Forecasting cargo growth and regional role of the port of Hong Kong

Transcription

1 Pergamon doi: /s (02) Forecasting cargo growth and regional role of the port of Hong Kong Cities, Vol. 20, No. 1, p , Elsevier Science Ltd. All rights reserved. Printed in Great Britain /02 $ - see front matter William Seabrooke *, Eddie C.M. Hui 1, William H.K. Lam 2, Gordon K.C. Wong 3 Department of Building and Real Estate, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong, People s Republic of China The port of Hong Kong is a critical component of both the city s and the region s economy. However, forecasts of cargo growth and development of the port of Hong Kong have been scarce and the findings conflict, while systematic treatments on the subject are rare. This paper predicts cargo growth and the development of the port of Hong Kong by means of regression analysis. Factors affecting cargo throughput in Hong Kong are identified, qualitatively evaluated and then entered into a forecast model that generates a projection of cargo throughput. Based on the cargo throughput forecast, and an assessment of the Pearl River Delta (the hinterland of the port), the future role of the port is postulated. Further, the current cargo forecast is compared to the official forecast by the Port and Maritime Board, on which policy decisions are based Elsevier Science Ltd. All rights reserved. Keywords: Hong Kong, port cargo forecast, regression analysis Introduction The port of Hong Kong has been one of the busiest ports in the world. In 2000, it handled 175 million tonnes of total cargo throughput and was ranked the fourth busiest port internationally (Rotterdam Municipal Port Management, 2000). Of the total cargo volume, 18.1 million TEUs 4 (over 120 million tonnes) were containerised cargo, making Hong Kong the world s busiest container port, surpassing Singapore and dwarfing Rotterdam. In fact, Hong Kong was ranked the busiest container port in all except two years since 1987, despite the fact that fees charged Corresponding author. Tel.: ; fax: ; bsbill@polyu.edu.hik 1 Tel.: ; fax: ; bscmhui@ polyu.edu.hk 2 Affiliated with Department of Civil and Structural Engineering, The Hong Kong Polytechnic University. Tel.: ; fax: ; cehklam@polyu.edu.hk 3 Tel.: ; fax: ; bsgordon@ polyu.edu.hk 4 TEU stands for 20-foot equivalent unit, which refers to a standard container of ft. by terminal operators have been the highest in the world (Hong Kong PMB, 2000). In 1998, port and related down-stream activities accounted for not less than 20% of Hong Kong s GDP and 22% of its workforce (TDC, 1999). Nevertheless, there is speculation concerning the ability of Hong Kong to enhance or even maintain this position. This can be attributed to several factors. In line with the development of the Chinese economy, other ports of China have been expanding rapidly. As the manufacturing base is continually being moved from Hong Kong to the Mainland, the ports in the Pearl River Delta (PRD), in particular, have challenged Hong Kong s leading position. For example, located in eastern Shenzhen, less than 8 km from the Hong Kong Shenzhen border, the port of Yantian has been rapidly developing into a major container port in the region. In the last five years, the port experienced a 20-fold increase in container movement and its market share has increased by more than eight times. Some argue that since total regional cargo movement is taken as given, Yantian s rapid expansions will imply a diminishing role for the port of Hong Kong (Lee, 2001). 51

2 Regional competition is not the only challenge facing the port of Hong Kong; for as China s primary gateway to the global market, China s accession to World Trade Organization (WTO) in 2001 also has implications for the port of Hong Kong. The free trade provisions under WTO will increase trade volume in China and encourage Mainland ports to become more competitive. Hence, the effects of WTO membership on the port of Hong Kong are a mixture of threats and opportunities. The possibility of liberalisation of direct trade links between China and Taiwan also casts doubt on the continuation of existing cargo traffic between these two regions. Full liberalisation of trading relations between Taiwan and Mainland China will reduce the routing of cargo between Taiwan and China through Hong Kong. Furthermore, the economy of Hong Kong is in the process of being restructured, providing more high-value, knowledgebased services and placing less reliance on manufacturing industry, reducing the level of direct exports. Finally, since the port of Hong Kong is privately owned and operated by a few sizable and influential companies, the market power and operation decisions of these operators will have decisive influence on the port s development. The port of Hong Kong has traditionally been a gateway between China and the rest of the world. It has been a conduit of goods to and from the Mainland and especially South China. However, with the development of other ports in the PRD and the associated competition facing the port of Hong Kong, it is possible that the importance of Hong Kong could decline and its regional role as China s primary intermediary for trade may change. Opinions on the prospects and future role of Hong Kong s port have yet to reach a consensus. Even though some commentators agree that the growth rate of cargo throughput will decline (Cheng and Wong, 1997), others are more optimistic (Planning Department and Port and Maritime Board, 2001). Some believe that Hong Kong will continue to be an important hub in the region (Ngai and Lin, 1997), others see it replaced by surrounding ports (Lee, 2001). The purpose of this study is to investigate the prospects of the port of Hong Kong and the role it will play in a regional context. We do this by identifying and examining factors that will affect the port s cargo throughput structure and volume. Based on these factors and the latest data, we forecast cargo movement at the port. The quantitative projections and qualitative assessments will form a foundation on which we postulate the future of the port. The Pearl River Delta Located on the southern coast of China, the PRD is formed by the confluence of three rivers as they