Ports in Short Sea Shipping. A critical assessment of the European Maritime Transport Policy

Ports in Short Sea ShippingA Critical Assessment of the European Maritime Transport Policy

Ancor Suárez AlemánPhd Dissertation – Tesis Doctoral

Facultad de Economía, Empresa y Turismo Universidad de Las Palmas de Gran Canaria, 24 de octubre de 2013

Contents

Introduction. Facts and SSS

Chapter 1. A critical review of recent EMTP

Chapter 2. Theoretical tools for analysing the role of ports within the EMTP.

Chapter 3. Port efficiency in the EMTP. Is time adequate to measure efficiency?

Chapter 4. Are there other incentives to promote port efficiency?

Chapter 5. The determinants of SSS potential success. A case study.

Future research & overall conclusions

2

Facts

90% of the EU external freight trade is seaborne.

Above the 40% of intra-EU exchanges is carried by sea.

Roads are (still) the preferred modal choice for users, with a market share of 46,6% (COM, 2012c).

European policies: aimed at reducing the environmentally negative effects of transport and to re-balance the uneven modal split.

Short Sea Shipping (SSS)

SSS is currently viewed as an alternative to road transport in most of the European corridors.

In this thesis we adopt the description suggested by the EU, which defines the SSS as

“the movement of cargo and passengers by sea between ports situated in geographical Europe or between those ports situated in non-European countries having a coastline on the enclosed seas bordering Europe.”

The role of ports in fostering SSS promotion has been under-reported. EU policy has focused mainly on prompting companies to transfer cargo from road to sea.

4

The EU promotes maritime transport

-------SSS

How ? How not ?

Giving aids to companies that shift cargo from road to

sea and funding infrastructure

Encouraging port efficiency

How to estimate it according to SSS

requirements?

Time in the port performance

How to minimize it?

Incentives to promote port efficiency

A case study

Why?

Geography

Competition concerns

Environmental concerns

CHAPTER 1

CHAPTER 2

CHAPTER 3

CHAPTER 4

CHAPTER 5

Chapter 1

A critical review of recent European maritime transport policies

Transport activities account for about 5% of European GDP, providing around ten million direct jobs and numerous indirect ones in related sectors.

Any effective transport policy needs to go well beyond local or national borders, and requires strong international cooperation (COM, 2011b).

In the EU, road transport has received particular attention from the authorities. The high demand for this mode and its official encouragement resulted in much congestion on the roads.

7

European Maritime Transport PolicyA critical review

8



Road transport still plays the leading role in the EU freight movements: it has absorbed about half of the market share in the last few decades (COM, 2012c).

The EU has developed a number of different financing instruments with the aim of reaching actual intermodal competition in the last two decades.

The EU goals may be summarized as:

1) offering environmentally sustainable solutions and

2)promoting the aperture of the transport markets to achieve free and undistorted competition (COM, 2011b).

9

A critical review of the EMTP Geography

Around 70% of European industrial production is located within 150-200 kilometres from the sea (Paixão and Marlow, 2002).

According to the Eurostat (2011), around 205 million people live in the EU coastal regions, i.e. 41% of the EU population or 44% of the coastal Member States’ population.

Over 1,200 commercial seaports operate along some 70,000 kilometres of the EU coasts (COM, 2013a).

10

A critical review of the EMTP The environmental concerns

SSS is considered to be the most environmentally friendly mode of transport (Paixão and Marlow, 2002; Camarero Orive and González Cancelas, 2004; Medda and Trujillo, 2010).

Eurostat (2011) data: 33% of energy consumption is accounted for by transport and 80% of this is by road.

It is unrealistic for governments to expect shippers to move to a more environmentally friendly, modally integrated transport choice if, in doing so, it results in additional costs (Brooks and Frost, 2006).

11

A critical review of the EMTP The role of intermodal competition

COM (2011b) points out the need of establishing a level playing field between modes that are in direct competition.

The Commission has stated that “SSS can help rebalance the modal split, bypass land bottlenecks, and it is safe and sustainable” (COM, 2003).

12

A critical review of the EMTP Main objectives and instruments

Operations

TEN-T1996-

PACT 1992-2001

Infrastructure

European Maritime Transport Policy (EMTP)

Marco Polo I 2003-2007

Marco Polo II2007-2013

Motorways of the Sea (PP21)

€1.5 tr.

€53 m.

€102 m.

€740 m.13

A critical review of the EMTP Conclusions

As COM (2013b) states, “the ambitious objectives of modal shift set by the legislator have not been fully achieved”

A contradictory and ambiguous sentence from the Commission states, “Marco Polo represents a good example of efficient use of the EU funds even if the programme's objectives have not been fully met and the allocated budget has not been entirely spent” (COM, 2013b).

