Impact of Ports on the Ability to
Access International Markets

World Bank Transport Forum, January 22, 2003

James R. McCaul
International Maritime Associates, Inc.

1. Seaports are gateways in global distribution networks. Their function is to service importers and exporters. To the extent a port is efficient and movement though the port is seamless and predictable, the cost of imported products is lowered and exporters using the port are better able to compete in international markets. To the extent there are inefficiencies, unpredictability and extra costs, consumers pay more for imported products and exporters are handicapped in their ability to compete internationally. Sounds obvious — but we have seen many situations where the connection between trade access and port costs is either not recognized or appreciated. All of the supply chain participants upstream and downstream of the port lose when this happens. We discuss in this paper some of the more common inefficiencies and added costs in ports that impact the ability of a country to access international markets, describe actions that can be taken and indicate why these actions are important.

A. Common Problems in Ports

2. We have encountered ten problems in the port sector that impact a country's ability to access international markets. Not all these problems exist in all ports. But they are frequently found — and their cumulative impact can be a substantial burden on exporters and importers.

· Using ports as cash cows for the general treasury

· Failing to keep pace with trade requirements

· Investing in the wrong facilities and equipment

· Using port employment for social purposes

· Burdensome clearance and inspection practices

· Sticky labor

· Failure to apply IT strategically

· Poorly structured privatization of port services

· Policies and regulations inhibiting competition

· Bribery and corruption in the ports

Each of these is discussed below, along with examples of situations where we have seen the problem firsthand, some where corrective actions have been taken.

3. Using Ports as Cash Cows — Ports that service the local economy should be lean operations. They should raise sufficient revenue to (1) cover operating expenses (2) provide for reinvestment in facilities and (3) generate a small accumulation for unexpected events. To the extent the tariff is set up to generate a surplus beyond this amount, a tax is being imposed on exporters and importers. But situations are often encountered where a government treats its ports as cash cows to generate income for the general treasury. In one country we have worked, the port authority receives 51 to 65 percent of the revenue generated by the terminal operators operating in the port. Even higher revenue sharing percentages apply to some of the other port services. What makes this particularly notable is that virtually all of the traffic moving through the port is locally generated. So in effect, the surplus generated by the port sector is nothing more than a tax on local exporters and importers. This tax ultimately gets passed on to local consumers in the form of higher prices for imported consumer goods. It also raises the cost of the country's exports, impeding the ability of exporters to compete in world markets. What would happen to prices of imported goods in local supermarkets if the port authority decreased its take from the revenue sharing arrangements? How much more competitive would exporters be? These are the questions that should be asked.

4. Failing to Keep Pace with Trade Requirements —To ensure efficient access to international markets, ports need to keep pace with underlying customer requirements. Sometimes things are beyond the control of the port. Location, natural harbor conditions, original quay depth design, etc. can present major obstacles to being able to keep pace with requirements to accept increasingly larger containerships. This in turn can take a port off the mainline route, potentially impacting the country's importers and exporters through longer transit time and higher transport costs. For example, most ports in the Arabian Gulf that once had direct access to international markets are now serviced by feederships operating through hubs in the UAE, Oman or Yemen. But often the port can reinvent itself and adjust to the changes. The port of Baltimore illustrates how this can be done. Fifteen years ago Baltimore was the primary East Coast gateway for Midwest container freight, being 150 miles closer to Chicago, Detroit, Toronto, etc. than any other East Coast port. However, a number of circumstances conspired to undercut Baltimore's comparative advantage vis a vis the port of Norfolk for container freight moving to and from the Midwest. This loss of market occurred at the very time that the Maryland Port Administration had just completed the $600 million Seagirt container terminal. Port management initiated an effective response to the changed environment. The ensuing years have witnessed a rapid conversion of much of the cargo handling equipment, terminal layout and cargo handling specialization within the port. Today, Baltimore has transformed itself into a major boutique port — one that specializes in handling pulp and paper products, newsprint, construction materials, farm equipment, automobiles, buses and project freight. Most of the port's local container business is still handled at Seagirt. But the ports other large container terminal has been largely re-engineered, subdivided into a number of specialized cargo handling zones and leased out to tenants with specialized cargo handling competencies.

