Understanding Maritime Economics Regarding Port Financial Economics Essay

This literature review divided into six parts for understanding the economics and maritime economics regarding port financial matter what featured in first part. Furthermore, second part is discussed the logistics activities at port in relation to the global supply chain management, management of transportation where infrastructure and intermodal systems helps port to increase the efficiency by changing the commodities frequently to/from port area. In addition, seaborne trade parts will forecast the present basic scenario of international business and shipping trade. Finally reviewed the literature of port transport where port effectiveness, competitiveness, performance are highlighted for understanding the role of seaport in international context and what strategies Bangladesh should take for developing her port facilities considering the derived demand of trade.

3.1 INTERNATIONAL TRADE AND ECONOMIC GROWTH

Shipping plays a vital and significant role in national economy. The very beginning of modern economics described about the literature of living standards that is interested on trade and development. Clark et al (2001) found the lack of initial consensus among researchers on the relationship between trade and growth has been mirrored by differences in the actual trade strategies of developing countries. Globalization and liberalization of trade also brought the competition for sustaining on the international trade in all context developed or developing country. Basic needs of any place is mitigating by importing from other place in a cheap rate along with quality product. This is happening because of easy access to the seaport for transporting the cargo at low cost. This economics of commodity transportation or minimizing the sea transport cost or together created the environment for doing international business. Globalization (King, 1997) is a break with the past, challenging accepted modes of thought and their translation into business practice which reflect the reach of processes that are increasingly influencing our lives broadly intended to imply a shift in the basic assumptions that have underpinned international business and trade on the basis of comparative advantages. It is describes as a holistic approaches to international business strategy for supplying against the demand at a cheap rate in the competitive market.

The Economist Anderton (1993:p7) inaugurated economic scarcity as “there are only a finite (or limited) number of resources such as workers, machines, factories, acres of land and resources of oil in the planet earth. Because these resources are finite, it is not possible to produce an infinite number of goods and services”. The basic economic problem is arising day by day because human wants are not limited. Moreover, the numbers of human being are increasing irregularly and most of the countries are unable to control it. In addition, all resources are not equal for all. It is vary person to person, country to country. Globalization and wants of people changed the definition of import (Shortage item to be brought from abroad) and export (Surplus item to be transported to abroad commercially). To balance the want and resources in a specific country, import and export activates are not only a trade but also it is extremely a commercial matter for a country. As a result, economical condition of a country depends on its natural and artificial resources, population, activities of trade and others.

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Economic ( JCRA,2006) efficiency plays a vital role in promoting economic growth and development at the rate of higher return in business , for labour , overall , is higher real wages and increased employment. Hopefully, in respect of consumer welfare, it leads to lower price, higher quality goods and level best service for full pledged satisfaction. Branch (1998:p-198) stated that “Governments and trading blocs such as ASEAN, NAFTA and the EU give a high priority both to developing their regional economics and to fostering international links with other nations and trading blocs through the vehicle of international links with other nations and trading blocs through the vehicle of international trade”.

Macroeconomics (Monteil, 2009) concerned with growth theory or the evolution of an economy’s productive capacity over the time and how fully the economy use its productivity capacity. The most (Quinet andVickerman, 2004) immediate macroeconomics consequences of the development of infrastructure developed the transport sector which is denoted as a determinant of economic growth.

Shipping is an international business where foreign exchange performed as the leading variables for importing and exporting commodity. In a study, Lane (2001) expressed that home and foreign price levels are sticky, a movement in the nominal exchange rate shifts the real exchange rate and delinks home and foreign consumption growth where home and foreign output rises since the domestic demand expansion raises demand for imports at the fixed relative price of imports in terms of domestic currency. Foreign exchange rates which helps to make decisions in domestics development but before going for developing need to analyse the supply and demand for assessing the strength of the country. Monteil (2009) addressed three questions to derive the supply and demand for foreign exchange, which are as follows:-

What determines the relative attractiveness of domestics versus foreign goods?

What determines the relative attractiveness of domestics versus foreign assets?

What rules govern central bank transactions in the foreign exchange market?

As Bangladesh is import based country and depends on the foreign loan or financial assistance, before taking any investment decision, need to assess the above questions.

McConville (1999:p 15) defined “Maritime Economics is a discipline or field of study connected with the manner in which existing material and human resources are used in the industry and how they changed and develop over time. Maritime Economics theory consists of a body of concepts and principles which assists in the explanation of the industry’s progress”. Drewry (1996) shipping consultants featured that shipping finance is a high risk but low return business. Therefore, economics of shipping is very hard and complex by its nature.

