The Profitablity Marketing and Economic Impact of Port Investment Finance Essay

As far as investing in port assets is concerned, there are two ways, almost in contrast with one another, of regarding the port: The port may be considered a public service that is generally useful to the economy, justifying the tax system being utilized for the purpose of funding the investments required. The port may be considered a business system that operates within a highly competitive market and requires investment projects to be selected with efficiency. The line drawn between these two functions changes, depending on the country, environment, business, social and political culture, period and political trends. In most institutional models, the large infrastructures that either provide access to a port or are used for general purposes attract public investments, while terminal superstructures are instead invested in by the terminal company itself. The port of Durres is located in the heart of Durres city, which is approximately 39 from Tirana. The port of Durres is Albania's largest sea port. Durres is one of Albania's oldest cities and was founded as a Greek colony in 627 B.C. Since then, the city has grown and expanded while preserving monuments of the ancient city. Now Durres is the second largest and one of the most economically developed cities in Albany due to the large port that allows trading in the Adriatic Sea. The recent construction of a motorway that links Durres with Tirana has cut down the traveling time to the capital to only 30 minutes. Tirana is also accessible by train, between Durres and Tirana there is a frequent and cheap rail service. Also the construction of the motorway that links Durres and Prishtina will cut down the traveling time and cost between Albania and Kosova. The port of Durres, beyond its physical dimensions, is historical, and certainly the reality is that in the future it will be an important actor in the lives of not only this city of our country but also throughout the region. Always important strategic point in the eastern Adriatic coast, the port has been developed in years as a privileged institution that has enjoyed particular attention. Thousands of people, workers, managers, leaders and important personalities have given their contribution to its development. Financing of investment in the Port of Durres is one of the main priorities for the Albanian Government and foreign financial institutions as the World Bank, European Union and the European Investment Bank. World Bank with an investment of $ 23 million has completed the rehabilitation project for the Port of Durres which includes rehabilitation of the piers, warehouses and buildings. European Union - Fare Program with an investment of A¢”šA¬ 4.4 million, has completed the project which includes rehabilitation of the Ferry Terminal, pier reconstruction of 120 ml and 60 ml of building the new pier. TDA - Trade and Development Agency (USA) $ 9.1 million. This project involves studying the feasibility of new container terminal and its equipment at the Port of Durres. TDA has also given a grant of $ 1.4 million to purchase two "reach stacker, a" spreader "plumber and some other assets. The project has been completed. European Investment Bank (IEB) with investment of A¢”šA¬ 17 million. The project includes financing the construction of Container Terminal, drainage systems, emergency excavation for the entrance channel and the aquarium, and the purchase of a mobile crane for the Port of Durres. Infrastructure Rehabilitation Project. The project started its implementation. Now it is buying mobile crane with a capacity of processing 120 tons of containers and continues the implementation of two other components of the project: Laying asphalt, drainage works worth about A¢”šA¬ 10.4 million. Digging for emergency and incoming channel port aquarium worth A¢”šA¬ 3.3 million. In early 2006 there was inaugurated the completion of paving works on the sites after the piers, which was conducted by the Croatian company "Montmontaza".