5. Investing in the wrong facilities or equipment — The flip side to not investing enough is to buy the wrong thing. This happens all too frequently in the port sector, resulting in the need to recapture expenditures for useless capital equipment through increased charges or deferring investment in other port services. Examples include purchasing new container cranes with inadequate height or reach for the types of ships that will use the port, requiring additional expenditure for modification and never quite getting the full efficiency that would have been achieved if the proper size cranes had been initially ordered. This could also include a massive blooper such as investing in a new container terminal that goes largely unused because the market either didn't exist or evaporated before construction ended. The terminal in Cagliari is a good example of a massive blooper. Having built the new Cagliari International Container Terminal at an estimated cost exceeding $500 million, the Port Authority and terminal concessionaire have been unable to land any major customer to utilize the facility as a hub. The terminal is said to be losing $5.7 million per year and the entire investment may largely be a worthless sunk cost. The only beneficiaries of the new container terminal have been the container carriers who regularly use the threat to relocate to Cagliari to muscle handling charge reductions from other hubs in the Mediterranean. Certainly market access for exporters and importers in Sardinia has not benefited from this white elephant — and the cost of the eventual write down will likely be at least partially borne by port users.

6. Using Port Employment for Social Purposes — This is a problem common to many ports. Basically, the port sector is often used to provide employment to persons who otherwise would be out of work. It's relatively easy to do this when the ports are operated as public entities under the control of a government ministry. Just create some new employment positions and pass along the added cost of the excess labor force through higher charges to port users. In Sri Lanka, for example, the Port of Colombo has been massively overstaffed, with 12,000 unnecessary personnel on the port payroll. In Brazil, the Port of Santos is estimated to have about 7000 unnecessary personnel among its workforce of 11,500 employees. In Port-au-Prince we found that about 850 of the 1430 personnel on the port payroll were redundant. In Egypt, according to a 1997 World Bank report, there were more than 20,000 unnecessary personnel in the port sector, including personnel in public operating companies in the ports. It would not be difficult to cite many other ports that are drastically overstaffed. To some extent this issue has been dealt with in ports through severance packages, other financial incentives and retraining activities designed to reduce redundant personnel. But the problem is very difficult to deal with, given the extraordinary amount of excess labor often found in the port sector and the political clout of organized port labor in maintaining its hold on jobs. One thing for sure is that to the extent the port payroll is padded by excess personnel, the cost of providing port services is inflated, other port spending priorities are impacted and ultimately exporters and importers pay more than necessary for international access.

7. Burdensome Clearance and Inspection Practices — While the ultimate objective should be for ports to provide seamless movement of cargo, in some cases the process is unbelievably inefficient and slow due to burdensome clearance and inspection procedures. In one country in which we have worked, rules call for virtually all imported containers to be stripped and inspected in the port area. Seeing a large number of containers lined up row after row with the contents pulled out for inspection is an impressive sight. In another country, clearance procedures require as much as 15 to 20 days from arrival in the port and the resulting congestion in the port adds 0.5 percent in demurrage charges to the cost of imported goods. A Bank report in the late 1990s estimated that this was costing the country more than $60 million per year. In a third country, we found that as many as 17 signatures are needed for importing goods and as long as one month can pass before import cargo is cleared. To the extent these problems remain, it is not possible for importers and exporters to take full advantage of containerized transport. Instead of seamless movement of goods, the clearance requirements result in a series of barriers that impede traffic flow. These burdens can be largely eliminated. For example, in the new Sukhna port in Egypt, streamlining of the clearance and inspection process is said to have reduced the clearance time from 28 to 2 days. This is accomplished through electronic transmittal of manifests, elimination of translation requirements, automated calculation of fees and use of x-ray equipment for container inspection.

