Friday, January 27, 2017

India, Russia and the Persian Gulf: A new OBOR in the making?

The Chinese One-Belt-One Road (OBOR) initiative is a US$ 1 trillion plan, with an estimated economic multiplier of 2.5. However, since the initiative was first announced in 2013 by President Xi of China, only 5% of this budget has been spent. There are as many plans as interested countries, and China is talking to most of them.

This impressive transport network consists of a “Belt”, i.e., overland transport connecting China to Europe through Central Asia; and a “Road”, i.e., a maritime return-route from southern Europe, through Suez, back to Asia. The Mediterranean Basin is therefore ‘central’ in this network which, looking at Chinese investments in Australia, central- and south America, could be easily extended to a global around the world transport system. Such a development assumes more concrete credence, after president Trump’s withdrawal from the Trans-Pacific Partnership (TPP) and, possibly, from NAFTA too in the near future.

Although Arabian Gulf ports are not yet part of this network in any visible way, the Region’s importance cannot be underestimated, as seen also by Chinese investments in Oman, Qatar, etc., as well as India’s interest in the Iranian port of Chabahar, so as to ‘bypass’ the (for her worrisome) Pakistani port of Gwadar, developed by China.

In short, and particularly for ports in the Upper Gulf (MAK, Umm Qasr, Bandar Imam Khomeini), the region could constitute a (land) alternative to Suez, at the same time connecting the Gulf to the Mediterranean Sea. In addition, a ‘port system’ such as this, would and could serve the vast hinterlands of Iraq, Iran, Turkey, all the way up to Moscow, thus connecting to OBOR (Belt) through Russia’s North South Transport Corridor (NSTC).

Could such a scenario be feasible in the short- to medium term? The answer is 'yes', and much of the infrastructure is already there. The only thing it will take is a firmer understanding that progress and welfare are better achieved through economic cooperation rather than political conflict. HH 

Tuesday, January 17, 2017

Davos 2017

Sergio Ermotti (UBS): "We ought to listen to what people say: The benefits of globalization are clearer to emerging economies than to developed countries"

[excerpt from my new book, written 20 years ago]:
[...] The western world has been losing out in this zero sum game, as it has proven to be after all. The West’s initial enthusiasm with globalization and trade liberalization was based on a false premise: i.e. that its saturated economies and increasing returns to scale industries could only survive if and only if the West could expand the international market for its exports. Unfortunately, this didn’t happen. Instead of producing ‘here’ and exporting ‘there’, Foreign Direct Investment (FDI) started to flow ‘there’, producing ‘there’ and, often, re-importing back ‘here’. Profits of European multinational companies have not been repatriated in a way that would allow us to sustain our welfare systems and way of life, developed over decades with the taxes of our fathers and forefathers. These systems are now being unraveled in the pursuit of the Holy Grail of cost competitiveness, and as a result of a mentality of ‘cheap consumerism’ which, if it does not change, it will be signing the economic death certificate of, at least, Europe... HH  

Thursday, January 12, 2017

Mother, should I work in a port?

[The recent New York Times article* reminded me of this photo which I had collated some time ago, appearing in my forthcoming book]
In the earlier days (up to the beginning of the 1960s) general cargo, carried by liner ships, was transported, in various forms of packaging (pallets, boxes, barrels, crates, slings), by relatively small vessels, known as general cargo ships. These were twin-deckers and multi-deckers, i.e. ships with holds (cargo compartments) in a shelf-like arrangement where goods were stowed in small pre-packaged consignments (parcels) according to destination (figure).

This was a very labour-intensive process and, often, ships were known to spend most of their productive time in port, waiting to load or discharge. And although seafaring was great fun in these days [sic], the same cannot be said for casual port work which was rather ill-considered and looked down by society.

As a result of the unpredictability of port work, port management could not possibly employ permanent staff, paying them while idle, and waiting for the next ship to arrive. Labour was thus casual, i.e. employed for as long; as much; and whenever required.

Recruitment of dockers was very different too. Each morning, a number of dockers would present themselves to a union foreman, often a mobster, and he, on the basis of certain ‘criteria’ that had more to do with natural selection rather than anything else, would thumb-in the youngest, the strongest, the favorites of the Union, or those prepared to return a kickback to the Union.
To indicate this ‘preparedness’, the latter dockers used to put a toothpick behind their right ear.[1] The rest would return to their ‘locales’ [sic] and indulge in whatever it was they were indulging in.

Containerization and the new cargo-handling techniques changed all this by taking work away from the waterfront to inland consolidation areas, or to the backyard of the manufacturer who would stuff/strip the container at his own good time. Port labor was thus reduced by 90%, while at the same time labor productivity increased tenfold. Port management had to make generous concessions to docker unions, including the setting up of 'funds' to compensate port workers for the fewer hours they now had to work as a result of automation. In a number of countries, including the US, such 'funds' exist even today, topped up by carriers, and at rates such as $5/ton of cargo handled.

In spite of the reduction in numbers, port union strength has remained largely unchanged and it is not uncommon, in many western ports, to see 'closed shop' salaries well above 100 thousand dollars per year.

