private sector this is equal to unity (1), otherwise it is equal to zero (0); is the container throughput (TEU) of terminal i in year j; is a dummy variable. If the terminal is a hub port, this is equal to unity (1), otherwise it is equal to zero (0); is the nautical deviation distance of terminal i in year j; and is the efﬁciency of customs and other border procedures, expressed as a percentage in the World Bank’s Logistic Performance Index.

Tobit model estimation

Basic descriptive statistics of the data for the Tobit analysis are shown in Table 28.6 and the output from the Tobit regression analysis in Table 28.7. The likelihood ratio of 30.42 and associated p-value of zero suggest that, at the 5% level of signiﬁcance, some form of statistically signiﬁcant relationship exists between the set of input variables and the DEA-CCR efﬁciency estimates that constitute the dependent variable. It can be concluded, therefore, that at least one of the regression coefﬁcients in the model is not equal to zero and that further analysis is justiﬁed as a consequence. The direction of the relationship between the hypothesized causal factors (the independent variables) and the transformed efﬁ-

585

CONTAINER TERMINAL EFFICIENCY

Table 28.6

Summary statistics of variables for Tobit regression analysis

Mean Standard error Median Mode Standard deviation Kurtosis Skewness Range Minimum Maximum Count

Throughput (TEU)

Private sector (yes)

Hub port status (yes)

771,775.91 96,625.00 649,000 N/A 662,427.62 3.68 1.67 3,141,970 60,030 3,202,000 47

0.53 0.07 1.00 1.00 0.50 −2.07 −0.13 1.00 – 1.00 47

0.26 0.06 – – 0.44 −0.69 1.16 1.00 – 1.00 47

Deviation distance (nm)

Logistics performance (index value)

520.85 46.37 673 673 317.93 −0.59 −0.04 1,157 1 1,158 47

0.48 0.14 0.18 – 0.94 26.72 4.67 6.04 – 6.04 47

Table 28.7 Summary output for Tobit regression analysis Y PRINV SCALE HUB DIST CUS _cons /sigma

Coef.

Std. err.

t

P > |t|

−0.979599 −1.31e−06 −0.420981 0.000993 0.150386 2.10227 1.122628

0.413672 5.95e−07 0.679898 0.000822 2.391018 1.909761 0.122657

−2.37 −2.20 −0.62 1.21 0.06 1.10

0.023 0.033 0.539 0.233 0.950 0.277

[95% conf. interval] −1.814424 −2.51e−06 −1.793071 −0.000665 −4.674883 −1.751784 0.875097

−0.144775 −1.09e−07 0.951109 0.002652 4.975655 5.956324 1.37016

Number of observations = 47 LR χ2(5) = 30.42 Prob > χ2 = 0.0000 Pseudo R2 = 0.1863 Log likelihood = −66.424403 Observation summary 5 left-censored observations at Y<=0 42 uncensored observations 0 right-censored observations

ciency values (the dependent variable) is in line with what might be expected. Because of the transformation made, based on equation (5), a full efﬁciency estimate of 1.00 becomes 0.00, and measures less than unity

take positive values up to inﬁnity. Therefore, the higher the value of the transformed variable, the greater is the level of inefﬁciency. Hence, all the coefﬁcients are expected to exhibit negative signs, as all the

586

B. DEMIREL, K. CULLINANE AND H. HARALAMBIDES

input variables have been posited to be positively correlated with efﬁciency estimates. Since this subsequent Tobit analysis incorporates a factor related to scale in explaining the relative efﬁciency scores, it is logical that the efﬁciency values are derived from the output from a standard DEA model where scale and pure technical efﬁciency are not disaggregated. However, the scale variable (i.e., container throughput) has been used as a dependent variable during the process of estimating DEA scores. This can potentially result in an overly inﬂated estimate of the scale coefﬁcient and a misspeciﬁcation of the other estimated parameters in the model. A range of tests for the presence of this bias have been implemented, none of which produces any signiﬁcant differences in parameter estimates, thus conﬁrming the validity of the original model speciﬁcation. The variable PRINV, associated with private sector involvement in container terminals, is found to be statistically signiﬁcant at the 5% signiﬁcance level with a t-statistic of −2.37 (p-value = 0.023). This provides support for the hypothesis that private sector involvement in the operation of container terminals is associated with greater efﬁciency. The effect of the SCALE variable (where throughput values are regarded as the appropriate measure of scale) is similarly found to be statistically signiﬁcant at the 5% level with a t-statistic of -2.20 (pvalue = 0.033). Efﬁciency estimates can be inferred, therefore, to be positively related to scale (throughput), implying that largerscale production (output) tends to be associated with higher levels of efﬁciency. In contrast to the PRINV and SCALE variables, the parameters associated with the hub or gateway status of the terminals

(HUB), the nautical deviation distance from the main east–west shipping route (DIST), and the efﬁciency of customs and other border procedures (CUS) are found to be statistically insigniﬁcant. In essence, therefore, the results point to private sector involvement and scale in container terminal operations as the critical determinants of terminal efﬁciency. As possibly evidenced by the descriptive statistics contained in Table 28.6, one important caveat to these results is that, for this sample, there may be insufﬁcient variation in the variables found to be insigniﬁcant to constitute a valid test of their inﬂuence. This implies that hub/gateway status, deviation distance and efﬁciency of customs and border procedures may well prove to be signiﬁcant inﬂuences on port efﬁciency for empirical tests using other samples. Equally, it suggests that in future research which is similarly focused on a relatively small geographical region where the ports/terminals all have similar levels of technology etc., it might be worth including input variables which are more port- or terminal-speciﬁc in nature, such as level of capital intensity.

28.7

Discussion

Data underpinning the World Bank’s Logistics Performance Index suggests that none of the customs or border authorities in the region under analysis exhibit any level of outstanding performance. Given the generally average level of performance in the region, it is hardly surprising that no statistically signiﬁcant relationship has been found between terminal efﬁciency and customs procedures. Some previous studies (e.g. Cullinane, Wang, Song and Ji 2006; Notteboom, Coeck

587

CONTAINER TERMINAL EFFICIENCY

and van den Broeck 2000) have found that higher levels of technical efﬁciency are associated with transshipment, as opposed to gateway, ports. However, it is not particularly surprising to ﬁnd that the study undertaken herein shows no signiﬁcant relationship between the hub or gateway status of the terminals and their efﬁciency levels. Even though a transshipment container is generally counted twice in the container throughput of a terminal, while occupying only a single slot in the yard, this is not a very signiﬁcant issue as, in the majority of cases, the amount of work associated with the handling of a transshipment container within a terminal does not, in fact, differ much from that associated with an import or export container (Wang and Cullinane 2006). The absence of any statistically signiﬁcant relationship between deviation distance and efﬁciency estimates is a very interesting ﬁnding. Container terminals which are located at greater distance from mainline (trunk) shipping routes might be expected to offer a much more efﬁcient and speedy service to shipping lines so that time lost during the deviation voyage to access these terminals is compensated for by the time saved in efﬁcient and relatively fast handling in the terminal. Alternatively, they could provide the same service levels but at lower direct cost, so that the total transport costs of the shipping lines are reduced. Subject to what has already been alluded to earlier in this chapter, that variation in the data on deviation distance may not be that great, the results of the analysis described here indicate that, at least within the geographic region under analysis, the latter approach would seem to be more widely adopted, a phenomenon which also says something about the price elasticity of

demand for container handling services within the region. It may also be the case that there is an inverse relationship between throughput and deviation distance that actually works to suppress efﬁciency levels. The remainder of this section focuses on the two input variables that emerged from the Tobit regression analysis as statistically signiﬁcant in explaining DEA-CCR efﬁciency estimates.

28.7.1

Private sector participation

With some exceptions (e.g. Cullinane, Ji and Wang 2005; Liu 1995), most research that applies efﬁciency estimation to the container port sector ﬁnds high levels of technical efﬁciency to be associated with greater private sector participation. Similarly, Table 28.8 clearly shows that, for both forms of DEA model applied to the sample data in this study, “private” terminals exhibit greater efﬁciency on average than their “public” counterparts. On the basis of the DEA-CCR model, “private” container terminals in the Eastern Mediterranean region have an average efﬁciency score of 0.626, while “public” terminals have an average efﬁciency estimate of just 0.496. Therefore, under the assumption of constant returns to scale, on average, “private” terminals are approximately 26% more efﬁcient than “public” container terminals in the Eastern Mediterranean region. Under the BCC model, “private” terminals have an average Table 28.8 Average technical efﬁciency in the Eastern Mediterranean region Ownership Public Private

DEA-CCR

DEA-BCC

0.50 0.63

0.76 0.81

588 Table 28.9

B. DEMIREL, K. CULLINANE AND H. HARALAMBIDES

Port governance and average efﬁciencies

Container Terminal

Country

Governance

CCR Efﬁciency

BCC Efﬁciency

Izmir Haydarpaşa Mersin Marport Kumport Gemport Mardaş Borusan Evyapport Constanta CSCT Haifa Thessaloniki Piraeus Novorossiysk Port Said SCCT Damietta DCHC

Turkey Turkey Turkey Turkey Turkey Turkey Turkey Turkey Turkey Romania Israel Greece Greece Russia Egypt Egypt

Public Public Privatea Private Private Private Private Private Private Private Public Public Public Private Private Public

0.390 0.433 0.426 0.837 0.439 0.512 0.353 0.834 0.234 0.809 0.726 0.403 0.483 0.232 1.000 0.822

0.521 0.827 0.454 0.865 0.560 1.000 0.511 1.000 1.000 0.840 0.766 1.000 0.495 1.000 1.000 0.845

a Mersin port was a public port until 2007. It was privatized in April 2007. Different annual efﬁciency estimates contribute, therefore, to calculated average efﬁciencies for both the “private” and the “public” sectors.

efﬁciency score of 0.809, compared to 0.764 for their “public” counterparts. Under the assumption of variable returns to scale, therefore, private terminals are estimated to be almost 6% more efﬁcient than public container terminals in the region. A broad categorization of the governance of each of the container terminals in the sample and their associated average efﬁciencies are provided in Table 28.9. It can be seen that Marport and Borusan in Turkey, Constanta in Romania and Port Said in Egypt are the main contributors to the higher average efﬁciency estimates for “private” container terminals. On the other hand, Izmir and Haydarpaşa in Turkey and Piraeus and Thessaloniki in Greece are the most signiﬁcant contributors to the lower average efﬁciency estimate derived for “public” container terminals.

It should be noted that Mardaş and Evyapport container terminals in Turkey (with average CCR efﬁciency estimates of 0.353 and 0.234 respectively) and Novorossiysk container terminal in Russia (with an average efﬁciency estimate of 0.232) are examples of “private” terminals which have performed less well than the “public” sector average. Similarly, Haifa in Israel and Damietta in Egypt are examples of “public” terminals with higher efﬁciency estimates on average than “private” sector terminals. It is worth mentioning, however, that these two terminals are corporatized – operated by companies owned by their respective governments – and the higher efﬁciency estimates obtained may perhaps be due to the fact that they operate on quasi-private commercial principles.

CONTAINER TERMINAL EFFICIENCY

Table 28.10 Average technical efﬁciency in Turkey Ownership Public Private

DEA-CCR

DEA-BCC

0.42 0.54

0.64 0.77

Focusing on the Turkish terminals speciﬁcally, Table 28.10 shows average technical efﬁciency estimates of “public” and “private” container terminals in Turkey obtained from both CCR and BCC models. Like the results for the wider Eastern Mediterranean region, these clearly show that, on average and under both model forms, “private” sector terminals have greater efﬁciency than their “public” counterparts. Based on the CCR model, “private” container terminals in Turkey have average efﬁciency of 0.538, while “public” terminals in Turkey have average efﬁciency of 0.416. Therefore, under the assumption of constant returns to scale, “private” terminals are roughly 29% more efﬁcient than their “public” counterparts in Turkey. Efﬁciency estimates from the BCC model produce a similar result in that “private” container terminals in Turkey yield an average efﬁciency estimate of 0.774, while “public” terminals have an average efﬁciency of 0.644. Therefore, under the assumption of variable returns to scale, “private” terminals are approximately 20% more efﬁcient than “public” container terminals in Turkey. A comparison shows that both “public” and “private” container terminals in Turkey have lower average efﬁciency than those in the rest of the Eastern Mediterranean region. Under the CCR model, “private” container terminals in Turkey have average efﬁciency of 0.538, while the average for the rest of the region is roughly 16% higher at

589

0.626. The equivalent ﬁgures for the BCC model are 0.774 for Turkey’s “private” terminals and 0.809 as the average for “private” terminals in the rest of the region, the latter being roughly 5% higher. For “public” container terminals, the remainder of the region exhibits 48% greater technical efﬁciency than Turkey under the CCR model and 15% greater under the BCC model. From the efﬁciency results in this study, it seems that, even though efﬁciency levels in Turkey’s container terminals have increased over the course of time, despite greater private sector participation in the market at least some of these ports still lack the characteristics to keep pace with competitor ports in the region (Oral, Kisi, Cerit et al. 2007).

28.7.2 Efﬁciency versus scale (throughput) Only a very few empirical studies have concluded that scale of operation is not one of the primary determinants of port efﬁciency (Al-Eraqi, Mustafa, Khader and Barros 2008; Coto-Millan, Banos-Pino and RodriguezAlvarez 2000; Cullinane, Song, Ji and Wang 2004; Tongzon 2001). In the vast majority of cases, the scale effect has proved to be positively and highly signiﬁcant in explaining empirically derived efﬁciency estimates (e.g. Cullinane, Song and Gray 2002; Cullinane and Wang 2006; Herrera and Pang 2008; Liu 1995; Martinez-Budria, DiazArmas, Navarro-Ibanez and Ravelo-Mesa 1999; Notteboom, Coeck and van den Broeck 2000; Turner, Windle and Dresner 2004; Wang and Cullinane 2006). The Tobit regression analysis applied in this work has also found that, together with private sector participation, scale (throughput) is a signiﬁcant determinant of terminal

590

B. DEMIREL, K. CULLINANE AND H. HARALAMBIDES

Efficiency 1 0.8 0.6 0.4 0.2 0 0

1

2

3

4

Container throughput (million TEU)

Figure 28.1

Relationship between efﬁciency (DEA-CCR) and scale (throughput). Efficiency 1 0.8 0.6 0.4 0.2 0 0

1

2

3

4

Container throughput (million TEU)

Figure 28.2

Relationship between efﬁciency (DEA-BCC) and scale (throughput).

efﬁciency. The relationship is shown in Figures 28.1 and 28.2, from which it is clear that, without any exceptions, container terminals with a throughput of over 1 million TEUs are associated with high levels of estimated efﬁciency. The hypothesis that the efﬁciency of a container terminal is inﬂuenced by its scale of production (output) cannot be rejected, which implies that economies of scale exist in the container port sector. Wang and Cullinane (2006) suggest

that this scale effect exists because large container terminals are more likely than their smaller counterparts to utilize state-of-theart equipment and to possess sophisticated management. As previously stated, the CCR model assumes constant returns to scale. The CCR efﬁciency estimate is sometimes called global technical efﬁciency, since it takes no account of the scale effect. The BCC model, on the other hand, assumes variable returns

CONTAINER TERMINAL EFFICIENCY

to scale, and the BCC efﬁciency estimate is sometimes called local pure technical efﬁciency. If a container terminal is fully efﬁcient, with an efﬁciency estimate of 1.000 under both CCR and BCC models, it is said to be operating at its most productive scale. A container terminal that has full BCC efﬁciency but a low CCR score is said to be operating locally efﬁciently, but not globally efﬁciently because of the scale of the terminal’s operations. Thus, it is reasonable to characterize the scale efﬁciency of a container terminal by the ratio of the two estimates (Cooper, Seiford and Tone 2006). Table 28.11 lists the scale efﬁciency scores of the container terminals in the sample. Of the 47 observations, ﬁve exhibit constant returns to scale, 42 exhibit increasing returns to scale, and none exhibits decreasing returns to scale. Port Said in Egypt is the only container terminal showing constant returns to scale in all years of observation; it can be inferred, therefore, that it is operating at its most productive scale. All the other terminals in the sample exhibit increasing returns to scale (where output in TEUs is less than optimum) in at least one of the years observed. This is a common phenomenon in the container terminal sector, where excess capacity is sometimes regarded as an operational necessity in facilitating quick turnaround times for ships (Haralambides 2002).

28.8

Summary

The main objective of this study has been to investigate the possible inﬂuence of private sector participation on container terminal efﬁciency in Turkey and the wider Eastern Mediterranean region. Efﬁciency

591

estimates for the selected sample of terminals have been derived by applying the DEA-CCR and DEA-BCC models. The ﬁrst major ﬁndings are that signiﬁcant inefﬁciency is present in container terminal operations in the Eastern Mediterranean region, and that container terminals in Turkey, whether “public” or “private,” have lower than average efﬁciency levels for the region. It is important to bear in mind, however, that while numerous Turkish terminals are included in the sample, only major competitor terminals from the wider region have been analyzed. When interpreting the results of the analysis, it is also important to recognize that a nation’s phase of economic development has generally been found to have no relationship to the average level of technical efﬁciency of its port sector (Wu and Goh 2010; Wu and Lin 2008). Through the application of Tobit regression analysis, private sector participation in container terminals has been found to be statistically signiﬁcant in explaining DEA efﬁciency estimates. Therefore, there is insufﬁcient evidence to reject the hypothesis that private sector participation in container terminals is associated with higher efﬁciency. In Turkey speciﬁcally, under the CCR and BCC models respectively, “private” terminals have been found to be, on average, almost 22% and 17% more efﬁcient than “public” container terminals. Using throughput values as a measure, operating scale has also been found to be statistically signiﬁcant. Therefore, there is insufﬁcient evidence to reject the hypothesis that terminal efﬁciency is positively related to scale (throughput), which implies that larger-scale production does tend to be associated with higher levels of efﬁciency. Interestingly, the transshipment status of a

Table 28.11

Scale efﬁciency estimates of the container terminals in the sample

2006 Izmir Haydarpaşa Mersin Marport Kumport Gemport Mardaş Borusan Constanta CSCT Haifa Thessaloniki Piraeus Novorossiysk Damietta DCHC Port Said SCCT 2007 Izmir Haydarpaşa Mersin Marport Kumport Gemport Mardaş Evyapport Borusan Constanta CSCT Haifa Thessaloniki Piraeus Novorossiysk Damietta DCHC Port Said SCCT 2008 Izmir Haydarpaşa Mersin Marport Kumport Gemport Mardaş Evyapport Borusan

Scale efﬁciency

Returns to scale

Reason

0.752 0.542 0.951 1.000 0.774 0.543 0.659 0.832 0.922 0.918 0.476 0.967 0.151 1.000 1.000

Increasing Increasing Increasing – Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing – –

Pure technical inefﬁciency Scale inefﬁciency Pure technical inefﬁciency

0.751 0.559 0.885 0.951 0.777 0.547 0.606 0.217 0.828 0.989 0.966 0.508 0.986 0.205 0.987 1.000

Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing –

Pure technical inefﬁciency Pure technical inefﬁciency Pure technical inefﬁciency Pure technical inefﬁciency Pure technical inefﬁciency Scale inefﬁciency Pure technical inefﬁciency Scale inefﬁciency Scale inefﬁciency Pure technical inefﬁciency Pure technical inefﬁciency Scale inefﬁciency Pure technical inefﬁciency Scale inefﬁciency Pure technical inefﬁciency

0.742 0.459 0.997 0.941 0.815 0.445 0.827 0.250 0.841

Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing

Pure technical inefﬁciency Pure technical inefﬁciency Pure technical inefﬁciency Pure technical inefﬁciency Pure technical inefﬁciency Scale inefﬁciency Pure technical inefﬁciency Scale inefﬁciency Scale inefﬁciency

Pure technical inefﬁciency Scale inefﬁciency Pure technical inefﬁciency Scale inefﬁciency Scale inefﬁciency Pure technical inefﬁciency Scale inefﬁciency Pure technical inefﬁciency Scale inefﬁciency

593

CONTAINER TERMINAL EFFICIENCY

Table 28.11 (Continued)

Constanta CSCT Haifa Thessaloniki Piraeus Novorossiysk Damietta DCHC Port Said SCCT

Scale efﬁciency

Returns to scale

Reason

0.991 0.966 0.224 0.986 0.341 0.909 1.000

Increasing Increasing Increasing Increasing Increasing Increasing –

Pure technical inefﬁciency Pure technical inefﬁciency Scale inefﬁciency Pure technical inefﬁciency Scale inefﬁciency Pure technical inefﬁciency

terminal as a hub or a gateway, the nautical deviation distance from the mainline east– west route, and the efﬁciency of customs and other border procedures, are all found to be statistically insigniﬁcant in explaining efﬁciency. However, the caveat that there may be insufﬁcient variation in these variables for a true test of their inﬂuence needs to be acknowledged. The results of this analysis have important implications for port policy in Turkey and more generally, both within and outside of the Eastern Mediterranean. In the quest to maximize and maintain competitive advantage for some or all of Turkey’s container ports, it is critically important that government policies on trade and ports facilitate the highest possible levels of efﬁciency within its container port sector. Turkey has recently embarked on a policy of partial port devolution, including some privatization. From the results achieved in this analysis, it would appear that Turkey is now beginning to reap the beneﬁts of these policies, with the country’s “private” container port sector outperforming its “public” sector counterparts in terms of the efﬁciency levels offered to customers. Indeed, there exists some justiﬁcation for the government to seek to apply port privatization

more widely to Turkey’s remaining “public” container ports. The result that scale has been found to be a signiﬁcant determinant of efﬁciency also informs any policy of port devolution in terms of how best to bundle container port facilities for offer to private sector interests. Of course, the maintenance of a sufﬁciently large size to reap maximum beneﬁts from economies of scale does need to be balanced with the demand for and availability of ﬁnance, as well as with the inevitable desire on the part of policy makers to engender and ensure internal competition within a container port. All this suggests that Turkey should pursue its policy of port privatization with an even greater sense of urgency. The efﬁciency gains derived from doing so will have an important inﬂuence on the nation’s speed of economic development, as they will enable Turkey’s industry to become more competitive for exports. In addition, the fact that Turkey’s container ports are found to be less efﬁcient than their counterparts within the Eastern Mediterranean region suggests that the country’s terminal operators should begin to benchmark their operations against the most efﬁcient of their competitors (such as the terminals in

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Egypt), with the objective of assessing how the general level of port/terminal efﬁciency can be improved and how much progress is being made towards achieving parity with those benchmarks. On the basis of the results of this analysis, however, while port privatization will inculcate management values that place a higher priority on efﬁciency, terminal operators are very much exposed to the “chicken and egg” situation relating to the scale of their operations; they need to grow to increase efﬁciency through the optimization of economies of scale, but, equally, they need to be perceived as efﬁcient in order to attract a greater scale of throughput. The solution to this conundrum lies in investment in infrastructure, technology and human resources to achieve objective improvements in technical efﬁciency, while simultaneously developing an appropriate marketing strategy, so that the subjective perceptions of prospective customers reﬂect this reality. The ﬁnding that Turkey’s container ports are generally less efﬁcient than the regional average is indeed worthy of further investigation in a supplementary study. For this, it would be important to expand the sample both cross-sectionally (to include a greater range of small, medium and large container ports from each of the countries in the region) and over time (to encompass varying market situations, rather than simply the economic malaise covered by the period of analysis within this study). Doing so would make efﬁciency estimates much more diversely distributed and reﬁned as sample size increased. In addition, the inclusion of smaller terminals from other countries within the region would parallel the comprehensive treatment of Turkey within this analysis and so might lead to the emergence

of a very different pattern of relative efﬁciencies that would allow a more meaningful comparison of container terminal efﬁciency across the region. This would also remove any possibility that efﬁciency estimates within the region are somehow a function of the somewhat unusual market conditions which prevailed during the period covered by the study. Other possible avenues of future research include: 1.

2.

3.

4.

5.

to expand the range of port outputs considered beyond just container handling, to encompass other types of terminals or activity, such as dry and wet bulks, vehicles or passengers; to account for the labor input more explicitly, preferably by accessing consistent and reliable sources of data. Alternatively, deducing an accurate relationship between labor and capital input factors for ports in the Eastern Mediterranean region would go some way towards achieving greater reliability in the efﬁciency estimates produced; to validate the ﬁndings from this analysis by applying alternative methodologies, particularly stochastic frontier analysis (SFA), to the same data set; to collect supplementary data on the factor costs of each terminal within the sample and to develop estimates of allocative efﬁciency; and to investigate the relationship between terminal efﬁciency estimates (particularly scale efﬁciency) and the degree of differentiation in devolved ownership and/or operation – that is, whether the same levels of efﬁciency are achieved at terminal level, irrespective of whether they are independently operated or are

CONTAINER TERMINAL EFFICIENCY

one of a number of terminals under common ownership/operation, both within and across national boundaries. In conclusion, it is important to reiterate that the fundamental raison d’être for central government port policies that seek to maximize container terminal efﬁciency is to achieve a competitive advantage for the affected terminals, particularly as compared to container terminals within other nation states. This implies that a signiﬁcant area for future research in this ﬁeld, that has thus far been largely neglected, would be the establishment of the precise contribution of technical, scale and allocative efﬁciency to a container terminal’s competitive position.

Acknowledgments The authors are grateful to two anonymous referees and to the editor, Wayne Talley, for helpful comments on an earlier draft of this work.

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29

Determinants of Users’ Port Choice Photis Panayides and Dong-Wook Song

29.1

Introduction

Users’ choice of ports and terminals is fundamental in the contemporary shipping industry. Ports are integral to the route and network plan of shipping lines and of critical importance to the operations of shippers. The decision of shipping lines as to which port to use is a strategic one, and it is bound to inﬂuence the operational and business performance of the organization. In an effort to attain competitiveness, shipping lines have attempted to globalize their service coverage (Parola and Musso 2007). This attempt towards the globalization of service coverage places emphasis on the importance of port choice in adequately servicing the chosen networks. With the gradual abolition of the conference system, shipping lines have realized that competitiveness largely depends on creating customer value, which encompasses wide network coverage, service quality, service extensions, and cost control to deliver lower prices. However, for the companies to be able to create value for their customers their

operations must be adequately serviced, and port choice thus becomes critical. For the ports themselves, the choice of shipping lines and other users inﬂuences directly their performance and viability. In an era of intense port competition, it is imperative for port authorities, port managers and terminal operators to have a thorough understanding of the factors that inﬂuence user port choice, and by extension the factors that can lead to the sustainable competitiveness of their organizations. Port competitiveness has been studied from the perspectives of price and service quality (Cullinane, Teng and Wang 2005) and of increasing cooperation between adjacent ports (Heaver 1995; Song 2002, 2003). Integral is the ability of a port to attract and retain port users and to be preferred to its competitors, a consequence of port choice. Several factors in the process of port choice are considered which can contribute to the port preferences of shipping lines, shippers, freight forwarders and other users and stakeholders. The early studies by Foster (1978a, 1978b) and the work of

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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Willingale (1981) that pointed to cost and location determinants were followed by the development of an array of port choice criteria in a stream of literature spanning more than three decades. Previous literature has also highlighted the role of ports in facilitating the logistics and supply chain management objectives of their users (Bichou and Gray 2004; Carbone and De Martino 2003; Heaver 2002; Panayides 2006; Paixao and Marlow 2003; Robinson 2002, 2006; Wang and Cullinane 2006), a role that makes this one of the key criteria in port choice. In this role, the port is considered as part of a cluster of organizations in which different logistics and transport operators are involved in bringing value to the ﬁnal consumers. To fulﬁll this role, ports and terminals must evolve from the traditional functions of facilitating loading and discharging operations, albeit at greater efﬁciency, to becoming a link in a larger logistics chain, part of a global distribution channel. The purposes of this chapter are to review the literature on port choice by shippers and shipping lines, to analyze the criteria that shipping lines use in making port choice decisions, and to assess the role of logistics and supply chain management criteria in port choice. The analysis includes conceptual development using the key variables and approaches, and an empirical analysis of primary data retrieved from a survey of management decision makers involved in the choice decision by container shipping lines. In fulﬁlling this purpose the chapter makes certain contributions and adds value in this ﬁeld of research as follows: •

review and classiﬁcation of the main studies in the area;

•

•

identiﬁcation of criteria for logistics/ supply chain management port choice; and ranking of logistics/supply chain management factors in order of importance and in relation to other port choice criteria factors.

29.2

Literature Review: Shippers

A number of studies have examined the factors determining the choice of port. The studies may be classiﬁed according to the approach adopted in identifying the choice criteria. Certain authors have sought to examine the factors that contribute to a port’s competitiveness and why, on the basis of some criteria important to users, particular ports are preferred over others. Most of the studies, however, examine the point of view of the shippers, and to a lesser extent the port choice determinants of the freight forwarders or shipping lines. This is because of the belief that shippers are the people who actually make the decision to route cargo through a port (Tongzon 2009). The main studies that examine the determinants of port choice by shippers include Willingale (1984), Murphy, Daley and Dalenberg (1992), Gibson, Sink and Mundy (1993), Murphy and Daley (1994), Mangan, Lalwani and Gardner (2002), Nir, Lin and Liang (2003), Tiwari, Itoh and Doi (2003), Malchow and Kanafani (2001, 2004) and Ugboma, Ugboma and Ogwude (2006). Murphy, Daley and Dalenberg (1991) support the view that, since intermediaries (e.g. freight forwarders) sometimes select ports on behalf of their clients, their perspective should also be examined. Equipment availability was deemed to be the most

DETERMINANTS OF USERS’ PORT CHOICE

important factor inﬂuencing the port-choice decision, highlighting the necessity for ports to maintain good cargo-handling equipment. Other important variables included low frequency of cargo loss and damage, large shipment capabilities, and convenient pickup and delivery times. A port’s information-handling capabilities, by contrast, were relatively unimportant in the decision of freight forwarders to use a speciﬁc port, indicating that a port’s operational capabilities are more signiﬁcant than its service capabilities. Nevertheless, the study showed that freight forwarders are willing to accept higher costs in return for improved service. A subsequent study by Murphy, Daley and Dalenberg (1992) investigated the variability in port selection factors among ﬁve major stakeholders. The groups investigated were ports, carriers, freight forwarders, and large and small US shippers. The results indicated that water ports viewed water carriers as their main customers, and that there are differences among the groups, especially between the shippers and ports, in terms of what factors are more important in port selection. The study indicates that ports tend to consider themselves “good handlers” of cargo rather than as participants in the supply chain who should provide their customers with a variety of services. Conversely, shippers do consider the information services provided by the port to be important, indicating that shippers do not perceive ports merely as cargo handlers, but as service providers in a greater environment of partners. Following the 1992 study by Murphy, Daley and Dalenberg, Murphy and Daley (1994) examined how purchasing/materials managers view the port selection decision in comparison with shippers and water

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ports. Purchasing managers, like shippers in the earlier study, consider shipment information of paramount importance. Another important factor is the port’s loss and damage performance. The general conclusion was that purchasing managers regard the value-added services provided by the port as more important than its physical operations, whereas ports paid more attention to their physical operations. These two studies aim to demonstrate that a port has more customers than solely the water carriers and that ports should tailor their offerings, either physical or service, to match the needs of all their customers. Consequently, ports should focus more on improving customer service and reposition themselves as service providers rather than as mere physical entities. Nir, Lin and Liang (2003) also studied the port choice criteria used by shippers and compared how shippers’ choices change according to their previous experience with the port. The results indicated that shippers consider travel time the most important factor. Consequently, their chosen port will minimize the costs incurred by travel time. As a result, they will not differentiate their choice even when ports are competing among themselves in terms of improved service. Instead, shippers will choose the port which is closest to import or export containers in order to keep their transportation costs down. Factors such as port facilities, port services and increased frequencies had a weak impact on their decision. What is more, Nir, Lin and Liang (2003) showed that the shippers’ last choice experience with a speciﬁc port inﬂuences their future choice; that is, they will most likely choose a port they have chosen before. Another study, that of Tiwari, Itoh and Doi (2003), also illustrated the importance

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of distance in shippers’ port choice. Considering that a shipper’s characteristics also inﬂuence its choice of port, the study showed that the distance between the shipper and the port played the most signiﬁcant role in shippers’ decision-making process. On top of this, the operational characteristics which inﬂuence a port’s ability to move freight quickly and efﬁciently and reduce congestion also have an important effect on shippers’ choice. On the other hand, Malchow and Kanafani (2001, 2004) indicate that a shipper, by choosing a carrier, implicitly chooses a port for a particular shipment. But in the competitive market of shipping it is the attributes of the door-to-door service that a carrier offers that inﬂuence the shipper’s choice. This means that the real inﬂuence on the port choice process is the attributes of the service offered by the carrier. This service is inﬂuenced by the supply chain management and logistics processes that can be facilitated in the context of the port– carrier relationship; therefore the carrier’s port choice is central. Malchow and Kanafani (2001) analyzed the ﬂow of four commodities in eight major US ports and concluded that inland distance (distance between the place of shipment and the port) and ocean distance (distance between the place of shipment and the foreign port) were the most signiﬁcant factors inﬂuencing port selection by carriers. Speciﬁcally, inland distance proved to be more signiﬁcant when lower-value commodities were to be transported, whereas ocean distance was more signiﬁcant for fabrics and manufactured goods, clearly indicating the need to keep inventory costs down. Subsequently, Malchow and Kanafani (2004) further examined whether competition among ports would inﬂuence the deci-

sion in port choice. They showed that lower-value goods are more likely to be transported via a neighboring port and transited over a longer ocean distance. On the other hand, higher-value goods are more likely to be shipped via a land bridge to a port with greater access to the shipment’s destination. Gibson, Sink and Mundy (1993), too, studied the selection criteria used by shippers when choosing a carrier and showed that shippers with a formal carrier-selection program used different selection criteria than those shippers without such a program. D’Este and Meyrick (1992a, 1992b), Ugboma, Ugboma and Ogwude (2006) and De Langen (2007) have found customer focus, or quick response to users’ needs, to be one of the key factors considered by shippers and freight forwarders in their port selection decision. Willingale (1984) and Murphy, Daley and Dalenberg (1991) found that port location was not as important in port choice decisions. The reason for this is that transportation systems have become more advanced and therefore more efﬁcient, which has the effect of lessening the importance of geographical proximity between ports and their customers in port choice decisions. This implies that supply chain performance may nowadays be regarded as more important than port location in port choice decisions. This derives from the fact that supply chain performance and location have an impact on the overall transit costs of cargo trafﬁcking, and if such costs can be effectively minimized through efﬁcient supply chains the location factor becomes secondary. This is in contrast to older studies that highlighted port location, port geography, spatial hegemony (Fleming and Hayuth 1994; Fleming 1997; Hilling and Hoyle

DETERMINANTS OF USERS’ PORT CHOICE

1984), and the impact of distance on transportation costs (Tiwari, Itoh and Doi 2003). Foster (1978a) identiﬁed port charges as a principal port choice criterion. However, port charges alone become irrelevant if the overall cost of using a port, including costs due to the inefﬁciency of the supply chain facilitated by the port, is higher. Ng (2006), investigating container transshipment in Northern Europe, found that monetary cost is not the only component of port attractiveness; it includes other factors such as time efﬁciency, geographical location and service quality. Slack (1985) surveyed port end-users (exporters and freight forwarders) engaged in transatlantic container trade between the American mid-West and Europe to identify port selection criteria. Bird and Bland (1988) studied the perceptions of European freight forwarders. De Langen (2007) compared the port selection criteria of Austrian shippers and freight forwarders. Tongzon (2009) sought to determine the key port selection factors from the perspective of the freight forwarder and also to assess the relative importance of those factors. He concluded that the key factors include high port efﬁciency, good geographical location, low port charges, adequate infrastructure, wide range of port services, and connectivity to other ports. However, the most important criterion was found to be port efﬁciency, followed by shipping frequency, infrastructure, location and then port charges. On this basis Tongzon concluded that freight forwarders’ port selection is a complex process because the ports are not considered in isolation but together with other requirements associated with the movement of cargoes across the portoriented supply chain. This view supports the emerging trend of ports as elements in

603

a supply chain and as facilitators of an efﬁcient supply chain process, and places added emphasis on the importance of logistics and supply chain determinants of ports choice. Similarly to Tongzon (2009), the results of the study of Ugboma, Ugboma and Ogwude (2006), who investigated the port choice criteria used by shippers, deemed efﬁciency the most important factor in shippers’ port selection process, while frequency of ship visits and port infrastructure followed. Quick response to port users’ needs proved to be insigniﬁcant to them. Chang, Lee and Tongzon (2008) identify the factors that affect the port choice criteria of shipping companies, and also seek to identify differences on the basis of whether the shipping line operates a direct main trunk service (East Asia–Europe and transpaciﬁc) or is a feeder operator (intra-Asian feeder operations). The ensuing analysis revealed that six variables were regarded by the total sample of respondents as important in port choice decisions. They include local cargo volume, terminal handling charge, berth availability, port location, transshipment volume and feeder connection. Main-haul shipping lines were found to place added emphasis on value-added services and port costs. This conﬁrmed the ﬁndings of Tongzon and Sawant (2007), who found port costs and range of port services to be the only signiﬁcant factors in shipping lines’ port choice. A potential inﬂuence on the choice of port for shipping lines is the development of the carrier’s network, which entails the selection of a hub port to act as a load center, and spoke or satellite ports in the vicinity. The formation of the maritime network is important, and inﬂuences port selection since, as Lago, Malchow and Kanafani (2001) found, the level at which

604

PHOTIS PANAYIDES AND DONG-WOOK SONG

scale economies can be achieved in oceanic transit differs between corridors. Consequently the choice of ports inﬂuences the achievement of economies of scale in the carriers’ transportation network, and hence the carriers’ cost. On the other hand, the inﬂuence of shipping lines on route choice has not been adequately covered in the scientiﬁc literature. In fact there is little evidence to indicate the determinants of port choice by shipping lines.

29.3 Literature Review: Shipping Lines The literature review reveals that many authors have taken the view that port choice rests largely on the decisions made by shippers as to where to ship their cargoes from. However, developments in liner shipping indicate that shipping lines have a critical role to play. As can be seen from the research already conducted, ports have multiple customers, which include shippers, freight forwarders and carriers. Slack (1985) observed that a greater understanding of inter-port competition necessitates an examination of the location decisions of the shipping lines. In his study, the forwarders and exporters are more likely to obtain their information about ports from the shipping lines than from port advertising, port promotions and port visits. In addition, the growing role of many lines in providing door-to-door service for clients makes it clear that the shipping companies must be taken into account in any consideration of inter-port competition (Malchow and Kanafani 2001, 2004). Slack (1985) further states that port facilities must be maintained and upgraded where necessary, yet this study suggests that such

improvements are unlikely to have a direct effect in diverting trafﬁc to the port. The beneﬁts of facility improvements are likely to be realized by the shipping companies, and only indirectly in trade growth. The fact that shipping lines have been investing in their own terminals, logistics, and through transport systems and operations, means that the choice of port to use increasingly comes within their remit. In addition it was found that shipper choice is to a large extent inﬂuenced by price and service considerations of ocean carriers, not merely those of ports (Slack 1985; Tongzon 2002, 2009). On the basis of the above and the somewhat limited research on the choice criteria of shipping lines, this study focuses on the port choice criteria of shipping lines and ocean carriers. In order to make further progress in the determination of port choice factors, it is important to consider simultaneously three key issues: the criteria conceptualized and tested by investigators, the methodology used in making the empirical assessment, and the ﬁndings with respect to the actual criteria used in the port choice of shipping lines. Table 29.1 provides a taxonomy of the criteria and methodologies utilized in shipping lines port choice. From the table, it is evident that a wide variety of port selection factors as well as methodologies has been used and tested in the literature. Factors like costs, port location, port efﬁciency, valueadded services, port’s hinterland connection and oceanic and inland distance seem to be considered by shipping lines the most signiﬁcant for their choice of a port. The limited published papers indicate that the research carried out is not exhaustive, whereas the use of different and varying approaches and methodologies renders the

Carriers US ports to international destinations Commodities: (1) bulk commodities, (2) fruits and vegetables, (3) fabrics, and (4) manufactured goods Chamberlain logit model Shipping companies selecting transshipment port in Taiwan under a fuzzy environment Fuzzy Multiple Criteria Decision Making Method (FMCDM)

Malchow and Kanafani (2001, 2004)

Chow (2007)

Twelve deep-sea container operators selecting ports/terminals in the Hamburg–Le Havre range over others Personal interviews

Methodology

Wiegmans, Hoest and Notteboom (2008)

Authors

Table 29.1 Shipping line port choice studies

Strategic factors: ﬁt of the port in the trade; requirements imposed by the alliance structure, by shippers/customers location and relations, by existing contracts, market entry and penetration, and by the arrangements between the shipping line and incumbent terminal operators (e.g. dedicated terminal facilities) These strategic considerations (for port choice) are the most important, as long as cost differences between dedicated and common terminals are acceptable At tactical level: (1) availability of hinterland connections; (2) reasonable tariffs; and (3) immediacy of consumers (large hinterland) Feeders also consider the environment and the total portfolio offered by the port as important Inland distance proved to be more signiﬁcant when lower-value commodities were to be transported Ocean distance was more signiﬁcant for fabrics and manufactured goods Distance is the most important factor Choice behavior varies signiﬁcantly across carriers as well as commodities Port charges are not important Volume of import/export/ transshipment containers Cost Port efﬁciency Port physical environment Port location (Continued)

Findings/port choice criteria

Tongzon and Sawant (2007) Chang, Lee, S-Y and Tongzon (2008)

Guy and Urli (2006)

Lirn, Thanopoulou and Beresford (2003)

Tang, Low and Lam (2008)

Authors

Methodology

Liner shipping companies choosing among major Asian ports Network-based Integrated Choice Evaluation (NICE) model that integrates the network characteristics of the port industry into the traditional multinomial logit preference model (MNL) via the connectivity index. The NICE model also takes into account the endogeneity of port variables and applies factor analysis Taiwanese liner container carriers choosing a transshipment port in Taiwan Delphi technique Analytic Hierarchy Process Shipping lines: port of Montreal or New York Multicriteria approach in combination with scenarios Survey of shipping lines in Malaysia and Singapore Revealed preference approach Main trunk (ocean carriers) and feeder operators Survey

Table 29.1 (Continued)

Ocean carriers more sensitive to port cost Five port choice categories: advancement/convenience of port; physical/ operational ability of port; operational condition of shipping lines; marketability; port charge

Physical and technical infrastructure, geographical location, port management and administration, carriers′ cost perspective All four factors were about equal in importance Important sub-criteria: carriers loading/discharging cost; berthing delay; loading/discharging rate; proximity of the feeder ports For Montreal to become the preferred choice (over NY), extensive hinterland coverage must be the top criterion for carriers and simultaneously the port must perform better in terms of cost and/or service Port charges and wide range of port services the only signiﬁcant factors in their port choice

Port efﬁciency is most inﬂuential in increasing the attractiveness of ports A competitive port should also perform reasonably well in scale economies and convenience

Findings/port choice criteria

DETERMINANTS OF USERS’ PORT CHOICE

ﬁndings not conclusive but indicative. On many occasions the studies are regionally based or are port or route speciﬁc, something which limits the generalizability of the results. In addition, the role of logistics and supply chain management criteria has not been empirically examined.

