The private and social cost efficiency of port hinterland container distribution through a regional logistics system

Abstract

Increasingly, the debate on freight transport and logistics involves the challenge of sustainable development. Key objectives of sustainable or “green” freight logistics systems are the mitigation of negative environmental and human health effects of distribution operations and the realization of a major modal shift in transport preferences, while at the same time achieving internal generalized cost efficiency and quality of services. Pursuing these goals requires the introduction of a range of measures. These measures call for private and public actors to take up various initiatives and adopt policies. Usually, it is more effective to combine different actions into an integrated package of measures than to introduce single instruments in isolation.

This article explores the nexus between sustainability and port hinterland container logistics. In particular, the methodology and results of an empirical analysis based on applications of a network programming tool called the “interport model” are presented and discussed. The model enables an examination of all possible effects on inland container flows and their associated internal and external costs due to public and private initiatives in the field of port hinterland container logistics. The empirical analysis aims to evaluate the impact of a set of simultaneous policy options and operational measures on the competitiveness and sustainability of hinterland multimodal distribution of import and export containers handled at the seaports of the Campania region located in Southern Italy. The loading units can transit through the dry port facilities (the so called “interports”) located in the same region and/or through extra regional railway terminals, before reaching their ultimate inland destinations or the seaports. The integrated package of measures simulated by means of the model includes: (i) infrastructure policy, (ii) improvements of rail services, (iii) regulatory changes in terms of customs authorizations and procedures, (iv) removal of technical and legal barriers to fair and non-discriminatory competition in the market of rail traction between regional seaports and interports, (v) new business models integrating container logistics operations between seaports and interports, and (vi) social marginal cost charging of transport operations. Once this package of instruments is introduced, higher private and social cost efficiency of port hinterland container distribution through the investigated regional logistics system can be achieved. For instance, it has been estimated an annual saving of the order of about 12,660 tonnes of CO₂ equivalent emissions from transport corresponding to an external cost reduction of 0.27 million euros from the observed real life situation, whereas the estimated saving in terms of air pollution (CO, NO_x, PM, SO₂, VOC) from transport is approximately 220 tonnes per year corresponding to an external benefit of 1.31 million euros.

The most immediate priority appears to be the customs and intermodal logistics integration of seaports and interports by means of full implementation of the “extended gateway” concept as a way to increase the rail share of modal split and improve the overall cost efficiency of the system. In addition, the simultaneous introduction of a social marginal cost charging policy can contribute to make the regional interports a viable solution to expand the hinterland reach of the regional seaport cluster.

Introduction

The transportation policy, planning and research communities are moving towards the paradigm of sustainable or “green” logistics, which implies a broader perspective to address problems and find solutions in the freight sector (see for instance: European Commission, 2007, McKinnon et al., 2010, Rodrigue et al., 2001, Thore, 1991).

The approach towards the distribution of goods has greatly evolved in recent decades, firstly recognizing the need to see transport as a fundamental element of larger logistic strategies of businesses. Moreover, particularly within the last decade, the concerns related to the challenge of sustainable development have become increasingly important in freight logistics, with issues related to transport mode share and the internalization of transport external costs featuring strongly.

Sustainable or green freight logistics systems are concerned with the movement of goods, taking account of the negative environmental and social impacts of operations. Thus the objectives pertain not only to private aspects, such as cost minimization or profit maximization, but also to the wider effects of logistics on social well being, mainly in terms of the negative externalities – also referred to as “external costs” – associated with climate change, pollution, congestion, accidents and other biological and ecosystem damages deriving from transport. The challenge lies in minimizing these impacts while achieving strong logistic benefits in terms of total internal generalized cost reduction of distribution operations and service level improvement.

In any sector there cannot be economic efficiency unless prices reflect all costs to society actually caused by economic agents. The costs of transport can be split into private or internal costs and external costs. The former are directly borne by the users of transport system, while the latter, such as those indicated above, are imposed on others but not supported by the users. Transport external costs are a form of market failure and, without policy intervention, they do not directly affect the decisions about mode, route and timing of movements. The sum of private and external costs gives the social cost of transport (see for instance: European Commission, 2008a, European Commission, 2008b, Nash, 2003, Pigou, 1920, Prud’homme, 2001, Rothengatter, 2003, Verhoef, 1996, Yang and Huang, 1998).

