Transport Terminal Governance

Authors: Dr. Jean-Paul Rodrigue, Dr. Brian Slack and Dr. Theo Notteboom

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1. The Nature of Governance

Governance is the exercise of authority and institutional resources to manage activities in society and the economy. It concerns the public as well as the private sectors, but tends to apply differently depending if public or private interests are at stake. Like all sectors of activity, transportation has a unique set of characteristics about its governance. For transport terminals many different forms of governance are in place which shape modes of financing, operations, functioning and external relationships. There are two main components of terminal governance; ownership and operations. Ownership involves who the owner of the terminal site and facilities (including equipment):

• Public ownership is common because of the economic and strategic importance of many types of terminals. In many countries passenger railroads are owned by the national government, and the passenger stations are thus under the control of the state-owned railway company, such as is the case in China, Europe and North America. Public ownership of airports is also prevalent, although in the United States this takes palce at the State or municipal levels of government. Under public ownership, investment in infrastructure and planning future expansion is carried out by the public authority using public monies. The private sector is then offered leasing opportunities which terms and duration can be negotiated.
• Private ownership is less evident in transport terminals. There are numerous exceptions for certain modes, such as road freight (distribution centers), rail freight transport in North America, and where privatization has taken place, as for example in ports and airports in the United Kingdom and New Zealand. Here, private capital is used to provide infrastructure.

Operations involve the day-to-day management and carrying out of terminal activities:

• Public control of operations is typical in many ports, such as Singapore and Hampton Roads, in many state-controlled railroads such as China, and at publicly owned airports such as in the United States. Here the public authority provides the handling equipment, contracts with the labor force, and operates the rail, airport and port terminals.
• Private companies manage and carry out operations in privately owned terminals. They are also active as operators in many publicly owned facilities under a concession agreement. The latter is a growing trend in ports and airports, where facilities are leased to terminal operators for fixed terms. The types of concession vary considerably, in terms of duration and conditions. Some are short term, a few years or so; more typically they are long-term concessions of 15 to 30 years. In some the owner provides some equipment, such as gantry cranes in ports, in others the concession holders are expected to invest in equipment. In some they are required to use public employees, while in others they may use their own workers. In Canada a half-way private/public system of governance of major airports and ports is in place. The airports and ports are leased to locally-managed non-profit corporations that have to operate the facilities commercially, without access to public funds. Surpluses have to be re-invested.

Public ownership and operations has been important in many modes because of the strategic importance of transport and the long term investments required that the private sector may be incapable or unwilling to make. In this way the terminals can be owned and operated as public goods, and can be integrated with public regional and national economic policies. On the other hand, public facilities are seen by some as slow to respond to market conditions, with a propensity to over-invest in non-economic developments, and with high costs to the users.

There is a growing tendency towards privatization in transport as a whole, particularly with deregulation. Transport terminals increasingly became an attractive form of investment for private equity firms seeking valuable assets and a return on their investments. This is manifested in the sale of ports and airports in some countries such as the UK, and in the break-up of state rail monopolies, as in the EU. Privatization is most evident, however, in the awarding of operational concessions to private companies. The trend towards concessions is warranted in part by the belief that the private sector is more efficient than the public in operating terminals, and that this form of governance keeps the ownership still under public control. It is also seen as a mean of reducing public expenditures at a time when states are becoming less willing (or able) to make large investments. Thus, the setting of public / private partnerships is seen as a dominant trend in the governance of transport terminals.

2. Changing Port Governance

Even as late as the 1980s, ports around the world were amongst the types of terminal most dominated by public ownerships and operation. While the form of governance differed greatly, from the municipally-owned ports in Northern Europe and the US, to the state owned ports in France, Italy and much of the developing world, public ownership was dominant and publicly managed port operations were prevalent. This contrasted with the shipping industry, where private ownership was almost universal. The changes, slow at first, came from two directions:

• First, there was the belief, promoted in the UK by Prime Minister Thatcher, that the transport industry as a whole should be divested to the private sector to promote competition. Ports were among the many sectors thus targeted. New Zealand actually carried out this policy before it was finally implemented in the UK. In both countries the state has relinquished control over the port industry.
• Second, there was a policy recommendation from the World Bank that developing countries would do well to free their highly controlled port industry, by issuing concessions to companies capable of modernizing their port industries and better manage operations. To facilitate the changes required, the World Bank created a Port Reform Tool Kit to demonstrate to States how to go about affecting the reforms.

These developments helped create what has become a global snowball of port reform. It made governments around the world more open to considering reforming port governance and offering better conditions to ensure privatization. The growing demands for public and private investment in ports, precipitated by the growth in world trade, and the limited abilities of governments to meet these needs because of competing investment priorities, were key factors. Thus while few were willing to go as far as the UK in the total privatization of ports, many countries were willing to consider awarding concessions as an intermediate form of privatization. The result has been an almost global trend towards the award of port operational concessions, especially for container terminals.

If the opportunities to award operational concessions can be seen as an increase in demand, growth has also been greatly affected by an increase in the supply of companies seeking concessions. In Northern Europe and the US many ports had already operated through concessions, awarded to local terminal handling companies. Because they were relatively small and locally-based with only few exceptions, they did not participate in the global growth of opportunities for concession awards. The exceptions were Stevedore Services of America (SSA) that was already active in several US West Coast Ports, that obtained concessions to operate facilities in Panama and several other smaller ports in Central America, and Eurogate, a joint company formed by terminal handling companies from Bremen and Hamburg, that obtained concessions in Italy.