enter the South China Sea. The flood plain occupies an area of about 9000 km 2, making it second in China to the Yangtse Delta. The PRD has a population of 28 million and is the heart of Guangdong province (see Figs. 1 and 2). It contains two major cities (by population), Guangzhou and Hong Kong (see Fig. 2). At the next level, in descending order of population, are nine smaller cities of Shenzhen, Macao, Zhuhai, Foshan, Jiangmen, Zhongshan, Dongguan, Huizhou, and Zhaoqing (see the above figure for the major cities). Below these are the 22 urban centres with county-status and the nearly 300 urbanised towns scattered across the region (Lee et al, 2000). In 2000, the GDP of Guangdong province was US$1208 million, which ranked it the most productive province in China. Although the PRD is not an official Chinese province, the strong economic ties, common geography, linguistic and cultural heritage among the member cities have prompted many to consider it a distinct and independent entity. Hence, the Delta is defined not politically, but economically and geographically. The PRD was traditionally an agricultural economy, but since the introduction of the Open Door policy in 1978 and the establishment of special economic zones (SEZs), the PRD has become one of the most vigorous regional economies in China. 5 The combination of low production costs and export opportunities has attracted a tremendous influx of capital from Hong Kong, the rest of the Mainland and, more recently, Taiwan. This has been invested mainly in the production of light industrial goods. The investments have transformed Guangdong from an agricultural economy to China s leading exporter, currently accounting for over 40% of China s exports (Lee et al, 2000). 6 Over the last decade, the PRD has experienced further transformation as the production focus has been gradually shifting from light industrial goods to high-tech products. Many municipalities along the banks of the Pearl River have become national leaders in a number of scientific areas. 7 In 1998, for example, high-tech industries accounted for more than 35% of Shenzhen s industrial output and one third of its exports (Lee et al, 2000). With the dramatic increase in output in the region since the 1970s, the demand to export finished goods and import raw materials had been enormous. The spread of economic liberalisation into other regions of China only acted to intensify that need. It was Relationship between the port and the hinterland Any discussion of development of the port of Hong Kong must be set in its regional context. The context that is particularly relevant is the PRD, which is the hinterland that the port serves. 5 The three SEZs were set up in Guangdong and they are Shenzhen, Zhuhai, and Shantou. 6 The SEZs especially benefited from the investments. For example, within a decade of the economic opening, Shenzhen s industrial outputs have increased from 29 million to almost 5 billion yuan. 7 These municipalities include Guangzhou, Shenzhen, Dongguan, Panyu, Shunde, Zhongshan, and Zhuhai. 52

3 Figure 1 Map of China. Source: redrawn from Figure 2 Map of Guangdong and the PRD. Source: redrawn from Planning Department, Hong Kong Government under these circumstances that the port of Hong Kong, which at the time had already been developed for over a century under British rule, grew to become a natural gateway between China and the world (see Figs. 3 and 4). The port of Hong Kong Hong Kong has been a free port since it was ceded to Britain in 1842 after the end of the Opium War. At the turn of the 19th century, it had become a major port for world trade. In the 1960s, as the global ship- ping market entered the container era, the construction of container terminals began in Hong Kong. Today, with more than two-thirds of the port s cargo being containerised, Hong Kong is considered primarily a container port. At present, there are eight container terminals in Kwai Chung (see Fig. 4). As throughput continued to grow, the construction of terminal 9 (CT9) began in 1998 (see the above figure) and it is expected to be completed in The government projected that container terminal 10 will not be needed until the later part of the next decade. 53

4 Figure 3 Map of Hong Kong. Source: redrawn from Survey Mapping Office, Lands Department Table 1 Total throughput in world s ports in 2000 (gross weight in millions of tonnes). Rank City Throughput 1 Rotterdam Singapore Shanghai Hong Kong Nagoya Antwerp Busan Yokohama Marseilles Hamburg 85.1 Source: extracted from Rotterdam Municipal Port Management. Figure Port of Hong Kong. Source: redrawn from Wu, However, there are many conflicting opinions about how soon, and even whether, Hong Kong will need a new terminal and its ancillary development. The future demand, and the role of the port, which this study attempts to investigate, are important factors to consider when making such decisions. The port of Hong Kong has several highly desirable attributes. It is strategically located near the centre of the Asia-Pacific region. The harbour is free of riverborne silt and has deep-water access. In fact, it is the only deep-water harbour between Singapore and Shanghai. It also has well-developed port facilities such as container terminals and supporting infrastruc- tures. The extremely advanced port management skills and easy access to capital further enhances its competitiveness (Enright et al, 1997, p 124). Tables 1 and 2 subsequently show the ranking of the world s ports and container ports, respectively. Despite its successes, the port of Hong Kong has Table 2 Total throughput in world s container ports in 2000 (millions of TEUs) Rank City Throughput 1 Hong Kong Singapore Busan Kaohsiung Rotterdam Shanghai Los Angeles Long Beach Hamburg Antwerp 4.1 Source: extracted from Rotterdam Municipal Port Management. 54

