JOINT TRANSPORT RESEARCH CENTRE
Round Table, 10-11 April 2008, Paris

Discussion Paper No. 2008-19
October 2008

Port Competition and
Hinterland Connections
SUMMARY AND CONCLUSIONSPort Competition and Hinterland Connections

TABLE OF CONTENTS

1.

INTRODUCTION ...............................................................................................................52.

THE CHANGING INDUSTRIAL ORGANISATION OF SUPPLY CHAINS AND THE
IMPACT ON PORTS ......................................................................................................... 6
2.1 Containerisation, larger vessels and expanding hinterlands ...................................... 6
2.2 The emergence of global supply chains ..................................................................... 7
2.3 The rising importance of transshipment hubs ............................................................. 8
2.4 Impacts on ports ......................................................................................................... 8
2.5 Impacts on modal split and on congestion in the hinterland ....................................... 93.

PORT AUTHORITIES’ RESPONSES ............................................................................. 11

4.

PUBLIC POLICY FOR PORTS AND SUPPLY CHAINS ................................................. 13
4.1 Local authorities ....................................................................................................... 13
4.2 Higher-level authorities ............................................................................................. 15

5.

CONCLUSION ................................................................................................................17

REFERENCES ....................................................................................................................... 18© OECD/ITF, 20083

1. INTRODUCTION

Maritime freight transport has experienced strong growth and profound change overrecent decades. Freight volumes and container traffic in particular have grown with theintensification of global trade and the geographical dispersion of production. The industrialorganization of the sector has evolved rapidly. These changes have rendered the portsbusiness environment more challenging. Many agents along the supply chain have engaged
in horizontal and vertical integration of activities. This has lead to more efficiency in the
movement of cargo, but has reduced the number of players, with an attendant risk of abuseof market power. The market power of the ports vis-à-vis shippers and shipping companies
has become correspondingly weaker.
The rapid expansion of trade has led to fast growth of throughput in many ports. As aresult, in many large gateway ports, local communities are increasingly concerned about thenegative impacts of port activity, including local pollution and congestion. The greenhousegas emissions generated by freight traffic are also a growing policy concern. This paper
explores the economic framework in which potential regulatory intervention to address theissues of competition, air pollution, congestion, greenhouse gas emissions, and financing
and provision of infrastructure should be considered. It begins with an overview of the mainchanges in the sector, emphasizing how they have affected the role of ports and of otherplayers in the supply chain (Section 2). Section 3 asks if ports’ current responses to thechanging environment are appropriate, or whether ports could and should play a more activerole in shaping the supply chain. It is argued that there may be ways for ports to strengthen
their positions within the supply chain, but that their actions may not always serve the public
interest, even when ports effectively pursue a mix of public and private goals. Section 4
examines the policy issues that result. We first look at local authorities’ scope for reducing
negative local impacts, and conclude that some agents along the supply chain are sufficiently
influential to affect policy design and potentially defeat its aims. At the same time purely local
regulation of these impacts is likely to ignore the benefits of trade that occur outside the local
economy. These observations highlight the need for better regulation at a national or
multilateral level. Unfortunately, there is little evidence of systematic national – let alonetransnational – policy frameworks towards ports or towards supply chains in general. This isproblematic, given the emergence of large transnational conglomerates that have createdagile and footloose supply chains with sufficient power to withstand or evade attempts toregulate them at national level.

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2. THE CHANGING INDUSTRIAL ORGANIZATION OF SUPPLY CHAINSAND THE IMPACT ON PORTS

This section briefly discusses three of the major changes in the way maritime-based
freight transport is organized: containerization, the emergence of global supply chains, andthe rising importance of transshipment container terminals. The impact of these changes on
the role and power of ports in the supply chain is then discussed.

2.1

Containerization, larger vessels, and expanding hinterlands

Containerization was a major technological innovation that revolutionized the nature ofmaritime-based freight transport of manufactured goods. It caused a substantial degree ofstandardization of port services, implying that ports cannot rely on specialization to maintainmarket share and generate revenues as much as they used to. With containerization, ports inthe same region become closer substitutes, and hence are more exposed to competition
from other ports and other routes. This tendency is reinforced by two other factors. First, theuse of ever larger container vessels1 implies that fewer port calls are required for the same
freight volume. This move to larger ships reduces shipping lines’ dependence on particular
ports and intensifies competition among ports for the remaining calls (assuming each port
can handle the larger vessels2). Second, the emergence of intermodal rail and barge
corridors has extended gateway ports’ geographical reach. The extension of hinterlands
leads to more overlap among ports’ hinterlands and hence to stronger competition.
These technological factors imply that the exposure of ports to competition has
increased. At the same time, there has been widespread adoption by governments of new
public management principles and the ensuing devolution of port management has resulted
in a more commercial approach to the management of port operations (Brooks andCullinane, 2007); this has led to intensified port competition as well. This is not to say that all
ports behave like private firms as, in many cases, they pursue a mix of private and public
objectives and there is considerable public sector involvement in infrastructure supply. Thechange in port behavior has been facilitated by a rather passive policy context; in section 3,
the question to be tackled is: is a more active public policy towards port and supply chain
developments now required?
Port competition is intense, but ports are not “perfect substitutes”, i.e. they are notinterchangeable perfectly or without cost. First, gateway ports still have a strong position in atleast some of their service area, as hinterlands do not overlap completely. Second, the1

