Chapter 30

Port Management, Operation and Competition: A Focus on North Europe

Hilde Meersman and Eddy Van de Voorde*

1. Introduction

In the past decades, the role of port management has changed quite fundamentally. It has gradually evolved from being a supervisory and determining capacity to a more subordinate function that often consists solely of providing the required facilities for the various parties involved in port operations.

The port landscape has also altered in many respects. New technologies and strategic developments have led almost automatically to greater port competition, both at port authority level and at the level of companies operating within the various ports. All port players, from authorities to terminal operators and agents, are looking for ways to maximise profits, to maintain or increase market share, or simply to survive. These goals are not so easily achieved in an era of internationalisation of production, consumption and trade.

National and regional authorities are also monitoring these developments closely. A strong and efficiently run seaport can be an important asset for a country or region in trying to improve its economic position. For one thing, port activities generate value added and employment. Moreover, a seaport can be an important point of attraction for a broad range of industries.

This in part explains why European ports, especially in the Hamburg–Le Havre range, are involved in such a fierce competitive struggle for attracting goods flows, shipping lines, and infrastructure and industrial investment. Economic resources are scarce, which explains the ferocity of the competitive struggle in which port authorities in particular were engaged until just a few years ago. Watching from the sidelines were a number of other “players”: consignors, goods-handlers, shipping companies, etc. This situation has now changed.

The supposed strategic importance of seaports to the economy of a country (or region) has prompted quite a few national and regional authorities to artificially protect their seaport(s), among other things through partial or full subsidising of port infrastructure and maritime access routes. This, in turn, has led to mutual accusations of (attempts at) distortion of competition. This seems quite understandable in a context where different ports within the same range have similar investment plans and are competing for the same goods flows.

The above demonstrates quite clearly that there is a connection between port management and the manner of competition. Each port management is concerned primarily with its own competitive position in the range to which it belongs. Decision making is geared towards safeguarding or preferably improving this competitive position. Strategic moves by competing ports are monitored very closely.

In this contribution, we shall discuss this issue in some greater detail. We shall deal consecutively with evolutions in port management, the ever-changing port environment and the need for an appropriate set of analytical tools. Finally, we shall consider some recent findings in research into port competition.

2. Evolutions in Port Management

Port management used to be almost exclusively in the hands of the port authorities. However, over the years, and especially in the past decade, this situation has changed quite profoundly. The power of the port authority has clearly dwindled. It must now undergo the might of the strong(er) port players, in particular the shipping companies and terminal operators. Still, it is interesting to consider how the theory and practice of port management has changed, especially in terms of the objectives pursued and the tools applied.¹

The objectives of a port authority are closely connected with what is considered to be the economic purpose of a seaport. In the past, these goals were restricted mainly to increasing throughput, generating value added, creating local employment, or maximising operating profits. However, today’s reality is more complex and more dynamic than that, primarily because of the specific nature of the “port product”.

The port product is in itself a chain of consecutive links, while the port as a whole is likewise a link in the global logistics chain. In the course of time, the relative importance of these various links has clearly changed. This was due to, among other things, significant technological developments (e.g. increasing containerisation rate, larger vessels, more speedy handling …) which have increased efficiency. In other words, it no longer suffices to concentrate on one or just a few links in the chain.

However, to move beyond such a fragmentary approach and take full advantage of possible benefits of scale, clear insight is required into the generalised cost structure of the constituting links and of the chain as a whole. It is important to know how out-of-pocket costs and costs associated with loss, damage, and delay have an impact on the choice of port.

Within a logistics chain, the port cost usually constitutes only a fraction of the total cost. Overall demand for port services in a particular range will therefore be inelastic, especially in the absence of alternatives. On the other hand, competition between goods handlers, ports and countries within the same range is often fierce. The possibilities for substituting one port for another are often so great that the price elasticity for a specific port may be quite considerable after all.