29.4 Port Choice from a Logistics and Supply Chain Management Perspective Shipping lines seem to place added emphasis on particular choice criteria when it comes to choosing a port. The question which arises is the role of logistics and supply chain management criteria in shipping lines’ port choice decisions. To answer this question one needs to consider the deﬁnitions of logistics and supply chain management. The Council of Supply Chain Management Professionals (2009) deﬁnes logistics management as that part of supply chain management that plans, implements and controls the efﬁcient, effective forward and reverse ﬂow and storage of goods, services and related information between the point of origin and the point of consumption in order to meet customers’ requirements. Logistics is the process of planning, implementing and controlling the ﬂow or storage of raw materials, inventory, ﬁnished goods, services and related information from the point of origin to the point of consumption (Coyle, Bardi and Novack 1999). Supply chain management is a broader concept, which encompasses logistics, and emphasizes in particular the cooperative and coordinated role of channel participants, including suppliers and end

607

customers, in the facilitation of goods and information ﬂows that add value to all concerned (Council of Supply Chain Management Professionals 2009). On the basis of the above the port as a logistics system would engage in inbound and outbound receipt and dispatch of goods and information and offer a range of highquality services efﬁciently and costeffectively. On the other hand, in a supply chain context the port would engage more actively in how activities and processes beyond its boundaries may inﬂuence its goals of adding value to the supply chain process and improving supply chain performance. On the basis of the literature review and these deﬁnitions of logistics and supply chain management it can be conceptualized that the port’s role in a supply chain management context is to provide highquality and varied services efﬁciently and cost-effectively, and to facilitate supply chain integration and better logistics performance.

29.4.1

Port technical efﬁciency

Shipowners in general, and shipping lines in particular, consider the time that a ship spends in port to be expensive and unproductive. Because of this, the speed and efﬁciency of container handling and the time it takes for a ship to be turned around are important for shipping lines, which places pressure on ports to improve their productivity and efﬁciency. A port’s technical efﬁciency may be deﬁned as the maximum output that a port can provide in utilizing a given level of inputs (or resources). It can be said that the higher the technical efﬁciency level of a port or terminal operation, the more likely it is to be preferred by users.

608

PHOTIS PANAYIDES AND DONG-WOOK SONG

The recognition that port technical efﬁciency is a key criterion in port choice has prompted extensive study and analysis of the technical efﬁciency of various ports around the world. The approach that has been widely applied is to consider the port as a productive unit that processes a given number of inputs to produce outputs, port efﬁciency being deﬁned as the efﬁciency with which inputs are converted into outputs. In fact, what has been widely studied is the relative technical efﬁciency of ports and container terminals that provide benchmarks of port efﬁciency among a chosen port sample through the application of parametric and nonparametric approaches like stochastic frontier and data envelopment analysis (see Cullinane 2002 and Cullinane, Wang, Song and Ji 2006). Studies of port technical efﬁciency have traditionally used the factors of production (land, labor and capital) as inputs into the port’s production process, and TEU throughput as the output of the production process. Examples of inputs include the number of gantry cranes, the size of the labor force, capital investment, labor expenditures, the number of berths, the number of tugs, the size of the terminal area, the book value of the assets, operational costs’ and total length of quay, whereas outputs include TEU throughput, level of service, port service satisfaction, frequency of calls made by ocean carriers, revenue from port facilities, ship working rate, number of ship arrivals and departures, and value of sales (Barros 2003; Barros and Athanasiou 2004; Barros 2006; Cullinane, Song, Ji and Wang 2004; Poitras, Tongzon and Li 1999; Min and Park 2005; Tongzon 2001; Roll and Hayuth 1993; Valentine and Gray 2001, 2002).

Cullinane, Wang, Song and Ji (2006) undertook an empirical study with the aim of comparing data envelopment analysis and stochastic frontier analysis in measuring the technical efﬁciency of container ports. A sample of 57 container ports or terminals was used with one output (throughput) and ﬁve inputs (terminal length, terminal area, number of quayside gantries, number of yard gantries and number of straddle carriers). They found a fairly high degree of correlation in the results from the application of the two approaches. Another signiﬁcant outcome of this study was the fact that large ports (arbitrarily identiﬁed as those with above one million TEU annual throughput) were found to be scale-inefﬁcient and small ports scale-efﬁcient. Rios and Macada (2006) analyzed the relative efﬁciency of operations in container terminals of the Mercosur for the period 2002–4, using the BCC-DEA technique. The inputs used were the number of cranes, the number of berths, the number of employees, terminal area and the amount of yard equipment, while the outputs included the number of TEUs handled and the average number of containers handled per hour/ ship. The chosen sample included terminals in Brazil, Argentina and Uruguay. Port technical efﬁciency studies are strongly focused on the measurement of relative, not absolute, technical efﬁciency, which also limits to some extent analysis of cause-and-effect relationships, that is, what determines better efﬁciency. However, certain factors to explain technical efﬁciency and its determinants have been hypothesized, and technical efﬁciency is generally regarded as an important port choice criterion, especially for shipping lines aiming for efﬁciency in supply chains.

DETERMINANTS OF USERS’ PORT CHOICE

29.4.2

Cost

Cost is an important criterion in port choice because port charges have traditionally constituted a signiﬁcant part of the total transportation costs incurred by carriers and shippers. Port costs and charges inﬂuence supply chain management total costs. Hence, in an effort to cut costs and remain competitive, port users may look at port charges as a way to reduce total operating costs, bearing in mind that for a liner service a number of port costs are ﬁxed costs. However, there must be assessments both of which cost is important for port users and of the impact of port tariffs and service charges in relation to the direct and indirect costs that using the port may incur. Foster (1978a, 1978b) indicated that port charges are an important criterion and may still have an impact. However, in the context of potential losses arising from port inefﬁciency, delays, low reliability, etc., the actual port charges become less important (Tongzon 1995). In fact, according to the ﬁndings of Murphy, Daley and Dalenberg (1991, 1992) there are port users that are willing to incur higher costs in terms of port charges in return for superior and more efﬁcient service. Authors examining port competition, such as Bardi (1973), Foster (1978a, 1978b, 1979), Slack (1985), Hanelt and Smith (1987) and D’Este and Meyrick (1992a, 1992b), generally suggest that service-related factors are more important than price in port choice.

29.4.3

Supply chain performance

The supply chain process is the process of door-to-door transportation of cargo; it may include warehousing and other services. In the context of port-to-port transpor-

609

tation, cargo passes through other ports. The role traditionally played by ports was as a facilitator, focusing on the provision of superstructure and infrastructure for ship operations, loading/unloading, temporary storage and intra-port operations. Ports nowadays play a very different and important role as links in the door-to-door supply chain. Ports are bi-directional logistics systems: they receive goods from ships to be distributed to land (road/rail) and inland waterway modes that form the remaining legs of the transport systems, and at the same time they receive cargoes arriving by road/rail and inland waterway and deliver them to ships for the sea-leg. This bidirectional logistics system requires a high level of coordination and inter-connectivity capabilities within the port system. In this role, the port is one of a cluster of different logistics and transport operators involved in bringing value to the ﬁnal consumers. Bichou and Gray (2004) indicate that adopting a logistics approach to the measurement of port performance is beneﬁcial to port efﬁciency because it directs port strategy towards relevant value-added logistics activities. In order to be successful, such channels need to achieve a higher degree of coordination and cooperation (De Souza, Beresford and Pettit 2003). The recognition that ports are increasingly integrated in supply chains is illustrated in papers by Paixao and Marlow (2003), Marlow and Paixao (2003) and Bichou and Gray (2004). Paixao and Marlow (2003) and Marlow and Paixao (2003) introduce the logistics concepts of lean and agile operations as key factors in the measurement of port performance. Ports may be instrumental in facilitating the supply chain process and improving logistics performance goals. For instance,

610

PHOTIS PANAYIDES AND DONG-WOOK SONG

Dias Quaresma, Calado and Mendonca (2010) argue that the application of logistics principles and integration of port terminals to inland distribution centers reduces friction costs and impedance, promotes spacetime compression and adds value by compressing several transit times. Robinson (2002) suggests that ports are part of a value-driven chain system competing with other value-driven chain systems. Cargo ﬂows will seek routes that offer the lowest cost, and ports that offer efﬁcient hinterland accessibility through productivity, efﬁciency and reliability in intermodal transport connectivity and inter-operability, and add value to shippers and consignees in the supply chain. Bichou and Gray (2004) indicated that port and terminal integration may involve the extent to which the port plans and organizes activities, processes and procedures beyond its boundaries and monitors performance in such activities. Notteboom and Rodrigue (2005) indicate that such practices may include involvement in the introduction of new shuttle train services to the hinterland, together with the respective national railway companies, rail operators, terminal operators, shipping companies and/or large shippers. In addition, it includes the extent to which port management collaborates with other members of the supply chain in order to identify costeffective and supply chain performanceenhancing solutions for the goods passing through the system. Location is important because it can have a positive effect on the efﬁciency and performance of the overall supply chain process, including the costs incurred and the beneﬁts derived from a port being at an attractive location, close to major shipping lanes or serving important hinterlands.

However, in an era of advanced information and transportation technology, the efﬁciency of cargo transportation and cargo transit will not depend on geographical proximity as such but on the efﬁciency of the supply chain process, which can overcome the place gap that occurs between the shipper and the consignee. The performance of the supply chain process has been widely studied in the general literature but has not received the requisite attention in the context of liner shipping supply chains.

29.4.4

Service adequacy

“Service” means all aspects relating to the service offering and the value proposition of the port to its users and target market segments. It includes such issues as service variety and range, provision of value-added services, quality, including reliability and responsiveness to users’ needs, and the ﬂexibility to meet changing user needs. Reliability of port operations – the ability of the port to offer its services to its users dependably and accurately – is an important criterion for port choice. The ability of the port to offer its services without the delays that may arise from inefﬁcient practices, strikes, equipment breakdown, weather conditions, etc. will affect the choice of shipping lines and shippers. Reliability is associated with service quality, and a port’s higher service quality will give it competitive advantages that will be preferred by users (Notteboom and Winkelmans 2001).

29.4.5

Value-added services

The provision of value-added services is important in a port context. For example, studies on priority systems have shown that they contribute to port service differentia-

DETERMINANTS OF USERS’ PORT CHOICE

tion and are important for adding value to and differentiating the service, which may then be preferred by port users (HoguinVeras and Jara-Diaz 1999). For instance, Robinson (2002) suggests that ports form part of a value-driven chain, and as such can add value to the goods passing through them. Carbone and De Martino (2003) indicate that procurement and pre-assembly stages are becoming signiﬁcant and may well shape the future development of ports. Tongzon and Heng (2005) have found that a port’s adaptability to customers’ demands, through understanding their needs and making efforts to meet and exceed their expectations, is an important factor in port choice. Paixao and Marlow (2003) put forward a framework that can be adopted for adding value in a port environment. It involves adding value in the context of the different operations, services and capabilities that take place in a port, and includes: the capacity to provide hinterland and foreland for road/rail access, launch new tailored services and handle different types of cargo; the speed with which the port can take decisions on altering schedules, amend orders and change design processes to meet customers’ demands; the variety of services in intermodal operations; the capacity to convey cargo, through the most diversiﬁed routes or modes and in the least possible time, to end-users’ premises; and the capacity to deliver tailored services to different market segments and to act as a collaborative intermodal hub network.

29.4.6

611

important for the port as well as for the shipping lines and other users. Information sharing and establishment of seamless communication systems have been intensively discussed in the supply chain management context (e.g. Cachon and Fisher 2000; Lewis and Talalayevsky 1997; Stefansson 2002; Wu, Yeniyurt, Kim and Cavusgil 2006; Zhao, Xie and Zhang 2002). It has been found that information sharing leads to high levels of supply chain integration ( Jarrell 1998) by enabling organizations to improve reliability, dependability and speed. Information and communication systems in the supply chain impact supply chain performance in terms of cost and service level (Zhao, Xie and Zhang 2002) and, providing shipping notiﬁcations with much shorter lead times, give the potential to speed up the entire shipping transaction (Stefansson 2002). Carbone and De Martino (2003) found that essential parameters for facilitating the integration process between supply chain partners at the port of Le Havre included the presence of advance information and communication technologies. Paixao and Marlow (2003) suggested that the introduction of information technology and information-sharing systems would encourage greater integration, avoid duplication of documentation, and improve the processing and treatment of data by all players in the transport chain, with a consequent reduction in total port costs. On this basis it can be hypothesized that the availability of information and communication systems is integral to the selection criteria of ports.

Information systems

The establishment and use of seamless communication systems that facilitate efﬁcient servicing of operations and achievement of the port’s and its users’ goals are

29.5

Methodology

The methodology for empirically assessing the importance to shipping lines of

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PHOTIS PANAYIDES AND DONG-WOOK SONG

determinants in port selection entails the development of measures and scales for measuring the identiﬁed constructs, the development of a questionnaire for data collection, the selection of a sampling frame and sample to administer the survey, and data analysis.

29.5.1

Measure development

The development of measurement scales for operationalizing the constructs adopted the traditional approach suggested by Churchill (1979), further developed by Gerbing and Anderson (1988) and utilized in numerous studies since. Measurement scales were developed on the basis of earlier literature. The variables for measure development are the adequacy of port facilities, port efﬁciency, port costs, port service, information system availability, and the port’s intermodal and value-added services. The actual measures, together with the supporting literature, are shown in Table 29.2. The most basic requirement for a good measure is content validity, which means that the measurement items in an instrument should cover the major content of a construct (Churchill 1979). Content validity is usually achieved through a comprehensive literature review and interviews with practitioners and academicians. Pre-tests evaluated the items in terms of substantive (content) validity, and modiﬁcations were effected prior to adoption. All items were measured on seven-point Likert scales.

29.5.2 Sampling and survey administration In order to identify the importance of logistics criteria in port selection to shipping

lines, the study sought to develop a survey questionnaire and collect primary data from a sample of key informants in shipping lines. Measures for operationalizing the constructs were developed on the basis of an extensive literature review that identiﬁed previously developed and tested scales. All constructs were measured with multipleitem scales. The key informant technique was implemented in order to facilitate response rate from selected individuals deemed to be knowledgeable of the aspects under scrutiny (Phillips 1981). The questionnaire was developed in accordance with the method of questionnaire design outlined by Dillman (2000). The questionnaire consisted of three sections. Section I sought to capture the importance of logistics port choice criteria of shipping lines on the basis of the earlier conceptualization (adequacy of a port’s facilities, port efﬁciency, port costs, intermodal and value-added services, service adequacy, and information system availability and use). Since the study aimed to choose respondents who were expected to have a good knowledge of the research issues, an authoritative sampling frame was sought. The list of respondents was obtained from the shipping operators’ section of AXS–Alphaliner, an online information platform, and from Lloyd’s Maritime Directory. The operators included in the list were from an international sample of countries. In an effort to improve response rate and reduce nonresponse bias, Dillman’s (2000) authoritative suggestions (stamped addressed envelope, assurances of conﬁdentiality/ anonymity. and rewards) were adopted. We administered the survey using postal and online versions of the questionnaire. All respondents were sent a postal question-

Table 29.2 Port selection criteria measures Variable Adequacy of port facilities

Port efﬁciency

Port costs

Service

Authors Murphy, Daley and Dalenberg (1992), Lirn, Thanopoulou and Beresford (2003), Tiwari, Itoh and Doi (2003), Ugboma, Ugboma and Ogwude (2006), Tongzon (2009) Tongzon (1995, 2002, 2009), Bichou (2007), Chow (2007), Grosso and Monteiro (2008)

Slack (1985), Lirn, Thanopoulou and Beresford (2003), Nir, Lin and Liang (2003), Tongzon and Sawant (2007), Wiegmans, Hoest and Notteboom (2008) Slack (1985), Tongzon (2002, 2009), Ugboma, Ugboma and Ogwude (2006), and Tongzon and Sawant (2007)

Measures The port’s ship container-handling equipment The port’s shore container-handling equipment The port’s berth capacity The capacity of the container storage facility provided at the port The size of the container port yards The loading/discharging rate that the port or port terminal is capable of The efﬁciency of the port/terminal’s service operations for the multimodal interface The reliability of the terminal’s service operations for the multimodal interface The average length of your ship’s service time by the port The average cargo dwell time Reasonable navigation costs related to the port Reasonable berth service fees of the port Reasonable cargo-handling charges of the port The provision of cost-effective multimodal operations by the terminal

The frequency of departures that the port can facilitate The frequency of freight loss and damage at the port The assistance provided by the port with claims handling The quality of the personnel involved in port operations The port’s ﬂexibility in meeting your special needs (Continued)

614

PHOTIS PANAYIDES AND DONG-WOOK SONG

Table 29.2 (Continued) Variable Information system availability

Intermodal and valueadded services

Authors

Measures

Bowersox and Daugherty (1995), Hammel and Kopczak (1993), Marlow and Paixao (2003), Vickery, Jayaram, Dröge and Calantone (2003), Wu, Yeniyurt, Kim and Cavusgil (2006) Slack (1985), Guy and Urli (2006), Magala and Simmons (2008), and Grosso and Monteiro (2008)

The port’s management information system The use of modern IT and computerized information systems by the port The cargo-handling information service The cargo-tracing information service The availability of electronic data interchange (EDI) capabilities

naire, together with a cover letter explaining the purpose of the questionnaire and an e-mail, which included the link for the online questionnaire. This was followed by three waves of reminder e-mails. The respondents were assured that they would receive a professional report when the study was completed, as a token of appreciation. The respondents chosen were generally members of the top management of the shipping ﬁrms. The survey was carried out between December 2009 and February 2010 and was administered to 339 shipping companies. Of these, four companies replied that they did not take part in the port selection decision, because their ship-

The connectivity of the port or port terminal to a multimodal interface The capacity to handle the transferring of cargo from one mode to another The range of warehousing services provided by the port (e.g. crossdocking, consolidation, palletization, packing, labeling, stufﬁng, de-stufﬁng, inventory management, continuous replenishment) The provision of support services (e.g. incoming goods inspection, spare parts support)

pers choose the port, four replied that they did not take part in surveys, and ﬁfteen could not be reached via e-mail, for various reasons. Despite the great effort to obtain data, only 22 replies were received, of which one was discarded because it provided almost no data. Despite the low response rate, the fact that respondents were CEOs, managing directors, directors or senior managers gives qualitative value to the results. Both large and small companies participated, with a wide range of variation in terms of ships and number of operated routes. The responding companies were relatively large, with a mean of 884 employ-

DETERMINANTS OF USERS’ PORT CHOICE

ees, an average of 15 ships owned and 25 operated, and an average age of 44 years, which indicated that they are well established. The companies operated an average of eight routes.

29.6

Empirical Results

The empirical results of the study are indicated in Table 29.3. The table provides a ranking of each item on the basis of the mean scores from the responses on the Likert scale from 1–7. The survey provides evidence with regard to the ranking of port selection determinants from the perspective of container shipping lines. The evidence is not conclusive, but indicative of what the speciﬁc respondents regard as important in their choice criteria. Although the results are more useful from a qualitative than from a quantitative perspective (statistical signiﬁcance) they nevertheless provide a good indication of the beliefs of 21 top managers in shipping lines that have been exposed to port choice decisions. The results indicate that adequacy of port facilities (berth capacity), service (ﬂexibility in meeting the customer’s special needs), costs (navigation costs and cargohandling costs) and availability of information systems (EDI availability, cargo-handling and cargo-tracing information) are the most important determinants of port choice by shipping lines. It follows that logistics criteria are very important to, and highly ranked as choice criteria by container shipping lines. However, container shipping lines do not yet seem to have appreciated the role of ports in a supply chain context; according to the evidence from this study they consider

615

supply chain factors less important. Factors that measure the supply chain capability of ports do not seem to be highly ranked by the shipping lines surveyed. In fact, the factor “connectivity of the port or terminal to a multimodal interface” is ranked eighth in importance. The ﬁndings of this study corroborate previous research on port choice criteria. In particular, Willingale (1981) considers port facilities to be among the important criteria, and Collison (1984) indicates average waiting time in port (which correlates with berth capacity) and port service capacity as the key criteria. Slack (1985) and Brooks (1984, 1985) consider tariffs and port costs the key criteria, whereas in a series of papers Murphy, Daley and Dalenberg (1988, 1989, 1991, 1992) identify port facilities, information regarding handling, and ﬂexibility in meeting special needs as key. Peters (1990) also considers service level and available facility capacity to be important, while McCalla (1994) ﬁnds port facilities to be a highly ranked criterion. The ﬁndings seem to be in line with Chang, Lee and Tongzon (2008), who indicate that terminal handling charges and berth availability are among the key port choice criteria from an overall sample of container shipping lines and feeder operators. Tongzon and Sawant (2007) investigated the difference between the stated and revealed preference of container shipping lines in Singapore and Malaysia. They asserted that, while efﬁciency was the most important criterion in the container shipping lines’ stated preference for ports, it was insigniﬁcant when the revealed preference approach was used. Instead, the port’s costs and a wide range of services were the most signiﬁcant criteria for container shipping lines.

Table 29.3

The ranking of port selection criteria

The port’s berth capacity The port’s ﬂexibility in meeting your special needs The navigation costs related to the port are reasonable The availability of EDI capabilities The average length of your ship’s service time by the port The cargo-handling charges of the port are reasonable The cargo-handling information service The cargo-tracing information service The berth service fees of the port are reasonable The quality of the personnel involved in port operations The use of modern IT and computerized information systems by the port The loading/discharging rate that the port or port terminal is capable of The connectivity of the port/port terminal to a multimodal interface The port’s Management Information System The frequency of freight loss and damage at the port The port’s shore container handling equipment The terminal provides cost-effective multimodal operations The frequency of departures that the port can facilitate The average cargo dwell time The port’s ship container handling equipment The efﬁciency of the port’s/terminals multimodal operations The capacity to handle the transferring of cargo from one mode to another The assistance provided by the port with claims handling The capacity of the container storage facility provided at the port The range of warehousing services provided by the port (e.g. cross-docking; consolidation, palletization; packing; labeling; stufﬁng; de-stufﬁng; inventory management; continuous replenishment) The reliability of the terminal’s service operations for the multimodal interface The provision of support services (e.g. incoming goods inspection; spare parts support) The size of the port’s container yards

Response rate (%)

Mean

Std. dev.

95 100 100 100 23

6.33 6.09 6.05 6.05 6.00

.730 1.151 0.785 0.899 0.000

100 100 100 100 95

6.00 5.95 5.95 5.95 5.86

1.024 0.950 1.133 0.950 1.195

100

5.82

1.140

23

5.80

1.095

86

5.68

1.293

41 95 91 100

5.67 5.48 5.45 5.41

1.000 1.250 1.701 1.260

95 18 95 27

5.38 5.25 5.19 5.17

1.532 0.500 1.940 0.753

86

5.11

1.197

95

5.05

1.627

100

5.05

1.527

86

4.95

1.129

27

4.83

0.753

86

4.74

1.284

100

4.59

1.709

DETERMINANTS OF USERS’ PORT CHOICE

29.7

Summary

The question of users’ port choice has occupied a central position in researchers’ interests, especially in the past two decades (e.g. Chang, Lee and Tongzon 2008; Murphy, Daley and Dalenberg 1992; De Langen 2007). The selection of a speciﬁc port greatly affects a shipping line’s network conﬁguration, and consequently the routing and the coverage that the ﬁrm can achieve as well as customer service. Hence, the choice of port by shipping lines is becoming more crucial, since it will determine whether the shipping line can realize its operational, service and ﬁnancial performance goals. This study has sought to identify the factors inﬂuencing users’ port choice decisions and to focus speciﬁcally on the criteria, especially the logistics-related criteria, used by shipping lines. Regarding the latter, there is mixed evidence from the empirical assessment. Some logistics-related criteria are considered by shipping lines to be very important, whereas other factors, such as the provision of value-added facilities, and to some extent even the port’s connectivity to the multimodal interface, are regarded as less important. This ﬁnding is potentially signiﬁcant in the context of the investments made, not least by ports and terminals, in value-added and multimodal connectivity superstructure. The port selection criteria of shipping lines need to be studied from a number of perspectives. It must be recognized in further research that criteria may vary in terms of the ranking and importance of certain structural factors and characteristics of shipping lines as well as environmental characteristics. Further research should ﬁrst seek to identify such factors and characteristics. A key issue is how the different struc-

617

tural characteristics of a particular decision group, namely the shipping lines, affect the port choice decision. Further research should seek to classify the criteria in terms of their importance ranking, determine segments of companies and use the structural characteristics (of shipping lines and environmental characteristics) to develop proﬁles of the segments. Another question which arises is the determination of sought beneﬁts by the different segments of shipping lines. The decision of which port to choose is related to the criteria that the shipping lines consider important in their evaluation of ports. What cannot be overlooked are the factors that actually inﬂuence the formulation of the speciﬁc choice criteria. Shipping lines make port choice decisions on the basis of several internal and external environmental factors, which may include ﬁrm strategy, structure, leadership and the environment (Hult, Ketchen, Cavusgil and Calantone 2006; Miller 1987). With regard to the importance of logistics and supply chain management criteria, it can be concluded that this is an area where most variation can be found between the shipping lines. This study has identiﬁed the existence of such variation, with supply chain management factors evidently ranked lower in the choice criteria reported by shipping lines. The variation can be explained by the characteristics of the shipping lines and probably by Miller’s (1987) strategy imperative. It can be hypothesized that certain liner companies will inevitably be more oriented than others to logistics and supply chain management, probably on the basis of the strategy imperative. For instance, many liner companies have made supply chain management investments, like the investment in owned port terminals. Terminal ownership requires

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knowledge and investment in a supply chain management context as terminals play the nodal role in supply chain management. Another question which arises from the study concerns the relationship between port choice criteria, port choice, and performance. In other words, do the choice criteria employed and the consequent selection of particular ports have positive impact on the ﬁrm in terms of its performance? In conclusion, the area of port choice criteria is evidently in need of further research. Explanatory research will provide important information for decision makers in ports and terminals, port users, and the shipping lines in particular.

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30

Port Investment and Finance Sander Dekker and Robert J. Verhaeghe

30.1

Introduction

This chapter presents a framework for decision making on port investment and ﬁnance strategies. This framework is set against the background of inter-port competition and the public–private issue. Distinguishing public and private roles in port investment projects is highly relevant to untangling public and private interests in decision making on port investment and ﬁnance strategies. This is a prerequisite to selecting the most effective investment option, setting up a proper ﬁnance strategy, and applying an evaluation framework that takes account of the national welfare and commercial perspectives. The chapter identiﬁes a bestpractice approach for tracing the most effective strategy for port investment and ﬁnancing, with the aim of enhancing the competitive position of a port while taking into account its maritime and hinterland connectivity. Section 30.2 discusses the efﬁciency drive taking place in the maritime industry, which

is a major reason for ports to invest. Section 30.3 deals with the process of deciding upon port investment and ﬁnance strategies by setting the overall feasibility of port investment projects as the main theme. Section 30.4 identiﬁes different port investment options by means of an analysis of the cargo transfer process in the port. Section 30.5 takes a closer look at issues in port investment ﬁnance by differentiating public and private interests. Section 30.6 discusses evaluation of port investment by making a distinction between the national welfare and commercial perspectives. Section 30.7 summarizes.

30.2 Efﬁciency Drive in the Maritime Industry Until the 1970s, the global economic system was primarily driven by mass production. Since then some fundamental moves have taken place towards a demand-driven economy. These were induced by an

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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increasing individualization of the consumer, liberalization of global trade, and attention to environmental issues. New demand-driven production models emerged that focused on the needs of the customer; these require fast-responding and ﬂexible supply chains. These changes have been facilitated strongly by information technology. With the increasing pressure on ﬁrms to improve efﬁciency, more complex transportation/logistics concepts were developed with the aim of optimizing the total transportation process. Such systems include transportation, distribution, storage and information associated with cargo ﬂows. Of particular importance in this concept is intermodal freight transportation, in which seamless connections between the different transportation modes are essential. Challenges to the efﬁcient functioning of intermodal transportation were to be found in every cargo-handling activity, keeping in mind that each such activity entails a risk of damage. The solution was found in a uniform cargo transport concept, the container, which has facilitated efﬁcient and safe cargo handling and maritime transportation. Presently, according to Ebeling (2009), cargo ships transport more than 90 percent of the world’s trade goods inside intermodally shipped containers. Containerization has led to a revolution in shipping. Vessel sizes have increased greatly, and with them the beneﬁts of transport cost reductions due to economies of scale. Lim (1998) estimated the reduction in operational costs gained from increasing vessel size from 4000 to 6000 TEU at about 21%. Responding to the high investment cost of large ocean vessels, carriers rationalize their service networks through mergers

and alliances. As a consequence, major trade ﬂows have become consolidated at a fairly small number of ports, which have been transformed into load centers or hubs where container ﬂows are concentrated, and carriers focus their operations. The attractiveness of hubs lies in the fact that economies of scale in port operation can be obtained through handling large numbers of containers, which further enhances the competitive position of hubs in international transport networks. The competitive position of hubs is, however, constantly under pressure. There is a constant threat that (parts of ) cargo ﬂows will shift to competing ports that offer more efﬁcient (cheaper and/or faster) services. This shift is facilitated by the increased volatility of cargo ﬂows due to further development of intermodal transportation and electronic data interchange. The efﬁciency drive taking place in the maritime industry through intermodal transportation, containerization, increased vessel sizes, rationalization of service networks through mergers and alliances, and consolidation of trade ﬂows, serves as a stimulus for continuous shifts of cargo ﬂows from one port to another. This competition – together with demand growth due to autonomous factors such as economic development in the hinterland – is a main driving force for ports to invest. Huge amounts of capital are involved in port investments which are difﬁcult to obtain from only one source (public or private); public ﬁnancing is complicated by budget restrictions as well as by policies that promote a level playing ﬁeld for ports (particularly in the European Union; see Haralambides, Verbeke, Musso and Benacchio 2001). According to Haralambides (2002), the port industry is moving from a

PORT INVESTMENT AND FINANCE

position in which predominantly public funds were used to provide common user facilities (“ports as pure public goods”) to one in which capital – public and private – is being used to provide terminals that are designed to serve the logistical requirements of a more narrowly deﬁned group of users. Ports should be considered, then, as club goods or private goods with external effects rather than as pure public goods. This has an impact on answering questions such as: who is entitled to make investments (public or private parties)? And: what purpose will the investment pursue (commercial goals only, or also public goals such as promoting employment)? In the next sections, we address port investment and ﬁnance strategies against the background of inter-port competition and the public–private issue. We deal with this from an engineering perspective, in which we focus on developing a practical approach to making decisions on port investment and ﬁnance strategies. This focus can be considered an elaboration of the more economic (policy) approach followed by Musso, Ferrari and Menacchio (2006) in their discussion of proﬁtability, economic impact and ﬁnancing of port investment.

30.3 Port Investment and Finance Strategies Port investment essentially aims at enlarging capacity as well as at developing more efﬁcient cargo-handling processes. These bring about gains (lower service times and costs) for port users and – if a port’s demand increases sufﬁciently after investment – ﬁnancial gains for the port authority and

625

terminal operators. If lower service times and costs are passed on to society, they lead to the ultimate (public) goal of port investment, namely, “to increase producers’ surplus of those who originate the exports passing through it, and to increase the consumers’ surplus of those who ultimately consume the imports passing through it” (Goss 1990: 211). Two conditions are essential to establish a feasible port investment plan, namely (1) a sufﬁcient ﬁnancing arrangement, and (2) an evaluation of the economic beneﬁts (potential increase of producers’ and consumers’ surpluses) versus the costs. The second condition is of particular importance when public funding is involved; it is also particularly complex in a public (welfare) context because of potential indirect and external effects. When only private ﬁnance is involved and its cost can be fully recovered from revenues, the second condition contributes only to obtaining social acceptance of potential negative effects such as environmental impacts. Decision making on port investment and ﬁnance strategies should address the following six questions (Dekker 2005): (1) What is the expected demand for services in terms of types and volumes of the transport ﬂows? (2) What is the required supply of capacity in terms of physical characteristics (sizes and numbers) and service characteristics (tariffs, speed and reliability)? (3) What is the equilibrium demand? (4) What are the investment cost and the service price? (5) What are the ﬁnancial and economic beneﬁts, and (6) What is the overall feasibility assessment of the project? These questions are incorporated into the ﬂow diagram in Figure 30.1, which represents decision making on port investment and ﬁnance strategies.

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SANDER DEKKER AND ROBERT J. VERHAEGHE

Port investment

Supply of capacity

Demand for services

Competition in transport network

Equilibrium demand

Costs

Service price Direct and indirect effects

Commercial evaluation

External effects

Economic evaluation

Feasibility of the port investment project

Figure 30.1

Decision making on port investment and ﬁnance strategies.

As indicated in Figure 30.1, port investment affects supply of capacity (through physical capacity expansion or improved services) and/or demand for services. The interaction between supply and demand leads to a certain equilibrium demand that determines, together with the costs, the service price. The service price affects, in turn, the competitive position of the port in the transport network. From a ﬁnancial perspective, the revenues over the lifetime of the port investment project, obtained from the service price and possibly comple-

mented with public funding, should at least balance the costs. Traditionally, port authorities have planned, constructed and maintained port infrastructure by using public funds. The general view is that the public sector should own these assets to avoid the risk of monopolization by private parties. However, since the beginning of the 1990s, the global trend is toward increasing participation of private capital in the construction of port infrastructure (e.g. Trujillo and Nombela 2000; see also Musso, Ferrari and

627

PORT INVESTMENT AND FINANCE

Menacchio (2006) for the development of EU policy on this issue in the 1990s). Private port investments can be recovered from charges on the use of port infrastructure. The contribution from public funds will be mainly based on the (potential) indirect and external economic effects of such an investment. Assessing the overall feasibility of a port investment project requires a distinction to be made between commercial evaluation, which focuses on the private (ﬁnancial) perspective, and economic evaluation, whose focus is on the national welfare perspective. The direct costs and the service price are major inputs to the commercial evaluation. Additional effects, such as indirect and external effects, form inputs to the economic evaluation. Direct and indirect effects are determined by the match between the supply of capacity and the demand for services – in the transport market as well as in related markets; changes in producers’ and consumers’ surpluses are major compo-

nents. External effects concern welfare impacts that occur beyond the supply– demand mechanism.

30.4

Options for Port Investment

The demand for services, and their potential for revenue/welfare generation versus the investment cost, form the core of the evaluation of port investment. A range of types of investment can be considered, associated with the cargo transfer process in the port. This process (see Figure 30.2) can be considered as a set of interdependent stages or links; the weakest link determines the overall efﬁciency. Each of the links can be modiﬁed to improve the efﬁciency of the total transfer process. To realize the full potential of a port investment, all links in a port should be adapted to create a chain of mutually balanced link capacities (see also Jansson and Shneerson 1982). Selecting the most

Storage Ship unloading Ship approach and mooring

Storage transport

Hinterland mode loading Loading transport

Departure hinterland mode

Figure 30.2 Interdependent stages in the port cargo transfer process. Source: adapted from Jansson and Schneerson (1982).

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effective investment option therefore entails identifying the bottlenecks in port system capacity; the option (or combination of options) that solves the most signiﬁcant bottleneck(s) and contributes to the highest net beneﬁt should be selected. Peak loads due to the arrival of large ocean vessels that have to be handled in the shortest possible time are a major cause of shortages in port capacity and considerably complicate capacity planning. Capacity problems in the cargo transfer process can be solved by (a combination of ) investments in improvements to the supply of capacity that lead to capacity expansion or improved services, or by demand management measures that lead to improved utilization of existing facilities.

30.4.1

Increasing the supply of capacity

30.4.1.1 Capacity expansion Different types of measures can be applied to the different links of the cargo transfer process, such as (1) dredging works to make entrance channels and basins deeper so that they can receive bigger vessels, (2) removal of obstacles constraining waterways (e.g., low bridges), (3) application of locks to assure a constant water level in ports that are otherwise affected by the tide, (4) more cranes per berth to increase berth capacity, and (5) additional road and rail connections to expand hinterland transportation capacity. The potential for such measures depends strongly on the geographical/physical layout of the port and the options for hinterland transportation. Seawards expansion of the port by land reclamation is often applied. It expands the surface area of the port, and bigger ships can be handled as well, because channels and basins become deeper in the seawards

direction. The port of Rotterdam, for instance, is currently expanding its port area with a land reclamation project that comprises an area of 1,000 hectares (the Maasvlakte 2 project) for business activities. Sixty percent of this area (600 hectares) is reserved for container services and 40% for other activities such as storage and chemical industries. The total project involves an investment of 2.9 billion. Investments in capacity expansion such as the Maasvlakte 2 project exhibit four characteristics which are often cited to emphasize the necessity of public funding for infrastructure investments (e.g. Wiegmans, Ubbels, Rietveld and Nijkamp 2002). First, they are capital-intensive, because of indivisibilities and sunk costs. Second, they have a very long planning horizon (decades). Third, they bring substantial risks during the construction and operation phases. Fourth, they may have a substantial impact on the economy as well as on the environment, requiring an evaluation framework which is broader than the purely ﬁnancial scope of private ﬁnancing (see Section 30.6, “Evaluation Perspectives”). Another, related, issue is the presence of excess capacity, which is generally caused by a mix of indivisibilities, economies of scale in port construction, over-optimistic demand forecasts and the fact that excess capacity is considered an “operational necessity,” being a major means of providing quick turnaround times to ships (Haralambides 2002). Excess capacity in a competitive market may lead to a decrease in port prices, which is applied by ports to attract sufﬁcient market shares to utilize capacity more efﬁciently. Collapsing port prices may be the result, making cost recovery difﬁcult. It follows that ﬁnancing of

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investments in capacity expansion is a complex and specialized activity. 30.4.1.2 Improved services The potential gain from improved or increased handling through capacity expansion, involving substantial investment, should be weighed against the risk that demand will not materialize; inter-port competition may be an important factor in this trade-off. Alternatively, less capital-intensive options for supply of capacity, essentially based on improved services, may be pursued. For port area expansion, the alternative options include the following (Dekker, Verhaeghe and Pols 2002): 1.

better utilization of the existing port area by reallocation of port activities in the existing port area and by use of new technologies; 2. spread of activities to other regions in the hinterland; and 3. coordination with other ports (e.g., secondary ports). The ﬁrst alternative is receiving increasing attention. The potential of new technologies that focus on upgrading terminal logistics and hinterland transportation is, however, not easy to realize. It is often easier to pinpoint port area expansion (e.g. by land reclamation) as a focus for government investment as a component of its hub policy rather than the introduction of new technologies, which is primarily a private undertaking and therefore dependent on the willingness of terminal operators to invest. The other two alternatives focus on cooperation; they depend on the willingness of other regions and ports to cooperate, which is often difﬁcult to achieve. Such

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cooperation usually only has a chance if complementary services can be offered and mutual beneﬁts can be clearly identiﬁed. Moreover, cooperation between ports may lead to monopolistic behavior with associated inefﬁciencies (higher tariffs and less quality), which is undesirable from a welfare point of view.

