Wherefore Ports of Auckland?

Ports of Auckland (POAL) growth plans have been built unquestioned into Auckland Council's economic development strategy for Auckland. These assume a further 20 hectare reclamation into Waitemata Harbour and a raft of supporting public infrastructure. Just what assumptions underpin these plans, and do they stack up against international best practice? Auckland Council's economic development strategy calls for "an average annual real GDP increase greater than 5%"; POAL has stated that its growth plans assume a 5%/annum growth rate in container traffic (in 2010 POAL reports 890,000 container movements) NB: POAL's strategy paper states: "Shipping industry rule of thumb is shipping volume growth = 2.5 times GDP growth..." If Auckland accepts POAL's stated rule of thumb, and Auckland Council's aspiration of 5% increase in GDP/year, then we are looking at a need to increase POAL's freight handling capacity by around 12.5%/annum. Rather more than 5%/annum. I have researched industry trends and issues reported internationally about the management of port freight handling infrastructure. In this posting I provide extracts which I think throw light on what is happening in Auckland. First of all a few extracts from a 2003 report: CONTAINER PORT PRODUCTION EFFICIENCY by: Teng-Fei Wang, Dr Dong-Wook Song, and Prof Kevin Cullinane: "Container terminal production is both an important and complicated element in the contemporary global economy… Standing at the crucial interface of sea and inland transportation, the significance of the container port and its production capabilities cannot be ignored. Compared with traditional port operations, containerisation has greatly improved port production performance.... To reap economies of scale and of scope, liner shipping companies and container ports are respectively willing to deploy dedicated container ships and efficient container handling systems. In so doing, port productivity has been greatly enhanced. On the other hand, many container ports no longer enjoy the freedom yielded by a monopoly over the handling of cargoes from within their hinterland. They are not only concerned with whether they can physically handle cargo but also whether they can compete for cargo. This inter-port competition, under the orthodox microeconomic framework, is believed to provide an incentive to improve port performance... Under such a competitive environment, port performance measurement is not only a powerful management tool for port operators, but also constitutes a most important input for informing regional and national port planning and operations..... A couple of important concepts are introduced in this extract. The first is that because a lot of trade has been "containerised" - ie that everybody has agreed to adopt the same technology - there is no longer the opportunity to compete by adopting a different shipping technology. All container ports have the same equipment more or less, and do the same job. More or less. As far as a ship full of containers is concerned it doesn't matter which port it goes to. They all look the same. The second concept is "hinterland". This word is used to describe the transport networks on land that connect the port with the ultimate destination or source of goods. Hinterland refers to road and rail networks and suchlike. POAL strategic planning documents are concerned chiefly with the "whether they can physically handle cargo" dimension mentioned in the extract above. So. If GDP increases, so does the number of containers, and so therefore POAL will need more land and more cranes and more berth space to handle that increased traffic. POAL do mention that there will also be requirements to increase the capacity of road and rail infrastructure, but this is not quantified. Consistent with its concern about "whether they can physically handle cargo", POAL provides information about its container handling capability, compared with Melbourne and other Australian ports. This sort of comparison is extensively referred to in other reports. For example, in: MEASURING PORT EFFICIENCY: AN APPLICATION OF DATA ENVELOPMENT ANALYSIS, by: Geoffrey Poitras, Jose Tongzon and Hongyu Li, we read: "A number of different measures of port output are available, depending on which features of port operation are being evaluated. This study uses two output measures. The first output measure is the total number of containers loaded and unloaded. In addition, because the container handling aspect of port operation constitutes the largest component of total ship turnaround time, the speed of moving cargoes off and onto ships at berth, measured as the amount of cargo handled per berth hour, is the second measure of port output selected. Improving efficiency in this area is consistent with port authority intentions of maximizing berth utilization, a factor which will influence both port charges imposed on shipowners and the actual throughput handled..... Conclusions: Available studies of port efficiency have not provided a satisfactory answer to the problem of making efficiency comparisons across ports. With considerable success, this study applies DEA analysis to evaluate relative port efficiency. The efficiency results obtained depend on the type of DEA model employed which, in turn, depends on an assumption made about the returns to scale properties of the port production function. If a linear technology is assumed, then three of the five Australian ports examined are found to be inefficient in a 1991 sample of 5 Australian and 18 other international ports. One Australian port, Fremantle, is found to be the most inefficient port in the sample using