Strategies for Mediterranean Port Development Harilaos N. Psaraftis

Strategies for Mediterranean Port

Development

Harilaos N. Psaraftis Professor, National Technical University of Athens

9 Iroon Polytechneiou St., 15773 Zografou Greece and General Manager, Piraeus Port Authority Akti Miaouli 10, 18538 Piraeus Greece

Email: hnpsar @ deslab.ntua.gr

Abstract

In this paper we discuss development strategies that may be used by ports in the Mediterranean as we are about to enter the new century. Increased integration of ports within intermodal transport chains is expected to play a

key role in that development. Issues such as infrastructure and superstructure improvement, financing, pricing, and optimal use of port resources are seen as critical factors that will influence future port competitiveness and performance. The container market is used as the main context of this paper,

although other sectors are also mentioned.

I. Introduction

As we are approaching the new millenium, the Mediterranean promises to be an exciting area as far as port development is concerned. Emerging economies in three continents (Europe, Africa

and Asia), such as the Black Sea, the Middle East, the Balkans, and Northern Africa will use the Med as their main partner in trade, either directly, or indirectly. Developments in ship technology, cargo

handling, and in the computer and telecommunications technologies will increase the cost effectiveness of maritime and intermodal

transport. As a result, trade to and from areas adjacent to the Med is expected to grow strongly in the years ahead. Mediterranean ports cannot be absent from such developments, and in fact these ports are

expected to shape, to a great extent, these very developments.

The trend in the last few years may give a flavor of what one may

expect in the future. With the economies of scale realized by large (up to 8,000 TEU) container vessels deployed on trunk routes worldwide,

it is not cost effective for these vessels to make direct calls in many ports. For this reason, lines develop hub and spoke systems, in which feeder vessels distribute containers to and from smaller ports, whereas

larger mainline vessels connect only to larger ports ("hub ports").

Which ports establish themselves as hub ports worldwide is up for

grabs, and the Mediterranean is no exception. The main trunk route of the Med is the one connecting the Far East with Northern Europe, through the Suez Canal and Gibraltar. Some of the traffic on this route

makes no Mediterranean port calls. However, some of the traffic comes from (or is destined to) markets on the Med (or close to Med

ports) or markets in the Black Sea, and therefore has to pass through a Med port, either as local traffic, or as transshipment traffic.

Container lines such as Sea Land and Maersk have a huge transshipment terminal in Algeciras, Spain (a port, which, although just outside Gibraltar, is considered a Med port for all practical

purposes). Other lines use ports such as Malta, Naples, Piraeus, or Damietta (Egypt) as hub ports. The story of the Medcenter Container Terminal in Gioia Tauro is indicative, as this port was not even on the

map in 1995, but via an aggressive expansion and pricing policy became the top Med container port two years later.

What are the essential elements of possible port development strategies in the Mediterranean as we are approaching the next century? The rest of this paper attempts to answer this question by

examining the main factors that are expected to be key determinants of such strategies. The focus will be on the on the container market, although other market areas will also receive attention.

2. Intermodal integration

Intermodality is already the name of the game in port competitiveness. It will be even more so in the future. No port will be able to acknowledge complete satisfaction from its customers if its intermodal interfaces cannot function in a seamless fashion. This includes speed and efficiency in cargo handling, minimal storage, logistics support, and streamlined procedures such as customs clearance.

Connectivity to major rail and road networks will be a plus to those ports that have it and a minus to those that do not. This is true not only for freight (especially unitized cargoes), but also for passenger and car traffic. A container terminal will benefit if it is linked to the rail network because by doing so its effective hinterland gets larger.

Similarly, a port that handles huge numbers of passengers will be handicapped if its function is not integrated within a good urban or suburban transport network.

The establishment of Trans-European Networks (TENs) is expected to play a key role in the development of ports that are components of the TEN structure. For Med ports, this could also increase the share of traffic that has one of its ultimate endpoints (origin or destination) in a Central European location, traffic that would otherwise pass through a Northern European port. In that respect, Gioia Tauro would compete with Rotterdam or Hamburg for cargoes from the Far East to countries such as Austria and vice versa. As currently many cargoes completely

bypass the Mediterranean, it is expected that the development of intermodal connections in Med ports might help reverse this trend. Of

course, pricing considerations in the rail sector are critically relevant on this subject (see also Section 5).

Similar considerations apply for ports on the Southern and Eastern rims of the Med. Good intermodal connections are expected to boost throughput and trade in the ports in which such connections are

established.

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3. Infrastructure and superstructure

development

Developments in ship technology have a spin-off effect on port infrastructure and superstructure, and the Mediterranean is no

exception. With larger and wider ships, it is necessary for channels and keys to be deeper, and for cranes to have a wider reach. Container terminals that boast depths above 16 m and the new generation of

Super Post Panamax gantry cranes will be better placed to attract new traffic. The danger is for ports to get caught in the vicious circle that prevails in much of the liner industry, in which there seems to be no

end in sight with respect to the maximum size of ships.

Larger ships (such as the ones recently commissioned by lines such as

Maersk and Evergreen) can cut freight rates dramatically because of economies of scale. These cuts are often rolled over to ports, which

are usually told they will have to cut rates too to be served by such ships. At the same time, ports have to invest heavily to accommodate these ships (dredging, docks, cranes, etc). The net result of this,

coupled with increased competition among ports, is an added pressure on ports to operate on increasingly thinner margins. There is obviously a limit to the extent this is feasible without jeopardizing the

ports' financial position. For some Med ports that are struggling to get developed and are short of financial resources, this can be a serious problem.

4. Financing

The obvious issue in the development of port infrastructure and

superstructure is who would finance it. There is no magic recipe here. Ports that can raise capital easily have a comparative advantage over those that cannot.