30.4.2

Demand management measures

Other less capital-intensive options for port expansion are demand management measures; these aim at controlling demand at a particular port by introducing measures to induce a different (more favorable) demand pattern, including suppressing demand or shifting a portion of it to alternative locations. Examples are pricing, slot auctioning and redirection of cargo ﬂows. Pricing (tariff strategy) is an economic approach that uses the price mechanism as an instrument for modulating trafﬁc demand. It could typically take the form of a surcharge on the use of facilities – according to the level of congestion for instance (e.g. a toll that is set equal to the marginal external cost; see for example Haralambides, Verbeke, Musso and Benacchio 2001 and Haralambides 2002). Special forms of such pricing are peak pricing (i.e. increased prices during busy hours with the aim of encouraging users to shift to less busy times or facilities) and demurrage charges (charges imposed by terminal operators to deter long dwells). Slot auctioning is based on selling the right to use facilities at a certain time during the day (a slot) to the highest bidders. Freemarket forces determine the cost, which are simply what users are willing to pay for using a scarce resource such as capacity at a certain time. Extended discussions of

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different port pricing structures, including efﬁciency-promoting price structures such as congestion pricing and slot auctioning, can be found in, for instance, Haralambides and Veenstra (2002) and Strandenes (2004). Redirection of cargo ﬂows helps to reduce the demand on the original port facilities by serving part of it at complementary facilities or secondary ports. At the sea side of the port, it could be applied to the redirection of (parts of ) transshipment ﬂows. The risk of canceling out scale advantages in port exploitation must be kept in mind, however (see Subsection 30.6.1, “Evaluation from a national welfare perspective”).

30.5 Issues in Investment Finance In the optimization of the links in the total cargo transfer process of a port, four types of investment can be distinguished (Wiegmans, Ubbels, Rietveld and Nijkamp 2002; Dekker 2005), namely, investment in (1) basic infrastructure (maritime access channels, sea defense structures, port land and hinterland connections), (2) port infrastructure (port basins, quays and docks), (3) infrastructure-plus (surface hardening and tracks on the terminals), and (4) superstructure (sheds, cranes, vehicles and other equipment). The distribution of these types of investments between public and private parties depends on the governance structure for the port (see Chapter 25, “Port Governance”). National governments are often responsible for the basic infrastructure. The distribution of investments and expenditures between port authority and (private) terminal operators usually follows the dividing line between port infrastruc-

ture at one end, and superstructure at the other end. In principle, the national government funds investment in basic infrastructure as far as it contributes to national welfare (see further). There is a tendency for governments to see themselves as no longer fully responsible for port ownership (see Chapter 25, and also Estache and Trujillo 2009). Joint funding with private parties (public–private partnerships) increasingly constitutes a condition for making such investments. The national government usually takes care also of investment in hinterland infrastructure. Port authorities determine rent (longterm lease), quay charges and port dues to recover their investments. Port dues are paid by ships entering from or leaving for the open sea, as a function of, for instance, gross tonnage, cargo loaded and/or unloaded or, in some ports, number of passengers. Wharf and land dues are often determined in accordance with the intensity of use. Superstructure is often privately owned, and ﬁnanced with the revenues from handling charges. The owner (the terminal operator) is responsible for investments in sheds and equipment. Sometimes, these investments are (partly) funded by the port authority and passed on cost-effectively to the users of the superstructure. A major feature in ﬁnancing (port) investment is risk, which is the probability that the return on investment will be lower than expected. Several characteristics of port investments have an impact on overall risk, such as the fact that port investments are capital-intensive (particularly capacity expansion), have a long lead time, and are often subject to extensive adaptation or modiﬁcation because of their potential impact on the environment. Furthermore,

PORT INVESTMENT AND FINANCE

ports face competition from other ports, strategic behavior by shipping lines, and other sources of (market) risk that may affect demand for services and its associated revenue/welfare generation.

30.5.1 Economic justiﬁcation of public contributions Two major conditions for governments to get involved in investment projects are (1) effects for the national economy which go beyond the commercial (ﬁnancial) scope of the project, and (2) investment costs which go beyond the ﬁnancial means of the private partner. The government investment should then at least yield a return larger than the social discount rate – the opportunity cost of the average contribution to national welfare of other public investment opportunities. The total contribution of port investments to national welfare consists of direct, indirect and external effects. Investments in ports lead ﬁrst of all to cost savings which affect consumer and producer surplus. These effects are the so-called direct effects and are closely related to (new) users and operators of the port. Economic effects that are passed on to others in society via the pricing mechanism are the so-called indirect effects, including multiplier effects (Banister and Berechman 2000). External effects, in contrast, are passed on to others beyond the pricing mechanism. Indirect and positive external effects increase (national) welfare insofar as they create more efﬁciency via network effects (economies of scale, scope and density), and other economic effects such as agglomeration economies and reduction of labor market imperfections (e.g. Van Exel, Rienstra, Gommers et al. 2002). According to Banister and Berechman

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(2000), the most fundamental impact of investments in (large-scale) infrastructure is the improvement of transport conditions (i.e. improvement of accessibility), which affects the location decisions of households and industries. A major justiﬁcation for public funding can then be found in indirect and positive external effects, which are outside the scope of commercial exploitation by the private sector – and outside the scope of private ﬁnancing – but within the national welfare scope of government. The government may then contribute a portion of the investment (cost), which balances the discounted indirect and external effects (beneﬁts) over the project’s lifetime. Straightforward application of this concept leads, then, to the conclusion that the proportions of direct effects (in particular those related to the operators), and the sum of indirect and external effects in the total economic effects, determine the appropriate ratio of private to public investment (see Dekker, Verhaeghe and Pols 2003).

30.5.2

Private participation and risk

There are various formats for private participation in infrastructure projects within public–private partnerships. A major format is private participation under a DBFM structure (Design Build Finance and Maintain). A major criterion for private investors in deciding whether to participate in the ﬁnancing of a project is the expected return on investment, which is based upon the projected cash ﬂows. Commercial evaluation of a port investment project involves an ex ante assessment of the many factors that affect the projected cash ﬂows and associated return on investment. Accurate projection of costs and beneﬁts appears to be

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difﬁcult; according to, for instance, Grigalunas, Chang and Luo (2002), ex post results often differ considerably from ex ante assumptions. These differences appear in the construction phase as well as in the operation phase. The two phases have different risks that may have an impact on the projected cash ﬂow pattern (e.g. Wiegmans, Ubbels, Rietveld and Nijkamp 2002). Most of the expenditures are concentrated in the construction phase. Of particular interest in this phase is the risk of cost overruns, mostly due to cost underestimation in the planning stage. According to Flyvbjerg, Skamris Holm and Buhl (2002), cost underestimation in public works projects can have (1) technical or methodological causes (forecasting errors due to imperfect techniques, inadequate data, honest mistakes, inherent problems in predicting the future, lack of experience on the part of forecasters, etc.), (2) causes related to economic interests, either self-interest – when a project goes forward, it creates work for engineers and construction ﬁrms, and many stakeholders make money – or public interest – project promoters and forecasters may deliberately underestimate costs in order to provide public ofﬁcials with an incentive to cut costs and thereby to save the public’s money, (3) psychological causes (e.g. appraisal optimism), and (4) political causes (political reasons to present lower costs). In the construction phase, there is also the risk attached to the characteristics of the project and its context and environment. Grigalunas, Chang and Luo (2002), for instance, point to environmental issues that may lead to higher compensation costs and a longer construction period, causing a later start of the revenue ﬂows. The revenues start to materialize with operation of the project. In this phase,

market risk is highly relevant, particularly that associated with the demand for services. Apart from “deliberately” wrong demand forecasts (see Flyvbjerg, Skamris Holm and Buhl 2005), this risk is associated with inherent demand uncertainty due to (1) macroeconomic factors affecting autonomous development of the demand for a port’s services, and (2) the potential for inter-port competition. Other sources of risk in the operation phase, according to Grigalunas, Chang and Luo (2002), include labor, because of the possibility of strikes, terminal operational efﬁciency with its impact on the need for capacity expansion, and the quality of intermodal connection, which “anchors” the port to its hinterland. The latter source of risk is closely related to potential trafﬁc congestion caused by (autonomous) growth of hinterland transportation and insufﬁcient capacity measures to meet that growth. In setting up a port investment and ﬁnance strategy with a private ﬁnance component, sufﬁcient attention should be given to assessing the relevance and signiﬁcance of the various sources of risk as well as to how to manage them. Options for risk management include avoidance (using alternative solutions that do not have the risk), control (developing a risk reduction plan and applying it to the investment project), acceptance (accepting the risk and proceeding the investment project) and sharing (transferring (a part of ) the risk to other parties, such as insurance companies and investment partners).

30.6

Evaluation Perspectives

Port investments, in particular large-scale investments such as port area expansion,

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generate beneﬁts to (national) welfare, but they also have important negative effects on the environment as well as causing trafﬁc congestion in inland transportation networks. This requires a proper perspective for evaluating the different costs and beneﬁts in a national-welfare context; all effects should be incorporated. The commercial perspective, in contrast, tends to focus on an increase in the volume of goods by optimizing port efﬁciency and, in this context, the competition with other ports. Important in the economic evaluation is the deﬁnition of the base case or “do nothing” scenario. For example, in the case of the expansion of Rotterdam port, a capacity shortage in the port area is expected in the near future. This shortage will result in the rerouting of parts of the potential trade ﬂows through the port of Rotterdam to competing ports, such as Antwerp and Hamburg/Bremen. The economic consequence might be a lower attractiveness (higher costs and reduced reputation) to port-related industries, and therefore fewer beneﬁts to (national) welfare.

30.6.1 Evaluation from a national welfare perspective The decision to implement a capacity expansion project such as Maasvlakte 2 in Rotterdam port concerns an investment of public funds and therefore requires an evaluation based on the net contribution to national welfare. The components for evaluation can be related to cargo ﬂows through the port. Figure 30.3 presents a ﬂow diagram showing the cargo ﬂows through a port, the investments needed to improve the functioning of a port, and their impacts. The cargo ﬂow through the port of Rotterdam represents a fraction of the total

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international cargo ﬂow to and from Western Europe. Important factors that determine the competitive position of the port – and therefore the demand for port services – are the capacity and efﬁciency of the port and its hinterland connections. Investing in these factors affects the market share attracted by the port. A major differentiation can be made between domestic ﬂows (to and from the country in which the port is located) and non-domestic transit trade ﬂows (to and from foreign countries in the hinterland); they differ strongly in their effects on national welfare. Both ﬂows have an effect on the environment and on congestion. The domestic ﬂows, however, have a strong relation to the creation of indirect effects (employment and added value). Nondomestic and transshipment ﬂows contribute only to a relatively small increase in employment in transport services. The port of Rotterdam, for instance, has a relatively high proportion of non-domestic transit and transshipment ﬂows; container transshipment ﬂows accounted for about 28 percent of the total number of container moves in 2008 (Port of Rotterdam 2009). The non-domestic and transshipment ﬂows in particular are in competition with other ports and are therefore a relatively volatile part of the total ﬂow. At the same time, these ﬂows are crucially important to maintain the hub status of the port, because large cargo volumes and many direct maritime connections are characteristic of a hub port. Such large-scale ports create extra efﬁciency gains for domestic ﬂows. These efﬁciency gains (represented by the shaded area in Figure 30.4) are obtained via a reduction of the port price for domestic ﬂows, paid for by economies of scale (and scope) in port exploitation.

Investment in the port

Capacity and efficiency of the port

Effects: environment employment & value added by cargo handling industries

Trade flows attracted by the port

International trade flows

Domestic trade flows

Transfer of cargo through the port Non-domestic (transit) trade flows

Transshipment flows

Effects: - environment - traffic congestion - employment & valueadded by transport sector - employment & valueadded by port-related industries Effects: - environment - traffic congestion - employment & value-added by transport sector

Capacity and efficiency of hinterland connections

Investment in hinterland connections

Figure 30.3

Schematization of a port from a national welfare perspective.

Service price (e.g. ˘/TEU) Port-price curve characterized by economies of scale in port exploitation

Reduction of port price for domestic flows

efficiency gains for domestic flows

domestic flows

Flow (TEU/year)

domestic flows + non-domestic flows + transshipment flows

Figure 30.4

Efﬁciency gains due to economies of scale in port exploitation.

PORT INVESTMENT AND FINANCE

In deciding on expansion of port facilities from a national welfare perspective, decision makers should weigh the scale and scope of the beneﬁts from the expansion against marginal expansion costs. The economic effects which can be expected from a large-scale expansion project such as Maasvlakte 2 include beneﬁcial effects accruing to existing and new companies and industries, as well as effects on transport ﬂows in terms of type, volume and modality.

30.6.2 Evaluation from a commercial perspective International cargo ﬂows have become more volatile. As a result, the physical relation of port activities to the port as a place of settlement has been reduced. A most important challenge in establishing a feasible port investment plan, then, is to ﬁnd the optimal strategy for dealing with competition. In this respect, integration of (maritime and hinterland) transportation with transshipment in the port and logistic services has become crucial. Clark, Dollar and Micco (2004) found that improving port efﬁciency by 25–75% (in terms of decreased handling costs) leads to a reduction of shipping costs of more than 12%. So, handling costs are a major component in the total cost of transport logistic chains. Furthermore, it is expected that in the further development of the port sector, the coupling of ﬂows of goods with document streams and ﬁnancial transactions by electronic data interchange will be crucial to improving the competitive position (see also Chapter 29, “Determinants of Port Choice by Users”). In deciding upon commercially sound port investment strategies to deal with com-

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petition, three essential components can be distinguished, namely (1) estimation of demand for services, (2) determination of supply of capacity and (3) assessment of costs and revenues. Less capital-intensive strategies, such as tariff strategies, upgrading of logistic services, technological improvements and cooperation between ports, affect by deﬁnition the costs and are therefore particularly related to the third component. Representation of those strategies by appropriate cost–revenue streams should allow assessment of commercial feasibility. To what extent demand and supply are affected by less capital-intensive strategies depends on the orientation of the strategy (demand- or supply-oriented). Demandoriented strategies such as tariff strategies have, via the price mechanism, a direct impact on the attractiveness of ports. The combination of strong inter-port competition and tariff strategies (price reductions) may lead, however, to price wars between ports. These can spiral into collapsing port prices, which makes full cost recovery difﬁcult. Supply-oriented strategies, such as upgrading of logistic services and technological improvements, are largely private undertakings and closely related to a substantial reduction in the need for space for storage and distribution activities. This is particularly so if the private sector is indeed willing to invest in such strategies. If it is, this contributes to the arguments of those opposed to the traditional role of governments in funding port investment. A relevant question is then whether port infrastructure is to be considered as a club good or private good with external effects, rather than as a pure public good.

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30.7

SANDER DEKKER AND ROBERT J. VERHAEGHE

Summary

Decision making on port investment and ﬁnance strategies requires the untangling of public and private interests. This allows differentiating and selecting the most effective investment options, and is instrumental in the setting up of a proper ﬁnance strategy and the application of an evaluation framework that takes account of the national welfare and commercial perspectives. To select the most effective port investment option, it is relevant to consider the cargo transfer process in the port as a set of interdependent stages or links. Each of the links can be modiﬁed to improve the efﬁciency of the total transfer process. To realize the full potential of a port investment, all links should be modiﬁed to obtain a chain of mutually balanced link capacities. Selecting the most effective investment option therefore requires tracing the bottlenecks in port system capacity. The selected investment option may consist of (a combination of ) investment in improving supply of capacity leading to capacity expansion, improved services, and demand management measures leading to improved utilization of existing facilities. Basic strategy directions for port investment ﬁnance are (1) public funding, (2) private ﬁnancing and (3) partnerships of public and private parties. Strategies (1) and (3) require an economic justiﬁcation of the public contribution to the total port investment. This concerns the indirect and external effects, which are outside the scope of commercial exploitation but within the national welfare scope of the government. The government may then contribute a portion of the investment equivalent to the sum of discounted indirect and external effects over the project’s lifetime. In apply-

ing strategy directions (2) and (3), the ones with a private ﬁnance component, special attention should be given to assessing the relevance and signiﬁcance of various sources of risk as well as to how to manage them. Evaluating port investment from a public perspective requires considering a large set of costs and beneﬁts in a national welfare context. This contrasts strongly with the commercial perspective, which tends to focus on increasing the volume of goods by optimizing port efﬁciency, and in this context competition with other ports. Economies of scale and scope, related to the position in maritime transport networks and the hinterland potential, are most important factors in the development of ports and their competitive position; they create substantial beneﬁts. Enhancement of the competitive position of a port and its hinterland requires the identiﬁcation of a best-practice approach to deﬁning the most effective strategy for port investment. Major factors in this are maritime and hinterland connectivity.

References Banister, D. and J. Berechman (2000) Transport Investment and Economic Development. London: UCL Press. Clark, X., D. Dollar and A. Micco (2004) Port efﬁciency, maritime transport costs, and bilateral trade. Journal of Development Economics 75(2), 417–50. Dekker, S. (2005) Port investment: towards an integrated planning of port capacity. PhD thesis, TRAIL Research School/Delft University of Technology. Dekker, S., R. J. Verhaeghe and A. A. J. Pols (2002) Expansion of the port of Rotterdam: framework for evaluation. Transportation

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Research Record: Journal of the Transportation Research Board 1782: 49–55. Dekker, S., R. J. Verhaeghe and A. A. J. Pols (2003) Economic impacts and public ﬁnancing of port capacity investments: the case of Rotterdam port expansion. Transportation Research Record: Journal of the Transportation Research Board 1820: 55–61. Ebeling, C. E. (2009) Evolution of a box. Invention and Technology 23(4): 8–9. Estache, A. and L. Trujillo (2009) Global economic changes and the future of port authorities. In H. Meersman, E. Van de Voorde and T. Vanelslander (eds.), Future Challenges for the Port and Shipping Sector, pp. 69–78. London: Informa. Flyvbjerg, B., M. K. Skamris Holm and S. L. Buhl (2002) Underestimating costs in public works projects: error or lie? Journal of the American Planning Association 68(3): 279–95. Flyvbjerg, B., M. K. Skamris Holm and S. L. Buhl (2005) How (in)accurate are demand forecasts in public works projects? Journal of the American Planning Association 71(2): 131–46. Goss, R. O. (1990) Economic policies and seaports: 1. The economic functions of seaports. Maritime Policy and Management 17(3): 207–19. Grigalunas, T. A., Y.-T. Chang and M. Luo (2002) Containerport investment appraisal and risk analysis: illustrative case study. Transportation Research Record: Journal of the Transportation Research Board 1782: 64–72. Haralambides, H. E. (2002) Competition, excess capacity, and the pricing of port infrastructure. International Journal of Maritime Economics 4(4): 323–47. Haralambides, H. E. and A. Veenstra (2002) Port pricing. In C.Th. Grammenos (ed.), The Handbook of Maritime Economics and Business,

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pp. 782–802. London/Hong Kong: Lloyds of London Press. Haralambides, H. E., A. Verbeke, E. Musso and M. Benacchio (2001) Port ﬁnancing and pricing in the European Union: theory, politics and reality. International Journal of Maritime Economics 3(4): 368–86. Jansson, J. O. and D. Shneerson (1982) Port Economics. Cambridge, MA: MIT Press. Lim, S.-M. (1998) Economies of scale in container shipping. Maritime Policy and Management 25(4): 361–73. Musso, E., C. Ferrari and M. Menacchio (2006) Port investment: proﬁtability, economic impact and ﬁnancing. In K. Cullinane and W. Talley (eds.), Port Economics, pp. 171–218. Research in Transportation Economics, 16. Amsterdam: Elsevier. Port of Rotterdam (2009) Haven in cijfers [Port statistics]. Rotterdam: Port of Rotterdam. (In Dutch.) Strandenes, S. P. (2004) Port pricing structures and ship efﬁciency. Review of Network Economics 3(2): 135–44. Trujillo, L. and G. Nombela (2000) Seaports. In A. Estache and G. de Rus (eds.), Privatization and Regulation of Transport Infrastructure: Guidelines for Policymakers and Regulators, pp. 113–69. Washington, D.C.: World Bank. Van Exel, J., S. Rienstra, M. Gommers, A. Pearman and D. Tsamboulas (2002). EU involvement in TEN development: network effects and European value added. Transport Policy 9(4): 299–311. Wiegmans, B. W., B. Ubbels, P. Rietveld and P. Nijkamp (2002) Investment in container terminals: public private partnership in Europe. International Journal of Maritime Economics 4(1): 1–20.

31

Ports as Clusters of Economic Activity Peter W. de Langen and Elvira Haezendonck

31.1

Introduction

The application of insights from cluster theories to ports started roughly a decade ago. The ﬁrst two substantial works were Haezendonck (2001) and de Langen (2004). These were followed by, among others, Lambrou, Pallis and Nikitakos (2008), Musso and Ghiara (2008), Roh, Lalwani and Naim (2007) and Brett and Roe (2010). The port cluster concept has also been applied in practice: the port of Valencia has embraced the port cluster concept and positions itself as a leader in port cluster governance (Port of Valencia 2009); the Chinese government uses the port cluster concept in port planning (People’s Daily Online 2008); the Korean Maritime Institute analyzes the potential of Korea’s ports to develop further as logistics clusters, and United Nations publications promote the development of port and logistics clusters (UNESCAP 2007). So the port cluster concept seems, at least from an empirical perspective, to be useful and valuable.

In port studies, the perspective that regards ports as “transport nodes” is well established (for example Button 1993; Charlier and Ridolﬁ 1994; Cooper 1994; Goss 1990; Pallis, Vitsounis and de Langen 2010; Robinson 2002). The “cluster perspective” complements this “transport node perspective.” Central in this cluster perspective is the recognition that interdependent ﬁrms cluster together in port regions, with various forms of coordination and resource sharing as a consequence. Four arguments substantiate the value of analyzing seaports from the cluster perspective, as a complement to the more widely established “transport node perspective.” First, the cluster perspective provides new insights for determinants of port competitiveness. For instance, research on clusters demonstrates the importance of intracluster competition (Porter 1998 and applied in Haezendonck 2001). This has led to attention to the value of intra-port competition for port competitiveness (see de Langen and Pallis 2006). Other relevant variables

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

PORTS AS CLUSTERS OF ECONOMIC ACTIVITY

based on cluster studies include an “education regime” (de Langen 2008) and cargocontrolling intermediaries and industrial clustering in ports (Haezendonck 2001). Second, in the transport node perspective, the competitiveness of a port is typically measured by its throughput volume. A cluster perspective provides additional measures of performance, such as value added (Haezendonck 2001; Haezendonck, Coeck and Verbeke 2000; Robinson 2002) and investment level (Mathys 2009). Third, a port consists of a large number of independent, but also interdependent, ﬁrms. The performance of a port depends to a large extent on coordination between ﬁrms. Collective action of ﬁrms in clusters may sometimes be problematic, because of opportunism or lack of trust, but it can also strongly contribute to the competitiveness of the cluster as a whole. For example, Jans and Haezendonck (2010) argue that cluster organizations have a positive impact on the proactive environmental strategies of ﬁrms in that cluster. The empirical application in this chapter concentrates on petrochemical ﬁrms in the port of Antwerp, and argues that this positive impact can lead to competitive advantages for these ﬁrms in the port cluster and for the cluster as a whole. Collective action is discussed widely in the cluster literature (e.g. Baptista and Swann 1998; Krugman 1991; Maskell 2001; Nadvi 1999; Porter 1998, 2000; Steinle and Schiele 2002). Dominant ﬁrms may strongly inﬂuence the performance of a cluster (McKendrick, Donner and Haggard 2000). This may be particular relevant in ports, since in many port clusters the port authority or a major port operator plays a crucial role and can therefore be key to the cluster’s success. The cluster perspective provides a

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theoretical background for analyzing collective action and the role of dominant ﬁrms. Fourth, the transport node perspective does not provide a solid theoretical framework for analyzing the role of the port authority. The widely accepted classiﬁcation of landlord ports, tool ports and service ports describes only a part – directly related to transshipment on terminals – of all the activities port authorities engage in. A variety of other activities, such as port marketing, promotion, and acquisition of investors are not captured in this approach. Furthermore, the role of the port authority in attracting and facilitating industrial activity is not addressed. The cluster perspective offers an additional framework for analyzing the roles of port authorities in port clusters. This is discussed in more detail in Section 31.4. An overview of the key characteristics of both the transport node and cluster perspective for ports is provided in Table 31.1. To conclude, the cluster perspective provides a theoretical framework that can usefully be applied to ports. This framework complements the common perspective in which a port is analyzed as a part of a transport (or supply) chain. The framework is especially useful in providing additional insights into determinants of port competitiveness, port performance indicators and governance in ports. In this chapter we review some important results of the application of cluster theories to ports. First, we brieﬂy discuss the activities included in a port cluster. Next, we focus on two main contributions made by applying cluster theories to seaports, the insights concerning port governance in Section 31.3 and the emerging issue of clusters of ports in proximity in Section 31.4. Section 31.5 concludes.

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Table 31.1

Key characteristics of both port perspectives Port as transport node

Deﬁnition

Performance indicator Models for analyzing the role of government

Frequently mentioned performance variables Research issues

Geographical focus

Port as economic cluster

A gateway through which goods are transferred between ships and the shore Throughput volume

An economic complex consisting of all ﬁrms related to the arrival of ships and cargo and located in one region

The widely used but very stylized classiﬁcation of ports in landlord ports, toolports and service ports Maritime accessibility Geographic location Hinterland connections Development of liner network structures Hinterland accessibility as determinant of port competitiveness Factors inﬂuencing terminal efﬁciency Speciﬁc terminals

Port authority as central organization in cluster governance.

Value added in the port (cluster)

Intra-port competition Knowledge spill-overs A qualiﬁed labor pool The effect of institutional arrangements on port competitiveness Ports as logistics, trade and production centers Clusters of ports in proximity Green port and port’s social responsibility Geographical and institutional proximity of actors in ports.

Source: authors.

31.2

Deﬁning a Port Cluster

Various scholars have provided cluster deﬁnitions; an often cited one is “a spatially concentrated group of ﬁrms competing in the same or related industries that are linked through vertical (buyer/supplier) and/or horizontal relationships (alliances, collaborations, resource sharing, etc.)” (Porter 1998). Haezendonck (2001) deﬁned port clusters as inter-organizational networks among actors belonging to different sectors but situated at the crucial interface between the land and the water legs of industrial and

commercial activities. Such port clusters include shipping companies, pilotage and towing services, terminal operators, warehousing ﬁrms, value-added logistics companies, manufacturers, forwarders, shipping agents, distribution companies, haulers, railway companies, barge masters, maritime service companies (such as ship chandlers, insurances and experts in maritime law). Even though the “borders” of a cluster are somewhat vague in practice, it is important – at least conceptually – to delimit and deﬁne a cluster as precisely as possible. This can be done in the following steps.

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31.2.1 Selecting the core activity of a cluster

Table 31.2 Activities included in a port cluster

Delimiting a cluster starts with selecting a core cluster activity in a speciﬁc region (e.g., ﬁnancial services in London, life sciences in the Øresund). Generally, the analysis of geographical concentration, with such indicators as an above-average location quotient, a clear “export surplus” of products to other regions (Porter 1998) and the presence of regional industry associations, provides the basis for the selection of core activities (see for example the European cluster observatory, www.clusterobservatory.eu). In the case of port clusters, core activities encompass all those related to cargo and ships.

Cluster component

Activities

Cargo handling

Loading, unloading and transshipment activities Pilotage Port engineering Shipping services Inland shipping services Salvage services Shipbrokers Rail transport Pipeline transport Trucking services Transport intermediaries (forwarders and ship agents) Warehousing and storage Logistics consultancy services Oil reﬁning Flour milling Cokes manufacturing Basic chemical manufacturing Other chemical manufacturing Production of iron and steel Shipbuilding and repair Specialized suppliers to port industries Trade intermediaries in oil, fuel and chemical products Trade intermediaries in metals, ores and food Fuel, grain, metals and mineral oil wholesalers

31.2.2

Transport

Logistics

Analysis of linkages

The second step consists of deﬁning “cluster industries.” An automotive cluster, for example, encompasses the industries forging and stamping and vehicle assembly. Cluster industries are generally identiﬁed according to an analysis of economic linkages (Porter 2010). The existence of linkages is shown by input/output relations, inclusion in the same value chain, information exchange, specialization of ﬁrms and the existence of joint ventures and other partnerships.1 This analysis leads to a list of the industries included in a cluster (see the cluster descriptions of Harvard Business School’s cluster project, led by Michael Porter, for practical examples). Table 31.2 shows industries generally included in the port cluster (de Langen 2004).

Manufacturing

Trade

Source: de Langen (2004).

31.2.3

The relevant cluster region

The geographical scope of a cluster is in many cases not well deﬁned. Often,

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administrative regions are used. When detailed data are available, a relevant cluster region can be deﬁned as all adjacent areas where cluster industries are overrepresented. This issue is relevant in ports, as ports in proximity can in some cases be regarded as one port cluster, even when the ports are located in different regions or even in different countries; see Section 31.4. This approach to deﬁning ports has been applied to the ports industry (see de Langen 2004 and Musso and Ghiara 2008, as well as Mathys 2009, which calculates the economic impact of ports in line with this method). The application of the cluster concept to ports not only has an effect on such impact studies (another example of an empirical application is the EU co-funded IMPACTE project in 2006; see IMPACTE 2006 and Haezendonck, Dooms and Verbeke 2010), but also has important implications for theories on port governance. These are addressed next.

31.3 The Cluster Perspective and Port Governance In cluster studies, the importance of collective action for the performance of a cluster is widely accepted (see for instance Nadvi 1999 and Giuliani 2005). Even when the collective beneﬁts of collective action exceed (collective) costs, cooperation does not (always) develop spontaneously. This tendency towards insufﬁcient shared investments is relevant for various types of investments in clusters, including education, innovation and marketing (see de Langen and Visser 2005; Fuller, Bennett and Ramsden 2004).2

31.3.1

The role of port authorities

From a welfare point of view, collective goods (or local public goods) should be provided by local institutions, and the costs recovered directly, for example through local taxation. This does not involve subsidies by national governments. Port authorities are often well positioned to play this role of providing local public goods and to recover the costs through revenue streams, such as land rents and port dues. However, for a port authority (PA in the remainder of this chapter) to play this role effectively, it ﬁrst needs to have incentives to invest in the cluster. This is the case when the revenue streams of the PA are related to the performance of the cluster. Second, the PA needs to be self-sustaining, but not proﬁt-maximizing. The port authority owns and exploits the port area and beneﬁts when the port cluster is an attractive location, because it can potentially lease more land and charge higher prices. Furthermore, port authorities collect “port dues.” Thus, the more ships call at a port, the higher the port dues. For these two reasons, port authorities have a clear incentive to invest in the performance of the port cluster3 (the ﬁrst condition). Furthermore, many port authorities are self-sustaining but not proﬁt-maximizing (the second condition). Such port authorities can act as cluster managers4 in the sense that they invest in collective goods, such as port marketing, training, education and a port community system. With such investments, port authorities improve the competitive position of the entire port complex. And the investments are in the end ﬁnanced by the port users, through port dues and land rents. Given this background, Figure 31.1 shows a “decision tree” for port authorities. The

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Has an investment positives cluster extemalities?

No

Is ‘return-on-investment’ (sufficiently) positive?

Yes Dototal benefits (internal and external benefits) exceed costs?

No

No Do not invest

Yes

Leave investment to associations and alliances.

Yes Are investments made without involvement of PA? No Are firms willing and able to No co-finance investments? Yes Is it possible and effective to create specific charges to recover investments? Yes Invest in (the development of) a PPP that offers services for a user charge Hinterland terminal Rail service center Pipeline infrastructure

No

Is it possible and effective to create specific charges to recover investments?

Yes

Can private firms make the investments? Yes No Leave investments to firms

Make investments, recover costs directly

Invest and create charges to recover investments Waste collection Yes Interterminal infrastructure

No Invest and recover through higher general charges Fund (the development of) (port dues or land prices) a PPP that invests in the Traffic control Cluster, without user charges Port community system Port marketing Dredging Innovation platforms

Figure 31.1 A “decision tree” for a cluster manager Source: authors.

tree shows four arrangements that port authorities can create to make and facilitate investments, with cluster effects and examples of such investments.

31.3.2 Port authority investments with collective beneﬁts Port authorities have convincing arguments for making investments such as port marketing and a port community system when three conditions are met. First, the investment has positive external effects for the

cluster (in other words, it contributes to the competitiveness of various ﬁrms in the port cluster); second, overall beneﬁts (the beneﬁts for the PA itself and beneﬁts for the ﬁrms in the port cluster) exceed overall costs; and third, without PA involvement these investments are not made. The PA can ﬁnance and recover investments in four different ways. When private ﬁrms are not willing to contribute to investments, the PA needs to invest alone. These investments can in some cases be recovered through direct charges (e.g. a charge for

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shore power); in other cases this is not possible, and the PA revenues from port dues and land rents can be used to make these investments (for example dredging). When private ﬁrms are willing to contribute to investments, a partnership of various ﬁrms that contribute ﬁnancially is generally more appropriate. In some cases, Table 31.3

this partnership can charge ﬁrms for the services it provides (for instance a hinterland terminal); in other cases investments are made without direct cost recovery (such as port marketing). Table 31.3 shows that in practice port authorities do make investments with collective beneﬁts. Investment costs are recov-

Cluster investments of PAs

Four forms of cluster management Direct investments of the port authority, recovered through general charges Direct investments of the port authority, recovered through speciﬁc charges

Investment through a public private partnership that invests without direct cost recovery Through a public private partnership that charges users for its services

Cluster investments

Cases

Trafﬁc control, port community system, dredging

No direct private co-ﬁnancing, ﬁnanced through port dues

Rotterdam, LMPC, Durban

Logistics zones Dedicated freight transport systems

Land lease charges Infrastructure charges. In principle, once the investments are made, exploitation could be tendered to private operators. Subsidy to a port marketing association that is also funded by contributions of ﬁrms. Member ﬁrms of the platform pay a fee. Port authority invests in infrastructure and equipment and leases this on a cost recovery basis to ﬁrms.

Rotterdam Rotterdam (pipeline)

Port marketing and promotion Innovation platforms and research Rail and barge service centers

Venture capital provision

Training and education infrastructure

Source: de Langen 2004.

Arrangements of private co-ﬁnancing

Port authorities take a share in venture capitalist. The investments of this ﬁrm should generate a healthy return, while reducing start-up barriers. Schools develop training courses; costs are partially recovered through fees. Port authority contributes to developing courses.

Rotterdam

Rotterdam, LMPC Rotterdam, LMPC1

Rotterdam

Rotterdam, Durban

PORTS AS CLUSTERS OF ECONOMIC ACTIVITY

ered indirectly, through port dues and land prices. The cluster perspective provides the theoretical explanation for this role of PAs. This theoretical background suggests that this role of a port authority can contribute to the competitiveness of the port as a whole. The theoretical background discussed above suggests that a port authority can create “real beneﬁts.” These beneﬁts are (at least partially) passed on to importers/ exporters (and ﬁnally consumers). This is beneﬁcial for the economy as a whole.

31.3.3 Port governance structure for the cluster manager This argument has important implications for port governance. Port governance structures that enable the PA to play this role as cluster manager effectively are – other things being equal – more beneﬁcial for a country than structures where this is not possible (see Helsley and Strange 1998).5 In line with the arguments provided above, an ideal type port governance structure consists of PAs that are self-sustaining, can decide the level of port dues and land rents required to ﬁnance investments in the port, have the freedom to recover investment costs as speciﬁcally as possible, and to invest when “cluster beneﬁts” exceed costs but private ﬁrms are not willing to invest.6 This requires a not-for-proﬁt port authority that administers one port cluster. These two implications are further discussed below. The line of reasoning discussed above provides a convincing argument against fully private port authorities: private port authorities are less inclined to make investments with positive cluster externalities precisely because these beneﬁts cannot be PA-internalized. Furthermore, private PAs

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will have higher transaction costs for creating joint investments, since the threat of opportunistic behavior from a private PA is higher than that of a commercially operating but not proﬁt-driven PA.7 The cluster perspective is also relevant for analyzing the appropriate geographical scope of PAs. The appropriate geographical scope is one port authority for one port cluster. In this case, over-investment in similar facilities is prevented, while the PA faces competition and thus needs to be efﬁcient. Furthermore, the ﬁrms in the port cluster have clear incentives to improve the performance of the PA.8 A national PA (for instance one PA in India that sets tariffs, collects revenues and decides about investments for all Indian ports) is not effective for two reasons. First, a branch in charge of one speciﬁc port has limited incentives to operate efﬁciently, since all revenues are collected centrally. This leads to a principal–agent problem, and consequently high monitoring costs. Second, and directly derived from the “cluster management” line of thought, national tariffs prevent PAs from setting the appropriate investment level and resulting level of port charges.9 This will lead to under- or over-investment,10 both with adverse welfare-economic effects. Too much decentralization is also not effective, for two reasons: PAs with a small jurisdiction will not be able to invest in new port facilities outside this jurisdiction, even if locations outside this jurisdiction are superior. This argument is relevant because the ongoing spatial transformation of port regions (see Bird 1971; Hayuth 1988) requires investments in new port facilities at new locations. Second, a PA with a small jurisdiction will increase the risks of duplication of facilities such as container

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terminals, vessel-tracking systems, hinterland infrastructure, and a port community ICT system. These implications for port governance are important in the ongoing debate on this issue (see Brooks and Pallis 2008), and form a contribution from the cluster perspective to the understanding of port governance.

In the next subsection, we ﬁrst relate the discussion of the relevant geographical scope to recent theoretical and practical developments concerning port regionalization, and second discuss the case of Copenhagen Malmö Ports – the only crossborder merger of publicly owned port authorities – to illustrate the preceding theoretical analysis.

31.4 Ports in Proximity: One Port Cluster?

31.4.1 A regional cluster of different ports in proximity?

One of the key questions concerning port clusters is: In which cases can ports in proximity be regarded as one port cluster? As argued in Section 31.3, this question has important implications for port governance. There is no clearly established method of addressing this question. For instance, de Langen deﬁned the “Lower Mississippi Port Cluster” as one integrated cluster, stretching more than 200 km along the banks of the river, but did not consider Rotterdam and Antwerp, no more than 100 km apart, as one cluster (de Langen 2004). Initiatives to develop port policies for groups of ports or gateways can be observed in many parts of the world: Chinese policy makers regard the Pearl River delta ports as one port cluster, the ports in the Adriatic sea position themselves as one cluster, and Canada has developed gateway policies, where gateways consist of a number of ports. Furthermore, in some cases port governance is uniﬁed on a broader geographical scope. For instance, the port authorities in the Vancouver area cooperate strongly and the ports of Copenhagen and Malmö are fully merged. This shows the practical relevance of analyzing clusters of ports in proximity.

Port regionalization (Notteboom and Rodrigue 2005) and the extended gateway concept (VIL 2006) show that ports increasingly develop into port networks. As suggested and discussed in Notteboom and Rodrigue (2005), logistics integration, new patterns of freight distribution and the changing role of ports lead to an increasing network orientation. Changes in logistics and the pursuit of efﬁciency improvements in logistics (such as decreasing the total cost of logistics, for example in container transportation), and more generally the changing market environment, have induced the development of global supply chains and have forced ports to focus more on hinterland locations to sustain or increase their competitiveness. Notteboom and Rodrigue (2005) argue that port competition is focusing increasingly on the development of hinterland connections because the inland logistics costs are crucial. The concept of port regionalization, based upon market strategies and policies, extends the hinterland reach of a port, with a closer link to inland freight distribution centers and to other ports, including inland ports. This logic of network formation also applies to ports in proximity. Port networks consist of vertical networks, with inland

PORTS AS CLUSTERS OF ECONOMIC ACTIVITY

nodes, as well as horizontal networks, with other seaports. Ports in proximity may beneﬁt from collaboration in terms of, for example, hinterland infrastructure, terminal capacity and a shared labor market (see Notteboom, Ducruet and de Langen 2009). Port competition and an increasing number of customer demands can trigger ports to share resources, and complementary ports may even jointly develop a “regional port network.” The growing importance of the network of ports with inland logistical hubs and other ports became clear in an allencompassing calculation of the socioeconomic impact of the port of Antwerp: the development of the port network would lead to more employment creation in the wider region than in the port itself (Verbeke and Dooms 2007). In line with this concept of port regionalization and with the results obtained by various studies on the future importance of inland logistical hubs in the context of port competition, Vlaams Instituut voor de Logistiek (VIL) developed its “Extended Gateway” concept for Flanders (VIL 2006). Both concepts are building on the facts that land for port-related sactivities is increasingly scarce and that multimodality, value-added complementarities and logistics optimization are increasingly important for a port’s and a region’s strategy.11 Cooperation of ports can contribute to resource sharing and a lower, or at least less concentrated, environmental impact. As a result, different government levels encourage the formation of port networks or even mergers. An example is the concept of the “Flanders Port Area,” which encompasses the four main ports in Flanders situated less than 100 km from each other, Antwerp, Zeebrugge, Ghent and Ostend. The aim is to stimulate port cooperation

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and to provide a platform for combining, sharing and developing assets. Many ﬁrms operate in two or more of these ports and consider these ports as complements for their clients. Interestingly, many industry experts argue that this is just a ﬁrst step in collaboration – initially focusing on marketing – and that the aim should be joint governance, such as a port holding structure (see for example Vlaamsehavenvereniging. be, Alfaportantwerpen.be and the Flemish Ministry of Mobility and Transport). Similar policies to enhance cooperation between ports in proximity are in place in the Netherlands and Canada. In this context, Haezendonck and Dooms (2007) and Haezendonck, Dooms and Coeck (2006) argue that cooperation between ports in proximity may have an impact on their environmental performance, as scale may promote environmentally friendly modes of inland transport (rail and barge). The abovementioned recent developments suggest that it increasingly becomes necessary to analyze clustering in the port industry at a wider geographical level, and to pay more attention to clusters of ports in proximity, as more uniﬁed forms of governance may have potential for the increased performance or growth of these ports. This issue is explored next.