8. Sticky labor — Ocean shipping has changed significantly over the past 30 years with the introduction of containerization. Use of containers has resulted in a dramatic decrease in the number of personnel required to handle cargo in the ports, as well as major changes in the types of skills required. But the ability to make these adjustments has been limited by "sticky" labor practices in ports throughout the world. Many of these practices are the result of historic arrangements that are very difficult to unravel. In Lebanon, for example, Société Libanaise d'Acconage has the right under a presidential decree to unhook containers. In Malta, the Port Workers Scheme controls the lashing of containers under a long-standing arrangement that no longer makes any sense. In Pakistan, the "sons clause" transfers jobs from generation to generation in the Port of Karachi. Common to sticky labor situations is the ability of a relatively small group of labor within the port to disrupt port activity. Sticky labor is often found at a choke point in the port. Rather than tackle the issue to rationalize the situation, it's often found expeditious to leave things in place — accept the problem as a cost of doing business. But at the end of the day, these practices add cost and inefficiency to port operations, which ultimately impedes the ability of exporters and importers to access international markets.

9. Failure to Apply IT Strategically — Physical distribution is increasingly information intensive and ports are often not keeping pace with the requirements of international traders. With the intensification of IT in global logistics, ports are expected to be information agents — sources of data entry, quality control and confirmation of existing data, integrators of diverse data, synthesizers of data into operationally relevant information. Their role is becoming more and more important to assuring that the supply chain operations of commercial partners upstream and downstream of the port remain integrated, coordinated and transparent. Much of the success of ports like Singapore and Dubai is related to the way that they have effectively applied IT to create virtual communities of traders with the port in the information center. But the majority of ports worldwide have much to do to strategically apply IT in a manner which will assist port users in their efforts to compete in the global marketplace.

10. Poorly Structured Privatization of Port Services — Generally speaking, privatization of port services has been found to improve the efficiency of port operations. The advantages from port privatization are well documented in the Port Toolkit. But a poorly structured privatization can decrease rather than increase the efficiency of port operations. A worse case privatization scenario is the transfer of port services from a public to a private monopoly without providing a regulatory structure to ensure the public interest is maintained. We recently encountered a situation where management of a port has been outsourced to an international port operator who has been given full control over the operations and finances of the port for the next twenty years. But no entity has been established to monitor the practices of the port operator — despite the fact that the port is the only gateway to the country. What's to ensure the public interest is protected? We also recently encountered a situation where the criteria for selecting the successful bidder for a terminal concession were poorly structured, resulting in the award to the bidder who used a loophole to win the contract. Ok, except the bidder then discovered that he couldn't make money with the price he offered and ultimately backed out of the deal — leaving the government with a semi-finished container terminal in which it had invested over $100 million. The terminal remains unfinished today. How much has the delay in opening the terminal had on the ability of local exporters and importers to access markets?

11. Policies and Regulations Inhibiting Competition — There are many ways that competition can be inhibited in the port sector. Any of these will ultimately raise the cost of using the port. An example found in many countries is the use of a national tariff that applies common charges to all of the country's ports. This is frequently the situation where the ports are under the control of a central government ministry. In one country in which we have worked, a national tariff applies to the eight ports in the country, preventing ports from competing with one another for traffic on the basis of different prices. This "one size fits all" tariff policy removes one of the basic freedoms for competition. We found, for example, that establishing separate tariffs for each port would open the opportunity for one particularly underutilized port to compete for containers originating in the local industrial area, rather than be sent 150 miles by road to another port for export as is now done. Each port has its own cost structure and should be permitted to exploit its comparative advantages. Within ports there should also be the opportunity for competition among port service providers. Regulations often restrict the number of service providers in particular activities, ostensibly to provide sufficient core business for current players and maintain the quality of service in the port. But in many situations, there is nothing wrong with opening the sector to anyone who wants to play. The recent freeing up of tug service in European ports has indicated the advantages that can be gained from offering competition to the established player. In the end, competition should increase efficiency and reduce the cost of port services. Ultimately the port user wins and access to international markets is enhanced.

12. Bribery and Corruption in the Ports — Let's face it, the port business is not comprised of angels. Stories exist throughout the world of small time bribery that has to accompany passage of ships and cargo through a port. Opportunities for rent collection abound wherever traffic queues form, vessels line up for discharge or cargoes accumulate in the port. And once rent collection becomes institutionalized within a port, opportunities to reduce delays and to shorten queues invariably fail. This is not to say ports are unique. Bribery is common practice in many activities. But anecdotally, the port sector seems to have more than its fair share of this practice. Any ship's agent, freight forwarder or other company responsible for moving ships or cargo through a port knows there are many hands to grease. While many of these euphemistically named "informal costs" or "rent" are individually minor amounts, overall they can add up to a substantial figure and be a general burden on the port user. In Lebanon, a trade efficiency study estimated $475 in informal cost is encountered to import a 40 ft. container through the Port of Beirut. This cost, like other costs incurred in the port, is passed on to the importer and exporter. However, the direct cost of corruption is only a small part of the total social and commercial cost. The cost of lost cargoes, delayed cargoes and missed sailings typically exceed the rents collected through bribes and other forms of self dealing in the ratio of 100:1. While it's naive to think that informal costs can be fully eliminated in the port sector, their full eradication should be the ultimate goal. Certainly, they should not be simply accepted as a way of life. They impede access to international markets.

