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Topic area: A2 Maritime Transport and Ports

The measurement of port efficiency using Data Envelopment Analysis

V.F.Valentine and R.Gray (Corresponding author and speaker)

Institute of Marine Studies, University of Plymouth,
Drake Circus, Plymouth, PL4 8AA United Kingdom
Email: vvalentine@plymouth.ac.uk and rgray@plymouth.ac.uk
Telephone: +44 (0) 1752 232442
Fax: +44 (0) 1752 232406

Introduction

Understanding performance is a concept fundamental to any business, whether it is the measuring of achievements against set goals and objectives or, against the competition. Ports are no exception and it is only by comparison that performance can be evaluated. Ports are, however, a complex business with many different sources of inputs and outputs which makes direct comparison among apparently homogeneous ports seem difficult. The subject is further complicated by the various types of port ownership and organisational structures that exist throughout the world. During the last two decades the ownership of one of the most important trade entry points into any country, the seaport, has changed from being solely in the hands of national or local governments into, either wholly or partially, private hands. It is this change which is called privatisation that has attracted much interest from both academics and those working within the industry. This paper will look at how these seaports are owned and how their structure is organised to determine whether these factors have any relation to its performance. The results of this paper will help serve as a guide for governments, port administrators and port owners on the different ways they can structure their ports which may lead to greater efficiency.

Background

Privatisation is a concept rather than an actual definable process. The word came into being during the late 1960s and was later attributed to the UK government's reforms to ownership and operation of numerous companies managed by the state. Chapman (1990) has accredited Drucker (1969) as the author of the word 'privatization', in its American spelling. The actual process of implementing privatisation is not however a new concept. Neither can it be said to have originated in the UK. It was rather a christening of an established process, a renaissance of an earlier idea on the ownership and management of a company. What can be said is that the extent to which the UK government pursued this course of action certainly attracted attention from other countries which no doubt contributed to the sudden global desire to privatise during the 1980s. A comprehensive review of privatisation methods is given in Abdel-Fattah et al (1999).

Privatisation in developing countries is often the first phase in a process of industrial liberalisation and a move towards industrial progression. Viewed as this first step towards creating free trade it has therefore not surprisingly been a high priority for developing countries. It begins with the transferring of absolute control of industry away from the government to private partners with particular expertise. The reasons for this change are numerous but can be summarised as follows: improvements in efficiency through private sector management skills; enhancement of service quality through improved commercial responsiveness; reduction in the fiscal burden of loss making state enterprises or the need for the future subsidy; a reduction in the fiscal demands on central and local government through access to private sector capital; and additional revenue streams (Port Development International, March 1999).

More than 40 countries have committed to some form of port privatisation and more are likely to do so (Cass 1996). Some countries have rapidly progressed towards this goal of privatisation whilst others have been hindered by political, fiscal, labour or a general unwillingness to accept change.

One of the 'problems' with privatisation is the perception that it reduces jobs. Indeed, this is often the immediate reality in many industries that are privatised, as companies no longer have to accept restrictive employment practices. The longer term view that it creates efficiency, profitability and growth are not issues that are considered by those faced with the prospect of redundancy.

Ownership structure

Cass (1997) in his study of world port privatisation concluded that there were only really three types of port ownership, public, private or joint public/private. He points out that the most common type of port privatisation are (1) the sale of operating concessions, (2) joint public/private venture, (3) private orientated but port authority controlled operating subsidiaries, (4) the 'corporatisation' of government port agencies or (5) the dissolution of government owned cargo handling monopolies. The 'lock, stock and barrel' approach of Great Britain and New Zealand are the exceptions. The degree of public involvement is naturally dependent upon national ideology. Cass (1997) and Heikkila (1990) both state the examples of the United States where the municipal authority plays a major part in the operation of the port. Here ports compete against other ports along the coast for business. However, at the other end of the scale is Taiwan where the administration of the ports is centralised.