5 Table 3 Size of port in the world in 2000 (quay length in metres, area in hectares) Port Quay length Area a Hong Kong (existing) (CT1-8) Hong Kong (existing + developing) (+CT9) Singapore 31, Busan 24, Kaohsiung 21, Rotterdam 80, Source: various. a Includes only land area. a very small land area and its services are very expensive. The port covers an area of only 201 ha. By comparison, the port of Rotterdam has a land area of 5000 ha. Table 3 presents the land areas of world s major container ports. Hong Kong s terminal handling charges (THCs) are the highest in the world. 8 THCs at Hong Kong are at least 63% more expensive than other Asian ports and in many cases much higher than that. Table 4 shows the comparison of THCs between 11 Asian ports. Apart from high throughput volume, expensive fees, and small land area, the port of Hong Kong is also characterised by its private ownership and operation. Most ports around the world are run by a government agency, usually a port authority. Hong Kong relies on the private sector to build, finance, own, and operate new terminals, in response to market demand. These operators assume the risk and also take the profit. The government provides the necessary back-up land, navigation channels, infrastructure, Table 4 Origin THCs at Asia s container ports, 2001 (US dollars per TEU) Port Australia Trans Intra Europe Middle India (US$) Pacific Asia (US$) East sub- (US$) (US$) (US$) con (US$) Hong Kong Taiwan Guangdong n/a n/a n/a Japan n/a Indonesia Singapore Malaysia Korea Philippines n/a Thailand Shanghai Source: extracted from Panel on Economic Services, Legislative Council. 8 THCs are fees charged by shipping lines to shippers; whereas tariffs are referred to as fees charged by terminal operators to shipping lines. Tariffs should not be interpreted as custom charges by the government since Hong Kong is a free port. and utilities (Yuen, 2001). Cheng and Wong (1997) point out that there is a correlation between the port s private ownership and its characteristically expensive, yet highly efficient land use and operation. 9 The port of Hong Kong and the manufacturing industries in the PRD have developed a mutually beneficial economic relationship. The former has acted as a gateway to make possible the production and distribution process in the region and the latter has generated a huge cargo volume through the port. China accounted for the single largest share of port traffic in Hong Kong. The port has been the second busiest port in China after Shanghai and the busiest port in South China (see Tables 1 and 2). Hong Kong s role as South China s intermediary to the global market is clear, although today, other ports in the Delta region gather momentum. Cross-strait trade may be fully liberalised, and Hong Kong is transforming into a knowledge-based economy. These factors most certainly have a bearing on the port s cargo growth and future development. We will examine these factors in detail in the following section. Factors affecting port cargo throughput in Hong Kong The factors that affect cargo movement in Hong Kong include, macroeconomic conditions, regional competition, China s entry to the WTO, possible full-liberalisation of direct trade link between China and Taiwan, Hong Kong s economic restructuring, and the major operators market power. Macroeconomic conditions Demand for port services is derived from demand for import, export, and transshipment. In Hong Kong, the port handles about 80% of such cargo movement. Thus, cargo volume of the port is directly related to the level of external trade and the macroeconomic conditions. In this study, macroeconomic variables are treated as primary determinants in forecasting cargo throughput. A set of regression equations is used to estimate the linear relationship between cargo throughput and macroeconomic variables. Other factors, such as China s WTO accession and possible lib- 9 In Hong Kong, supply of new terminals is determined by the trigger point mechanism, under which new terminals will not be built until forecast throughput reaches forecast capacity. (In contrast, in Singapore the government builds terminals ahead of demand.) This prevents long-term strategic planning, causes the construction of new terminals to lag behind demand, and contributes to traffic congestions. (Mid-stream operations exist largely because of the congestion problem.) Cheng and Wong (1997) argue that the adoption of this mechanism can partly be attributed to terminal operators desires to avoid excess-capacity, and hence, price reductions. Unlike publicly operated terminals, private terminal operators are profit-maximisers. There are currently only five major terminal operators in Hong Kong who have the incentive and market power to control price levels. Hence, while being highly efficient, the market structure is not without negative impacts on the port s competitiveness. 55

6 eralisation of cross strait trade, cannot be incorporated as variables in the usual manner because historical data are not available. Therefore, these factors, which are discussed subsequently, will be treated as external shocks that affect the regression results. Regional competitions The most important of these external shocks is that of competition from other ports in the PRD. When the manufacturing base of Hong Kong started to migrate over the border to Guandong, they had little alternative export route other than Hong Kong. 10 Finished goods were transported from factories in the PRD to Hong Kong first, before being re-exported to world markets. However, this is costly and time consuming. Trucking time is long and the cargo needs to clear customs twice: once at the Hong Kong Shenzhen border and again at the Hong Kong customs. Consequently, manufacturers located in the PRD sought nearby alternative routes for their exports, which stimulated the development of a number of ports in the PRD. Currently, there are currently seven ports in the PRD, excluding Hong Kong. They are located in Shenzhen (which includes ports of Yantian, Shekou, Chiwan, and Mawan), Zhuhai (which includes the ports of Gaolan and Jiuzhou), and Guangzhou (see Fig. 2). Competition in the region is, therefore, significant, although there is substantial variation in the size and level of development among the ports. The ports of Shenzhen are located closest to Hong Kong and have been expanding most rapidly in recent years. In 2000, the Shenzhen ports had a throughput of 4 million TEUs of containerised cargo (with 57 million tonnes of total port cargo) and ranked the 11th busiest container port in the world. The ports of Shenzhen