Authors: Dr. Jean-Paul Rodrigue and Dr. Theo Notteboom

Ports are catalysts for economic development as they enable trade and support supply chains. Port investments have economic benefits that can be direct, indirect, or induced.

CHAPTER CONTENTS

1. Direct, Indirect and Induced Benefits of Ports

Like other transport infrastructures, port infrastructure investments yield several economic benefits. The port is a value proposition where each has an economic, social, and environmental value. Economic theory often refers to ports as important economic development factors, particularly from a historical standpoint where they acted as promoters of commerce and the welfare of nations. It is not surprising to realize that most of the world’s major cities are port cities, since the port is a catalyst for urban economic development. The economy, the city, and the port often grow concomitantly. Still, as an economy and its complexity grow, the relationships between ports and economic development may become less significant even if ports handle a much larger amount of cargo. The paradoxical outcome is that most direct port activity now plays a smaller role in the regional economic framework, with the exception of very large ports dominating their region.

The basic argument is that ports expand the market opportunity of both national and international firms by expanding the port cargo base and hinterland. By expanding the market areas of firms, ports increase competition, resulting in lower prices for port traffic users. These involve all economic activity sectors, including manufacturing firms, heavy industries, resource extraction industries, and retailers. Therefore, the economic benefits of ports are specific to the nature of the hinterland they serve. They can be straightforward for hinterlands heavily dependent on resources since the output is directly handled by the port, or more nuanced when the hinterland involves manufacturing firms producing intermediate goods.

The increasing competitiveness brought by port investments can also be a double-edged sword for a national economy. It enables foreign firms to better access a national economy and compete with national firms, with some sectors being put out of business. However, the benefits of having better access to foreign markets and cheaper goods usually far exceed the risk of having inefficient national firms being undermined. Increasing competitiveness promotes positive economic benefits at the aggregate level, but these benefits are not uniformly distributed among sectors and geography.

Ports can be considered “funnels” to economic development since they act as catalysts and incite development in specific economic sectors and locations near ports or along corridors. The economic benefits of ports are commonly categorized as direct, indirect, and induced. Indirect and induced benefits are far from being clearly identifiable. It is challenging to prove that the economic activity and use of related resources would solely result from the port investment. When a port investment does lead to increased economic activity, the benefit is measured by the net value of the additional output. The direct benefits to the port are financial in nature and would be taken into account in any financial appraisal as well as in economic appraisals. However, the financial benefits would be valued somewhat differently, with economic appraisals using a social discount rate and, for some inputs, possibly valuing them at shadow prices.

The Port as a Value Proposition | Port Economics, Management and Policy — The Port as a Value Proposition

port_cargo_base | Port Economics, Management and Policy — The Port as a Value Proposition

2. Assessing the Economic Benefits of Port Investments

The economic benefits of ports are usually measured at an aggregate level by indicators such as value-added, employment, taxation revenue, and return on investment. These indicators are primordial for the decision to invest in port development and must be taken into consideration:

Demand forecasts. Trying to evaluate the expected traffic that the investment will support and facilitate, particularly if new investments relate to additional demand.
Liner shipping strategies. How shipping lines service markets and how the port fits within their service configuration in terms of ship capacity and frequency. While some ports are acting as load centers, others are transshipment hubs. The function of transshipment is often the outcome of the regional strategies of shipping lines.
Hinterland transport capacity and accessibility. Contingent on the cargo bound to and originating from the port. They define the existing and potential cargo base that could be handled by the port.
Competition between terminals. There may be competing terminals within the same port facility. Terminals in a monopolistic situation usually have more pricing power and can be linked with higher returns.
Financing of investment. Relates to the capital source and conditions. Large port infrastructure projects are usually financed by bonds issued by port authorities or by investments made by international financial institutions such as development banks, sovereign wealth funds, or pension funds.