Boardman and Vinning (1989) found that different types of ownership structure, the state owned enterprises and mixed economies performed substantially worse than similar private companies. They concluded that there were performance differences between public and private companies in competitive environments and, that where there was a partial privatisation the performance was sometimes the worse. They cited that conflicting ideologies between the two different owners cause what they term 'cognitive dissonance'. However, Bos (1991) looked at what Tandon (1997) called the survey of all the surveys on the efficiency of public and private firms and came to the opinion that Boardman and Vinning (1989) were at direct opposing views with a previous study by Borcherding et al (1982). Tandon's (1997) explanation of these apparent conflicting views relies not upon the ownership structure but upon the market conditions in which they operate. Private firms are likely to be in a more competitive environment and thus more in tune with the need to be efficient than public enterprises that perhaps operate in a restrictive environment. He argues that in studies involving public and private firms in the same business, such as airlines, some private airlines are more profitable but on balance it is approximately equal. This research aims to see whether this is the case for ports.

Caves et al (1982) in looking at United States private railways and Canadian public railways concluded the Canadian public firm was more efficient. Tandon (1997) states that the process of identifying which approach is more efficient depends upon disentangling ownership from the effects of deregulation and competition. Everett and Robinson (1998) in their research into Australian port reform suggest that the corporization of some ports has not resulted in the liberalisation and the near private performance that was anticipated. Frech (1980) in looking at the role of property rights within the firm suggests that if the ownership structure is attenuated this leads to lower firm wealth and more nonpecuniary benefits. Thus, privatisation, by shortening the ownership structure should have an opposing effect. Likewise the organisation structure should also play a significant role by suggesting that simple structures be inherently more efficient than the more complex machine bureaucracy and divisional structures. De Alessi (1980) states that not only are government firms less efficient but are also less successful in satisfying the consumer's needs. Thus, efficiency of ports owned in a variety of ways needs to be measured and applied to a conceptual model in order to test these notions.

Organisational structure

Roe (1999) in looking at the newly privatised subsidiaries of the state owned Polish Ocean Lines observed that there was a desire to avoid control of the parent company and to change the organisational structure soon after privatisation. Mintzberg (1979) looked at organisational structures and reached the conclusion that there are essentially five different types of organisational structure. Simple, Machine bureaucracy, Professional bureaucracy, Divisional and Adhocracy. As far as ports are concerned only three of these seem to fit into the modern day port structure. First let us consider the options that do not fit. The adhocracy does not fit into the structure of any port because of its lack of rigidity. Suitable for software companies and film producers, its role within a port would likely lead to chaos. Ports require careful planning and development based upon what may be needed 10 or 20 years into the future. Without the rigidity of a formal structure each element in the chain would not know the whole picture, only the person at the top may see everything. Likewise the professional bureaucracy is not suitable in a port because of the routine and repetitive tasks that are commonplace within a port's day to day service. The professional bureaucracy is typical of industries that require highly professional people to perform routine tasks in an unsupervised manner such as solicitors and accountants. Whilst professional people are required in certain areas and qualified personnel needed to operate expensive and dangerous machinery, a professional bureaucracy would not be appropriate. This leaves us with the three remaining structures that are prevalent in the port industry, viz. simple structure, machine bureaucracy and divisional.

The simple structure is the most flexible, allowing separate divisions/departments reporting straight to the top decision-maker. As the name suggests it is usually the first stage through which a company progresses through in its evolution. In the conceptual model this has been chosen as the best description of a private port owner. This structure by its simplicity is therefore likely to be the most efficient.

The machine bureaucracy is characterised by its many departments reporting up a chain of command to a line manager before reporting to the top decision-maker. Because the decision making has to follow a long process before it reaches the top decisions tend to be slower. These structures tend to be found in government owned enterprises and hence the inclusion of port bodies and corporatisation in this category.

The divisional structure occurs when companies operate within large areas. Each department has to report to a regional office that in turn reports to a select group of managers before information is passed to the top decision-maker. This structure can be best seen in the municipal ports of the UK and the port societies of Chile. These divisional structures tend to operate where there are joint public/private enterprises or where conglomerates own the port.