Negative externalities caused by transportation are widely recognized as a major problem in Europe and worlwide. Road transport is responsible for by far the largest share in transport external costs. Accordingly, a modal shift from unimodal road transport to less impacting modes is an accepted policy goal at various institutional and geographical levels. In this respect, much attention is currently being given to intermodal transport solutions particularly in inland freight sector. Intermodality today generally refers to the movement of cargoes in standardized loading units, using two or more modes of transportation. The partial or full transfer of containers, swap bodies and semi-trailers from road to rail or waterway mitigates the negative external impacts of transport operations, thus enabling the pursuing of efficient and greener freight logistics systems. The European Commission has also introduced the concept of “co-modality” to define a new policy approach promoting integrated transport systems where single modes do not necessarily compete against each other but rather complement one another, in the aim to obtain an efficient and sustainable utilization of resources (European Commission, 2006, European Commission, 2007).

The achievement of private and external cost efficiency in freight logistics requires simultaneous actions by public and private actors as well as a close cooperation among stakeholders in order to create synergies.

Private companies can support the greening of logistics by adopting new technologies and/or by introducing new business models involving innovation in operations. Some of them are even starting to implement sustainable approaches to logistics and supply chain management as part of their Corporate Social Responsibility (CSR) agenda (see for instance: Sarkis, 2006).

Although logistic activities are mainly carried out by private operators, governments are still responsible for influencing the environmental and human health effects of cargo distribution operations. They have at disposal a range of policy measures to tackle sustainability problems in freight logistics, reducing transport external costs and inducing modal shift. Such measures can affect the demand or supply of transport and, in general, are not mutually exclusive. Their successful implementation may also require a complex interplay of different political levels at local, national and supranational scale.

Market based instruments rely on price mechanisms directly or indirectly addressing the so called “internalization” of transport external costs by means of financial penalties or incentives such as, for instance, charges, taxes and modal shift grants. Via monetary inducements, the users of transport systems are encouraged to reduce the negative external impacts they generate. More specifically, the internalization of external costs means making such effects part of the decision making process of transport users and it is therefore a policy instrument to ensure fair and efficient pricing within and between transport modes, while also altering the relative competitiveness of modes and favoring more environmental and social friendly logistic chains. Internalization eliminates the market imperfections due to externalities and defines a new equilibrium in which individual behaviours are consistent with the maximization of social welfare.

The level of economic measures aimed at internalization should ideally be based on the so called “social marginal cost charging” approach (see for instance: European Commission, 2008a, Nash, 2003, Prud’homme, 2001, Rothengatter, 2003, Yang and Huang, 1998). Transport prices expressed in kilometer charges should therefore correspond to the additional short term social cost created by one extra user of the infrastructure. However, within most countries, governments are still a long way from full application of the social marginal cost charging to the freight sector, as well as from reversing the long term modal shift to road. On the other hand, the benefits from internalization can only materialize when, for reason of fairness, not only freight movements but all transport sectors and all modes are subject to correct pricing of external effects, at least in a long term perspective. The internalization of the environmental and health costs of freight transport is currently high on the transport policy agenda in the European Union and is likely to be implemented over the next 10 years.

Furthermore, social marginal cost charging will only be effective insofar as transport choices are sensitive to price variations. In the presence of rigidities resulting from, or combined with different market failures (e.g. lack of alternatives, bounded rationality, etc.) that make demand less responsive to economic measures for internalization, other policy instruments can be used in mutually reinforcing ways to create greater price elasticity of demand and to make the supply of certain services more attractive (European Commission, 2008a, European Commission, 2008b, European Commission, 2011).

The presence of multiple market failures in transport sector suggests the adoption of a combination of individual instruments that complement each other and create a comprehensive policy mix. Besides market based measures, the most important government policy tools to achieve sustainability in freight logistics are: (i) regulation (including, amongst others, competition policy, administrative and technical simplification and harmonisation policy, working time directives, vehicle access restrictions, and the setting of standards), (ii) infrastructure policy (including the development of new infrastructure systems as well as the maintenance, repair, upgrading and optimal use of existing networks), (iii) land use planning (also including the siting of freight terminals, logistic platforms, etc.), (iv) innovation policy (also including the adoption of new technologies of information and communication), (v) research policy, and (vi) marketing and information policy.