both constant or variable returns to scale assumptions. Two Australian ports, Sydney and Brisbane were found to be efficient independent of the returns to scale assumption, indicating that port size alone is not the primary determinant of port efficiency. I have included this extract here simply to illustrate that a lot of energy does go into this sort of analysis. POAL subscribes to this approach, and much of its justification of how well it is doing, and so on, is based on its container handling performance. The problem with this approach is that it is narrow, and does not engage with the broader idea of "hinterland" or of "competition" itself. A helpful view of these matters is available in a 2009 report by the OECD – International Transport Forum, part of its JOINT TRANSPORT RESEARCH CENTRE. The report is entitled: PORT COMPETITION AND HINTERLAND CONNECTIONS. Extracts from this report follow: "...Maritime freight transport has experienced strong growth and profound change over recent decades. Freight volumes and container traffic in particular have grown with the intensification of global trade and the geographical dispersion of production. The industrial organization of the sector has evolved rapidly. These changes have rendered the ports business 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 abuse of market power. The market power of the ports vis-à-vis shippers and shipping companies has become correspondingly weaker. The critical ideas that are introduced here include the idea of "supply chain" - that is the origin-to-destination path, or maker-to-user or producer-to-consumer pathway, of a good. The second idea is that a Port is just one link in that supply chain. This is a serious issue for POAL and for New Zealand as this further extract explains: "...Containerization was a major technological innovation that revolutionized the nature of maritime-based freight transport of manufactured goods. It caused a substantial degree of standardization of port services, implying that ports cannot rely on specialization to maintain market share and generate revenues as much as they used to. With containerization, ports in the 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, the use of ever larger container vessels 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 vessels). 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. This extract describes what we observe in the competition between POAL and POT (Port of Tauranga). The "hinterland" transport networks on land (roads, state highways and railways, and even "inland ports") for Auckland, Tauranga and Northport overlap. And for many goods they overlap extensively, which is why from a supply chain point of view, from exporters' point of view, it doesn't really matter whether the goods are trans-shipped by POAL, POT or NorthPort. This is a profoundly important point. Owners and operators of individual competing ports are forced to do whatever they can to cut costs and speed up service, so that their contribution to the overall supply chain cost and service level keeps them in contention by exporters who are keen to buy export services from the lowest provider. This driver has all sorts of side effects, which the report goes on to describe: "...Local communities near mega-port sites are confronted with the adverse impacts of increased port throughput. Port-generated traffic contributes to congestion on transport networks, and to safety risks, noise, and local air pollution. As incomes in these communities grow, sensitivities to these side effects grow as well. From a public policy point of view, the question is: are these side effects excessively high? The answer is yes, in the sense that congestion and air pollution are external costs, i.e. they constitute real costs for local communities (as well as for port traffic) that are often ignored in decisions regarding port and hinterland traffic volumes. There are other side effects in Auckland of an expansion of POAL activities - for example dredging, reclamation into the City of Sails playground, and obstruction of view corridors. However, if POAL does not expand then the report has this advice: "...When a port or its hinterland facilities are more strongly 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.... Just a quick digression here into Auckland's "hinterland". Specifically rail. The POAL plan suggests "as much as 30%" of container movements could be by rail. That sounds not very much to me. We should get as many of these container movements as we can onto rail - rather than trucked by road. Let's assume 50% and consider the implications of POAL's growth plans. The 5% POAL growth strategy would mean the port would be handling about 3,600,000 container movements per year in 2040. About half of these are ship-ship movements - ie POAL acts as a hubbing port for other ports. The other half are distributed by road and rail. Assuming half of these are moved by rail, that means 900,000 containers are moved by rail. What would that mean for Auckland's "hinterland"? Well. All of these container movements have to use the North Island Main Trunk Line NIMT - which takes them through the residential areas of Orakei, Panmure and Glen Innes. Trains through these areas travel slow, at about 30 kph. What does it mean for the local environment? Well. 900,000 containers carried by train over a year, each about 10 metres long (allowing for gaps between containers and rail trucks), would require 30 trains a day, each about a kilometre long, to get these 900,000 containers through that bit of Auckland's hinterland. If trains ran with a 5 minute headway between each train, POAL container trains would run for 3 and a half hours each and every day of the working year (estimated to be 300 days) through Panmure and Glen Innes etc. And if that matter isn't a concern, then POAL's strategy of becoming a gateway port (in competition with POT) should be, as the paper goes on to explain: "...One consequence of the drivers of change in the organization of supply chains is that gateway ports have in many cases become a replaceable element of the chain, with relatively 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. 