Conceptual model

The use of models in looking at the organisational and ownership structures within the port industry is a necessity since the theory of organisation and ownership structure is abstract to the operation of the port. In order to see how the structure of the port can affect the efficiency of its operation the designing of models is imperative. The benefit of a conceptual model is that it enables real ports to be categorised and placed together according to their similarities. Ports that do not fit into the defined categories enable the research to be developed further by adapting the model and devising theories to take account of differences and previously unforeseen eventualities.

Using the three different types of organisation structure and the four different methods of ownership, mentioned earlier, it has been possible to create the following table (1). There are of course many different combinations of port ownership depending on the percentage of ownership by any of the categories, but essentially they can be broken down into ten categories.

Table 1 - Categories of port structures

Ownership Structures	Organisational Structures
Public	Public simple structure	Public divisional	Public bureaucracy
Private	Private simple structure	Private divisional	Private bureaucracy
Joint Public/Private	Private/Public simple structure	Public/Private divisional	Private/Public bureaucracy
Mixed	Mixed Public/Private/Municipal

By using the above ten categories of ports the conceptual model seen in figure 1 has been designed. One of the findings reached by this work is that the organisational structure of ports varies considerably throughout the world making it difficult to place certain ports into specific categories. Into this model were placed a random selection of ports to illustrate its applicability to the real world.

Ports may be divided into three distinct types of organisations, the first is the private simple structure, that of the wholly owned private company. This relates to the singly owned private port such as Boston, UK. The next is the public/private divisional structure which includes ports such as Portsmouth. The third type of port ownership listed is the machine bureaucracy which in terms of ports relates to the corporatisation which is present in South Africa and Singapore. The corporatisation is in effect a public concern which is due to be privatised within the near future, it is commonly the stage before privatisation.

Figure 1 - Ownership and organisational structure applied to ports

It is possible that the labelling itself may lead rise to opposition from within the industry because of the language used. To label a port such as Singapore as a machine bureaucracy will no doubt cause contention within its management, since the term machine bureaucracy tends to denote a rather old fashioned and inefficient structure. However, the port of Singapore rates as the largest in the world in terms of container throughput with figures that consistently year after year compete with its strong and next biggest competitor Hong Kong.

However, in the context of organisational theory, the term is not a derogatory label but refers to a system marked by pronounced procedures and regulations with the regularity and functionality of a clockwork machine.

The relationship between both the structure of the organisation and it ownership has a direct influence on the decisions made by the company. This is therefore seen as an input into an equation with the output being efficiency. The research associated with this paper sets out to establish whether the input functions have a bearing upon the final output, namely does structure, whether organisational or ownership affect efficiency. The results so far indicate that it does. This has been further compounded by other research such as Boardman and Vinning (1989).

Technique

Data Envelopment Analysis (DEA) is an established statistical technique which measures the relative efficiencies of units where simple efficiency measures are difficult to obtain (Farrell 1957; Charnes et al 1978). The main attraction of DEA is that it can deal with multiple inputs and outputs. The units in any DEA assessment are generally homogeneous and independent units performing the same function, and it is of most use where there are a large number of units providing an 'identical' service in relative isolation (Szczepura et al 1992). DEA was first developed as a way of measuring service units by Charnes et al. (1978). The model has since been added to and developed over the years. Warwick Business School in the UK has pioneered the research and are regarded as one of the leading institutions working in this field. DEA has been successfully used in airports, local government authorities, courts, hospitals general medical practices and bank branches to test efficiency where there are multiple centres of inputs and outputs. Its application to the port industry would therefore appear to be ideal. As far as the authors are aware there have been no studies using DEA within actual seaports. However, Roll and Hayuth (1993) state that DEA is a most suitable tool for measuring port efficiency, although they have only applied it hypothetically.

