The Blackwell Companion to Maritime Economics

By Wayne K Talley

The Blackwell Companion to Maritime Economics presents comprehensive and in-depth coverage of the entire scope of issues relating to shipping and port economics.

• Unprecedented survey of maritime economics provides full coverage of shipping and port economics
• In depth examinations offer an up-to-date study of the field including all facets of shipping, ports, logistics, and maintenance and topical discussion on security and environmental problems
• Presents original theories relating to theories for maritime carriers and ports
• Features contributions from the most respected international specialists in the field

• Language: English
• Publisher: Wiley
• Release date: Nov 30, 2011
• ISBN: 9781444345643

Book preview

Part I: Introduction

1

General Introduction

Wayne K. Talley

This chapter provides a general introduction to the contents of the book. Specifically, a two-paragraph synopsis of each of the chapters, 2 through 34, is provided.

In Chapter 2 the evolution of maritime economics as a field of study is discussed. Maritime economics as an explicit field of study is less than fifty years old. Before 1960 there were publications on the subject, but they did not have a separate identity. The field has evolved from the study of the history of shipping, e.g., trade-offs among alternate ship designs, contractual arrangements for shipping and trade, and managing port infrastructure and services to efficiently serve the needs of trade.

Research in maritime economics has become more complex and its quantity and quality are higher than ever. Improved availability of data, methods to analyze these data and theories have contributed to this growth. University programs in maritime studies worldwide have been established and a greater number of journals are publishing research in maritime economics.

An historical perspective of shipping – evolving worldwide from primitive to developed societies – is presented in Chapter 3. The ancient cultures of Egypt, Greece, Mesopotamia and Rome were involved in the early stages of the development of shipping. Shipping is the oldest mode of transportation for moving large quantities of cargo.

The business of shipping has been impacted over time by a number of factors: (1) geopolitical factors that affect the demand for transportation, (2) development of maritime technology, (3) development of ship types to transport certain types of cargoes, e.g., such bulk cargoes as oil, ore and grains, and (4) intra-modal (among shipping companies) competition and intermodal (e.g., from land routes to and from ports by railways and trucks) competition. Without shipping the development of the modern industrialized world would have been impossible.

Chapter 4 considers commodity trade flows in shipping. The commodity-trade classification system of the United Nations includes one hundred major categories of commodities, each containing several subcategories. Given this granularity of information, the chapter restricts itself to providing an overview of the major worldwide commodity trade flows – the main export and import flows in recent years, in the context of the underlying factors driving each commodity. The chapter is divided into two main sections – major bulk commodities, and general cargo and containerized trade flows.

A slowdown in world trade followed the financial crisis in 2008. The majority of trade flows are still growing, but at a slower pace; other flows have contracted. What does the future hold? Will the rate of worldwide oil depletion result in prohibitive energy prices for shipping, thus leading to a further slowdown? Will natural gas suffice as a bridge fuel?

Chapter 5 describes a maritime carrier from a microeconomic theory perspective. A maritime carrier is a firm that provides for-hire transportation service by transporting goods and/or individuals in vessels over a waterway from one location to another. Maritime carriers are described by the type of vessel utilized – for example, ferry and cruise lines use ferry and cruise vessels respectively – and by the type of cargo transported – for example, LNG and container carriers transport liquefied natural gas and containers respectively.

If the amount of transportation service provided by a maritime carrier is the maximum amount that can be provided given the resources at the carrier’s disposal and the amounts of cargo (numbers of passengers) provided by shippers (individuals) to be transported, then the relationship may be described as the maritime carrier’s production function in the provision of transportation service. If so, the maritime carrier is technically efficient. A maritime carrier’s operating options are the means by which it can vary the quality of its service. A maritime carrier is cost-efficient if it minimizes cost in provision of its technically efficient services. The demand by passengers and shippers for maritime transportation services is a derived demand.

Maritime freight markets in which cargo is transported by water are discussed in Chapter 6. These markets tend to be cyclical in nature because of the volatility in both the demand for and the supply of world shipping services. Variations in service demand reflect world economic activity and global trade and tend to be short-term in nature, while variations in service supply tend to be long-term in nature. Beyond vessel speed adjustments and lay-ups, adjustments in service supply tend to take longer. When shipbuilding capacity is scarce, it may take three to four years after a contract is signed for a new vessel to be built. Thus, prices for shipping services may fluctuate greatly because of adjustments to differences in demand and supply for these services, which results in volatile maritime freight markets.

Maritime freight markets are dominated by east–west trade flows. This dominance has been strengthened by the importance of Asia and the increasing importance of interregional Asian trades. The fragmentation of geographical production processes has added intermediary products to these trade flows, especially since many of the production processes are outsourced to emerging markets in Asia and transition economies in Eastern Europe.

Chapter 7 discusses intermodalism and new trade flows. Intermodalism is the transportation of freight in an intermodal container or vehicle, using two or more modes of transportation. Before the 1950s, freight was packed in boxes, barrels and bags for transport by two or more modes from origin to destination. In the 1950s the introduction of containers provided for a more efficient intermodal transportation system, which, in turn, stimulated a significant growth in world trade – because of the lower rates and reduction in delivery times that ocean container transportation brought. Intermodal container transportation has also impacted trade routes; for example, rather than seaborne trade from Asia arriving at the US East Coast via the Panama Canal, an alternative land route to this all-water route came into being in April 1984, when container ships began calling at ports along the US West Coast to unload their containers for placement on double-stack trains for transport to the East Coast (a landbridge service).

Data for new trade (cargo) flows into the US from foreign ports without a history of flows to the US are also analyzed. The analysis suggests that new trade flows are greater for exporting foreign countries which have relatively large amounts of hinterland transport infrastructure and whose foreign ports handle container cargoes. Further, the more developed a foreign port is from an intermodal perspective in providing new trade flows to the US, the greater the likelihood that it will grow and the smaller the likelihood that it will fail.

Chapter 8 discusses the evolution of the cruise industry – water carriers that provide transportation, leisure and tourism services. In the early days of the industry it was often stated that passengers aboard cruise vessels were either just married or nearly dead. However, this is no longer true. Cruise passengers now are of all ages. Cruise lines seek to tailor their services to accommodate the wishes of their customers.

