Port Economics: Institutional Approach

Introduction to Port Economics

• The lecture focuses on an institutional approach to ports
• Presented by Dr. Larissa van der Lugt on January 15, 2025

Relevance of Ports

• Ports are essential infrastructures for the economy and logistics

Learning Objectives

• Understand port economic concepts and different perspectives
• Understand the governance of ports and the role of the port authority
• Analyze a port's transport function within maritime chains
• Analyze the port's industrial function, including industrial symbiosis
• Evaluate port economic concepts relative to drivers of change

Planning Lectures

• Introduction to Seaports: January 10 (Albert Veenstra)
• Institutional approach to ports: January 15 (Larissa van der Lugt)
• Seaports as node in maritime chains: January 22 (Albert Veenstra)
• Role of the port authority: January 29 (Larissa van der Lugt)
• Seaports as node in maritime chains: February 5 (Albert Veenstra)
• The port as an industrial cluster: February 12 (Bart Kuipers)

Lecture Focus

• Main question being addressed: What governance issues apply in ports?
• Lecture setup:
  • Externalities (positive and negative effects of ports).
  • Cluster activities and effects
  • Competition, Minimum Efficient Scale (MES)
  • Heterogeneity
  • Stakeholders in the ports (and its dilemma's)

Recap: What is a Port?

• A node in transport chains
• A place for maritime-related activities
• A location for industrial activities benefiting from the vicinity of water
• Part of a World Port City

Externalities of Ports

• Economic effects of large ports has both positive and negative effects

Positive Economic Effects of Large Ports

• Direct and indirect employment and added value
• Attractive location for businesses
• Connectivity leading to transport cost advantages at national/transnational levels
• Cluster formation and Agglomeration effects
• Energy and resource transition
• Port-city dynamism and culture

Negative Economic Effects of Large Ports

• Impact on living environment
• Supports a fossil fuel-based economy
• Unequal distribution of costs and benefits
• Congestion impacting infrastructure
• Reactive economic, not an economic "engine"
• Branch economy with headquarters located abroad
• Economical lock-in risks/path-dependency
• Facilitates global drugs economy

Port Cluster Governance

• Focus on theory applied to cluster governance

Defining Clusters

• Clusters are populations of geographically concentrated, related businesses and institutions
• Clusters are centered around a distinct economic specialization
• Clusters consist of inter-related industries driving wealth creation, primarily through the export of goods and services
• Cluster industries are geographically concentrated connected by the flow of goods and services

Clustering in Ports

• Seaports can be meaningfully analyzed from a cluster perspective
• Seaports are clusters of economic activity linked to ship arrival/service and cargo distribution
• These clusters can be industrial clusters

Clustering Synergies

• Co-locating transport hubs, value-added hubs, and industrial complexes leads to synergies
• Co-location creates captive cargo and builds resilience
• Commodities benefit as they co-locate

Port Clustering: Rotterdam Example

• Ports are not standalone entities

Cluster Ports: New Clusters

• New clusters connect to existing activities
• Hydrogen cluster provides an example, showing mobility, import, pipelines & production

Ports, Clusters, Networks, Ecosystems

• Ports connect Businesses, transport, clusters, regions,

Cluster Effects: Positive Externalities

• Clusters promote both competition and cooperation, increasing productivity
• Numerous firms competing for resources/customers in close proximity
• Cooperation involving supporting companies occur which adds value to cargo

Cluster Effects: Additional Positive Externalities

• Value chain effects improves supplier efficiency for a larger purchaser base
• Skilled labor is encouraged to seek work nearby, reducing recruitment time
• Knowledge and information flow easier/faster
• Increased industrial activity concentrates/improves transport links
• Large industries may gain better political/bargaining power and favorable terms

Cluster Effects: Negative Externalities

• Preserving existing structures discourage renewal/regional restructuring
• High degree of specialization reduces competition
• Lack of heterogeneity affects economic rents residing in the port region

Cluster Challenges

• Creating sufficient competition
• Managing (dis)agglomeration economies
• Addressing lack of heterogeneity
• Balancing small firms cooperating locally vs. large multinationals

Cluster Issues/Calls for Action

• Competition/minimum efficient scale
• Agglomeration management
• Heterogeneity

Competition Advantages

• Competitive markets have advantages
• Impulse to be more productive and efficient
• Avoiding excessive rents
• Innovation/investment in cost-reducing technologies
• Encouragement of development of new infrastructure
• Selection of the most efficient companies/ensuring market access
• Price is a mechanism