Sachish (1996) looked at the different techniques for measuring productivity and confirmed DEA's usefulness. However his research adopted an engineering method to take account of the technological investments when looking at the efficiency of Israeli ports. Various other studies have been made using the assessment of productivity based upon output per worker (DeMonie 1987), output per wharf (Frankel 1991) whilst others use production functions, (Kim and Sachish 1986, DeNeufville and Tsunokawa 1981). Gillen and Lall (1997) looked at airport terminals and chose two outputs, number of passengers and pounds of cargo. They chose six inputs, number of runways, number of gates, terminal area, number of employees, number of baggage collection belts and number of public parking places. They conclude that the number of gates has the most overall affect upon efficiency. In terms of ports, gates, which facilitate the loading of the cargo could be equated to loading cranes and runways to berths.

Efficiency can simply be expressed as a ratio of output to input provided that the product only produces one output. However, as most institutions produce multiple outputs from multiple inputs each variable must be given a weighting to produce a more accurate result. Efficiency then begins to resemble the sum of weighted outputs over the sum of weighted inputs. As the method of weighting can be biased towards one particular outcome, the DEA technique allows for each weighted input/output to be seen in its most favourable light. The number of variables entered into the formula cause for there to be more of a discriminatory power of DEA. This means that the more variables included into the equation may lead to a lack of emphasis on particularly important piece of data. Therefore Szczepura (1992) argues the number of variables should be kept to as low as possible. However, by weighting the variables it is still possible to reduced this limitation and include more variables.

Findings

For the purpose of this research data has been collected from 21 container ports in the Cargo Systems Journal 1999 list of top 100 container ports. The plan is eventually to obtain data for all 100 ports. The ports chosen for this preliminary study were those that either provided adequate statistics on their web sites or who responded for a request for information. The raw data collated for analysis by DEA as inputs and outputs is shown in Table 2

Table 2 Inputs and Outputs

	Output	Output	Input	Input
Port	Containers	Total throughput	US$- Assets	Quayage (m)
Auckland	499,285	4,200,000	165,137,688	6,046
Charleston	1,277,514	10,270,000	520,402,000	3,844
Goteborg	519642	30,394,000	205,506,788	11,955
Halifax	435,425	13,173,353	59,500,633	5,948
Houston	968,169	169,100,000	740,542,000	24,648
Jacksonville	753,823	7,377,000	549,394,000	12,728
Johor	460,000	19,322,363	208,379,772	2,665
Liverpool	487,000	33,000,000	429,558,525	18,785
Long Beach	4,100,000	60,800,000	2,215,034,000	18,182
Los Angles	3,378,218	82,126,624	2,431,141,000	13,758
Melbourne	1,044,000	42,108,000	234,733,746	12,969
Miami	860,000	5,850,000	452,124,219	5,686
Montreal	932,701	206,000,000	185,684,200	15,537
New York/Jersey	2,465,993	56,000,000	3,505,136,000	9,000
Penang	510,307	16,480,000	119,060,620	3,388
Port Klang	1,820,018	40,000,000	88,396,401	5,973
Rotterdam	6,010,000	315,000,000	1,418,117,624	77,000
Seattle	1,544,000	13,000,000	2,635,262,000	22,912
Southampton	846,257	35,000,000	1,604,014,008	10,053
Sydney	801,081	16,450,000	219,119,780	5,888
Vancouver	800,000	71,405,000	361,969,878	11,243

This above raw data has been computed using the DEA technique mention earlier. The two columns labelled outputs and the two columns labelled inputs have been compared with each other to produce a table of relative efficiency. This table of relative efficiency is shown in Table 3. However, it must be stressed that this is not an absolute efficiency measurement and that those ports that are at either end of the scale can neither be said to be efficient or inefficient. The results merely show that the ports can be ranked in order to show which ports achieve a greater throughput with the minimum of assets and least berth space, i.e. quayage. In order to achieve an absolute efficiency rating additional data needs to be included within the equation. Such additional data would have to include all the port's outputs such as number of passengers; amount of general, liquid, bulk or other type of cargo that pass through the port as well as other inputs, such as number of employees or cranes utilised.