The capacity of the world cellular container fleet increased by more than factor 4 between 1991
and 2006, and the share of ships with more than 4000 TEU increased from 8% to 47% (Wilson,
2007: 11)2

Accessibility is an issue for upstream ports such as Antwerp and Hamburg, and both ports
respond by engaging in dredging programs.

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intensifying effect of containerization on port competition may be muted by congestion in
ports or in their hinterland transport networks. When a port or its hinterland facilities are morestrongly congested than is the case for competing ports, the quality of that port’s service may
be lower in that it takes more time to access and egress the port and the reliability of service
declines, and this weakens its competitive position. The interaction between port competitionand congestion is discussed in more detail later in this section. Third, switching ports iscostly, although more from a terminal operator’s point of view than from the perspectives ofshipping lines or manufacturer-controlled supply chains. There is no consensus in theliterature on the degree of inertia in port choice from shipping lines’ point of view. It is widely
accepted that supply chains are increasingly footloose, but it is less clear which elements ofinertia remain.

2.2

The emergence of global supply chains

The second driver of change that directly affects the role of ports is the development of
global supply chains. These chains link strongly dispersed production and sourcing sites tomore geographically concentrated consumption regions. What matters from the point of viewof shippers and customers is the performance of the supply chain in terms of price, service
quality and reliability. This focus on the chain as a whole is reflected in efforts of the players
in various segments to consolidate, vertically integrate or otherwise enter into long-term
contracts, in order to drive costs down but also to increase the level of coordination andsynchronization. Such concentration and restructuring carries a risk of generating excessive
market power for some of the actors in the chain. It has also increased volatility, meaningthat small deviations from expected or planned processes have large consequences for
system performance. Volatility increases uncertainty and induces logistics providers to build
in redundancy by using more than one of a set of routing options, so as to mitigate route risk.
This trend further weakens the shipper or customer’s reliance on a specific port.
The increase in levels of concentration, along several dimensions, is quite spectacular.
In 1980 the top 20 of the world’s shipping lines controlled 26% of TEU-slot capacity; by 2007
their share had increased to 81% (Notteboom, 2008).3 Many of these top 20 further
concentrate effort by engaging in alliances. Shipping lines also vertically integrate, in somecases working towards “extended gates” where shipping lines take control of inland transport
and inland terminals and depots. At the level of port terminal operations, the market share interms of throughput of the top 10 players rose from 42% in 2001 to 55% in 2005. This raises
concerns over increasing market concentration. Some terminal operators have extended
vertically in the direction of “terminal operator haulage”. With respect to vertical integration,
the current picture is one of widespread experimentation with ways of organizing the supply
chain (see Notteboom, 2008, for an overview), and while it is not clear exactly which models
will persist, the emerging picture is one of market dominance by a handful of large players at
each segment of the supply chain, combined with fringe firms specialising in profitable nichemarkets. Despite the small number of players, competition in and for the market (within andbetween ports) is strong, and may be strong enough to alleviate concerns about market
power in the supply chain in many circumstances. Concerns were expressed by participantsthat the market power of integrated, global transport and logistics companies is a concern for
3

Increased concentration partly replaces the weakening impact of conferences (which set rates for
specific routes), so that the effect of concentration on market power may be weaker than
indicated by the percentage change.

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ports themselves. Finally, geographical concentration of flows is increasing as well. For
example, the North-South imbalance among ports in Europe is growing larger, and this islargely because of more favourable hinterland transport conditions in the North.
It is noteworthy that many actors along the supply chain are involved in attempts tovertically integrate, but that ports as such have not strongly engaged in this trend. In
combination with the technological trends discussed earlier, this further weakens ports’market and bargaining power.

