The Geography of Transport Systems
FOURTH EDITION
Jean-Paul Rodrigue (2017), New York: Routledge, 440 pages.
ISBN 978-1138669574
The Economic Impacts of Port Investments
Authors: Dr. Jean-Paul Rodrigue and Dr. Joseph Schulman
1. Ports and Economic Change
A port generally offers a value proposition to its regional since it offers economic and social benefits, but is also prone to environmental constraints. Significant increases in port throughput, particularly in the containerized sector, have put pressures for the development of new port infrastructures on existing facilities, and also for entirely new developments when additional capacity cannot be developed on existing sites. Ports are capital intensive infrastructures that are associated with a wide array of economic impacts. Port development and world trade are closely interrelated. There are numerous expectations by the public sector, which is often providing substantial capital investments (through the port authority or general funds), to see concrete and measurable economic impacts and benefits resulting from these investments. However, the existing literature is relatively scarce about the formal impacts of ports on regional development. Evidence is usually related to a single port over a narrow range of impacts, which makes general assessments difficult to make.
Economic impacts concern the wide range of changes brought buy infrastructure investment projects while economic benefits tend to be directly measurable impacts in terms of a monetary value. However, many of these impacts can only be observed after the investments have been made and the benefits measured. An ex-ante (forecasting) exercise is hazardous and commonly lead to inaccurate assessments. Port forecast models are rarely accurate. The bottom line is that the estimation of economic impacts of port investments is an inexact field, which focus on the effectiveness of transport infrastructure as a catalyst of indirect and induced benefits. Further, these investments are contingent to the scale and scope of changes in which they are taking place. Among the most relevant changes that have impacted ports and maritime transport:
  • Economic changes. Seaborne trade has increased substantially, in part because of the massive redistribution of manufacturing to low cost locations (outsourcing) and in part because of ongoing economic growth. This underlines the growing importance of logistics to organize the resulting complex distribution system.
  • Technical changes. The growth in ship size to better achieve economies of scale has been a prevalent technical change, particularly since the 1990s when post-Panamax containerships were first introduced. There is also a growing level of ship specialization (containerships, bulk carriers, car carriers, and even cruise ships) that required dedicated port terminal facilities. All of the above has been placing pressures on ports to upgrade and improve their facilities.
  • Organizational changes. The maritime and port industry are increasingly controlled by large shipping companies and terminal operators that have engaged in strategic alliances as well as mergers and acquisitions. Their goal is to provide a level of vertical and horizontal integration, which is improving the performance of the port transport chain. This has led in a number of ports to the setting of inland terminals.
The outcome of these changes have involved port developments that are more capital intensive, while relying on less labor and consuming more land. The imperatives of maritime shipping companies have been felt on ports as they increasingly tend to compete to attract traffic, particularly since hinterlands tend to be more contested. The industry is expecting lower tariffs and lower port times in light of a highly competitive environment and low profit margins. Ports acting in a monopolistic fashion are finding themselves with less leverage, with negative impacts on their activity and regional economies.
The spatial framework of the port is also changing. Many port areas have seen the relocation of port industries to new sites, either within the region or to another country altogether. These changes have been associated with a dislocation of the relationships of many ports with their localities and regions; this has been labeled as port regionalization. While the port remains a strategically important infrastructure, its economic benefits are less directly apparent within the community with weaker but more complex relations at the regional versus global levels.
The impacts of port infrastructure investments are expect of a positive influence of port throughput on local economic development. However, evidence across the world underlines that this influence is weak, with elasticity levels between throughput and employment that are typically less than 0.05 jobs per 100 tons. This implies growth in traffic volumes are not associated with significant direct gains in employment. This elasticity is among the weakest in the transport sector, particularly in regard to airports, which are the infrastructure with the highest elasticity. Still, the employment impacts of ports are positive and are usually higher for the service sector than for the industrial sector. Empirical evidence underlines that port infrastructure investment projects do foster economic development and are important when a port is nearing its operational capacity. Under such circumstances, the lack of investments will clearly lead to additional externalities, namely congestion, which will undermine the competitiveness of a whole region, if not a nation.
