8 minute read
Port
Hong Kong and the Greater Bay Area in the 2020s
Defining a role or a declining role? Dr Jonathan Beard, a partner at EY Infrastructure Advisory, deliberates on the city’s port fortunes this decade
The announcement of the Greater Bay Area (GBA) initiative by the Beijing government in 2017 heralded a new set of challenges and opportunities for Hong Kong’s container port. In truth, the ‘newness’ is perhaps exaggerated – much of the GBA initiative involves accelerating longer standing development trends in the Pearl River Delta (PRD) and hastening the process of regulatory, political and economic integration between Hong Kong, Mainland China and Macau - ‘evolution’ rather than ‘revolution’.
Nonetheless, it feels that Hong Kong’s port is at a crossroads – can it maintain its position as a key regional hub for ocean transhipment and a gateway for south China imports and exports, or will it continue to lose absolute volume and market share as the GBA port cluster evolves? To understand the likely future of the territory’s port, it is necessary to understand how it and the GBA port market have evolved.
Box migration
Go back 30 years and Hong Kong port was pretty much the only show in town. The city’s container terminal operators were in the enviable position of handling gateway cargo for a booming PRD economy that was reaping the benefits of Deng Xiaoping’s Open Door Policy.There was limited competition from other ports, but space was constrained and this drove a remarkable increase in productivity and densification to expand in situ capacity. Handling rates were relatively high as was terminal profitability, despite paying large upfront premiums to secure concessions and taking on the full development risk for terminal construction.
However, the future direction of travel was clear, especially to the more visionary operators such as Hutchison, which saw the potential for terminal investment across the border in Shenzhen, initially at Yantian, but quickly replicated across the PRD by other operators, including at Shekou, Chiwan, Guangzhou and Nansha. The mainland ports developed high quality capacity at breakneck speeds and rapidly closed the productivity and overall service quality gap to Hong Kong.
Whilst in the initial years, Hong Kong could afford to charge a ‘service premium’ this was rapidly eroded. Meanwhile, two key items fundamentally raised the total through costs for PRD gateway cargo routing through Hong Kong as compared
with Shenzhen: higher terminal handling charges (levied by the shipping lines as an implied cost recovery for cargo handling charges) and higher costs for cross-boundary trucking. The latter had little to do with distance, and everything to do with regulatory inefficiencies. Full liberalisation of cross-boundary trucking may have stemmed the diversion of cargo to mainland ports, but policy makers were unwilling to move aggressively enough.
Figure 1 highlights the market shift: in 1996 Hong Kong was handling over 95% of the GBA import/export market. By 2015, this had dropped to 20% and absolute volumes had also declined. Even as terminal handling charges fell, the overall service quality and connectivity offered by competitor ports in the GBA was close to Hong Kong – the decision to route via one port or the other had become highly price sensitive.
Hong Kong maintains a position in three market segments: the Hong Kong economy; ocean transhipment; and western / central GBA barge transhipment. The latter segment is still gateway cargo, but connects with Hong Kong via cross-boundary barge as opposed to truck. Interestingly enough, this ‘crossboundary’ business is largely liberalised (unlike trucking) and over the last 20 years, stakeholders have worked to drive economies of scale, upgrade the fleet and use digital technology to enhance the efficiency and transparency of cargo movements. However, Hong Kong’s port was never originally designed to accommodate high levels of barge traffic and has undergone some reconfiguration
Figure 1: Hong Kong Port Loss of Market Share - South China (GBA) Import/Export Market
to improve operational efficiency.
Hong Kong’s position in the ocean transhipment market has benefited from the absence of cabotage restrictions – conversely, these do apply to mainland port competitors to the detriment of their ability to access this market. The growth in this throughput segment has to some extent offset the decline in gateway volumes, however it is a lower yielding market and traditionally footloose.
Moreover, ocean transhipment is increasingly characterised by economies of scale: transhipment hubs have to deal with bigger vessels, bigger lines (a product of M&A activity over the last five years) and bigger alliances - and in many instances a wider variety of vessel and call sizes. Transhipment calls have become increasingly complex (Figure 2)
Figure 2: Box Moves Get More Complicated with Alliances and Larger Vessels and a major challenge for Hong Kong was a relatively high number of inter-terminal transfers (ITTs), due to the fragmented nature of terminal ownership and layout.