Assessing this information can involve different methodologies:

Surveys. Based on interviews, questionnaires, or microeconomic data on firms. They try to identify and quantify the relationships between the various port actors, often from a qualitative perspective, but commonly in terms of employment. These studies have underlined the important relationships between freight forwarders and agents. The economic benefits of ports are reflected in the complex system of transactions of the actors involved.
Comparative analysis. Infers economic benefits observed at a reference port, particularly its economic base. This approach tries to infer the economic changes that have already taken place in a comparable port setting (similar traffic and composition of traffic) to the port being investigated. Since local and regional economic conditions are not similar, such studies do not provide particularly accurate results. Still, they provide applicable guidelines about what could happen to a port and its regional economy once an investment occurs.
Input-output analysis models. Aim to identify inter-sectoral multipliers, such as those between port traffic and regional employment. They highlight the agglomerating effects of port activities, both around the port and within the port region. Such studies have underlined low levels of elasticity between port traffic and service sector employment.

Input-output analysis is one of the most commonly used techniques. I-O analysis is based on a set of tables that quantify the linkages and transactions between different sectors of the economy. The quantities of inputs and outputs for a given period are entered in an input-output matrix/table in order to analyze what happens across various sectors of an economy by performing a multiplier analysis.

A multiplier is an index (ratio) that indicates the overall change in activity level that results from an initial change in activity. It effectively adds up all of the successive rounds of re-spending, assuming that major factors such as input prices are unchanged and that there are no resource limitations.

All sector-based multipliers (including direct, indirect, and induced effects) can be calculated when the matrix is complete and includes private consumption figures. The I-O technique can be used to prepare multipliers for a variety of impact measures, such as output, employment, and income. Multipliers can also be estimated for major components, such as by cargo type. Input-output analysis follows a top-down approach, building upon comprehensive data per sector. Data collection can also rely on a bottom-up approach, which implies that the overall impact numbers are computed based on firm-level data. In the latter case, data collection can be based on the balance sheets or annual accounts of individual firms, or data is collected via surveys.

The technique and results of an I-O analysis are relatively easy to understand, and the expertise required is readily available. However, the use of the technique also faces some issues:

Complexity. An economy is a complex system with a multiplicity of relationships between sectors. Some multipliers could be significant, while others could be limited and even have unintended effects. Multiplier effects and the related I-O tables can be challenging to quantify accurately.
Costs. Input-output base tables at the national and regional levels can be costly to generate and update. As the structure of a regional economy changes over time, the use of older I-O tables might lead to inaccurate results. In many cases, new regional tables are generated using survey methods, or existing tables are updated by incorporating more recent data on production and employment in the region.
Supply constraints. It does not incorporate any constraints on the supply side. For example, port development in a tight labor market can lead to crowding effects or the shift of employees from one industry (e.g. chemical industry) to the port sector. In such a case, the net employment effect for the regional economy stays the same (no net gain in the total number of jobs).

There are also integrated modeling techniques available to measure the economic impact of ports. These approaches combine input-output analysis and econometric techniques to analyze the response of an economy to external shocks over time. A very advanced technique is computable general equilibrium (CGE) modeling, which estimates the optimal mix of economic variables (e.g. consumption) in response to an external shock. Integrated modeling and CGE modeling are more sophisticated than multiplier analysis, but the data requirements of these methods are very high, and so are the costs of performing the analysis.

Port activities have multiplying effects within an economy, which are much larger than the port itself. While the economic importance of ports grows, particularly for the sectors they are connected to, their relative importance within the region they are servicing often declines. This diminishes total economic benefits for a regional economy as the economy grows and becomes more complex. The following are the most commonly observed economic benefits of ports for regional employment:

Port throughput. In general, it is positively related to employment in port regions, implying that the higher the throughput, the higher the employment level. Employment impacts are more substantial in the industry than in the service sector.
Employment impacts. They vary by commodity sector. For instance, container and break bulk traffic usually have twice the employment impact of dry and liquid bulk traffic.
Private ports. They typically have more regional employment impacts than public ports, as they usually serve commercial supply chains.
Direct port employment. Commonly associated with about three to four indirect jobs, although such figures vary widely according to the surveys and the context. There is limited empirical evidence about job multiplier figures.