Some old markets of cruise lines have reached saturation, e.g., the Alaska market. New markets in the Far East, the Middle East and Australia are experiencing explosive growth in new cruise business. Expedition tourism, targeting the affluent passenger, will continue to gain popularity. Remote destinations unspoiled by mass tourism that feature secluded and out-of-the-way places, such as Antarctica and the many historic islands dotting the Pacific Ocean, are drawing cruise passengers. The inland-waterway cruise market in Europe is another growing market and is expected to experience double-digit growth in coming years. Small river-cruise vessels offer amenities far surpassing those of the average hotel and restaurant associated with typical bus tours.

Chapter 9 describes the world’s ferry passenger markets and identifies the main characteristics of these markets. The world’s ferry industry transports almost as many passengers each year as the world’s airline industry. The services demanded by ferry passengers range from pure transportation to entertainment and sightseeing. From a supply perspective, ferry operators have a wide range of technologies from which to choose.

There are a few ferry companies that provide ferry services far outside of their home region, but no ferry company provides global ferry services. The establishment of new ferry routes tends to be difficult, since access to marine terminals at the end points of these routes must be obtained. Ferry routes face limited intra-modal competition, something which is evident from the fact that only a very few ferry routes in the world have more than two competitors. The majority of ferry routes are served by only one ferry company. In addition to passengers, ferries worldwide transport millions of cars and trailers each year.

Chapter 10 discusses the world dry bulk shipping industry. In 2009 its fleet of ships had the largest carrying capacity of any shipping industry fleet, surpassing the tanker industry fleet. The dry bulk shipping market has experienced volatility over time. Sources of the volatility include external influences (such as changes in the economic geography of bulk trades and in the state of the world economy) and inherent dynamics (such as inter-firm competition and changes in the distribution of maritime activity among countries). The volatility in the market had reached new heights by late 2008. The magnitude of the decline in the market was historic.

The chapter also focuses on the changing dynamics of the dry bulk shipping industry over time and the adaptation of the industry to globalized conditions. Shifts in geographical patterns, fleet characteristics and market traits are discussed. In the twenty-first century, the market transformation of the dry bulk shipping industry will be affected by economic geography and the mechanics of shipping markets.

Chapter 11 presents a discussion of the world liquid bulk shipping industry. Liquid bulk cargo is bulk cargo that is transported in tanks, into and out of which the cargo is pumped. The largest amounts of liquid bulk cargoes shipped are crude oil and oil products. Other categories of liquid bulk cargoes, for which the amounts shipped are much smaller, include: liquefied gas (LNG and LPG), vegetable oil and liquid chemicals. The liquid bulk shipping industry is vital for the transportation of oil and its products from a limited number of oil-producing countries to the rest of the world.

Liquid bulk cargoes represent one-third of the total volume of maritime cargoes. Although oil is transported over land by vast pipeline, specialized truck and specialized rail networks, the amount transported is small in relation to the amount transported by tanker vessels. The liquid bulk shipping industry has drawn worldwide attention for its vessel oil spills and potential spills. In order to reduce oil spills from tanker vessel accidents, many countries in the world are now requiring that by 2012 or 2015 tanker vessels must be double-hulled in order to enter their waters.

Chapter 12 provides a comprehensive overview of current issues in the container shipping industry. Topics include market growth, the changing geography in container shipments, capacity management, the pricing problem in the container shipping industry, the search for scale and scope operations by container shipping lines, and evolving networks over which container shipping lines operate. Container ships transport a limited range of standardized containers: the twenty-foot equivalent unit (TEU) and the forty-foot equivalent unit (FEU). Slightly diverging container units include 45-foot containers, high-cube containers, and tank and open-top containers.

The advantages and cost savings from container shipping include faster vessel turnaround times in ports, a reduction in cargo damages and the associated insurance fees, and integration with inland transportation modes, e.g., truck, barge and rail. With the advent of container shipping, globalization of intermodal transportation was established. Container shipping has been instrumental in reshaping global supply chains, allowing multinationals to reshape their global sourcing strategies and develop global production networks. New supply chain practices, in turn, have placed stricter requirements on container shipping lines with respect to frequency, reliability and global coverage of service. Before 2009, container shipping lines operated in a market characterized by moderate to strong growth. Asian economies represent an ever-increasing share of global container volumes.

Chapter 13 discusses business models and strategies for shipping. The shipping industry market is complex, dynamic and risky, which is attributable to its being fixed-asset-intensive, having assets with long lifetimes and being exposed to volatile global flows in cargo and energy prices. Recent events, such as the significant decline in world trade, the dramatic decline in ship prices and the lack of available capital for the purchase of new ships, have accentuated the complex, dynamic and risky aspects of the shipping industry market. Emergent business models and strategies that may be beneficial to the shipping industry are presented in this chapter.

The chapter reviews industry forces that are forcing changes in the business models and strategies of the shipping industry. Shipping business models and their relationships to shipping strategies are discussed. Four shipping industry business model archetypes that, taken together, capture the shipping industry are presented, as are competitive and cooperative strategies within these business model archetypes. The way changes in business models shape the transformation of the shipping industry and, in turn, shipping industry strategies is analyzed. Shipping industry strategies are tied to the broader strategic management literature.

Chapter 14 provides an overview of the primary international institutions and regulations for ensuring safe, clean and level-competing operating environments for international shipping. The concept of the freedom of the seas dates from the seventeenth century, when national shipping rights were restricted to a stated number of miles from a country’s coast. This freedom was established by the United Nations at the end of World War II via its Conference on the Law of the Sea. There have been three significant international conferences since the end of World War II that have shaped legal concerns associated with the sea.

The 1982 United Nations Convention on the Law of the Sea established internal, territorial and archipelagic water limits, defined contiguous and exclusive economic zones, and described the legal regime governing the international navigation of the high seas. Areas of importance to international shipping are the right of innocent passage in territorial seas, criminal and civil jurisdiction on board ships and in relation to ships in territorial seas, rights of passage through straits used for international navigation, and freedom of the high seas. International shipping regulations have primarily been developed under the aegis of the United Nations International Maritime Organization (IMO). The responsibility of a flag state is to ensure that ships flying its flag are surveyed by a qualified surveyor and have on board appropriate charts and navigation equipment, and qualified masters and officers.