2.3

The rising importance of transshipment hubs

A third key change is the changing role of transshipments. Gateway ports become moreengaged in transshipments, and pure transshipment hubs have emerged. More than 20 of
the 100 largest ports worldwide are transshipment hubs, in the sense that at least half oftraffic is ship-to-quay-to-ship (Baird, 2007). This evolution is related to increasing vessel sizeand fewer port calls per service discussed before, and is taking place in many regions. Major
gateway ports are increasingly profiling themselves as transshipment terminals, because thefragmentation of production tends to pull production out of (relatively expensive) gateway
cities.
Shifting transshipment to pure transshipment hubs reduces the pressure on gateway
port capacity, which can then focus on serving expanding hinterlands. There is no such hub
in Northern Europe at present, so that some 30% of activity in gateway ports in the region
concerns transshipment. While these ports may have little incentive to shed this traffic, it isless clear whether maintaining the current port configuration is optimal from a broader pointof view. The idea to construct a hub at Scapa Flow (Orkney Islands) is thought superior by
Baird (2008). At the same time, transshipment hubs in the Western Mediterranean are
currently moving towards more direct calls, a trend that may extend to the Eastern
Mediterranean. More in general, the hub-and-spoke model is attractive when the density ofdemand is low, but becomes less attractive as market volumes rise. Assuming continued
growth of demand, this suggests that the pure hub port model may not remain viable as,
ultimately, handling costs are lower for direct service than for transshipment connections.
2.4

Impacts on ports

One consequence of the three drivers of change in the organization of supply chains isthat gateway ports have in many cases become a replaceable element of the chain, withrelatively weak bargaining power. A port that provides service of a given quality at the lowest
price does not necessarily gain market share, as other factors – that are not under the port’s
control – also affect port choice. The focus shifts from port performance to supply chain
performance. Among the other factors, hinterland transport costs have become relatively
important, as the cost per kilogram per km on the hinterland is 5 to 30 times as high(depending on the hinterland transport mode) as the maritime shipping cost (Notteboom,2008). Routing choices, and to some extent port choices, are strongly dependent on
hinterland transport conditions and reliability of the total route has become increasingly
important to those in the supply chain making the routing decisions.

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This is not to say that port price and “internal performance” are irrelevant. For example,
Blonigen and Wilson (2006) find that port efficiency affects port choice. Also, efforts toimprove the reliability of port services can have a substantial payoff and, consequently,
reduce the incentives for shipping lines to acquire dedicated terminal capacity. Ports canincrease their attractiveness by exploiting complementarities with other parts of the supply
chain, for example through closer ties with inland distribution centers, as well as by making
efficient use of capacity in the port and the hinterland where they can (De Langen, 2008).
One way of increasing effective port capacity is through technological and operationalinnovations within the port. Rodrigue (2008) claims that improvements are available todouble the throughput of existing terminal facilities.4 A second way to effectively increase port
capacity is to move some functions into the hinterland. For example, ports’ distributionfunction is being decentralized by the creation of truck based inland distribution centers in the
nearby hinterland (“port regionalization”, Notteboom and Rodrigue, 2005), so relievingpressure on port capacity. In sum, it seems that port capacity is not a major constraining
factor in determining a port’s attractiveness, as no excessive levels of congestion shouldsystematically arise there. This assessment is reinforced by the observation that capacity
use in ports is organized in a more coordinated way than in general purpose transport
networks (as usage patterns are less fragmented), leading to better (though not necessarily
optimal) congestion management.

2.5

Impacts on modal split and on congestion in the hinterland

Hinterland transport uses a mix of road freight, rail, and marine (barge and short sea
shipping variants). Rail and barge operators require cargo consolidation in order to provide
an economically viable service. The combination of increased concentration at the level ofshipping lines and terminal operators and increased vertical coordination should therefore
provide conditions favourable to development of rail and barge transport, in the sense that it
promotes carrier haulage and not merchant haulage. Nevertheless it is likely that the successof rail and barge will be limited to a fairly small number of corridors where densities of traffic
are sufficient, and should not be expected to drastically change port impacts on hinterland
road networks.5 Short sea shipping is another potential competitor for road haulage. The“Motorways of the Sea” initiative in the European Union aims to stimulate sea-based
hinterland services. The competitive position of sea-based hinterland transport depends to alarge extent on the prevailing prices and infrastructure subsidies for other modes. Distortionsin the pricing of infrastructure use may hamper its development, e.g. where road freight uses
infrastructure at a price below marginal social cost. Furthermore, outside of Europe, thedivergence of regulatory policies applicable to short sea shipping restricts its development byindustry, with cabotage in US waters protected by the Jones Act.