Labor 'rigidities' such as the above often lead to large gang sizes, excessive over-manning, little labor mobility and high port user costs. In many ports around the world, the inflexible and monopolistic supply of port labor has effectively discouraged intended private sector activities around the port and has, thus, deprived the latter from one of its main functions, that of being a "growth pole" for the region and the country. 

[1] A beautiful account of the “waterfront” can be watched in Elia Kazan’s 1956 masterpiece “on the waterfront”, with Marlon Brando (soundtrack: Leonard Bernstein), or Mike Newell’s 1997 drama “Donnie Brasco”, with Al Pacino and Johnnie Depp.

* "The Mob’s Last Candy Jar", New York Times, January 8, 2017, p. MB1.

Wednesday, December 28, 2016

The end of private car ownership?

These days every year is the time of predictions and I have never shied away from them. Here are therefore my predictions, not for 2017 but for 2027.

Autonomous (self-driving) cars are here to stay and the plans of manufacturers point at an exponential future growth. Consumers have already expressed their preferences for reading; working; meeting; or chatting on their cellphone in the car, rather than driving.

The internet of things (IoT) is already changing our mobility behavior and, with applications like Uber, as well as GPS navigators such as Waze and Sygic, our car is already connected to all others. This has the potential to alleviate much of our transport externalities, such as accidents, congestion and air pollution, and lead to a much better, and more efficient, use of road infrastructure.

We are using our car only for 10% of its time and that’s a terrible waste; car-pooling (in autonomous vehicles) will increase. Private transportation services will be demand-driven: I will have a car waiting outside my door only when I need it. I won’t need half an hour every evening to find a parking spot in the neighborhood, nor would I need to pay car ownership taxes for having a car gathering rust on my sidewalk. Once it has dropped me off, the car could go and park itself at a specially designated parking area, hopefully outside our congested cities. Residential areas will again become what the word says: "residential".

Considering the above, at some point in the near future, car manufacturing will start declining precipitously. The end of car ownership is here.

Happy New Year 2017 to all.


Tuesday, December 20, 2016

On public contracts in ports, natural monopolies and supernatural nonsenses

Ports are often referred to as the classic example of the so-called natural monopoly case, whereby possible market failure can justify government intervention. Under certain conditions (level of demand, cost structures and technology), a market with two or more firms can produce sub-optimal economic outcomes (for example a certain port may be too small to have two tug operators), whereas a single firm might produce the required output more efficiently. For this reason, governments often decide to move away from a multi-firm competitive environment (competition “in” the market), towards a monopolistic, albeit regulated, situation (competition “for” the market), achieved (sic) through competitive public tendering. 

I have always argued that such public intervention in commercial decisions is wrong. And it is wrong for two reasons. 

First, the sometimes widespread corruption in the public sector may result in ‘photographic’ tenders favoring the local incumbent, effectively shutting-off international or even national competition. Thus, it is not uncommon for public tenders to end up with only one interested bidder, while the correlation between ‘single-bid’ contracts and corruption in the public domain is not passing unnoticed either (Figure). Finally, the opening up of the market for public contracts is one area where WTO is dragging its feet for years now without any progress. 

Second, governments, and the public administration by and large, are by far the least competent actors to decide on ‘market size’, or on the financial ramifications for private firms who would like to take calculated risks and enter a market. This is because governments lack both the information required for such decisions (a typical case of asymmetry of information), and the legitimization to decide themselves on the fortunes of private risk-takers.[1] 

Instead, the role of the public administration is to set the rules of the game; determine the conditions and quality of service it requires (including any Public Service Obligations) and then leave it up to the private sector to decide for themselves if the market is big enough, if they see profit prospects, or if they would like to go bust; but this ought to be ‘their’ decision, because it is ‘their’ money, and ‘their’ neck on the block.

HE Haralambides

[1] A notorious case, immediately overruled by the State Council, was the communist (sic) Greek government’s decision, in 2016, to limit the number of national TV stations to 4, on arguments based on the ‘financial survivability’ of broadcasters, given the size of the advertising market...

Monday, December 12, 2016

Protectionism: choosing the wrong medicine to the right illness

Trade has undoubtedly created unimaginable wealth and welfare throughout the world, but at the same time it has also precipitated worrisome disparities in job creation and income distribution in many countries. 
Spellbound this afternoon, I listened to Yi Xiaozhun, Deputy Secretary General of WTO, to reaffirm my conviction that protectionism is the wrong medicine for the cure of this malady. 
Rather than questioning the merits of trade, affected partner countries of our multilateral trading community should find those tools and economic policies which ensure that (a) benefits from trade are distributed as fairly as possible among local communities and their peoples; and (b) local industry of high import content is not unreasonably exposed to (unfair) foreign competition.
A great lecture by all counts.

HE Haralambides

Friday, December 2, 2016

For whom the bell tolls?

Once the critical instrument for the reconstruction of a Europe dilapidated by war, infrastructure today is increasingly becoming a private- rather than a public good, where the user pays principle ought to apply. In this sense, Germany’s road toll plans are in the right direction.