II. PROFITABILITY, SOCIAL DESIRABILITY AND PORT INVESTMENTS

Investment is a variation of the total stock of capital goods used in productive activities. In the port sector this is necessarily a variation in instrumental assets, as the product - the throughput - is a service and therefore cannot be stocked. Investment is carried out by a port business in order to have the desired level of throughput capacity at its disposal. Investing in ports, therefore, has a direct impact on overall port capacity and supply. Neoclassical production theory expresses investment as a variation over time of the level of capital used by a business. It usually hypothesizes a standard (Cobb-Douglas) production function as; (1) where L and K are, respectively, the amounts of labor and capital employed over a period of time, investment is the variation in capital levels A¢Ë†” K, which takes place between one period and the next. According to neoclassical economists, the investment decision is a direct function of the amount of capital needed to produce the level of output Q deemed optimal by a business (for example, the amount needed to maximize its profits), and an inverse function of the interest rate, which is the cost of the investment. The investment, as a variation in the level of capital, will be equal to; (2) According to Keynesian theory, investment takes place if the marginal efficiency of capital is higher than the market interest rate, which represents the return of the other possible uses of the resources employed. It is also normally considered that the rate of profit expected from the investment should be greater than the interest rate plus a spread (to ''reward'' the risk of the profit achieved proving to be lower than that originally expected). Since the potential investor will rank possible investment projects starting from those with the highest marginal efficiency, the well-known inverse relationship results between (cumulated) investment and the market interest rate. In the port industry, the product is throughput, and the investment is the creation of throughput capacity. Port investments are those increases in capital goods that allow greater throughput via an increased efficiency in using the production factors. These include the following: infrastructures, such as breakwaters, dams and lock systems that enable access along canals and rivers, the excavation or dredging of riverbeds and the construction of new piers, wharfs, yards, etc.; terminal ''superstructures'' (cranes, means of transport, buildings used for storage or port services); and other assets useful for the production of port services. Most port investments - particularly infrastructural investments - bear the following features: their profitability is at least in part indirect, since they are part of collective capital, which acts as a location factor for business activities and generates positive externalities; they also generate environmental costs and negative externalities; the construction of infrastructures brings with it significant indivisibilities, owing to economies of scale, financial requirements and network economies; they require considerable time to be accomplished, including a lengthy planning and design period, and subsequently boast an extremely long economic life. As a result, there is a hefty time lag between costs (incurred primarily before the port comes into operation) and revenues, and a long payback period for the investment itself; high risk and high uncertainty of expected profit, due in part to the difficulty of estimating costs; in the case of ''general purpose'' assets (such as dams, canals and basins) cost cannot be imputed to individual users, while the benefit for each user cannot be quantified either; and infrastructure costs are ''sunk'' (i.e. lost whenever the investor decides to withdraw from the market), and therefore act as ''exit barriers'' that jeopardize the market's contestability and create the risk of a monopoly. Comparing direct usefulness (profitability), be it positive or negative, with external usefulness (be it positive or negative) produces four possible combinations, shown in Fig. 1 as a Cartesian graph, where direct profitability (profit forecast) is shown along the abscissa and social utility (net benefit) is shown along the ordinate. Fig. 1. Direct Profitability and Social Utility of Investment. Assuming that the coordinates at the origin of the axes are, respectively, market interest rate (to which a risk premium may be added), and 0 (or, alternatively, the above-mentioned ''standard'' socioeconomic internal rate of return), the bisector of quadrants II-IV separates the situations bearing total (direct+external) positive utility, above the bisector, from those bearing total negative utility, below the bisector. Private profitability normally stems from the private nature of benefits (port services or assets are ''private goods'', featuring excludability and rivalry between users): in the port arena, this can be the case for services (both to goods or to ships), superstructures (cranes) and, to a lesser extent, terminal infrastructure. Public profitability stems from the existence of long-term external benefits, such as hinterland accessibility, ''public'' or ''club'' goods such as nautical assets (dredging, breakwaters, locks, etc.), land based networks and general local accessibility. Fig. 1 shows the situations that may then arise. Quadrant I contains those situations where investment is driven by private profitability and also implies a public benefit. It is promoted by the market and there is no reason for it to be halted by the public administration (although it may be regulated in order to enhance public benefit). On the opposite side, quadrant III clearly shows investment projects that appear neither profitable nor socially desirable and, therefore, should never be promoted. Quadrant II features investments deemed ''socially useful'' (external economies, accessibility, etc.) but with little or no direct profitability. If the balance is positive (i.e. above the bisector), investments should be promoted by adopting the appropriate policies, which might include grants and public-private partnerships (PPPs), capable to shift profitability (as represented by vector b) even if the offsetting costs reduces overall utility, and therefore moves the point closer to the bisector. What is an unprofitable investment for private capital may, nevertheless, be regarded as socially desirable (for example, as a driver of regional economic development). Ports have often been regarded, be it rightly or wrongly, as drivers of regional development as well as a source of considerable external benefits. Nowadays the ''local'' net external benefit is less certain, although ports are regarded - more than before - as essential gateways for the competitiveness of the hinterland. This may drive forward an investment even with no private profitability. The investment can be entirely public, or (if public resources are scarce) publicly co-financed in order to supplement private profitability and push it above the threshold that is critical for the private investor (i.e. interest rate+risk premium). Yet, the risk is to promote investments that are actually below the bisector. If we assume that any compensation policy shifting benefits/costs from one sector to another does have a cost, then no policy can make the point shift from below to above the bisector. Quadrant IV shows investments that are profitable for the investor, but a source of net external costs. This situation is common nowadays, and increases in port capacity required by terminal and logistics companies often gives rise to conflict and opposition at a local level, due to there being no (or very few) external benefits in comparison with external costs. An investment should nevertheless be encouraged for projects placed above the bisector, through the offsetting and reduction of external costs to ''shift'' the investment towards quadrant I, as represented by vector a (even if offsetting costs reduces the investment's overall utility, and again it moves the point closer to the bisector). Investments where social disutility of external costs exceeds direct profitability (below the bisector) must instead be prevented by way of appropriate bans and restrictions, etc. A pure market economy would promote all - and only - investments in quadrants I and IV (where direct profitability is higher than the market interest rate), while a centralized economy should promote all - and only - investments in quadrants I and II. If market failures are taken into account instead, the focus should be on promoting investments ranging above bisector II-IV. Indeed, area A of quadrant IV shows situations where the social effect of directly profitable investments needs to be mitigated through reductions and restrictions (even at the risk of limiting their profitability). In area B of quadrant II, private investment that would otherwise be uneconomical needs to be encouraged through incentives or through funding that is seen to stem directly from public investment. Only in quadrant I, are investments privately and socially profitable, although regulations and governance-oriented measures may be taken to amend the ''profitability mix''.