There is not a single optimum package of instruments for all territories. The proper policy mix will always require to be tailored to specific circumstances such as geography, infrastructure development, freight logistics market, industrial strategy, and the weighting attached by policy makers and the public to different negative external effects from transport. In any case, the bundling of different policy measures can lead to synergies with the introduction of one type of instrument reinforcing the impact, and offsetting the disadvantages, of another.

The landside distribution of maritime containers from and to seaports is a complex process that affects the internal costs and the negative external impacts of production–distribution and logistic supply chains, having implications in terms of private and public decision making.

The actual modes of transport for port hinterland container flows are road, rail and barge. Transport organization can be done either by production and distribution companies or by their third party logistics providers in the case of “merchant haulage”. Another possibility provides the arrangement of inland container transport directly by shipping lines and marine terminal companies in the cases of “carrier haulage” and “terminal operator haulage”, respectively. In addition to pure transport operations, the port hinterland logistics of containers also involves a range of activities at seaports and inland facilities such as for instance the handling and storage of loading units, and the activities related to various types of clearance and inspection procedures.

The hinterland forwarding of containers has received a great deal of attention lately due to issues concerning the continuous growth of international trade, the introduction of bigger ships into the main trade lanes, and the possibility to raise the competitiveness of seaports, territories and productive systems through the adoption of innovative practices in inland intermodal distribution.

The steady increase in international container traffic volumes worldwide is putting great pressure on maritime terminals and port hinterland networks, particularly road networks surrounding the major port cities. For instance, approximately a quarter of the annual total inland freight transport demand within the European Union is port related and is mainly met by road (NEA, 2010), thus leading to undesirable levels of negative effects on environment and society. A crucial challenge many containerports are currently facing is the congestion due to insufficient storage space, long dwell times¹ and poor inland transport. All these criticalities generate a need for new port hinterland distribution solutions essentially based on the combination of different transport modes and multimodal interchange nodes.

Sustainable port hinterland container logistics implies an efficient and environmental and social friendly landside distribution system supporting the container traffic of seaports. This puts emphasis on the use of rail and barge intermodal transport rather than unimodal truck transport. In addition, the development of inland multimodal nodes according to the so called “extended gateway” concept is a relevant option to reduce congestion phenomena and to improve the accessibility and connectivity of port hinterland container logistics systems.

The multimodal interchange nodes in the hinterland network of containerports are described differently in different countries, such as for example “inland ports” or “inland terminals” in the United States and Canada, “strategic rail freight interchanges” in the United Kingdom, “dry ports” in Sweden and other European countries, and “interports” in Italy as an abbreviation of “interior ports” (see for instance: Cullinane and Wilmsmeier, 2011, Harrison, 2007, Hayut, 1980, Iannone et al., 2007, Iannone and Thore, 2010, Jaržemskis and Vasiliauskas, 2007, Kirkland, 2007, Leitner and Harrison, 2001, Rodrigue and Notteboom, 2009, Rodrigue et al., 2010, Roso, 2008, Roso and Lumsden, 2010, Thore, 2007, UNCTAD, 1982, UNCTAD, 1991). These facilities can contribute to the moving of traffic off the roads and onto rail and/or inland waterways, and to the improvement of cost and service efficiency of supply chains, enabling green and integrated freight logistics operations and stimulating regional economic growth.

The extended gateway concept incorporates the idea that some seaport facilities and functions can be duplicated and/or complemented at hinterland locations such as the interports (Franc and Van der Horst, 2010, Iannone, 2012, Iannone and Thore, 2010, Rodrigue and Notteboom, 2009, Veenstra et al., 2012, Visser et al., 2007). In particular, the availability of authorized areas dedicated to customs controls and other administrative and inspection procedures for the clearance of international freight shipments can qualify interports as an integral part (that is an extension) of specific seaports. Under a regime of customs continuity, the containers can be transported between seaports and interports without the need for inland customs transit documentation. This trade facilitation permits to save a great deal of time for the technical and administrative operations of container release in seaports and is the basis for sustainable transport.² Shippers and/or their logistics agents can arrange directly in the interports all the formalities in relation to the clearance of cargoes, whereas the organization of transport between seaports and interports is done by shipping lines and/or marine terminal companies. Moreover, governments can increase their revenue from taxes due to the generally acknowledged positive link between trade facilitations and freight flows.

