An Analysis of the Dynamics of Ownership, Capacity Investments and Pricing Structure of Ports

Abstract

With more than 80% of the world's cargoes being transported by sea, effective port management is critical to the well-being of the global economy. This study models the effects of port ownership and governance on capacity investment and pricing structure, and these changes' implications on port service level and social welfare. The study argues that capacity investment and pricing are significantly influenced by a port's ownership form, and the different levels of government involved. Inter-port competition leads to increased capacity investments by private investors and local authorities, which can be either higher or lower than social optimal level. Therefore, it is important for policymakers to consider the effects of institutional and competition factors in port reform initiatives.

Acknowledgements

Financial support from the Hong Kong Polytechnic University (ICRG: A-PJ57) and the National Natural Science Foundation of China (11101069) are gratefully acknowledged. Also, the authors would like to thank the independent reviewers for their useful comments and advice. The usual disclaimers apply.

Notes

There are various industrial sources indicating that, in the past three decades, there had been a substantial reduction of port calls in container liner shipping. For example, according to Europe Container Terminal's (ECT) report, before the 1990s, a typical East-Europe liner shipping route called more than ten ports along the European coastline. In 2004, such a typical route only called fewer than five ports along the same coastline. For further details, see ECT (2004).

For a detailed description of the ownership and management structure of ports, including tables summarizing port ownership, see Farrell (2012).

Nowadays, Twenty Foot Equivalent Unit (TEU) is the generally accepted standard unit of measurement for containers.

Here the terms “local” and “central” governments are used as references only. In practice, local government may need to care about users' interests to maintain long term cooperative relationships. However, a central government does not always fully appreciate port users' well-being, especially foreign companies who do not have a major local presence. As shown in the following sections, such alternative specifications will only make a difference when there is substantial inter-port competition.

For example, one alternative delay function is D = Q/Q(K − Q), thus D approaches infinity when output Q approaches capacity K.