III. HOW TO CREATE A PORT INVESTMENT MODEL

The port capacity installed by the investor (be it public or private) may be exploited by the investor itself, if it acts as the asset's manager and charges the carrier for use. Alternatively, it may be leased to a stevedore, which manages it and charges the carrier. Moreover, the carrier and the terminal operator may be vertically integrated (the so-called dedicated terminals) and in some cases, the carrier may also overlap with the shipper, which may manage its own ships and sometimes its own terminal(s) as well. However, if only business functions are considered, the port investment ''chain'' involves the following players: (i) the investor investing in the port facility; (ii) the terminal operator; (iii) the carrier using the port, or its representatives; and (iv) the shipper, or its representatives. The investment's return is determined by the stevedoring industry's profits, which in turn influence those of the shipping industry, logistics and eventually the profits of the manufacturers/shippers and the utility of consumers. This section investigates the effects generated by the port investment, so as to highlight significant relationships between players, as well as the implications for investment decisions and for the funding of investments. It focuses on the ''microeconomic'' effects of an investment, disregarding any macroeconomic benefits to employment, earnings and their distribution, any environmental benefits-costs (both direct environmental impact and the balance between the environmental impact of maritime transport and that of alternative transport). These macroeconomic effects are rather difficult to measure, while the environmental effects are uncertain, since the development of maritime transport through port investments leads to an increase in the environmental costs associated with a port and maritime transport, but on the other side it encourages a modal split with a more sustainable environmental impact. A port investment may be ''extensive'', if its aim is to increase productive capacity while average costs remain unchanged, or ''intensive'', if its aim is to increase productivity and reduce unitary costs. From a theoretical perspective, the notion of a purely extensive investment may be viable when, for example, a terminal operator - having to meet sharp rises in demand - decides to increase its throughput capacity by adding new infrastructures that offer the same productivity as those already in use. When, on the other hand, demand is stagnant or competition from other operators is already fierce or on the rise, a terminal operator may well plump for a purely intensive investment, aimed at increasing productivity. Actually, though, it is very likely that in the former situation the new assets would be more productive than those already in place, thanks to technological improvements that are likely to have been introduced. As a result, an increase in quantity also translates into an increase in average productivity. In the latter situation, a rise in productivity is normally achieved, thanks to the reduced time per unit of throughput, and the consequent increase in throughput per unit of time. It is therefore very realistic to assume that between these two ''theoretical'' extremes, the effects of the investment will, in practice, be distributed between an increase in quantity and a reduction in costs. In a market of perfect competition this cost reduction would turn into a correspondent reduction in price (or in generalized cost) without increase in profit. On the other hand, in a monopoly situation, or if demand is extremely inelastic, it could lead purely to a rise in profit, without any benefit being enjoyed by the user (with a reduction in price approaching or equal to zero). In any intermediate situation, the effect will be distributed, depending upon the elasticity of demand and the position of the cost curves, between an increase in profit and a reduction in price, accompanied by an increase in throughput. From a microeconomic viewpoint, then, an investment in a port asset normally causes an increase in the level of throughput (total and per unit of time) as well as an improvement in the level of service. This causes a reduction in the generalized cost Cg of the port service (equivalent to a reduction in price) and/or an increase in the profits of the stevedore. The decrease in generalized cost will cause throughput to increase, at a rate that will be directly correlated to the degree of competition within the port services market: the greater the competition, the greater the reduction in price and the increase in throughput; the lower the competition, the greater the profits netted by the manager (unless demand is completely inelastic). The increase in throughput leads in turn to an increase in the stevedore's profits, and usually to increasing returns to scale as well, thereby triggering a further fall in the cost of production, generalized cost, price and potentially a further increase in profits. Moreover, this reduction in generalized cost/price leads to a decrease in the generalized cost (price) of the whole transport cycle, triggering within the transport industry the same kind of effects: lower prices, higher volumes and higher profits. Again, an increasing return to scale is likely to occur, and these effects can therefore build up to become stronger. Finally, the same kind of effect will also be seen for shippers (and possibly for intermediate operators such as logistic operators, forwarders, etc.,): a lower generalized cost causes both volumes and profits to rise, with possible further increases due to economies of scale. The final decrease in prices for transported goods can eventually benefit final consumers. There is therefore a ''chain'' running from port investors, to port operators, carriers, forwarders or logistic operators, all the way through to shippers and consumers, as shown in Fig. 2. Fig. 2. Port Investment and its Microeconomic and Macroeconomic Consequences. Note: Inv = investment, C = cost, GC = generalized cost, s.l. = service level, P = price, Th = throughput, Aâ‚¬ = profit. Assuming a linear demand function, such as; p = a - bq (3) for every possible position that may be taken by E, then: US = q [a - (a - bq)]/2 = 1/2 bq2 (4) This is a parabola on an ever-upward slope in the first quadrant. The revenue function is then TR = aq - bq2 (5) and the function of the long-run average cost (LRAC) is straight, expressed that is to say by the function TC = cq (6) and, total profit can therefore be expressed as; TAŽA  = TR - TC = (a - c)q - bq2 (7) The profit-maximising quantity is given by d TAŽA  / dq = 0 (8) from which we obtain a - c - 2bq = 0 (9) q = (a - c)/2b (10) The quantity that maximizes the sum of profit and consumer's surplus, considering thus both direct and external profitability, is then d (TAŽA  + US)/dq = 0 (11) from which we obtain a - c - 2bq + bq = 0 (12) with the optimal quantity emerging thus q = (a - c)/b (13) As a result, the quantity that maximizes the sum of profit and consumer surplus Equation (13) is double the quantity that maximizes profit Equation (10).