B. What Can Be Done

13. While these problems are formidable, they are not unsolvable. But the solution must start by recognizing that there is a problem and harnessing top level support to deal with a very complex situation involving many players. Then a long term strategy should be formulated, measurable goals set and continued monitoring set in place to assure things are moving in the right direction. Some ideas on what can be done are discussed below.

14. Recognize There are Problems — The first step is to recognize that problems exist in a country's port sector. This is not so easy. Port managers have a perspective that often precludes seeing problems that the port can be having on the overall economy. We have frequently encountered situations where a port authority is quite proud of its financial performance, pointing to the sizable surplus that the port generated in the latest year. But management fails to point out that the rates charged for services in the port are higher than ports in the surrounding area, productivity is not so good and the port user community is dissatisfied with the level of service it is receiving. All the port manager sees is that the port makes money. Of course it makes money — without financial checks from competition a port is largely able to make a surplus by simply adjusting the prices to cover costs and make a surplus. If costs increase, rates increase. Underlying problems can go a long time before being noticed. In almost every other key link in international supply chains comparisons are made being made, traded and compared among production and distribution platforms. This process of continuous process analysis and refinement known generically as "benchmarking" has become a refined science within most globally competitive industries. Sadly, this is not yet the case in the port industry.

15. Harness Top Level Support to Deal with the Problems — Ports are complicated places. One writer described them as places where the ship hits the paperwork. All types of government agencies can be found in ports that have some degree of control over activities in the port area. Customs is responsible for inspecting cargo and ensuring duties are collected. Agriculture is responsible for checking the quality of imported foods. The Coast Guard controls access to the port and watches for environmental deficiencies. Immigration watches for unwelcome visitors. Other agencies get involved elsewhere. All of these agencies typically report to separate government ministries, with the result that there is frequently lots of finger pointing, rather that solution finding, when port users complain about problems in the port. We recently studied a port in the middle east that had a reputation for poor, unfriendly service. Our recommendation to make certain changes in Customs inspection procedures to reduce clearance time provoked a loud protest from Customs, saying port employees, not Customs inspectors were the source of the problem. The port was not transferring containers to the inspection area in a timely manner. Port management had a different view, saying it was all the fault of Customs. They were taking too long to inspect. It is not uncommon to see this type of finger pointing — which in the end is not productive as it does not solve the problem. The only way to effectively deal with issues that cross ministerial borders is by creating an inter-ministerial coordinating group that has full powers to identify and resolve issues that cause port inefficiency. But this group needs top level support in the government to be effective and should include participation of the most senior government economic advisor. We believe such a coordinating body, provided it has the full support at the top of the government, can get at the problems in the ports and make a difference.

16. Formulate Strategy and Priorities for the Port Sector — The strategy of a port should be to maximize its contribution to the country's ability to access international markets. Investments in equipment and facilities should be benchmarked against this strategy and only investments that contribute to the strategic vision should be undertaken, and even there priorities are required to determine which investments get first access to available funds. In formulating strategy and priorities, we have found a mapping technique placing the port on a competitive landscape to be useful. However, the main point is not the technique, rather the type of thinking that needs to go into a strategic decision to invest in new facilities. The test of any investment should be to what extent it will ultimately improve access to international markets.

17. Establish Measurable Goals for Improving Market Access — A strategy without measurable goals will likely die on the vine. There will be no way to know whether the implementation of the strategy is successful. Measurable goals such as reducing port costs as a percent of CIF value of imported goods, reducing average clearance time and reducing paperwork required for export and import shipments are direct indications of how successful the strategy is in improving market access. Specific, but realistic, targets should be set for these improvements. Note that among these goals is no mention of reducing labor, privatizing, buying new equipment, etc. These are means, not ends.