2. The Economic Benefits of Ports: Direct, Indirect and Induced Effects
Several economic impacts of port infrastructure investments obviously result into economic benefits. Economic theory often refers to ports as important factors of economic development, particularly from an historical standpoint where they promoted commerce and the welfare of nations. It is not surprising to realize that most of the world’s major cities are port cities, even if in many cases port activity now plays a rather small role in the general economic framework of their regions. The basic argument is that ports expand the market opportunity of both national and international firms. By expanding the market areas of firms, ports increase competition, resulting in lower prices for the consumers of the port traffic. These involve all sectors of economic activity, including manufacturing firms, heavy industries, resource extraction industries or retailers. Therefore, the economic benefits of ports are specific to the nature of the hinterland they service. They can be straightforward for hinterlands heavily dependent on resources, since the output is directly handled by the port, or more nuanced when the hinterland is involving manufacturing firms producing intermediate goods.
Increasing competitiveness brought by port investments can also be a double-edged sword for a national economy. It enables foreign firms to better access a national economy and thus compete with national firms, with some sectors being put out of business. However, the benefits of having better access to foreign markets and cheaper goods usually far exceeds the risk of having inefficient national firms being undermined. At the aggregate level, increasing competitiveness promotes positive economic benefits, but these benefits are not uniformly distributed among sectors and geography.
Ports can be considered as "funnels" to economic development since they act as a catalyst and incite development to take place in specific economic sectors and locations nearby ports or along corridors. The economic benefits of ports are commonly categorized as direct, indirect and induced. Indirect and induced benefits are far from being clearly identifiable since it is difficult to demonstrate that the economic activity and use of the related resources would only occur as a result of the port investment. When port investment does lead to increased economic activity, the benefit is properly measured by the net value of the additional output. The direct benefits to the port are financial in nature and would be taken into account in any financial appraisal as well as in economic appraisals. However, the financial benefits would be valued somewhat differently, with economic appraisals using a social discount rate and for some inputs possibly valuing them at shadow prices.
3. Assessing the Economic Benefits of Port Investments
The economic benefits of ports are usually measured at an aggregate level by indicators such as value added, employment, taxation revenue and return on investment. These indicators are primordial for the decision to invest in port development and must take into consideration:
  • Demand forecasts trying to evaluate the expected traffic that the investment will support and facilitate.
  • Liner shipping strategies, particularly how they service markets and how the port fits within their service configuration in terms of ship capacity and frequency. While some ports are acting as load centers, others are transshipment hubs. The function of transshipment is often the outcome of the strategy of a shipping company to service specific regions.
  • Hinterland transport capacity and accessibility is contingent to the cargo that is bound to and originating from the port. It defines the existing and potential cargo base that could be handled by the port.
  • Competition between terminals, since there may be competing terminals within the same port facility. Terminals in a monopolistic situation usually have more pricing power but can be linked with higher returns.
  • Financing of investment relates to the capital source and conditions. Large port infrastructure projects are usually financed by bonds issued by port authorities or by investments made by international financial institutions such as development banks, sovereign wealth funds or pension funds.
Assessing this information can involve different methodologies:
  • Surveys based on interviews and questionnaires or microeconomic data on firms. They try to identify and quantify the relationships between the various port actors, often from a qualitative perspective, but commonly in terms of employment. These studies have underlined the important relationships between freight forwarders and agents and that the economic benefits of ports are reflected in the complex system of transactions of the actors involved.
  • Input-output models that seek to identify inter-sectorial multipliers, such as between port traffic and regional employment. They underline the agglomerating effects of port activities, either around the port or around the port region. Such studies have underlined low levels of elasticity between port traffic and service sector employment.