Thus, while support and funding have been given to companies that shift cargo from road to rail or SSS, there are no incentives to promote efficiency in SSS activities and to make this more attractive to companies.

14

Chapter 2

Theoretical tools for analysing the role of ports within the EMTP

16

Chapter 2A theoretical model for freight transport market

We depart from traditional transport cost models to develop a theoretical model for intermodal competition between two alternative modes – road transport vs. SSS – in a single corridor.

Byroad

Origin Des na onFactory Finalmarket

BySSS

Port C

1

1 32

Port D

We will determine the generalized cost of each alternative,

This analysis comes from Dixit and Nalebuff (1993).


p : price per kilometrez : taxes per kilometredOD: distance between origin O and destination Dvi : value of time of shipper iκ : carriage all in (includes loading, unloading, drive to the storage)Q : quantity (p.eg., a TEU)Smode : average speed on each mode

troad

a : road access time (explain)

η : port inefficiency

18


Each firm will choose the mode that minimizes its cost.

Let us now suppose that there is heterogeneity in the value of time (v); the willingness to pay for time differs at individual level.

We seek the marginal shipper that is indifferent to choose one mode or another. Therefore, considering that firms are located between 0 and 1 in time value space, this firm will determine the modal split.

19

( ) (0,1)iv f product and company characteristics= ∈

mGCmode

= min GC1,...,GC

M{ }


GCroad

= GCsss

19

20


vi

* =p+ z( ) ×d

AB−d

AC−d

BD( ) − κQ

÷×d

CD

troad

BD + troad

AC + troad

a + tsss

CD +η − troad

AB

0 v* 1

GC

Road

SSS

SSSfirms Road firm s

21

Chapter 2a) Increasing road transport taxes

∂vi

*

∂z=

dAB

−dAC

−dBD

troad

BD + troad

AC + troad

a + tsss

CD +η − troad

AB

0 v* v* ’ 1

GC

Road

SSSfirms Road firm sNewSSSfirms

SSSSSS’

Road’

22

∂vi

*

∂ κ / Q( ) =d

CD

troad

BD + troad

AC + troad

a + tsss

CD +η − troad

AB

Chapter 2b) Funding “carriage all in” cost

0 v* v* ’ v* ’’ 1

GC

Road

SSS

SSSfirms Road firm s

NewSSSfir

ms

New SSSfirms

SSS’ (h)SSS’ (l)

23

∂vi

*

∂η=

− p+ z( ) ×dAB

−dAC

−dBD( ) − κ

Q

÷×d

CD

troad

BD + troad

AC + troad

a + tsss

CD +η − troad

AB

2

Chapter 2c) Improving port efficiency

0 v* v* ’ 1

GC

Road

SSS

SSSfirms Roadfirm sNewSSSfirmsSSS’

24

Despite EU efforts, maritime transport has experienced a decrease in terms of market share while road transport has augmented.

Supply chain efficiency has been largely ignored by the EU, especially in the case of ports, the nodes of SSS activities, despite their key role in SSS competitiveness.

An improvement in the level of efficiency would provide the correct incentives for firms, which would recognize by themselves how SSS is more profitable in cases where it actually is.

Chapter 2Conclusions

24

Chapter 3

Port efficiency in the EMTP. Is time adequate to measure port performance?

Frequently, ports either actually constitute, or are perceived as constituting, bottlenecks that reduce the competitiveness of maritime corridors (Wilmsmeier et al, 2006).

Traditional port efficiency studies:

Factors such as size or value of the labour force or the number or value of capital items as inputs into the port production process, with quantities (typically couched in terms of TEUs, containers or tons) as the product of the production process.

DEAs or SFAs

Widely covered in the academic literature (González and Trujillo, 2009).

Chapter 3Port efficiency in the EMTP

26

Our hypothesis: From SSS perspective, the time spent within the whole transport corridor becomes a major issue.

Through the development of a conceptual and theoretical model, this chapter proposes the direct utilization of the time spent in port by ships as a suitable measure for port efficiency.

Chapter 3Port efficiency in the EMTP

27

Madrid-Pariscorridor

Port A Port BMaritimeprice (€)

(1)

Maritime

time(hours)(2)

Maritime

externalcosts(€)

(3)

Monetary

cost (€)(4=1+roadcosts)

Total time(hours)(5=2+

roadtime)

Total external

costs(€)(6=3+ roadext. costs)

Subsidized

Int. Price(€) (4+6)

ToParis

Road Option 1398 43.1 423 1821

Gijón St. Nazaire 450 21 49 1500 36.6 353 No 1853

Bilbao Zeebrugge 950 44 127 1759 56.4 362 No 2121

Source: www.shortsea.es

An efficiency approach where the output is reoriented to the concerns of port users (“how long is going to take my stay at port?”) introduces greater transparency for them in terms of intermodal competition.

