Global Trends and Port Reform: Positioning South African Ports in the 21st Century

1. PORTS IN THE 21ST CENTURY: COMPETING FOR THE FUTURE Portfolio Committee on Trade and Industry, on Transport and Public Enterprises Ismail Dockrat 26 June 2002

2. Overview • National Policy Objectives • Global Developments • Global developments • Local developments • SA Operations in a global context: a snapshot • Objectives of Port Reform

3. National Policy Objectives • National Ports’ policy has recognised the need to: • Transfer management & provision of port services to private sector • Stimulate greater private sector investment into Port operations • To achieve this goal: • Utilize various instruments of port reform i.e. PPPs, concessions, JVs, management contracts, etc. • However, the following must be considered: • Global trends in the shipping line industry • Global trends in the Ports industry • Peculiarly South African dynamics

4. Global Developments • More than 80% of trade with developing countries is waterborne • Total world port traffic grew at an average of 3% per year in the 1990’s (UNCTAD) – expected to grow by 4% or 5% between 1998 and 2010 • Containerisation of general cargo traffic has been increasing steadily – doubling every seven years • Maritime freight costs has been declining in real terms over the last 10 – places costs pressures on shipping lines • Total logistics costs in developing countries is higher than in developed countries. Africa is the worst performer among developing countries • Changing global sourcing and production practices, driven by increasingly sophisticated customer demands, are placing immense pressures on global supply chains, including port activities

5. Global Developments • Container traffic and consolidation of shipping lines • 1990 – 1998 the world Port container traffic doubled to 175 million TEU’s • TEU forecasted to be 270 million by 2005 (55% increase) • Global market share of containerised traffic expected to continue to increase • Translates into 200 – 300 new container terminals • 20 leading container carriers has 60% of global market share • Ongoing consolidation activity in global Liner industry • Few shipping lines control large portion of SA market • Only 10 of the world’s top 20 global operators are in SA • Only 3 global operators have a multi-trade presence in SA Global shipping lines becoming more powerful

6. Global Developments • Port developments • In 1997, 88 of the top 100 container ports were Landlord Ports • 10 leading container Ports handled 31% of world traffic in 1998, which increased to 40% in 2000 • Private sector involvement in port operations and investment in port infrastructure has grown significantly in the 1990’s – more then 100 concessions by end of 1998 (mostly in container terminals) • Global consolidation of the Ports industry is driven by: • Traffic concentration on large inter-modal platforms • Increased size of ships resulting in lower call frequency & division of Ports into hub, feeder & niche Ports • Pressure on logistics prices - result of bargaining power • Vertical integration of shipping lines into Port & inland transportbusiness • Fierce competition between ports to attract cargoes

7. South African Operations in the Global Context • Port pricing has not been founded on sound principles • A serious shortage of adequate infrastructure, superstructure and equipment to ensure optimal operations • There is a general lack of efficiency at SA ports, but not in all cases • South African Container Terminal Operations is extremely inefficient compared to global best practice • Durban’s throughput per: • Berth = 28% of Hong Kong throughput • Hectare =14%of Hong Kong throughput • Crane = 45% of Hong Kong throughput • Waiting time is over 3 times the expected norm • TEUs moved per hour is about half of the expected norm • Freight costs in Africa are11.36% of total imports compared to 5% in developed countries and 8,06% in developing countries SA ports are not competitive

8. Objectives of a Port Reform for SA • Improve the efficiency of Port operations • Maximise volumes through the Terminal / Port • Maximise the choice of shipping lines calling at SA Ports available to service SA importers and exporters • Appropriately apportions the roles of different ports into hub, feeder and niche ports • Enable investments in specialized infrastructure • Optimise local economic development opportunities • Enhances the Port Operator’s bargaining power in negotiating a price and service level agreement with global and dominant shipping lines

9. Impressions of Port Policy • The National Commercial Ports Policy provides appropriate direction for port reform to enhance South Africa’s global competitiveness • For our ports • For our industries • For our consumers • But, much of the detail needs to be dealt with during the actual reform/restructuring processes.

10. An approach to Concessioning

11. Concessioning Options • Advantages of the concessioning of SA Container Terminal Operations to a global shipping line include: • Greater commitment from shipping line to South Africa • Increased efficiencies – global technology & processes • Better service for shipping line customers • However, the disadvantages outweigh the advantages: • Shipping lines not involved in Port Operations would be alienated from the Port and the country • Probable for the “Operator” line to build monopoly power • Tendency for the “Operator” line to focus on marketing their “integrated service” services of the Port • More likely for the “Operator” line to abandon the terminal business, should the shipping line change its strategy • Land transport operators may be alienated from the “Operator” as they could be in competition with the “Operator’s” land transport partners

12. Concessioning Options • The benefits of consessioning out the container terminals to a global independent operator – operators would: • Increase revenues by attracting shipping lines to the Port / SA • Be perceived as an honest broker by land transport logistics providers – enable development of effective logistics platform • Negotiate dedicated berths & terminal facilities with a shipping line – enabling seamless land-sea logistics integration benefits • Introduce leading global technologies and methodologies • It is undesirable to concession out the container terminal at regional hub Ports to an independent and shipping line: • It would decrease the potential economies of scale thus inhibiting optimal overall investment in the Terminal • Shipping lines could play operators off against one another - unsustainable pricing & consequently sub-optimal investments • The “shipping line operator” could build economies of scale, offer very competitive prices thus create a monopoly position

13. Recommendations • At least until a national Ports’ strategy is finalised, it is not advisable to concession out a container terminal to a dominant shipping line at a niche Port • The shipping line could divert significant portions of its traffic to the niche Port thus subverting the national strategy to build corridor densities and economies of scale at the hubs • It is therefore recommended that a policy be adopted that, at least until the national Ports’ strategy is finalised, concessions for South Africa Container Terminal Operations to be granted to independent global Port Operators