IV. INVESTMENT, PROFITABILITY, PRICING, PRIVATE AND PUBLIC FINANCING

These results suggest some remarks on the financing of port investment. Port investment may produce both direct and indirect benefits. Direct benefits provide a funding channel by way of the pricing applied for the use of infrastructure, revenues and the consequent profit for the company that builds and/or manages the terminal (if two different companies are involved, the profit of the terminal operator will be used to pay the charge to the company that owns the port facility). Net public benefits justify the utilization of fiscal resources instead. So far, port investments have very often attracted public investment, due to the very features of the infrastructures and systems associated with ports. However, there has been no proper criterion in place to determine - if only theoretically - the extent to which the public taxation system should be involved in a port infrastructure. This particular issue is closely linked to the price charged for using infrastructure, for two reasons: (i) the pricing applied to, and the payment made for, the utilization of a port asset generates a level of private profit that is complementary to the public taxation system (the greater the resources obtainable from pricing, the lower the resources required from taxation, and vice versa); and (ii) the pricing criterion itself may reflect not only the port operators' profit-maximizing strategies (or just its market strategies), but also the purpose of maximizing the welfare generated by the investment.

V. BUSINESS STRATEGIES AND MARKET FORMS OF INVESTMENTS

Two attributes of the investments that characterize - even if not exclusively - companies operating within ports are the degree to which investments are reversible and uncertainty, which is typical of every decision that has anything to do with the future. The first of these two attributes would appear to be of considerable importance in our case, since a growing number of private firms are being asked to invest not only in port superstructures, but also in actual infrastructures. Suffice it to consider, for example, the many dedicated terminals - typical of the container transport sector, and similarly the cruise transport sector - in which the transport company is vertically integrated to become a terminal company as well, thereby participating in the cost of the terminal investment proportionally to its share in the venture. In these situations, it is clear how at least part of the investment should be regarded as irreversible, making it interesting therefore to ascertain how this circumstance, together with the uncertainty as to how the operating environment will evolve, may cause the company to accumulate surplus, or insufficient, capital. According to authors irreversibility and uncertainty of investments involve two types of effect; the so-called ''user-cost'' effect, which leads firms to under-invest. This is because entrepreneurs are more reluctant to invest, given that their inability to disinvest results in a higher user-cost of capital in relation to current investment decisions; and the so-called ''hangover'' effect, indicating the reliance of current capital stock on past behavior, which leads firms to over-invest in the presence of irreversibility and uncertainty.