Table 3 shows that in terms of container ports the Port Klang along with Johor and Charleston rate amongst the highest of this sample. These figures are capped to ensure that the ceiling of relative efficiency of any port does not exceed 100%. However if the scale is not adjusted then Port Klang has a score of 110.23 whilst Johor stands at just 110.13 and Charleston 109.07. This therefore denotes that these ports main specialisation is likely to be in containers.

Table 3 - Relative efficiency of ports

Rank	Relative Efficiency rating	Port
1	100	PORT KLANG
2	100	JOHOR
3	100	CHARLESTON
4	92.28	NEW YORK/JERSEY
5	91.77	HOUSTON
6	87.16	LOS ANGLES
7	84.96	VANCOUVER
8	70.85	LONGBEACH
9	67.73	PENANG
10	54.72	ROTTERDAM
11	46.84	SOUTHAMPTON
12	45.51	MIAMI
13	44.27	SYDNEY
14	43.82	MELBOURNE
15	34.01	GOTEBORG
16	31.16	HALIFAX
17	24.91	AUCKLAND
18	23.50	LIVERPOOL
19	20.33	SEATTLE
20	19.78	MONTREAL
21	18.02	JACKSONVILLE

The figures for Asian ports may be distorted by the fact that they include within the equation the asset value converted to USD. Due to the difference in land values and the value of assets in general Port Klang would naturally be expected to rate more favourable than a port in the West where land and other goods are relatively more expensive. Therefore by including assets within the equation it is likely that a port situated in the East would achieve a higher ranking than a port in the West. Thus the position of Jacksonville at position (21) at the bottom of the scale does not mean that this port is inefficient but does highlight that this port has a higher asset value than say, Vancouver, which has approximately the same container throughput but ranks at position (7).

Indeed in terms of valuation the port of Seattle, ranked at position (19), is equivalent to almost 30 ports the size of Port Klang and 8 ports the size of Houston (5). The results of this test therefore show that assets valuation is a questionable raw input in the equation. However by adjusting the asset figure to reflect the economic situation of the country by say, comparing it to the Gross Domestic Product (GDP), it should be possible to compare ports from different countries. This method will be left open for further research but meantime another way to compare ports in different countries is to use a measurement that can cross national barriers and exchange rates. The method which has been chosen for this research is to include the size of the port by using the length of berth against the same outputs. It however should be noted that the results may be misleading since by utilising in the equation container traffic it assumes that this is the port's sole activity. The results do not allow for the number of passengers or quantity of bulk or liquid cargo that is handled by the port. Consequently Miami receives a rating below fifty percent which does not reflect the several millions of passengers that transit the port each year.

However using these ports as a guideline and ignoring the limitations of the present data the next stage of assessment is to analyse the data in terms of ownership and organisational structure. As a guide figure 2 shows the sample ports results placed into the conceptual model using just ownership structure. Further research needs to be undertaken on the organisational structure of these ports in order to utilise the model for its intended purpose. The numbers contained with the diagram indicate the average efficiency of ports in that particular category. The most efficient ownership structure is indicated to be joint private/private at an average of 58.5, followed by private ports at 56.78 and lastly publicly owned ports at 51.26. It must be stressed that in order to see whether this is indicative of the port industry more ports will need to be examined.

Figure 2

Conclusion

This research has shown that organisation theory and ownership structure can be incorporated into a conceptual model of the port industry that can in itself enable a simple comparison of the efficiency of differing patterns to be made. The research has highlighted the need for additional inputs into the equation as well as emphasising the limitations of using assets as an input. Data which knows no national boundaries such as size of the port, length of berth and the primary function of the port need to be included in order to compare ports on an equal basis. However, the results have shown that DEA's ability to handle multiple inputs and outputs combined with the ability to add weights will allow for a meaningful analysis to be accomplished.

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