McConville (1999) argued that there is no country in an international economy who is self sufficient in the commodities that its population needs and expects. He functioned that the maritime transport as a bridge between producers and consumers for minimizing the gap of needs and expects. Structural (Gallegos nd) changes in international trade and the evolution of maritime transport have a direct impact on port growth and expansion. Globalization, or the expansion of markets and hence of the economic prospects of societies, is taking place not only because of the supra-national nature of markets, but also because of the flow of foreign investment and the strategies of multinational enterprises.

3.2 THE LOGISTICS CHAIN.

Logistics is defined by Branch (1998) as the time -related positioning of recourses for ensuring the materials, people, operational capacity and information are in the right place at the right time in the right quantity and quality and at the right cost. Fragmented in 1960, logistics is fully integrated in 2000 where transportation is the main wings of physical distribution reviewed by Bardi et al (2006) in their study of transportation. However, this part is designed for featuring the role of port in supply chain on the context of logistics.

Transportation (Bowersox et al. ,2007) is the operational area and primary responsibility of logistics across the supply chain that geographically moves and positions inventory which traditionally received considerable managerial attention .Quinet & Vickerman (2004) expressed that transport has a key role in economic activity which contributes to a share of national output. Also added that it is a derived demand and growth of the economy as a whole; it is necessary to understand the nature and the intensity of this link and improvements themselves can determine the rate of growth of the economy. Moreover, transport is like any factor of production which can be substituted for others, dependent on technology and on relative factor prices. In a study of transport economics, Hensher and Brewer (2001: p 3) expressed that “Risks and opportunities, challenges and rewards pressure the economic world of transport and logistics management” .

Pallis (2002: p-1) stated that “In fact, the maritime transport system has been a highly institutionalized and politicised economic sector. Precisely because of its strategic economic significance, national governments are performing as market (de)regulators, as well as maritime infrastructure investors and owners”. Ocean (Jarzemskis and Vasiliauskas, 2007) freight transport industry has changed its structure as a result of the new trends and preconditions that came with the introduction of the container and the rise of inter-modality. Pedersen (2001) explains that during the 1990 transport and communication appear slowly to be on their way into the mainstream again, but now transformed into a much broader concept of logistics, which has become an increasingly important element in the organisation and restructuring of the globalizing economy. From being an external factor, transport has become an integrated part of the production and distribution system.

Kumar and Hoffmann (2002) stated that the trade in merchandise and unfinished goods increases faster than the worlds GDP, and so does the demand for maritime transport services which part of the global logistics chain that determine a good’s competitiveness. At the same time, the maritime business is itself strongly affected by globalization. Trade in maritime services is one of the most liberalized industries, and its “component” such as vessels, flag registration, class inspections, insurance and the work of seafarers, are purchased globally.

The ( Pettit and Boresford 2009) role of ports within the supply chain has taken several different forms and development paths for supporting the all logistics partner of transport. The Supply Chain Management (Martino and Morvillo, 2008) supports the development of partnership between the actors of the chain and considers the integration of activities and resources along business process as source of competitive advantages. In a particular context of port competitiveness, SCM approach is given the traditional hostile relationship between port actors for overcoming the complexity on shipping trade. In order to model the distribution of goods between two places , Tavasszy (1997) assumed that shippers combine locations of demand and supply in a rational way for maximizing the profit resulting from the interaction and this profit is determined by the balance of costs and benefits coming from production, transportation and consumption or selling. Procuring the raw materials and delivery of finished goods or transferring commodity, transport cost is the main operating cost which determines the value of the product. Internationally, setting a factory or investing in a foreign environment maritime access and port efficiency are the important determinants because of commodity transportation economically and timely. Global supply chain management is highly depends on the performance of seaport and intermodal system of the producing country.

Transportation (Bardi et al.,2006) is an integral activity for a modern society which influenced in every aspect of our lives for determining the value of goods by adding time place and quantity utilities to them. Overseas sourcing and marketing by manufacturing and merchandising firms are increasing the importance of global transportation. Moreover, the activities of them are growing by cantering the port for procuring raw materials and shipment of finished goods.

The most primitive industrial processes are maintained through a good supply chain for placing the raw materials and shipped the finished product in factory and vehicle respectively. The relationship (King, 1997) between the supplier of raw materials and the consumer of finished products involves a complex network of linkage, both within and between individual companies by a system of supply chain which linked together by the feed-forward flow of materials and the feed-back of information. Stopford (2009) believes that shipping is concerned with international trade; it inevitably operates within a complicated pattern of agreements between shipping companies, understandings with shippers and the policies of government. The demand (Evans and Marlow, 1986) for sea transport is complex and variable because it is a measure of the comparative advantages enjoyed by one country over the other. Most probably maritime industry is the only industry where investment is very high but return is very low and time factor investment comparing with any others.