However, the economic benefits per unit of port cargo handled, either in terms of employment or economic activity, usually increase with economic growth. The lower relative benefits of port investments are thus masked by economic growth, while the economic importance of ports is increasing. The economic benefits are less directly related to port activities but more related to the dynamics of the supply chains they support, which are derived and induced effects. This support becomes operational and functional, a benefit that is crucial to national competitiveness. Therefore, global trends underline a decline in the direct economic benefits of ports but a notable rise in their indirect and induced economic benefits. This trend is challenging because direct economic benefits can be readily assessed, while indirect and induced effects are complex to capture.

3. Employment Effects of Ports

Ports are important job generators. Shipping, cargo, and industrial activities and services in port areas generate direct employment effects. The logistics and industrial clusters in ports employ a vast labor force linked to cargo ship loading and unloading operations, ship operations and services (agencies, pilotage, towage, and bunkering), land transport, logistics activities, cargo services (freight forwarding and customs broking), industrial production facilities, and government agencies. The emergence of the cruise industry has also generated its own employment effects, such as in the hospitality and restaurant sectors.

The skills of the port-related employees and the interactions between them contribute to the competitiveness of seaports. Port activities are also responsible for a wide range of indirect employment effects through the linkages of harbors with other economic sectors and the spatial interactions with large logistics and economic poles outside port areas. Job creation in ports is mirrored in employment levels in education and training, tourism, and even in more cultural segments of the economic spectrum, such as maritime museums. All the above activities provide people with wages, salaries, and other earnings and are major tax revenues for governments at different geographical levels.

The employment effects of a port activity usually extend beyond the initial round of employment generated by that activity. For example, stevedoring companies purchase a part of their inputs from local suppliers. The production of these inputs generates additional employment in the local economy. Suppliers, in turn, purchase goods and services from other local firms. There are further rounds of local re-spending, which generate additional employment. Similarly, households that receive income from employment in stevedoring and related activities spend some of their income on local goods and services. These purchases result in additional local jobs. Some of the household income from these additional jobs is, in turn, spent on local goods and services, thereby creating further jobs and income for local households. As a result of these successive rounds of re-spending in the framework of local purchases, the overall impact on the economy exceeds the initial round of output, income, and employment generated by stevedoring. In essence, seaports create employment impacts in four ways:

Direct employment. Includes the jobs local firms provide to support services at the seaport. Seaports create direct port employment through all types of activities in the port cluster. These jobs are dependent upon seaport activity and would disappear if the seaport activity were to cease. Typical direct jobs include dockworkers, ship agents, pilots, tug boat operators, freight forwarders, employees of port authorities, ship chandlers, warehouse operators, terminal operators, and stevedores, and jobs with railroad, barging, and trucking companies.
Indirect employment. Ports also generate indirect jobs due to local purchases by port-related companies directly dependent upon seaport activity. Hence, port activities are responsible for a wide range of indirect employment effects through the linkages of harbors with other economic sectors and spatial interactions with large logistics and economic poles outside port areas.
Induced employment. The employees of port-related companies spend part of their wages and salaries. Induced jobs are those created locally and throughout the wider national or supranational economy due to purchases of goods and services by those directly employed. Induced employment can include grocery stores, local construction industry (housing), retail stores, health care providers, local transportation services, local and state government agencies providing public services and education to those directly employed, and businesses providing professional and business services in support of those directly employed.
Related employment. The last group of employment effects consists of related jobs. Manufacturing and distribution firms in and outside the port partly rely on efficient cargo handling operations in seaports. For instance, the steel industry requires the cost-efficient import of iron ore and coal for the blast furnaces and needs a port for exporting finished products such as steel booms and coils. Manufacturers, retail outlets, and distribution centers handling imported containerized cargo rely on efficient port operations. The dependency of related jobs on the port is a function of the location. When industrial activities or distribution centers are located in the port or in close proximity, the low competitiveness of the seaport could lead to a loss of jobs. In such a case, it is difficult to make a strict distinction between direct and related jobs. When these activities are located in the more distant hinterland, inefficient operations in one port could lead to a shift of the cargo flows to a competing port. A shift of traffic between ports generally preserves employment levels in the related industrial companies and distribution centers in the more distant hinterland. The demand for the final product (e.g. steel products or consumer products) creates the demand for employment with these shippers/consignees that do not involve using a particular seaport or marine terminal.