4

Examples of such innovations are on dock rail facilities, barge services or high volume container
flows between dock and storage areas, as well as better stacking through operations research,etc. In addition, if information collected for security purposes were no longer proprietary, then it
could be put to productive use in ports and along the supply chain.

5

It was mentioned during the discussion that this is corroborated by the Australian experience withcomprehensive pro-rail policies, which were made ineffective by innovations in road freight
alternatives . Subsequently policy shifted to support for specific projects.

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9

It is noteworthy that inland distribution centers (port regionalization) increase pressure
on hinterland road and rail networks in Europe, with adverse effects on congestion and air
pollution. This form of port decentralization discourages a modal shift from truck to rail orbarge (or from rail to short sea), an effect likely to persist in the long run given the land-use
decisions involved. Ports tend to opt for regionalization because cheap land is available
outside the port and externalities are not internalized, so that port regionalization is cheaper
than increasing in-port capacity. If relatively cheap options to increase in-port capacity areavailable but ports nevertheless choose regionalization, there may be a role for public policy
to stimulate the development of in-port capacity, preferably by bringing the costs of truckbased inland distribution centres in line with social costs through infrastructure pricing
policies. Land-use policies may be used as well, but fragmentation of responsibilities and therisk of unexpected and unintended side effects make them less attractive.
The social costs of ports include not only congestion effects, but also local and global
pollution. Global pollution matters because the decentralized port region model is likely to be
more greenhouse gas-intensive than the centralized model and possibilities for carbon
capture are smaller (e.g. plans to store carbon in gas fields in the Port of Rotterdam werementioned during the discussion). There is considerable consensus that scale andintegration of port and logistics activities support the development of rail alternatives to road
haulage and are, therefore, more likely to be “sustainable” than decentralized and small
scale development. Scale alone may not generate sustainable patterns, so that steering
policy will be required.
The interaction between competing ports’ pricing and investment strategies is studied inrecent economic literature on competition between congestible facilities (De Borger et al.,2008; Zhang, 2008). A basic insight is that congestion in the port or in its hinterland
increases costs and hence weakens a ports’ competitive position. The hinterland congestion
problem is particularly relevant. Figures for the Los Angeles/Long Beach ports presented in
Zhang (2008) provide prima facie evidence that port growth and market shares suffer wherecongestion levels are high, and a survey of port managers by Maloni and Jackson (2005)
highlights that their concerns on capacity expansion are mainly related to the hinterland, notthe port. Hinterland congestion of course is not a pure port problem, as the networks serve aheterogeneous set of users and the share of port traffic often is fairly small. In fact, from theport and supply chain perspective, reliability – which is correlated with but different fromcongestion – may matter more than congestion itself.
It is clear that concerns about port and hinterland congestion are stronger when ports
compete. Hence, calls for more capacity in the port or its hinterland to alleviate congestion
are stronger in a competitive setting, and this may result in investment levels exceeding
those where ports face less intense competition (Zhang, 2008). Whether these investments
are closer in line with socially desirable levels is less clear, although the answer is likely to be
yes. In general one would expect private ports to invest more when there is competition thanwhen the port is a pure monopoly, with oligipolistic market structures falling between thosepolar cases. However, since decisions in investments in port capacity frequently are at least
partly made by public authorities, insights about private port behaviour provide little
guidance. In this regard, De Borger et al. (2008) find that privately owned competing ports
invest less in port capacity than ports that set commercial prices but whose capacity is
publicly financed, because the public investor has broader objectives than just port profits.
Port and hinterland congestion may be expected to affect the degree of ports’ market
share Specifically, one might assume that growth in traffic and rising congestion in the10© OECD/ITF, 2008