For a complete analysis of a freight transportation problem with all its alternative solutions and operating dimensions, Demilie et al (1997) argued for separate operation of transports by different means on the same infrastructure, loading, unloading, moving, transporting and transiting of commodity, particularly, the goods transfer operation from one mode or means to another must be included to analyze the alternatives offered by multimodal transports.

Political ( Gubbins,2003) thinking and government action or initiative can change people’s perception of transport but as a service industry it is also conditioned by events which although peripheral to itself, can still cause large changes on the transport network. In the context of transport networks, Capineri (1997) identified three main possible scenarios which are as follows:-

A growth scenario that means traffic will still increase because of its demand, So that traffic control or separation scheme is the derived demand and basic part of the management of transportation.

A substitution scenario like modal change, public versus private. Creation of modal facilities such as artificial canal for reducing road traffic. Proper management of transport by privatization or handing over the responsibly for better management or avoiding traditional approach.

Finally the multimodal scenario which will help to fulfil the demand of shipper and consignee for sending and receiving commodity on her premises in a package program.

3.3 SHIPPING TRADE AND INTERNATIONAL BUSINESS

Recent ( Kwak et al 2005) environmental changes over the world and rapid advancement of ocean technology are shifting the perception of maritime industry. In addition, economic depression what relocated the economy from developed to developing also diverted the course of marine trade towards developing country like China or other Asian country. The development of port and shipping sector is lagging behind in Bangladesh. Due to financial crisis and inability to improve the shipping policy, the country is s depends on the foreign shipping company. for due to its Legislative ( Drewry, 2000) control of shipping has effectively shifted from national level to international level also moving from rules devised and implemented by individual national administrations with a few international agreements, to a complex and growing set of global requirements. In (Francois and Wooton, 2000) the maritime world, the oceans are populated with shipping conferences which meet regularly to set rates, analyze market conditions, and assess other developments like fuel prices and port charges for constructing the market structure and business environment.

On ( UNCTAD, 2009) the heels of the unfolding global financial crisis and economic downturn started from 2008 decelerated the growth of world economy and global merchandise export and import. Reducing the global production as well as demand or lowering the levels of trade has undermined the growth of seaborne trade. In addition, climate change and greenhouse gas emissions from international shipping are adding a further challenge to the maritime sector. The seaborne trade is highly depends on the world GDP growth which is indicating a tough time of world development.

In ( Bichou and Gray ,2004 ) the recent debate on port competitiveness, a growing number of papers has focused on the issue of integration of port activities regarding supply chains for framing the unitarily of the port in the process of creating value for the end customer .The difficulties ( Martino and Morvilo,2008) are encountered in the use of a systematic approach in the port-aimed for determining the contribution of the whole port community in the supply chains-is mainly linked to the lack of a ‘competitive community spirit’ among the actors, both public and private. The concept of integration in the port context has essentially concerned intermodality and organizational integration undertaken by global carriers aimed at responding to the changing requirements of industrial and commercial enterprises and, at the same time, improving their own internal efficiency.

The field of analysis to the role and integration modes of ports within global transport systems, on the other hand they underline the passive role traditionally played by ports in relation to the strategic choices of other port community operators, with obvious effects on their bargaining power and, in general, on their development strategies. In this respect, it ( Slack ,1993) has already been shown that ports are mere ‘pawns in the game’ within global transport systems and that the power of liner shipping affects port development . In a study Robinson (2002) identified the role of the port in the supply chain through the contribution of the ‘multi-port operator’, i.e. large terminal operators, in the process of creating value. Finally, Bichou and Gray (2004) try to conceptualize the port system from a logistics and supply chain management perspective, aiming to define a new framework to measure port performance. They start from the hypothesis that ‘by using a logistics and supply chain approach, ports may achieve a better use of port capacity’.

The port landscape (Meersman & Voorde, 2002 ) has, after all, also altered in many respects because new technology and strategic developments have led almost automatically to greater port competition, both at port authority level and at the level of companies operating within the various ports. In addition, all port players, from authorities to terminal operator agents, are looking for ways to maximize profits, to maintain or increase market share or simply to survive. They also added that a strong and efficiently run seaport could be an important asset for a country or region in trying to improve its economic position. When looking at the determinants of port efficiency, Clark et al (2001) found that the level of infrastructure and organized crime exert a significant positive and negative influence respectively. In addition, policy variables reflecting regulations at seaports affect port efficiency in a non- linear way. This result suggests that having some level of regulation increases port efficiency, but an excess of regulation could start to reverse these gains.

