WORLD BANK PORT REFORM TOOL KIT MODULE 2 THE EVOLUTION OF PORTS IN A COMPETITIVE WORLD The Port Reform Toolkit could be elaborated thanks to the financing contributions of the following organizations: The Public-Private Infrastructure Advisory Facility (PPIAF) PPIAF is a multi-donor technical assistance facility aimed at helping developing countries improve the quality of theirinfrastructure through private sector involvement.For more information on the facility see the web site:www.ppiaf.org. The Netherlands Consultant Trust Fund The French Ministry of Foreign Affairs The World Bank The Port Reform Toolkit Modules have been prepared with the contributions of the following organizations,under the management of the World Bank Transport Division: International Maritime Associates (USA) Mainport Holding Rotterdam Consultancy (formerly known as TEMPO),Rotterdam Municipal Port Management (The Netherlands) The Rotterdam Maritime Group (The Netherlands) Holland and Knight LLP (USA) ISTED (France) AXELCIUM – Ingenierie et Regulation Financiere (France) Nathan Associates (USA) United Nations Economic Commission for Latin America and the Caribbean (Chile) PA Consulting (USA) Comments are welcome. Please send them to the World Bank Transport Help Desk. Fax:1 202 522 32 23.Internet:[email protected] MODULE 2 THE EVOLUTION OF PORTS IN A COMPETITIVE WORLD COMPETITIVE SCAN MODULE achieved over the past several decades, ports are now perceived to be the remain- The port sector has radically changed ing controllable component in improving over the past two centuries. During the the efficiency of ocean transport logistics. 19th century and first half of the 20th cen- This has generated the drive today to tury ports tended to be instruments of improve port efficiency, lower cargo han- state or colonial powers and port access dling costs and integrate port services and egress was regarded as a means to with other components of the global dis- control markets. Competition between tribution network. Because of the capital ports was minimal and port-related costs intensity of such efficiency improvements, were relatively insignificant in compari- these have also generated the drive to unbind ports from bureaucratic control of son to the high cost of ocean transport public entities and encourage private sec- and inland transport. As a result, there tor operation of a wide range of port- was little incentive to improve port effi- related activities. ciency. OVERVIEW OF THE COMPETITIVE How times have changed! Most ports LANDSCAPE today are competing with one another on a global scale and, with the tremendous In the 21st century, five forces will inter- gains in productivity in ocean transport act to shape the competitive landscape 1 BOX 1 THE COMPETITIVE LANDSCAPE DETERMINANTS OF THE THREAT OF TTHREATHREAT OOFF NNEWEW DETERMINANTS OF THE INTENSITY OF DETERMINANTS OF SERVICE NEW PORT ENTRANTS ENTRANTSENTRANTS PORT RIVALRY PROVIDER BARGAINING POWER • Capital intensification in ports and • New port facilities in the region • Balance of demand and • Number of competing • Experience and unique capabilities that the terminals that creates barriers by • Start up of regional load centers supply for port services ports able to service provider brings to the port raising cost of entry • New service providers in the port and facilities in the region economically access the • Extent to which service provider • Changes in regional distribution • Ability to segment same hinterland markets participates in financing the activity patterns and ability of carriers to operations in the port to • Ability to control utilize load centers in place of direct efficiency of port • Existence of "choke points" in the port create competition service services, particularly that facilitate slowdowns or stoppages among service providers • Provisions in leases and other Customs clearance in port operations • Stakes at risk in agreements protecting service preserving existing procedures • Ability of service providers vs. port Potential of new ports or providers from new entrants in the business • Rules and policies on management to absorb downtime service providers port • Ability to absorb losses number of competitors • Inter-relationships among service • Natural barriers to expansion and/or and/or criteria for providers and port users • Magnitude of switching costs to cross-subsidize operating within the port • Legal rights conveyed in leases and utilize other ports or service operations other use agreements providers within the port 2 • Cost advantages of existing service BARGAININGBARGAINING PPOWEROWER OOFF providers and customer loyalties RIVALRYRIVALRY AMONGAMONG EXISTINGEXISTING BARGAININGBARGAINING PPOWEROWER OOFF SERVICESERVICE PROVIDERSPROVIDERS COMPETITORSCOMPETITORS