The shipping industry has been subject over the last thirty years to various forms of corporate tax systems imposed by international governments. Chapter 15 analyzes the economic justification for a shipping corporate tax and its implications for the liquidity of the industry and its future investment decisions. The type of shipping corporate tax that has increasingly been adopted by countries (and more recently by European countries) is the tonnage tax.

The consensus is that fiscal policies such as a shipping corporate tax that are directed at the shipping industry should consider their opportunity cost to the countries imposing the policies and to the shipping industry itself. The shipping industry has some unique features: (1) ships are mobile assets; (2) ships may be registered anywhere in the world; (3) the shipowner (or the shipowner’s representative) is free to choose among available registers, so that the level of ship taxation has become a determinant of register choice; and (4) a ship may be registered under a national flag or a flag of convenience (or an open register).

Chapter 16 explores the market for seafarers and its specific characteristics. The chapter’s primary focus is on the supply of seafarers – their number, recruitment, retention, mobility and migration. Seafarers play a vital role in the water transportation of international trade. Numerous seafarer skills are required. Seafaring is one of the world’s oldest professions. It is undergoing considerable change from a technological perspective.

The international seafaring labor force is segmented according to specific skills and educational levels, which provides an opportunity for seafarer labor discrimination. Specifically, this means that shipowners can segment seafarers by wage and working conditions. However, such discrimination has been tempered by the regulation of seafarer working conditions and by such organizations as the International Labour Organization (ILO) and the International Transport Workers’ Federation (ITF). The efforts of these organizations have resulted in significant improvements in the working conditions of seafarers.

Chapter 17 discusses vessel accidents – unintended happenings that may or may not result in damage to the vessel. The likelihood of a vessel sustaining damage in an accident is the product of two probabilities: (1) the probability of involvement in an accident (event probability) and (2) the probability of vessel damage given that an accident has occurred (damage conditional probability). The severity of vessel accidents varies from the loss of the vessel to an absence of vessel damage.

This chapter also uses data from a US Coast Guard vessel accident database for 2001–8 to analyze the determinants of vessel damage severity in individual cargo vessels. Four types of vessel (freight barge, freight ship, tank barge and tanker) are considered in the investigation. The empirical results suggest that freight barge accidents have the highest probability of incurring vessel damage and total losses. Freight ships are expected to incur less vessel accident damage than freight barges, tank barges and tankers. Accidents at nighttime and involving older vessels are associated with greater vessel damage. Accidents involving larger vessels, occurring in spring or involving vessels with steel hulls are expected to result in less vessel damage than their alternatives. The policy implications of the results are that relevant vessel safety regulations should be modified or designed to improve the safety of freight barges, older vessels and nighttime navigation.

Chapter 18 discusses the historical and geographical development of piracy in shipping. Contentious issues in defining piracy, recent changes in the geography and modi operandi of piracy, and how poverty and political instability have been root causes of piracy are also discussed. Piracy is a land-based economic and socio-political problem that manifests itself at sea.

Ship piracy has posed a threat to trade and shipping for millennia. Ancient accounts show piracy flourishing in the Eastern Mediterranean as early as four thousand years ago. In the 1970s, less than a century after its apparent demise, a number of attacks ushered in modern piracy. In 2009, a total of 406 piracy and armed robbery incidents were reported worldwide, a 40 percent increase on 2008. Within the last twelve years the sophistication and organization of attacks have increased and patterns and trends in location and armed robbery against ships worldwide have shifted. Today, piracy attacks against ships in the waters off Somalia, followed by demands for ransoms of millions of US dollars, have become common. In 2009 piracy attacks off Somalia represented 53 percent of all such attacks reported worldwide.

Chapter 19 discusses the economics of ships – a broad subject area that encompasses, for example, ship design, shipping network design, ship markets, ship safety, ship security, and impacts of ships on the environment. The chapter focuses on selected aspects of the economics of ships and highlights a few related issues that are important today. Two important criteria governing the economics of ships are concerned with how to (1) optimize the economic performance of a ship and (2) incorporate risk into decision making in respect of the economics of ships. Incorporating risk into decision-making models should be of significant benefit to shipowners in their decision-making practices.

Ship costs may be categorized as capital costs, crew expenses, vessel expenses, cargo expenses, terminal handling charges, port charges and administrative expenses. An important decision variable in optimizing ship economic performance is ship speed. Ship speed is important in that it is the main determinant of fuel costs, a significant component of vessel expenses. Given the high degree of uncertainty in ship economic performance, ship risk management has become an important dimension of the economics of ships. Ship risk management addresses events that can influence expected ship cash flows.

A discussion of the US equity capital markets as a source of finance for shipping companies – that is, for financing the acquisition of newly built vessels and the sale and purchase of second-hand vessels – is found in Chapter 20. The shipping industry is one of the world’s most capital-intensive industries, utilizing a wide array of capital sources for its finance. In addition to equity finance, shipping companies use mezzanine finance and debt finance. Sources of equity finance include the owner’s private equity, the company’s retained earnings, and public and private equity offerings. The main types of mezzanine finance include preference shares, warrants and convertibles. The types of debt finance utilized by shipping companies include bank loans, export finance, bond issues, public or private placements, and leasing.

The chapter presents an overview of the US equity capital markets for shipping, possible reasons for public listing by shipping companies, and the advantages and disadvantages of such a decision. Also, an overview of trends in the issuance of shipping stocks in the US for the period 1987–2010 is provided. In addition, factors that may affect the pricing and long-run performance of shipping and key issues for investors and shipping companies in the US equity capital markets are discussed.

Chapter 21 highlights the US high-yield bond market as a source of debt finance for shipping companies. The anatomy of the US shipping high-yield bond market and the market’s advantages and disadvantages are discussed. Further, the importance of credit ratings, the pricing of shipping high-yield bonds and the probability of their default are presented.