During the evolution of the port, a key concern for the Hong Kong government was to ensure inter-terminal competition, which was achieved via a variety of procurement strategies for terminals one to nine. Jump forward to present day, and GBA importers and exporters now have a choice of ports and terminals, and shipping lines have a choice of transhipment hubs (e.g. Hong Kong, Busan, Kaohsiung, Singapore, etc.). Inter-port competition provides choice – there is little need for inter-terminal competition. Furthermore, single operator ports with large scale contiguous capacity are much better positioned to handle transhipment.
Therefore in 2019, the key terminal operators created the Hong Kong Seaport Alliance (HKSPA), whereby all terminals, save terminal 3, are operated as one facility. To get this past the Hong Kong Competition Commission, the operators agreed to cap all gateway cargo handling charges. The hope was that HKSPA would provide the necessary efficiencies and economies of scale to reverse the decline in Hong Kong’s volumes, however, to date this has not happened. In 2020, Hong Kong handled 17.97m teu, a contraction of 1.8% and enough to drop it to ninth place in the global ranking of ports (peak volumes were reached in 2008 at 24.49m teu).
The future
So, what future does the GBA hold for Hong Kong’s port? In other PRC port clusters, the direction of policy has been to create large integrated operations, dominated by domestic players. Indications are that the Mainland authorities would prefer greater coordination and control of development for the GBA, to avoid ‘destructive competition’ and uncontrolled development. The GBA port cluster, however, is the most mature and most complex in terms of jurisdictions, port development models and ownership structures – this presents some challenges for consolidation and / or integration.
Furthermore, where private interests and investment have led port development, the necessary checks have already come in to place. For example, the reclamation at Dachan Bay to the east of Shenzhen was originally slated for extensive terminal development, however as the market has changed, so has the private sector appetite for investment, and this site is now being developed as a ‘smart city’. Conversely, where greater public subsidy has been allocated to port development, these same checks and balances have not come into play, as has been seen further up the Pearl River Delta, where expansion has proceeded despite the absence of natural deepwater.
Therefore, an alternative option might be to continue liberalisation and create a single GBA market for port services, encouraging competition and innovation, but on a ‘level playing field’ with minimal public subsidy and avoiding a chase to the bottom on environmental standards. The implementation of a GBA wide emission control area (ECA) in 2016 shows what can be achieved in terms of creating a common framework– indeed China was the first Asian country to implement ECAs. A similar approach could be adopted for dredging and reclamation in the Pearl River Delta – after all, the waters and ecology do not observe any jurisdictional boundaries. If combined with limits on port subsidies, such an approach would provide logistics stakeholders with choice and spur innovation in the delivery of port services. Clearly, cabotage restrictions and a protected cross-boundary trucking industry would be at odds with such a liberalised environment.
To compete, Hong Kong‘s port would need to ramp up innovation and think outside the box. It would need to become a ‘smart port’ – to digitalise the port ecosystem and streamline the flow of cargo and information through the port. Progress in this regard has been slow and be-devilled by the absence of a strong port authority, that could advocate and drive change not only within the port, but also outside the ‘port gate’. Hong Kong is unique among major ports in having no port authority. Nearly 20 years ago, a Digital Trade and Transportation Network (DTTN) was proposed, but little progress has been made, in stark contrast to the rapid digitalisation in the mainland. Working from ‘bottom up’, Hong Kong industry stakeholders have proposed smart port initiatives but they have yet to gain traction, although the recent policy address provides cause for optimism.
Finally, an out of the box option, would be to dust down options for port development considered under the 2020 Master Plan. A wholesale relocation to a better site would free up the Kwai Tsing basin for much needed residential and commercial development, in a prime, highly connected, city centre location. Under a GBA plan, Hong Kong could present options to develop a new state of the art facility that would provide ongoing capacity for GBA gateway cargo and ocean transhipment, and would be an integrator for a digitally connected, multimodal air-sea logistics cluster.