Minimum Efficient Scale (MES)

• Introduction to the concept
• MES is the point where economies of scale end, returns become constant
• MES is the balance point for competitive prices.
• Achieving MES minimizes long-run(LRATC) average total costs

Minimum Efficient Scale (MES) Factors

• Influenced by:
  • Market size/structure
  • Technological change
  • Operational/geographical considerations
  • Shipping lines' costs/business patterns

Minimum Efficient Scale (MES) Scenario 1

• When MES can be achieved with a small amount of production relative to smaller demand
• Many companies can efficiently compete
• Example: trucking companies

Minimum Efficient Scale (MES) Scenario 2

• When can be achieved with a high level of production relative to demand
• Fewer companies operate
• Higher chance of natural monopolies (high start-up costs)
• Example: Container terminal

Minimum Efficient Scale (MES) Natural Monopolies

• Monopoly allowed when a single company can supply product/service at lower cost than any competitor, above 1/2 demand total
• Potential social costs arising from monopoly power, economies of scale benefits is not passed onto customer
• Port authorities want to avoid social costs and try to balance the efficiency of production in its port

Minimum Efficient Scale (MES) Applying to Ports

• Natural monopoly/minimum efficient scale apply
• Preferred scales vary for port development co's/terminal operators
• Terminal can maximize utility
• Port development firms need to avoid social casts such as monopoly powers
• Level of demand (important determining factor)
• No single globally applicable MES as companies differ in structure/economics

Minimum Efficient Scale (MES) Addition Factors

• Port governance objectives/geographical limitations/market size&structure
• Business practices of liner companies
• Concessioning practice decisions are delicate for port development companies
• Requires understanding of MES and market strutures

Agglomeration Economies

• Agglomeration/external economies occur when concentrating output benefits
• External ones occur as firms benefit from lower average costs
• Economies can be referred to as positive, external benefits from industrial expansion

Heterogeneity: Diversity

• Heterogeneity of capabilities enhances cooperation
• Diverse clusters or ecosystems are less vulnerable to external shocks
• Diversity enhances innovation: 'Schumpeterian new combinations'
• Diversity of size enhances cooperation
• Variety in internationality imports and exports innovations

Cluster Governance

• Considers stakeholders in the cluster

Stakeholders of Port Clusters

• Port clusters have a variety of stakeholders and conflicting interests
• Stakeholders include, amongst others:
  • Transport firms (including terminal operators)
  • Local port related manufacturing industries
  • End users of ports/port labor/Local environmental groups
  • Local residents/ Local and regional government/National government

Stakeholders in Port clusters with defined interestes and source of influence

• Port and transport firms desire low costs through lobbying and branches association
• The result of this is the existence of port specific association with level of subsidies relating regulation
• Local Environmentalist lobby for minimum externalities
• They do this through lawsuit, political policy, investment restrictions which leads to the existence, power and possibility to go and threaten court actions

Cluster Governance: Dilemmas

• Five important dilemmas within cluster governance:
  • Environmental protection vs. Port development
  • Urban development vs. Port development
  • Labor conditions vs. Port development
  • Resident interests vs. Port development
  • Overall economic development vs. Port development

Cluster Governance: Environmental Protection vs. Port Development

• Conflicts between environmentalism and economic interests can delay port expansion
• Cooperation is a mitigating solution, Cooperative strategy instead of a confrontational strategy
• Outcome: smoother decision-making/balancedprojects supported

Cluster Governance: Urban vs. Port Development

• Focuses on spatial dilemma
• Waterfront redevelopment projects
• The dichotomy of Urban housing vrs. Port Development

Cluster Governance: Conditions vs. Port Development

• Conditions vs. Port Development
• An example is the Australia DP World Strike
• In the case of workers rights VS expansion investements

Cluster Governance: Resident Interest vs. Port Development

• Considers the impacts of Residents negative influences for the living standards
• Negative externalities leads to resistence of port activites

Cluster Governance: Economic vs. Port Development

• Focuses on Investements for service industry verse the Transporting industry
• Interest groups try of influence these choice to enhance the development of their industry
• It should be noted that the Impact of port is not only within the port area, its more of and enabler of economic development in other sectors

Lecture on port economics focusing on the institutional aspects of ports. Covers governance, the role of port authorities, and the transport function within maritime chains. Explores the industrial function, including industrial symbiosis, and evaluates port economic concepts relative to drivers of change.