5.1. Stackelberg Equilibrium

It is worthwhile remembering that the Stackelberg duopoly considers two firms - known as ''L'' and ''F'' (leader and follower) - that need to decide (not at the same time) how much capital to employ. The function of profits for these two firms may be expressed as; AŽA L(KL, KF) = KL(1 - KL - KF) AŽA F(KL, KF) = KF(1 - KL - KF) (14) This situation leads firm L (the firm to decide first, since it is the first to introduce a new technology or to enter a particular market) to select the amount of capital in such a way as to maximize its own profit function, while taking into account the reaction curve of firm F. This means that where; KF = RF(KL) = (1 - KL)/2 (15) the equilibrium - which is different from the Cournot equilibrium, based on companies making their choices at the same time - makes the levels of capital employed equal to; KL = 1/2 KF = 1/4 (16) Profits and the ratio between them therefore emerge as; AŽA L = 1/8 AŽA F = 1/16 (17) AŽA L/AŽA F = 2 The firm investing first therefore accumulates twice as much capital as the other, while also netting a profit that is double that realized by the follower. If at a later stage a rise in demand is expected, the model shows how both firms will increase their productive capacity to a similar extent, so that the ratio between the respective profits of the two firms remains unchanged. We are thus witnessing a game that repeats itself by the same procedures. In other words, this duopoly leads the firms to cover three-quarters of the amount that would be exchanged in a market of perfect competition, leaving unchanged their respective market share as leader and follower, with one twice that of the other. Compared with monopolistic equilibrium, this model guarantees that a higher amount is exchanged (50% more in fact). This gives rise to the capacity surplus seen in these types of oligopoly.

VI. CONCLUSION

Port investment is a key issue in modern port economics with regard to planning port development, financing and assessing the return on investment. In the literature, the topic of infrastructure investment has been historically tackled either from a pure macro-economic perspective or from the mere firm's point of view (the managerial decision process related to port investment). These approaches focus mainly on the macro-economic costs and benefits of the port industry and, on the other side, on the economic efficiency of the port function for port users. This paper overcomes that kind of segmentation. It addresses some of the features related to port investment starting from the evaluation of the main paradigms that characterize the port industry from a global point of view, and focuses on the relations, synergies and conflicts between the numerous stakeholders actually involved. Profitability, economic impact and financing are seen as the most critical nodes in the complex chain of port investment decisions. Port investment has been described as the result of the equilibrium of several interactions between different forces and interests, where the most relevant aspects are (i) the public/private combination, which imprints the port industry and (ii) the geographical scale of evaluation. The mix between public and private interests, and the specific role of public bodies, may in fact be seen as the core of a specific port investment theory, which evaluates direct and indirect effects as well as uncertainty in returns. The different perspectives of evaluating the impact of port investment can lead to a different evaluation of the costs and benefits involved, and their desirability. The framework of the paper has been primarily based on the description and critical evaluation of the public/private and local/global tradeoffs, which in turn affect the assessment of port impacts, the development of funding, pricing and tax systems, the competitive scenario and distortions, which are likely to occur in inter-port and intra-port competitions. The main contribution of the paper may be seen in the effort of building up a comprehensive scenario where single aspects and variables related to port investments can fit into a general scheme of interrelationships, which identify feasible outcomes. The foreseeable outputs in terms of demand and supply provide insights for possible incentives to efficiency to be improved by decision-makers at different levels, promoting the reduction of conflicts and the synergies of interests. Although the topic has clearly practical implications, the work follows a theoretical approach rather than an empirical one. The proposal is, in fact, to develop an overall framework of analysis with a certain degree of originality in comparison with consolidated fields of the past literature, limiting at the same time the risk of a rapidly non-updated decision-support tool. The implementation of a number of outlined policy guidelines can be considered as an implicit agenda for future research.

SYMBOLS

C = cost EIB = European Investment Bank EU = European Union GC = Generalized Cost Inv = Investment P = Price PPP = Public - Private Partnerships s.l. = service level, TDA = Trade and Development Agency Th = Throughput US = Users' Surplus WB = World Bank, Aâ‚¬ = Profit

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