hinterlands of large gateway ports would lead to an increase in the market share of smaller
and less congested ports in the same port range. The evidence, however, shows that thishas not so far been the case. To the contrary, prevailing patterns of concentration prevail orare strengthened. For example, the share of traffic handled by the large ports within the
Northern European range is stable between 1975 and 2007 (but large upstream ports gain at
the expense of large coastal ports; Notteboom 2008), and the Northern range has gained
market share on the Mediterranean ports. Similarly, traffic on the US West coast remains
strongly concentrated in the Los Angeles – Long Beach ports, with a reasonably constant
70% share of west coast container traffic over the last two decades. This is not to say thatcongestion has no impact on routing, and switching major container flows to smaller ports
could have a large impact on local congestion. While up to now it appears that the benefits
from further concentration still outweigh the decision-makers’ costs, in some cases
congestion does intensify the search for alternative routings. The US west coast is an
example, where possibilities to substitute these routes with services via Panama and Suez toserve non-local markets are under consideration. Environmental constraints on capacity
expansion nevertheless appear a more critical factor for growth in the ports of Los Angeles
and Long Beach.
The geographical concentration of flows reflects the concentration patterns in supply
chains just mentioned, and suggests that the costs of hinterland congestion generally do not
outweigh supply chain benefits from increased concentration (internal returns to scale, or
external sources such as agglomeration economies), at least from a supply chain operators’
point of view. Whether the cost-benefit analysis is the same when broader social benefits(including congestion and other adverse effects incurred by non-port activities) are taken into
account is a different question, to which the answer is unclear. On the one hand,concentration and centralization may be more amenable to managing congestion (and air
emissions to the extent they are increased by congestion) than fragmentation of the supply
chain but, on the other hand, the spatial concentration of the negative impacts of supply
chain activity may excessively affect local communities. Irrespective of whether the local
impacts are excessive or not, the concentration of negative impacts provokes strong
resistance in communities adjacent to mega-gateway ports, and this may effectively
constrain further growth. The benefits of concentration and scale need to be weighed against
both the concentration of local environmental impacts and the potential costs of abuse of
market power.

3. PORT AUTHORITIES’ RESPONSESDe Langen (2008) argues that port authorities can and should become more strongly
involved with hinterland access infrastructure and operations. They can become involved
because port authorities control decision margins that affect the efficiency of hinterland
access. Specifically, port authorities can provide infrastructure inside and outside of ports (forexample, through the creation of inland terminals); they can manage infrastructure access toimprove the efficiency of use of port and hinterland capacity (for example, Key Rail was
created in Rotterdam to allocate slots for quayside access more efficiently); and they can
improve data exchange among the various agents involved in moving a container from ship
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to hinterland. While it has been suggested that concession contracts can be used tostimulate the use of some of these innovations, many ports have awarded very long-term
concessions without clauses for re-opening, and so their use is often constrained.
De Langen (2008) argues that port authorities should introduce better coordination along
the supply chain because other private and public parties have weaker incentives to do so.
There can also be social benefits from improved coordination. Landlord port authorities that
pursue a mix of private and public goals have an interest in providing efficiency-improving
coordination of parts of the supply chain, as coordination can contribute to their net revenues
from land leases and throughput growth. Even if not all benefits accrue to the port directly,
the partly public role of the port suggests they might be interested in generating broader
benefits as well. It was pointed out, however, that the business model underlying this view isunclear on exactly which public objectives are included and how they are traded off against
narrower commercial concerns. Moreover, the landlord port authority model followed in
Rotterdam is not universally applicable due to differences in governance and politicalcultures. When the model does work, it may help narrow the gap between responsibility forthe strong impacts that port activities have outside the port area and the rather narrow set ofcompetencies of a port in a traditional landlord port model.
Concession agreements with terminal operators are one lever that port authorities might
use to pursue objectives regarding modal split, environmental impacts, and the like. The Portof Rotterdam uses them to influence the use of port space and transport modes, setting
targets for the rail, barge and road shares in container movements out of terminals in the
new Maasvlakte 2 development. The Antwerp Port Authority, in collaboration with cargohandlers, has developed an alternative approach, acting as a facilitator to develop the use of
the rail mode through “Antwerp Intermodal Solutions (AIS)”. This role may be extended in an
Antwerp Intermodal Agency. The power of concession agreements is limited by the practiceof renegotiations, which introduces considerable flexibility in these agreements. Concessionagreements are also not always amenable to influencing business-to-business processes
and decisions affecting the choice of transport mode.
However, it should not be taken for granted that a port authority’s interest coincides withthe broader public interest. For example, port authorities can become actively involved withthe development of inland dry ports, to help decongest the seaport and possibly its adjacenttransport network, but this is not necessarily ideal to improve hinterland access in as it may
merely relocate the congestion.
Notteboom (2008: 25) noted that the policy push to achieve changes in modal split in theEU, through gradual liberalization of barge and rail markets, new pricing approaches andsubsidy and support programmes, has to date failed, in the sense that modal shifts occur
only when transformations in the supply chain make them attractive to those involved, andnot by simply declaring the policy objective. Policy removed obstacles, but the actual changecame about through “market pull” instead of through “policy push”. As the decentralization
issue suggests, market pull does not always work in socially preferable directions, inparticular when external costs are present.6

6

12

In addition, the increased levels of concentration makes designing effective policies harder, as
powerful private entities may have considerable political bargaining power or can develop
strategies to bypass policies.
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Conflicts of interest may also arise because the port authority cares about negative side
effects such as congestion and air pollution only to the extent that they affect its own
performance. Port authorities’ actions to limit such negative impacts do not necessarily
reduce overall congestion and air pollution, and may indeed make them worse. The next
section deals with policy-making to curb negative local impacts of port-related traffic in moredetail.

