i.2 – Seaports: Economic Value

Authors: Dr. Theo Notteboom, Dr. Athanasios Pallis and Dr. Jean-Paul Rodrigue

Seaports play a strategic role in supporting international trade and economic growth. They have positive socio-economic effects but potential adverse effects on the environment.

1. Ports as Economic Catalysts

The core value of ports is economic since they support trade flows and an ecosystem of related activities. As they can represent a substantial economic investment, ports are expected to provide enough value to justify these investments. From an economic and public policy perspective, ports are viewed as economic catalysts for the regions they serve. Two distinct approaches can be followed when evaluating the strategic and economic significance of ports. The first is to measure the economic significance of ports via distinct economic and financial parameters. There exists a large range of potential indicators. Some are expressed in absolute figures, while others are expressed in relative terms. The most significant economic indicators (the port as a factor of added value and growth) include:

  • Gross value-added, which provides an insight into the contribution of port activity to the GDP (Gross Domestic Product) or GRP (Gross Regional Product) in a given time period (often annually). This added-value can be complex to evaluate since ports directly impact activities directly connected to them and without which the port could not effectively function. There is also a range of indirect impacts on the whole ecosystem of economic activities that may interact with the activities directly related to the port. As international trade grew, the indirect impacts of ports on national or regional economies became even more important.
  • Employment is mainly expressed in full-time equivalents (FTEs) and provides insight into how port activities contribute to employment creation. In most cases, a snapshot is taken once a year to provide the total employment or port activities. Similar to added-value, there is a whole range of employment that is indirectly related to port activities.
  • Trade volumes and values provide insight into the importance of ports for international trade. Traffic direction can also be considered since several ports are dominantly export platforms while others are focused on imports. In these cases, the same volume and trade composition can support different economic structures.

The most significant financial indicators (the port as a source of revenue and investment) include:

  • Fiscal revenue indicates how port activities contribute to the taxation income within their jurisdictions, ranging from national to municipal governments. This is particularly relevant to justify the public expenses supporting port activities, particularly infrastructure.
  • Investments by the public and private sectors in port activities over a given period. Port superstructure and infrastructure are capital-intensive and require constant maintenance.

The second approach is of a more qualitative nature and tries to evaluate the significance and value of seaports for the economic development and performance of their market. These strategic aspects are difficult to quantify but deserve attention.

2. Ports as Generators of Added value and Employment

The first approach asserts that ports contribute to the generation of socio-economic benefits and wealth, particularly direct and indirect added value and employment. The external spill-over effects of ports can be substantial. Simultaneously, the economic effects of seaport activities are no longer limited to the local environment. They are increasingly spread over a much wider geographical area and among a large number of international players. In other words, the economic benefits of port activities are expanding from the local port system towards a much larger economic system. The geographical dispersion of economic effects is apparent when a port does not develop local added-value activities linked to transit cargo or establish a strong local industrial and logistics cluster. In that case, cargo flows are transiting the port, thereby generating employment and value-added effects for the local community, mainly in cargo handling, ship services, and inland transport operations.

The changing distribution of benefits is also illustrated by the development of logistics zones in the vicinity of seaports or inland locations along the main corridors towards the hinterland. This trend has been supported by growing containerization and intermodal transport systems. In many cases, these logistics sites and zones generate considerable economic benefits by providing low-end, high-end value-added logistics services (VALS) to the cargo and only using ports as a point of transit. However, it is unlikely that these sites and zones would have developed if it were not for seaports.

Policymakers and public authorities typically approach the macro-economic impacts of ports from a national or regional competitiveness perspective. Most available reports and figures on the economic impact of seaports portray the national or regional economic effects. Ports impact the wider economic space and international trade, with logistics receiving less attention. While leakages of port-related benefits to regions in the more distant hinterland can be substantial, policymakers focus on maximizing the port’s input payback for the local or regional communities under their jurisdiction. The main port development objective is to provide infrastructures for the local, regional, or national interest at the lowest combined cost to the port and its users.

From a macro-economic perspective, seaports typically are important generators of employment. The employment effects of a port activity usually extend beyond the initial round of employment generated by that activity. The extent of the employment effects of ports is affected by the boundaries of the economy that is being analyzed. The increasingly international nature of port and shipping activities and the characteristics of global supply chains make the employment effects of port activities typically extend beyond the local level to a regional or even supranational level. For instance, shipping lines are operating on a global scale with related employment effects, such as for ship crews. On a local scale, they might generate employment via their liner shipping agencies in the ports of call.

Employment related to ship management, container fleet management, and investment and commercial strategies are usually concentrated in global or regional headquarters. The same applies to global container terminal operators such as PSA (headquarters in Singapore), Hutchison Ports (Hong Kong), DP World (Dubai), or APM Terminals (The Hague). While these companies generate many operational jobs at the local port level, they keep some activities centralized in global or regional headquarters, such as equipment purchases and research and development. Terminal operators might purchase terminal equipment from foreign suppliers such as Kalmar, based in Gottwald, Sweden, or Shanghai-based ZPMC. For a particular port activity, the flow-on employment effects to the national or international economy will generally be larger than the flow-on effects to the regional economy.

3. The Strategic Value of Ports

By providing cost-efficient, reliable, and frequent connections to overseas and inland markets, seaports play an essential role in facilitating trade and increasing the competitiveness of a nation or region. This strategic value manifests itself in different ways:

  • First, the proximity of efficient seaports can be an important factor in the location decisions of firms.
  • Second, the availability of a competitive seaport system can reduce reliance on foreign ports for trade and can reduce the total logistics costs for firms located in the region.
  • Third, seaports can substantially contribute to the international competitiveness of firms in a region or country, mainly through existing innovation and advanced business networks and management.