comprise four local ports, which are located in Yantian, Shekou, Chiwan, and Mawan. The port of Yantian is the largest of the four and has the most potential to develop into a major container port. The port s containerised cargo throughput has increased 20-fold over five years from 100,000 TEUs in 1995 to 2 million TEUs in The corresponding market share increased from 2% in 1995 to 15% in To catch up with the demand, capacity has quadruped from 500,000 TEUs in 1995 to 2 million TEUs in Total cargo throughput has also increased 17 times from 700,000 tonnes in 1995 to 11.4 million tonnes in Further infrastructure expansion is being planned, and the long-term goal is to build a total of 35 berths capable of handling 8 million TEUs of containers and 120 million tonnes of cargo per year. The other three ports are smaller in scale. The port of Shekou had a total cargo throughput of For many years, manufacturing share of GDP of Hong Kong has been declining. It only accounted for 15% of the city s GDP in 1998 (Planning Department and Port and Maritime Board, 2001). By 2000, about 90% of Hong Kong s manufacturing industries moved to China (Wu, 2001). million tonnes in 2000, while the ports of Chiwan and Mawan had throughput of 10.7 and 0.4 million tonnes, respectively. Many see Yantian as a serious threat to the future of the port of Hong Kong. Located in eastern Shenzhen near the Hong Kong Shenzhen border, the port of Yantian is constructed and operated by a joint venture of a Hong Kong company and the Shenzhen government. 11 The port offers several advantages over Hong Kong. First of all, the port of Yantian allows for shorter trucking time for factories located the PRD. It also charges lower tariffs and has a greater natural hinterland. However, it has earned a reputation for complicated and time-consuming customs and other regulatory procedures (Cheng and Wong, 1997). Located in western Shenzhen, the port of Shekou shares similar advantages and disadvantages to Yantian. It is located even closer to Hong Kong when compared to Yantian. 12 However, due to draft restrictions and small land area, the development at the port of Shekou is rather limited (Ngai and Lin, 1997). The port of Gaolan is located in Zhuhai, southwest of Macau. Compared to Yantian and Shekou, Gaolan is much further away (more than 65 km) from Hong Kong, on the western bank of the Pearl River. The port s natural conditions are better than Shekou, but not as good as Yantian. It is unlikely that Gaolan will develop into a major regional port and some think it might remain largely a feeder port in the foreseeable future (Cheng and Wong, 1997; Ngai and Lin, 1997). China s entry to the WTO Regional competition is not the only challenge to Hong Kong. By entering the WTO, China has made substantial market access commitments. For many types of products, existing tariffs will be lowered and import quotas will be removed. Foreign investments in many sectors, such as telecommunications, financial, and professional services, will be relaxed. In return, import quotas for certain types of Chinese products, such as textiles and garments, will also be lifted. More than 100 countries will grant Normal Trade Relations (NTR) to China. Under the WTO provisions, imports and exports are expected to increase by US$21.3 billion (13%) and US$10 billion (5%), respectively (Planning Department and Port and Maritime Board, 2001). China s WTO accession has both positive and negative impacts for Hong Kong s port business. Lower tariffs, simpler customs procedures, and a more liberal trade regime will make shipping via Mainland ports more attractive. As a result, an 11 The joint venture Yantian International Container Terminals Limited (YICT) is formed by Hutchison Port Holdings and the Shenzhen Yantian Port Group Company Limited (YPG). YPG is a state-owned enterprise directly under Shenzhen Municipal Government. 12 Whereas Yantian is about 5 h steaming distance from Hong Kong, Shekou is 2 3 h away. 56

7 increasing share of Hong Kong s cargoes originating from or destined for China may be shifted to the neighbouring ports in the PRD, such as Yantian and Shekou. However, with significantly increased overall trade between China and the world, the port of Hong Kong may experience a growth, even after accounting for the cargo diversion to the South China ports. The Port and Maritime Board estimates that Hong Kong s re-export to and from China will be 4 6% higher due to China s WTO accession (Planning Department and Port and Maritime Board, 2001). Liberalisation of cross-strait trade Another potential threat to the port of Hong Kong is the full liberalisation of direct trade links between China and Taiwan. The regulations governing Mainland Taiwan trade have changed over the last few decades. Direct trade between China and Taiwan, banned in 1949, was relaxed in 1987 to allow cross strait trading via a third region. For geographical and economic reasons, Hong Kong became this third region. In 1997, transshipment was allowed between the Taiwan port of Kaohsiung and the Mainland ports of Xiamen and Fuzhou, but direct shipment (ie shipment for domestic cargoes) across the strait remained prohibited. On 1 January 2001, partial liberalisation of direct trade was established, where direct trade was allowed between the Mainland and two designated locations in Taiwan: the Kinmen province and Matsu island (of Lina-Jiang province). 