Port competition, for a common European hinterland, is intensifying as a result of plentiful road infrastructure, much of it in Germany. Motorways are thus becoming just transit links, with the benefits of costless infrastructure accruing to the origin (e.g. China) and destination (e.g. Switzerland) of cargo, rather than to the German taxpayer who is called upon to finance infrastructure development and maintenance.

The Dutch government ought to study more carefully its objections to the German road toll plan. The elasticity of demand for Hamburg port services is three times higher than that of the port of Rotterdam, and a more expensive use of German motorways could have the effect of diverting cargo traffic from Hamburg to Rotterdam. And few would mind this in The Netherlands; or would they? 

HE Haralambides

Wednesday, November 2, 2016

One Belt One Road, Port Capacities, and Industry Relocation along OBOR

The complexity of the OBOR network -both its land and ocean part- is such that the map is changing by the day. A very unstable and unpredictable geopolitical landscape is of course playing its role in this too.

Groundbreaking research, appearing soon in Maritime Economics and Logistics expands actual (physical) transport networks in malleable ‘super-networks’, able to identify shifts in manufacturing activity along the OBOR, as a function of port investments and rising land and labor costs in China. User equilibrium traffic assignment models estimate production impediment functions, analyze the path choice behavior of products in the super-network, and determine industrial relocation (and regional development) which minimizes generalized costs (production-transport-distribution).

Sri Lanka and its Port of Colombo, pivotal in OBOR, is used as a case study. The research shows that were Colombo to invest in an additional 8 berths, and price Terminal Handling Charges at 111 USD/TEU, the port could achieve incremental annual profits of USD 0.73 billion, with a Return on Investment of 7.3%. Total impact on the country’s GDP is estimated at USD 30 billion, while wages of manufacturing workers could rise from their current level of USD 420/month to USD 625/month as a result of higher labor demand.

Research is continuing on other countries and ports along the OBOR network.

Friday, September 9, 2016

The Hanjin bankruptcy: No one is too big not to fail

The (anticipated) collapse of the world’s seventh biggest carrier has undoubtedly created tsunami-class waves that continue to ripple throughout the supply chain: from shippers and forwarders, to ports, terminals and creditors. Still, this is just a temporary inconvenience and the Government of Korea, together with the Korean Development Bank, are only to be complimented for their tough stance. Had the same thing happened with the bankruptcies of 2009, the liner shipping industry would be in a much better state today than it actually is.

The issue here has to do with the important aspect of moral hazard; i.e. exercising lesser due diligence, or assuming a higher investment risk than what would normally be warranted, just because you know that if things turn out badly, there will always be a helping hand stepping forward to your rescue.

If carriers know that this is no longer the case, and “out is out”, they would be much more prudent before ordering new tonnage. Supply would thus correspond more closely to demand, rates would as a result be more sustainable, and the financial performance of the industry would be less of a roller-coaster.

A “no one is too big not to fail” approach in shipping is therefore just as good for the taxpayer as it is for the carrier himself.  HH 

Tuesday, August 30, 2016

Public financing of private ports?

After years of debating, I must admit I am quite happy that the European Commission appears to converge to my views on the subject, repeatedly expressed for more than 20 years now.

As ports are increasingly adopting an ‘enterprise’ model through the award of concessions to private port operators, the public financing of port infrastructure and operations assumes a very different dimension, even for ports that are under full State of municipal control.

For instance, what happens if a public intervention, intended to promote the ‘general economic interest’, instead favors only one concessioner, or group of concessioners, against some others located in the same port, neighboring ports, or neighboring countries? What are, finally, those ‘infamous’ sovereign state responsibilities, often taking the form of Public Service Obligations, that allow governments to pour public money into clearly private port infrastructure?

Dredging is a good case in point I have often used with my students. Providing and maintaining access to a port could be rightfully considered as a public good serving the general economic interest. But when the access channel is dredged down to 16 meters, surely this public good is not meant for my little fishing boat, but for a containership of 20,000 TEU. Once identified, it should therefore be the user of the good who should pay for the costs of its production and not the general taxpayer. In other words, port access is no longer a public good and, among other things, the taxpayer should be informed on how his money is being spent by public port authorities.

Last mile investments is another good example. Connecting the port with the national motorway system is in principle a public good, serving the general economic interest (I would happily take my bike and go to the shore for some birdwatching!). But what happens if this ‘connection’ favors just one terminal operator against many others? Clearly, this ‘last mile’ investment is a private rather than a public good and the terminal operator should pay; participate in the development costs; or pay for the use of the road, once completed. Finally, the absence of such a connection should be clearly discussed in the concession agreement: More often than not, concessions are awarded, with the concessioner quickly reverting back to the awarding authority to ask for more infrastructure and connections because, allegedly,  he cannot do his job as efficiently as he would like to. The awarding authority is often ‘obliged’ to accommodate such requests and this cannot continue.

As said, I am quite content with the policy orientations of Competition Commissioner Vestager  in terms of focusing on the real issues facing our ports. HH