The Productive Efficiency of Container Terminals

An Application to Korea and the UK

Dong-Wook Song, Kevin Cullinane, Michael Roe

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351883511
• Edition: 1
• Topic: Economia
• Subtopic: Economia internazionale

This work applies the theory and techniques of economic efficiency measurement to the realistic context of the ports industry. The objective is to assess the practical impact of port privatization policies upon the economic performance of the sector. Specifically, this volume presents Korea's port and terminal development plans and systematically analyses not only the process and results of privatisation, but also the claims of its proponents that it leads directly to improved efficiency. The Korean experience is given global relevance by applying the same approach to Britain's main container ports and terminals which, of course, are at a more advanced stage in the privatisation process. This work constitutes a unique contribution to the literature relating to shipping and ports, econometrics and the Korean economy and will be of primary interest to port authorities and practitioners, as well as to students of economics and/or the shipping industry.

1
Introduction

Research Background

The Republic of Korea (South Korea, hereafter referred to as just Korea) has achieved remarkable economic growth over the last four decades: from a poor developing country with a small manufacturing sector and heavily dependent on foreign aid in the 1960s to a fully industrialised country currently ranked as the world's 11th largest trading nation¹. This impressive development within a short period of time is largely thanks to the adoption of outward-oriented and export-led economic policies.

This inspiring economic growth has resulted in a rapid increase in export and import cargoes and this trend has recently been accelerated by the better trade relations with the Chinese economy: the fastest growing economy in the world. Since the foreign trade of Korea is carried predominantly by sea transport (approximately 99.8% in terms of volume), its ports play a crucial role in the process of economic development; any Korean port can, therefore, be regarded as a 'trade facilitator'.

The recent development and operation of Korean ports has kept pace with the ever-growing seaborne cargoes. However, they still have a number of problems including, amongst other things, insufficient port and terminal capacity, inefficient managerial and operational behaviour, and bureaucratic administration. As a consequence, Korean ports suffer from serious port congestion. This problem is particularly acute in the port of Pusan, the country's main seaport and the fifth largest container port in the world. By adding to the logistics costs of manufactured products, the delays caused by this congestion seriously undermine their competitiveness in world markets and detract from Korea's further development capability.

Until recently the development and operation of ports and terminals was entirely dependent upon government funds. This system caused problems due to the inflexibility of the budget and the bureaucratic procedures for obtaining the necessary funds. Fortunately, under the new ongoing economic policy allowing more freedom to businesses, the government and the public port authority regard private sector participation in an industry whose activities used to be dominated by the public sector, as an important means of reducing their administrative and financial burden. This new tendency has resulted in massive private sector participation in several projects, including new container terminal developments.

In the past, all ports and terminals were controlled and administered by the Korea Maritime and Port Administration (KMPA), which was a public port authority. In 1996, by merging three maritime-related organisations, the Korean government established a new government organisation, the Ministry of Maritime Affairs and Fisheries (MMAF), with a mission to administer and manage its seaports and other maritime-related activities and to improve management efficiency in the maritime area.

Just as the 1970s and the 1980s were known for enormous capital investments into the port industry, it can be asserted that the late 1980s through the 1990s will become known for port sector reorganisation. In an attempt to improve efficiency and performance and to reduce the government's financial burden in supporting a very capital intensive industry, a number of countries have considered or have already undertaken some form of institutional reform of their port industry (e.g. commercialisation and privatisation).

Parallel with the general privatisation and liberalisation policies of the government and following the dominant current trend in the world's port industry, Korea's new port authority, MMAF has launched several new port and terminal development schemes as a means of solving problems related to port congestion and other sources of inefficiency. As the MMAF implements its plan to attract private capital into both existing and new port facilities by seeking some degree of privatisation where the costs and returns to port businesses can be shared between public and private sectors, competition has also been introduced into the Korean port industry. This is an environment which the country's port industry is totally unused to.

The motives for privatisation are complex and varied, but one key claim made is that the transfer from public to private ownership improves economic efficiency and, hence, ultimately financial and operational performance. Economic theories and existing empirical studies, however, fail to establish any clear-cut evidence of private enterprises performing better than their public counterparts. This phenomenon may reflect, to some extent, a paucity of performance indicators which can be systematically applied across enterprises and industries to allow a comparative analysis of performance to be undertaken. It is essential, therefore, to have a system for evaluating the impact of privatisation which can be widely applied and to provide a systematic and pragmatic analytical framework to assess the process of privatisation and its results.

Research Objectives

In light of the above context, this text aims to critically review the characteristics of international port privatisation along with the economic theory of privatisation; to introduce a novel method for efficiency measurement which is applicable to the port industry; and to assess policy implications for the Korean government and port authority, paying particular attention to the privatisation strategy and its implementation within the nation's seaports and terminals.

Research Methodology

To achieve the objectives, the current research employs a recently developed econometric method for efficiency measurement known as the 'frontier production function model' as an analytical tool to determine whether or not port privatisation has improved the efficiency of Korea's port industry.

Under the hypothesis that the productive efficiency of terminal operators improves as their ownership transforms from public to private sectors, the frontier model is divided into two types: the cross-sectional and panel models. The former is concerned with calculating an average efficiency level of terminal operators during each sample period, while the latter deals with the time-invariant terminal operator-specific efficiency over the period of analysis.