13 Although direct trade between the Mainland and the rest of Taiwan remains illegal, it is generally expected that full liberalisation will eventually be permitted, at which time it is projected that 80 90% of cross-strait cargo movement will bypass Hong Kong. In 2000, transshipment related to China and Taiwan amounted to about 5.3 million tonnes of cargo or 8.7% of all transshipment traffic (Census and Statistics Department, 2000). Liberalisation is expected to have an even greater impact on tourism and passenger traffic. Hong Kong s economic restructuring The economics of competitive advantage encourages manufacturing industries to relocate from high- to low-cost locations. Hong Kong s high operating costs (especially in terms of land and labour) have prompted factories to relocate to the Mainland and the domestic economy to focus on higher-value, knowledge-intensive activities. The government has repeatedly pointed out that restructuring is inevitable and that it will take measures to support the trans- 13 Some maintained that partial liberalisation has limited economic impacts because illegal trade and transport between the Mainland and Kinmen and Matsu have traditionally been severe and partial liberalisation only legalises such activities. Also, the ports of Kinmen and Matsu can only accommodate ships less than 5000 t (about 400 TEUs), compared to the larger vessels which can easily reach a capacity of 6000 TEUs. It is pointed out that only a full liberalisation will have substantial economic effects. formation (Tung, 2001). Hence, after transforming from an entrepôt, to a manufacturing, to a service economy, Hong Kong is now transforming to what is known as a knowledge-based economy, in which intangible rather than physical production will be the dominant economic activity. Manufacturing industries are an important driver of port traffic. The migration of factories to the Mainland has already caused Hong Kong s port to lose market share to the cheaper and more convenient ports in the PRD, and the overall decline of manufacturing industries will further affect the port sector in a negative way. The role the port will play in the region may also change. Market structure and power of terminal operators Last, but not least, the market structure of the port sector and the market power of terminal operators also influence port development. As mentioned earlier, the port of Hong Kong is one of the few major ports in the world that is completely privately owned and operated. At present, there are over 20 large and small mid-stream operators and numerous river trade operators. 14 However, the dominant method of cargo handling is through container terminals, which handled 53% of all cargoes at the port of Hong Kong in There are currently only five terminal operators in Hong Kong, belonging to three competing groups. 15 The largest and most influential group is Hutchison Port Holdings, which operates CT 4, 6, and 7 through its subsidiary Hongkong International Terminal Ltd (HIT) and CT8 East through COSCO HIT (a joint venture with China Ocean Shipping Company). HIT will also operate part of CT 9 when it becomes operational (see Fig. 5). In 2001, Hutchison Port Holdings, a listed company and part of a major commercial conglomerate based in Hong Kong, operated a total of 30 ports in the world and handled over 25 million TEUs of container throughput. Among those operated by Hutchison are the ports of Hong Kong, Yantian, and Rotterdam. In Hong Kong, Hutchison owns and operates three and a half out of the total eight existing container terminals and, in 2000, was responsible for 49% 14 Mid-stream operations involve transferring cargoes from ships at buoys and anchorages. Their fees are 4 60% lower than THCs and they act as a valve for overflow from terminals. However, due to the limitation of equipment, there is a technical upper limit in the size of ships they can serve. River trade refers to the movement of cargoes between the port of Hong Kong and the PRD as well as other inland waterways in Guangdong and Guangxi. To some degree river trade can be regarded as a response to inadequate road transport between Hong Kong and its neighbouring areas in the PRD. Mid-stream operations and river cargo vessels handled 22 and 25% of them, respectively. 15 The five terminal operators are: Hong Kong International Terminal Ltd (HIT), Modern Terminal Ltd (MTL), COSCO HIT (a joint venture formed by HIT and COSCO Pacific), Asia Container Terminals (ACT) and Sea land Orient Terminal (SLOT). HIT and COSCO HIT are under the control of Hutchison Port Holdings. ACT is a subsidiary of CSX World Terminals and SLOT s principal investor is CSX. 57

8 respond to them. The strategic element inherent in operators long-term planning, and the vast number of things a company can do, make this variable highly resistant to standard modelling, however. It is simply impossible to predict a particular company s strategic maneuvers over a decade with any degree of accuracy. Although the corporate factor cannot be incorporated into the models in a scientific manner, it is nevertheless important to recognise its potential influence on port development. Figure 5 Ownership of container terminals. Source: redrawn from Marine Department, 2000 of the total container throughput of the port. Hutchison has a controlling interest in Rotterdam and owns a 48% stake in Yantian. As discussed earlier, Yantian is expected to be a major competitor of Hong Kong, due to its close geographical proximity and price differential. The fact that the two ports are owned by the same company implies that their relative development in the future is not determined solely by their objective competitiveness, but the overall development strategy that would best serve the interest of the company. Given the size and market power of Hutchison, the future development of ports can certainly be manipulated through differentiated pricing, strategic infrastructure development, or other means. For example, in 2002 Hutchison sold some of its stake in four Mainland and Hong Kong ports to a number of shipping lines on the condition that they meet minimum usage requirements (Kwok, 2002). The ownership commitment gives shipping lines a clear incentive to use those ports. Consequently, cargo growth at certain ports may deviate from their original paths as a result of operator manipulation. Unlike the other factors mentioned earlier, which are largely exogenous to our area of interest, the corporate factor is an endogenous variable. In other words, terminal operators consider the changes in their business environment (of which the events discussed earlier in this section are examples) and Review of current policy debates Port development policies in Hong Kong were primarily based on the consultancy report titled Port and Airport Development Strategy (PADS) commissioned by the Lands and Works Branch (1989) of the Hong Kong government. The report forecasts Hong Kong s port cargo throughput and translates the results into infrastructure requirements. The