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Port Economics: Prof. Michael Dooms on Sustainable Port Development

Lamu
Lamu Port under construction (LAPSSET Corridor Program)

Published Sep 2, 2022 7:49 PM by Brian Gicheru Kinyua

In the past two years, the shipping and ports sector has seen a drastic transformation. Historically, container shipping has been a loss-making venture as overcapacity plagued the industry. For instance, in the decade preceding the pandemic, the operating profit margin for container shipping was -0.2 percent. This has now jumped to 57.4 percent as of Q1 2022, according to Alphaliner.

As back-to-back disruptions hit the world, starting with the Covid-19 pandemic in 2020, the fortunes of the container shipping industry has changed a great deal. Analysts are predicting that this year’s combined net income for the top eleven ocean carriers could reach $256 billion, a figure almost equivalent to the gross domestic product of Portugal.

To remain ahead of the curve, stakeholders must adopt a proactive approach in how they view the entire maritime sector.

To help decipher the new dynamics in shipping’s business model, Brian Gicheru sat down with Michael Dooms, a Professor of Port Economics at Solvay Business School, University of Brussels, Belgium.

How can businesses create resilient supply chains in a global economy inundated with disruptions, especially on the ports side?

What I have seen is that most internationalized businesses have been able to adapt very quickly. In Europe for instance, some corporations had already started nearshoring and reshoring plans long before the disruptions hit. When lockdowns came and maritime freight rates skyrocketed, the majority of corporations made a shift to rely on regional (EU) supply chains, also driven by the general uptake of Enterprise Risk Management (ERM) the last decade.

Nevertheless, these disruptions continue to pose a structural challenge to companies with internationalized supply chains. Depending on an exclusive or limited supplier base remains a recipe for disaster, as the war in Ukraine and the Covid-19 pandemic has shown. However, the debate on re-shoring and nearshoring cannot be generalized. Different dynamics are at play depending on the type of an industry.

The labor cost incentives that encouraged companies to offshore production towards developing countries in the past are being neutralized by rising transport costs due to port and supply chains disruptions. The labor cost incentive was already under pressure due to automation in certain emerging economies, decreasing the labor cost advantage significantly. 

For ports, it means they have to develop a thorough understanding and constant monitoring of the different value chains located in or passing through their infrastructure and regions.

There has been a recent surge in port strikes, specifically in western nations. What is your take on effective stakeholder management by port authorities around the world?

Following the recent disruptions, ports and airports have become visible as a crucial component of the supply chain. For many years, the ports sector has been operating behind the scenes, but the public is now seeing the value of the connectivity offered by large container terminals.

Therefore, logistics is now regarded as an important element of the economy to stabilize prices or at least minimize disruptions to keep the whole economic system running.

Ocean carriers and ports/terminals are making lots of money. Unfortunately, this is yet to trickle down to port and dockworker remuneration. Remember, these workers put in an extra effort during the Covid-19 pandemic for ports to remain open, often in difficult working conditions. A scenario where the share of the profits fails to reach them will definitely create some conflict. It is all about an equitable distribution of resources and benefits to all stakeholders concerned.

Building on this issue of stakeholder management, you had mentioned earlier about a weeklong discussion you had with European dockworkers on ports automation before the pandemic. Is this a concern for port workers on their job security?

Based on our conversations, dockworkers are not necessarily against automation, and they acknowledge the fact that their profession is evolving with the need to embrace innovation. In fact, they see some benefits.

The only concern is that most existing terminals have to automate in stages, which could generate additional risks and complexities in the interaction between human workers and large automated machines.

This means that port authorities have to invest in thorough training of workers on the hybrid system, which also entails costs and sometimes even lower productivity in the adjustment phase. If such an exercise is rolled out without the participation of dockworkers’ unions, there could be an increased risk of accidents at terminals, ultimately causing resistance due to safety concerns, and a decrease of stakeholder support for automation.

Finally, the benefits of the innovations brought by automation and digitalization also need to be fairly distributed.

Climate change is now a major concern globally. How should ports re-draw their business strategies to ensure they are compliant with emerging climatic requirements?

There is no silver bullet to deal with the sustainable transition. Each port should design a specific green policy based on the type of economic activities taking place and their local environmental impacts.

For instance, some approaches are best suited to reduce global carbon emissions, while others are deployed to control location specific emissions with a direct impact on local communities (such as fine particles). Take the case of Mombasa Port, where as the facility grows, it could have an increasing toll on the Mombasa city environment.

A few years ago, I was taking pictures while flying into Mombasa and you will notice a thick layer of smog above the city. The presence of ships in the port with running engines and the movement of trucks plays a significant role, as impact measurements in port cities around the dsworld have shown. In such a situation, maintaining the appropriate air quality standard becomes a priority. In some cities, increase in air pollution is becoming a public health tragedy.

When designing green port policies, we must take a holistic approach of viewing the environment. We need a solid package of measures that are internally consistent to make sure all the stakeholders are benefitting from such a policy.

In addition, all the parties involved must share in the common vision of having a good environment, and while there may be short-term negative impacts, no economic activity should be unnecessarily disadvantaged in the long run.

We are seeing a rise in construction of greenfield ports in East Africa, like Lamu (Kenya) and Bagamoyo (Tanzania) ports. What is your take on this, based on the rapid evolution of the shipping sector in the past two years?

I think that in East Africa, there has been what I would call a ‘fever’ for big infrastructure projects. Almost every country wants to have a logistics hub and a maritime gateway for the other.

As we have seen in Europe about these large terminals, there is a need to ask some critical economic questions. This is not a business understood by everyone and based on the fact that it happens away from the public (out in the sea), the scrutiny tends be lower, as opposed to other large-scale infrastructure (such as airports, energy projects, shopping malls).

We have to be realistic about factors such as maritime traffic forecasts, the functioning of liner shipping companies function and most importantly, how the shipping companies are evolving with changing trade dynamics. Another critical question is probing the realistic growth in containerization vis-à-vis the potential of the earmarked projects as transshipment hubs.

Many studies have concluded that the decision for the construction of these ports not always based on sound economic analysis, sufficiently challenged by experts and stakeholders.

Usually, it stems from top-down government policies and the need to upgrade physical infrastructure, which of course is an important and legitimate purpose. However, when combined with other factors such as pressure from donors - often with specific interests in construction - the inevitable result is a compromise on the socioeconomic rationale for building a new infrastructure.

This constitutes a solid risk of infrastructure overcapacity for very long periods, leading to dwindling societal and even market support for these projects, in turn leading to stakeholder opposition for future infrastructure development across the board.

However, there could be strategic benefits to these upcoming ports. In 1991, Rotterdam embarked on a massive seaward port expansion project, creating over 2,000 hectares of space into the sea, of which 1,000 hectares for new economic activities. The dominant thinking at the time was the space would eventually fill up with containers as trade grew, but this did not happen as container markets matured. Twenty years later, the project has found relevance with offshore wind companies scrambling for portside space for production of wind turbine components.

Therefore, the area will rather have a very mixed economic vocation, including but not entirely container handling. The sustainable transition towards a carbon-free economy could be an opportunity for these high-value greenfield projects.