In view of the considerable number of players in any given port (authorities, port management, consignors, shipping lines, trade unions …), each of whom has different objectives, the nature of port activities is inevitably heterogeneous. Consequently, the goals of a port authority are determined in part by the degree to which this authority is, directly or indirectly, subjected to foreign influences, external control or competition from other ports. Not surprisingly, then, these goals may differ quite considerably and indeed may change profoundly over the course of time.²

It is also striking in this respect that one often needs to search for a compromise between the priorities of the various important market players. As the relative strength of the different market players may change in the course of time, so might the objectives of the port authority. We shall return to this issue later on.

At the same time, evolutions in port managerial structures are also a direct consequence of technological developments and changes in the socio-economic environment. The British port sector is a very good example in this respect: it was nationalised after World War II and grouped in the British Transport Docks Board (privatised as Associated British Ports in 1981) followed by a government decision in 1991 that the most important ports could be privatised. While the situation did not develop equally drastically in continental Europe, there was clearly a trend towards more autonomy for port authorities and a greater private stake in goods handling.

Far-reaching mechanisation and sweeping technological changes have also resulted in a sharp decline in the employment of dock workers and indeed in a thorough reorganisation of the work itself. A typical example of this trend is found in container transhipment. After all, the capital-intensive nature of liner shipping demands that capacity utilisation be maximised with a view to achieving an acceptable return on investment. Ports and terminal operators are thus forced to strive constantly for a further improvement of efficiency and productivity of labour. Under this considerable pressure, an important part of port activity has become capital intensive, with a very high level of investment in infrastructure and cargo-handling equipment.³

It follows from this evolution that the role of government has changed. Much attention has been paid in this respect to possible financial or other support from government for port authorities and the consequences this may have on the competitive balance between companies and ports.

However, it is very hard to make sensible comparisons between ports, as they usually operate in different economic, legal, social and fiscal environments. Consequently, there are until today considerable differences in the management of European ports: the Anglo-Saxon tradition of independent port authorities, the centralising Latin tradition in France, Spain and Italy, or the municipal Hanseatic tradition in Germany, the Netherlands and Belgium.⁴

These different traditions have resulted in two important, but diametrically opposed, philosophies. First, there is the continental approach whereby “the port in the limited sense of the word is managed and operated by the port authority, the maritime access routes and the connections with the interior are more the responsibility of the central authorities, and the cargo-handling and various other services are in private hands”.⁵ Diametrically opposed to this continental tradition stand the ports that are run as ‘total organisations’ (e.g. such British ports as Felixstowe), whereby the maritime access, the port and cargo-handling are the responsibility of a single organisation that supervises all port operations.

Thus, seaports possess characteristics of public utilities on the one hand and of private enterprises on the other.⁶ Cargo-handling and related activities are commercial operations that, under normal circumstances, do not need subsidising. By contrast, port infrastructure has many characteristics of public good and is thus approached from a socio-economic perspective (cf. the application of socio-economic cost–benefit analyses to determine whether or not an investment is justified).

Is it imaginable that we may evolve towards a port landscape in which government does not fulfil a regulatory role? For the time being, it would appear that the (national) authorities had best remained an interested party, if only for strategic and safety reasons, and to prevent that monopolies are abused by port authorities, terminal operators or dock workers. Goss⁷ asserts in this respect that “the conclusion must be that there are likely to be many instances of ‘market failure’ in seaports, e.g. in the processes of planning, controlling externalities and promoting competition if these were left wholy to the private sector: but there are also many opportunities for ‘government failure’, whether in port authorities or in other official bodies, including government departments supervising the port authorities”.

In a fiercely competitive market such as the port business, the role of government may however continue to be hotly debated. Indeed, it may be the source of continual mutual accusations of distortion of competition. Can a European port policy resolve this issue? Is Europe able to take due account of existing differences between its ports?⁸

One of the most important points of debate remains whether port infrastructure, particularly maritime access routes to ports, has the nature of public goods. These are defined as goods that would, in all probability, not be produced in a satisfactory manner and in sufficient amounts, if at all, by a competitive industry. It concerns goods for common or non-rivalrous consumption, whereby it is impossible to exclude those who cannot pay.