construction of container terminals and other port facilities in Hong Kong are largely determined by PADS projections and recommendations. Since the PADS study, four Port Development Strategy Reviews (PDSRs) have been carried out by the Port and Maritime Board (PMB), in order to revise the PADS forecasts and recommendations in the light of the latest economic development, so that policy decisions can be up-to-date. 16 The government s own projection is one of the very limited attempts to forecast port cargo throughput with a statistical model. Based on their own assessments of threats and opportunities the port faces, Cheng and Wong (1997) revise the government s forecast by applying a multiplier (which is a predetermined percentage) to the forecast results. The revised projections are more pessimistic than the official ones, which suggests that construction of new container terminals should be postponed. Cheng and Wong s revisions have not changed the structure of the original model and in that sense both forecasts share the same analytical foundation. Ngai and Lin (1997) discuss the future of Hong Kong s port in a qualitative manner without resorting to a formal analysis. Their view is roughly in line with the official projections, while admitting an element of uncertainty in the future. More important, these forecasts provide insights in the future development of port facilities in Hong Kong. For instance, PDSRs form the basis of policy decisions on port infrastructure development. These research efforts attempt to answer the question asked by people from a variety of economic sectors: do we need more port facilities and container terminals? According to PDSRs, CT 9 is needed now and CT 10 in the next decade. Ngai and Lin s view is similar to the PDSRs, but Cheng and Wong main- 16 PMB is formerly known as the Hong Kong Port Development Board (PDB). 58

9 tain that construction of container terminals should be postponed due to projections of declining demand. The cargo forecast results cited in PDSRs were produced by Port Cargo Forecast (PCF) studies. It should be mentioned that the latest PCF (2000/2001) has abandoned the traditional systematic approach to forecasting. Regression analysis, which had been the analytical foundation for forecasting in previous PCFs, was no longer used. Instead, projections are done on the basis of professional judgments which are formed by a combination of heuristic review of historical trends and interviews with key stakeholders. In this manner, the growth of the total cargo movement in South China is determined first, which is followed by a projection of the distribution of cargo shares across the ports in the region. Unlike the traditional methodology, this heuristic approach subordinates forecast results to the influences of subjective opinions and stakeholders interests. Alternative rigorous attempts, as mentioned earlier, are not available. Besides, economic conditions have changed dramatically, mostly for the worse, since the publication of the last PDSR. These considerations support the need for a new systematic treatment to forecasting cargo movement. The port has always been a critical component of Hong Kong s economy. The current study attempts to use the latest available data to project cargo throughput in a systematic manner for the port of Hong Kong. The regression models that previously formed the basis of PMB forecasts (now abandoned) are adapted in this study. The model is modified by incorporating a range of factors that have been previously neglected. Based on the forecast, we discuss the future role the port will play in a regional context. Model forecast Following PCF traditions, OLS regression analysis is performed, to relate variations in cargo throughput to variation of economic indicators, using the latest data. The equations estimated in the regression model take the following form: n y i =α+ β i x i + ε (1) i = 1 Where y i s are different types/modes of cargo movement and x i s are economic indicators. The regression model consists of 43 equations grouped into four different sets (or modules) in Tables A1 A4 in Appendix A, and a list of variables is reported in Table A5. The first two sets involve overall cargo movement and the other two sets single commodity movement. The regression results are summarised in the Appendix A. Once the estimated statistical relationships are obtained, projections on cargo throughput are calculated, using assumptions on the growth rates of the economic indicators. These assumptions are derived from both historical trends and assessment of the latest economic development. While macroeconomic conditions are built-in to the model, a number of other factors are not used as explanatory variables because historical data are unavailable. These factors, such as China s WTO accession and the possible liberalisation of direct trade links, are treated as external shocks which would adjust the projection results generated by the regression. The forecast results, along with PMB s projection published in the latest PCF (2000/2001), are reported in Table A5. The model uses annual data from 1983 to Eight out of the 43 equations have additional data for the year Port traffic data are obtained from the Hong Kong PMB (2001a,b), Marine Department, and Cargo and Shipping Section of the Census and Statistics Department. Economic data are obtained from the Census and Statistics Department (2001a,b), National Bureau of Statistics of China and Statistical Bureau of Guangdong (2001). Forecast results Overall, the regression results are promising. Adjusted r 2 in most cases are very high, meaning that cargo movements are highly correlated with the economic indicators used in the model. T-statistics for almost all variables are significant at the 5% level, which further indicates that the explanatory variables do affect cargo volume. Variations of performance exist across the four modules. The two overall-movement modules (which are reported in Tables A1 and A2) exhibit higher explanatory power than the other two single-commodity component modules (Tables A3 and A4). Out of the 10 overall-movement equations estimated, all but one show adjusted r 2 of 0.76 or above, indicating that not less