The data necessary for empirical investigation are taken from the annual reports and financial accounts published by each container terminal. The time span is from 1978 to 1996 inclusive. For an international comparison with a country where port privatisation policies have had more time to work, the main container terminals in the UK are also included in the analysis. The UK terminals sampled for inclusion account for a significant proportion of the UK container traffic and have different ownership attributes not only among themselves but, most importantly, as compared to their Korean counterparts.

Structure

The text consists of eight chapters. Following the introductory Chapter 1,Chapter 2 reviews the Korean national economy with an emphasis on trade promotion strategy and its effects on foreign trade, the role of the public sector in the process of economic development, and the newly adopted economic policies of privatisation and deregulation. Chapter 2 ends with by a brief examination of the current economic crisis which is severely influencing the nation's economy in terms of restructuring opportunities. Chapter 3 details the importance of Korean ports to the national economy and discusses increasing container traffic due to the trade-oriented development policy, port and terminal congestion as a result of the aforementioned policy, and new port and terminal development plans. The administrative system which controls the port industry and the increasing participation of the private sector in port activities are also examined in Chapter 3. In Chapter 4, economic theories and empirical evidence relating to privatisation are critically assessed. The principles applicable to, and the practice of port privatisation are evaluated in Chapter 5. After a review of the basic concepts related to production functions and economic efficiency, Chapter 6 justifies the application of two types of frontier model (i.e. the cross-sectional and panel models) for the empirical analysis. Chapter 7 applies the analytical tool developed in the previous chapter to the selected container terminals in Korea as well as the UK and provides the results of the application. Finally, Chapter 8 presents the interpretation of the findings and their implications for port privatisation in Korea, together with an objective assessment of the contribution to knowledge of this research, its limitations and ideas for further research areas. A flow chart illustrating the structure of the research is shown in Figure 1.1.

Figure 1.1 Research Flow Chart

(1) At the time when this text was being finalised, the Asian financial crisis had seriously affected the Korean economy. The country's inherent economic structure (e.g. the government's heavy-handed intervention into business activities and inflexible bureaucratic system) was one of the main reasons behind the nation's deep economic woes. This economic crisis is discussed in a section of Chapter 2 from the perspective of the opportunity it provided for rationalisation.

2
An Overview of the Korean National Economy

Introduction

Strategically located in the north-eastern part of the Asian continent, the Korean Peninsula thrusts to a southerly direction for about 1,000 kilometres. To the north lie regions of China and Russia, while the Chinese mainland lies directly to the west. To the east, the peninsula faces the islands of Japan. The shortest distance from the west coast of Korea to China's Shantung Peninsula is about 190 kilometres. The shortest distance from the southern port of Pusan to the Japanese island of Honshu is about 180 kilometres. The total area of Korea is 221,607 square kilometres (about 85,563 square miles). At present, the land is divided into two parts: the Republic of Korea (South Korea) and the People's Republic of Korea (North Korea). Due to this political situation, Korea is engaged in foreign trade as an island nation like Britain and Japan, thus forcing the country to actively participate in the maritime industry for effectively carrying its own trade. The administrative area of the country is 99,237 square kilometres or about 45% of the Korean Peninsula, which is slightly larger than Hungary or Portugal, and a little smaller than Iceland.

With 44.6 million inhabitants at the end of 1994, Korea is one of the most densely-populated countries in Asia and also has one of the smallest land areas per capita in the world. Moreover, its terrain is very hilly, with only one-fifth of the land being arable. It is not, however, well endowed with natural resources. Morita (1987) remarks on Japan's natural resource poverty, that the land provides almost no raw materials except water, and that less than a quarter of the land is usable. This statement describes Korea's situation almost exactly as well. Therefore, like Japan, Korea has to rely on foreign countries for most mineral resources such as oil, iron ore, copper, gold, silver, etc., which are crucial for industrialisation. This poverty in natural resources has forced the country to pursue an outward-oriented economic policy.

National Economy

In 1960, Korea was a poor developing country with a small manufacturing sector and heavily dependent upon foreign aid. It had seemingly few prospects for increasing and sustaining economic growth. Over the last three decades, however, Korea has achieved what is widely acclaimed as 'the economic miracle of the Han River' (World Bank, 1993). Since Korea embarked on an economic development plan in 1962, its economy has grown at one of the fastest rates in the world. This remarkable success can be largely attributed to the outward-oriented and export-centred economic policies implemented by the Korean government and to the determination of the Korean people. As a result, Korea has successfully transformed itself from a largely agrarian based economy in the 1960s to a fully industrialised one today, and is currently ranked as one of the largest trading nations in the world.

The importance of ports for national economic development is widely recognised, for example, by Nagorski (1972), Faust (1978), Hoyle (1983), and UNCTAD (1985). There is a close relationship between ports and the prospects for economic development. The port is not only a determinant of economic development, but also a decisive factor in it. Moreover, ports not only have an influence on economic development but, at the same time, are also directly affected by economic development. The influence of a port o...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Figures
• List of Tables
• Preface
• 1 Introduction
• 2 An Overview of the Korean National Economy
• 3 The Korean Port Industry
• 4 Privatisation Theory and Evidence
• 5 Port Privatisation: Theory and Practice
• 6 A Theoretical Framework for Efficiency Measurement
• 7 Productive Efficiency of Container Terminals: An Empirical Investigation
• 8 Discussion, Policy Implications and Conclusions
• Bibliography
• Appendices