An efficient port has the possibility to charge higher prices if it provides faster and more reliable services or if it allows the shipper to save elsewhere (Wilmsmeier et al, 2006).

The time a ship spends in a port is a significant determinant of that port’s competitiveness. Indeed, Hummels (2001) suggests that time constitutes a trade barrier.

Chapter 3Time in port activities

28

Traditional efficiency analysis has been developed on the most efficient ports or terminals will attempt to minimize the time in port of ships, so the output can be maximized.

For several possible reasons, however, this could not be the case: ruptures between the time a ship spends in port and the quantity of output that a port or terminal may occur.

Thus, the estimated levels of efficiency which are derived from such an analysis may not correlate very well with the levels of efficiency as observed or perceived by port users in terms of the time their ships spend in ports.

Chapter 3Time in port activities

29

African ports provide a relatively straightforward and suitable study case to determine if empirically there are differences in results when we take different outputs specifications in efficiency analysis.

Data has been collected for 16 ports from the statistical information published annually by the Containerization International Yearbook (2012) and the Africa Infrastructure Country Diagnostic.

A non-parametric estimation is proposed (DEA).

Inputs: Length of berths (in meters), terminal area (in square-meters) and the number of cranes.

Outputs: Movements in port (output 1), movements per hour (output 2).

Chapter 3An empirical example

30

Chapter 3An empirical example

31

By adopting an approach where the outputs in port efficiency analyses are reoriented more directly to the needs and interests of port users (i.e. related to the time spent in port), the potential benefits are that:

1) There is greater transparency for port users in comparing and selecting alternative intermodal solutions;

2) Port decision makers are provided with more market-oriented (rather than merely technical) benchmarks and;

3) Policy makers within the EU are provided with explicit information on relative port performance from the perspective of users.

An immediate policy implication: the need to establish a data collection process in SSS terminals, attending to time structure disaggregation.


32

Chapter 4

Are there other incentives to promote port efficiency?

The government is under-informed in relation to the return of its policies, so ports are free to establish their own private goals, bypassing the public objectives that they are assumed to pursue (Barros, 2003).

Indeed, the European Court of Auditors (ECA, 2012) states that millions of European Union public port finance was squandered on ineffective transport projects.

16 out of 27 audited transport projects—which covered 85.5% of allocated the EU cohesion and structural funds between 2000 and 2006—ended up unsuccessfully.

COM (2009a) currently states that the challenge is to provide the right mix of measures to ensure that ports can cope efficiently with their gateway function.

Chapter 4Incentives to promote port efficiency

34

Agents: Government (the overall society). Road infrastructure (R). Port infrastructure (P).

Strategy: We minimize the aggregate social cost defined as the sum of the aggregate

generalized cost of each transport mode plus the subsidy.

Variables: Monetary component (m); Non-monetary component, as the sum of invested

time and the value of it, + the externality cost of each mode. Invested time: A minimum + the port inefficiency (η).

Chapter 4Modeling subsidies in the EMTP

35

Following the Chapter 2 analysis (…), the profit function of the port infrastructure is:

where k is the infrastructure capital cost c(e) is the cost of the effort exerted by the operator S(η(e)) is the subsidy that depends on the inefficiency and indirectly on

the effort exerted

To simplify, we assume c(e)=e and e ∈ {0,1}

Different degrees of effort. We also face the normalization: c(0)=0 and c(1)=1.

π = m− c( ) −ε P +ε R

t P − t R +η e( )

÷÷− k − c e( ) + S η e( )( )

Chapter 4Modeling subsidies in the EMTP

36

The government cannot observe the effort exerted by the infrastructure operator.

The objective is to obtain a second-best solution, that is, a proper subsidy to promote maritime transport.

But, the government has to minimize the social cost (S.C.), satisfying two conditions:

The participation constraint (P. C.)

The restriction of incentives compatibility (R.I.C.)