The extent of the employment effects of port activity is affected by the boundaries of the economy that is being analyzed. The increasingly international nature of port and shipping activities, along with the characteristics of global production networks and global supply chains, makes the employment effects of port activities increasingly extend beyond the local port level to a regional or even supranational level. A few examples underline this trend:

Shipping lines. While shipping lines operate globally, at a local scale, they generate employment via their liner shipping agencies in the ports of call. However, jobs related to ship management, container fleet management, and investment and commercial strategies are usually concentrated in global or regional headquarters.
Global container terminal operators. Operators such as PSA, Hutchison Ports, DP World, or APM generate many operational jobs at the local port level but keep some activities, such as equipment purchases, centralized in global or regional headquarters. Terminal operators might purchase terminal equipment not from local operators but from foreign suppliers in Europe (e.g. Kalmar, Gottwald) or overseas (e.g. Shanghai-based ZPMC).

For a particular port activity, the flow-on employment effects on the national or international economy will thus generally be larger than the flow-on effects on the regional economy.

4. Measuring Employment Effects

The appropriate technique for analyzing the economic impact of specific port activity is determined by the characteristics of the activity, the region being analyzed, and the purpose of the analysis. The availability of data is also an important factor. Measuring the employment impacts of ports is not an easy task. There are several methodological problems when evaluating port impacts:

Port employment dependency. Identifying activities dependent on the port and evaluating their degree of dependency, such as the extent to which local bank employment is linked exclusively to the port. Measuring the degree of dependency is potentially subject to subjectivity. A lack of exact data can lead to an overestimation of the degree of dependency and an overestimation of the employment effects.
Port employment intensity. Determining the intensity of the employment impact of the port, such as how much of the consumption activities and multiplier effects can be attributed to the existence of the port. Also, an estimation bias can occur when no exact figures are available.

Many of the above problems are structured by the differentiation between direct, indirect, induced, and related jobs. However, there is no unique standard methodology for defining the types of impacts, which makes port comparisons difficult. Benchmarking employment impacts of ports is further complicated by the large variety of methodologies applied (mostly bottom-up approaches) and a general lack of recent and port-relevant economic input-output data at the macro-economic scale.

Despite the lack of a uniform approach to the issue, many port authorities and (national) government agencies produce figures on the economic impact of their respective ports, including the effects on employment. A few European examples are:

Every year, the National Bank of Belgium publishes figures on the economic impact of the ports of Antwerp, Ghent, Zeebrugge, Ostend, and, more recently, also for the ports of Brussels and Liège. The studies are part of the Working Papers series of the National Bank.
The Ministry of Transport, Public Works, and Water Management of the Netherlands regularly commissions a ‘Havenmonitor’ report (Port Monitor).
In the autumn of 2008, Oxford Economics was commissioned by the Chamber of Shipping, British Ports Association (BPA), and United Kingdom Major Ports Group (UKMPG) to prepare two economic impact studies on aspects of the UK maritime industry. One focuses on ports and the other on the UK shipping industry. These studies are entitled “The economic contribution of ports to the UK economy” and “The economic contribution of the UK shipping industry”.

The employment effects are mainly expressed in full-time equivalent (FTEs), and a distinction is generally made between direct and indirect/induced effects. Employment impacts are often disaggregated to the level of individual ports or port regions and specific economic activities (cargo handling, industrial sector). However, the results are often not comparable among countries or even among ports within the same country, as there is a great diversity in measurement methods between countries/ports. There are methodological differences, particularly in terms of the definition of the port area and the economic sectors, the terminology used, the level of aggregation of the data, the approach followed (i.e. top-down via an input-output table with sector data or bottom-up based on firm-level data) and the definitions and methods deployed to analyze indirect/induced employment effects. The observed methodological differences can result in non-transparency and wrong benchmarking exercises. Stakeholders might show some mistrust of the results obtained, even if the methodology is made very transparent. The fact that methodologies differ further fuels criticism of employment studies for being over-optimistic regarding real job creation.