Raising capital from public sources has become increasingly difficult for Med ports, as pressures to eliminate deficits and subsidies pervade

the policies of many governments, and as capital is scarce anyway in many developing countries. Financing sources such as Cohesion Fund

for some of EU's peripheral regions and other EU funding programs can be used to provide some of the necessary capital.

Private capital use has become a more common method to finance port development recently, and in some cases it has become a necessity. The development of many private or partly private ports has been spurred to a large extent by the availability of such capital. It is speculated that such use will become more prevalent in the years ahead, as privatization becomes more common in Med ports.

In the liner shipping area, one has seen shipping giants such as Cosco, Evergreen, and Maersk, as well as port operators such as the Port of Singapore Authority, Eurokai, and P&O Ports (the list is not exhaustive) willing to make substantial investments in Mediterranean port infrastructure and superstructure. This means that these private companies expect that the Med can provide a substantial return on their investment.

If there is a difference between private and public financing of port infrastructure and superstructure, it is perhaps in the criteria that are applied in the assessment of the respective investments. Thus, whereas private return on investment is expected to be the norm as a criterion in private financing, public financing has traditionally involved broader criteria, more linked with some form of social welfare.

For instance, port development in remote and peripheral regions (and

there are several such areas in the Med) is unlikely to attract too much private capital, as it is unlikely that such development will be able to achieve acceptable returns to the private investor. In the port of

Piraeus, which finances itself, investment in the passenger port (which is the largest in the Med in terms of traffic) has never produced a reasonable return, at least by private criteria. This has been partly by

design, and partly by necessity.

The differences between the two classes of financing notwithstanding,

it is our view that these differences will tend to get less pronounced in the future than what they have been in the past. The reason is that guidelines dealing with cost recovery, subsidy elimination, and

transparency of port pricing will receive higher attention in the future, and these guidelines will force a more uniform treatment of port

investment, whether by public or by private funds.

5. Pricing

The European Commission's "Green Paper on Ports and Maritime Infrastructures" (presented and discussed in Barcelona last May) has issued some principles to be adhered to as far as port pricing is

concerned. One of these is the "user pays" principle, meaning that prices that are charged to port users should reasonably reflect the full

costs of the services rendered. A related principle is that of "transparency" in port charges, meaning that a port charge should be clear as to what it entails and how it is calculated. Elimination of state

aids, or other forms of subsidy, is considered a related desirable goal.

Such principles may be reasonable and easy to state, but more

difficult to implement than it would seem at first glance, and a debate on this matter is ongoing within European port industry circles. For instance, it would be unfair to apply the user pays principle to a port

in isolation, while this principle is not applied to other components of the intermodal chain which the port in question, or other competitor

ports, are part of. If for instance a railway serving port A is subsidized or if external costs in that railway are not internalized, it would be unfair to apply the user pays principle to port B that is competing with

port A. It would be equally unfair to apply this principle only to the port sector, and not to other modes of transport linked to ports. That would distort competition.

For Med ports, this means that the application of such principles, although worthwhile in and of itself, would have to be coordinated

with the application of the same principles in other contexts as well. These contexts may involve transport scenarios that are geographically away from the Med, but that could, by way of chain

reaction, impact traffic through Med ports. The concept of the "European Rail Freeways", advocated by the European Commission, should be applied with caution as far as pricing is concerned, so as to

avoid distortion of competition across modes. Such a distortion may very well have negative ramifications for European ports in the Med.

Irrespective of the Green Paper, price competition among Med ports is expected to continue, partly as a result of external pressure from the

shipping lines, and partly as a result of the internal pressure to stay in the race in which some ports are engaged. It is up to the Med port community to decide how far it can tolerate pressures of this kind, and

what measures it can take to defend itself against the negative effects of such a situation.

6. Optimal use of port resources

The problem of optimizing port performance under finite resources and other constraints that effectively limit its capacity is not an easy one to solve. However, it is clear that better results could be achieved by the use of appropriate operations research methods, procedures, and other tools. The examples below are from the Piraeus container terminal, but may be applicable in other settings as well:

1) Scheduling berthing priorities. Right now the standard scheduling policy in Piraeus is First-Come, First-Served- FCFS, although this

can be overridden if necessary. As FCFS is not necessarily optimal, the question is what policy is better. If FCFS is

overridden, there should be at least some rules, so that the terminal is not accused of being arbitrary and unfair. 2) Allocation of ships to berths and cranes. A question is how many

gantry cranes should be allocated to each ship on arrival, at which berth this should take place, how many shifts of labor should be allocated, and other related matters. This is a difficult scheduling

- queueing problem to solve, particularly during periods of congestion, and in Piraeus it is being solved only manually at this

time. 3) Yard management. As containers are continually rearranged into the terminal's stacking areas, the question is how to do this so as to minimize movements of straddle carriers and increase

throughput. This is also a difficult problem, which is being solved only in an ad hoc manner at this time. 4) Route and schedule consolidation. By a suitable consolidation and

rearrangement of their routes and schedules, many lines could find that coming to Piraeus for transshipment is beneficial. Which

lines are prime targets for such a campaign by Piraeus? We have completed a preliminary study that sheds some light on this question, but more work is necessary.

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7. Conclusions

This paper has attempted to describe a set of factors that will likely be important determinants of the strategies that will be used by

Mediterranean ports in the years ahead.

Ports that manage to understand the importance of these factors will be better placed within the port competitiveness game than other ports that are slower to respond.

Whatever happens, it is clear that the port picture in the Med is rapidly evolving, and that we are in for a period of fluidity and

evolution before the results of the strategies that are at play finally crystallize.