31.4.2 The case of Copenhagen Malmö Port In this section, we brieﬂy describe the case of Copenhagen Malmö Port, to illustrate the relevance of cooperation between ports in proximity. This case alone is not enough to provide scientiﬁcally valid empirical support for the preceding arguments, but may serve as an exploration of a topical

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issue and provide a basis for “analytical generalization” (Yin [1984] argues that in analytic generalization, previously developed theory is used as a template against which to compare the empirical results of the case study). On January 1, 2001, the ports of Copenhagen and Malmö merged, to become Copenhagen Malmö Port (CMP). The shareholders of CMP are “Port of Copenhagen” and “Port of Malmö.” CMP engages in port activities. Port of Copenhagen is still active in urban redevelopment of old port areas. Port of Malmö also still administers some investments that have been left outside the merger. Figure 31.2 shows the ownership structure of CMP. When CMP was formed, it was explicitly decided not to distinguish a “Swedish” and a “Danish” business unit. Such business units would lead to questions regarding where proﬁts were made and where investments would take place. Instead, there are ﬁve business units, for the ﬁve most important market segments. This structure ensures that CMP does not control which

The Danish State 45%

part of turnover, proﬁts or investments is made in Copenhagen and which part in Malmö. For the customers of both ports, little has changed since the merger, since the account managers have remained the same for most companies. CMP is a “service port,” engaged in operational activities in the port. CMP provides cargo-handling services. The port land is still owned by the municipality and/or state. The throughput ﬁgures of both ports declined after the opening of the Øresund Bridge, because of the loss of ferry trafﬁc (and some container trafﬁc). Since the merger in 2001, throughput has grown consistently Some key ﬁgures of CMP are given in Table 31.4. These ﬁgures show that the turnover, productivity, proﬁts and solvency all have increased following the merger. As an illustration of the analysis of cluster governance changes on cluster performance, we analyze the evolution of the market share of Copenhagen Malmö Port after the merger. Figure 31.3 indicates how the market share of CPM, relative to all

City of Copenhagen 55%

CPH City Port Development 50%

City of Malmö 55%

Malmö Hamn AB 50%

COPENHAGEN MALMÖ PORT

Figure 31.2 The ownership structure of CMP Source: Copenhagen Malmö Port (2010a).

Private investors 45%

Table 31.4 Key total trafﬁc ﬁgures of CMP (2001–2009) 2009

2008

2007

2006

2005

2004

2003

2002

2001

Throughput 15,000 18,000 18,051 16,600 15,200 14,800 14,800 13,400 13,259 Malmö and Copenhagen (’000 tonnes) Net sales (SEK 733 784 733 649 602.9 544.6 509.7 473.4 464.0 millions) 128 181 146 93 79.7 35.2 31.0 13.2 8.8 Operating proﬁts (SEK millions) Net margin 17 23 20 14 13.2 6.5 6.1 2.8 1.9 (%) Solvency (%) 75 72 68 61 50.3 56.2 60.6 58.4 56.6 Net sales per 1779 1647 1497 1378 1302 1184 1151 1081 1052 employee (SEK 1,000) Source: Copenhagen Malmö Port (2010a).

Market share CMP (in Sweden and Denmark) 9% 8% 7% 6% 5% 4% 3% 2% Market share CMP

1% 0%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Figure 31.3 Evolution of CMP market share in Sweden and Denmark (1998–2008) Source: authors’ calculations based on port statistics.

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CMP

7.00%

96−00 00−04 04−08

5.00%

L

A T

3.00% B

H

1.00% −1.00% −3.00%

2.00%

3.00%

4.00%

S

6.00%

5.00%

7.00%

F

−5.00% −7.00% −9.00%

Figure 31.4 Dynamic port portfolio analysis of CMP and eight relevant competing ports The considered competing ports in the portfolio are: Brofjorden Preemraff (B), Fredencia Havn (F), Trelleborg (T), Luleå (L), Århus Havn (A), Statoil-havnen (S), Helsingborg (H) and Copenhagen Malmö Port (CMP). Source: authors’ calculations based on throughput data of the respective port authorities (port statistics). (For the portfolio analysis included, the authors would like to thank Dr. Steven De Schepper for his valuable contribution.)

Danish and Swedish ports, has steadily grown since the port merger in 2001. Building upon the port portfolio analysis developed by Haezendonck (2001), Figure 31.4 provides a more detailed look into the changed competitive position of CMP considered in terms of three relevant time periods (1996–2000, 2000–4 and 2004–8) and seven competitors, namely Brofjorden Preemraff, Trelleborg, Luleå, Fredericia Havn, Århus Havn, Statoil-havnen and Helsingborg. (Göteborg is excluded as an outlier, because of its very high volume and market share; note that Göteborg did not grow as rapidly as CMP in the three periods

considered.) The selected ports in Denmark and Sweden, with more than 7.5 million tonnes of throughput per year, together account for more than 50 percent of Sweden’s and Denmark’s port throughput; they were identiﬁed as the relevant “port range” for this dynamic port portfolio analysis. CMP is the only port of the eight competitors that succeeds, within the considered time frame and focusing on the last period considered, in combining a very favorable annual growth rate and a higher than average market share, and is the only “star performer” in the range.12 Although

PORTS AS CLUSTERS OF ECONOMIC ACTIVITY

most of the eight competing ports considered increased their growth rates in the third period (2004–8), CMP performed noticeably better in terms of average annual growth, and combined this with a greater than average market share in the range. This analysis provides some evidence for arguing that the merger of these two ports in proximity did lead to a better performance of the port management company, as well as to a better performance of the entire port complex. Of course, these data do not prove that the merger directly caused these effects. A more in-depth analysis could include other ports in the Baltic region in competition with CMP and should also further investigate the relationship between the degree of integration and increased performance. However, the data do suggest that adjusting the governance structure of ports in proximity may have positive performance effects.

port as a whole as well as for the wider economy. The case of Copenhagen Malmö Port suggests that uniﬁed governance of ports that can be regarded as one port cluster may strongly contribute to the performance of this cluster. Thus, the model of a fullﬂedged merger may be an effective way to promote the joint competitive position of ports in proximity. Future empirical research to complement case study analysis should be encouraged. It should be based on alternative methodological frameworks, such as statistical analysis of the causal relationship of “key port performance indicators” to levels of intra- and inter-port cooperation using data of different regions, ports and sub-clusters in ports, and over various periods in time.

Notes 1

31.5

Summary

This chapter ﬁrst discussed the relevance of applying the cluster concept to ports and provided, in general terms, an approach for deﬁning a port cluster. Next, the cluster concept was used to address an increasingly important issue: cooperation and changing governance structures of ports located in geographical proximity. The cluster perspective is relevant for the ongoing discussion on port governance structures: in a model with self-sustaining, regionally operating and commercial but not proﬁtmaximizing port authorities, the port authority is well positioned and has the incentives to make investments with collective beneﬁts. This role is beneﬁcial for the

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Linkages with strategic relevance (shown by frequent information exchange and partnerships) are more relevant than “arm’s-length” ones. For example, machinery supply is included in a shipbuilding cluster, while “general administrative services” are not. Input/output data provide a basis and are often complemented by a “value chain analysis” based on an analysis of interactions, partnerships, ownership structures and specialization (Porter 1998). The presence of a cluster association also gives information on the nature and strength of linkages. A regional association that brings together ﬁrms from different industries – in the case of a port a port association – shows such linkages. Therefore, an analysis of the association structure of a region is a practical ﬁrst step in a cluster analysis. 2 Because ﬁrms in clusters cannot – or at least not perfectly – be excluded from

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5

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beneﬁts of investments, such investments can be considered “local public goods” (Zodrow and Mieszkowski 1986) or “collective goods” (Antonelli 2000). The “Hanseatic port model” (Kreukels and Wever 1998), in which the local or regional administration controls the port authority, is fairly widespread, especially in Continental Europe. In this model the port authority has an additional motive, on top of the economic incentives mentioned above, to invest in the port cluster: it generates employment and value added in the port region. For regional policy makers, such effects are important. Port clusters are special because of the prominent role of port authorities. In many other clusters, such as the Dutch maritime cluster (de Langen 2002), the shipbuilding cluster in the Northern Netherlands (Van Klink and de Langen 2001) and Silicon Valley (Hall and Markusen 1985), a central actor, with a similar set of incentives and resources and a similar institutional position, is lacking. Therefore, cluster management is likely to be more advanced in ports than in other clusters. An interesting comparison that is beyond the scope of this paper is with so called “business improvement districts” (BIDs). In such districts, ﬁrms have to contribute ﬁnancially to investments to improve the district as a whole. This requires speciﬁc legislation to enable the BID to function effectively. The ﬁve criteria discussed in this paper also apply to these BIDs: they have to be self-sustaining, have incentives to invest in the performance of the BID, be able to make investment decisions, recover costs as speciﬁcally as possible, and not “replace” investments that would have been made by (alliances of ) private ﬁrms in the ﬁrst place (see Helsley and Strange 1998). This can be the case because a substantial part of the beneﬁts are “external” to the

7

8

9

10

11

(coalition of ) ﬁrm(s), the uncertainty is too high, the payback period is too long, or regulation prevents private investments. In this respect, it is important to note that, even though there is a clear trend towards privatizing terminal operations (Baird 2002), PAs themselves are in the vast majority of ports public (see Baird 2002; Cullinane and Song 2002). This argument for public PAs is not relevant in all cases: when there is no or hardly any need to make investments with cluster externalities, as in single-user ports or ports with a small number of users, ports can be fully private and there is no need for a public PA that acts as cluster manager. In the case of large and diverse port clusters, public ownership is better, since the PA creates real economic beneﬁts that are passed on to port users. The issue of the market power of a PA that administers one port cluster must be assessed case by case. In some cases, competition from other ports will be sufﬁciently strong (thus, the PA has no market power), while in other cases regulation to prevent abuse of market power is necessary. If speciﬁc branches do have such autonomy, the central port authority has no decision-making power and is not a “port authority” in the sense used in this chapter. It is virtually impossible for a national PA to identify the appropriate investment level for each individual port, since the local branch of a national PA will lobby for all investments and there is a considerable difference in information between the local branch (that has more knowledge of the local market) and the national PA, leading to difﬁcult “principal agent problems.” Various recent studies on the economic and social impacts of ports (e.g. National Bank studies in Belgium NBB annual studies on the value-added of Belgian seaports, and the EU-funded IMPACTE study carried out in 2006) show that the geographical distribution of the various impacts of port activ-

PORTS AS CLUSTERS OF ECONOMIC ACTIVITY

12

ities has become very important for port management, policy and, especially, attracting public investment funds. See Haezendonck (2001) for the terms given to the quadrant in port portfolio analysis.

References Antonelli, C. (2000) Collective knowledge communication and innovation: the evidence of technological districts. Regional Studies 34(6): 535–48. Baird, A. (2002) Privatisation trends at the world’s top-100 container ports. Journal of Maritime Policy and Management 29(3): 271–84. Baptista, R. and P. Swann (1998) Do ﬁrms in clusters innovate more? Research Policy 27(5): 525–40. Bird, J. (1971) Ports and Port Terminals. London: Hutchinson University Library. Brett, V. and M. Roe (2010) The potential for the clustering of the maritime transport sector. Maritime Policy and Management 37(1): 1–16. Brooks, M. R. and A. A. Pallis (2008) Assessing port governance models: process and performance components. Maritime Policy and Management 35(4): 411–32. Button, K. J. (1993) Transport Economics. Cheltenham: Edward Elgar. Charlier, J. J. and G. Ridolﬁ (1994) Intermodal transportation in Europe: on modes, corridors and nodes. Maritime Policy and Management 21(3) 237–250. Cooper, J. (1994) The global logistics challenge. In J. Cooper (ed.), Logistics and Distribution Planning, pp. 98–121. London: Kogan Page. Copenhagen Malmö Port (2010a) Annual reports 2009 and 2006. www.cmport.com/ Corporate/Finance/Annual%20Reports.aspx (accessed February 2010). Copenhagen Malmö Port (2010b) Company description. www.cmport.com/Corporate/

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Organisation%2052/Ownership.aspx (accessed February 2010). Cullinane, K. and D.-W. Song (2002) Port privatisation policy and practice. Transport Reviews 22(1): 55–75. Fuller, C., R. J. Bennett and M. Ramsden (2004) Local government and the changing institutional landscape of economic development in England and Wales. Environment and Planning C: Government and Policy 22(3): 317–47. Giuliani, E. (2005) Cluster absorptive capacity: Why do some clusters forge ahead and others lag behind? European Urban and Regional Studies 12(3): 269–88. Goss, R. O. (1990) Economic policies and seaports. Maritime Policy and Management 17: 207–87. Goss, R. O. (1999) On the distribution of economic rent in seaports. International Journal of Maritime Economics 1(1): 1–9. Haezendonck, E. (2001) Essays on Strategy Analysis for Seaports. Leuven: Garant. Haezendonck, E., C. Coeck and A. Verbeke (2000) The competitive position of seaports: introduction of the value added concept. International Journal of Maritime Economics 2(2) Special Issue on Ports: 107–18. Haezendonck E. and M. Dooms (2007) Environmental strategy for ports: towards a green network approach. Proceedings of Annual Conference of the International Association of Maritime Economists (IAME), Athens, July 4–6, 2007. Haezendonck, E., M. Dooms and C. Coeck (2006) Environmental strategy for ports. In T. Notteboom (ed.), Ports are More than Piers, pp. 147–73. Antwerp: De Lloyd. Haezendonck, E., M. Dooms and A. Verbeke (2010) Socio-economic impact of ports: development of a European port economic impact toolkit. Proceedings of Annual Conference of the International Association of Maritime Economists (IAME), Lisbon, July 7–9. Hall, P. and A. R. Markusen (1985) Silicon Landscapes. Winchester, MA: Allen & Unwin.

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Hayuth , Y. (1988) Rationalization and deconcentration of the US container port system. Professional Geographer 40: 279–88. Helsley, R. W. and W. C. Strange (1998) Private government. Journal of Public Economics 69: 281–304. IMPACTE (2006) Intermodal Port Access and Commodities Transport in Europe. The economic role of ports, delivery package 2B, Development of a socio-economic impact tool kit, EU-supported study for SEEDA. www.seeda.org.uk/enabling_infrastructure_ &_development/transport_projects/ impacte/. Jacobs, W. (2007) Port competition between Los Angeles and Long Beach: an institutional analysis. Tijdschrift voor de Economische en Sociale Geograﬁe 98: 360–72. Jans, T. and E. Haezendonck (2010) The impact of the meso-level on proactive environmental strategies of ﬁrms. Paper presented at the Academy of Management (AOM) annual conference, Montreal, August 6–10 2010. Klink, H. A. van and P. W. de Langen (2001) Cycles in industrial clusters: the case of the shipbuilding industry in the northern Netherlands. Journal of Social and Economic Geography 92(4): 449–63. Kreukels, T. and E. Wever (1998) North Sea Ports in Transition. Utrecht: Van Gorcum. Krugman, P. (1991) Increasing returns and economic geography. Journal of Economy 99(3): 483–99. Lambrou, M. A., A. A. Pallis and N. V. Nikitakos (2008) Exploring the applicability of electronic markets to port governance. International Journal of Ocean Systems Management 1(1): 20–39. Langen, P. W. de (2002) Clustering and performance; the case of maritime clustering in the Netherlands. Maritime Policy and Management 29(3): 209–21. Langen, P. W. de (2004) The performance of port clusters; a framework to analyze cluster performance and an application to the port clusters of Durban, Rotterdam and the

Lower Mississippi. PhD thesis, Erasmus University Rotterdam. ERIM and TRAIL thesis series. Langen, P. W. de (2008) Analysing training and education in ports. WMU Journal of Maritime Affairs 7(1): 5–16. Langen, P. W. de and A. A. Pallis (2006) Analysis of the beneﬁts of intra-port competition. International Journal of Transport Economics 33(1): 69–86. Langen, P. W. de and E. J. Visser (2005) Collective action regimes in port clusters: the case of the Lower Mississippi port cluster. Journal of Transport Geography 13: 173–86. Maskell, P. (2001) Toward a knowledge-based theory of the geographical cluster. Industrial and Corporate Change 10(4): 921–43. Mathys, C. (2009) Economisch belang van de Belgische havens: Vlaamse zeehavens, Luiks havencomplex en haven van Brussel – Verslag 2007. Working Paper 172, Nationale Bank van België (National Bank of Belgium), Brussels. McKendrick, D. G., G. F. Donner and S. Haggard (2000) From Silicon Valley to Singapore: Location and Competitive Advantage in the Hard Disk Drive Industry. Stanford, CA: Stanford University Press. Musso, E. and H. Ghiara (2008) Ports and Regional Economies. Milan: McGraw-Hill. Nadvi, K. (1999) Collective efﬁciency and collective failure: the response of the Sialkot surgical instrument cluster to global quality pressures. World Development 27(9): 1605–26. Notteboom, T., Ducruet, C. and de Langen, P. (2009) Ports in Proximity: Competition and Coordination among Adjacent Seaports. Aldershot: Ashgate. Notteboom, T. and J. P. Rodrigue (2005) Port regionalization: towards a new phase in port development. Maritime Policy and Management 32(3): 297–313. Pallis, A. A., T. K. Vitsounis and P. W. de Langen (2010) Port economics, policy and management: review of an emerging research ﬁeld. Transport Reviews 30(1): 115–61.

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People’s Daily Online (2008) Hebei to build world largest coal export port cluster. February 29. http://english.peopledaily. com.cn/90001/90776/90884/6363571.html. Porter, M. (1998) The Competitive Advantage of Nations. 2nd rev. edn. London: Macmillan. Porter, M. (2000) Location, competition, and economic development: local clusters in a global economy. Economic Development Quarterly 14(1): 15–34. Porter, M. (project leader) (2010) Cluster Proﬁles website of the Institute for Strategy and Competitiveness at Harvard Business School. http://data.isc.hbs.edu/cp/index.jsp. Port of Valencia (2009) El cluster portuario de Valencia port liderado por la Autoridad Portuaria, elegido “Best in class” por el Global Institute of Logistics. Press release, 16 June. www.valenciaport.com/ SiteCollectionDocuments/cultures/es-ES/ Documentos/News/APV%20nombrada%20 Best%20In%20Class.pdf. Robinson, R. (2002) Ports as elements in valuedriven chain systems: the new paradigm. Maritime Policy and Management 29(3): 241–55. Roh, H. S., C. Lalwani and M. M. Naim (2007) Modelling a port logistics process using the structured analysis and design technique. International Journal of Logistics 10(3): 283–302. Steinle, C. and H. Schiele (2002) When do industries cluster? A proposal on how to assess an industry’s propensity to concentrate at a single region or nation. Research Policy 31: 849–58.

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UNESCAP Transport Division (2007) Logistics Sector Developments: Planning Models for Enterprises and Logistics Clusters. New York: United Nations. www.unescap.org/ publications/detail.asp?id=1257. Verbeke, A. and M. Dooms (2007) Long-term strategic port planning: integrating the extended gateway concept: an application to the port of Antwerp. Presented at Calgary Asia-Paciﬁc Gateway and Corridor Round Table; Prairie Canada/Western Canada in the Emerging Asia-Paciﬁc Gateway. Calgary, March 28–9, 2007. VIL (2006) Jaarverslag 2005 [Annual report]. Vlaams Instituut voor de Logistiek (Flemish Institute for Logistics), Antwerp. Yin, R. (1984) Case Study Research: Design and Methods. 1st edn. Beverly Hills, CA: Sage. Zodrow, G. R. and P. Mieszkowski (1986) Pigou, Tiebout, property taxation, and the underprovision of local public goods Journal of Urban Economics 19(3): 356–70.

Further Reading Langen, P. W. de and M. H. Nijdam (2009) A best practice in cross-border cooperation: Copenhagen Port. In T. Notteboom, C. (eds.), Ports in Proximity: Competition and Coordination among Adjacent Ports, pp. 163–74. Aldershot: Ashgate.

32

Port State Control Inspection Deﬁciencies Pierre Cariou, François-Charles Wolff and Maximo Q. Mejia, Jr.

32.1

Introduction

Port state control (PSC) is a regime of unannounced safety inspections on board foreign ships, conducted by designated PSC authorities in a given port or offshore terminal, to verify compliance with international regulations relating to manning, equipment, maintenance and operations. These regulations are contained in provisions under the International Convention for the Safety of Life at Sea, 1974, as amended (SOLAS), the International Convention on Standards of Training, Certiﬁcation and Watchkeeping for Seafarers, 1978, as amended (STCW), the International Convention for the Prevention of Pollution from Ships, 1973, as amended (MARPOL), the International Convention on Load Lines, 1966 (Load Lines), the International Convention on Tonnage Measurement of Ships, 1969 (Tonnage 69), the Convention on

the International Regulations for Preventing Collisions at Sea, 1972, as amended (COLREG 72), and the Merchant Shipping (Minimum Standards) Convention, 1976 (ILO Convention No. 147). While the PSC regime is not a panacea to prevent all accidents ( Jin, Kite Powell and Talley 2008), it has played an active role in reducing substandard shipping. Indeed, PSC inspections provide many advantages. Firstly, they represent a credible regime that balances ﬂag state responsibility against a port state mandate. Secondly, public information on results from inspections allows shippers, maritime administrations and maritime stakeholders to assess a vessel’s safety records. Thirdly, PSC inspections help towards the understanding of factors that explain the likelihood of having a substandard vessel, that is, a vessel whose probability of being detained for being hazardous to safety, health or the environment is high.

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

PORT STATE CONTROL INSPECTION DEFICIENCIES

These factors are reﬂected in target factors used by most PSC regional memoranda of understanding (MoUs). This chapter outlines what these targets factors are, and how deﬁciencies detected during a control either are corrected or recur over time. To do this, we use a data set of 42,071 vessels/inspections carried out from 2002 to 2009 by 18 state members of the Indian Ocean MoU (IO-MoU). The selection of the IO-MoU is motivated by the importance of the Indian Ocean in shipping, since it is one of the world’s largest oceans, where major sea routes connect the Middle East, Africa and East Asia to Europe and America, and where strategic trades such as crude oil and oil products from the Persian Gulf and Indonesia transit.1 From an empirical perspective, the IO-MoU provides a unique exhaustive data set, starting in 2002, on the inspection and detention of vessels, including information on deﬁciencies detected over time.

32.2 Substandard Vessels Using PSC Data: A Survey PSC traces its origins from a memorandum of understanding signed in The Hague by eight North Sea states in 1978. Since then, nine regional MoUs have been established, involving almost all the maritime countries.2 One of their main contributions has been to set up, at a regional level, common target criteria for selecting vessels to be inspected;3 selection is necessary because the resources, personnel and time made available to inspectors are limited (Knapp 2007). Naturally, the inspecting authorities then concentrate their efforts on substandard vessels – those with a high probability of being detained because of hazards to

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safety, health and the environment – using target systems based on generic and historic factors (Paris MoU 2010). Since January 2011, the seven criteria in the new Paris MoU inspection regime have been ship type, age, ﬂag, recognized organization, company performance, and numbers of deﬁciencies and of detentions recorded within the last 36 months. Economic analyses of PSC regimes often question the focus of target factors on vessels that are not compliant with international regulations when one might expect a focus on vessels more likely to be involved in accidents. This has led to studies on the potential relationship between black-listed ﬂags of registry and casualty data (Knapp 2007; Degré 2008), on the relevance of target factors (Knapp 2007; Cariou, Mejia and Wolff 2007, 2008a, 2008b, 2009; Li, Tapiero and Yin 2009), and on differences between the results of inspections amongst countries of inspection (Knapp and Franses 2007, 2008; Cariou and Wolff 2010). If most criteria, such as the age, type and classiﬁcation society of a vessel, are found relevant, a concern remains on the relative weight to be assigned to these factors; apart from the Australian Maritime Safety Agency (2008), which uses its Shipsys database to calculate a numerical risk for individual ships, PSC authorities assign weight to risk factors mainly on the basis of experts’ ad hoc judgment. A recent area of research looks at opportunistic behavior, such as ﬂag- and class-hopping, exhibited by shipowners to avoid controls (Cariou and Wolff 2011). This chapter provides a contribution that focuses on the relevance of target factors when a dynamic approach is used. It aims at estimating, for a given vessel, how the results of inspections evolve over time and whether deﬁciencies are recurrent.

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32.3

P. CARIOU, F.-C. WOLFF AND M. Q. MEJIA, JR.

Descriptive Statistics

The PSC IO-MoU data set provides results for 42,071 inspections carried out from January 1, 2002 to December 31, 2009 by 18 countries.4 Every PSC boarding results in a written report containing the following information: vessel’s name, IMO number, ﬂag of registry, recognized organization, type, gross tonnage, deadweight tonnage, year of delivery, type of control (new or follow-up), date of inspection, date of detention, date of release, place of inspection, inspecting authority, and nature of deﬁciencies detected. As reported in Table 32.1, bulk carriers (46.5% of vessels inspected), general cargo ships (16.8%), tankers (10.2%), and container ships (9%) are the vessel types subjected to the greatest proportion of inspections. Australia, with 23,674 inspections or 56.2% of all inspections from 2002 to 2009, is the country that has undertaken the most number of inspections in the regional MoU. Figure 32.1 presents the mean number of deﬁciencies (as a bar) and the detention rate (as a line) by year of inspection and by type of vessel. The mean number of deﬁciencies is 2.9, ranging for all vessels from a minimum of 2.3 in 2002 to a maximum of 3.4 in 2008. The detention rate is between 5% and 10%. Figure 32.1 also shows that general cargo/ multi-purpose ships, Ro-Ro cargo ships and refrigerated cargo carriers record higher detention rates, speciﬁcally since 2006. We generated eight generic categories of deﬁciencies (see Table 32.2) to aid in analyzing potential differences in deﬁciencies detected in controls taking place within the Indian Ocean MoU. These categories are certiﬁcates, working and living conditions, safety-and ﬁre-ﬁghting appliances, stability and structure, ship and cargo operations, equipment and machinery, navigation and

communication, and management-related deﬁciencies. Safety- and ﬁre-ﬁghting appliances-related deﬁciencies are the most recurrent type of deﬁciencies detected (28.6%), followed by stability and structure (18.8%) and navigation/communication (17.6%). Safety- and ﬁre-ﬁghting appliancesrelated deﬁciencies are found for 34.7% of vessels inspected. Figure 32.2 presents results on the types of deﬁciencies detected, according to port state control authorities, vessel age at inspection, and ﬂag of registry. On board ships visiting Australian ports, deﬁciencies relating to safety and ﬁre-ﬁghting appliances constituted the most recurring type (31.8%), followed by navigation and communication (19.8%). In India, deﬁciencies related to safety and ﬁre-ﬁghting appliances were less likely (13.6%) than those related to stability and structure (23%). It was found that vessels of 25 or more years in age had proportionately more deﬁciencies related to certiﬁcates, while those that were less than ﬁve years old tended to have more deﬁciencies related to navigation/communication. Finally, deﬁciencies related to stability/ structure proved to be more common for vessels ﬂying the Russian ﬂag.

32.4 Determinants of Deﬁciencies What follows is an attempt to explain how the characteristics of a vessel inﬂuence the probability that a speciﬁc deﬁciency, deﬁned as a dichotomous variable, will be recorded. We therefore exclude vessels without deﬁciency5 and estimate a set of Probit models. The factors inﬂuencing the probability of a deﬁciency being detected during an inspection are as follows:

Table 32.1 Characteristics of vessels inspected (2002–2009) Variables Age at PSC inspection 0–4 5–9 10–14 15–19 20–24 25+ Type of ship Bulk carrier General cargo/multi-purpose ship Oil tanker Container ship Chemical tanker Vehicle carrier Woodchip carrier Refrigerated cargo carrier Ro-Ro cargo ship Gas carrier Others Flag of registry Panama Liberia Hong Kong China Bahamas Cyprus Singapore Russian Federation Malta Greece Others Recognized organization Nippon Kaiji Kyokai Lloyd’s Register Det Norske Veritas American Bureau of Shipping Germanischer Lloyd Bureau Veritas Russian Maritime Register China Classiﬁcation Society Korean Register of Shipping Others Total number

Australia

India

Iran

South Africa

Others

Total

18.9 26.2 20.7 15.8 13.6 4.9

14.5 12.2 9.4 10.0 22.0 31.8

14.2 10.8 12.4 14.6 21.8 26.2

17.3 17.3 13.7 14.8 20.2 16.8

9.8 10.5 10.6 8.5 14.4 46.2

16.9 20.2 16.8 14.4 16.7 15.0

58.3 6.6 6.9 9.0 3.1 4.9 2.5 0.3 0.5 1.7 6.3

44.7 33.9 3.4 7.8 4.7 0.1 0.0 0.0 1.0 0.3 4.1

19.8 29.4 27.2 6.0 5.5 0.1 0.0 3.8 2.8 0.9 4.4

44.0 25.4 3.7 10.9 2.5 2.1 2.1 5.3 0.7 0.3 3.1

15.4 29.1 14.3 20.6 4.0 1.3 0.0 0.7 5.1 1.1 8.3

46.5 16.8 10.2 9.0 3.7 3.0 1.6 1.4 1.2 1.3 5.5

31.3 7.1 8.2 5.1 4.0 5.5 0.4 3.2 3.5 31.7

25.3 4.1 6.5 2.4 4.8 5.9 0.3 5.9 1.9 42.9

23.8 6.6 2.8 3.5 3.6 3.5 14.4 6.3 2.2 33.3

23.2 11.4 4.6 7.9 5.5 4.5 0.2 6.0 2.9 33.8

22.5 7.8 3.0 2.9 3.4 5.6 0.3 5.6 1.6 47.5

28.1 7.0 6.5 4.6 4.1 5.1 2.9 4.4 2.9 34.3

37.7 14.6 10.0 9.2 7.4 7.5 0.6 3.9 5.2 4.1 23,674

24.6 14.3 6.4 8.3 8.7 8.9 3.3 6.1 3.8 15.7 5,120

18.1 13.8 9.8 7.6 6.9 7.8 18.7 2.9 2.9 11.6 7,484

25.4 16.1 10.5 9.6 15.4 11.4 2.4 2.0 1.8 5.3 3,777

14.5 11.4 7.0 8.6 14.8 8.1 2.2 2.7 1.6 28.9 2,016

30.4 14.4 9.4 8.8 8.5 8.1 4.4 3.7 4.1 8.1 42,071

Source: own calculation. Indian Ocean MoU 2002–2009.

02

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Figure 32.1 Mean number of deﬁciencies (bar) and detention rates (line) over time, by type of vessel and year. Source: own calculations. Indian Ocean MoU 2002–2009.

661

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Table 32.2 Type of deﬁciency by year of inspection 2002

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2009

All

% of deﬁciencies Certiﬁcates 7.2 6.3 5.9 4.5 4.2 4.4 4.9 4.9 5.2 Working/living 7.1 6.0 6.5 7.5 8.5 6.2 7.4 7.0 7.1 conditions Safety/ﬁre 30.7 28.4 28.5 29.2 28.1 29.1 28.4 27.0 28.6 ﬁghting appliances Stability/ 18.6 22.8 21.9 19.0 19.0 18.0 16.5 15.8 18.8 structure Ship/cargo 13.2 13.1 12.3 13.7 12.0 12.3 12.3 12.3 12.6 operations Equipment/ 4.4 4.3 4.2 6.2 5.3 6.7 6.9 7.0 5.7 machinery Navigation/ 16.5 15.9 16.3 14.4 18.8 18.6 18.6 20.3 17.6 communication Management 2.3 3.3 4.4 5.6 4.2 4.8 5.1 5.6 4.5 % of vessels Certiﬁcates 12.2 10.4 9.9 7.6 8.0 8.9 10.2 10.1 9.7 Working/living 10.6 11.0 11.6 14.5 16.3 13.2 15.6 15.0 13.5 conditions Safety/ﬁre 30.0 32.5 34.0 35.9 36.5 36.0 36.5 36.9 34.7 ﬁghting appliances Stability/ 21.7 26.6 27.6 25.6 26.4 26.5 26.0 24.8 25.6 structure Ship/cargo 19.4 21.1 20.9 22.9 21.4 23.1 22.9 23.0 21.8 operations Equipment/ 6.7 7.6 7.9 10.9 10.9 13.3 13.8 13.6 10.5 machinery Navigation/ 21.6 23.2 25.2 24.4 28.8 28.6 29.8 31.4 26.6 communication Management 4.4 6.7 8.9 11.4 10.2 10.7 12.4 12.8 9.7 Number of 5431 5072 5642 5180 5087 4791 5593 5275 42071 vessels inspected Source: own calculations. Indian Ocean MoU 2002–2009.

Type of deficiency = f ( Age at inspection, Flag of registry, Type of ship, Recognized organization, Country of inspection, Year of inspection) (1)

Marginal effects are reported in Table 32.3. The estimated probability of a vessel having safety- and ﬁre-ﬁghting appliances-related deﬁciencies is 28.4% (28.6% for observed data in Table 32.2), 18.1% for stability and

80 60 40 20 0

Distribution of deficiencies (in %)

100

By inspection country

Australia

India

Iran

South Africa

Other countries

80 60 40 20 0

Distribution of deficiencies (in %)

100

By age at inspection

0-4

5-9

10-14

15-19

20-24

25+

80 60 40 20 0

Distribution of deficiencies (in %)

100

By flag

PNM

LIB

HK-CH

BAH

CYP

SNG

RUS

MLT

GR

Others

Certificates

Working/living conditions

Safety/fire appliances

Stability/structure

Ship/cargo operations

Equipment/machinery

Navigation/communication

Management

Figure 32.2 Type of deﬁciency detected by port state control authority, vessel age at inspection and ﬂag of registry. Source: own calculations. Indian Ocean MoU 2002–2009.

Age at PSC inspection 0–4 5–9 10–14 15–19 20–24 25+ Flag of registry Panama Liberia Hong Kong China Bahamas Cyprus Singapore Russian Federation Malta Greece Others Type of ship Bulk carrier General cargo/ multi-purpose ship Oil tanker Container ship Chemical tanker Vehicle carrier Woodchip carrier

Explanatory variables

Ref +0.008* +0.025*** +0.039*** +0.047*** +0.045*** −0.004* −0.005 +0.014*** −0.003 −0.002 +0.005 +0.046*** −0.002 −0.028*** Ref +0.008** +0.005 +0.004 +0.009 +0.002 +0.033*** +0.010

−0.001 −0.005 −0.012*** +0.001 +0.006 −0.009*** +0.005 +0.003 +0.003 Ref

−0.048*** −0.029***

−0.022*** −0.028*** −0.024*** −0.028*** −0.024***

+0.038*** +0.036*** +0.060*** +0.048*** +0.099***

+0.025*** +0.013

−0.000 +0.013 −0.001 +0.016* +0.015* +0.009 −0.049*** +0.011 +0.001 Ref

Ref +0.038*** +0.041*** +0.046*** +0.051*** +0.037***

Working/living Safety/ﬁreconditions ﬁghting appliances

Ref −0.014*** −0.015*** −0.020*** −0.027*** −0.021***

Certiﬁcates

Table 32.3 Probability of detecting a deﬁciency: marginal effects

−0.013 +0.038*** −0.013 −0.063*** +0.017

+0.049*** +0.034***

−0.001 −0.006 +0.003 −0.003 −0.004 +0.027*** +0.023* −0.004 −0.025** Ref

Ref +0.033*** +0.093*** +0.122*** +0.134*** +0.138***

Stability/ structure

+0.014** −0.025*** +0.003 +0.014 −0.023**

−0.033*** −0.025***

+0.002 −0.010* −0.009* −0.009 −0.003 −0.013** +0.031** −0.011** +0.000 Ref

Ref −0.014*** −0.030*** −0.044*** −0.049*** −0.054***

Ship/cargo operations

−0.000 +0.018*** +0.007 −0.000 −0.024***

−0.002 +0.001

−0.002 −0.002 +0.007* +0.005 −0.005 +0.003 −0.031*** −0.001 +0.009 Ref

Ref +0.016*** +0.030*** +0.045*** +0.047*** +0.046***

Equipment/ machinery

−0.019** -0.021** −0.025*** −0.007 −0.031**

+0.003 +0.010

−0.001 +0.010 −0.006 −0.010 −0.012* −0.014** −0.023** +0.001 +0.025** Ref

Ref −0.017*** −0.048*** −0.068*** −0.079*** −0.079***

Navigation/ communication

+0.020*** +0.007 +0.019*** +0.014** +0.004 (Continued)

+0.013*** +0.014***

+0.006*** +0.003 +0.004 +0.005 +0.004 −0.000 −0.002 +0.004 +0.015*** Ref

Ref −0.009*** −0.016*** −0.017*** −0.022*** −0.025***

Management

Refrigerated cargo −0.030*** carrier Ro-Ro cargo ship −0.008 Gas carrier −0.024*** Others Ref Recognized organization Nippon Kaiji −0.019*** Kyokai Lloyd’s Register −0.011*** Det Norske −0.012*** Veritas American Bureau +0.001 of Shipping Germanischer −0.009*** Lloyd Bureau Veritas −0.008*** Russian Maritime −0.016*** Register

Certiﬁcates

(Continued)

Explanatory variables

Table 32.3

+0.033* +0.011 +0.065*** Ref −0.002 +0.006 +0.013* +0.002 +0.006 −0.005 +0.003

−0.019*** +0.000 −0.001 Ref +0.015*** +0.008** +0.002 +0.010** +0.006 +0.004 +0.028***

Working/living Safety/ﬁreconditions ﬁghting appliances

+0.011 +0.017

−0.016**

+0.002

+0.001 +0.006

+0.007

−0.022 +0.002 Ref

−0.016

Stability/ structure

+0.000 −0.013*

−0.004

−0.007

−0.005 −0.001

−0.001

−0.033*** −0.044*** Ref

+0.047***

Ship/cargo operations

+0.011*** +0.027***

+0.015***

+0.008**

+0.021*** +0.019***

+0.005*

+0.010 +0.032* Ref

+0.033***

Equipment/ machinery

−0.004 −0.029***

0.006

−0.007

−0.009 −0.008

+0.004

+0.035** +0.006 Ref

−0.023*

Navigation/ communication

−0.004 −0.012***

−0.001

−0.006**

−0.005** −0.009***

−0.007***

+0.004 +0.002 Ref

+0.017**

Management

−0.024*** −0.012 −0.037*** −0.030*** Ref +0.068

−0.075*** −0.019*** −0.021*** −0.023*** Ref +0.041

+0.094*** +0.017 +0.050*** +0.063*** Ref +0.284

Ref

+0.015*

+0.008

−0.067*** −0.031** −0.021* 0.017 Ref +0.181

Ref

+0.021**

+0.044***

Stability/ structure

+0.043*** +0.069*** +0.012 +0.018 Ref +0.124

Ref

−0.016***

−0.022***

Ship/cargo operations

Probit regressions also include a set of year dummies. Ref denotes the reference category. For dummy variables, the marginal effect is for discrete change of dummy variable from 0 to 1. The size of the sample is N = 121319 deﬁciencies. Standard errors are clustered at the vessel level and signiﬁcance levels are 1% (***), 5% (**) and 10% (*). Source: own calculations. Indian Ocean MoU 2002–9.

Ref

+0.004

−0.021*** Ref

+0.037***

−0.025***

China Classiﬁcation Society Korean Register of Shipping Others Inspecting authority Australia Iran India South Africa Others Estimated probability

Working/living Safety/ﬁreconditions ﬁghting appliances

Certiﬁcates

Explanatory variables

+0.006 +0.057*** +0.027*** −0.000 Ref +0.051

Ref

+0.012**

+0.017***

Equipment/ machinery

+0.047*** −0.023* +0.066*** +0.044** Ref +0.171

Ref

−0.007

−0.037***

Navigation/ communication

+0.011* −0.011* −0.022*** −0.029*** Ref +0.039

Ref

−0.002

−0.015***

Management

666

P. CARIOU, F.-C. WOLFF AND M. Q. MEJIA, JR.

structure (instead of 18.8%), and 12.4% for ship and cargo operations (instead of 12.6%). Results show the inﬂuence of age, ﬂag, vessel type, recognized organization, inspecting authority and year (not reported). The reference category of age (0–4-yearold vessels) exhibits higher probabilities (negative signs for other age categories reported) of certiﬁcates, ship and cargo operations, navigation and communication, and management-related deﬁciencies. Age has a positive inﬂuence on the likelihood of ﬁnding deﬁciencies related to working and living conditions, safety and ﬁre-ﬁghting appliances, stability and structure, and equipment and machinery. The ﬂag of registry plays a limited role. The probability of a vessel having a deﬁciency for safety and ﬁre-ﬁghting appliances is higher when this vessel is a woodchip carrier (+9.9%), a gas carrier (+6.5%) or a chemical carrier (+6%). This result could be explained either by inspectors making a greater effort when inspecting vessels for which an incident might have more severe consequences, or by differences in the complexity of systems aboard various vessels. Another illustration involves refrigerated cargo carriers, for which ship and cargo operations (+4.7%) and equipment and machinery (+3.3%) are essential to insure the continuity of the “cold chain,” but which also induce more complex equipment. Reported recognized organizations achieve better performance than smaller societies gathered in the “others” category. The probability of a vessel having deﬁciencies in safety and ﬁre-ﬁghting appliances is higher when inspections are carried out in Australia (+9.4%), South Africa (+6.3%) or India (+5%), while opposite conclusions hold for stability and structure in Australia (−6.7%). This country-speciﬁc effect is puz-

zling, though it could simply suggest that port state control authorities have different priorities or that the characteristics of vessels calling at Australian ports are different (Cariou and Wolff 2010).

