Some governments see the large volumes handled by transshipment ports and believe that converting their port into a transshipment hub will bring economic benefits in the form of high concession fees and royalty payments. But transshipment cargo may not be very good business for either a government or for a private port operator. Transshipment only makes sense for ports located in places with ideal geographical and natural conditions where the ports can succeed with a “supermarket” approach: very high volumes at a low price together with very high efficiency, which can generate an attractive return on investment despite low revenues per move.
When governments first consider the concession of an existing or new port terminal to a private operator, they often look with envy on a port like Panama’s Manzanillo International Terminal. Manzanillo, located on the Atlantic mouth of the Panama Canal, grew from approximately 160,000 TEUs per year in 1995 to 1.6 million TEUs per year over 15 years by focusing on “transshipment” cargo. (A TEU is a twenty-foot-equivalent unit, an industry standard measure of shipping containers.) In this context, transshipment is the transfer of containers between a large ship, usually coming from or going to a major port, and smaller ships, usually coming from or going to smaller ports. Transshipment makes sense where a large ship may not be able to enter small ports due to water depth or because it would be uneconomical for the large ship to make a series of stops at the smaller ports.
Governments may see the large volumes handled by transshipment ports (many upwards of 1 million TEUs per year) and believe that converting their port into a transshipment hub will bring economic benefits in the form of high concession fees and royalty payments. However, what they may not realize is that transshipment cargo may not be very good business for either a government or for a private port operator. By positioning their port as a transshipment hub in a concession auction, a government may risk actually scaring off many private operators. They may be concerned about opposing views on developing the business, or the potential for unrealistic goals. Those operators who do bid may offer less in the form of an upfront pay-ment or revenue sharing than if the port were positioned to handle primarily local “destination” cargo.
Conditions are important
It’s counterintuitive that large volumes would not translate to high revenues, profits, and return on investment. But most ports simply do not meet the requirements to become a transshipment hub. Shipping lines choose a port to transfer containers between large and small ships for a variety of reasons, including:
- Low handling and ports fees.
- Location on a major shipping route so there is little or no deviation between the cargo origin and destination (time is money in the shipping business).
- A deep harbor and entry channel to accommodate today’s large vessels (Maersk’s new Triple-E class ships carrying 15,000-18,000 TEUs need a minimum of 15 meters of channel depth when fully loaded).
- Extremely high productivity in the form of ultra-fast loading and unloading through the use of large, modern, expensive container cranes and a very efficient workforce.
Transshipment ports must have the ability to fight off competition, either by offering very low tariffs or having a location (such as the entrance to the Panama Canal) that gives a major competitive advantage.
Even if a port can meet the requirements to become a transshipment hub, this may not be the best economic strategy for a government or a private port operator.
Unlike cargo that is destined for areas near a port —for which a port has a natural monopoly—transshipment cargo is highly discretionary and can be transferred at many different locations along a shipping route. Shipping lines are notorious for seeking the lowest tariffs for transshipment (not surprising, as the shipping business is itself extremely competitive) so they regularly change their transshipment locations to ports that can offer the best prices and service.
Even for ports that are able to meet the requirements to become a transshipment hub, this may not be the best economic strategy for a government or a private port operator. Because of the intense competition for transshipment cargo, the rates to move one container may be as little as 25 percent of the rates typically charged to move a “destination” container. This means the port must move four times the volume of transshipment containers to make the same revenue it would handling only destination cargo.
In addition, the capital costs for the equipment to compete for transshipment cargo may be significantly higher than for equipment needed to handle destination cargo. For example, a port with natural destination cargo of 200,000 TEUs per year may be able to provide good service with mobile harbor cranes and other equipment costing less than $30 million in total. If that same port decides to pursue large scale transshipment volumes, it may need to spend an additional $60-80 million or more for Post-Panamax gantry cranes, sophisticated landside equipment and IT systems, and potential dredging of the harbor and access channels to accommodate larger ships.
Ultimately, the return on investment to pursue that highly volatile transshipment business may be negative, and the terminal operator (government or private) may find that the only way to break even is to increase tariffs for destination cargo to subsidize the transshipment losses. This could undermine one of the key objectives of a port PPP, which is lower tariffs and improved service for the country’s importers and exporters.
A natural fit
Transshipment does make sense for some ports, especially in places with ideal geographical and natural conditions—like Dubai; Manzanillo, Panama; Port Said, Egypt; Singapore; and Tangier, Morocco. Here, the ports succeed with a kind of “supermarket” approach: very high volumes, which together with very high efficiency can generate an attractive return on investment despite low revenues per move.
Other ports with a large destination cargo base, such as Colombo, Sri Lanka and Manzanillo, Mexico have become successful transshipment centers because the large local cargo volumes require the same modern equipment as a transshipment hub. Those ports can use transshipment business to fill in unused capacity without having to make additional investments, thereby generating a good return on the incremental transshipment volumes. Shipping lines also prefer to transship at ports that have a large local cargo base as it means less deviation from their natural cargo routes, saving them money.
In considering a port PPP, it’s critical that governments be realistic in what they have to offer and what will best achieve their objectives. If their objectives are better service and lower costs for the country’s importers and exporters, they should think carefully about whether it is the right strategy to meet their country’s goals.