18. Follow up with Continued Oversight at the Top Level — Someone at a high level should be responsible for reviewing the performance of the port sector on a continuing basis and ensuring that the strategic goals are being achieved. If not, responsibility for the shortfall should be determined and corrective actions taken. This may include replacement of top management in the port. The entire focus should be on making the port sector responsive to accessing the international market. No barrier to trade created by the port sector should be accepted.

C. Why Action is Needed

19. Ports should contribute to a country's ability to access international markets. They should be integral partners in a global distribution network, not inhibitors to trade. To the extent the country's port sector falls short of fulfilling this goal, exporters are less competitive, consumers pay more for imported goods, the country does not exploit the advantages of modern transport systems and the country's economic growth potential is not realized. Let's look at each in more detail.

20. Exports are Less Competitive — Exporters operate on a global competitive landscape where customers often have the capability to switch sources of supply. Many types of fruits, for example, can be sourced from West Africa, Latin and South America, the Caribbean or Asia. Cement and other building products often can be sourced from many different export locations. Grain and other basic agricultural foodstuffs have alternative sourcing possibilities. Clothing manufacture is globally footloose, with many potential locations to source product. Basically, unless an exporter has a unique product, there will be a competitor out there that will threaten to take market share if the cost of delivering product increases. Even where there is a situation of no alternative source, increased cost of delivered product will meet the normal demand curve, with fall off in volume as price increases. Ports play a role in this picture. To the extent port costs are unnecessarily high, exports are choked off as the added costs are passed on in the delivered price. In some cases, the port could make or break the ability of an exporter to enter or remain in an export market. Ports are certainly not the only factor that limits export potential, but they are part of a mosaic that determines the ability of exporters to compete internationally.

21. Consumers Pay More for Imported Goods — Higher port costs are passed on to port users, ultimately passing through to consumers of imported products. This can be a major factor driving the cost of basic commodities in developing countries. In the Horn of Africa, for example, a USAID study found that port related costs for delivery of basic foodstuffs to Ethiopia represented 5 to 8 percent of CIF value of import shipments, with inland distribution costs representing another 10 to 16 percent. Reducing this percentage would ultimately be reflected in the cost of doing business in the country. The WFP for example spent $168 million in 2001 to supply food aid to Ethiopia and bringing port costs to 4 to 7 percent of CIF value would save almost $2 million in operational expenditures. How many more people could be fed with these savings?

22. Advantages of Modern Transport are not Exploited — Port inefficiency prevents a country from fully benefiting from the advantages of containerized shipping. Containerization offers the potential to seamlessly move goods from point of origin to final destination under one waybill without the cargo being disturbed in route. Ports that create impediments to seamless transport are doing a major disservice to the country's economy. For example, a country in which we have worked in the middle east requires incoming reefer containers to be emptied at the port and the contents transferred to local trucks for inland movement. This interrupts the flow of traffic, adding cost and burdens that get passed on to consumers. In Egypt, where spread of containerization has been discouraged by Customs formalities that require containers to be unstuffed in the port, a Bank study in 1997 concluded that limited use of containerized shipping was costing Egypt $600 million per year. This is a large drain on the country's resources.

23. Economic Growth Stagnates — Reduced export opportunities, higher import costs, not exploiting modern transport processes is a combination that limits economic growth. The extent of the impact will depend on the circumstances of specific countries. The greater the reliance on international markets, the more the impact. But overall the world economy is increasingly being integrated and the export share of GDP in most countries has been increasing over the past 50 years. Failing to keep pace with world trade growth will leave a country behind in this international competition. Ports have the capability to help countries stay in front of the competition, or fall behind.

D. To Sum Up

24. Ports are nodes in international distribution networks that affect the efficiency, predictability and cost of these networks — and impact access to international markets. We have described a variety of problems typically found in ports. Eliminating these problems should be a high priority. The results of an inefficient, high cost port will ripple through the economy, cutting exporters from potential overseas markets and raising prices consumers pay for imported goods. We think many of the problems are solvable, but first they must be recognized and top level action taken to address them.