The US high-yield bond market commenced in 1992 and in 1998/99 a number of shipping companies defaulted on their bonds, resulting in a sharp decline in volume activity for the next couple of years. However, the re-emergence of the US high-yield bond market that began in 2009 continues today. This market has become important to shipping companies as an alternative source of finance. Some of the advantages of the US high-yield market include a longer repayment horizon and the less strict covenants that a high-yield bond issue may entail. Investment banks have played an important role in the recent issuance of high-yield shipping bonds. While the 2009 statistics for syndicated bank finance show a substantial decrease in the overall annual volume of shipping syndicated loans, bank finance is expected to remain a major source of capital for shipping companies.

In Chapter 22 the volatility in the prices of ships is discussed. Such volatility has long been a concern for shipping companies, shipyards and banks, because short-run fluctuations in ship prices have a significant impact on the profitability and viability of these enterprises. Also, a reduction in the value of a ship may affect the shipowner’s creditworthiness and thus his ability to service the debt obligations of the ship.

This chapter also examines the possibility of hedging ship price risk using forward freight agreements (FFAs). Specifically, a data set of dry bulk ship values and forward freight agreements for the same type of vessel is used to investigate the effectiveness of FFAs in hedging ship values. The results indicate that FFAs are indeed very effective for hedging ship price risk. For the Capesize ship market, the results indicate that hedging 85 percent of the value of a ship using FFA contracts would reduce the variability of one’s hedging position by as much as 86.5 percent.

Chapter 23 discusses marine insurance – an efficient means of protecting investments in ships and their cargoes. A form of marine insurance that is used today was well established in Europe by the fourteenth century, the earliest known policy being issued in Genoa in 1347. Relatively sophisticated insurance markets – places where one could find many insurance underwriters and supporting services – were found in a number of North European cities (including Antwerp, Amsterdam, Hamburg and London) in the seventeenth century.

Ship- and cargo owners (or their advisors) should read the clauses of marine insurance policies carefully in order to understand what is covered or excluded under these policies. Some policies are more comprehensive than others. When selecting an insurance policy, the insured should also have a good understanding of the insurance laws in the jurisdiction of the underwriting association. However, the major clauses of marine insurance policies have been converging, and the differences in insurance coverage have become more subtle over time. Marine insurance may eventually become uniform worldwide, offering universally accepted coverage for both hull and cargo insurance.

Chapter 24 presents a microeconomic theory of the port. A port is a place where cargoes and passengers are transferred to and from vessels and to and from shores and waterways. Ports are also nodes in transportation networks and thus are used by transportation carriers in the provision of transportation services. A port provides interchange services: for example, received cargoes and passengers are passed through to departing vessels and vehicles. The users of port services include shippers, passengers and transportation carriers, i.e., maritime and surface carriers (railroad and truck). The primary port service provider is the port (or terminal) operator.

Port production functions relate the maximum amounts of interchange services that ports can provide, given the amounts of resources utilized and the amounts of cargo and the numbers of passengers, vessels and vehicles received by the port. A port’s operating options are the means by which it can differentiate the quality of its interchange services. A port’s resource function for a given resource relates the minimum amount of the resource to be employed by the port to the levels of its operating options and the amounts of cargo and numbers of passengers, vessels and vehicles received. The long-run total cost function for a multi-service port relates the minimum costs incurred by the port over the long run to the resource prices paid by the port, the levels of freight, passenger, vessel and vehicle interchange services provided by the port, and the amounts of cargo and numbers of passengers, vessels and vehicles received by the port. Shippers, passengers and carriers incur two prices for port interchange service: shippers and passengers incur a money price that is charged by the port for the service and a time price related to their cargoes and themselves while in port.

Chapter 25 discusses recent developments in port governance. The globalization of production and distribution, changing forms of cargo transportation and technological breakthroughs ended a long period of stable, state-controlled (government) port governance in most countries. Although government ownership of ports remains firmly entrenched in many countries, private management in the provision of port services has also been widely adopted. Port corporatization continues to be an acceptable governance option.

Under port reform, ports have incurred difficulty in addressing issues with their hinterlands, such as congestion and infrastructure investment beyond the traditional boundaries of the port. In some cases, this has spurred interest in broader and more community-based governance models. A study of major international ports reveals the involvement of private interests in port terminal operations, a movement toward more effective and efficient management of ports, a trend for port authorities to go beyond their traditional functions, and recognition of the economic influences on ports.

Chapter 26 focuses on the socioeconomics of port labor and the regulation of the port labor market that has been contested in ports worldwide. Conflicts on the waterfront have shaped the historical development of the port labor workforce. It is no coincidence that ports with the most effective forms of labor market regulation also have the lowest strike incidence. The transition from port casualism to containerization to commercialization has been marked by port labor conflict and dissension among port management, labor, government and third parties (e.g. local communities, direct customers and wider business interests) affected by port activities.

The chapter describes how employment agreements negotiated under port technological advancements of containerization have transformed the casual system of port labor employment. Some ports have adapted their labor market far more effectively than others to the challenges of containerization and the modern-day demands of the port customer. However, conflicts between port labor (and its trade unions) and port management still remain. Port management seeks to minimize labor conflicts in order to avoid disruption to shipping and to various value-added services that it provides to its customers.

Chapter 27 discusses competition among and the competitiveness of container ports. Definitions of and approaches to the analysis of container port competition and competitiveness are presented. Container ports are in a better position to compete with neighboring container ports if they have modern infrastructures supported by competitive and reliable transportation services and serve as collection and distribution points for hinterlands that extend far beyond their traditional boundaries. Ports that lose ship calls will experience a decline in connectivity, choice of service providers and container throughput. The negative impact will also affect other ports that have complementary services with the port.

A methodology is presented for analyzing inter-container port competition and competitiveness of container ports along the Malacca Strait, the Pearl River Delta and the Antwerp–Hamburg range. It is demonstrated that the configuration of container shipping line services has a direct effect on inter-container port competition. The decision by a container shipping line to switch port calls from one port to another can lead to significant economic and commercial ramifications for both ports. Container ports that are less flexible in accommodating the needs of shipping lines may be circumvented, while ports that are able to accommodate, complement and add value to the port calls of container shipping lines will be preferred.