Despite the lack of a standardized methodology, some common conclusions apply:

Total employment effects of ports (direct and indirect/induced). Significant and typically represent between 1% and 5% of the total employment in a country.
Local employment effects of ports. In many ports, local direct employment effects of port activity are stagnating or decreasing due to a combination of deindustrialization, containerization, and the increasing use of automated port handling systems and technology. As a result, the growth in direct FTEs in many (but not all) port areas is either negative or close to zero while throughput volumes increase.
Outside port area employment. An increasing number of jobs are being created outside the port area. A large variety can be observed in how these processes are materializing in specific individual ports. At one extreme, some ports have succeeded in attracting more businesses and, thus, more jobs in the port area in recent years. At the other extreme, some seaports have become merely transit centers servicing economic and logistics centers in the immediate or more distant hinterland. When employment effects increasingly extend beyond the local port level, ports might be confronted with a lower direct employment level but higher indirect and related jobs. Potential reasons for fewer direct jobs include productivity gains, outsourcing activities to companies outside the port, or the delocalization of activities to the hinterland.

5. Global-Local Mismatch of the Economic Benefits of Ports

With the setting up of global supply and transport chains, there has been a growing level of mismatch between the benefits of port activities and the scale and scope of these benefits. While at the aggregate level, it is clear that port investments have economic benefits, the spatial and sectoral distribution of these benefits is far less evident. One particular mismatch concerns local (community) versus regional, national, or global benefits. The following points underline this mismatch:

Labor. Usually comes from the local community, and its benefits (mostly wages) are derived in the region, particularly indirect job multipliers. As port employment decreased due to mechanization, containerization, and automation (more recently), so did the local labor benefits. Yet, several port jobs are remunerated at a much higher wage than those usually found in the manufacturing sector. The most important employment multiplier of ports is usually related to trucking.
Capital. Usually does not come from the community but is provided by national and international funding sources, such as investment banks, pension funds, manufacturers, shipping lines, and terminal operators. Thus, the return on this capital (e.g. loan or operational revenues) does not accumulate in the port region but among global financial centers.
Firms. They can be locally owned, but commercial trends have underlined vertical and horizontal integration in the port industry. For instance, terminal operations at one port are usually part of a portfolio of terminals located in different ports across the region or even the world. Thus, profits derived from terminal operations are not necessarily invested in the port where they were generated.
Port land use. Usually regulated by leasing and concession contracts, but land prices are often a tool for attracting investors and usually do not reflect real value. This underlines that the impacts of ports on real estate values are not necessarily fully accounted for.
Local transport infrastructure. Usually provided for free (or at a fee lower than real costs), particularly for roads. This represents a form of local or regional subsidy for globally-focused activities.
Taxes and customs duties. They are only partly allocated to the port region. They are usually a national source of income used to fund other social and infrastructure programs.
Environmental externalities. Externalities such as pollution, noise, and accidents are assumed by the community, while the generators of these externalities usually bear only a fraction of them.

Therefore, port benefits are increasingly distributed across actors and concern geography that transcends the local community and, at times, the region. This trend skews the assessment of the benefits of port investments, where the local economic impacts can be much less significant than those at the regional or national levels. Conflicts or pressures can arise from local communities that may be disappointed if their expectations about the economic benefits of port activities are not met. At the same time, their perception of environmental externalities is present. Still, despite the complexity of assessing their economic impacts, ports remain fundamental to the economic well-being of the nations, regions, and localities they are embedded in.

Chapter 11.2 – Ports and Economic Development

Authors: Dr. Jean-Paul Rodrigue and Dr. Theo Notteboom

1. Direct, Indirect and Induced Benefits of Ports

2. Assessing the Economic Benefits of Port Investments

3. Employment Effects of Ports

4. Measuring Employment Effects

5. Global-Local Mismatch of the Economic Benefits of Ports

Related Topics

References

Authors: Dr. Jean-Paul Rodrigue and Dr. Theo Notteboom

1. Direct, Indirect and Induced Benefits of Ports

2. Assessing the Economic Benefits of Port Investments

3. Employment Effects of Ports

4. Measuring Employment Effects

5. Global-Local Mismatch of the Economic Benefits of Ports

Related Topics

References

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