32.5 Recurrent Deﬁciencies and State Dependence Effects Earlier studies did not pay too much attention to potential state dependence effects in a vessel condition (Cariou, Mejia and Wolff 2008a being an exception). In this section, we seek to estimate how results of past inspections may inﬂuence the probability of a given deﬁciency in t being detected. The permanent effect for a vessel is captured by a dummy variable equal to 1 when the same deﬁciency is reported in t-1 and in t (and 0 otherwise). Therefore, vessels inspected only once were dropped, reducing the sample from 42,071 to 28,330 vessels. Results on transitional states between two successive inspections (t-1 and t) are presented in Figure 32.3. For a vessel without deﬁciency in t, two initial states exist in t-1: either no deﬁciency (Nt = Nt-1), or more (Nt > Nt-1). Now, for a vessel with deﬁciencies in t, three possibilities exist in t-1: fewer (Nt < Nt-1), the same (Nt = Nt-1), or more (Nt > Nt-1) deﬁciencies. Vessels without deﬁciency in t were without deﬁciencies in t-1 for 55% of them, while for vessels with deﬁciencies in t, more than 60% had less, 10% the same number and 30% more in t-1. These results are evidence of improvements in vessels’ condition over time. We next perform an analysis by categories of deﬁciencies (see Figure 32.4). We again ﬁnd evidence of a state dependence

General cargo/multi-purpose ship

60 Proportion (in %) 40 30 50 20

Proportion (in %) 40 30 50

10

20 No deficiency in t-1 Nt
Deficiencies in t-1 Nt=Nt-1

0

0

0

10

10

20

Proportion (in %) 30 40 50

60

60

70

70

Bulk carrier

70

All vessels

No deficiency in t-1

Nt>Nt-1

Nt
Deficiencies in t-1 Nt=Nt-1

60 Proportion (in %) 30 40 50 20 10 Nt
Deficiencies in t-1 Nt=Nt-1

70 Proportion (in %) 30 40 50 20 10 Nt
Deficiencies in t-1 Nt=Nt-1

Nt>Nt-1

Deficiencies in t-1 Nt=Nt-1

Nt>Nt-1

70 60

70

Proportion (in %) 50 30 40 20

Proportion (in %) 40 30 50

10

20

0

10 0 Deficiencies in t-1 Nt=Nt-1

Nt
Other vessels

60

60 Proportion (in %) 30 50 40 20 10 0

Nt
No deficiency in t-1

Nt>Nt-1

Gas carrier

70

Ro-Ro cargo ship

No deficiency in t-1

Nt>Nt-1

0 No deficiency in t-1

Nt>Nt-1

Deficiencies in t-1 Nt=Nt-1

60

70 Proportion (in %) 30 40 50 20 10 0 Deficiencies in t-1 Nt=Nt-1

Nt
Refrigerated cargo carrier

60

60 Proportion (in %) 30 40 50 20 10 0

Nt
No deficiency in t-1

Nt>Nt-1

Woodchip carrier

70

Vehicle carrier

No deficiency in t-1

Nt>Nt-1

0 No deficiency in t-1

Nt>Nt-1

Deficiencies in t-1 Nt=Nt-1

70

70 Proportion (in %) 30 40 50 20 10 0 Nt
Nt
Chemical tanker

60

60 Proportion (in %) 40 50 30 20 10 0

No deficiency in t-1

No deficiency in t-1

Nt>Nt-1

Container ship

70

Oil tanker

Deficiencies in t-1 Nt=Nt-1

No deficiency in t-1 Nt
Deficiencies in t-1 Nt=Nt-1

Nt>Nt-1

No deficiency in t-1 Nt
Deficiencies in t-1 Nt=Nt-1

Figure 32.3 Change in number of deﬁciencies detected between two successive inspections, by type of vessel. Source: own calculations. Indian Ocean MoU 2002–2009.

Nt>Nt-1

80

70

Proportion (in %) 50 60 30 40

20

10

0

80

70

Proportion (in %) 50 60 30 40

Only in t-1

Ship/cargo operations

Only in t Both in t-1 and t

Never

Certificates

Both in t-1 and t

Only in t-1

Never

Only in t

Equipment/machinery

Only in t

Never

Working/living conditions

Only in t-1

Never

Only in t

Navigation/communication

Only in t Both in t-1 and t

Never

Safety/fire appliances

Only in t-1

Only in t-1

Both in t-1 and t

Only in t-1

Both in t-1 and t

Only in t-1

Never

Only in t-1

Both in t-1 and t

Only in t

Management

Only in t Both in t-1 and t

Never

Stability/structure

Figure 32.4 Change in number of deﬁciencies detected between two successive inspections, by type of deﬁciency. Source: own calculations. Indian Ocean MoU 2002–2009.

Only in t Both in t-1 and t

Never

10

0

20

80 70 Proportion (in %) 40 50 60 30 20 10 0 70 10 0

20

Proportion (in %) 50 60 30 40

80

80 70 Proportion (in %) 40 60 30 50 20 10 0 80 70 Proportion (in %) 30 40 50 60 10 0

20

80 70 Proportion (in %) 30 40 50 60 20 10 0 80 70 Proportion (in %) 30 50 60 40 20 10 0

PORT STATE CONTROL INSPECTION DEFICIENCIES

effect. Vessels never record any deﬁciency related to certiﬁcates in more than 80% of cases. Similar conclusions hold for working and living conditions, equipment and machinery, and management. We ﬁnd more contrasted patterns for safety and ﬁreﬁghting appliances and for navigation and communication. The proportion of vessels without deﬁciency in both t-1 and t is around 50%, while those with deﬁciencies in both t-1 and t is 10%. To further understand the transition from one state to another, we estimated for the eight categories of deﬁciencies several Probit regressions on the probability of a vessel having a speciﬁc deﬁciency, including a lagged value of past deﬁciencies. Marginal effects are reported in Table 32.4. Estimates conﬁrm the existence of a strong state dependence over time, detected by the lagged value on deﬁciency.6 This persistence effect is more likely in deﬁciencies in working and living conditions (+16.4%), safety and ﬁre-ﬁghting appliances (+16.9%), stability and structure (+15.7%), and ship and cargo operations (+15.6%), and is not signiﬁcant for administrative deﬁciencies such as in certiﬁcates or management. This could be explained by the presence of more volatility in these deﬁciencies, which can be relatively easily corrected over time. As expected, older vessels have a higher probability of recording deﬁciencies related to seaworthiness in general, with +40.4% for stability and structure and +30.6% for equipment and machinery when vessels are more than 25 years old. These latter are also more likely to keep deﬁciencies over time in certiﬁcates (+6.8%), safety and ﬁre-ﬁghting appliances (+11.1%), and navigation and communication (+13.8%). Such deﬁciencies are indeed expensive to correct and it might not be economical to do so when vessels are

669

reaching the end of their economic life. Finally, for bulk carriers, the negative coefﬁcients of Deft−1 for safety and ﬁre-ﬁghting appliances (−7.6%), stability and structure (−7.3%), and ship/cargo operations (−5.9%) suggest that their condition is likely to improve over time.

32.6

Summary

Studies on the PSC regime and its use in identifying substandard vessels reach a consensus on factors inﬂuencing the probability of a vessel being detained during an inspection. However, several issues remain unresolved. The weight to be assigned to these factors and the increased harmonization in controls amongst various PSC regional MoUs are some of them. This chapter provides an original contribution on other potential issues: factors inﬂuencing the likelihood of detecting a given deﬁciency and the existence of persistence effects over time. If factors inﬂuencing the probability of a vessel with a given deﬁciency being detected during a control are similar to those of a vessel being detained – with a strong inﬂuence exerted by age, type, classiﬁcation society, ﬂag etc. – estimates suggest that a state dependence effect exists and changes with the type of deﬁciency and vessel. Therefore, to set in advance a ﬁxed period of time between two inspections, as in the inspection regime of Paris MoU, regardless of the type of vessel and deﬁciency, might not be relevant. Furthermore, when carrying out inspection campaigns focusing on one speciﬁc deﬁciency, PSC regional MoUs should probably consider this persistence effect, because some deﬁciencies might not be persistent

Existence of the same deﬁciency Def t-1 (lagged value) Age at inspection 0–4 5–9 10–14 15–19 20–24 25+ Age at inspection * Def t-1 5–9 * Def t-1 10–14 * Def t-1 15–19 * Def t-1 20–24 * Def t-1 25+ * Def t-1 Type of ship Bulk carrier General cargo/multi-purpose ship Oil tanker Container ship Chemical tanker

Explanatory variables

+0.164*** Ref +0.061*** +0.115*** +0.157*** +0.224*** +0.282*** −0.022 −0.032 −0.007 −0.039* −0.027 +0.047*** +0.050*** −0.024** −0.002 +0.042**

Ref +0.005 +0.020*** +0.042*** +0.082*** +0.130*** +0.032 +0.029 +0.032 +0.027 +0.068** −0.023*** +0.027*** +0.003 −0.019** −0.001

Working/ living conditions

+0.061*

Certiﬁcates

−0.036* +0.003 +0.069***

+0.106*** +0.061***

+0.023 +0.019 −0.001 +0.009 +0.111***

Ref +0.115*** +0.176*** +0.233*** +0.272*** +0.263***

+0.169***

Safety/ ﬁre-ﬁghting appliances

−0.016 −0.003 +0.063**

+0.136*** +0.119***

−0.002 +0.004 −0.000 +0.005 +0.064*

Ref +0.118*** +0.224*** +0.307*** +0.358*** +0.404***

+0.157***

Stability/ structure

Table 32.4 Probability of transition in deﬁciencies from t-1 to t : marginal effects

−0.045*** −0.029* +0.033

+0.031** +0.036**

−0.018 −0.009 −0.009 −0.030 +0.023

Ref +0.051*** +0.075*** +0.100*** +0.138*** +0.181***

+0.156***

Ship/cargo operations

−0.001 +0.035*** +0.058***

+0.036*** +0.055***

−0.031 −0.041* −0.031 −0.034 −0.018

Ref +0.057*** +0.105*** +0.155*** +0.220*** +0.306***

+0.111*

Equipment/ machinery

−0.080*** −0.028 +0.003

+0.070*** +0.057***

+0.034 +0.042* +0.021 +0.004 +0.135***

Ref +0.039*** +0.064*** +0.090*** +0.124*** +0.133***

+0.072**

Navigation/ communication

−0.024** +0.000 +0.010

+0.039*** +0.010

−0.008 0.022 −0.023 −0.010 −0.010

Ref +0.022*** +0.021*** +0.048*** +0.040*** +0.061***

+0.061

Management

+0.004 +0.014 −0.049** +0.014 −0.072*** Ref −0.036* +0.002 +0.029 −0.008 −0.044 −0.050 −0.006 −0.058 +0.019 +0.012 +0.129

−0.045*** −0.033*** −0.038*** +0.022 −0.034*** Ref −0.023* −0.001 +0.025 −0.021 +0.007 −0.014

Vehicle carrier Woodchip carrier Refrigerated cargo carrier Ro-Ro cargo ship Gas carrier Others Type of ship * Def t-1 Bulk carrier* Def t-1 General cargo* Def t-1 Oil tanker* Def t-1 Container ship* Def t-1 Chemical tanker* Def t-1 Vehicle carrier* Def t-1 Woodchip carrier* Def t-1 Refrigerated cargo * Def t-1 Ro-Ro cargo ship* Def t-1 Gas carrier* Def t-1 Estimated probability −0.076*** −0.034 −0.028 +0.016 +0.011 −0.083** −0.064 −0.132** −0.015 −0.069 +0.360

+0.003 +0.101*** −0.019 −0.043 −0.083** Ref

Safety/ ﬁre-ﬁghting appliances

−0.073*** −0.002 +0.039 −0.016 +0.039 −0.000 −0.129*** −0.062 +0.096 +0.044 +0.245

−0.100*** +0.030 +0.014 −0.054* −0.076** Ref

Stability/ structure

−0.059*** −0.011 +0.067* −0.064** −0.037 −0.055 −0.093** −0.013 +0.031 −0.062 +0.214

−0.023 −0.011 +0.021 −0.026 −0.111*** Ref

Ship/cargo operations

Probit regressions also include a set of year dummies. Ref denotes the reference category. For dummy variables, the marginal effect is for discrete change of dummy variable from 0 to 1. The sample is N = 28330 vessels subject to repeated inspections. Standard errors are clustered at the vessel level and signiﬁcance levels are 1% (***), 5% (**) and 10% (*). Source: own calculations. Indian Ocean MoU 2002–9.

+0.071

+0.019 +0.058

Working/ living conditions

Certiﬁcates

Explanatory variables

+0.011 +0.058* +0.137*** +0.008 +0.040 −0.081*** −0.004 +0.027 +0.198** +0.052 +0.092

−0.016 −0.032** +0.077*** +0.002 −0.012 Ref

Equipment/ machinery

−0.022 +0.014 +0.095** −0.021 +0.026 +0.008 +0.062 +0.106 +0.143** −0.005 +0.269

−0.030 −0.048* −0.049 −0.043 −0.095*** Ref

Navigation/ communication

−0.003 +0.047 +0.065 +0.046 +0.020 −0.089*** +0.017 +0.042 −0.017 +0.088 +0.103

+0.008 −0.012 −0.029 −0.021 −0.069*** Ref

Management

672

P. CARIOU, F.-C. WOLFF AND M. Q. MEJIA, JR.

over time. To be conclusive, however, these preliminary ﬁndings should be supported by further analysis on larger inspection data sets from other PSC regional MoUs.

Notes 1

It is estimated that 40% of the world’s offshore oil production originates from countries bordering the Indian Ocean. 2 The nine MoUs are: Paris MoU – Europe and the North Atlantic; Tokyo MoU – Asia and the Paciﬁc; Acuerdo de Viña del Mar – Latin America; Caribbean MoU – Caribbean Sea region; Abuja MoU – West and Central Africa; Black Sea MoU – Black Sea region; Mediterranean MoU – Mediterranean Sea region; Indian Ocean MoU – Indian Ocean region; Gulf Cooperation Council (GCC) MoU – Arab States of the Gulf. 3 The ﬁnal choice still remains in the hand of sovereign states, which may have different priorities. 4 In June 2011, the 18 countries were: Australia, Bangladesh, Djibouti, Eritrea, Ethiopia (observer), India, Iran, Kenya, Maldives, Mauritius, Mozambique, Myanmar, Oman, Seychelles, South Africa, Sri Lanka, Sudan, Tanzania and Yemen. For more information see www.iomou.org/. 5 Each deﬁciency is accounted as one observation in our sample: 121,319 deﬁciencies/ observations for 42.071 inspections undertaken from 2002 to 2009. Standard errors are clustered at the vessel level when the regressions are estimated. 6 The lagged value associated is introduced exogenously in regressions.

References Australian Maritime Society Association (2008) Port State Control in Australia: Fact Sheet.

Australian Government. www.amsa.gov.au/ Shipping_Safety/Port_State_Control/. Cariou, P., M. Q. Mejia, Jr. and F.-C. Wolff (2007) An econometric analysis of deﬁciencies noted in port state control inspections. Maritime Policy and Management 34(3): 243–58. Cariou P., M. Q. Mejia, Jr. and F.-C. Wolff (2008a) On the effectiveness of port state control inspections. Transportation Research Part E 44: 491–503. Cariou, P., M. Q. Mejia, Jr. and F.-C. Wolff (2008b) Port state control inspection and vessel detention. In W. K. Talley (ed.), Maritime Safety, Security and Piracy, pp. 153–68. London: Informa LLP. Cariou, P., M. Q. Mejia, Jr. and F.-C. Wolff (2009) Evidence on target factors used for port state control inspections. Marine Policy 33(5): 847–59. Cariou, P. and F.-C. Wolff (2010) La détention des navires par les Etats du Port: Une application uniforme des règles? Annuaire de Droit Maritime et Océanique 28: 411–27. Cariou, P. and F.-C. Wolff (2011) Do port state control inspections inﬂuence ﬂag- and class-hopping phenomena in shipping? Journal of Transport Economics and Policy 45(2): 155–77. Degré, T. (2008) From Black-Grey-White detention-based lists of ﬂags to Black-GreyWhite casualty-based lists of categories of vessels, using a multivariate approach. Journal of Navigation 61(3): 485–97. Jin, D., H. Kite Powell and W. K. Talley (2008) US ship accident research. In W. K. Talley (ed.), Maritime Safety, Security and Piracy, pp. 55–71. London: Informa LLP. Knapp, S. (2007) The econometrics of maritime safety – recommendation to enhance safety at sea. Doctoral thesis, Erasmus University, Rotterdam. Knapp, S. and P. H. Franses (2007) A global view of port state control: econometric analysis of the differences across port state control regimes. Maritime Policy and Management 34: 453–84.

PORT STATE CONTROL INSPECTION DEFICIENCIES

Knapp, S. and P. H. Franses (2008) Econometric analysis to differentiate effects of various ship safety inspections. Marine Policy 32: 653–62. Li, K. X., C. S. Tapiero and J. Yin (2009) Optimal inspection policy for port state control (PSC). Proceedings of the Annual Conference of the

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International Association of Maritime Economists (IAME), Copenhagen, June 23–6, 2009. Paris MoU (2010) Ship risk proﬁle: Targeting and ship risk proﬁle. Paris Memorandum of Understanding on Port State Control. www. parismou.org/Inspection_efforts/ Inspections/Ship_risk_proﬁle/.

33

Port Security: The ISPS Code Adolf K. Y. Ng and George K. Vaggelas

33.1

Introduction

In the pre-9/11 era the formation of transport policy was mainly focused on achieving the efﬁcient operation of transport modes, of the supply chain, and thus of international trade. The 9/11 terrorist attacks, along with a series of security incidents in transport modes in many other countries, revealed the brittleness and vulnerability of the transportation system. The risk of a terrorist attack in transport modes and transportation systems is very high, because of (1) the concentration of potential victims, (2) the use of transport modes as “Trojan horses” for the carriage of weapons, and (3) the use of transport modes as weapons (Gordon, Moore and Richardson 2009). Such an attack can lead to unprecedented disruption of global trade (Flynn 2006), which might involve human casualties as well as economic, political and social impacts, notably the breakdown of supply chains and potentially global economic recessions (Greenberg, Chalk, Willis et al. 2006). The maritime sector can be considered a high risk as far as terrorist attacks are

concerned, because of its complexity and opacity (Gordon, Moore and Richardson 2009). It also facilitates an extensive international network with many actors and interactions (Brooks and Pelot 2008) and is subject to multiple legal frameworks (Pallis and Vaggelas 2008). It becomes clear that further, and perhaps radical, changes are required to maximize maritime and supply chain securities in the twenty-ﬁrst century (see Mensah 2003). Ports are nodal points for every intermodal logistical supply chain (Robinson 2002), and therefore are crucial elements in securing the maritime transport system and the supply chains, as indicated also by a number of policies and measures undertaken by international and regional organizations and countries. As deﬁned by Ng and Gujar (2008), port security includes all security and counter-terrorism activities which fall within the port’s domain, including the protection of port facilities and the coordination of security activities when ship and port interact.1 Although several studies on maritime security have been undertaken, both academic (for instance Bichou 2004; Bichou, Bell and Evans 2007; King 2005;

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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Mensah 2003; Talley 2008; Zhu 2006) and industrial (for instance Greenberg, Chalk, Willis et al. 2006; OECD 2003; OECD-ITF 2009), works dedicated to port security have, so far, been rather theoretical (e.g. Pallis and Vaggelas 2008) or technical (for instance, Bichou 2004; Kumar and Vellenga 2004) in nature. This might be due to ports’ complexity. Contrary to maritime transport modes, ports facilitate a complex transport system where there are train, truck and ship ﬂows as well as cargo and passenger ﬂows; thus tackling port security is challenging. The purpose of our study is twofold. On the one hand, it examines port security, and more speciﬁcally the ﬂagship of the international port security regulations, the International Maritime Organization’s ISPS Code (hereinafter called “the Code”), and its implications for port security. On the other hand it examines the major issues and challenges for ports when the Code was implemented locally in two different geographical regions, namely the Asian and European regions, through case studies of the ports of Hong Kong and Piraeus, respectively. The case studies of these two ports can offer valuable results not only through the comparison of the Code’s application in two different geographical regions but also through the comparison of a port of international importance (Hong Kong) and a port with a more peripheral/regional role (Piraeus). After this introductory section, Section 33.2 describes the new “securitized” port environment. Section 33.3 introduces the Code, focusing on its implications for port security. Section 33.4 introduces the methodological framework and Section 33.5 illustrates how the Code’s guidelines have been implemented in the ports of Hong Kong and Piraeus. Section 33.6 discusses the

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major challenges that the case study ports are currently facing in addressing port security issues. A comparison of the application of the Code in these ports unveils some useful conclusions on how the perception of security in different regions and differentsized ports affects their potential. Section 33.7 concludes and provides some food for thought for further research.

33.2 The New “Securitized” Transport Environment Transport security has been a major policy issue ever since 9/11. To address it, international organizations, such as the International Maritime Organization (IMO), regional organizations, such as the European Union (EU), countries (an exceptional paradigm being the US), even private organizations and companies, have moved towards the development of policies and measures aimed at enhancing security in maritime transport, in ports and in the supply chains. The driving force in the development of security policies and measures is the US, while the EU, despite its initial “follow the same path” approach, has moved in recent times towards a distinctive approach (Pallis and Vaggelas 2008). The IMO seems to hesitate to follow the port security initiatives developed nationally, after the initial adoption of a USinitiated regulation which led to the introduction of the Code. On the other hand, the Asian region seems to follow a half-hearted, minimalist but pro-trade approach in port security, and is sluggish in the enforcement of compliance processes (Brooks and Pelot 2008; Ng and Gujar 2008). As already noted, US leads the way in securitized transport systems. Among the

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most important US initiatives are the 96hour rule, the Maritime Transportation Security Act (the “ancestor” of the Code2), the 24-hour rule, the Container Security Initiative and the Security and Accountability for Every Port Act (SAFE), which has caused turbulence in many countries and organizations (see CLECAT 2006; ESPO 2009; GAO 2007) because of the devastating investments it requires3 and its impact on ports and supply chains efﬁciency. Finally, the Transportation Worker Identiﬁcation Credential (TWIC) and the National Infrastructure Protection Plan are other arrows in the USA quiver for tackling the ports security issue. For the EU, transport security seems to be an ascendant policy ﬁeld. According to Chlomoudis and Pallis (2002), the EU’s port policy has three distinctive periods, of which the last has run from 1991 till the present and is marking a steady course towards a European port policy. One could argue with this analysis by adding a fourth period in European transport policy, which began in 2001 and whose very essence is the enhancement of security in transport modes, systems and supply chains. The EU’s security initiatives era started with Regulation 725/2004, which transposed the Code into EU legislation (with respect to stricter security measures), and continued with a Directive on enhancing Port Security (65/2005), the Revised Customs Code (Regulation 648/2005), the Proposed Regulation on Enhancing Supply Chain Security (79/2006) and the European Programme for Critical Infrastructure Protection.4 As well as the IMO, the US and the EU, many other international organizations have proposed port security measures.

For example, the International Labour Organization proposed measures for the identiﬁcation of seafarers with the Seafarers’ Identity Document Convention (Revised), while the International Organization for Standardization introduced the 28000 ISO series as an attempt to ensure port and supply chain security. The above analysis points to some conclusions. First of all, it is evident that the USA in primary place, and secondarily the EU and the IMO, are in the forefront of the development of port security initiatives. In contrast, such port security initiatives are far from being a goal in Asian countries and organizations. In fact, as noted by Ng and Gujar (2008), the only regional effort in Asia at addressing maritime and port security was the Secure Trade in the APEC Region (STAR) program (aimed at ensuring regional standardization of security measures), which once again was initiated by the USA, as it is an Asia-Paciﬁc Economic Cooperation (APEC) member. Secondly, all these port security initiatives have created a complex legislative environment for the port industry. Paraphrasing Gordon, Moore and Richardson (2009) we can say that there is a “port spaghetti”5 regarding security. This is true, as the US security scheme in place is complex (Pallis and Vaggelas 2008), while port security planning and implementation in the EU form a continuing challenge (Pallis and Vaggelas 2007). The application of security regulations requires substantial investments and thus creates additional barriers in the port industry, especially for small ports (Thibault, Brooks and Button 2006) and ports located in poor countries (Brooks and Button 2007). Furthermore, port security inﬂuences ports’ efﬁciency and hence com-

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petitiveness, which in turn inﬂuences the competitiveness of modes (see, for example, Ng 2007 on the implications of port security for the EU’s short sea shipping sector) and supply chains. In conclusion, security can be either a barrier to port throughput (by reducing a port’s efﬁciency) or a challenge to increase throughput (as security might be a competitive advantage, especially for cargoes bound for the US) (Talley 2009). This new “securitized port environment” with its multiple initiatives reveals the lack of a global holistic, systematic and coordinated approach to the regulation of security (Gordon, Moore and Richardson 2009). The exception seems to be the Code, despite the fact that in some regions and countries (such as the EU and the USA) differences in the Code’s application can be observed, especially with regard to the voluntary clauses. The following sections show these differences in the Code’s application, as well as the challenges and major issues they give rise to.

33.3 The ISPS Code and the Obligations of Ports The “new” vulnerable transport environment after 9/11 created a pressing need to develop a legislative framework dealing with security. Regarding the maritime transport system, the ﬁrst and only initiative to gain wide international acceptance is the Code, based on the amendments made in December 2002 to the International Convention for the Safety of Life at Sea (SOLAS) 1974, as amended, and on the Special measures to enhance maritime security (Chapter XI-2) added to

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SOLAS. The Code was adopted by the International Maritime Organization (IMO) in December 2002 and fully implemented on July 1, 2004. Labeled the comprehensive security regime for international shipping (Mensah 2003), the Code includes deliberate guidance on maritime security (ships and ports). However, it is to be noted that the Code primarily addresses how terrorist attacks can be deterred and minimized, while detailed procedures for addressing the aftermath of signiﬁcant security incidents – crisis management, remediation, recovery, etc. – are not covered. In compliance with the Code, all ships over 500 gross tonnes (gt) and critical facilities within a port’s domain are obliged to conduct vulnerability assessments and develop security plans to deter potential terrorist attacks. The Code has several objectives, namely (1) the detection of security threats, (2) the implementation of security measures, (3) the collation and promulgation of information related to maritime security, (4) the provision of reliable methodologies in assessing maritime security risks, (5) the development of detailed security plans and procedures for reacting to a change in security level, and (6) the establishment of security-related roles and responsibilities by contracting governments (and their administrations), shipping companies and port operators at national and international levels, including the provision of professional training. The Code has two major components: Part A illustrates the minimum mandatory requirements that ships (represented by their ﬁrms) and ports (represented by the contracting government) must follow, while

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Part B provides more detailed, but not compulsory, guidelines and recommendations for the implementation of security assessments and plans. Within the Code, three aspects are directly related to port security: 1.

Security levels A three-tier securitylevel system (L1, L2 and L3), similar to the Maritime Security Level (MARSEC) system, should be introduced at all ports within the territories of the contracting government. L1 implies the situation at which a ship or port facility normally operates; L2 implies a heightened risk of a security incident; L3 implies an exceptional risk, when a security incident is probable or imminent. The level is based on an assessment of the credibility, the collaboration, and the speciﬁc and imminent nature of the threat information, as well as the potential consequences of such an incident. 2. Responsibilities of contracting governments Contracting governments should appoint a designated authority (DA) dedicated to port security affairs and at the same time establish an administrative structure to support the DA in carrying out its duties, including the development of the appropriate legal framework. In turn, the DA should set security levels and provide guidance for security incidents in ports, and especially provide the necessary and appropriate instructions to affected ships and port facilities in the case of higher security levels (L2 and L3). They are also responsible for approving Port Facility Security Assessment (PFSA) reports and Port Facility Security Plans (PFSP), as well as testing their effective-

3.

ness. Finally, contracting governments should establish the speciﬁcations in cases where a Declaration of Security (DoS) is required when ship and port facilities interact. Port facility security Critical facilities within a port’s domain are required to act in accordance with the security levels set by its contracting government. The degree of protective measures should be increased with changing security levels in the following securityrelated issues: performance of security duties, access and monitoring of port facility and restricted areas, supervision of the handling of cargoes and ships’ stores, and availability of security communication. Apart from daily routine operations, a contracting government (or its designated authorities) has to assess port facilities security periodically and report the outcomes (or approve the report if it is undertaken by a separate designated authority).

Through an appropriate risk-based methodology (IMO 2002a), the assessment must address at least the following issues: (1) the identiﬁcation and evaluation of important assets and infrastructure that it is crucial to protect; (2) the identiﬁcation of possible threats to the assets and infrastructure, and the likelihood of their occurrence; (3) the identiﬁcation, selection and prioritization of counter-measures and procedural changes and their level of effectiveness in reducing vulnerabilities; and (4) the identiﬁcation of weaknesses, including human factors, in infrastructures, policies and procedures (IMO 2002b). Based on PFSA outcomes, a PFSP has to be developed for each facility which has provisions for addressing changing security levels for

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every security operation.6 The Code has noted that a single PFSP may cover more than one facility, provided that the operator, location, operation, equipment and design of these facilities are very similar to each other. To implement a PFSP, a Port Facility Security Ofﬁcer (PFSO) should be appointed for each designated port facility (or one PFSO for multi-facilities if they are very similar to each other). The PFSO is usually selected by the port facility management, subject to the approval of the contracting government before being formally appointed, and is accountable for ensuring that the PFSA exercises and the PFSP are well prepared and effectively carried out. In addition to routine duties, the PFSO also needs to ensure that the facilities concerned are secured, through inspection and supervision, the distribution of responsibilities to his or her subordinates, gathering securityrelated information, and managing training, drilling and exercises. The PFSO also acts as the liaison between the contracting government and the shipping companies, often through ship security ofﬁcers (SSOs) and company security ofﬁcers (CSOs). Unlike those for ships, most of the responsibilities for port security lie in the hands of the public sector, as reﬂected by IMO’s emphasis on the roles of contracting governments, which have the ultimate authority in virtually all decisions. This might be due to the perception of port security as primarily a public good (Vaggelas and Pallis 2010), as ports’ operations inﬂuence a larger part than ships do (or the whole) of the community. The public sector’s responsibilities include the approval of PFSAs and PFSPs, the endorsement of PFSO appointments, the right to request a DoS, and the review

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of (parts of ) a ship’s security plan in exceptional circumstances. This implies that nongovernmental port stakeholders, including terminal operators, are largely expected to follow international standards and government policies, and thus play peripheral roles in the development of port (and port facility) security issues (a trend strengthened by the cost of developing and applying new port security measures). In certain countries or regions, such shortcomings have been addressed through the formation of committees and working groups in port security. For example, in the US, the Maritime Transportation Security Act (MTSA) requires the establishment of an Area Maritime Security Committee (AMSC) in all American ports to coordinate the activities of port stakeholders – public agencies at different levels as well as industries – in speciﬁc tasks requiring collaboration on port security plans, so that resources dedicated to security can be more efﬁciently utilized. The emphasis on contracting governments also implies the criticality of training capable manpower to deal with such new requirements effectively, as pointed out by O’Neil (2003) and Zhu (2006).

33.4 Implementing the ISPS Code in Hong Kong and Piraeus: Methodology The research for accessing the implications of the Code’s application in the ports of Hong Kong and Piraeus was conducted through (1) a literature review focusing on indexing the Code’s ofﬁcial documents in Hong Kong and Greece and (2) semistructured, in-depth interviews with key

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stakeholders who play pivotal roles in carrying out port security measures in Hong Kong and Piraeus. Interviewees answered 13 questions about port security and the application of the ISPS in the case-study ports (on the responsibilities of authorities and terminal operators, legislative framework, future plans for port security and cooperation among ports for enhancing security). The ten stakeholders interviewed regarding Hong Kong (hereafter called “interviewees”) include representatives from the HKSAR Government and other facility operators, while for Piraeus the interviewees include three ofﬁcials from the Piraeus Port Authority and a representative of the Hellenic Coast Guard. The small number of interviewees for Piraeus was mainly due to the absence of private terminal operators (in the time in which interviews were carried out, COSCO had just started operating in the Piraeus Container Terminal). The core objective of these interviews was to identify and obtain information which was unavailable in published sources.

33.5 Implementing the ISPS Code in Hong Kong and Piraeus: Results This section focuses on how the Code has been implemented in Hong Kong and Piraeus ports, the repercussions caused and the challenges posed on account of such changes. It is divided into ﬁve subsections, covering (1) legal documents, (2) administrative structure, (3) security levels, (4) control of ships within or intending to enter the port, and (5) port facility security.

33.5.1

Legal documents

Hong Kong The main legal document for addressing port security issues in the Hong Kong Special Administrative Region of the People’s Republic of China (HKSAR) is entitled “An Ordinance to implement the December 2002 amendments to the International Convention for the Safety of Life at Sea [SOLAS], 1974 and the International Ship and Port Facility Security [ISPS] Code and related provisions in the Convention to enhance security of ships and port facilities; and to provide for incidental or related matters” (long title), or the Merchant Shipping (Security of Ships and Port Facilities) Ordinance (short title) (CAP 582, Ordinance No. 13 of 2004, hereinafter called “the Ordinance”). Section 6 of the Ordinance is complemented by an empowering document entitled “Merchant Shipping (Security of Ships and Port Facilities) Rules” (CAP 582A, hereinafter called “the Rules”). Both documents were enacted by the Legislative Council, HKSAR’s de facto parliament, in June 2004. To fulﬁll the objective of complying with SOLAS Chapter XI-2 and the Code, the Ordinance and the Rules often make reference to these two documents. For example, the Rules clearly state that a designated port facility shall comply with regulation 10.1 of Chapter XI-2 of the Convention (Section 23), while references to Part A of the Code in issues related to port facility security had been made four times (Sections 24, 25, 28 and 29). The major difference, however, lies in the fact that the Ordinance and the Rules provide much more detailed information and guidance on how SOLAS Chapter XI-2 and the Code should be put into practice in Hong Kong; it includes procedures for how the Director of the Hong Kong Marine

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Department (HKMD) can withdraw approval of a PFSP amendment (CAP 582A, Section 27), the power and limitations of inspections by HKMD personnel (CAP 582, Sections 11, 12 and 13), possible ﬁnes or penalties if the facility operator concerned fails to comply with the set standards (for instance, CAP 582, Section 13; CAP 582A, Sections 28 and 30), and port facility management’s appeal procedures against any decisions made by the Director of HKMD (for instance, CA 582A, Section 31). Piraeus The corresponding legal documents in Greece are: 1.

Presidential Decree 56/2004, entitled “Ratiﬁcation of the amendments of the SOLAS International Convention adopted at the International Conference of the Signatory Governments of SOLAS Convention on December 12th 2002.” 2. Law 3622/2007, entitled “Strengthening the Security of Ships, Ports and Port Facilities.” This law brings into the Greek legal framework EU Regulation 725/2004 (which in turn is the adoption of the Code into the EU’s legal framework). The former adopts the Code into the Greek legal framework, while the latter provides more detailed information (than in the Code), as in the case of Hong Kong, on how SOLAS Chapter XI-2 and the Code apply in Greece. Law 3622 contains direct references to the Code and to SOLAS Chapter XI-2; for example, clause 4.3 makes a reference to rule number 7 of Chapter XI-2 and clause 7.1 makes a reference to articles 15.3 and 15.4 of the Code’s Part B. Despite the direct references, and because the law is similar to

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the EU’s Regulation 725/2004, the application of the Code follows the stricter rules of the EU (compared with the Code rules, see Section 33.3); and this is a core difference between Hong Kong and Greece, mainly due to the presence of a coherent regional organization, the EU.

33.5.2

Administrative structure

Hong Kong Hong Kong’s administrative structure for port security is shown in Figure 33.1. The Hong Kong Marine Department, subordinate to the Transport and Housing Bureau, is the DA for the contracting government, the HKSAR government, in discharging port security duties in accordance with the mandatory requirements of the Code.7 According to the Ordinance and the Rules, the HKMD’s Director (hereinafter called “the Director”) may specify the extent of the application of SOLAS Chapter XI-2 and the Code in relation to any designated port facility (Section 5, CAP582), designating security organizations to execute certain port security duties, as long as they possess the appropriate expertise and are in compliance with Section 4.3, Part A of the Code, authorization of ofﬁcers (Section 9, CAP582), and granting exemptions from the provision of the Ordinance (Section 14, CAP582). Under the HKMD, in June 2003, an advisory, non-statutory committee was established – the Port Area Security Advisory Committee (PASAC). Its function is to advise the HKSAR government and its designated authority, the HKMD, on all matters connected with the implementation of SOLAS Chapter XI-2 and the Code in Hong Kong (PASAC 2003a), as well as to monitor its progress (PASAC 2004a). The

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ADOLF K. Y. NG AND GEORGE K. VAGGELAS

Chief Executive Chief Secretary for Administration

Secretary for Transport & Housing Transport & Housing Bureau

Secretary for Security Security Bureau

Marine Department

Custom & Excise Department

Port Facility Security Working Group

Immigration Department

Port Area Security Advisory Committee

Hong Kong Police Force

Keys: Chaired by Represented by

Representatives from designated port facilities (non-governmental)

Figure 33.1 Port security administration structure in Hong Kong Source: authors.

committee, chaired by the HKMD’s Deputy Director, consists of 19 members – governmental representatives from the HKMD and the Hong Kong Police Force, and nongovernmental representatives from the designated port facilities. Each facility group (see HKMD 2009) nominates one or two representative(s) to sit on the committee (PASAC 2003a) (see Table 33.1). As at the beginning of 2009, nine such committee meetings had been undertaken. PASAC primarily focuses on port (rather than ship) security, although in certain cases matters related to the ship–port interface are also discussed (see PASAC 2003a). On July 2003, the Port Facility Security Working Group (PFSWG) was established, chaired by HKMD and represented by the Customs and Excise Department, the Immigration Department and the Hong

Table 33.1 2009

The composition of PASAC in

Position or body Chairman (Deputy Director of Marine) Secretary (Marine Ofﬁcer/Port Security Administration) HKMD Hong Kong Police Force Container terminal operators Oil terminal operators River trade terminal operators Ship repairs industry Cruise industry Bulk industry Hong Kong Liner Shipping Association Total Source: HKMD (2009).