Chapter 28 discusses port performance. Significant gains in productivity by ocean transportation over recent decades have left ports as the last remaining component for improving the efficiency of maritime logistics chains. Since improvements in the efficiency of a country’s ports are likely to reduce its export cargo prices, thereby making the country’s export products more competitive in global markets, governments are increasingly recognizing the importance of improving the efficiency of their ports for the economic well-being of their countries. In many parts of the world, governments have taken action, either direct or indirect, to improve port performance, for example by installing labor-saving cargo-handling equipment, promoting improvements in port labor productivity, simplifying customs procedures, promoting greater use of information technology and commercializing port management.

The literature suggests that private sector participation in port operations enhances port performance and thus port productivity. This chapter extends the literature by investigating the impact of private sector participation on the operations of ports in the Eastern Mediterranean region, with particular emphasis on the ports of Turkey. Turkey has recently adopted a policy of partial port devolution, including some privatization. The results of the investigation suggest that Turkey’s private container port sector is outperforming its public container port sector in terms of efficiency in the provision of services to customers, thereby providing some justification for Turkey seeking to apply port privatization to its remaining public container ports.

Chapter 29 discusses port choice by shipping lines and shippers as well as the effects of logistics and supply chain management decisions on port choice. Port choice by shipping lines is critical to determining whether shipping lines can realize their operational, service and financial performance goals. A key issue is how the different structural characteristics of shipping lines affect their port choice decisions. For the ports themselves, their selection by shipping lines and shippers directly impacts their performance and viability. Where intense port competition exists and in order to have sustainable port competitiveness, it is important for port mangers to have a thorough understanding of the factors that influence the selection of their ports by shipping lines and shippers.

Ports play an important role in facilitating the logistics and supply chain management objectives of their shipping line and shipper users. In order to do so, ports must evolve beyond their traditional functions of moving cargo to and from ships, trucks and railcars to become links in global logistics chains. Some shipping lines are more logistics- and supply chain management-oriented than others, for example those that have invested in their own port terminals, thereby requiring knowledge of how ports play a nodal role in supply chain management. With the gradual abolition of the conference system, shipping lines have come to realize that their competitiveness largely depends on creating customer value, and port choice has become critical in this respect.

Chapter 30 presents a framework for making port investment and finance decisions. The most effective port investment option requires a port’s cargo transfer process to be considered as a set of interdependent links. An efficiency improvement in each link is then considered, and hence the efficiency of the total transfer process is enhanced. Furthermore, all links should be modified to obtain a chain of mutually balanced link capacities so that problems related to port capacity bottlenecks are minimized. The selected investment option may address capacity expansion, improved services, and demand management measures leading to an improved utilization of existing facilities (or combinations of these).

A distinction should be made between public and private interests in making port investment decisions. Evaluating port investment from a public perspective requires that all related costs and benefits (direct and indirect) be considered in determining the optimum port investment decision. In contrast, the private perspective focuses on port competition and port hinterland connectivity in making port investment decisions.

Chapter 31 discusses port clusters. A port cluster is a spatially concentrated group of firms of related industries for which one firm is a port; these firms are linked through vertical and horizontal relationships. The chapter discusses the relevance of applying the cluster concept to ports, as well as the port cluster concept as a tool for analyzing the impact of port cooperation and changing port governance structures on ports located in geographical proximity. Central to the port cluster concept is the recognition that interdependent firms cluster together in port regions for purposes of coordination and resource sharing. The port cluster concept has been applied by the Chinese government in port planning and the Korean Maritime Institute in developing logistics clusters.

Analyzing ports from the perspective of port clusters provides (1) new insights into determinants of port competitiveness, (2) additional measures of port performance, (3) insights into the role of the port in promoting activities among interdependent firms in its region, and (4) an alternative framework to that of port governance for describing the role of port authorities. A dominant firm such as a port authority may have a strong influence on the performance of a cluster. In many port clusters, the port authority or a terminal operator plays a crucial role in the success of the port cluster.

Chapter 32 presents a discussion of port state control (PSC) – a regime of unannounced safety inspections on board foreign ships in ports or marine terminals by designated PSC authorities for the purpose of verifying the adherence of ships to international regulations related to ship manning, equipment, maintenance and operations. These regulations are found in the 1974 International Convention for the Safety of Life at Sea, the 1978 International Convention on Standards of Training, Certification and Watch Keeping for Seafarers, the 1973 International Convention for the Prevention of Pollution from Ships, the 1966 International Convention on Load Lines, the 1969 International Convention on Tonnage Measurement of Ships, the 1972 Convention on the International Regulations for Preventing Collisions at Sea and the 1976 Merchant Shipping Convention.

PSC inspections provide information about factors such as vessel age, vessel type, classification society and vessel flag, which may predict the likelihood that a vessel will be found to be substandard. These factors are reflected in the target factors used by PSC regional memoranda of understanding (MoUs). This chapter describes these target factors and how vessel deficiencies detected during PSC inspections are corrected or recur over time. A data set of 42,071 vessels/inspections carried out from 2002 to 2009 by 18 state members of the Indian Ocean MoU (IO-MoU) is used to determine factors that increase the likelihood of detecting vessel deficiencies in PSC inspections and the persistence of vessel deficiencies in subsequent PSC inspections over time.

Chapter 33 is concerned with port security and counter-terrorism activities within the port’s domain that protect port facilities and coordinate security activities between the port and its users. It discusses the International Maritime Organization’s International Ship and Port Facility Security (ISPS) Code, the major international port security regulatory code, and examines the challenges faced by ports in the implementation of this Code. For the latter, cases studies of port security at Hong Kong in Asia and Piraeus in Europe are used.

In Hong Kong, port security is not widely regarded as an important port issue, as revealed by the fact that port security managers hold junior positions. The core rationale of port security compliance by major stakeholders of the Port of Hong Kong appears to be one of avoiding potential economic consequences from non-compliance (e.g., losing US trade). In contrast, the Port of Piraeus has a strong security culture. It has implemented a stricter form of the ISPS Code, and cooperates with other ports on port security know-how and good practice.