The major global terminal operators mostly came from Asia with four large companies dominating, three coming from a stevedores background and one from a shipping line:

• Hong Kong-based firm, Hutchison Port Holdings (HPH), part of a major conglomerate Hutchison Whampoa.
• Port of Singapore Authority (PSA), the government owned operator of the port of Singapore.
• Dubai World (DW), which is mainly part of a sovereign wealth fund created to invest the wealth derived from oil trade.
• AP Moller Terminals (APM), as a parent company of the world's largest shipping line; Maersk.

HPH, which originated as a terminal operator in Hong Kong, first purchased Felixestowe, the largest UK container port, and today has a portfolio of 51 terminals around the world, including in Rotterdam and Shanghai. PSA has been active securing concessions in China and Europe, including Antwerp. These two terminal operators take their origin from globally oriented ports offering limited local terminal expansion opportunities. The local operators were thus incited to manage the constrained assets efficiently and to look abroad for expansion opportunities. DW has grown through purchases, such as P&O Ports and CSX World Terminals, and by securing concessions elsewhere.

Shipping lines have also participated in terminal concessions, but to a lesser extent. The most important is the in-house terminal operating company of Maersk, APM Terminals. In addition, Evergreen, COSCO, MSC, NYK, and CMA-CGM hold port terminal leases. Between the dedicated terminal operating companies and the shipping lines, a global pattern of concessions is evident.

3. Significance and Consequences

The rapid expansion of terminal operating companies reflects two economic forces. First, the entry of former terminal operators into the global system represents a process of horizontal integration, in which the companies, constrained by the limits of their own ports, seek to apply their expertise in new markets and seek new sources of income. Second, the entry of shipping lines into terminal operations is an example of vertical integration, in which the companies seek to extend their control over other links in the transport chain. Several other factors explain the growth of global terminal operating companies:

• Profitability. By modernizing port operating systems, mainly through better equipment, information systems and management, port holdings are able to increase the profitability of their terminal assets. For instance, HPH achieved a 35% per year return on investment in the early 2000s. Port management was very lucrative, inciting others to expand existing assets and new players to enter the field.
• Financial assets. Port holdings have the financial means to invest in infrastructures as they have a wide variety of assets and the capacity to borrow large quantities of capital. They can use the profits generated by their efficient terminals to invest and subsidize the development of new ones, thus expanding their asset base and their operating revenues. Most are listed on equity markets, giving the opportunity to access global capital, which realized in the last decade that the freight transport sector was a good source of returns driven by the fundamentals of a growth in international shipments. This financial advantage cannot be matched by port authorities even those heavily subsidized by public funds. In other cases, terminals became financial assets per se which can become more valuable as the traffic they handle increases (additional revenue). Financial holdings, such as retirement funds, are thus considering transport terminals and port terminals in particular, as valuable assets to own in a portfolio.
• Managerial expertise. Port holdings excel in establishing procedures to handle complex tasks such the loading and unloading sequence of containerships and all the intricacies of terminal operations. Many have accumulated substantial experience in the management of containerized operations in a wide array of settings and are therefore able to transfer managerial expertise to new terminals. Being private entities, they tend to have better customer service and have much flexibility to meet the needs of their clients. This also includes the use of well developed information systems networks and the capacity to quickly comply with legal procedures related to customs, clearance and security.
• Gateway access. From a geographical standpoint, most port holdings follow a strategy aimed at establishing privileged positions to access hinterlands. Doing so they secure a market share and can guarantee a level of port and often inland transport service to their customers. It can also be seen as a commercial strategy where a “stronghold” is established, limiting the presence of other competitors and a situation of monopoly. Gateway access thus provides a more stable flow of containerized shipments. The acquisition of a new port terminal is often accompanied by the development of related inland logistics activities by companies related to the port holding.
• Leverage. A port holding is able to negotiate with maritime shippers and inland freight transport companies favorable conditions, namely rates, access and level of service. Some are subdiaries of global maritime shipping lines (such as the A.P. Moller group controlled by the shipper Maesrk) while others are directly controlled by them (such as Hanjin or Evergreen) so they can offer a complete logistical solution to international freight transportation. They are also better placed to mitigate pressures from port authorities to increase rents and port fees. The “footloose” character of maritime shippers has for long been recognized, with a balance of power more in their favor than of the port authorities they negotiate with.
• Traffic capture. Because of their privileged relationships with maritime shipping lines, port holdings are able to capture and maintain traffic for their terminals. The decision to invest is often related to the knowledge that the terminal will handle a relatively secure number of port calls. Consequently, a level of traffic and revenue can be secured more effectively.
• Global perspective. Port holdings have a comprehensive view of the state of the industry and are able to interpret political and price signals to their advantage. They are thus in position to influence the direction of the industry and anticipate developments and opportunities to offer global solutions to terminal requirements in ports around the world. Under such circumstances they can allocate new investments (or divest) to take advantages of new growth opportunities and new markets.

The growth of multi-national terminal operating companies has resulted in a concentration of power. In 2005 the top five global terminal operators accounted for 47% of global container port activity. What is perhaps most important is that they now dominate at the most important container ports in the world. They are able to wield monopoly power in many parts of the world. The consequences of this power remain to be analyzed, but there is growing evidence of dissatisfaction in many ports about the actions of these companies that possess long term leases. Thus, in Genoa there is concern about the lack of performance of the port since PSA took over the main container terminal. In Antwerp, there are concerns about the imposition of Singapore-based management systems on a European operation. In China there is opposition to HPH and how it is increasing terminal handling costs to enhance profitability, which is seen as undermining China's competitiveness on global markets. On the other hand, there is strong evidence to suggest that port performance has improved in most ports as a result of the award of concessions to international terminal companies. The question will be whether to regulate further concentration of power.