An important issue is addressed by Tongzon (1995) in the study of port performance and efficiency and that is quantified the contribution of terminal efficiency to the overall determination of port performance. He found that port provides empirical support for the notion that terminal efficiency is a vital component of any waterfront reform aimed at improving port performance and efficiency.

DETERMINANTS OF EFFICIENCY

Container Mix

Crane efficiency

Work Practice

Vessel size and cargo exchange

DETERMINANTS OF THROUGHPUT

Location

Frequency of Ship call

Port Charges

Economic Activity

Figure 3.12 ( Diagram) Port performance components (Tongzon,1995)

The role (Reid & Sanders, 2002) of operations strategy (which is a part of Business Strategy along with Marketing & Finance strategy) is to provide a plan for the operations functions for making the situation to use its resources perfectly and effectively. For developing the operations strategy in maritime business, it is very important to follow the all stages of operations because it is not only the business but also serving the nation and act as a catalyst of all trades of the country.

Figure 3.13 (Diagram). Performance objectives in operations (Slack and Lewis, 2008: Reid & Sanders, 2002)

COST. Cost is the main elements of business. Less cost or minimize the access expenditure will help to increase the profit margin as well as decrease the misuses of the company resources. Logistical ( Bowersox et al 1997) systems should be designed to utilize transportation that minimizes the total transport cost .

QUALITY. Quality as a competitive priority (Reid & Sanders, 2002) mainly focused on product and service quality. There will be no sacrifice in quality of the service.

TIME. Time is the best priority for speed and on time replacement of the vessel. The port performance is measured by the speed of handling of cargo and vessels.

FLEXIBILTY. Due to the pattern and style change of trade, environment change rapidly, including customer needs and expectation, the ability of the organisation to accommodate these changes can be a winning strategy.

DEPENDABILITY. Organisation (Slack and Lewis, 2008) needs to achieve higher confidence in the operations for reaching to the final destination or result timely.

Stopford ( 2009) believed that port improvement plays a major part in reducing the sea transport cost which affected the value of the commodity. Globalization, trans-nationalism of production, or placing the raw materials or finished product in right time by moving through sea ,land or air need a perfect place for coinciding the supply and demand. Larger ship, containerisation or latest technology or combination of sea and air or any processes for reliable transport modes, Palmer (1999) identified one point at which a cargo moves from sea to land or land to sea and that is port which attracted geographers, economic historians and sociologist . Recent technical changes in container and bulk handling, port development is essential for staying with the trade clock and reducing the turn round time of the vessel is the main target of authority because shipping is the low return business where investment is very high.

The basic aim of economic planning is to bring about rapid economic development through the development of Agriculture, power, transport, communication, cottage industry and all other sectors of the country context Bangladesh. Through rapid growth that means economic growth, the country aims at increasing GDP. Directly or indirectly, port has been fuelling to the all sector of economy for developing in national economy where transport of a country serves as the life line.

Overall, port leads the economic development of a country. Port operates as institutions for promoting industrialization, expansion of trade and commerce, sustaining stability in price levels, settlement of payments for imports and exports. Adam Smith, often regarded as the father of modern economics, saw shipping as one of the steeping stones to economic growth. A country can’t run without links to the outside world, can never, Adam Smith argued, achieving high levels of efficiency by shipping that means the special role of a port. The physical or quality performance of a port helps to contribute on the national development.

However, from the above literature review regarding port in connection to the intermodal systems, hinterland, and infrastructure of transport systems along with port own infrastructure of terminals, equipments and quays Bangladesh will find the ways to set up a strategies for developing the port services to play an important role in GDP directly and social services indirectly. On the other hand, discussion about economics and others will help to understand the financial outcomes from the port transport by improving the port facilities. Last but not least, overall, development of the Bangladesh maritime industry as an important sector of national economy.

3.6 SEAPORT DEVELOPMENT IN BANGLADESH

The development of Bangladeshi port or developing countries are highly depends on the finance of international donor or loan from international Bank. This literature review will help how Bangladesh can invest locally or international for their port development and infrastructure projects for making easy access to the sea port for using cheap maritime facilities in import and export business.

The maritime ( Khanam and Misir,2008) dependency factor of Bangladesh is about 30 % where 89% of international trade is handled by the prime port Chittagong as the principal gateway of international trade and commerce. Unfortunately, this port is unable to provide prompt and efficient port operations comparing with private sector port operation in other countries of the world. Roy and Banerjee (200nd) identified two great impediments to the development of Bangladesh for trade facilitation and these are poor transport facilities and infrastructure. Inadequate development of multimodal systems, Congestion and inefficiency at major port Chittagong, limited role of private participation in transport etc are the main reasons to develop a good transportation systems. Razzaque(1997) added that poor port and related facilities are major factors hindering the development of a logistics system in the country.