Chapter 34 addresses the effects of port security activities on the quality of port interchange services. Specifically, it addresses the question: Can improvements in the quality of port security service increase the quality of port interchange services? Although it is generally agreed that improvements in the quality of port security service such as one-hundred percent scanning can have a negative effect on the quality of port interchange services (for example by increasing port congestion), the question of a positive effect has not been investigated heretofore in the literature.

Data for investigating whether improvements in the quality of port security service can improve the quality of port interchange services were obtained from an e-questionnaire that was e-mailed to a database of container port operators. In the questionnaire, respondents were asked whether increases (or improvements) in container port security service would have a positive effect on the quality of container port interchange services. The results of the empirical analysis suggest that increases in the quality of port security service, via increases in the amount of throughput that is inspected and more frequent security inspection of entrance gates, departure gates and storage yards, will result in an improvement (i.e., a decrease) in port cargo theft. These results provide evidence that improvements in the quality of container port security service can result in improvements in the quality of container port interchange service.

2

The Evolution of Maritime Economics

Trevor D. Heaver

2.1 Introduction

The history of ships, trade and related businesses is global, long and fascinating. It is important to note the relationship of this chapter to that history. First, the context here is dominantly European and reliant on English-language materials. Second, the time period studied is very short in relation to the history of ocean shipping but long in relation to the brief existence of maritime economics as a field. It is long because the history of the field reveals the distinctive characteristics of maritime industries which provide the general framework for studies of maritime economics.

2.2 The Foundations

Maritime economics as an explicit field of study is less than fifty years old. Goss (2002) notes that before 1960 there was very little maritime economics and Grammenos (2002a) notes that in the late 1960s there were only a few publications on maritime economics. Yet the roots of the subject lie in the special challenges and risks of seaborne trade that go back to time immemorial. Three aspects of the special challenges and risks are evident in the history of shipping. They are: first, the technical or engineering, and therefore the pecuniary, challenges created by the need to make trade-offs among alternate ship designs; second, the difficulty of reaching contractual arrangements for shipping and trade that give rise to specialized market structures; and, third, the difficulty of managing the infrastructure and services provided at ports to serve the needs of trade efficiently.

The challenges of travel by the seas and the oceans have given rise to many specializations in human endeavor. Some of the challenges have ceased to be major matters; such is the case with navigation, because of technologies from chronometers in the eighteenth century to global positioning systems today. However, the development of more specialized, more sophisticated and larger ships has increased challenges for private and public decision makers and contributed to the development of maritime economics.

Building safe and efficient ships has remained a major challenge even though the engineering of ship design and shipbuilding has made great advances. The initial accumulation of knowledge and expertise in shipyards led to the development of naval architecture and marine engineering, especially with the advent of iron ships and the use of steam power. Reflecting this, the Royal Institution of Naval Architects (RINA) was formed in London in 1860 to advance the art and science of ship design.¹ The Society of Naval Architects and Marine Engineers (SNAME) was formed in the US in 1893. The National Maritime Research Institute of Japan has its origin in 1916 and the Maritime Research Institute Netherlands was founded in 1926.

The focus of these organizations was on technology. It was not until after World War II that the application of formal economic analysis to the selection of ships was encouraged. The reasons for this development are explored later.

The second aspect of the marine challenge is the complexity and risks inherent in entering into contractual relationships for the conduct of trade and shipping businesses, which led to the development of specialized professionals. Ships and their cargoes are exposed to high and shared risks on the high seas while the parties entering into contractual arrangements are often far apart and from different cultures. Consequently, the roots of marine insurance and ship brokerage go back to the conduct of business in the coffee houses of London in the late seventeenth century. Lloyds of London for insurance and the Baltic Exchange for ship brokerage are now examples of institutions around the world to facilitate global business. Various international organizations promote the development and acceptance of standard contracts. For example, the Baltic and International Maritime Council headquartered in Copenhagen has played a role in the acceptance of a number of standard charter parties and the International Chamber of Commerce based in Paris has issued the widely used Incoterms.²

Matters dealing with the insurance of ships and cargoes have stayed dominantly within the purview of insurance professionals and lawyers. They have not been subjects of study by maritime economists, although Goss (2003) argues that more attention from economists would have been beneficial. However, maritime economists have undertaken many studies of the businesses involving shipping finance and brokerage. The interests of economists in market behavior came to be reflected in studies of the near-perfectly competitive charter markets and of the cartelized liner markets.

Developments in ships and the growth of trade have posed challenges for societies to provide suitable port facilities for the protection of ships, the handling of cargo and the movement of cargo to and from vessel berths. The challenges have magnified greatly over the last one hundred years, and especially over the last fifty years as ports have had to provide a wide array of specialized facilities and services for rapidly growing trade moving to and from greatly expanded hinterlands. The challenges have resulted in the development of new businesses, new port management structures and new approaches to logistics management to serve global supply chains.

The special challenges have been approached differently by analysts as scientific methods and conditions of trade have evolved. A full appreciation of the development of maritime economics requires a brief review of developments up to World War II. This forms Section 2.3. After the war, there was a period of transition during which studies that warrant recognition as maritime economics were published but maritime economics was still not recognized as a defined field of study. This period of transition is the subject of Section 2.4. The selection of a date for the recognition of maritime economics as a field of study is somewhat arbitrary, as many events and studies over more than a decade contributed to its evolution, but we can settle on 1973, the first year of publication of the journal Maritime Studies and Management, changed in 1976 to Maritime Policy and Management (MPM) to reflect the public and private sector readership. The publication of the journal is indicative of a wide interest in the study of maritime issues. The chapter concludes with a review of the development of maritime economics since 1973. As a result of the various themes to be considered during the periods, developments are not always presented in chronological order.

2.3 Approaches to Maritime Issues to World War II

The approaches taken to maritime issues are considered in the light of the scientific methods and the characteristics of the shipping and trade conditions of the time. The limited role of economics is considered first.