4. PUBLIC POLICY FOR PORTS AND SUPPLY CHAINSThe overall principles for public policy towards ports and supply chains are no different
from those for other sectors of the economy. Intervention may be indicated when market
failures arise, e.g. to price external costs or preserve competition. Public investment may be
merited where very long investment cycles make demand risk difficult for private investment
to handle. A balance has to be struck in creating a climate for both competition andinvestment. High and increasing levels of concentration in the industry may generate
substantial market power and suggests that vigilance against the abuse of market power is a
growing policy imperative. Research is far from conclusive on the scale of the potential
problem. As Slack (2007) points out, terminal ownership and access models are very
diverse. There are even cases of shipping lines running terminals at which their own ships do
not call. A more detailed understanding of market power is required to draw conclusions andthis will be the subject of a companion report (OECD ITF 2009). Industry concentration also
has an impact on the treatment of congestion (the external component of congestion costs issmaller than in a more competitive environment), and on the possibilities to shape public
policy (see section 4.1). On a general level, policy towards supply chain activities currently is
ad hoc. The adoption of more systematic, transparent and uniform policy frameworks isdesirable. Given the extended geographical reach of supply chains and of some players in
the market, and given that some of the policy issues (e.g. greenhouse gas emissions) areglobal, such policy frameworks need to be defined at central rather than local levels ofgovernment, and involve inter-governmental or multilateral consultation. While theserecommendations seem straightforward, they are not always reflected in current policy(section 4.2).

4.1

Local authorities

Local communities near mega-port sites are confronted with the adverse impacts ofincreased port throughput. Port-generated traffic contributes to congestion on transport
networks, and to safety risks, noise, and local air pollution.7
As incomes in thesecommunities grow, sensitivities to these side effects grow as well. From a public policy pointof view, the question is: are these side effects excessively high? The answer is yes, in thesense that congestion and air pollution are external costs, i.e. they constitute real costs for
7

Port traffic also contributes to regional and global pollution (e.g. greenhouse gas emissions), butthese are ignored here.

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local communities (as well as for port traffic) that are often ignored in decisions regarding
port and hinterland traffic volumes.
There is thus a case for policy intervention, and the standard prescription is to find least
cost ways of reducing these external costs to socially desirable levels. In some cases, e.g.
for congestion, this means internalizing external costs through charges that reflect thesecosts. In other cases, technology regulation or defensive expenditures may turn out more
effective than the use of charges. The internalization principle should not be applied to port
traffic in isolation, and because the external costs mentioned are just one of many market
distortions, it is not obvious which structure and level of charges or other policies would
maximize benefits. Even if the “optimal” policies were known, it is not clear whether they area practical – politically feasible – option.
The experience with policy-making to contain negative local side effects in theLos Angeles–Long Beach port region, described in Giuliano and O’Brien (2008), provides
insight on how citizen concerns about such externalities shape policy outcomes. A study on
the health impacts of pollution from diesel engines, and the experience with the port
shutdown in 2002, changed the local public perception of the ports and stimulated regional
policy to contain negative impacts. As a result, there is currently no public support for further
port expansion. The policies introduced to deal with these have had mixed success.
Specifically, the contrast between the failure of Assembly Bill 2650 and the success of
the PierPass program – both of which had the objective of stimulating the use of extended
gate hours to reduce port traffic’s impact on hinterland road congestion8 – suggests that, inorder to be successful, any attempt to implement measures that reduce negative impacts
must take account of the interests of port-related businesses and, in this particular case,labour union demands and terminal operators’ interests. Assembly Bill 2650 was passed in
2002, and prohibited truck queuing for more than 30 minutes at terminal gates. Terminals
could respond by extending gate hours, but instead chose to introduce truck appointment
systems. The impact on the time distribution of port traffic was negligible.
The PierPass program started in 2005 and successfully spread port traffic over more of
the day, most notably shifting a significant share of the traffic to evening hours. The programis a form of cooperation between terminal operators, made possible by a Federal Maritime
Commission ruling exempting this discussion from antitrust policies in the public interest, andimplying that revenues from the program accrue to operators (with no public financial
records). The PierPass fee is calculated on the basis of the incremental costs to terminal
operators of operating a second shift, and bears no relation to marginal external costs. The
program can also be seen as pre-empting the establishment of a new public authority
charging for environmental impacts and using the revenue for mitigation. In this sense, thethreat of regulation was sufficient to provoke a response.
The PierPass program gave the “dominant” players in the port-related businessenvironment (including ports, terminal operators, shipping lines, port workers’ unions, andlarge freight-generating clients) the opportunity to shape policy to serve their interests, sothat the incidence of policies’ costs is on more weakly represented and organized parties,
mainly truckers. There seems to be a strong positive correlation between market power (vs.
price-taking) and influence on policy (vs. “policy taking”).
8