Number of representatives 1 1 5 2 2 2 1 2 1 1 1 19

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Kong Police Force. PFSWG acts as the executive arm in discharging the mandatory duties in sustaining port security in Hong Kong. The working group is also responsible for evaluating the PFSAs and PFSPs undertaken and prepared by facility operators, before submitting them to HKMD for ﬁnal approval. Any port-related security issues, like new requests from IMO, will be discussed ﬁrst within PFSWG in relation to their implications and practicality in Hong Kong and, if necessary, will be brought up on the agenda of the next scheduled PASAC meeting. In most cases, any new amendments, including the Ordinance, the Rules and the details of implementing the articles in the IMO’s Maritime Safety Committee (MSC) circulars, will be ﬁrst discussed within PASAC. According to interviewees, although it is not statutory in nature HKMD ensures that any new policies will have been discussed within PASAC and obtained its endorsement before their implementation. In terms of ﬁnance, neither HKMD nor the HKSAR government prepare any budgets related to port security, and the incomes received from the issuance of security certiﬁcates and from audit exercises are too trivial to cover the administration costs.8 Hence, facility owners and/or operators are responsible for all the ﬁnancial costs in the execution of their respective PFSAs, the preparation of PFSPs, and actions. During the second PASAC meeting, the chairman made clear to facility operators that the HKSAR government would not subsidize, or provide loans to, any port security-related projects (PASAC 2003b). Generally speaking, HKMD is responsible for executing its security obligations in three major categories: (1) setting the security levels, (2) control of ships within or

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intending to enter the port, and (3) port facility security. Piraeus Under law 3622/2007, the DA in Greece is the Directorate for Inspecting the Security Management of Ships and Port Facilities (in Greek DEDAPLE). DEDAPLE is under the direct control of the commander of the Hellenic Coast Guard and at a higher level is subordinate to the Ministry of Economy, Competitiveness and Merchant Marine (MECMM). The administration structure in Greece dealing with port security is shown in Figure 33.2. The responsibilities of DEDAPLE are the coordination, supervision and inspection needed to ensure the proper implementation of the Code and also the exploitation of security information provided by six public authorities. DEDAPLE consists of four divisions: (1) Supervision of the Safety Management of Shipping Companies and Vessels, (2) Supervision of Security Management in Vessels, (3) Supervision of Security Management in Port Facilities and (4) Inspection of Recognized Security Organizations and International Relations. The third division is devoted to port security; it is responsible for carrying out PFSAs according to the Code, approving PFSPs, issuing security certiﬁcations and, ultimately, carrying out security inspections at port facilities. Law 3622/2007 also introduces a Maritime Security Committee (MSC), which consists of 13 members. The responsibility of the MSC is to advise the MECMM about potential security threats, on the basis of the evaluation of the available information obtained from public authorities. The MSC proposes to the MECMM changes to the security level and the necessity for stricter security measures in Greek-ﬂagged vessels

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ADOLF K. Y. NG AND GEORGE K. VAGGELAS

Minister of Economy, Competitiveness and Merchant Marine Ministry of National Defense

Hellenic Coast Guard

Ministry of Foreign Affairs Ministry of Interior General Secretariat for Civil Protection National Intelligence Service Directorate of Customs

Directorate for Inspecting the Security Management of Ships and Port Facilities (DEDAPLE)

Maritime Security Advisory Committee (13 members)

Port Security Authority (4 members plus the PFSOs of the port)

Keys: In charge of Provision of information and assistance Advice to

Figure 33.2 Port security administration structure in Greece. Source: authors.

and ports. The ﬁnal decision regarding changes in the security level is taken by the MECMM. Eventually, any Greek port that fulﬁlls the requirements set by the Code is obliged, under the same law, to develop a Port Security Authority (PSA) consisting of four members plus the PFSOs of the port facilities located in the port authority’s area of jurisdiction. A PSA is responsible for developing a PFSA (undertaken by DEDAPLE or a recognized security organization (RSO) based on the requirements of Sections 15.3 and 15.4 of Part B of the Code. In accordance with the PFSA report and after its approval, a PSA has to develop a PFSP according to the requirements of the Code (sections 16.3 and 16.8 of Part B). Finally, every port facility appoints a PFSO subject to the approval of DEDAPLE. Table 33.2 shows the composition of the Maritime

Safety Committee and the composition of the Port Security Authority for Piraeus port. In comparison with Hong Kong’s PASAC, the corresponding Greek advisory committee (the MSC) has fewer members because the representatives of port facilities do not participate. The MSC consists merely of public authorities’ representatives, most of whom belong to security forces (the Hellenic Coast Guard and the Hellenic Police Force). In essence, there is a total absence of private sector involvement in the MSC, in contrast to the Piraeus PSA, where three members come from private companies. Regarding port security ﬁnancing, involvement of governmental funding is higher than in the Hong Kong scheme. Part of the necessary funding is covered by the revenues DEDAPLE receives for issuing certiﬁcates. According to interviewees, there

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Table 33.2

The composition of the MSC and the PSA

Position

Number of representatives in MSC

Number of representatives in Piraeus PSA

9 1

1

Hellenic Coast Guard Ministry of Economy (General Customs Division) Hellenic Police Force DEDAPLE Hellenic Intelligence Service Port Authority Piraeus Prefecture PFSOs Total

1 1 1

1

1 1 4 7

13

Sources: Law 3622/2007 and data from interviews.

Port:

Level 1

Hong Kong Registered Ships:

Level 1

Definition Level 1:

Normal

the level at which ships and port facilities normally operate.

Level 2:

Heightened

the level applying for as long as there is a heightened risk of a security incident.

Level 3:

Exceptional

the level applying for the period of time when there is a probable or imminent risk of a security incident.

Figure 33.3 The three-tiered security levels adopted by the port of Hong Kong. Source: HKMD (2009).

was a plan to develop the necessary security infrastructures in Greek ports that lacked security equipment, through a public– private partnership which froze in mid2009. The funding for the purchase of the necessary equipment and its maintenance, along with the day-to-day security operational costs, will be covered by imposing a security charge on cargoes and passengers. Although this plan has been frozen, interviewees highlighted that Piraeus port applies a “security charge” on containers in order to meet costs related to the development and maintenance of security.

33.5.3

Setting the security level

Hong Kong A three-tier security-level system, L1, L2 and L3, has been introduced. The status is available on the internet, accessible and updated on HKMD’s website 24 hours a day. The deﬁnitions of different security levels are closely equivalent to the guidelines found in Section 1.8, Part B of the Code (see Figure 33.3). All information and intelligence related to port security which can possibly lead to a change in the security level is provided by the Intelligence Unit of the Hong Kong

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Police Force. The Police Force assesses the credibility and potential consequences of the intelligence before advising HKMD on the necessity to change the security level; the website will be updated if a change is conﬁrmed by HKMD.9 There is a general understanding that the HKSAR government will instruct a facility operator to close down its facilities only if the security level changes to L3, although ultimate sanctions should lie with the DA (PASAC 2003b). Piraeus In Piraeus the Minister of Economy, Competitiveness and Merchant Marine is responsible for changing the security level under which Greek ports operate. The MSC evaluates the information gathered from the Greek Intelligence Unit, other public authorities and the private sector, and then recommends (it cannot mandate) to the Minister a change of security level. The security-level status is accessible 24/7

through DEDAPLE’s website, as shown in Figure 33.4.

33.5.4 Control of ships within or intending to enter the port Hong Kong The HKSAR government strictly follows the mandatory requirements of international documents on controlling ships within or intending to enter the port. For example, in the Rules, all the sections related to this issue (Sections 11 and 12, CAP 582A) make full reference to the requirements indicated in SOLAS Chapter XI-2 (Regulation 9). Additional regulations, however, are virtually non-existent. On the other hand, all necessary information and guidelines for ships within or intending to enter the port, including HKMD notices and information notes, pre-arrival security information, DoS and security advice to ships registered in Hong Kong, are down-

MARITIME SECURITY LEVELS MARITIME SECURITY LEVELS All Greek flagged ships All port facilities under the Greek territory

LEVEL 1 LEVEL 1

SECURITY ANNOUNCEMENTS (ISPS)

01/05/05-11-2005 01/06/19-01-2006 02/06/13-02-2006 01/08/24-01-2008 04/08/28-11-2008

The security level for all Greek flagged ships sailing in the wider area off the coast of Somalia is set to 2. The security level for all Greek flagged ships approaching Nigerian ports is set to 2. The security level for all Greek flagged ships approaching ports of Sri Lanka–Jakarta–Indonessia is set to 2. The security level for all Greek flagged ships sailing in the wider area of Kenya is set to 2. The security level for all Greek flagged ships sailing in the wider area of Gulf of Aden and Red Sea and in particular south of latitude 16″ 00′ N is set to 2.

Figure 33.4 Information on the current security level in Greece. Source: Ministry of Economy, Competitiveness and Mercantile Marine (2009).

PORT SECURITY: THE ISPS CODE

loadable from the internet through HKMD’s ofﬁcial website (HKMD 2009). Piraeus In Piraeus a ship intending to enter the port must inform the PFSO and the Piraeus port authority through a form report containing all the information required by the Code. There is an exclusion from this obligation for ships engaged in regular routes (for example coastal passenger ships) no more than twenty nautical miles from the nearest coast. This exclusion applies to many ships entering Piraeus port as it is the biggest passenger port in Greece, while the Aegean Archipelago does not have many sea areas that are more than twenty nautical miles from the nearest coast. According to an interviewee, this exception does not apply to coastal ships on the Piraeus–Crete route (where the distance from the nearest coast is more than twenty nautical miles for the larger part of the itinerary). For those ships the port authority applies the appropriate security measures with caution, according to the Code, during the embarkation and disembarkation procedures, as the port authority does not want these measures to affect the port’s efﬁciency. Lastly, according to the Code rules, Piraeus port follows the appropriate procedures regarding a ship’s Declaration of Security, provision of security information, etc.

33.5.5

Port facility security

Hong Kong In line with Hong Kong’s traditional policy direction, which emphasizes active non-intervention by the public sector (the so-called laissez-faire policy), all but three of the designated port facilities are privately owned and operated (the exceptions being the China Ferry Terminal, the Hong Kong–Macau Ferry Terminal, and

687

Buoys and Anchorage Services, which are operated by HKMD). The PFSAs and PFSPs are also carried out by the private companies themselves (or by any recognized security organization (RSO) chosen by them), while HKMD takes responsibility for undertaking and preparing PFSAs and PFSPs for the China and Hong Kong–Macau Ferry Terminals and for Buoys and Anchorage Services. PFSAs and PFSPs will be submitted to PFSWG for evaluation and vetting, before being recommended to HKMD for ﬁnal approval (see Figure 33.5). Up to 2008, HKMD had reviewed and approved more than 30 PFSPs, for container and ferry terminals, wharfs and dockyards, oil jetties and terminals, power stations, fuel receipt facilities, and mooring buoys and anchorages. To comply with Section 16.8, Part A of the Code, some companies, such as Hongkong International Terminals, Modern Terminals Ltd. and ExxonMobil (Hong Kong) Ltd., have chosen to prepare single PFSPs for all the terminals that they own and operate.10 Each of these companies has also opted to appoint a single PFSO for its terminals, in compliance with Section 17.1, Part A of the Code. The selection and appointment of PFSOs are made by the port facility management, subject to formal approval by HKMD. By 2007, 24 PFSOs had been appointed, some having the post as their sole responsibility, and others combining it with that of safety/operationrelated manager. HKMD has also ensured that their names and corresponding information are easily accessible through its ofﬁcial website. All PFSOs must have received training and certiﬁcation from a local port security program accredited by HKMD, or have attended a similar program overseas, of which veriﬁcation will be decided on a

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PFSWG recommends PFSP to HKMD for final approval

Facility Operator (re)undertakes PFSA

if ISPS requirements met

If required standard not met Completed PFSA submitted to PFSWG

If not approved (with relevant reasons)

if approved

Completed PFSP submitted to PFSWG

if required standard met PFSWG recommends PFSA to HKMD for final approval

Facility Operator prepares/amends PFSP

HKMD issues a letter to the facility operator confirming their compliance if not approved (with relevant reasons) if ISPS requirements not met

if approved

Figure 33.5 Procedures for the approval of PFSAs and PFSPs in the port of Hong Kong. Source: authors (cf. PASAC 2003a).

case-by-case basis (HKMD 2007a). For security personnel training and certiﬁcation, in accordance with Section 4.3, Part A of the ISPS Code, such responsibilities have been fully outsourced to recognized security organizations (RSO). Such organizations must have submitted a proposal to HKMD outlining a program which fulﬁlls the prerequisites laid down in the IMO’s Maritime Safety Committee (MSC) Circular No. 1188 and the Guidelines for Approving Port Facility Security Ofﬁcer Training Course (HKMD 2007b), and a formal accreditation process undertaken by designated HKMD ofﬁcials,11 of which the qualiﬁcation is valid for ﬁve years and is extendable when accompanied with evidence showing that the holder has been in service as a (Deputy) PFSO of a designated facility for at least twelve months within the preceding ﬁveyear period (HKMD 2007a, 2009). Towards the end of 2008, HKMD had approved two institutions capable of offering security

training and certiﬁcation programs.12 A PFSO program accredited by HKMD consists of 11 modules (Hong Kong Institute of Seatransport 2007).13 The major mechanism for auditing the PFSP is through site visits (announced in advance) to the designated port facilities14 (PASAC 2004b). Auditing is made up of full and partial audits, undertaken at intervals of ﬁve years and one year respectively. The auditing schedule and arrangement with the designated security facility management team are arranged by a designated ofﬁcer from HKMD, while the audit team also includes representatives from the Police Force and the Customs and Excise and Immigration Departments.15 According to interviewees, auditing categories are divided into seven areas: (1) documentation, (2) access control, (3) handling of cargoes, (4) the interface between port and ship, (5) control of restricted area, (6) awareness, and (7) security infrastructure.

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rectify the identiﬁed problems, and defective facilities are subject to a re-inspection during the next auditing exercise; HKMD can void the security certiﬁcate of the facilities concerned if non-compliance persists (PASAC 2004b).

All areas will be examined during a full audit, while four of them will be selected by the audit team leader for each partial audit. According to an interviewee from HKMD, investigating the physical condition of the designated facilities is the most important function during the site visit, following which evaluation results, recommendations and mandatory actions will be laid down in a (conﬁdential) audit report. When auditing the “soft” aspects, such as personnel arrangement and documentation, the designated facility management needs to ﬁll in a dedicated questionnaire prepared by HKMD. Minor deﬁciencies which are unlikely to seriously threaten designated facilities’ compliance with SOLAS Chapter XI-2 (such as worn-out fences or inadequate lighting), Part A of the Code, the Ordinance and the Rules, will not affect the endorsement of the validity of the security certiﬁcate. However, during the site visits, the facility management needs to provide a binding promise to the audit team on when they can

Piraeus In contrast with the laissez-faire policy governing Hong Kong, in Greece the port governance model is dominated by the public sector: port authorities are statecontrolled entities, the state acting as both regulator and port service provider (Pallis 2007a). There are only three privately operated designated port facilities, a marina, a shipyard facility and, since 2009, Piraeus Container Terminal S.A. (a COSCO subsidiary company). Piraeus port includes ten designated port facilities. Each one holds a PFSP after a PFSA has been developed, either by DEDAPLE or by an RSO with the ﬁnal approval of DEDAPLE. The process of granting a PFSA and a PFSP is shown in Figure 33.6.

Facility operator (re)undertakes PFSA (or assigns it to DEDAPLE or an RSO)

If standards not met

PFSP submitted to DEDAPLE for final approval

If not approved

Completed PFSA is delivered to PSA

PSA recommends PFSA to DEDAPLE for final approval

PSA or an RSO prepares PFSP

PFSA approval

Figure 33.6 Procedures for the approval of PFSAs and PFSPs in the port of Piraeus. Source: authors, based on data from Greek law 3622 2007.

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The procedures at Piraeus port are similar to those followed at the port of Hong Kong. The main difference is the absence of a committee similar to Hong Kong’s PFSWG, which acts as an intermediary between the HKMD and the facility operator. DEDAPLE had approved ten PFSPs by the end of 2009. Seven out of ten designated port facilities in Piraeus have separate PFSPs but only one PFSO. These seven facilities are owned and managed by Piraeus port authority. The other three port facilities have their own PFSO (as these facilities are managed by different companies). Each designated port facility proposes a PFSO to DEDAPLE. DEDAPLE evaluates the competence of this person in terms of the qualiﬁcations required by the Code. The candidate PFSO must have experience in port security issues and hold a university degree as well. If these requirements are fulﬁlled, DEDAPLE approves the PFSO, who attends educational programs, based on provisions 13.5– 13.8 and 18.5–18.6 of part B of the Code, provided by private and public institutions. PFSPs are subject to auditing by DEDAPLE through on-site inspections by authorized personnel. Moreover, according to EU regulations a PFSP must also be sent to the European Community for assessment in addition to the assessment by DEDAPLE. According to interviewees at the Piraeus port, PFSPs have been inspected by DEDAPLE, although these inspections are rare.

33.6

Discussion

The above analysis shows that several characteristics exist. On a positive note, Hong Kong has fulﬁlled the mandatory requirements laid down in SOLAS Chapter XI-2

and Part A of the Code. Virtually all the core elements of the international mandatory requirements have been addressed, while the security information necessary to maritime stakeholders and the public is easily accessible. The HKSAR government has also developed a well-supported legal and structural foundation for facilitating the implementation of the Code in Hong Kong, as well as providing basic mechanisms in complying with it. Furthermore, as an interviewee from HKMD agreed, facility operators are in general quite cooperative with the designated authority in complying with the mandatory requirements of SOLAS Chapter XI-2 and the Code. In Piraeus port too the Code has been fully implemented; in fact Piraeus has exceeded the mandatory requirements and also applies some voluntary provisions of the Code. This is because Greece is obliged to adopt the Code in a stricter manner in order to comply with the EU’s Regulation 725/2004. In particular, the mechanisms necessary to support the Code’s application and assessment are sufﬁcient. On the other hand, the absence of private sector participation in the upper levels of decisionmaking mechanisms such as the Maritime Security Advisory Committee should be mentioned. Another issue to be mentioned is that constructive innovation in the implementation of port security issues in Hong Kong is rather limited.16 The legal documents – the Ordinance and the Rules – were made as simple as possible, with all core sections conﬁrming the necessity of implementing the international prerequisites in Hong Kong. Thus, additional security requirements and measures are virtually nonexistent, a situation not helped by local conditions, which have practically disabled

PORT SECURITY: THE ISPS CODE

Hong Kong from carrying out securityrelated innovative activities. For example, at the time of writing, the port is still unable to introduce biometric identity systems for port workers (which has been carried out in many American and some European ports) because it did not have any signiﬁcant labor unions, partly because joining or registering such unions was not compulsory for workers.17 Another example lies with the differences in legal systems between Hong Kong and the US. Under Hong Kong’s legislation, the DA – HKMD – is not empowered to shut down any port facilities directly, but only to direct non-complying facilities to rectify the deﬁciencies; even if such a facility still does not comply, HKMD can only shut down the facilities by withdrawing its security certiﬁcate and reporting it to the IMO (PASAC 2006). As a consequence, Hong Kong seems to be less effective at reacting to extraordinary, and urgent, security incidents, such as those at L3. Piraeus, on the other hand, did innovate in port security, as it beneﬁted from the Olympic Games of 2004, hosted in Athens. Since these were the ﬁrst Olympic Games held after 9/11, there was much concern about the possibility of another terrorist attack. As a result, the Organizing Committee of the Games and the Greek government invested substantial funds in enhancing security systems and equipment to minimize the risk of an unlawful act. During the period of the Olympic Games, cruise ships planned to arrive at Piraeus port, many of them to be used as ﬂoating hotels for ofﬁcials. All the security equipment, security reaction plans and security systems remained in the possession of the port, and are used mainly in the passenger terminal, facilitating cruise trafﬁc. Moreover,

691

because of the stricter EU port security regulations (for example, Directive 65/2005), Piraeus port is adapted to the new security requirements. In the case of Hong Kong, there is an absence of regional security policies, and this factor inﬂuences a port’s desire to innovate. Piraeus, also according to interviewees’ answers, participates in many US security initiatives, such as the Container Security Initiative which brings know-how and expertise to the port. Furthermore, as an interviewee pointed out, the Piraeus port authority is seeking ways to sustain or even develop its capabilities in port security through cooperation with other ports or participation in European organizations. Piraeus port authority collaborates and exchanges knowledge with Cyprus port authorities in order to achieve good practices, and is also a member of the European Sea Ports Organization (ESPO), and thus has beneﬁted from participation in the preparation of port security policy contributions. While fully acknowledging the public nature of port security, the HKSAR government treats port security in accordance with its traditional and established laissez-faire policies, including port operation and governance (see Brooks 2004; Wang and Olivier 2007; Wong 2007).18 Such policy direction is reﬂected in the fact that, apart from the compulsory obligations laid down in Section 4.3, Part A of the Code, nearly all other, optional, responsibilities, including the execution of PFSAs, the preparation of PFSPs, the appointment of PFSOs and their training and certiﬁcation, have been outsourced to RSOs through legislation (such as Sections 25 and 26 of CAP 582A). Also, the government resists recommending any RSOs, thus giving operators the freedom to

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make their own choices (PASAC 2003a). Moreover, as mentioned, the HKSAR government insists on its policy of not subsidizing any security-related projects for designated facilities (PASAC 2003b) and does not allocate any signiﬁcant ﬁnancial resources to addressing port security. Under such a policy direction, the extent to which port security measures can be implemented in designated facilities is very much dependent on the attitude of facility operators. Piraeus port, on the other hand, relies mostly on public investments to enhance and maintain security. The application of the Code and its supervision lie almost exclusively in the hands of public sector, although there is a private sector involvement regarding the development of PFSAs and PFSPs by RSOs, and private designated port facilities are represented in the Port Security Authority. This trend is questionable in the mid-term as long as there are signs of port devolution towards greater participation of the private sector in port services production, such as the recent concession of Piraeus Container Terminal II to COSCO and the favorable opinions expressed by many CEOs of Greek ports towards a more “open” port market (Pallis and Vaggelas 2005). According to interviewees, there is some evidence supporting this view, as the Greek government planned a program (although it has now been frozen) of enhancing port security in the country’s major ports through public–private partnerships, as well as Piraeus port authority’s move towards imposing a security charge on containers so as to partially recover the security costs. Hong Kong is largely perceived as a lowrisk port with a limited risk of terrorist attacks (see PASAC 2003b), as it has yet to experience any change from the L1 security

level or any signiﬁcant security incidents (at the time of writing). This largely explains why the HKSAR government (and designated facility operators) is rather unenthusiastic about investing in security-related projects other than to fulﬁll the basic mandatory requirements and ensure that security reaches an acceptable level,19 especially given the lack of adequate evidence indicating that enhanced port security would bring positive economic impacts (Bichou 2008; Ng and Gujar 2008).20 The same view is found in the interviewees’ answers in Piraeus port. The absence of security incidents is an important factor in whether a port facility chooses to invest further (than the regulations require) in port security. An interviewee’s opinion brought in a new perspective regarding port security: he linked port security investments with the security risk of the country, which is a very important factor especially for cruise passengers. As he said, if a country is considered secure, then ongoing investments in port security might not bring the expected beneﬁts to the port because passengers choose to travel to a secure country, not to a secure port. The same also applies in the case of a non-secure country, because whatever security investments a port undertakes, traveling in a non-secure country is very risky. He also expressed the view that ports which do not accommodate transatlantic trade do not have a strong motivation to invest further in security. The interviewees’ answers show that there are two major problems in dealing with port security: cost and port performance. There were concerns regarding the impact of enhanced port security measures on port performance. As stated, new security measures might cause delays in the trade facilitation and hence in port and

PORT SECURITY: THE ISPS CODE

supply chain performance. According to some interviewees the appropriate solution is to balance security with port efﬁciency, that is, to take those security measures which guarantee port security without jeopardizing port performance. The problem becomes more intense when it is recalled that security installations need space, something that is lacking in ports. As noted by a Piraeus port authority ofﬁcial, the performance problem is evident at the cruise terminal when two or more cruise ships arrive at the same time, each carrying hundreds of passengers. In such cases the port authority has to process passengers through security in very little time, which can cause congestion in passenger terminals. The concern expressed by some interviewees is the absence of an international or even a European common framework for ﬁnancing port security. Some ports raise ﬁnance to enhance security from their revenues, others by imposing a “security charge,” while many ports also obtain government funding. This situation acts as a barrier (at least within the EU) against the creation of a level playing ﬁeld among ports, which results in the distortion of the market because some ports obtain a cost advantage over their competitors. The above problems are not helped by the abstract nature of the understanding of risk, which is difﬁcult to deﬁne or assess quantitatively (Pinto, Rabadi and Talley 2008). Also, measuring port performance in order to correlate security and performance is by no means an easy, straightforward task (Pallis 2007b), not to mention incorporating the security attribute into the already complicated formulae (cf. Brooks and Pelot 2008) and the signiﬁcant diversiﬁcations between ports (Cullinane and Song 2006). Given the impacts of the ﬁnancial tsunami

693

since 2008, the chances of signiﬁcantly improving the status quo in the foreseeable future do not seem high.

33.7

Summary

The 9/11 terrorist attack revealed vulnerabilities in the transportation system that can potentially lead to unprecedented disruption of the global trade system. In responding to such challenges, the international community has introduced various security enhancement instruments, notably the ISPS Code. Although several studies on maritime security have been undertaken, a comprehensive review of how such international guidelines could be applied locally was clearly lacking. Understanding this, through investigating the cases of Hong Kong and Piraeus, this chapter critically reviews how the Code has been implemented in a local perspective. We argue that Hong Kong and Piraeus are aware of the necessity for port security and have committed to address such challenges, quite effectively according to the ISPS requirements. Nevertheless, rather than being an innovator, Hong Kong is largely a follower when dealing with such issues. The port security administrative structure is fundamentally a DA purely for the implementation of SOLAS Chapter XI-2 and the Code with little innovation, while port security is mainly regarded as a “hardware technical” issue rather than as a software issue requiring signiﬁcant political and social initiatives. Indeed, security is not widely regarded as an important issue in port operation in Hong Kong, as reﬂected by the fact that PFSOs (or in some cases security managers) often occupy rather junior positions within facility operators.

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The HKSAR government is also reluctant to input resources of any signiﬁcance to address this issue. Hence, a security culture has yet to be established; the core rationale of compliance by major stakeholders seems to be to avoid the economic consequences that could arise from non-compliance (like losing the American market), rather than to appreciate the concept of a more secure port.21 Simply speaking, port security is a problem to solve rather than an opportunity to innovate. This view seems to contrast with certain claims that the port continues to be at the forefront of advances in port security (Mitchell 2008). Indeed, Hong Kong largely reﬂects the situation of Asian ports, where the approach to port security measures is rather half-hearted, pro-trade and economically driven (Ng and Gujar 2008). Regarding Piraeus, the study has showed that the port has a strong security culture. Besides the application of a stricter form of the Code as a result of EU regulations, Piraeus port authority applies a comprehensive security strategy through participation in US security initiatives, through participation in the European Sea Ports Organization, in which the future EU port policy is analyzed and contributions are made, and last but not least through cooperation with other ports on port security know-how and good practice. Although Piraeus port authority seems willing to apply new security measures imposed by international, regional or national organizations, interviewees’ answers suggest that the port is on the borderline concerning the usefulness of enhancing port security. On the one hand, interviewees acknowledge that security brings some beneﬁts to the port, such as market reputation, increased throughput as some shippers

might prefer a secure port, minimization of the risk of an unlawful act occurring and hence of consequent economic loss, and in general a competitive advantage to the port over its competitors. On the other hand, there are concerns about the negative impact of security, such as a possible decrease in port performance, the substantial investments required to develop and maintain security, and the potential for losing throughput to neighboring ports that do not apply the appropriate security measures and so are able to provide lower charges for ships using their port services. The above assessment might vary according to the type of cargo and the port’s trading partners. Indeed, Piraeus is among the leading ports in Europe in cruise trafﬁc, which is very vulnerable to security threats (for instance, many cruise companies, especially small ones, collapsed after the events of 9/11), and it is worth mentioning that cruising is a proﬁtable activity not only for the port but also for the city. Concerning the latter, only a small percentage of Piraeus’s container trafﬁc is bound to the US; thus the balance between safeguarding the US’s container throughput and compliance with the security measures requested by the US seems to be on the side of the new security measures. In conclusion, the chapter argues that rules and standards may not be completely effective, and that local circumstances, as well as other “soft” (subjective) aspects (like attitudes and governance system), should not be overlooked if port (and, indeed, maritime and supply chain) security are to be carried out effectively; in particular, distinctive approaches to the implementation of security measures may be possible in different regions around the world (Pallis and

PORT SECURITY: THE ISPS CODE

Vaggelas 2008). Further research is required to address a number of critical issues, namely (1) how such obstacles can be effectively overcome, (2) how such a security culture can be established, and (3) how to develop generally accepted measurement systems to assess the correlation between implementation of security measures and port performance, both technical and economic, especially in view of the ﬁnancial tsunami, which is likely to have a serious impact on the future of the maritime industries, including ports. By investigating the imposition of port security measures locally, this chapter has offered insight into the obstacles, challenges and solutions inherent in applying port security measures to different regions, countries and ports.

2

3

Acknowledgements This study is supported by the Hong Kong Research Grant Council (project code A-SA32). The authors are indebted to all the anonymous interviewees who provided useful information and advice. The usual disclaimers apply.

Notes 1

Despite the broad deﬁnition of maritime security (Ng and Gujar 2008), which can extend to issues like piracy, maritime dispute and undisrupted sea lane passages (Guan and Skogan 2007), since 9/11 much attention on maritime security has been paid to deterring threats from terrorist attacks. According to Talley and Rule (2008), terrorist incidents are intentional, with the objective of damaging properties or causing injuries to individuals, mainly for political reasons.

4

5

6

695

Despite the international nature of the Code, it is very much an American initiative, led by the US Coast Guard; part of the US government’s response to the tragic events of 9/11, its target was the creation of a consistent security program for ships and ports (and their operators and governments) to identify and deter threats from terrorists more effectively. For example, Valencia has estimated that for a medium-sized port like itself the implementation of 100% container scanning will require substantial investments and will affect port efﬁciency in the trade with the US. More speciﬁcally, for a forecast 340,000 TEUs bound to the US in 2012, the 100% scanning will require four times more land (40.000m2 compared with 10,000m2 for the current inspection scheme ), and the total annual costs will increase from €2,973,000 to €27,320,000 (Gomez-Ferrer 2009). A report by the EU (European Commission 2010) outlines the impact the 100% container scanning initiative would have on the European port industry, the European transport system and European welfare. As indicated, such a measure requires €430 million investments in ports as well as an annual operational cost of €200 million. Moreover, it will increase the direct transport cost (between the EU and the USA) by 10% and lead to an annual (combined) welfare loss of €10 billion for the EU and the US. For a comprehensive review of USA and EU maritime, port and supply chain security initiatives see Ng (2007) and Pallis and Vaggelas (2007, 2008). For Asia, see Ng and Gujar (2008). The actual term used was “supply chain spaghetti,” which describes the multitude of regulatory initiatives that overlap and possibly contradict each other. These security operations are: measures to prevent the introduction of weapons or dangerous devices into the port, to prevent

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unauthorized access to restricted areas, and to ensure the effective security of cargo and cargo-handling equipment and of information about security; procedures for responding to security threats and to new or amended security instructions, for evacuation, for interfacing with ship security activities, for periodic review and updating of the PFSP, for reporting security incidents, for audit of the plan and for the facilitation of shore leave for ship’s personnel or personnel changes; and the identiﬁcation of a port facility security ofﬁcer and of the duties of security-related personnel. 7 Although the HKMD was responsible for all navigational matters in Hong Kong and for safety standards for all classes and types of ships (Wong 2007), questions still existed as to why the responsibilities of port security were taken up by the HKMD, rather than by department(s) directly responsible for security affairs (like the Hong Kong Police Force). According to a senior interviewee from HKMD, apart from port security being a “maritime” issue, a signiﬁcant reason was the political circumstances at that time, wherein the HKSAR’s government was predominantly occupied by public controversies within Hong Kong’s society aroused by the need to enact laws of its own to protect China’s national security, as required by Article 23 of the Basic Law, HKSAR’s de facto constitution (HKSAR Government 2009). Under such circumstances, Regina Ip, then Secretary for Security, had imposed substantial pressure on the HKMD, a nonsecurity-related department, to take up such responsibilities. 8 According to Section 33 of the Rules, HKMD charges an hourly rate of HKD 1115–3270 for services including issuing or endorsing (interim) security certiﬁcates and approving PFSPs and designated port facility inspections. During the ﬁfth PASAC meeting, however, the chairman indicated

9

10

11

12

13

to committee members that the government had no intention of shifting the ﬁnancial burden of regular security audit exercises to port facility operators (PASAC 2004b). During the third PASAC meeting, an issue was raised concerning the transmission of threat assessment, as the security levels required by the Code did not coincide with the conventional security levels used by the Police Force. An ad hoc meeting on this issue was undertaken in February 2004 between the parties concerned, and it had been resolved before the Code was fully implemented on July 1, 2004. In practice, however, a single security certiﬁcate has been issued to each designated facility, so as to ensure that other facilities can still operate normally even when one or more facilities have to close down because of security threats or incidents. For example, three security certiﬁcates have been issued to Modern Terminals Ltd.’s container terminals, but they are covered and managed by one PFSP and one PFSO. According to the HKMD’s Guidelines for Approving Port Facility Security Ofﬁcer Training Course, formal approval to the institution concerned in providing PFSO training and certiﬁcation is granted only after the ﬁrst course of the program concerned has been monitored and assessed by HKMD ofﬁcials and the ofﬁcer(s) concerned, with positive feedback. The two institutions are the Hong Kong Institute of Seatransport and Lion Security Ltd. These are: (1) Introduction, (2) Maritime Security Policy, (3) Security Responsibilities, (4) Port Facility Security Assessment, (5) Security Equipment, (6) Port Facility Security Plan, (7) Threat Identiﬁcation, (8) Port Facility Security Actions, (9) Emergence Preparedness, (10) Security Administration and (11) Security Training.

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14

15

16

17

18

19

According to internal information, unannounced inspections cannot be undertaken because of the shortage of ﬁnancial support from the HKSAR government. While the Police Force always sends representatives to the audit team, the Customs and Excise and Immigration Departments only send representatives to selected designated facilities in which they have an interest. Generally speaking, the Customs and Excise Department and the Immigration Department are only interested in cargo- and passenger-related facilities respectively. In many cases, ports in the US and the European Union are more willing to devote time and ﬁnancial resources to R&D in port security. Rotterdam, for example, has prepared a number of reports related to maritime security ﬁnancing (Rotterdam Maritime Group 2005), and has proposed the development of port facility security toolkits for its users (in collaboration with Aon, see PFST 2009). This is not to claim that Hong Kong does not innovate at all. For example, in 2006, the port hosted the Integrated Container Inspection System (ICIS), a pilot program for scanning shipping containers using state-of-the-art technological processes (Mitchell 2008). The point here is the degree of innovation, rather than whether the port innovates or not. Wong (2007) further argued that such policies had contributed to other problems in latter years, notably trafﬁc congestion around the port areas, as the government did not foresee that the impacts of port operation would extend into adjacent transport networks even after the opening of the ﬁrst container terminal in Kwai Chung in 1972. How “acceptable” should be deﬁned is highly subjective. As noted by Brooks and Pelot (2008), most ports nowadays are certiﬁed by their governments as ISPS-

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compliant even if they are not. According to interviewees, in Hong Kong, port security at a minimum acceptable level is generally understood as ISPS-compliant. 20 Of course, the relation between security and business opportunities becomes a signiﬁcant issue only if genuine competition exists between nearby ports. The sensibility of this assumption, i.e., the existence of genuine inter-port competition, is beyond debate, given the amount of published research on this topic. See for instance Song (2003); Wang (1998); Wang and Olivier (2007); Wang, Ng and Olivier (2004). 21 According to Carluer, Alix and Joly (2008), of the 18 million containers arriving in the 13 largest American ports in 2006, 75% were from Asia. Different possible scenarios were developed in the same study, indicating that, by 2012, this share should at least be maintained, and even reach as high as 78%.

References Bichou, K. (2004) The ISPS Code and the cost of port compliance: an initial logistics and supply chain framework for port security assessment and management. Maritime Economics and Logistics 6: 322–48. Bichou, K. (2008) Security of ships and shipping operations. In W. K. Talley (ed.), Maritime Safety, Security and Piracy, pp. 73–87. London: Informa. Bichou, K., M. G. H. Bell and A. Evans (eds.) (2007) Risk Management in Port Operations, Logistics and Supply Chain Security. London: Informa. Brooks, M. R. (2004) The governance structure of ports. Review of Network Economics 3(2): 168–83. Brooks, M. R. and K. J. Button (2007) Maritime container security: a cargo interest perspective. In K. Bichou, M. G. H. Bell and A. Evans (eds.), Risk Management in Port Operations,

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Logistics and Supply Chain Security, pp. 219–34. London: Informa. Brooks, M. R. and R. Pelot (2008) Port security: a risk based perspective. In W. K. Talley (ed.), Maritime Safety, Security and Piracy, pp. 195– 216. London: Informa. Carluer, F., Y. Alix and O. Joly (2008) Global Logistic Chain Security: Economic Impacts of the US 100% Container Scanning Law. Le Havre: EMS. Chlomoudis, C. I. and A. A. Pallis (2002) European Union Port Policy: The Movement towards a Long-Term Strategy. Cheltenham: Edward Elgar. CLECAT (European Association for Forwarding, Transport, Logistic and Customs Services) (2006) Discussion paper on Commission proposal for enhancing supply chain security. Brussels: CLECAT. Cullinane, K. and D. W. Song (2006) Estimating the relative efﬁciency of European container ports: a stochastic frontier analysis. In K. Cullinane and W. K. Talley (eds.), Port Economics, pp. 85–115. Oxford: Elsevier. ESPO (2009) US retreats on demand for 100% container scanning. ESPO News (15.32), Brussels, November–December, 2009. European Commission (2010) Secure trade and 100% scanning of containers. Staff Working Paper (SEC(2010) 131 Final). European Commission, Brussels. Flynn, S. E. (2006) Port security is still a house of cards. Far East Economic Review Jan./Feb. 2006. www.feer.com/articles1/2006/0601/ free/p005.html. GAO (US Government Accountability Ofﬁce) (2007) Maritime security. One year later: a progress report on the SAFE Port Act. Statement of Stephen L. Caldwell, Director, Homeland Security and Justice Issues, Washington, D.C. (GAO-08-171T). Gomez-Ferrer, R. (2009) Container trafﬁc between Europe and the US: the case of Valencia port. Presentation of the Director General of the Valencia Port Authority at the Conference on Maritime Container Security, Bremen, September 10.

Gordon, P., J. E. Moore and H. W. Richardson (2009) Economic impact analysis of terrorism events: recent methodological advances and ﬁndings. In OECD–ITF (2009), Terrorism and International Transport: Towards Risk-Based Security Policy, pp. 51–81. Round Table 144. Paris: OECD. Greenberg, M. D., P. Chalk, H. H. Willis, I. Khiko and D. S. Ortiz (2006) Maritime Terrorism: Risk and Liability. Santa Monica, CA: RAND Corporation. Guan, K. C. and J. K. Skogan (eds.) (2007) Maritime Security in Southeast Asia. New York: Routledge. HKMD (2007a) Guidelines for application of qualiﬁcation recognition as port facility security ofﬁcer. http://marsec.mardep.gov.hk/ pfso_training.html. HKMD (2007b) Guidelines for approving port facility security ofﬁcer training course. h t t p : / / m a r s e c . m a r d e p. g ov. h k / p d f / CourseApp.pdf. HKMD (2009) Hong Kong Marine Department website. www.mardep.gov.hk (accessed December 2009). HKSAR Government (2009) The Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China, promulgated on April 4, 1990 by the National People’s Congress, People’s Republic of China, effective from July 1, 1997. www. basiclaw.gov.hk. Hong Kong Institute of Seatransport (2007) Port Facility Security Ofﬁcer Training Course. Hong Kong Institute of Seatransport, Hong Kong. IMO (2002a) Amendments to the Annex to the International Convention for the Safety of Life at Sea, 1974, as amended (SOLAS/ CONF.5/32). December, London. IMO (2002b) International Code for the Security of Ships and Port Facilities (SOLAS/ CONF.5/34). December, London. King, J. (2005) The security of merchant shipping. Marine Policy 29: 235–45. Kumar, S. H. and D. Vellenga (2004) Port security costs in the US: a public policy dilemma.

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Proceedings of the Annual Conference of the International Association of Maritime Economists (IAME), Izmir, 30 June–2 July, 2004. Mensah, T. A. (2003) The place of the ISPS Code in the legal international regime for the security of international shipping. WMU Journal of Maritime Affairs 3(1): 17–30. Mitchell, D. J. (2008) On the front lines: Hong Kong’s role in international security. In C. McGiffert and J. T. H. Tang (eds.), Hong Kong on the Move: 10 Years as the HKSAR, pp. 109–25. Washington, D.C.: CSIS. Ng, K. Y. A. (2007) Port security and the competitiveness of short sea shipping in Europe: implications and challenges. In K. Bichou, M. Bell and A. Evans (eds.), Risk Management in Port Operations, Logistics and Supply Chain Security, pp. 347–66. London: Informa. Ng, K. Y. A. and G. C. Gujar (2008) Port security in Asia. In W. K. Talley (ed.), Maritime Safety, Security and Piracy, pp. 257–78. London: Informa. OECD (2003) Security in maritime transport: risk factors and economic impact. OECD Maritime Transport Committee, Paris. OECD-ITF (2009) Terrorism and International Transport: Towards Risk-Based Security Policy. Roundtable 144. Paris: OECD. O’Neil, W. A. (2003) The human element in shipping. WMU Journal of Maritime Affairs 2(2): 95–7. Pallis, A. A. (2007a) Port governance in Greece. In M. R. Brooks and K. Cullinane (eds.), Issues on Devolution, Port Governance and Port Performance, pp. 155–69. Oxford: Elsevier. Pallis, A. A. (2007b) Whiter port strategy? Theory and practice in conﬂict. In A. A. Pallis (ed.), Maritime Transport: The Greek Paradigm, pp. 343–82. Oxford: Elsevier. Pallis, A. A. and G. K. Vaggelas (2005) Port competitiveness and the EU port services directive: the case of Greek ports. Maritime Economics and Logistics 7(2): 116–40. Pallis, A. A. and G. K. Vaggelas (2007) Enhancing port security via the enactment of EU policies. In K. Bichou, M. Bell and A. Evans (eds.),

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Risk Management in Port Operations, Logistics and Supply Chain Security, pp. 303–34. London: Informa. Pallis, A. A. and G. K. Vaggelas (2008) EU port and shipping security. In W. K. Talley (ed.), Maritime Safety, Security and Piracy, pp. 235–55. London: Informa. PASAC (2003a) Minutes of the ﬁrst meeting of the Port Area Security Advisory Committee, HKMD, Hong Kong, July. PASAC (2003b) Minutes of the second meeting of the Port Area Security Advisory Committee, HKMD, Hong Kong, September. PASAC (2004a) Minutes of the fourth meeting of the Port Area Security Advisory Committee, HKMD, Hong Kong, May. PASAC (2004b) Minutes of the ﬁfth meeting of the Port Area Security Advisory Committee, HKMD, Hong Kong, September. PASAC (2006) Minutes of the eighth meeting of the Port Area Security Advisory Committee, HKMD, Hong Kong, October. PFST (2009) Port Facility Security Toolkit. www.portfacilitytoolkit.com (accessed June 2009). Pinto, C. A., G. Rabadi and W. K. Talley (2008) US port security. In W. K. Talley (ed.), Maritime Safety, Security and Piracy, pp. 217–33. London: Informa. Robinson, R. (2002) Ports as elements in valuedriven chain systems: the new paradigm. Maritime Policy and Management 29(3): 241–55. Rotterdam Maritime Group (2005) Study on maritime security ﬁnancing. TREN/05/ST/ S07.48700. Rotterdam Maritime Group, Rotterdam. Song, D. W. (2003) Port co-opetition in concept and practice. Maritime Policy and Management 30(1): 29–44. Talley, W. K. (ed.) (2008) Maritime Safety, Security and Piracy. London: Informa. Talley, W. K. (2009) The impact of port security on port performance. Proceedings of the Annual Conference of the International Association of Maritime Economists (IAME), Copenhagen, June 24–6, 2009.