PORTPORT USERSUSERS • Contractors Ability to control negotiations by the Intensity of rivalry within and Size and importance of the • Carriers • Concessions threat of curtailing or canceling services between ports port user to the port • Shippers • Labor • Tenants DETERMINANTS OF BARGAINING POWER OF PORT USERS • Degree to which individual port Ability to utilize other ports or users control a large percentage other sources of supply of traffic in the port • Business realignments and alliances among port users that result in more powerful players • Existence of large value adding tenants that the port wants to POTENTIALPOTENTIAL FORFOR retain GLOBALGLOBAL SSUBSTITUTEUBSTITUTE • Importance of the port to the local economy • Other sources of supply • The services provided by the port • Substitute products can be replicated elsewhere • Other assembly sites • Cost of switching to other ports or service providers facing port authorities and port service neighboring Somalia. Dar es Salaam is providers: 1) rivalry among existing the major entry point to Tanzania, as competitors; 2) threat of new competi- well as the neighboring landlocked tors; 3) potential for global substitutes; countries of Zambia, Burundi, Rwanda 4) bargaining power of port users; and and Malawi. Little general cargo enters 5) bargaining power of port service Madagascar without passing through providers (see Box 1). These forces will Toamasina. There is obviously little, if impact ports of all sizes, driving require- any, rivalry between ports in such cir- ments for port expansion, service cumstances. In other situations, many improvement, pricing decisions and ports may be able to provide access to a other management actions. Winners common hinterland, creating intense and losers will emerge in the global port rivalry for market share. Numerous sector, largely dependent on how port ports on the U.S. East, Gulf and West managers strategically position them- Coasts compete for traffic to and from selves in the evolving competitive land- the Midwest. Likewise, a number of scape (see Box 2) large ports in Northern Europe and the Mediterranean compete for the Rivalry Among Existing Competitors European hinterland. In Asia, Hong The intensity of rivalry within the port Kong, Shekou, Yantian, Fuzhou and and between ports is the first of five other ports compete for access to the forces shaping the competitive land- Southern China market and numerous scape. In some ports there will be little, ports in Northern Asia are available to if any, rivalry, given the location of the service the Japanese and Korean mar- port, type of service being provided, kets. rules on number of companies able to Ability to service transshipment operate within the port, etc. In other sit- trade — While rivalry for hinterland uations, rivalry among competitors will market access can sometimes be limited, be intense and often result in pricing that strips the suppliers of profits. There rivalry for transshipment business is are several factors that determine the intense, even for ports that have estab- intensity of port rivalry. lished leading positions as load centers. Singapore established its role as the Hinterland market access — In some sit- world’s largest transshipment center as uations, only one port can logically pro- a result of an advantageous location on vide access to hinterland markets. This the Asia/Europe trade route and prox- may result from geographical features, imity to regional origin and destination lack of adequate transport infrastructure centers in Southeast Asia. Malta from all but one port, political issues or Freeport and Gioia Tauro established other factors. The port of Djibouti cur- their positions in the Mediterranean rently has a virtual monopoly on access transshipment market as a result of their to the Ethiopian market as a result of the location on the Asia/Europe trade route conflict between Ethiopia and Eritrea and proximity to the Southern Europe and lack of transport infrastructure from and Northern Africa markets. Colombo 3 BOX 2 Checklist of Key Questions for Positioning in the Global Port Market Here are some key questions that port managers and port service providers should ask when develop- ing long term strategy for market positioning. Rivalry Among Existing Competitors Which other ports have access to my hinterland market? √ Is future supply and demand for port services in the region expected to be in balance? √ Are competing ports able to absorb losses through cross-subsidizing services? √ Who has the greatest stakes at risk in maintaining and growing traffic volume? √ Where do we have a comparative advantage over our competitors? √ What actions can we take to attract and lock-in customers? Threat of New Competitors √ Are