A variety of indicators compare countries across economic performance criteria. Among the most influential:

  • The Global Competitiveness Index (GCI) of the World Economic Forum. Seaports contribute to the country scores through the dimension of infrastructures and the adoption of information and communication technologies.
  • There are also assessments focusing on logistics performance, such as the Logistics Performance Index (LPI) released by the World Bank where the availability of efficient seaports supports a higher score.
  • The Liner Shipping Connectivity Index (LSCI) released by UNCTAD incorporates many port-related characteristics related to the connectivity of port systems, such as the number of shipping lines offering services to the national port system and the largest ship sizes.

Good infrastructure and high accessibility or connectivity are increasingly becoming basic requirements for competitiveness. For high-income economies, innovation and advanced production factors become essential to remain competitive. This also alters the strategic role of seaports. Instead of just ensuring connectivity to overseas and inland markets, seaports also play a role as innovation centers. A port is no longer a quayside area where cargo is simply shifted from land to sea. It becomes a vital link in global supply chains and international transport networks. By striving for competitiveness and efficiency improvements, seaports can become drivers of innovation. This sense of innovation is strengthened by port cluster management that enhances knowledge exchanges among organizations within and outside the cluster. Through clustering, a knowledge spill-over is created, increasing innovation and added value.

Ports can be sources for innovation, productivity enhancements, and strategic cooperation through the presence of large multinational firms, leading firms, and clusters of related and supporting industries. Ports can also enhance specialization, innovation, and productivity improvements through cooperation with ports and other logistics hubs in the region. Finally, ports can help support the diffusion of competencies and the further gathering of knowledge in port management and logistics. Next to pure economic arguments, these more strategic aspects should be considered when evaluating port development plans.

The importance of a port to a regional, national, or supranational economy is greater than shown by measures of direct and indirect value-added and employment. For example, a 2015 study estimated the strategic value of the seaport system in Belgium at 45 billion euros, or 60% more than reported in the annual port economic impact studies of the National Bank of Belgium.

4. From Cargo Handling to Nodes in Global Supply Chains

Next to the macro-economic perspective, seaports can also be analyzed using a microeconomic approach. Port operations are usually oriented towards the two traditional components of ships and cargo.

  • Services to ships include those performed at the sea or waterways side (dredging, pilotage, mooring/unmooring) and the ship/shore interface (berthing, repair and maintenance, supply, and bunkering).
  • Services to cargo can be divided into those performed at the ship/shore interface (stowing, loading, discharging) and those entirely performed in land-side areas such as consolidation, storage, and distribution.

Key in the micro-perspective approach are the concepts of efficiency, performance, and sustainability at the operational level (i.e. a company or a terminal). This approach to ports advocates that corporations and their terminals are the relevant units of analysis when analyzing or assessing port competition, not seaports.

While the transit, transport, and handling of cargo is the rationale for ports, seaport functions have become diverse in scope and nature and evolve over time. The complexity of seaports goes beyond the loading and discharging of vessels along the quay. Fundamental processes of economic and technological change have broadened and deepened the functions of seaports. Seaports added new functions to their traditional role of transhipping and storing goods. After the Second World War, the industrial function grew rapidly. Some seaports have grown out to become industrial complexes comprising a large number of related industrial activities, the so-called maritime industrial development areas (MIDA).

In more recent years, the logistical function of seaports received attention. The increasing importance of integrating ports and terminals in value-driven supply chains has increased the focus on creating added value linked to cargo passing through the port. The gateway position of major seaports offers opportunities to enhance value-added logistics services (VALS) by integrating the production and distribution chain. By offering VALS, ports aim to attract a large portion of the value-added creation within product chains. Modern seaports have evolved from pure cargo handling centers to a function in a logistics system.

The competitiveness of ports can be better understood by following a supply chain approach. Ports compete not as individual places that handle ships but as crucial links within global supply chains. Port and route selection criteria are related to the entire network in which the port is just one node. The selected ports are those that will help to minimize the sum of sea, port, and inland costs, including inventory and quality considerations of shippers. Port choice becomes more a function of the overall network cost and performance. A well-coordinated logistics and distribution function of seaports, with the cooperation of various service providers, facilitates the integration of ports in advanced logistical and distributional networks through a new range of high-quality value-adding services.

5. Ports as Clusters of Economic Activity

At the intermediate level, ports are often approached as clusters of companies and economic activities. Ports typically consist of geographically concentrated and mutually related business units centered around transport, trade, and industrial production. Port clusters exhibit strong scale and scope advantages linked to physical cargo flows. The concentration of activities opens more opportunities for the bundling of cargo flows via intermodal transport (shortsea, barge, or rail) and to achieve higher connectivity to the rest of the world via frequent transport services. Port clusters can be home to a wide range of activities.

While industrial activities in ports are often associated with negative effects in terms of emissions and noise pollution, port clusters can exert strong environmental advantages. For example, “ecologies of scale” are achieved in the petrochemical industry through which companies utilize waste material or by-products such as heat. It would be far more difficult to achieve this if the concerned plants were spatially scattered. Ecologies of scale advantages are increasingly being acknowledged in environmental policy. Successful port clusters might also face some challenges, mainly in terms of accessibility (congestion) and higher land costs.

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