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Talley, W. K. and E. M. Rule (2008) Piracy in shipping. In W. K. Talley (ed.) Maritime Safety, Security and Piracy, pp. 89–101. London: Informa. Thibault, M., M. R. Brooks and K. J. Button (2006) The response of the US maritime industry to the New Container Security Initiatives. Transportation Journal 45: 5–15. Vaggelas, G. K. and A. A. Pallis (2010) Passenger ports: services provision and their beneﬁts. Maritime Policy and Management 37(1): 7389. Wang, J. J. (1998) A container load centre with a developing hinterland: a case study of Hong Kong. Journal of Transport Geography 6(3): 187–201. Wang, J. J., A. K. Y. Ng and D. Olivier (2004) Port governance in China: a review of policies in

an era of internationalizing port management practices. Transport Policy 11(3): 237–50. Wang, J. J. and D. Olivier (2007) Hong Kong and Shenzhen: the nexus in South China. In K. Cullinane and D. W. Song (eds.), Asian Container Ports: Development, Competition and Co-operation, pp. 198–212. New York: Palgrave Macmillan. Wong, P. (2007) Hong Kong: Asia’s world port. In K. Cullinane and D. W. Song (eds.), Asian Container Ports, pp. 113–26. New York: Palgrave Macmillan. Zhu, J. (2006) Asia and IMO technical cooperation. Ocean and Coastal Management 49: 627–36.

34

Port Security and the Quality of Port Interchange Service Wayne K. Talley and Venus Y. H. Lun

34.1

Introduction

It became clear following the terrorist attacks in New York City on September 11, 2001 that US ports and cargo at foreign ports bound for US ports were at high risk of terrorist attacks. In response to this risk, the US Congress passed a number of acts and initiated a number of programs to secure US ports and cargo bound for US ports from terrorist attacks – the 2001 Aviation and Transportation Security Act, the 2002 Maritime Transportation Security Act, the Coast Guard’s maritime security program, the Bureau of Customs and Border Protection’s (CBP’s) maritime security program, and the Security and Accountability for Every (SAFE) Port Act of 2006. Since no serious terrorist incident has occurred at US ports, one may conclude that these acts and programs have been effective in securing US ports from terrorist attacks. However, the effects of US port security acts and programs on the quality of

port interchange services provided by US ports and US foreign trading ports are unclear. Can improvements in the quality of port security service increase the quality of port interchange services? This chapter addresses this question. Although it is generally agreed that improvements in the quality of port security service, such as onehundred percent scanning of containers (Talley 2011), can lead to container port congestion and thus have a negative effect on the quality of container port interchange services, the question of a positive effect has not been investigated in the literature (to the knowledge of the authors). The next section discusses US port security legislations and programs, since many port security programs around the world are based upon these legislations and programs. Sections 34.3 and 34.4 discuss port interchange and port security services, respectively, as well as measures of the quality of these services. Then, a model of the relationship between the quality of port interchange services and port security

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

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service is presented. Section 34.5 presents an empirical investigation. Data for investigating whether improvements in the quality of port security service can improve the quality of port interchange services were obtained from an e-questionnaire that was e-mailed to a database of container port operators found in Containerisation International (2009). Section 34.6 concludes.

34.2 US Port Security Legislations and Programs Following the terrorist attacks in New York on September 11, 2001, regulations, both US and international, have created barriers to deny terrorist plans and events. The US Congress on November 19, 2001 established the Transportation Security Administration (TSA) with the enactment of the Aviation and Transportation Security Act. During TSA’s early existence, its primary emphasis was on aviation security, but today its mission is to ensure the security of the transportation of people and goods on all modes within and to and from the US. Improving access control to ports is an important component of TSA’s security mission. Port access-control measures include alarm systems, employee background checks, security patrols, perimeter fencing, terminal lighting, a closed-circuit television system and port access/egress controls on trucks and rail cars (i.e., vehicle checks). In 2002 the United Nations International Maritime Organization (IMO) ratiﬁed the International Ship and Port Security (ISPS) Code. The Code takes a risk management approach to the security of ports, by monitoring and controlling access, monitoring

the activities of people and cargo, and ensuring the availability of security communications at ports. Ports are required to have security plans, ofﬁcers and equipment. Marine terminals that serve seagoing vessels of 500 gross tonnage and upwards on international voyages were to comply with the ISPS Code by July 1, 2004. On November 25, 2002 the US Maritime Transportation Security Act (MTSA) was signed into law. The MTSA seeks to protect US ports and waterways from terrorist attacks by employing a risk-based methodology that focuses on the higher securityrisk sectors of the maritime industry. Further, the MTSA seeks to prevent security incidents in the movement of maritime cargo from shipper to consignee in the maritime supply chain. The international requirements of the ISPS Code are also a component of the MTSA. The implementations of the ISPS Code and the MTSA at US ports have resulted in more canine teams and identiﬁcation checks at these ports. Also, ﬂoating barriers provide physical protection and add a layer of defense, by stopping attacking vessels and increasing the security breach response time for authorities. Port security plans include not only access control, but staff training on how to respond to security threats. The US Coast Guard has played an aggressive role in US port security – utilizing a High Interest Vessel Boarding Program, deploying “Sea Marshals” aboard certain ships entering and leaving ports, and establishing port security zones around ships and high-risk port facilities. The Maritime Security Level (MARSEC) system was established to notify the severity of a security threat: (1) level one – a threat is possible, but not likely; (2) level two – terrorists are likely

PORT SECURITY AND SERVICE QUALITY

active in an area; and (3) level three – a threat is imminent to a given target. The security defense for US ports is much greater than just the security defense at the ports themselves. Speciﬁcally, the security defense for US ports is layered and consists of four zones: foreign port, offshore, coastal and dockside zones (Emerson and Nadeau 2003). The foreign port zone (layer 1) is a foreign port at which cargo bound for a US port is denied placement on board a ship that is bound for this US port. The offshore zone (layer 2) consists of US waters inside the 200-mile exclusive economic zone but beyond the US 12-mile territorial sea. In this zone, ships bound for US ports are required to provide an Advance Notice of Arrival at least 96 hours before arriving at a US port. The coastal zone (layer 3) consists of US waters inside the 12-mile territorial sea to the docks and piers of a US port. The US Ports and Waterways Safety Act allows the Coast Guard to establish security sub-zones within the coastal zone in order to keep waterways, vessels and ports safe from terrorist attacks. The dockside zone (layer 4) is the port itself. On March 1, 2003 the US Department of Homeland Security (DHS) was established. The DHS is responsible for strategies, standards and funding for the security of ports and other transportation infrastructures. The DHS Bureau of Customs and Border Protection (CBP) is responsible for establishing voluntary international programs that provide point-of-origin to ﬁnal destination visibility and control over containerized freight movements – the Container Security Initiative (CSI) and the Customs– Trade Partnership Against Terrorism (C–TPAT). The CSI is a bilateral agreement between the US and a foreign port, whereby the

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foreign port is to identify high-risk containerized cargo and work with deployed CBP ofﬁcers (at the foreign port) to target such cargo. Foreign ports are asked to screen containers (for dangerous cargo) before they are loaded onto US-bound ships. C–TPAT is a joint government–business initiative to build cooperative security relationships. Businesses seeking to become C–TPAT companies are required to adhere to security restrictions, i.e., a security plan that incorporates C–TPAT guidelines. The beneﬁt of C–TPAT to C–TPAT companies is the accelerated customs clearances of their shipments at US ports. A DHS compulsory program is the 24Hour Advance Manifest Rule (24-hour rule). This requires container shipping lines to provide information electronically to the CBP, at least 24 hours before departure, about container cargo on board any of their ships which is currently at a foreign port and bound for a US port as its next port of call. The submitted information allows the screening and targeting of suspected containers. On October 13, 2006 the US Security and Accountability for Every (SAFE) Port Act was signed into law. The Act seeks to strengthen US port security by establishing technology initiatives and better data-collection programs. One technology initiative is the implementation of the Transportation Worker Identiﬁcation Credential (TWIC) program, which requires background security checks and biometric credentials for all workers operating in or around US ports. The Act requires improvements in the US automatic targeting system program, which collects and analyzes container cargo data for the targeting of highrisk cargo. For example, data gathered on US-bound containers at foreign ports are to

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be encrypted and transmitted in near-real time to the CBP’s National Target Center. The Act also instructed the DHS to establish a pilot program – the Secure Freight Initiative (SFI) – to test the feasibility of onehundred percent screening of US-bound containers.1

34.3

Port Interchange Service

A port provides interchange service to cargoes, maritime-carrier vessels and surface-carrier vehicles (see Chapter 24, “Ports in Theory”); that is, cargoes, maritime-carrier vessels and surface-carrier vehicles received by a port are provided services by the port before their departure from the port. The amount of interchange service that a port can provide will depend upon the amount of resources that it utilizes in the provision of the service and the amount of cargo and the number of maritime-carrier vessels and surface-carrier vehicles that it receives for interchange service.

34.3.1 Port interchange service production and resource functions If the amount of interchange service provided by a port is the maximum amount that can be provided given the amount of resources utilized and the amount of cargo and number of maritime-carrier vessels and surface-carrier vehicles received by the port, then this relationship may be described as the port’s production function in the provision of port interchange service. If the port adheres to its production function in the provision of port interchange service, it is technically efﬁcient in providing interchange service.2 Port interchange produc-

tion functions for freight, vessel and vehicle interchange services may be expressed as (see Chapter 24): PFIS = fi (R 1, R 2,… , R s,… R S ; Cargoes) (1) PVIS = vi (R 1, R 2,… , R s,… R S ; Vessels) (2) PHIS = hi (R1, R 2,… , R s,… R S ; Vehicles) (3) where PFIS, PVIS and PHIS represent port freight, vessel and vehicle interchange services, respectively, and Rs is the sth resource, where s = 1, 2, . . . S. A port’s resource function for the sth type of resource (Rs) for interchange services relates the minimum amount of this resource to be employed by the port to the levels of its interchange service operating options and the amounts of cargo and the number of maritime-carrier vessels and surface-carrier vehicles received (Talley 1988); that is, R s = R s (Interchange Service Operating Optionn ; Cargoes, Vessels, Vehicles) s = 1, 2,… S; n = 1, 2, … N

(4)

where Optionn is the nth operating option of the port.

34.3.2 Port interchange service operating options A port’s interchange service operating options are the means by which it can differentiate the quality of its interchange services (see Chapter 24). When the port’s accident damage and loss operating options decrease (increase), the quality of the port’s interchange services increases (decreases). When the port’s reliability, accessibility and loading/unloading service-rate operating options increase (decrease), the quality of

PORT SECURITY AND SERVICE QUALITY

the port’s interchange services increases (decreases). Examples of interchange service operating options for a container port found in the literature are: • • •

•

•

•

•

•

• •

• •

• •

Accident damage to cargo in port – in dollars Theft loss of cargo in port – in dollars Departure gate reliability – the percentage of time that the port’s departure gate is open for vehicles Entrance gate reliability – the percentage of time that the port’s entrance gate is open for vehicles Berth accessibility – the percentage of time that the port’s berth adheres to the authorized depth and width dimensions Berth reliability – the percentage of time that the port’s berth is open to the berthing of ships Channel accessibility – the percentage of time that the port’s channel adheres to the authorized depth and width dimensions Channel reliability – the percentage of time that the port’s channel is open to navigation Accident damage to container ships in port – in dollars Loading service rate for container ships – containers loaded on a container ship per unit of time Theft loss of container ship property in port – in dollars Unloading service rate for container ships – containers unloaded from a container ship per unit of time Accident damage to vehicles in port – in dollars Loading service rate for vehicles – containers loaded on a vehicle per unit of time

• •

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Theft loss of vehicle property in port – in dollars Unloading service rate for vehicles – containers unloaded from a vehicle per unit of time. (Talley 2006)

A container port interchange service operating option not listed in Subsection 34.3.2 is the service rate for stored containers, i.e., stored containers per unit of storage time. When this rate increases (decreases), the port incurs a decrease (increase) in quality of service, since by being in storage containers are not passing through the port to generate greater port interchange service. Rather than using the operating option “service rate for stored containers,” container ports normally use its reciprocal, container dwell time or storage time per stored container, as an interchange service operating option. When dwell times for containers decrease (increase), the quality of the port’s container interchange services increases (decreases). Port service quality perception measures also appear in the literature. However, these measures are generally not port interchange service operating options. Port service quality perception measures are generally viewed from the perspective of port users, i.e., carriers and shippers, whereas port interchange service operating options are viewed from the perspective of the port (or its operator). Port service quality perception measures considered by Ugboma, Ogwude, Ugboma and Nnadi (2007) include tangibles (e.g., modern cargo-handling equipment), reliability (e.g., delivers on promises), responsiveness (e.g., little waiting time for ships to get service), assurance (e.g., handles complaints in a timely fashion) and empathy (e.g., informs promptly of any problems).

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Port service quality perception measures considered by Ha (2003) include port tangibles (e.g., the physical condition of the inland multimodal network), reliability (e.g., the expertise of port labor), responsiveness (e.g., effective resolution of ship and cargo claims) and convenience (e.g., reduction in ship turnaround time). Pantouvakis (2006) also considers the perception measures port tangibles (e.g., the physical condition of berthing facilities), reliability (accuracy in cargo pickup and delivery), and empathy (e.g., individual attention to customers).3

34.4

Port Security Service

A port’s security service production function is the relationship between the maximum amount of security service that a port can provide and the amounts of security resources used by the port in the provision of this service and the amount of cargoes and number of maritime-carrier vessels and surface-carrier vehicles received by the port. If the port adheres to its security service production function in the provision of security service, the port will be technically efﬁcient in providing this service. The port’s security service production function may be expressed as: PSS = ps(R1, R 2,… , R t,… R SR ; Cargoes, Vessels, Vehicles) t = 1, 2, … SR

resource function relates the minimum amount of a security resource Rt to be employed by the port to its levels of security service operating options and cargoes, vessels and vehicles received by the port. This function may be expressed as: R t = sr(Security Service Operating Optionso ; Cargoes, Vessels, (6) Vehicles) t = 1, 2, … SR; so = 1, 2, … … SO Port security service operating options are the means by which the port can vary the quality of its security service. A container port, for example, can improve the quality of its security service by increasing its security inspection rates and frequencies. Examples of container port security operating options are: •

•

•

• (5)

Port security resources Rt include, for example, security inspection personnel and equipment. A port security service resource function similar to its interchange service resource function also exists. A port’s security service

•

•

Container security inspection rate – percent of containers that are inspected per unit of time Mobile equipment security inspection frequency – number of times that mobile equipment is inspected per unit of time Departure gate security inspection frequency – number of times that the departure gate is inspected per unit of time Entrance gate security inspection frequency – number of times that the entrance gate is inspected per unit of time Berth security inspection frequency – number of times that the berth is inspected per unit of time Channel security inspection frequency – number of times that the channel is inspected per unit of time

PORT SECURITY AND SERVICE QUALITY

•

Ship security inspection rate – percent of ships that are inspected per unit of time • Vehicle security inspection rate – percent of vehicles that are inspected per unit of time • Storage yard security inspection frequency – number of times that the storage yard is inspected per unit of time If a port’s security service has a negative impact on the quality of its interchange service, for example by interfering with the service and thus slowing it down, then an increase in the port’s security service will lower the quality of its interchange service, all else held constant. Alternatively, a port’s security service may have a positive impact on the quality of its interchange service; for example, an increase in security inspections of port cargo storage areas may result in a decrease in port cargo theft, all else held constant. The non-intrusive inspection of containers at a port by scanning and radiation detection can have a negative impact on the port’s quality of container interchange service in several ways. First, if the security operating option – the container security inspection rate for non-intrusive inspections – is increased, containers may have to wait in inspection queues, so that they sit idle or in storage for longer than in the absence of these inspections. In this case, the increase in the container security inspection rate will lead to an increase in the interchange service operating option, service rate for stored containers (stored containers per unit of storage time), thereby reducing the port’s quality of container interchange service. Second, container inspection delays may arise not only because of inadequate scan-

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ning and radiation detection capacity but because the equipment generates more alarms than there are inspection workers to resolve. Third, redirecting containers through a centrally located inspection facility, and therefore diverting them from their usual port ﬂow pattern, has the potential to generate signiﬁcant container port congestion (Bakshi, Flynn and Gans 2009). If the quality of a port’s security service affects the quality of its interchange services, it may be inferred that the interchange service operating options of the port are a function of its security service operating options, i.e., Interchange Service Operating Optionn = h(Security Service Operating Optionso ) (7) n = 1, 2, … N; so = 1, 2, … SO If changes in a port’s security service operating options lead to a decrease (increase) in the quality of the port’s interchange services, then the port’s security service has had a negative (positive) impact on the quality of the port’s interchange services.

34.5

An Empirical Analysis

It is well known that an increase in port security inspections can have a negative effect on the quality of a port’s interchange services. For example, the one-hundred percent scanning of containers at a container port can create congestion in the ﬂow of containers at the port and thus have a negative impact on, for example, the speed at which containers can be loaded onto and unloaded from ships and road and railroad vehicles. However, it is unclear whether an increase in port security inspections can

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have a positive impact on the quality of port interchange services. This question was investigated using information gathered from an e-questionnaire4 that was constructed and e-mailed to worldwide container ports and marine terminals in a database found in Containerisation International (2009). Operators of nineteen container ports and marine terminals – in Australasia, China, Europe, North America and South America – responded to the questionnaire. A sample questionnaire appears in the Appendix. It consists of 16 questions. In questions 1 through 7, the respondent is asked to provide the name of the port or terminal and his or her name, department within the port or terminal, job title, phone number, fax number and e-mail address. The remaining questions, 8 through 16, ask the respondents to assess whether the quality of interchange service (as measured by a given interchange service operating option listed in Subsection 34.3.2) could be enhanced by improving the quality of the security service (as measured by increases in the nine security service operating options listed in Section 34.4). Questions 8 through 11 indicate that the quality of port interchange service improves as a result of an increase in the given container port interchange service operating option. Questions 12 through 16 show that the quality of port interchange service improves if the given container port interchange service operating option decreases. For the nine port security service operating options under each of the questions 8 through 16, the quality of port security service improves if the port security service operating options increase. Respondents to questions 8 through 16 were asked to rank their responses on a

5-point scale (1 = strongly disagree, 2 = disagree, 3 = neutral, 4 = agree and 5 = strongly agree). Consequently, each respondent was asked to make a total of 81 responses related to these questions – nine interchange service operating options multiplied by nine security service operating options. In order to test (using these responses) whether an improvement in the quality of a container port’s security service will result in an improvement in the quality of the container port’s interchange service (i.e., whether a positive relationship exists between a container port’s quality of interchange service and its quality of security service), t-tests of arithmetic means were performed. Speciﬁcally, 81 arithmetic means were computed based upon the 19 responses to each of the 81 questions. The 81 arithmetic means appear in Table 34.1. The nine security service operating options in the table are labeled “a” through “i.” The arithmetic means in Table 34.1 were used to compute t-statistics to test whether these arithmetic means could have come from a sampling distribution of means with a population mean of 3 (denoting neutral in the respondents’ rankings). An estimate of the standard deviation of the sampling distribution of means is obtained by dividing the standard deviation of the 19 responses for each question by the square root of the sample size (19 observations). The t-statistics in the ﬁnal column of Table 34.1 were determined by taking the difference between the sample mean and the assumed population mean of 3 (for the sampling distribution of means) and dividing this difference by the estimate of the standard deviation of the sampling distribution of means in column 4 in the table. The absolute values of the critical t-values for tests

Table 34.1 An empirical analysis of port interchange versus port security service operating option responses Survey question a_8 b_8 c_8 d_8 e_8 f_8 g_8 h_8 i_8 a_9 b_9 c_9 d_9 e_9 f_9 g_9 h_9 i_9 a_10 b_10 c_10 d_10 e_10 f_10 g_10 h_10 i_10 a_11 b_11 c_11 d_11 e_11 f_11 g_11 h_11 i_11 a_12 b_12 c_12 d_12

Arithmetic mean

Std. dev.

Std. dev/ n

2.10526 2.21053 2.63158 2.36842 2.26316 2.10526 2.26316 2.31579 2.47368 2.10526 2.26316 2.47368 2.42105 2.42105 2.31579 2.42105 2.42105 2.26316 2.05263 2.36842 2.42105 2.47368 2.31579 2.21053 2.26316 2.26316 2.31579 2.73684 2.89474 2.89474 2.63158 3.10526 3.05263 2.73684 2.47368 2.42105 3.31579 2.94737 3.31579 3.21053

0.80930 0.91766 1.01163 1.01163 0.99119 0.80930 0.93346 1.05686 0.96427 0.80930 0.87191 1.07333 0.90159 1.12130 1.05686 1.07061 0.96124 0.80568 0.70504 1.01163 0.96124 1.02026 1.00292 0.91766 0.99119 0.99119 0.82007 1.14708 0.99413 1.10024 1.11607 1.24252 1.22355 1.19453 0.90483 0.76853 1.15723 1.22355 1.05686 1.18223

0.18567 0.21053 0.23208 0.23208 0.22739 0.18567 0.21415 0.24246 0.22122 0.18567 0.20003 0.24624 0.20684 0.25724 0.24246 0.24561 0.22052 0.18484 0.16175 0.23208 0.22052 0.23406 0.23009 0.21053 0.22739 0.22739 0.18814 0.26316 0.22807 0.25241 0.25604 0.28505 0.28070 0.27404 0.20758 0.17631 0.26549 0.28070 0.24246 0.27122

t-statistic −4.8190 −3.7500 −1.5875 −2.7213 −3.2404 −4.8190 −3.4408 −2.8219 −2.3792 −4.8190 −3.6836 −2.1374 −2.7990 −2.2506 −2.8219 −2.3571 −2.6253 −3.9865 −5.8571 −2.7213 −2.6253 −2.2486 −2.9737 −3.7500 −3.2404 −3.2404 −3.6368 −1.0000 −0.4615 −0.4170 −1.4389 0.3693 0.1875 −0.9603 −2.5355 −3.2836 1.1895 −0.1875 1.3024 0.7762 (Continued)

Table 34.1 (Continued) Survey question e_12 f_12 g_12 h_12 i_12 a_13 b_13 c_13 d_13 e_13 f_13 g_13 h_13 i_13 a_14 b_14 c_14 d_14 e_14 f_14 g_14 h_14 i_14 a_15 b_15 c_15 d_15 e_15 f_15 g_15 h_15 i_15 a_16 b_16 c_16 d_16 e_16 f_16 g_16 h_16 i_16

Arithmetic mean

Std. dev.

Std. dev/ n

t-statistic

3.31579 3.15789 3.42105 2.94737 2.68421 2.89474 3.36842 2.63158 2.89474 2.73684 2.47368 2.89474 3.10526 3.00000 2.78947 2.47368 3.36842 2.78947 2.94737 2.94737 2.89474 2.52632 2.47368 3.05263 2.78947 2.89474 3.26316 2.89474 2.68421 2.84211 2.84211 2.57895 3.52632 3.31579 3.42105 2.68421 3.52632 3.73684 3.73684 3.31579 2.94737

1.20428 1.16729 1.12130 1.02598 0.94591 1.19697 1.21154 0.95513 1.19697 0.99119 0.84119 1.10024 1.19697 1.15470 1.13426 0.96427 1.21154 1.18223 1.07877 1.12909 1.19697 0.90483 0.84119 1.22355 1.03166 1.10024 1.28418 1.10024 1.05686 1.16729 1.01451 0.90159 1.26352 1.24956 1.21636 1.15723 1.17229 1.04574 1.04574 1.20428 1.17727

0.27628 0.26780 0.25724 0.23538 0.21701 0.27460 0.27795 0.21912 0.27460 0.22739 0.19298 0.25241 0.27460 0.26491 0.26022 0.22122 0.27795 0.27122 0.24749 0.25903 0.27460 0.20758 0.19298 0.28070 0.23668 0.25241 0.29461 0.25241 0.24246 0.26780 0.23275 0.20684 0.28987 0.28667 0.27905 0.26549 0.26894 0.23991 0.23991 0.27628 0.27008

1.1430 0.5896 1.6368 −0.2236 −1.4552 −0.3833 1.3255 −1.6813 −0.3833 −1.1573 −2.7273 −0.4170 0.3833 0.0000 −0.8090 −2.3792 1.3255 −0.7762 −0.2127 −0.2032 −0.3833 −2.2819 −2.7273 0.1875 −0.8895 −0.4170 0.8932 −0.4170 −1.3024 −0.5896 −0.6784 −2.0357 1.8157 1.1016 1.5089 −1.1895 1.9570 3.0713 3.0713 1.1430 −0.1949

PORT SECURITY AND SERVICE QUALITY

of signiﬁcance for 18 degrees of freedom (sample size minus 1) for one-tailed tests at the .05 and .01 levels of signiﬁcance are 1.734 and 2.552, respectively. Note that for all sample means for questions 8 through 10, the t-statistics are negative and statistically signiﬁcant at least at the ﬁve percent level, suggesting that improvements (or increases) in container port quality of security service do not result in improvements in the quality of interchange service where the latter is measured in terms of container port loading/unloading service rates for ships, for road and railroad vehicles, and for port cargo-handling equipment. In question 11, on security service operating options, for frequency of berth and channel security inspection the t-statistics are negative and signiﬁcant at the one percent level, suggesting that improvements (or increases) in these measures of quality of security service do not result in improvements in the quality of interchange service measured as the reliability of port entrance and departure gates. The t-statistics for the remaining security service operating options in question 11 are statistically insigniﬁcant, also suggesting that improvements in these security service operating options do not result in improvements in the reliability of the port’s entrance and departure gates. The t-statistics for question 12 and its security service operating options are statistically insigniﬁcant, suggesting that improvements (or increases) in the quality of security service will have no effect on the quality of interchange service via the accident damage cost to port cargo. For question 13, the t-statistic for an increase in the frequency of departure gate security inspection is statistically signiﬁcant, suggesting

711

(with a negative t-statistic) that an increase in this inspection will not result in an improvement or the lowering of accident damage cost to ships in port. For question 14, the t-statistics for the security service operating options – ships are security-inspected, frequency of berth security inspection and of channel security inspection – are statistically signiﬁcant, suggesting (with negative t-statistics) that an improvement in these security operating options will not result in an improvement in the quality of interchange service via the accident damage cost to road and railroad vehicles. For question 15, only the t-statistic for an increase in the frequency of channel security inspection is statistically signiﬁcant, suggesting (with a negative t-statistic) that an increase in the frequency of this inspection will not result in an improvement or lowering in accident damage cost to port cargo-handling equipment. For question 16, the t-statistics for the security service operating options – throughput is security-inspected, frequency of entrance gate security inspection, of departure gate security inspection and of storage yard security inspection – are statistically signiﬁcant, suggesting (with positive tstatistics) that improvements (increases) in these security operating options will result in an improvement (a decrease) in port cargo theft. These results provide evidence that improvements in the quality of container port security service can result in improvements in the quality of container port interchange service. Speciﬁcally, the empirical results suggest that increases in certain container port security inspections can reduce port cargo theft, thereby improving a container port’s quality of container port interchange service.

712

34.6

WAYNE K. TALLEY AND VENUS Y. H. LUN

Summary

An increase in security inspections of containers at a container port may result in container inspection delays at the port, resulting in containers waiting in inspection queues, sitting idle or in storage for longer. Thus, the container inspection delays will have had a negative effect on the quality of the container port’s interchange service – requiring more time for containers to pass through the port or to be interchanged, all else held constant. Can an increase in a port’s security inspections also have a positive effect on the port’s interchange services, that is, result in a improvement in the quality of the port’s interchange services? This question was addressed empirically by analyzing the responses to a questionnaire that was sent to container ports and marine terminals found in Containerisation International (2009). The questionnaire asked respondents to answer questions on whether increases (or improvements) in container port security service operating options would have a positive effect on container port interchange service operating options. The means by which a port can vary the quality of its security service are its security service operating options (e.g., container security inspection rate and entrance gate security inspection frequency). The means by which a port can vary the quality of its interchange services are its interchange service operating options (e.g., entrance gate reliability, loading service rate for container ships, and berth accessibility). The results of the empirical analysis suggest that increases in the security service operating options – throughput is securityinspected, frequency of entrance gate secu-

rity inspection, of departure gate security inspection and of storage yard security inspection – will result in an improvement (a decrease) in the interchange service operating option port cargo theft. These results provide evidence that improvements in the quality of container port security service can result in improvements in the quality of container port interchange service. Appendix: Questionnaire Q1. Q2. Q3. Q4. Q5. Q6. Q7. Q8.

Name of port or marine terminal Your name Name of your department/division/ section/unit Your job title Your phone no. Your e-mail address Your fax no. The loading/unloading service rates for ships at a port (i.e., the speed at which cargo can be loaded and unloaded to and from ships) can be improved if: a. More throughput is securityinspected b. More ships are securityinspected c. More road and railroad vehicles are security-inspected d. More port cargo-handling equipment is security-inspected e. Frequency of entrance gate security inspection is increased f. Frequency of departure gate security inspection is increased g. Frequency of storage yard security inspection is increased h. Frequency of berth security inspection is increased i. Frequency of channel security inspection is increased

PORT SECURITY AND SERVICE QUALITY

Q9.

The loading/unloading service rates for road and railroad vehicles at a port (i.e., the speed at which cargo can be loaded to and from road and railroad vehicles) can be improved if: a. More throughput is securityinspected b. More ships are securityinspected c. More road and railroad vehicles are security-inspected d. More port cargo-handling equipment is security-inspected e. Frequency of entrance gate security inspection is increased f. Frequency of departure gate security inspection is increased g. Frequency of storage yard security inspection is increased h. Frequency of berth security inspection is increased i. Frequency of channel security inspection is increased Q10. The loading/unloading service rates for port cargo-handling equipment at a port (i.e., the speed at which cargo can be loaded to and from port cargo-handling equipment) can be improved if: a. More throughput is securityinspected b. More ships are securityinspected c. More road and railroad vehicles are security-inspected d. More port cargo-handling equipment is security-inspected e. Frequency of entrance gate security inspection is increased f. Frequency of departure gate security inspection is increased g. Frequency of storage yard security inspection is increased

h.

713

Frequency of berth security inspection is increased i. Frequency of channel security inspection is increased Q11. The reliability of entrance and departure gates at a port (i.e., the ability of the port’s entrance and departure gates to process road and railroad vehicles at their designed standards) can be improved if: a. More throughput is securityinspected b. More ships are securityinspected c. More road and railroad vehicles are security-inspected d. More port cargo-handling equipment is security-inspected e. Frequency of entrance gate security inspection is increased f. Frequency of departure gate security inspection is increased g. Frequency of storage yard security inspection is increased h. Frequency of berth security inspection is increased i. Frequency of channel security inspection is increased Q12. The accident damage (in cost) to cargo at a port will decrease if: a. More throughput is securityinspected b. More ships are securityinspected c. More road and railroad vehicles are security-inspected d. More port cargo-handling equipment is security-inspected e. Frequency of entrance gate security inspection is increased f. Frequency of departure gate security inspection is increased

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WAYNE K. TALLEY AND VENUS Y. H. LUN

g.

Frequency of storage yard security inspection is increased h. Frequency of berth security inspection is increased i. Frequency of channel security inspection is increased Q13. The accident damage (in cost) to ships at a port will decrease if: a. More throughput is securityinspected b. More ships are securityinspected c. More road and railroad vehicles are security-inspected d. More port cargo-handling equipment is security-inspected e. Frequency of entrance gate security inspection is increased f. Frequency of departure gate security inspection is increased g. Frequency of storage yard security inspection is increased h. Frequency of berth security inspection is increased i. Frequency of channel security inspection is increased Q14. The accident damage (in cost) to road and railroad vehicles at a port will decrease if: a. More throughput is securityinspected b. More ships are securityinspected c. More road and railroad vehicles are security-inspected d. More port cargo-handling equipment is security-inspected e. Frequency of entrance gate security inspection is increased f. Frequency of departure gate security inspection is increased g. Frequency of storage yard security inspection is increased

h.

Q15.

Q16.

Frequency of berth security inspection is increased i. Frequency of channel security inspection is increased The accident damage (in cost) to port cargo-handling equipment at a port will decrease if: a. More throughput is securityinspected b. More ships are securityinspected c. More road and railroad vehicles are security-inspected d. More port cargo-handling equipment is security-inspected e. Frequency of entrance gate security inspection is increased f. Frequency of departure gate security inspection is increased g. Frequency of storage yard security inspection is increased h. Frequency of berth security inspection is increased i. Frequency of channel security inspection is increased The theft (in cost) of cargo at a port will decrease if: a. More throughput is securityinspected b. More ships are securityinspected c. More road and railroad vehicles are security-inspected d. More port cargo-handling equipment is security-inspected e. Frequency of entrance gate security inspection is increased f. Frequency of departure gate security inspection is increased g. Frequency of storage yard security inspection is increased h. Frequency of berth security inspection is increased

PORT SECURITY AND SERVICE QUALITY

i.

Frequency of channel security inspection is increased

Notes 1

For further discussion of US port security, see Pinto, Rabadi and Talley (2008). For discussions of EU and Asian port security, see Pallis and Vaggelas (2008) and Ng and Gujar (2008), respectively. 2 For a discussion of ports and technical efﬁciency, see Cheon, Dowall and Song (2010), Cullinane (2002), Dowd and Leschine (1990), Kim and Sachish (1986), Song, Cullinane and Roe (2001), Wang, Cullinane and Song (2005) and Yan, Sun and Liu (2009). 3 Discussions of port competition and quality of service are found in Lam and Yap (2006) and Yeo and Song (2006). 4 Source: https://mydoc.polyu.edu.hk/ mysurvey/public/survey.php?name= lgtjlauy_port_security_port_performance_ copy.

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Transportation Economics, 16. Amsterdam: Elsevier. Talley, W. K. (2009) Port Economics. Abingdon, Oxon: Routledge. Talley, W. K. (2011) One-hundred percent scanning of port containers: the impact on maritime transport chains. In K. Cullinane (ed.), The International Handbook of Maritime Economics, pp. 207–11. Cheltenham, Glos.: Edward Elgar. Ugboma, C., I. C. Ogwude, O. Ugboma and K. Nnadi (2007) Service quality and satisfaction measurements in Nigerian ports: an explora-

tion. Maritime Policy and Management 34: 331–46. Wang, T.-F., K. Cullinane and D.-W. Song (2005) Container Port Production and Economic Efﬁciency. Basingstoke: Palgrave Macmillan. Yan, J., S. Sun and J. Liu (2009) Assessing container operator efﬁciency with heterogeneous and time-varying production frontiers. Transportation Research Part B 43: 172–85. Yeo, G.-T. and E.-W. Song (2006) An application of the hierarchical fuzzy process to container port competition: policy and strategic implications. Transportation 33: 409–22.

Index

Page numbers in italics refer to tables and ﬁgures. accident studies 335–6 model 336–7 data 337 estimation procedures 337–9 estimation results 340, 341 marginal effects 340–2, 343 accidents collisions 293–4, 460, 465 Herald of Free Enterprise 290, 299 oil tankers 211, 295–6, 300, 301, 454 ship losses and freight rate 217 administrative expenses 376 Africa 76–7, 258 British Royal Africa Company 38 age of exploration and early modern period 36–9 age proﬁle of seafarers 327–8 air pollution (MARPOL) 297 Algerian gas 64 Alizadeh, A.H. 434 and Nomikos, N.K. 433–4 alumina and bauxite 79, 190–2 aluminium smelting 79–81 American Institute All Risk Cargo Clauses (AIMU) 463, 464 American Institute Hull Clauses (AIHC) 458–9, 460, 461, 462, 465–7

anti-trust/competition regulation 275 Antwerp Hamburg range (Rotterdam/Bremerhaven) 564–5, 566 port labour 535–6, 540 armed personnel and escort services 359–60 Asia container shipping industry growth 232–3 Far East cruise market 150–2, 155, 156 port commercialization 537–9 see also speciﬁc countries and ports asset management, container shipping industry 233–9 asset price risk 386–7 Associated British Ports (ABP) 539 auditing (port security) 688–9, 690 Audretsch, D. 135–6 and Mahmood, T. 134–5 Australia 68, 69, 70, 71, 75 port labour 519, 520 Balance of Payments Test 306–7 Baltazar, R. and Brooks, M.R. 495–6 Baltic Exchange: freight indices 108, 109, 198, 214–15, 384–5

The Blackwell Companion to Maritime Economics, First Edition. Edited by Wayne K. Talley. © 2012 Blackwell Publishing Ltd. Published 2012 by Blackwell Publishing Ltd.