Prospectus of Bangladeshi seaport is highly described by the noble prize winner Professor Mohammad Yunus (2006) as “Mega-port at Chittagong is the key to making Bangladesh the cross-road of the region. With the economy of the region growing at a sustained high speed, demand for the access to a well equipped well managed port will keep on rowing. A region, which includes two giant economies, will be desperately looking for direct shipping facilities to reach out to the world. Chittagong will offer the region the most attractive option. Evan today despite the problems of present Chittagong port, Kunming is requesting permission to utilize this facility. With global competition becoming more fierce shorter and shorter lead time for delivery will become magic formula to attract business. An efficient mega port at Chittagong will be in high demand. This port can be built and owned by national or international company with government participation in equity. It can contract out the management of the port to a professional port management company”.

Figure 3.10 ( Diagram) Maritime Profile of Bangladesh ( Hoffmann,2004)

The above profile indicates the worst situation of Bangladesh maritime industry. The number of population and natural sea access causing the demand of maritime business. Moreover, regional and international demand along with national derived demand forecasted the huge maritime business.

Due to natural advantages of seaport facilities in Bangladesh, she can take competitive advantages and develop the transport chain for connecting with the world by trade or providing logistics facilities to neighbours.

WTO (2006) reported that “Despite rapid growth of overall trade volume in recent years, and cargo preferences available to Bangladesh flag vessels, a shortage of vessels in the national fleet has prevented them from meeting their allocated share in sea-borne trade” Along with the national vessel shortage Bhattacharya and Hossain (200) found the following challenge for the country’s competitiveness in international trade as follows:-

Lack of adequate infrastructure of ports (Both Land and Sea) which imposed heavy business costs and long lead times of processing. However, the current infrastructure of the country is so far from conducive to an effective business environment.

Rules and regulations are not appropriate for doing international trade. Timely notification of relevant and required amendments to existing laws has hardly been done to facilitate trade. In addition, a little scope of private sector participation in the policy formulations by way of providing suggestions through mutual discussions.

Customs valuations and traffic classification ambiguities in the private sector.

Commonness of corruption among the customs personnel which raised the costs of doing business.

Inefficiency of the government bureaucracy has always been a major bottleneck for the country’s international trade.

However, they praised the initiative of government for facilitating the trade like customs administration modernization, development of the prime seaports, establishments of new infrastructures and simplification of documentation etc.

In 2001, the major two seaports handled about 4.7 million tonnes of seaborne cargo and it is likely to triple by 2015. Connectively, they argued ” There is no denying that such a growth of international trade demands more efficient port services, cargo-handling services and custom clearance for a cost effective business environment” [p-10].

A ( Chodhury,2008) key effect of economic globalization is the continuing increase in maritime trade and traffic. Private participation in port sector is just starting and Bangladesh needs to provide credible assurances to investors that their efforts will not be thwarted by bureaucratic process, lack of adequate resolve in implementing declared policies or regulatory stranglehold. Quick, effective implementation of port reforms could help to mitigate a major constraint for the export-led growth which Bangladesh wants to pursue. Denoting Chittagong port as first generation port of the world, Begum (2006 ;p-5) believed that ” There is no doubt that Chittagong port acts as the life line to sustenance & development of trade, commerce, transport and industry of Bangladesh”. She added that sustainable development of the country can be achieved by improving the transport sector including seaport facilities where seaport will be performed as per economic strategy of the nation and will act as trade facilitator.

However, from (Azad, 2008) the national point of view, the cost of output at Chittagong port is higher than the actual cost incurred for operations. This is happening due to the illegal uses of bribe to speed up the activities. So that is a great problems for reducing the cost of clearing the cargo from the port and export trade or for both domestics consumption and export purpose depends on the efficiency and performance of the service supply in the Chittagong port. Finally , Azad (2008 p-102) advised that ” The reorganisation of the supply of port services in Bangladesh should be such that the Government should not be the sole supplier of this service. Next, the Chitatgong port should be allowed to cater the needs of not only the users from Bangladesh but also users from the entire region in the neighbourhood of Bangladesh”.

Regarding private sector participation in Bangladeshi port, Khanam and Misir (2006) showed the way to follow the models used by other Asian countries like BOO-Build, Operate and Own, BOT-Build, Operate and Turnover, SOT-Supply, Operate and Transfer and etc for getting the new physical port or terminal structure.