than 76% of the variations in cargo throughput can be explained by the economic indicators. All the t-statistics are significant in these two modules. The two single-commodity movement modules deal with inward (ie import plus inward transshipment) and outward (export plus outward transshipment) cargo movement. The inward-movement module, which involves 17 individual equations on 17 different commodities, performs better than the outward-movement module. Twelve out of 17 (ie 70%) inward-movement equations exhibit adjusted r 2 of 0.75 or above; with four equations even attaining adjusted r 2 values of 0.97 or higher. The results for the remaining five equations, however, perform quite poorly. For example, regressing inward cereal movement on population size generates an adjusted r 2 of only 0.04, indicating that statistically, only 4% of the historical variations in cereal import can be attributed to changes in population size in Hong Kong. This could be due to the fact that a majority of the cereal coming into Hong Kong is re-exported to other countries. The outward cargo movement module does not perform as well as the other three modules. Only nine 59

10 out of the 16 (ie 56%) equations attained adjusted r 2 of 0.74 or above. The performance variations are also substantial. This could be due to the fact that economic data of the exporting city (Hong Kong in this case) rather than the importing cities/countries are used as explanatory variables in the module. 17 But if economic data of importing countries were used as explanatory variables, then that would greatly reduce the degrees of freedom of outward-movement module since Hong Kong exports to so many different countries. The gains from using these data would be outweighed by the losses associated with that approach. Regression results reported in Tables A1 A4 (see Appendix A) describe how cargo throughput is correlated with certain economic indicators. The value of direct imports proved to be the most reliable and influential determinant among all modes of trade for cargo traffic. In terms of geographical influences, port cargo movement between Hong Kong and China, which represents the single largest cargo share by country, turns out to be more correlated with the economic well being of Guangdong than that of China as a whole. Hence, the economic development of Guangdong will have a significant impact on the demand for the port. In order to forecast cargo throughput, assumptions on the growth of economic indicators are made. Historical trends of economic data provide a basis for making assumptions, which is further improved by investigating the latest economic development and other factors that have a bearing on cargo throughput, such as those mentioned in previous sections. With the assumed economic growth and the estimated relations between cargo traffic and the economy, cargo forecast is obtained. For comparison purposes, the current forecast results as well as PMB s projections are reported in Fig. 6 subsequently. The growth rate in the forecast period is predicted to be slower than it has been in the last decade. This is primarily because of competition from neighbouring ports and Hong Kong s economic restructuring, which is projected to have negative impacts on direct exports. Nevertheless, the growth rate is projected to be higher in both the first and second halves of the next decade, due to the impact of WTO access. Full liberalisation of direct trade link between China and Taiwan is expected to happen in around , which would result in a reduction in cargo volume through the port of Hong Kong. At the end of the forecast period in 2011, we project that a total of 263 million tonnes of cargo will go through the port of Hong Kong. By comparison, PMB s prediction of 2011 cargo throughput is 287 million tonnes. The current forecast is thus 24 million tonnes or 8.4% lower than PMB s projections for the year Throughout the 10 year forecast period ( ), the current forecasts range from 8.4 to 11.0% (in absolute terms, million tones), lower than PMB s forecast (see Fig. 6). The current projections translate to an average annual growth rate of about 4.0%, compared to 3.9% in PMB s projections. It is to be noted that although the current forecasts predict smaller throughput growth in absolute terms, the rates of growth are predicted to be slightly higher than PMB s projections. For validation purposes, we used our model to forecast total cargo throughput of the years 2000 and 2001 and compared the results to actual data. 18 Actual total port traffic for 2000 and 2001 was 175 and 178 million tonnes, respectively. The current forecast predicted the volume to be 168 (underestimated by 3.7%) and 174 million tonnes (underestimated by 2.2%) for the two years. PMB s forecast predicted 182 (overestimated by 4.3%) and 193 (overestimated by 8.3%) million tonnes for 2000 and 2001, respectively. Thus, while the current forecast underestimated, PMB s forecast overestimated. Nevertheless, the cur- Figure 6 Forecast cargo throughput, In other words, it is possible that the volume of cargoes going from Hong Kong to, say, Japan, depends more on the economic conditions of Japan than that of Hong Kong. Figure 7 Comparison of forecast errors 18 At the time when the forecast was done, actual port traffic data for the year 2000 was partially available and data for 2001 was unavailable. Hence, the forecasts for these two years can be considered ex ante just like the forecast for the following 10 years. 60