Chapter 4Government and ports: A moral hazard problem

37

Thus,

This problem is solved as usual for inequalities, that is, with a Kuhn-Tucker approach. The equilibrium condition:

Min SC

p(e)[(m− c) ε R −ε P

t P − tR +η(e)

i=1

N

∑ − k − e+ S η(e) ≥ 0

∂∂e

p(e)[(m− c) ε R −ε P

t P − t R +η(e)

i=1

N

∑ − k − e+ S η(e)

≥ 0


1= −λ − µ p '(e)

p(e)+η ''(e)+η '(e) S ''(η)

S '(η)−c−m( ) ε P −ε R( ) η ''(e)

S '(η)(t P − t R +η(e))2

÷÷

38

Naming , and

Then,

Corollary. Under the assumptions , and , a necessary condition is .

Here we can discuss among different types of contracts—depending on different subsidies schemes— to determine how they incentivize port inefficiency reductions.

∆ε = ε P −ε R( ) ∆b = m− c( ) ∆t = t P − tR( )p '(e)

p(e)= −1− λ

µ+η ''(e) 1+

∆b ∆εS '(η)(∆t +η(e))2

÷

η ''(e) < 0 ∆ε < 0 m > cS '(η)(∆t +η(e))2 < −∆b ∆ε


39

1. Fixed Payment

The most frequent mechanism: each policy based on giving a fixed amount of money to port authorities or terminal operators.

The infrastructure operator’s behaviour chooses the smallest possible effort.

Proposition 1. Under a fixed payment, the effort exerted by the operator is equal to 0, e=0 . Therefore, the optimal contract is a fixed payment equal to 0, .

Ports have no incentives to make a proper use of the funding; they could not be exerting the required effort.

S(η) = 0


40

2. Proportional payment

The operator receives a payment proportional to the inefficiency reduction. Let assume that the proposed contract takes the form .

The operator maximizes his profits considering this contract and the government takes the operator’s decision as given to choose the minimum .

Proposition 2. The minimum , the one that determines the government’s choice, is given by:

S(η) = αη

α

αMIN =∆b ∆ε

e2 − ∆t( ) 2− 12e


41

α

3. Two part contract

Proposition 3. Fixed part of the two-part tariff does not give incentives to the operator

to exert any level of effort. Thus, the optimal two-part tariff becomes a proportional one

with , and .

S η( ) = δ +αη

δ = 0 αMIN =∆b ∆ε

e2 − ∆t( ) 2− 12e


42

These results validate our hypothesis that subsidies similar to those proposed by European Commission are not an efficient mechanism for forcing port or terminal operators to exert an effort in the inefficiency reduction.

The need of improving port efficiency does not mean that the EU should support projects without any condition.

As a policy recommendation, here we propose the development of a subsidy per inefficiency-reduction unit. If port operators perceive the benefits of decreasing total time—by reducing administrative procedures or improving access to the infrastructure, among others—, then the policy will meet its real objective. Thereby, the efficiency gain process would be internalized.

Chapter 4Conclusions and policy recommendations

43

Chapter 5 The determinants of SSS potential success. A case study

Chapter 5The determinants of SSS potential success

There are 34 services which link 43 European ports in the Cantabrian shore and 35 services linking 64 European ports, considering SSS as alternative to road transport.

Assumptions:

18 cargo net tonsAn average road speed of 65 kilometers/hourA price per kilometer of 1.1 euros.

45

Chapter 5The determinants of SSS potential success

Chapter 5The role of prices

Some exogenous factors affect the monetary cost, which finally is one of the main strategic variables in any market: price established by transport operators.

We have built a database that includes the following variables:

Total cost per kilometrei (mi)

Subsidized routei

Maritime frequency (MFi)

Competitors in the route (NCi)

Distancei

Road transport cost (RCi)

GDP origin and destination

mi= β

0+ β

1Subsidized

i+ β

2MF

i+ β

3NC

i+ β

4Distance

i+

+β5RC

i+ β

6GDPo+ β

7GDPd+ Port effect

i+

i=8

18

∑ εi

47

Chapter 5The role of prices

Explanatoryvariables (A) (B) (C) (D) (E)

Subsidized route -0.59 (0.27)* -0.60 (0.28)* -0.57 (0.26)* -0.17 (0.13) -0.19 (0.08)*

Maritime frequency -0.07 (0.06) -0.07 (0.06) -0.07 (0.06) -0.08 (0.03)** -0.19 (0.06)**

Competitors in the route 0.35 (0.31) -0.11 (0.14) -0.75

(0.12)***

Distance -0.001(0.0003)**

-0.001(0.0002)**

-0.001(0.0002)**

2e-4 (6e-5)** 0.0001 (6e-5)

Road transport cost

(alternative)-0.02 (1.68) -0.018 (1.70) 0.94 (0.27)** 1.04 (0.34)**

% distance by sea -9.67

(1.59)***

-9.36

(1.23)***

GDP region of origin 6e-5 (4e-4)

GDP region of destination -6e-8 (6e-6)

Fixed effects by Port of origin No No No No Yes

Constant 4.98 (0.93)*** 5.00 (1.42)** 4.59 (1.68)** 6.46 (0.64)*** 6.21 (0.74)***

Observations 185 185 185 185 185

R2 0.38 0.38 0.38 0.75 0.79

F-statistic 14.16** (*) (*) (*) (*)

Note 1: *** 1%, ** 5%, *10% significance test. Standard errors are shown in brackets.