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. So. Spending up large on POAL reclamations will not guarantee that POAL is favoured as a gateway port - especially if road and rail conditions are congested and expensive. Two further points from this OECD paper: ...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 in traffic.... ....ports aim to maximize throughput, and can do so by charging low prices for the use of infrastructure and dredging that is often publicly provided. The consequence is that shippers and supply chain operators do not face the full cost of infrastructure, let alone the full social cost of their decisions. Transport infrastructure pricing structures that do not reflect marginal costs, including externalities, in the hinterland exacerbate these problems. More cost-based pricing approaches are likely to improve the balance between overall costs and benefits of port and supply chain activity, and may result in growth rates below those observed in recent decades. I think this extract underlines a significant concern that Auckland public has about POAL and its strategy, and that is POAL's assumption that shippers are able to avoid paying the true costs of the supply lines that are used - of which POAL is but a fraction. (An example: if you want to ship a container out of Auckland from Hamilton, the trucking charge to pick up the container - to be no more than 24 tonne - in Hamilton and deliver to POAL is quoted at around $700. While the current POAL charge to load the container on to a ship is just over $200. Shipping charges are additional, as are off-loading costs at the destination port, and local land transport costs.) Finally there is the matter of Air Freight - as opposed to Sea Freight. It is a significant policy matter if Auckland Council decides to subsidise freight out of Auckland via POAL, enabling POAL to establish a dominant trade position over Auckland International Airport, and thereby enhance revenue stream from POAL in which it has a 100% stake. You might think this is a red herring. But in fact Air Freight is carrying more and more exports and imports, as explained in a report: TRANSPORTATION COSTS AND INTERNATIONAL TRADE OVER TIME, by authority David Hummels. "Why has air transport grown so rapidly? … a major factor has been a sharp decline in the relative cost of air shipping. Less obviously, but perhaps as important, that a dollar of merchandise trade goods weighs much less today than in previous years. From 1960-2004, the real value of trade in manufactures grew about 1.5 percent per year faster than the weight of non-bulk cargoes.... A fall in the weight/value ratio of trade leads to more air transport for two reasons. First, the marginal fuel cost of lifting a 100 kg package into the air is considerably higher than the cost of floating it on water. Second, consumers are sensitive to changes in the delivered price of merchandise, not to changes in the transportation price. If transportation is but a small fraction of the delivered price, then when choosing transport mode the explicit costs of transportation may be trumped by implicit costs such as timeliness or reliability.... The International Air Transportation Association surveys international air carriers and reports worldwide data on revenues and quantities shipped in their annual World Air Transport Statistics (WATS)... Expressed in 2000 U.S. dollars, the price for air freight fell from $3.87 per ton-km in 1955 to under $0.30 from 1955-2004.... Ocean liner service itself has become much faster than in years past, both because the ships are larger and faster, and because their loading and unloading time is dramatically lowered by containerization. But even after these improvements ocean shipping is still a slow process. Shipping containers from Europe to the U.S. Midwest requires 2-3 weeks; from Europe to Asia requires five weeks. In contrast, air shipping requires a day or less to most destinations. Consequently, the 10-fold decline in air shipping prices since the late 1950s means that the cost of speed has fallen dramatically.... Changes in international transportation in the second half of the twentieth century are more than just a story of declining costs..... between 1955 and 2004. As a result air shipping grew in this period from an insignificant share of trade to a third of US imports and half of US exports outside of North America.... Economic historians have argued that technological change in ocean shipping was thecritical input to growing trade in the first era of globalization during the latter half of the 19th century. I would argue that technological change in air shipping and the declining cost of rapid transit has been a critical input into a second era of globalization during the latter half of the 20th century. Air freight is clearly growing, and more and more goods - especially high value and freshly grown goods - are travelling by air. Auckland International Aiport is well on the way to constructing a second runway. These - and the matters set out above - are among those that need to be considered by Auckland Council, before it rubber stamps POAL's growth plans.