The Port as a Funnel to Economic Development

The Port as a Funnel to Economic Development

Ports can be considered as “funnels” to economic development since they act as a catalyst enabling three major types of effects:

  • Direct benefits to port. They involve the revenues that accrue from the port activity and arise from the various charges levied on ships and cargo for the use of the port. The volume of the port is thus directly proportional to revenue. They mainly include fees charged for pilotage, berthing and towing, charges for cargo handling and demurrage charges. With the emergence of the landlord port model, port authorities are getting additional revenue from terminal concessions. Further, there may be additional rental revenue from development of port land, such as logistics zones or more general real estate projects. However, direct economic benefits tend to be less important than they were in the past, particularly because of mechanization and terminal concessions. Another category of direct benefits concerns the revenue generated by national transport firms servicing the port, such as trucking companies and railways (if present). The direct benefits to port users are generally referred to as economic benefits. These are also generally included in economic appraisals, although which particular benefits are to be included will depend on the given situation.
  • Indirect benefits to port users. They involve firms that import or export goods from the port. Indirect benefits to port users include cost savings that arise from reduced operating costs, some of which may be realized outside the immediate port area. They involve lower shipping costs due to reduced turnaround time from improvements such as more berth space, better channel access, better terminal productivity, and reduced processing time for cargo at the port. They may also include savings in ship operating costs due to economies of scale from larger ships enabled by deeper drafts and additional volumes. Enhanced port facilities and operations may also reduce inland transport costs due to less congestion, increased productivity and better turnaround time. Other benefits to users may include savings in insurance costs due to port improvements and savings in interest costs related to inventory, particularly from lower inventory levels as more efficient port operations enable users to adopt better supply chain management practices.
  • Induced benefits to the economy. Include the benefits that filter through to the suppliers of input factors, such as income to labor directly employed in port-related activities, and income to industries supplying the port with goods and services, creating indirect employment. In turn, these incomes generate re-spending, which further induces employment and income through the economic multiplier effect. Port investment may also have the effect of stimulating economic activity in industries that use the port. Such benefits, however, are not as straightforward as cost-saving benefits. The induced benefits are secondary and not usually taken into account in economic appraisals. This is partly because it is hard to know where to draw the line in including the successive rounds of induced income and employment. Thus, there is a risk for economic benefit analysis to overstate the impacts of port activities by assuming indirect benefits that may not materialize. Besides, in developing economies, the potential induced benefits are often curtailed by lack of capital and skilled labor and are lost through import leakage. Induced benefits can also be assessed from an environmental perspective where less pollution such as noise, particulates, and carbon accrue as social benefits in terms of quality of life and healthcare costs.