11 rent forecast improves on the error in absolute terms and the percentage error decreases with time. Comparisons of forecast errors are shown in Fig. 7 subsequently. It is difficult to pinpoint the exact sources of the differences since the two forecasts were arrived at by two quite different approaches. While PMB s forecast was based on professional judgments formed by a combination of historical data and interviews with key stakeholders, the current forecast relied solely on econometric analysis. Cullinane (2002) points out that stakeholders have incentives to overestimate growth of cargo movement in the PMB interviews, if it is in their interests for new container terminals to be built. As cargo traffic forecast is in part derived from assumed growth rates of economic indicators, the reliability of the forecast depends on the accuracy of assumptions of economic growth. While such assumptions are made on the basis of the latest data available, we nevertheless postulate different scenarios and see how the projection will vary under different growth rate assumptions. A sensitivity analysis is performed to investigate how changes in growth rates of Hong Kong, Guangdong, and China s GDP, arguably the most importantly economic indicators, will affect cargo projection. The baseline cargo traffic projection presented thus far is based on the assumptions that, in the next decade, the average growth rates of GDP of Hong Kong, Guangdong, and China, are 5, 6, and 7% respectively. 19 A sensitivity analysis is performed to determine future cargo movement when the regional economy experience high growth rates (where all are increased by 2% points) and low growth rates (where all are reduced by 2% points). The range is designed to cover all the realistic economic growth scenarios. It is found that under the high growth rate scenario, projected cargo throughput of 2011 is 295 million tonnes, which is 12% higher than the baseline projection of 263 million (see Fig. 8). In fact, it is even Figure 8 Sensitivity analysis 19 Derived from annual data from 1983 to higher than PMB s projection 287 million tonnes. (The high growth rate projection is roughly in line with PMB s projection for the year 2009 and surpasses it since then.) Under the low growth rate assumption, projected cargo throughput of 2011 is 237 million tonnes, which is 9.9% lower than the baseline projection (see the above figure). In sum, the different scenarios cover a range of million tons for the year The PMB projection enters the range starting from 2009 and in 2011 it is very close to the high growth rate scenario. Conclusion Some commentators predict that the significance of the cargo-handling role of the port of Hong Kong will diminish on a regional basis largely, because of competition from cheaper and more convenient ports in the surrounding areas. Our forecast results do not support this view. The results show that the continuous growth of the total cargo pool in the South China region will result in growth of cargo volume in Hong Kong, even after accounting for the diversion of cargo into Yantian and other neighbouring ports. Hong Kong s cargo movement will continue to increase every year through the next decade, albeit at a slower pace. The presence of neighbouring ports does slow down Hong Kong s growth, but as demand for the services of Shenzhen s ports has increased, so have the corresponding fees and charges. As a result, the price differential between the ports of Hong Kong and Shenzhen has been decreasing. In addition, Hong Kong still has an edge, through higher quality of services and simpler customs procedures. Shenzhen will get an increasing greater share of the cargo pool in the region, but it will not prevent cargo volume of Hong Kong from growing. It is true that Hong Kong will no longer be the sole conduit of goods to and from South China. The port of Hong Kong will continue to be important, but will likely experience a change of role and act alongside Shenzhen as the twin-port hub of the region, analogous to the case of Japan, where Kobe and Osaka jointly form a hub for handling cargo movement in the region. As a consequence of China s WTO accession and continuous economic development, the cargo pool in the South China area in the coming years will be too large for one single port to handle. Both of the above ports have their own competitive advantages, be it quality of services, custom procedures, cost or geographical advantages, with which they will serve customers in different market segments with different needs. In a nutshell, will other ports in the region acquire a larger market share at the expense of Hong Kong? Definitely, given the competing ports price differentials and location advantages. Will those ports (for example, the port of Yantian), surpass Hong Kong in cargo throughput terms? Probably, but not within the next decade. Will the cargo throughput of the port of Hong Kong start to decline? Not according to our 61

12 forecast, which shows that all things considered, cargo movement at Hong Kong s port can be expected to continue to grow, although at a slower rate than during the last decades. Although the results of our analysis are more conservative that those produced by PMB, they do not confirm the more pessimistic forecasts for the future of the port of Hong Kong. Appendix A Table A1 Results of overall freight movement forecast models (freight movement in thousands of tonnes, trade value in millions of HK dollars) Models r 2 adj. r 2 d.f. INTOTALl = (ln IM90) (t-stat) ( 12.45) (14.10) OUTTOTAL = (ln TX90) (t-stat) ( 9.41) (10.31) INDS = (ln RI90) (t-stat) ( 6.92) (7.38) OUTDS = (ln TX90) (t-stat) ( 19.34) (21.69) Table A2 Results of Hong Kong China freight movement forecast models (freight movement in thousands of tonnes, GDP in millions of yuan) Models r 2 adj. r 2 d.f. INTOTPRC = (GDPPRC78) (t-stat) ( 0.43) (11.32) OUTTOTPRC = (GDPGD78) (t-stat) (-11.16) (21.76) INDSPRC = (GDPPRC78) (t-stat) (6.75) (3.09) OUTDSPRC = (GDPPRC78) (t-stat) ( 2.25) (7.60) INRIVER = (GDPGD78) (t-stat) ( 4.02) (11.88) OUTRIVER = (GDPGD78) (t-stat) ( 5.72) (9.91) Table A3 Results of inward direct ocean traffic forecast models (freight movement in thousands of tonnes) Models r 2 adj. r 2 d.f. CEREAL = (POP) (t-stat) (3.65) ( 1.29) LOG = (ln BCCOST90) (t-stat) (0.19) (2.51) COAL = (ELECT) (t-stat) (2.25) (1.37) CEMENT = (ln BCCOST90) (t-stat) (1.95) ( 1.46) IRON = (ln BCCOST90) (t-stat) ( 8.42) (8.88) MEAT = (POP) (t-stat) ( 26.54) (31.00) EDIBLES = (RI90) (t-stat) ( 0.92) (8.11) PRI MAT = (RX90) (t-stat) (1.97) (14.73) CHEMICAL = (RX90) (t-stat) (5.92) (40.10) WOOD = (GDPHK90) (t-stat) ( 4.95) (10.54) PAPER = (IM90) (t-stat) ( 0.24) (25.41) TEXTILE = (ln IM90) (t-stat) ( 10.72) (12.16) METAL = (ln IM90) (t-stat) ( 5.52) (6.01) MINERAL = (ln RX90) (t-stat) ( 5.91) (6.97) MACHINE = (GDPHK90) (t-stat) ( 5.23) (10.40) MANUFACT = (IM90) (t-stat) (0.91) (9.58) PETROL = (RX90) (t-stat) (8.70) (21.71) 62