During the development of economics in the nineteenth century scant attention was given to the role of transport. Although J. H. von Thünen had recognized the effect of transport costs on land values in his treatise The Isolated State of 1826 (Thünen 1966), economists generally ignored the spatial costs. This is in spite of the importance of changes in transport technology to the economy, as noted by Alfred Marshall: The striking economic factor of our age is the revolution – not in production – but in transport (quoted in Strømme Svendsen 1958).

The revolution in transport was based on new technologies; canals, the railways with their steam power and, later, the iron steam-powered ships. The new technologies were associated with great attention to engineering studies including comparisons among alternate designs needed for commercial decisions.³ Among those writing on choices among engineering designs, A. M. Wellington stands out and is regarded as the father of engineering economy, now also known as engineering economics. His The Economic Theory of Railway Location, first published in 1887, had its final printing in 1914. Nevertheless, the focus of engineers remained on the physical properties as reflected in the statement of Eugene Grant, a twentieth-century leader in engineering economy, who said about his undergraduate education in engineering completed in 1917, The amazing thing to me was that in all my undergraduate days, nobody had ever mentioned to me that it made any difference how much anything cost.⁴

Technological innovation resulted in a decrease in ocean transport costs and an increased reliability in transit times. Reduced tariff barriers further enhanced opportunities for trade (Irwin 2002; Lundgren 1996). Concomitant with these changes, communications cables, first across the Atlantic in 1866, followed by a link between England and India in 1870, made it possible for business information to be exchanged quickly. Increase in the volume of trade and the greater complexity and sophistication of the associated businesses led to the establishment of the first true shipping bourse: the Baltic Mercantile and Shipping Exchange Ltd. established as a public company in 1900 (Cufley 1972).⁵

Developments required in ports were either considered as private commercial decisions, as in the London docks, or undertaken by public enterprises for the public good, as was the case for North Sea ports (Palmer 1990, 1993). In both situations, general expectations about the prospects of trade were the main guides to port development.

The literature on shipping matters expanded greatly as a result of commercial and public interests. The weekly trade magazine for the maritime industry, Fairplay International Shipping Weekly, has been published continuously since 1883. The need for current data on shipping freight rates was provided by the publications of brokerage firms such as the annual of Angier Bros. and by the Daily Freight Register distributed to subscribers from 1893 (Isserlis 1938).⁶ Public interest in the shipping industry also increased as trade became more important.⁷ The contributions of shipping to the national balance of payments were of particular interest.

In liner shipping, companies formed themselves into the cartels known as conferences whose practices became the subject of periodic investigations, starting with the British 1909 Royal Commission on Shipping Rings, and still not completely over. The early investigations into the case for and against anti-competitive practices of liner companies were dominated by the solicitation of views from shippers, shipping companies and others. Interest in the study of liner conferences by economists did not emerge until later.

The first thorough analysis of the shipping markets was by Isserlis (1938), the statistician at the British Chamber of Shipping from 1920 to 1942. His analysis of rates from 1869 to 1936 was based on a carefully constructed rate index. In particular, Isserlis documented the volatility of rates in the tramp shipping market. His conclusion on the predictability of rates remains true today and for more than the shipping industry: The fact remains that it is comparatively easy to find explanations for the various stages of a trade cycle that is past, and that it is impossible to predict correctly the occurrence of the successive phases of a cycle which is in progress, and still more so in the case of a cycle that has yet to commence.

Interest in economic cycles led Jan Tinbergen, whose early career was in mathematics and physics, to conduct empirical work on shipping markets: an examination of shipbuilding cycles in 1933 and an analysis to explain the course of freight rates in 1934. (The papers were originally in Dutch; they are available in English in Klaassen, Koyck and Witteveen 1959.) Koopmans (1939), also a mathematician and physicist, studied mathematical economics under Tinbergen, which may account for his analysis of the relationship between tanker rates and the level of tanker buildings.⁸

Koopmans’s Nobel prize was for his contributions to the theory of optimum allocation of resources. In part, this grew out of his work during World War II for the British Merchant Shipping Mission based in the US. His work involved allocating shipments between sources and destinations so that total cost would be minimized. The result was the development of the transportation problem as a special case of linear programming. Although the methodology has been invaluable to analysts, he did not make other contributions to maritime economics. However, his work illustrates the leap that could be made in scientific methods after World War II.

The expansion of trade and shipping businesses gave rise to a greatly enlarged market for information on shipping. This resulted in books offering descriptions of trade and shipping practices. Writing in 1914 in England, Owen notes that segments of the maritime industry have long been the subject of important treatises but the whole, collectively, have apparently never been dealt with at all (Owen 1914: v). Owen primarily intended his book to be instructive to naval and military officers because of the importance of sea transport in wartime. Books with similar broad coverage appeared in the US, for example those by Hough (1924), based on materials prepared for LaSalle Extension University in 1914, Berglund (1931) and Bryan (1939), a book intended as a text for college students. Berglund notes the changes in shipping, which he characterizes as having up-to-date business technique … with an outlook distinctly archaic (1931: 2). In particular, liner shipping companies have been secretive.

The development of specialized institutions is an important part of the development of fields of study. They reflect the importance of the related activities in society and they contribute to the development of bodies of knowledge. The establishment of RINA and SNAME was noted previously. The Chamber of Shipping in London was established in 1878 when more than thirty regional shipowners’ associations came together. The Norwegian Shipowners’ Association was founded in 1909; the Association and its members were to play an important part in the encouragement of maritime studies. In the US, the American Association of Port Authorities (AAPA) was formed in 1912 when nationwide issues associated with port administration were emerging.

2.4 The Period of Transition, 1945–1973

The post-war years commenced the third, dramatic period of technological change in shipping and the unprecedented growth of world trade (Lundgren 1996). They also soon witnessed the further growth of institutions related to maritime matters and the much wider application of economics to transport issues. Evidence of these developments is presented before contributions to the maritime literature are reviewed.