Note 2: (*) Due to use of cluster option, Stata does not report the F statistic for conjoint significance.

48

Chapter 5The role of external costs and time

This section examines the up and down of maritime transport.

More than 16,600 kilometres of the train network are also overcrowded, resulting in bottlenecks. According to the EU estimations, the damage from congestion accounts for more than 1% of EU GDP (COM, 2011b).

With regard to time and external costs, econometric estimations are not required. Travelling time depends on distances and speeds; that is, fixed and known factors. There is also other time that is not taken into consideration in this analysis: port time.

Monetary price, time and external costs provide evidences to choose different alternatives. Thus, the final choice will depend on user’s time value.

49


SSS would reduce the external costs in all the cases analysed, halving them in some cases.

Road generalized prices are higher than maritime ones in routes to Rome, London and Moscow: SSS is more competitive not only in monetary or external costs but also in time.

DECONSTRUCTINGSSSSAVINGS. THECASEOFMADRID

Route from

Madrid

Best Origin–Destinationports

combination.

Monetary

Cost savings

TimeCost

savings

External Cost

savingsGeneralizedprices

to Paris Gijón - St. Nazaire -7.29% 15.08% 16.54% Undetermined

to Rome Barcelona- Civitavecchia 26.9% 49.3% 52.3% gROAD > gSSS

to London Bilbao - Portsmouth 22.04% 23.82% 52.69% gROAD > gSSS

to Berlin Valencia - Genoa -3.91% 4.44% 22.22% Undetermined

to Moscow Santander - Kotka 6.41% 20.6% 40.59% gROAD > gSSS

50


Barcelona, being a coastal city, provides some advantages in the commerce with other coastal cities such as Rome.

It is probably the most competitive Spanish SSS corridor, due to the European geography, as cost data reflects.

DECONSTRUCTINGSSSSAVINGS. THECASEOFBARCELONA

Route from

Barcelona

Best Origin–Destinationports

combination.

MonetaryCost

savings

TimeCost

savings

External Cost

savings

Generalized

prices

to Paris Barcelona-Fos -6.76% -88.3% 30.56% Undetermined

to Rome Barcelona- Civitavecchia 40.32% 50.11% 76.7% gROAD > gSSS

to London Bilbao - Portsmouth -5.15% 9.34% 30.50% Undetermined

to Berlin Barcelona - Genoa 9.48% 7.34% 12.37% gROAD > gSSS

to Moscow Barcelona - Genoa -0.68% 23.45% 15.88% Undetermined

51


It is frequently assumed that maritime transport generates longer transit time, and it is seen as the slowest mode of transport.

However, the European geography provides a very proper scenario to encourage SSS corridors.

In the present analysis, the Mediterranean and Cantabrian coasts have proved to be suitable locations to establish some profitable corridors to central and east Europe.

SSS corridors generate substantial reductions compared to road transport, varying from 15.88 to 76.7%.

52

Future research &overall conclusions

Future research

Main lines of our future research

1. A demand analysis based on SSS user’s perception.

2. Determining the deconstruction of total time in SSS ports through the development of a database to monitor SSS activities.

3. European SSS terminal efficiency analysis.

4. A study on the European SSS fleet to determine the full impact of external costs.

5. Extension to other geographical areas.

54

Overall conclusions

SSS has not been properly promoted. There are no incentives to foster efficiency in SSS activities and to make this more attractive to companies.

The EU should not be financing firms to reach the desired modal shift, but making SSS more attractive, through the promotion of supply chain efficiency and implementing a combined road internalization cost measure.

Port inefficiency is mainly a matter of time: the more the movement of cargo in port/terminal takes, the more inefficient the port/terminal is.

Time savings must be considered as efficiency gains and should be promoted to guarantee a real modal shift.

EU should promote those SSS-intermodal corridors that are actually the best alternative to the society. 55

Thank you

Ancor Suárez AlemánPhd Dissertation – Tesis Doctoral

Facultad de Economía, Empresa y Turismo Universidad de Las Palmas de Gran Canaria, 24 de octubre de 2013

Documents

Ports in Short Sea Shipping. A critical assessment of the European Maritime Transport Policy