14Interestingly, the program focussed on moving traffic to the off-peak, not on changing the modal
split.
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It was noted in section 2 that concentration in the logistics industry is increasing, andthat the position of individual ports in exerting influence on traffic flows is weakening. The Los
Angeles – Long Beach examples suggest that strong economic power translates into strong
influence on local policy. One interpretation is that this makes ambitious environmental andtransport policy in port regions difficult, especially where one port can potentially be replacedby another. However, a more nuanced view seems warranted as the examples also showthat there has been a response to increased local demand for action. The powerful players
have strong influence on the nature of policy measures, but that does not mean thesemeasures will necessarily be ineffective. Hence, there is some scope for “self-regulation”,
also in the presence of limited rivalry among ports and terminal operators. To enable private
parties to overcome competitive concerns, communication and coordination on the specificissue being regulated is required. Such self-regulation will not produce the textbook ideal of
regulation, but is preferable over a situation where a regulator proposes measures, theregulated parties insist the market works without intervention, and the compromise result ispoor and ineffective regulation. Whatever the merits of the Los Angeles – Long Beach policy,
it is not clear if the model of “self-regulation” at the local level can be exported to regions
where port competition is more intense than along the US West coast. The San Pedro Bay
ports serve a huge and affluent hinterland with much better connections to the main markets
than neighbouring ports. Port rivalry is stronger in Europe.
While the incidence of costs of policies to reduce external costs may not meet common
equity criteria, the current policy-making constellation does provide some balance between
business interests and local community objectives. A more powerful local community may
give insufficient weight to business interests, leading to ‘nimby-ism’ but ignoring local
community interests may impose excessive costs on port regions.

4.2

Higher level authorities

There is at present a mismatch between levels at which policy is initiated and the scaleat which regulated parties operate. The fragmentation and decentralization in governancecontrasts with the wider geographic reach of (at least partially integrated) large
conglomerates. Local governments are not very powerful vis-à-vis these conglomerates.
Higher level (national) governments are better placed to handle them, and in some cases
transnational approaches are desirable. There is also a risk that leaving port policies in thehands of local governments leads to the dominance of local issues over economic benefits ofwider interest. This holds true for maritime transport in particular, as for example in Asia
trade is seen as a primary engine of growth, and any regulation that slows it down as an
impediment to growth. For global issues, such as climate change, a supranational approachclearly is desirable. Climate change policy as it relates to ports needs to be shaped at thehighest level.9
High level policy responses may also be needed for other goals, such as avoiding any
negative consequences of strong concentration in supply chains. Horizontal concentration isstrong in several segments of the supply chain, and close scrutiny of mergers andacquisitions is warranted. Vertical integration raises additional concerns for competition, as
fully or semi-integrated companies control several segments of the chain. The markets in
9Such a broad and high level approach may also help attain abatement goals at the lowest
economic cost.

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which these companies operate are hard to define and their boundaries are vague. Baird(2008) labels global logistics companies as “new empires”, with strong control over traderoutes and prices, and sufficient power to withstand or bypass fragmented policy
approaches. Here too, a systematic high level approach seems warranted.
On a more strategic policy level, higher level authorities need a vision on the likelihood
and the desirability of continued growth in volumes and geographical span of supply chains.
Until recently, the general expectation was one of further fast growth of freight volumes within
the current geographical pattern of “globalization”. This expectation has triggered massive
investments in transport infrastructure. However, it is not straightforward that this expectation
will be realized. Rodrigue (2008) argues that containerization has matured so that future
growth rates are likely to be lower than in the recent past. In addition, the medium term
economic outlook implies moderate growth, translating in limited or even negative growth intraffic.
High energy prices also affect the organization of the supply chain. Some European andUS manufacturers are re-relocating manufacturing closer to home market from overseas
locations, in response to rising transport costs due to higher energy prices (Wall Street
Journal Europe, 17 June 2008, US jobs return home as shipping costs from Asia rise;
Financial Times, 27 June 2008). Cross-border security concerns are another factor in
deciding on where to produce and upward pressure on overseas wages and in some caseson the value of local currencies may very well induce further re-relocation and restructuringof global supply chains. This evolution puts pressure on domestic transport systems,
indicating that returns to infrastructure investment depend strongly on highly flexible
production and trade patterns. The Asian trade model of the past two decades, characterizedby Chinese imports of intermediate goods from other parts of Asia and exports to Westerncountries, is under pressure as well, reliant as it is on cheap transport. The share of Chinese
exports based on imported intermediate goods has declined from 57% in 2001 to 44% in2007 (Morgan Stanley Research, 2008).
The strategic policy stance with respect to the development of supply chains also
depends on the wider normative economic perspective adopted. For example, it issometimes argued that supply chains are too stretched out geographically, and that there isexcessive growth in transport. There are several reasons why this may be the case. For
example, ports aim to maximize throughput, and can do so by charging low prices for the useof infrastructure and dredging that is often publicly provided. The consequence is thatshippers and supply chain operators do not face the full cost of infrastructure, let alone thefull social cost of their decisions. Transport infrastructure pricing structures that do not reflectmarginal costs, including externalities, in the hinterland exacerbate these problems. Morecost-based pricing approaches are likely to improve the balance between overall costs andbenefits of port and supply chain activity, and may result in growth rates below thoseobserved in recent decades.