Goss⁹ was quite clear on this matter when he asserted that: “non-rivalrous consumption occurs with all beacons, buoys and other fixed or floating navigational aids because their cost will be exactly the same no matter how many people are using them. The same is true of dredged entrance channels up to the point where they are congested. If the opportunity cost of using any of these is zero, then imposing any specific charge would have the effect of deterring the marginal user and reducing economic welfare.”

The kind of port infrastructure referred to has two important characteristics: the indivisibility of the enormous investments involved and their great longevity. No private company is assured of a sufficient return over such long periods of time. The amount of infrastructure provided would therefore lie below the optimum if such investments were left to the private sector. However, one can wonder whether the discussion about the public goods nature of maritime entrance is not outdated in an era of remote transhipment centres with natural deep-water sites.

It is apparent from the foregoing that theory and practice of port management have evolved quite dramatically. The role of government, and particularly the issue of government support, remains a point of considerable controversy.

3. The Radically Changed Port Environment

Until the 1990s, players in the port business acted very much as independent entities. Shipping companies competed for the same goods flows. Port authorities presented themselves as mainports, both to each other and to the market as a whole. Fierce competition unfolded between goods handlers operating within the same port. The hinterland modes (i.e. rail, road, inland navigation) were preoccupied with maximising their market shares.

Then a new trend emerged, as competition was unfolding increasingly at the level of logistics chains, in which port authorities, transhipment companies and the hinterland modes are the most important links. Those players who are able to contribute to the lowest generalised cost of the transport chain are most likely to be included. This also means that systematic mutual trade-offs are made between links in the transport chain. Consequently, it may still be the case that serving an inland port (e.g. Antwerp and Hamburg) is more expensive per tonne shipped, but that this higher cost is compensated for by cheaper hinterland transportation.¹⁰

This new market structure as such provides an incentive for establishing cooperation agreements and strategic alliances. Theoretically, the market players should after all benefit from gaining control of as large as possible a share of the logistics chain, be it for competitive purposes or for other reasons (e.g. stability).

Table 1 provides an overview of the cooperation agreements that exist within the maritime and port sectors. We shall restrict ourselves to the main actors (shipping companies, port authorities, terminal operators, hinterland transport modes).

A detailed analysis of Table 1 shows that shipping companies in particular have been taking initiatives in this respect, forging forms of partnership with each other as well as with other market players. The mutual forms of cooperation are mostly cartels of various description, but takeovers and mergers have also occurred. Through these arrangements, the shipping companies hope to increase their degree of control over the total logistics chain. By means of price agreements, they also attempt to gain control over hinterland transportation and, as the case may be, goods handling. Consider the following examples.

In 1992, the North Atlantic route was marked by a considerable surplus loading capacity in liner shipping. This led to sharp losses for shipping companies, even though there were conferences where two or more shipping companies contributed vessels and shared loading space.

The shipping companies’ response came in 1992 in the shape of the Transatlantic Agreement (TAA), which became operational in 1993. With this cartel, the main shipping companies intended to acquire greater control over the seriously loss making North Atlantic shipping market by jointly determining rates, capacity supplied and the transport conditions. The consequences were clear to see: over 80% of the market was controlled in this manner, and, partly because of a shrinking capacity, rates increased sharply (by between 30 and 50% in some years).

Consignors responded fiercely, as they suddenly found it much harder to obtain loading space and were now unable to negotiate directly with shipping companies. They demanded a sufficient degree of competition, coupled with free supply and demand and the possibility of negotiating with companies separately. As the Treaty of Rome prohibits cartelisation, the TAA was outlawed because of its manipulation of tariffs, the capacity policy pursued and the fact that cartel agreements also applied to pre-carriage and on-carriage.

It speaks for itself that these kinds of cartel agreements were regarded suspiciously by ports. The possibility of higher prices may, after all, result in less maritime transport (and thus in a decline in port throughput).

A similar reasoning is followed by ports in the case of mergers, as reorganisations and cost saving often result in fewer, but larger and stronger port users.