  • Comparative analysis inferring economic benefits observed at a reference port, particularly its economic base. This approach tries to infer the economic changes that have already taken place in a comparable port setting (similar traffic and composition of traffic) to the port being investigated. Since local and regional economic conditions are not similar, such studies do not provide particularly accurate results. Still, they provide useful guidelines about what could happen to a port and its regional economy once an investment takes place.
Port activities have multiplying effects within an economy, which are much larger than the port itself. While the economic importance of port grows, particularly for the sectors they are connected to, their relative importance within the region they are servicing is often declining. There are thus diminishing total economic benefits for a regional economy as this economy grows and become more complex. The following are the most commonly observed economic benefits of ports on regional employment:
  • Port throughput is in general positively related to employment in port regions, implying that the higher the throughout the more employment. Employment impacts are more substantial in the industrial than in the service sector.
  • Employment impacts vary by commodity sectors. Container and break bulk traffic have usually twice the employment impact than dry and liquid bulk traffic.
  • Private ports usually have more regional employment impacts than public ports since they are usually servicing commercial supply chains.
  • Each direct port employment is commonly associated with about 3 to 4 indirect jobs, although such figures vary widely according to the surveys and the context. There is limited empirical evidence about job multiplier figures.
However, the economic benefits per unit of port cargo handled, either in terms of employment or economic activity, usually increase with economic growth. The lower relative benefits of port investments are thus masked by economic growth, while in fact the economic importance of ports is increasing. The economic benefits are less directly related to port activities, but more related to the dynamics of the supply chains they support. This support becomes operational and functional, a benefit which is as crucial to national competitiveness. Therefore, global trends underline a decline of the direct economic benefits of ports, but a notable rise in their indirect and induced economic benefits. This trend is challenging because direct economic benefits can be readily assessed while indirect and induced effects are complex to capture.
4. Global-Local Mismatch of the Economic Benefits of Ports
With the setting of global supply and transport chains, there has been a growing level of mismatch between the benefits of port activities and the scale and scope of these benefits. While at the aggregate level it is clear that port investments have economic benefits, the spatial and sectorial distribution of these benefits is far less evident. One particular mismatch concerns local (community) versus regional / national / global benefits. The following points underline this mismatch:
  • Labor usually comes from the local community and its benefits (mostly wages) are derived in the region, particularly indirect job multipliers. As port employment went down because of mechanization and containerization, so did the local labor benefits. Yet, several port jobs are remunerated at a wage which is much higher than those usually found in the manufacturing sector.
  • Capital usually does not come from the community, but is either provided by national and international funding sources, such as investment banks, pension funds and terminal operators. The return on this capital (e.g. loan or operational revenues) thus does not accumulate in the port region but along global financial centers.
  • Firms can be local in ownership but the commercial trends discussed above have underlined vertical and horizontal integration in the port industry. This means for instance that terminal operation at one port is usually part of a portfolio of terminals located in different ports across the region or even the world. Thus, profits derived from terminal operations are not necessarily invested in the port they were generated.
  • Port land use is usually regulated by leasing and concession contracts, but quite often land prices are a tool for attracting investors and they usually do not reflect real value. This underlines that the impacts of ports on real estate values are not necessarily fully accounted.
  • Local transport infrastructure, namely roads, are usually provided for free (or at a fee lower than costs). This represents a form of local or regional subsidy for globally focused activities.
  • Taxes and custom duties are just partly earned by the port region. They are usually a national source of income used to fund for other social and infrastructure programs.
  • Environmental (pollution) and social (noise, accidents) externalities are assumed by the community while the generators of these externalities usually bear only a fraction of them.
Port benefits are therefore increasingly distributed across actors and concern a geography that transcends the local community and at times the region. This trend skews the assessment of the benefits of port investments, where the local impacts can be much less significant than those at the regional or national levels. Conflicts or pressures can result from local communities that may be disappointed because their expectations about the economic benefits of port activities may not be met. Still, in spite of the complexity of assessing their economic impacts, ports remain fundamental to the economic well being of the nations, regions and localities they are embedded in.