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5. CONCLUSION

The supply chain industry is subject to increasing vertical and horizontal concentration.
This arguably has lead to more efficiency in the movement of cargo, and possibly theconcentrated model is more favorable in some respects towards sustainable development
than a more fragmented landscape in the sense that it facilitates the development of rail andthe internalization of port congestion costs to some extent. These benefits of concentration interms of sustainable development would be smaller if hinterland transport prices were morein line with marginal social costs, for all modes. A downside of concentration is that there arefewer players, which increases the risk of abuse of market power, and requires close
oversight by competition authorities.
From the ports point of view, the main consequence of developments in supply chains isthat their market power has declined. Ports operate in an increasingly competitiveenvironment within their range as well as in their function as nodes in supply chains
increasingly prone to switch routings (route competition). From the perspective of welfare
economics, there is little reason to deplore the weakening of ports’ influence, as the
economic benefits depend on supply chains’ performance more than on a particular port’s
performance. However, when countries think of their ports as instruments for defending
strategic economic interests, the weaker influence of ports vis-à-vis shipping lines becomes
an issue of concern. The round table heard divergent views on how ports should respond totheir weakening market power, with some supporting increased involvement with hinterland
activities, and others doubting the social desirability of such an extended role for ports. Given
the competitive context, ports need sufficient operational independence to respond tochanging demands from their customers, in order to retain market share.
The growth in port throughput has triggered strong reactions from local communities,
and in some cases (such as Los Angeles and Long Beach) policies to mitigate negative
impacts have been implemented. Large supply chain players clearly influence policy design,
and although this does not mean that policy is impossible or necessarily ineffective, it doessuggest that local authorities are not always sufficiently powerful to handle port-related policy
issues. Similarly, experience with policy efforts to change the modal distribution of hinterlandtransport in the EU suggests that the attainment of targets requires that the policy needs tobe compatible with business interests. Concession agreements between ports and theirclients have some potential to reduce local congestion and environmental impacts, but this isa piecemeal approach that intrinsically lacks transparency.
The current diversity in governance models and management arrangements in the port
and supply chain business poses a problem for the development of systematic responses tonegative impacts. In order to deal with these impacts, higher level authorities need to be
involved and appropriate incentive structures are required. This holds for local impacts and toa stronger extent for regional or global effects. Local effects such as congestion and air
pollution affect local communities and not just the port area. Local governments may be in a
relatively weak bargaining position to design and enforce policy, particularly when port
competition is strong, leading to ineffective policy. When local authorities are in a strong
position, they may ignore part of the economy-wide benefits of port activity in policy design. A
higher level response thus is called for. High-level, transnational responses are ideal for
dealing with climate change, but there is little agreement on which supranational agency isbest placed to handle this problem.
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While the general principles for port and supply chain policies are fairly obvious (ensure
a level playing field in the provision of infrastructure and in the handling of externalities
between ports and between modes), these principles are far from systematically applied. A
failure to price the social costs of hinterland transport use and land development may resultin many ports preferring to develop inland distribution centres rather than more efficient portorganization in response to increasing traffic. When the implicit subsidy to road is larger thanfor rail, this also undermines the performance of rail investments even in major hinterland
corridors such as Los Angeles’ Alameda corridor. Unfortunately, piecemeal, and not very
effective policy is the norm. Globalisation increases the case for measures (such as roadpricing) to internalize congestion costs on hinterland roads and develop explicit policy
towards market power in logistics businesses10.

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10

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