The increased volume of trade and the increased size of ships ushered in the era of much greater public attention to shipping. Concerns about ship safety led to an international conference in Geneva in 1948 and the formation of the Inter-Governmental Maritime Consultative Organization (IMCO), renamed the International Maritime Organization (IMO) in 1982. In 1964, the UN Conference on Trade and Development (UNCTAD) was established to promote the development-friendly integration of developing countries into the world economy. For a number of years, UNCTAD’s Committee on Shipping had a number of well-known economists on staff, including S. G. Sturmey, formerly of the University of Lancaster. The 1969 publication on freight markets (UNCTAD Secretariat 1969) was a welcome economic description of freight markets and their rates. UNCTAD has published an annual Review of Maritime Transport since 1968, now under the authorship of the Trade Logistics Branch of the Division of Technology and Logistics. The World Bank was also interested in the influence of shipping on economic development, as reflected in the books of Bennathan and Walters (1969, 1979).

The expansion of trade and the increase in the size of ships resulted in congestion and related issues in ports. The growth of issues for ports is reflected in the founding of the not-for-profit International Cargo Handling Co-ordination Association (ICHCA) in 1952. The International Association of Ports and Harbours (IAPH) was founded in 1955.

The attention of economists was drawn increasingly to challenges in transport such as costing and pricing in light of the competition between road and rail transport. W. Arthur Lewis dealt with this in the first essay in his Overhead Costs (1949). Chapter 4 in that book is an insightful but little-known essay on the interrelations of shipping freights, including a framework for the analysis of inbound and outbound rates that has had surprisingly little recognition. Meyer, Peck, Stenason and Zwick (1959) was a response to issues raised by competition in land transport.

Issues associated with needed investments in infrastructure led to applications of project appraisal to transport, for example Mohring and Harwitz (1962), and Foster and Beesley (1963). The interest also led to the formation of the US Transportation Research Forum in 1958 and the Canadian Transportation Research Forum in 1965. These fostered the international conference organized by the College of Europe, in Bruges in 1972, which laid the foundation for the triennial World Conference on Transport Research, which became a Society in 1986 in Vancouver, Canada. The increased interest in transport issues reflected by these developments supported the launching of the Journal of Transport Economics and Policy in 1967.

The great growth and change in shipping and trade is reflected in the books by practitioners and academics. First, a number of books were written by those working or formerly working in the industry, for example, King (1956) on tankers, Bes (1963, 1965) on tanker shipping and on bulk carriers and Cufley (1962) on ship chartering. A notable text with contributions from many practitioners is McDowell and Gibbs (1954), which served a need arising from university courses developing in the US.

The books from academic writers reflect the emerging academic interest in maritime matters shown by the establishment a number of teaching and research programs on transport (Metaxas 1983). Marx (1953) is an excellent study of the liner shipping conferences. Strømme Svendsen’s Sea Transport and Shipping Economics (1958) was important as the first economics-oriented text. A translation of lecture notes at the Norwegian School of Economics and Business Administration (NHH), Bergen, it approaches shipping economics as simply the application to sea transport of the same methods and analytic means that are used in the general study of economics. The book describes and sets out algebraically the relationships of various inputs with outputs for shipping and for ports. The book does not have data for numeric examples. Strømme Svendsen and NHH have continued as important contributors to maritime economics. The need for texts is evidenced by the publication of Branch (1964) and O’Loughlin (1967).

Research was active at universities, and publications from theses made important contributions to the literature. Thorburn (1960) examines pricing for sectors of the shipping and port services markets under different demand and supply conditions. His aim was to assess the influence of distance by clarifying the effects of the characteristics of ships and ports on the supply of and demand for water transport. Thorburn’s book was the first, and arguably remains, the most comprehensive theoretical treatment of maritime economics. However, the author’s and the book’s influence on the field have been restricted by the book’s limited circulation and the fact that Thorburn, unlike Strømme Svendsen, did not work subsequently in maritime economics.

Zannetos worked on his thesis at the Massachusetts Institute of Technology between 1956 and 1959 and reworked the material for publication in 1966. He sought to build on Koopmans’s work and to contribute to the development of a theory of oil tankship rates. Veenstra and De La Fosse (2006) demonstrate that Zannetos’s work has provided a foundation on which many others have built.

The post-war importance of the maritime industries and the changing conditions of these industries in the UK and the US led to a number of industry studies. The industry studies reflect a growing interest in the economic efficiency of maritime industries and the factors contributing to it. The industries studied are the British shipbuilding industry (Parkinson 1960), the United States merchant marine (Ferguson, Lerner, McGee et al. 1961), and British shipping (Sturmey 1962). Also reflecting the concern with the status of maritime affairs was the UK Committee of Inquiry into Shipping (Rochdale 1970), for which the economic advisor was Richard Goss.

Journal publications in maritime economics related to the economics of ships, of shipping markets and of ports also became more common. The topics are dealt with in turn.

The application of economics to the selection of ship design was the result of general advances in the application of engineering economy, as reflected in Grant and Ireson (1960) (Thuesen 2005). The application to ships was advanced significantly by Benford through papers on general and specific applications of engineering economy (Benford 1957, 1963, 1967). Goss (1965) notes that, before Benford, studies of alternate ship designs, as in the transactions of associations such as RINA and SNAME, lacked explicit criteria for comparing ship designs. Goss and Benford recommended similar economic methods.

Continuing increases in the size of bulk ships led to greater interest in the differences in ship costs with size, in part because ports were being called upon to invest in new facilities for larger ships. The general absence of published cost information led to studies of actual bulk ship costs (Heaver 1968, 1970). A similar study was completed by Goss and Jones (1970) for the Board of Trade.

The development of container shipping following the establishment of international standards for containers in 1966 initiated decades of major changes in liner shipping. The changes and challenges associated with container shipping have been major subjects of studies by maritime economists after 1973, for example, Gilman (1975) on vessel size, and Gilman and Williams (1976) on network structure in container shipping.

Consistent with increased interest in the application of cost–benefit analysis to public investments, Goss presented the methodology for ports and the likely results in two papers (1967a, 1967b). The importance of ship time and costs in port was reflected in a United Nations study (1967) and in a study of the conditions affecting the actual time that bulk ships spent in port (Heaver and Studer 1972).

Recognition of the important effects of the changes in shipping on ports is