718 Bangladesh: piracy 364, 365 banks 265 crises 394, 403 derivatives 388 ﬁnance/loans 392, 393, 394, 398, 400, 409, 422–3, 428, 433 investment 394, 394–7, 399, 401, 418, 420, 422, 428 ship ownership 211 Barton, H. and Turnbull, P. 535–6 basis risk 387–8 bauxite and alumina 79, 190–2 Belgium: ship register 317 Bell, D. 518 Berglund, A. 20 Bergstrad, S. 304 BIMCO/ISF: seafarer supply study 322, 323 Bird, J. 23 Black Sea 57 Blue Riband 41 boards, port governance 505–8, 509–10 bond market see high-yield bond market, US book-building underwriting agreement 399 Brazil 70, 71, 76, 79 Bremen cog 36 Bremer/Bremerhaven 40, 540 Antwerp–Hamburg range 564–5, 566 British East India Company 37 British Royal Africa Company 38 Brooks, M.R. 495, 505, 508, 615 and Cullinane, K. 491–2, 494, 504 et al. 505 and Pelot, R. 674, 675 bulk carriers SOLAS 291 see also speciﬁc types bunker fuel see fuel business models and strategies 263–4, 265–8, 277–8 archetypes 268–74 innovating 273–4 operating 271–3 owning 268–70, 276–7 using 270–1, 272 changes 264–5

INDEX

combining 275–7 competitive and cooperative strategies 274–5 integrated approach 264–5 Canada 75, 77 port governance models 494, 502, 505 see also North America Canadian Paciﬁc Railway Company (car ferry) 164 capital costs 210, 376 capital investment 265 capital-intensive nature of container shipping 233–9 car carrier business 275 car ferries 164 cargoes costs/expenses 376, 380–1, 382 SOLAS 289–90 insurance 463–5 see also dry bulk commodities; dry bulk shipping; liner shipping; liquid bulk shipping; oil; shipping business: historical development; entries beginning freight Caribbean cruise market 149–50, 151, 152 Cariou, P. et al. 666 and Wolff, F.-C. 657, 666 casualism see under port labour catamaran ferries 173–4 CCR model of efﬁciency 576 CEC (Commission of the European Communities) 519–20, 541 Centre for Economics and Business Research (CEBR) 304–5 Charnes, A. et al. (CCR model of efﬁciency) 576 charters business model 270–1 contract duration 201–2 contract types, dry bulk shipping 198–9 trip time (TTC) 188–9, 198, 199 rates 111–12, 116, 201–2, 214, 219, 244 research 28 vs ship ownership 208–9, 210, 375–6

INDEX

China container shipping industry growth 83, 232, 233 container terminals 575 dry bulk cargoes 192–3, 195–6 coal 68, 69, 70 grains 75, 76 minor 79–81 steel 71–3 ferry market 165 gas (LNG) imports 64 oil and reﬁned products 56–7, 58, 60, 61 Petro Ranger oil tanker hijacking 354–7 port competitiveness 560–4 seafarers 323, 325 shipbuilding 196 see also Hong Kong; Singapore Chinamax 193 classiﬁcation societies 282–3, 334–5 Clermont (passenger steamboat, US) 39 climate change see emissions reduction climate conditions 70, 224 coal 65–70, 112, 114, 192 coastal states enforcement of regulations 285 piracy 349, 350 coastal trade China 196 historical 38, 42 Code of Safe Working Practices (COSWP), UK 300 Cold War era 46–8 collisions 293–4, 460, 465 combination carriers 208 communication and information technology 289, 359, 610, 611 competition anti-trust regulation 275 and cooperative business strategies 274–5 see also port competition; port competitiveness consulting ﬁrms 273 Container Security Initiative (CSI) 703 container shipping capacity see TEU (twenty foot unit) capacity concentration 117–18, 253 capacity management 233–44

719

asset management and capital-intensive nature 233–9 vessel size 239–41 cargoes 82–3 charter rates 111–12, 116 development 22–3, 24, 46–7, 122–4, 230–1 extended scope of operations see intermodalism growth of industry 231–3, 380 impacts 518–19, 530–6, 624 liner services 230, 251–7 network dynamics 258–9 operational strategies to absorb overcapacity 241–4 pricing and revenue stream risks 244–51 additional items and surcharges 247–51 freight rates and pricing problems 108, 113, 244–7 scale increases via operational agreements and M&As 251–7 Seaspan 268–70 service characteristics 115–18 trade routes 83–4, 112–14, 246–7, 250–1 container terminals governance 504, 505, 506, 507 interchange service 705 security service 706–7 see also intermodalism; port competitiveness container terminals: efﬁciency and private sector participation 571–3, 591–5 assessment 583–6 data collection 578–81 sample size 578 sample speciﬁcation 578–9 variable speciﬁcation 579–81 efﬁciency vs scale of operation (throughput) 589–91, 592–3 literature review 573–5 methodology: data envelope analysis (DEA) 575–8 advantages 576–7 and other models 575–7, 581–2, 587–8, 589–91 and Tobit model 577–8, 584–6, 589–90

720 container terminals: efﬁciency and private sector participation (continued) private sector participation 587–9 research questions 573 future 594–5 results 581–3 aggregate efﬁciency estimates 581–2 country-speciﬁc estimates 582–3 time effects 583 container-on-ﬂatcar (COFC) trains 125 contracts cargo 64, 71 historical perspective 17 see also under charters Convention on the International Regulations for the Prevention of Collisions at Sea (COLREGs) 293–4 Copenhagen Malmö Port (CMP) 647–51 costs/expenses 95–100 internal vs external 100 liquid bulk shipping 210–11 long-run – multi-service carrier 97–8 long-run – single-service carrier 95–7 non-shared vs shared 99–100 port carrier service 486–7 port choice 609 port labour 534 reduction strategies 318 short run 98–9 see also under ship economics Council of Supply Change Management Professionals 607 credit risk 387 crew brokerage ﬁrms 272 expenses 376 see also seafarers crude oil tankers Baltic Exchange Index (BDTI) 214–15 types 208 crude oil trade 53–8, 62 cruise ferries 164 cruise liners 138 current market and economics 142–52 expenses 143–6 markets and itineraries 146

INDEX

passenger market maps 146–52 revenue sources 142–3 future perspectives and trends expansion and growth 153–6 implications for researchers and practitioners 158–9 ships 152–3 historical development 138–42 1970s 140 1980s: business model reﬁnement 140–1 1990s: ﬂeet and product expansions 141 2000s: evolution and revolution 141–2 Cullinane, K. 434, 571 and Brooks, M.R. 491–2, 494, 504 et al. 572, 574, 575, 577, 599, 608 and Gong, X. 404 and Song, D.-W. 574, 693 Wang, T.F. and 578, 579, 580, 587, 590 Currency Adjustment Factor (CAF) 248 Customs–Trade Partnership Against Terrorism (C–TPAT), US 703 data envelope analysis (DEA) see under container terminals: efﬁciency and private sector participation Davies, S.C.J. et al. 520, 521 de Langen, P.W. 646 deadweight tonnage 408 debt ﬁnance 392, 394 see also high-yield bond market, US Dekker, S. 625 et al. 629 demand side 100–3, 485–7 carriers 486–7 ferry market 164–8 freight 101–2 liquid bulk shipping 205–8 passengers 102–3, 485–6 see also port demand demolition/scrap 376 prices containers 241 and freight rate 220, 221 volume and freight rate 216 Denmark Copenhagen Malmö Port (CMP) 647–51 seafarers 324–5, 327

INDEX

Skuldelev longships 35 see also Maersk Line Department for Transport (DfT), UK 298–9, 324 depreciation 377 tax allowances 309 derivatives ﬁnancial 385, 388 hedging 385, 387–8 see also freight derivatives Devlin, Lord/Devlin Committee 519, 526, 527–8, 533 Dickinson, M. 317 diesel cargoes 60 disclosure duty (insurance) 455–7 discrimination (seafarers) 328–9 Dock Labour Compensation Scheme (DLCS) 539 dockworkers see port labour door-to-door services see intermodalism Dover Strait ferry service 178–9 Drewry 201, 245, 246, 323–4 dry bulk commodities 190–2 coal 65–70, 112, 114, 192 general/‘other’ 81–4, 112, 115–16 grains 74–9 iron ore 65–71, 112, 114, 192–3 minor 79–81 steel 71–4 dry bulk shipping 187–8, 202–3 contemporary markets 188–93 cargoes see dry bulk commodities deﬁnitions 188–9 stability and adaptation 189–90 trends 192–3 freight rate cycle 108, 110 international division of labour 193–7 distribution/ownership 195–7 product-life cycle perspective (size and adaptation) 195 market dynamics 187–8 market practices 197–202 research literature 27–8 Dunne, T. et al. 132, 133, 135 early modern period, age of exploration and 36–9

721

Eastern Mediterranean see container terminals: efﬁciency and private sector participation economic linkage analysis 641 economies of scale 115, 633, 644 effectiveness/efﬁciency 103–4 freight markets 113–14 port 487–8 port choice 607–8 port investment and ﬁnance 623–5 see also container terminals: efﬁciency and private sector participation emissions reduction 297, 379, 389 English language skills of seafarers 327 Environmental Efﬁciency Design Index (EEDI) 389 environmental issues emissions reduction 297, 379, 389 IMO regulation 295–7, 302, 389 MARPOL Convention 283, 295, 296–7, 379 oil tanker accidents 211, 295–6, 300, 301, 454 Erika tanker accident 300, 301 Europe/European Union (EU) container shipping 124, 125, 233 enforcement of maritime regulations 300–1 ferry market 166–7, 168–73 gas (LNG) import terminals 65 grains 75, 76, 77 liner conferences 117, 118, 242, 250, 251 oil and oil products 57–8, 60 oil tanker regulation 211 Paris MoU (Memorandum of Understanding) 284–5, 344, 657 passenger market 150, 153, 154, 158 ports competitiveness 564–5 governance models 494, 500–2, 505, 506, 508 labour 519–20, 540–1 maritime cluster 305–6 security 676, 690 Single Market Programme 574 steel products 73 taxation systems 312–14, 315, 324 see also speciﬁc countries

722

INDEX

European Combined Terminals (ECT) 540 European Maritime Safety Agency (EMSA) 300, 301 Evergreen 251, 256, 258, 538, 558, 560 Exxon Valdez oil tanker accident 295–6 ferries deﬁnitions and types 161–3 Herald of Free Enterprise sinking 290, 299 historical development 163–4 ferry market demand side 164–8 European 166–7 preferences 167–8 world distribution 165 industry attractiveness 179–81 market structure 176–9 competition effects 178–9 strategic types 176–7 technological developments 177–8 supply side 168–73 choice of technology 173–5 European 168–73 non-European 169 second-hand 175–6 shipbuilders’ role 173 ﬁnancial crisis (2008) impacts bank lending 393, 403, 409, 410n, 422 container shipping 241, 242–3, 245, 248, 253–6 dry bulk shipping 189, 198, 200–1 Flag States Audit Scheme 300 ﬂag states 48 armed personnel on board ships 359 responsibilities 281–2, 283–5 ﬂags of convenience 48, 210–11, 318, 334 deﬁnitions 284, 304 ﬁnancial deterrents 307 ITF campaign against 330 Fleming, D. 52 ﬂeute cargo vessels 37 Flying P Liners 43, 44, 50n Fokas, T. 350 former Soviet (FSU) countries 57–8, 60, 61, 73, 75 forward ship value agreements (FOSVAS) 434

Fouché, H. 360–2 France Algerian gas 64 Dover Strait ferry service 178–9 Paris MoU (Memorandum of Understanding) 284–5, 344, 657 port labour 535 freight derivatives 384–5, 433–5, 447–8 forward agreements (FFAs) 265, 271, 384–5, 388 and ship prices 435–7 cointegration and causality 439–42 data and methodology 437–9 estimation results 443–7 long- and short-term correlation 439 minimum variance hedge ratio 442–3 stationary bootstrap procedure 446–7, 448–9 freight markets 107–8, 118–19 service characteristics liner and container shipping 115–18 tramp and bulk shipping 114–15 shipping networks/trade routes 112–14 efﬁciency 113–14 fragmentation of production 113 transportation demand 101–2 freight rates and charter rates 111–12, 201–2, 214 containers 108, 113, 244–7 cycles 108–12 historical perspective 19 oil tankers 213–24 required (RFR) 375 risk 284 fuel bunker prices 248, 385 costs and speed reduction 377, 378, 379, 380, 381 energy (E) see maritime transportation service and goods services 224 over-the-counter (OTC) bunker agreements 385 surcharges 248 Fulton, R. 39 Fusillo, M. 118, 253, 317 future market and freight rate 218, 219

INDEX

gantry cranes 475, 517, 542, 608 garbage disposal (MARPOL) 296–7 Gardner, B.M. 306–7 Garmon, T. 354 gas (LNG/LPG) 61–5, 66–7, 208 gasoline cargoes 60 general average and salvage 465 general cargo/’other dry’ 81–4, 112, 115–16 geopolitical events 224 Germany Bremen cog 36 historical perspective 42–3, 44–5 port labour 535–6, 540 ship ﬁnance 317 see also Bremer/Bremerhaven Glen, D. 110, 198, 625 and Marlow, P. 323 and Martin, B. 206, 210 global economic growth 224 Gordon, P.J.E. et al. 674, 676, 677 Goss, R.O. 16, 17, 22, 23, 491, 625 and Marlow, P.B. 318 Götenborg: port governance 501 Goulielmos, A.M. 25 governments port security responsibilities 678, 679 see also ﬂag states; entries beginning public grains 74–9 Grammenos, C. 16, 28, 392, 398, 407, 408, 418, 419 and Arkoulis, A.G. 405–6, 425 et al. 422, 426 and Marcoulis, S.N. 397, 404, 405 Grant, E. 18 Gratsos, G. 187, 192, 193, 196, 197, 198, 199, 200–2 gravity model of efﬁciency 114 Greece container terminals (DEA) 574–5 ferries 165, 166–7 ﬂag 318 see also port security: ISPS Code implementation study (Hong Kong and Piraeus) Grotius, H. 37 Guaranteed Annual Income (GAI) 532–3 Gwilliam, K.M. 25

723

Haezendonck, E. and Notteboom, T. 551 Hamburg 517 Antwerp–Hamburg range 564–5, 566 Hanseatic cogs 35–6 Hanseatic League 35–6 Hanseatic ports 501, 540 Hapag 40, 44–5, 47 Hapag–Lloyd 246, 256, 554 Heaver, T.D. 23, 24, 25, 257, 318, 550, 599 et al. 27 hedging (derivatives) 385, 387–8 see also freight derivatives High Seas Convention (2005), deﬁnition of piracy 349 high-speed ships (SOLAS) 290–1 high-yield bond market, US 417–18, 427–8 advantages 422–3 anatomy (1992–2010) 418–22 credit ratings 423–5, 426–7 default risk 424–5, 427 deﬁnition 417 disadvantages 423 re-emergence 419–22 reasons for default 418–19 underwriters 417, 420 yield premium 425–6 hijackings see piracy Hong Kong containers 233 ferry market 165 port competitiveness 560–4 see also port security: ISPS Code implementation study (Hong Kong and Piraeus) hovercrafts 174 hubs hub-and-spoke networks 258–9, 603–4 inland logistical 647 ports 603–4, 624, 629, 633 see also container terminals; intermodalism hulls insurance 458–63 single vs double 211, 295–6 hydrofoils 173 IAME see International Association of Maritime Economists

724

INDEX

ICC see Institute Cargo Clauses ICC–IBM see International Chamber of Commerce IHC see International Hull Clauses ILO see International Labour Organization imputation system of taxation 308–9 India 56–7, 64, 71, 75, 76, 79 Indian Ocean Memorandum of Understanding (OI–MoU) 657, 658 Indonesia 68, 69, 81, 165 piracy 354–7, 364 inert gas system (IGS), cargo tanks 295 information and communication technology 289, 359, 610, 611 inland transport and logistics see intermodalism inland waterways 460, 609 cruises 156 historical perspective 43, 44, 45 innovation business models 273–4 port security 690–1 see also container shipping; technological innovation inspections see port security; port state control (PSC) Institute Cargo Clauses (ICC) 463, 464 Institute Times Clauses Hull (ITCH) 458–9, 460, 461, 462, 465 insurance 452 cargo 463–5 cover 463–4 exclusions 464–5 companies 454 conditions 465–7 constructive total loss 465–6 duties of insured and underwriters 466–7 general average and salvage 465 contemporary market 453–4 deﬁnition of piracy 350–1 historical development 17, 452–3, 455 hull 458–63 cover 459–61 exclusions 462 perils covered 461–2

legal principles 454–8 proximate cause of loss 457–8 reform 458 utmost good faith and duty of disclosure 455–7 warranties and other terms 457 operational risk 387 protection and indemnity (P&I) clubs 335, 454 interest loans and 376–7 rate risk 386 intermodalism 121, 133–4, 256–7, 609–10, 624 advantages and impacts 124–6 deﬁnitions 124–5 evolution 122–4 new trade ﬂows empirical application 126–33 literature review 134–6 port clusters 646–7 internal rate of return (IRR) 375 International Association of Classiﬁcation Societies (IACS) 283, 334–5 International Association of Maritime Economists (IAME) 25 International Chamber of Commerce (ICC– IMB) 346, 351, 359 International Convention for the Prevention of Pollution from Ships see MARPOL Convention International Hull Clauses (IHC) 458–9, 461–2, 462, 465, 466–7 International Labour Organization (ILO) 287, 297, 323, 328, 329–30, 676 International Longshoremen and Warehousemen’s Union (ILWU) 529, 530, 531–2 International Maritime Organization (IMO) 285–7, 302–3 emissions reduction 297, 379, 389 environmental regulation 295–7, 302, 389 Flag State Audit Scheme 300 Formal Safety Assessment (FSA) 389 “Go to Sea” campaign 325 liability and compensation 302

INDEX

piracy anti-piracy measures 348 deﬁnition 351 port security 675, 676, 677, 678, 702 port state control (PSC), deﬁnition 334 safety conventions 288–95, 302 International Safety Management (ISM) Code 290, 335 International Ship and Port Facilities (ISPS) Code 291 see also port security: ISPS Code International Standards Organization (ISO) 122–3, 676 International Telecommunications Union (ITU) 287 International Transport Workers’ Federation (ITF) 284, 329, 330 interwar period 34–5 investments port clusters 642–5 tax incentives 309–10 see also port investment and ﬁnance; ship economics IPOs see public equity markets, US Iran–Iraq war (1984) 224, 379 iron ore 65–71, 112, 114, 192–3 carriers (VLOCs) 187, 192–3 ISO see International Standards Organization Isserlis, J. 19 Japan coal 69, 70 container shipping 256 gas (LNG) 61, 64 grains 76, 79 iron ore/steel products 70, 71, 73 oil 55, 57, 61 shipbuilding 196 Japan International Transport Institute ( JITI) 324 Jensen, V.H. 518, 522, 533 Jin, D. et al. 335–6 Johansen, S. 439–42, 443 Jones, B. et al. 125 Jovanovic, B. 134, 135 jumbo ferries 164

725

Kamsarmax (bulk carrier) 192 Kaohsiung, Taiwan: port labour 538–9 kidnapping for ransom 358 Kite-Powell, H.L. et al. 335–6 Koopmans, T.C. 19–20, 22, 108, 200 Korea container shipping 233, 256 gas (LNG) 64 grains 76, 79 iron ore/steel products 70, 73 shipbuilding 196 Korean Maritime Institute 638 labour issues see crew; maritime transportation service; port labour; seafarers laid-up ships 216, 217 containers 243, 245 Lam, J.S.L. et al. 117, 118 landbridging, US 125–6 landside operations/haulage 256–7 Lascelles, E.C.P. and Bullock, S.S. 518, 521 Leander, T. 324 Leggate, H. 323, 419 and McConville, J. 314, 324, 325, 327–8 Levinson, M. 518, 519, 530 liability collisions 460, 465 and compensation 302 limits 297, 300 towage 460–1 Liberty Ships 45–6 life-saving appliances/arrangements (SOLAS) 288–9 lights/signals (COLREGs) 294 liner conferences 117, 118, 242, 250, 251, 274 historical perspective 19 vs combined-based lines 274 liner shipping cargoes 188, 189 freight and charter rates 111–12 historical perspective 19, 44–5, 46 port competitiveness 554, 555, 556 research literature 27 liquid bulk shipping environmental protection, safety and security 211–12 expenses and administration 210–11

726 liquid bulk shipping (continued) freight rate generation mechanism/cycle 212–13, 225–8 global market system 213–25 external factors 224–5 internal factors (freight rates) 213–24 routes and demand trends 205–8 liqueﬁed natural gas (LNG) 61–5, 66–7, 208 liquiﬁed petroleum gas (LPG) carriers 208 Lloyd’s Insurance Market 351 Lloyd’s List 317, 377–8, 419, 541 Lloyd’s of London 453 Lloyd’s Shipping Economist 419 Load Line Convention 291–3 loans and interest 376–7 Logistics Performance Index (LPI) 581, 586 logistics systems development 24, 26 inland transport see intermodalism ports see port choice London insurance market 452–3, 454–5 Maritime London 305 port labour 533–5 long term contracts (LTCs) 64, 71 lookouts (COLREGs) 293–4 Lorange, P. 268, 274 McCleery, M. 393 McLean, M. 46, 47, 82, 122, 230 Maersk Line A.P. Moller–Maersk 256, 264, 275 European Rail Services (ERS) 257 mergers and acquisitions 253, 317, 557, 558 networks 258 pricing problems 245–6 private security provision 360 relocation 317 “super-slow steaming” 378 terminals 256, 540, 560, 565 TEU capacity 117, 239, 241 Malaysia Port Klang 537–8 see also Strait of Malacca Malchow, M. and Kanafani, A. 602, 604 Mansﬁeld, Lord 455–6

INDEX

Marine Accident Investigation Branch (MAIB) 299 Marine Guidance Notice (MGN), UK 299 Marine Information Notice (MIN), UK 299 Marine Insurance Act (1906) 456, 457, 464 maritime cluster, EU 305–6 Maritime Coastguard Agency (MCA), UK 299, 300 maritime economics: historical development 1945–73 20–3 1973–2010 23–8 foundations and challenges 16–18 World War II 18–20 Maritime Labour Convention (MLC) 297–8, 329–30 Maritime London 305 Maritime Security Committee (MSC) Greece 684, 685 PFSO training 688 Maritime Security Level (MARSEC) system 678 Maritime Transport Committee, OEEC 284 Maritime Transport Security Act (MTSA), US 679, 702 maritime transportation service 90–5, 104–5 costs 95–100 demand 100–3 effectiveness 103–4 measures 91–3 operating options 93–4 production functions 90–1 resources/resource functions 90, 94–5 market timing theory 392–3, 409 Marlow, P. and Mitroussi, K. 313, 315, 316, 318 Marlow, P.B. 310, 311, 313 et al. 305 Glen, D. and 323 Goss, R.O. and 318 Paixao, A.C. and 609, 611 MARPOL Convention 283, 295, 296–7, 379 Marshall, A. 18 Mechanization and Modernization (M&M) Agreement 530, 531–2 medieval and pre-medieval period 35–6 Memorandum of Understanding (MoU) Indian Ocean 657, 658 Paris 284–5, 344, 657

INDEX

Menefee, S.P. 350, 358 Merchant Shipping Act (1995), UK 299 Merchant Shipping Notice (MSN/M Notices), UK 299 Mercosur container terminals 608 mergers and acquisitions (M&As) 317–18, 407, 409 scale increases via operational agreements and 251–7 Metaxa, B.N. 21, 189, 195, 212–13 Middle East 55–6, 57, 58–60, 61, 206–7 Qatar 65 migration and mobility (seafarers) 326–7 military events 224 Miller, J.W. 359–60 Miller, R.C. 528–9 monohull ferries 174, 175 monohull vs double hull tankers 211, 295–6 Morewedge, H. 521–2 Morrison, J. 520–1 multimodal model of port governance 503–4 Murphy, P. and Daley, J. 601 et al. 600–1, 602, 609, 615 Myers, S.C. 392, 393 National Dock Labour Scheme (NDLS), UK 526–8, 534, 535, 539 national governments see ﬂag states; governments; entries beginning public naval escorts 360 NavCanada model of port governance 502 navigation (SOLAS) 289 net present value (NPV) ship economics 374–5, 376–7 taxation 310, 311, 312–13 networks business models (connectivity and constructivity) 266–8, 275 hub-and-spoke 258–9, 603–4 regional 646–7 see also intermodalism; trade ﬂows/routes New York: port labour 518, 526, 532–3 newbuilding prices and freight rate 219, 220 Ng, K.Y.A. and Gujar, G.C. 674, 675, 692, 694 Nigeria: piracy 365–6 Nippon Foundation 324

727

Nir, A.S. et al 601 Norman, V.D. 110–11 North America container terminals 507 grains 77 passenger market 147–50, 157 Norwegian Insurance Plan (NIP) 458–9, 460, 461, 462 Norwegian School of Economics and Business Administration (NHH) 21–2 Notteboom, T. 27, 90, 256–7, 258, 549, 550, 554 et al. 573–4, 580 Haezendonck, E. and 551 and Rodrigue, J.P. 257, 259, 610, 646 and Vernimmen, b. 243 and Winkelmans, W. 552, 610 noxious liquid substances (NLS) (MARPOL) 296 nuclear ships (SOLAS) 290 OBO ships and freight rate 216–17, 218, 223 Oceania cruise market 150–2 ofﬁcers 322, 323–4, 325, 326, 327–8 oil crises (1970s) 193, 379 crude 53–8, 62 pipelines 57–8 pollution 295–6, 389 prices 55–6, 379 products 58–61, 62 trade routes 112 transport efﬁciency 114 Oil Record Book 296 oil tankers accidents 211, 295–6, 300, 301, 454 classiﬁcation and industry characteristics 208–10 see also liquid bulk shipping oilﬁelds, new 224 OPEC countries 55–6, 56, 225 operating costs risk 385–6 operational risk 387 order book 421–2 containers 241, 242–3, 245 and freight rate 217–18, 219

728

INDEX

over-the-counter (OTC) bunker agreements 385 over-the-counter (OTC) SPFA agreements 387 Owen, D. 20 P&I clubs 335, 454 Paciﬁc Maritime Association (PMA) 529–30, 532 Paciﬁc Rim 70, 71 Paixao, A.C. and Marlow, P.B. 609, 611 Pallis, A.A. et al. 24, 26 and Vaggelas, G.K. 674, 675, 694–5 Panamax containers 208, 382 parcel tankers 208 Paris MoU (Memorandum of Understanding) 284–5, 344, 657 passengers early transatlantic 40–1, 42 port interchange service 485–6 transportation demand 102–3 see also cruise liners Passman, M.H. 349, 350–1 Pay Guarantee Plan (PGP) 532, 534–5, 539 pay/wages port labour 522, 526, 527–8, 532–3, 534–5, 536, 538, 539 seafarers 328–9 Pearl River Delta 560–4 pecking order theory 392–3, 409, 410 Persian Gulf 57 Petro Ranger oil tanker hijacking 354–7 Philippines: seafarers 323, 325, 327, 328 phosphate rock 79, 81, 190–2 pipelines gas 61–4 oil 57–8 piracy 346, 365–7 deﬁnitions 348–51 economic and political causes 360–4 historical perspective 347–8 number, location and characteristics of attacks 351–8 prevention and deterrence 358–60 vessels subject to attacks 360, 361 plastics disposal (MARPOL) 296–7 Plimsoll, S. 291

police: Hong Kong port security 685–6 political and economic causes of piracy 360–4 political risks 388 Politis, D.N. and Romano, J.P. 446–7, 448 port authorities (PAs) see port governance port charges/dues 248–9, 376, 642 port choice 599–600, 617–18 literature review shippers 600–4 shipping lines 604–7 logistics and supply chain management 607–11 costs 609 information systems 611 port technical efﬁciency 607–8 service adequacy 610 supply chain performance 609–10 value-added services 610–11 research methodology 611–15 measure 612, 613–14 sampling and survey administration 612–15 research results 615, 616 port clusters deﬁnition 640–2 core activity 641 linkage analysis 641 region 641–2 port authorities (PAs) “decision tree” 642–3 investments 642–5 management 645–6 role 642–3 proximity 646–51 Copenhagen Malmö Port 647–51 regional networks 646–7 and transport node perspective 638, 639, 640 port competition: deﬁnition and levels 550–1 port competitiveness deﬁnition and measures 551–3 research ﬁndings 557–65 Antwerp–Hamburg range (Rotterdam/ Bremerhaven) 564–5, 566 Pearl River Delta 560–4 Strait of Malacca 557–60

INDEX

research methodology 553–7 annualized slot capacity (ASC) 553–65 passim, 566, 567 geographical region and time period 556–7 two-port calls 554–6 port demand 485–7 carrier 486–7 investment and ﬁnance 629–30 passenger 485–6 shipper 485 port dues/charges 248–9, 376, 642 port effectiveness see under effectiveness/ efﬁciency; container terminals Port Facility Security Assessment (PFSA)/ Plans (PFSP) 678–9, 680–1, 683, 687–8 Port Facility Security Ofﬁcer (PFSO) 679, 684, 687–8, 690 port governance 491–2, 511–12 board composition and accountability 505–8, 509–10 concessions 504–5 deﬁnitions 512–13 Europe 494, 500–2, 505, 506, 508 evolution of reform 492–4 models and operating principles 508–11 ownership 496–8 port clusters 642–6 privatization and commercialization 492–3, 501–2, 536–41 public–private models 496–8, 504–5, 508–11 reform purpose and objectives 494–6 and security: ISPS Code 691–2 US 498–500 port interchange services 474–80 costs 480–5 measures 476–9 operating options 479 and port security see under port security, US production functions 475–6, 704 resources/resource functions 474–5, 479–80 port investment and ﬁnance 623, 636 demand management measures pricing/tariff 629 redirection of cargo ﬂows 630 slot auctioning 629–30

729

efﬁciency 623–5 evaluation 632–5 base case/“do nothing” scenario 633 commercial perspective 635 national welfare perspective 633–5 public–private 624–5, 626–7, 630, 631–2, 643–5 strategies 625–7 supply capacity expansion and excess 628–9 improved services 629 types 630–2 private participation and risk 631–2 public, economic justiﬁcation for 631 Port Klang, Malaysia 537–8 see also Strait of Malacca port labour 517–20, 541–2 agreements 529–30, 531–2 casualism 520–30 conditions 528–9 “dock labour schemes” 522–6 insecurities 521–2 commercialization 536–41 containerization 518–19, 530–6 historical development 517–20 pay/wages 522, 526, 527–8, 532–3, 534–5, 536, 538, 539 redundancy schemes 534, 539 strikes/trade unions 528, 529–30, 532, 533, 534, 539, 541 unemployment and underemployment/ surplus 521–2, 526, 533–4, 535 port security: ISPS Code 674–5, 693–5 new transport environment 675–7 port obligations 677–9 US 702 port security: ISPS Code implementation study (Hong Kong and Piraeus) discussion 690–3 compliance 690 constructive innovation 690–1 cost and performance 692–3 port governance 691–2 risk level 692

730

INDEX

port security: ISPS Code implementation study (continued) methodology 679–80 results administrative structure 681–5 control of ships within/intending to enter 686–7 legal documents 680–1 port facility security 687–90 security level 685–6 Port Security Authority (PSA), Greece 684, 685 port security, US legislation and programs 702–4 levels (MARSEC) 702–3 and port interchange service quality 701–2 empirical analysis 707–11 operating options 704–6 port security service 706–7 production and resource functions 704 questionnaire 712–15 zones 703 port state control (PSC) 284–5, 334, 656–7, 669–72 substandard vessels survey 657–66 characteristics 658, 659 deﬁciencies and detention rates 658, 660 descriptive statistics 658 determinants of deﬁciencies 658–66 probability of transition: marginal effects 670–1 recurrent deﬁciencies and state dependent effects 666–9 port-to-port transportation 609 Porter, M. 305 ports historical perspective 19, 21, 23, 24, 40 research literature 27, 28 transport node perspective 638, 639, 640 see also container terminals; intermodalism; maritime transportation service Portugal: container terminals 574–5 post-war era 45–6, 190 Prestige oil tanker accident 211, 300 private security providers 359–60

privatization/commercialization of ports 492–3, 501–2, 536–41 see also container terminals: efﬁciency and private sector participation; port governance product and ﬂeet expansions (cruise liners) 141 product prices 225 product tankers Baltic Exchange Index (BCTI) 214, 215 types 208 product-life cycle (dry bulk shipping) 195 production fragmentation (freight markets) 113 functions 90–1 port interchange services 475–6, 704 protection and indemnity (P&I) clubs 335, 454 Psaraftis, H.N. and Kontovas, C.A. 379, 380, 382 public equity markets, US 394–9 advantages 397–8 disadvantages 398 investors and shipping companies 406–9 pricing and long-run performance (IPO) 403–6 underwriting 398–9 vs shipping equities (1987–2010) 400–3 public port governance, US 498–500 public port investment and ﬁnance 631 public–private port governance 496–8, 504–5, 508–11 public–private port investment 624–5, 626–7, 630, 631–2, 643–5 public–private port security 692 Qatar: gas (LNG) 65 railways and car ferries 164 see also intermodalism recruitment and retention (seafarers) 324–6 redundancy schemes (port labour) 534, 539 regionalization see port clusters registration/registries 283–4, 316–17 open see ﬂags of convenience

INDEX

regulation 282–5 anti-trust/competition 275 environmental 295–7, 302, 389 EU enforcement 300–1 labour 297–8 safety 288–95, 333–5 UK enforcement 298–300 see also United Nations (UN) and speciﬁc agencies/Conventions reinsurance and reinsurers 454 resources and activities business model 265–6, 276–7 and resource functions 90, 94–5 port interchange services 474–5, 479–80 rice 76, 79, 80 risk management see under ship economics RiskMetrics 388 Ro-pax ferries 164 Roberts, M. and Tybout, J. 135 Rochdale Committee 284 Rodrigue, J.P. and Notteboom, T. 257, 259, 610, 646 Rotterdam Antwerp–Hamburg range 564–5, 566 capacity expansion 628, 633, 635 port competitiveness 565 port governance 501 port labour 531, 540 Rubin, A.P. 348, 349 running costs 210 Russia and former Soviet (FSU) countries 57–8, 60, 61, 65, 69, 73, 75, 77 Soviet state 46, 56 safety conventions and regulation 288–95, 333–5 see also accident studies Safety of Life at Sea Convention (SOLAS) 288–91, 295, 299–300 port security 677, 680–1, 689, 690 sailing ships 42, 43, 44 Sale and Purchase Forward Agreements (SPFA) 387 salvage, general average and 465 scrap see demolition

731

seafarers conditions and rights (MLC) 297–8, 329–30 from developed vs developing countries 329 discrimination 328–9 labour market 321–4 main supplying countries 322–3 market segmentation 327–8 age proﬁle 327–8 English language skills 327 mobility and migration 326–7 recruitment and retention 324–6 wages 328–9 Seaspan 268–70 second registers see ﬂags of convenience second-hand market containers 241 ferries 175–6 ship prices 219, 220, 435–6, 440 security see piracy; port security Security and Accountability for Every (SAFE) Port Act (2006), US 703–4 sewage disposal (MARPOL) 296 ship capacity containers see TEU and freight rate 216, 217 ship classiﬁcation business model 273 ship economics basic criteria 373–7 cost breakdown 376 depreciation 377 internal rate of return (IRR) 375 loans and interest 376–7 net present value (NPV) 374–5, 376–7 required freight rate (RFR) 375 responsibility for expenses 375–6 shipbuilding and scraping 376 taxes 377 environmental issues 389 optimizing performance 377–83 cost–beneﬁcial speed reduction 381–2 ﬂeet operation 382–3 model 380–1 speed as decision variable 377–80 risk management (ﬁnancial) 383–8 hedging and basis risk 387–8 operation 387 political 388

732

INDEX

ship economics (continued) price 384–7 value-at-risk (VaR) methodology 388 see also costs/expenses ship ﬁnance market timing theory 392–3, 409 pecking order theory 392–3, 409, 410 see also freight derivatives; high-yield bond market, US; public equity markets, US Ship Finance International 276–7 ship inspections see port state control (PSC) ship losses and freight rate 217 ship operating ﬁrms 271–2 ship ownership business model 268–70, 276–7 historical perspective 37, 40, 42 non-conventional 211 single-vessel companies 48–9 Soviet state 46 vs charters 208–9, 210, 375–6 ship prices/pricing second-hand market 219, 220, 435–6, 440 see also under containers; freight derivatives Ship Security Alert System (SSAS) 291 ship structure and construction (SOLAS) 288 ShiPax 161–2, 166, 167 shipbrokering 271, 272–3, 276 shipbuilding and design, historical perspective 17, 22, 23–4, 37 Far East 196 ferries 173 shippers port choice 600–4 port interchange services 485 shipping business: historical development 34–5, 49–50 age of exploration and early modern period 36–9 Cold war era 46–8 medieval period 35–6 pre-medieval period 35 recent trends 48–9 World War I and interwar period 43–5 World War II and post-war reconstruction 45–6 see also steam-powered vessels

shipping lines’ port choice 604–7 shipping markets, historical perspective 19–20, 24 shipping pool 274–5 Simpson, J. and Weiner, E.S.C. 348–9 Singapore containers 233 ferry market 165 piracy 350, 351 Slack, B. 603, 604, 615 slave trade 38 slot auctioning 629–30 slot capacities 253, 254–5 annualized (ASC) 553–65 passim, 566, 567 slow steaming/speed reduction 216, 218, 243–4, 377–80, 381–2 Somalia: piracy 264, 350, 354, 357–8, 359, 360–2, 366–7, 367–8n Southampton Container Terminal (SCT) 539 Soviet state 46, 56 soybeans 75–6, 77–9, 80 Spain: port labour 517, 541 speed COLREGs 294 high-speed ships (SOLAS) 290–1 reduction/slow steaming 216, 218, 243–4, 377–80, 381–2 split-rate system of taxation 309 spot oil tanker market 210 Stabell, C.B. and Fjeldstad, O.D. 266, 267, 274 Staggers Act, US 126 Standards of Training, Certiﬁcation and Watchkeeping Convention (STCW) 294–5, 326 stationary bootstrap procedure 446–7, 448–9 steam-powered vessels 39–43 combined services and cargo 41–3 ferries 163–4 ﬁrst 39 transatlantic lines 39–41, 42 steel 71–4 steelmaking 70, 79–81 Stena HSS (ferry) 174, 178 Stopford, M. 83–4, 89, 111, 113, 116, 187–8, 189, 190, 192, 195, 196, 199, 205, 212, 224, 230, 385

INDEX

stowage and securing of cargo (SOLAS) 289–90 straddle carriers 383, 475, 485, 542 Strait of Malacca piracy 350, 351 port competitiveness 557–60 strikes/trade unions (port) 528, 529–30, 532, 533, 534, 539, 541 substandard vessels survey see under port state control (PSC) Suez Canal 47, 57 supply side see under ferry market; port choice; port investment and ﬁnance Suppression of Unlawful Acts Against the Safety of Marine Navigation (SUA) Convention 291 surface effective ship (SES) ferries 174, 175 Svendsen, S. 21–2, 25, 108–9 Sweden Copenhagen Malmö Port 647–51 Götenborg port governance 501 Taiwan 79, 233, 538–9 Talley, W.K. 90, 93, 94–5, 99, 100, 101, 103, 123, 125, 334, 335–6, 475, 484, 486, 677, 701 et al. 142, 336 and Rule, E.M. 359 tanker freight rate cycle 108, 110–11 tanker industry/markets historical development 41, 43, 47 research literature 27–8 see also liquid bulk shipping; oil tankers tanker-barges 208 taxation 305–7, 318–19 corporate systems 308–10 impact of policies 316–17 investment incentives 309–10 NVP equation 377 positions 310–11 tonnage system 313–16, 324 traditional approach 307–8 UK 311–13, 316 wider context 317–18 technological innovation ferry market 173–5, 177–8 piracy prevention and deterrence 359

733

ports 610, 611 safety 289 WWII 18–19, 122 see also container shipping Temporary Unattached Register (TUR), UK port labour 534 terminal handling charges (THCs) 248–9, 376 terminal operating companies (TOCs) 505 terminals see container terminals; intermodalism; maritime transportation service; entries beginning port terrorism 291, 674 TEU (twenty foot unit) 230, 238–9, 241, 242, 243, 245–6 and FEU (forty foot unit) 230, 245 Maersk Line 117, 239, 241 port competitiveness 560–1, 564 throughput 476–8, 608 Thanopoulou, H. 188, 189, 193–4, 195–6, 197, 198 Thorburn, T. 22, 24, 25–6 Thünen, J.H. von 18 Time Charter Equivalent (TCE), Worldscale (WS) freight rate 214 Tinbergen, J. 19 Tiwari, P. et al. 601–2 Tongzon, J.L. 603, 604, 609 and Heng, W. 611 and Sawant, L. 615 tonnage deadweight 408 tax system 313–16, 324 Torrey Canyon oil tanker accident 454 towage liabilities 460–1 trade ﬂows/routes containers 83–4, 112–14, 246–7, 250–1 liquid bulk shipping 205–8 new see under intermodalism redirection 630 trade unions/strikes (port) 528, 529–30, 532, 533, 534, 539, 541 training PFSO 687–8 STCW 294–5, 326 transatlantic containers 230 transatlantic steam-powered vessels 39–41, 42

734 transport node perspective (ports) 638, 639, 640 Transport Worker Identiﬁcation Credential (TWIC) 676, 703 triangular trade 38–9, 192 trimaran ferries 174 truck carriers 126 Tsamourgelis, I. 329 Turkey see container terminals: efﬁciency and private sector participation Turnbull, P. 519, 537, 538, 539, 540, 541, 542 Barton, H. and 535–6 et al. 529, 533, 534 and Sapsford, D. 519, 526, 528, 529, 533 and Wass, V. 537, 538, 539, 540 two-port calls 554–6 Ukraine 73, 75 ULCC tankers 208 UNCLOS see under United Nations (UN) UNCTAD see under United Nations (UN) underpricing phenomenon (IPO) 404–5 underwriters duties 466–7 US ship ﬁnance 398–9, 417, 420 see also insurance; Lloyd’s unemployment and underemployment/ surplus (ports) 521, 521–2, 526, 533–4, 535 United Kingdom (UK) Dover Strait ferry service 178–9 port labour 534–5, 539 National Dock Labour Scheme (NDLS) 526–8, 534, 535, 539 strikes 528, 529, 532, 534, 539 port privatization 492–3, 501, 539 seafarer recruitment 324, 325 taxation 311–13, 316 UN Conventions enforcement 298–300 see also London United Nations (UN) 285–7 Security Council 350, 366–7 UNCLOS deﬁnition of piracy 349 ﬂag state responsibilities 281–2, 283

INDEX

UNCTAD 20–1, 117, 121, 123–4, 205, 313–14 dry bulk commodities 75, 81, 83 dry bulk shipping 187, 189 port commercialization 536, 537 see also speciﬁc agencies/Conventions United States (US) coal 68, 69, 70 Coast Guard accident studies 335, 336, 337 anti-piracy guidance 359 port security 702–3 Department of Homeland Security (DHS) 703 ferries 163–4 gas (LNG) 64, 65 grains 75, 76, 77, 79 insurance see American Institute iron ore/steel production 71, 73 liner conferences 117 oil and oil products 53–5, 57, 58, 60, 61, 64, 205–6 oil tanker accidents 211, 295–6 port labour 519, 526 agreements 529–30, 531–2 port security 675–6, 679, 702–3 ship ﬁnance see high-yield bond market; public equity markets see also intermodalism USSR see former Soviet (FSU) countries; Soviet state value chain business model 266 value network business model 266–7 value shop business model 267 value-added services (ports) 610–11 value-at-risk (VaR) methodology 388 Veenstra, A.W. 198 vessel expenses 376 vessels (V) see maritime transportation service vetting of oil tankers 215 VLCC tankers 108, 208, 214, 215, 216, 219, 220, 221, 224, 225 VLOC carriers 187, 192–3 voyage costs 210

INDEX

Wang, T.F. and Cullinane, K. 578, 579, 580, 587, 590 warranties 457 waterways (W) see maritime transportation service Welling, A.M. 18 wheat and coarse grains 74, 75, 76–7, 78 Wilson, D.F. 528, 533, 534 Winkelmans, W. and Notteboom, T. 552, 610

735

World Bank 536, 571 Logistics Performance Index (LPI) 581, 586 Port Reform Tool Kit (WBPRTK) 493 World Health Organization (WHO) 287 World War I and interwar period 43–5 World War II 18–20 and post-war reconstruction 45–6 Worldscale (WS) freight rate 214 Zannetos, Z.S. 22, 110, 208, 214

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