The implementation of the extended gateway concept within a regional logistics system requires cooperation and integration among different actors, including infrastructure managers, shipping lines, inland intermodal carriers, customs, and so on. Hence, there are a number of challenges behind the development of interports according to the extended gateway perspective: new partnerships have to be established, new business models have to been developed, and transparency of goods and information flows has to be achieved.³

Motivated by the relevance of the topics discussed so far, this article investigates a range of conditions to achieve private and social cost efficiency in the inland multimodal distribution of maritime containers imported and exported in Italy through the seaports of Naples and Salerno located in the Campania region in south of the country. The standardized loading units discharged and to be loaded in these seaports can transit through the interports of Nola and Marcianise located in the same region, as well as through extra regional rail intermodal terminals, before reaching their inland and port destinations.

The analysis of the existing situation concerning the port hinterland distribution of containers from and to Campania shows a general inefficiency and a number of other criticalities associated to the whole configuration and organization of the regional container logistics system. In order to precisely assess the optimization potential of such system, the impacts of a set of simultaneous policy instruments and operational measures aimed to increase the competitiveness and sustainability of port hinterland container logistics operations at the Campanian seaports and interports have been analyzed with the help of a mathematical programming tool called the “interport model”. This analytic instrument incorporates economic, environmental and social parameters of inland container operations. It solves for the cost optimal flows of loading units throughout a port hinterland network featuring: (i) road connections, (ii) rail connections (with capacity constraints), (iii) regional interports and extra-regional locations served by road and railway, and (iv) regional and extra-regional locations served only by road. Differently from the conventional four steps models of transport demand forecasting (generation, distribution, modal split and assignment), the interport model combines the modal split and the assignment in a single step, allowing the simultaneous choice of transport mode and route including transhipment points.

The major novelty of this capacitated network programming tool for port hinterland container logistics analysis and planning consists of the detailed modelling of container release operations and their associated pricing mechanisms at seaports and interports, including the possibility for shippers to relocate storage and customs operations from the seaports to the interports (i.e. the extended gateway concept). The model can simulate alternative long term logistic scenarios in terms of supply of infrastructure and services, demand characteristics, and government and industrial policies.

For the purpose of this work, two optimization scenarios have been formulated and solved by means of a high level computer programming language. These represent “ideal” policy scenarios simulating a range of public policies and private initiatives to improve the inland container operations at the Campanian regional logistics system. In detail, the public policy measures and the changes to operating practices that have been evaluated by means of the interport model are: (i) reactivation and/or improvement of a number of rail container connections from and to the regional seaports and interports, (ii) attribution of a fully operational customs status to the regional interports, so that these can be used as extended gateways where technical and administrative operations for the release of containers transiting through the regional seaport system can take place; (iii) internalization of the external costs deriving from inland transport flows.

The point (i) implies changes both in infrastructure policy and in provision of services. The point (ii) involves regulatory changes in terms of customs authorizations and procedures; in addition, it also implies some kind of vertical integration between seaports and interports as well as the facilitation to private companies in access to the market of rail traction services between seaports and interports. The point (iii) is assumed to indirectly represent a government scheme for funding rail container transport by means of incentives calculated as the total external cost savings arising from shifting containers from unimodal road transport.

The two ideal scenarios simulated by the model assume the introduction of the same public and private measures except one. In particular, a first modelled scenario, inspired by the work of Iannone (2012), does not take account of transport externalities in its objective function, while the second one internalizes in the objective function the transport external costs deriving from climate change, air pollution, noise, accidents and congestion.

The results in terms of logistic flows and total internal, external and social costs deriving from the optimal solutions of these scenarios have been compared with the observed real life situation. The external diseconomies of transport flows have therefore been calculated also with respect to both the existing situation and the modelled scenario whose objective function does not include the externalities. In addition, the comparison between real situation and ideal scenarios have been also made in terms of atmospheric emissions arising from inland transport operations, but the parameters representing such physical impacts have not been incorporated into the structure of the empirical models. Finally, a sensitivity test has been carried out to assess the modal split effects due to changes in the level of road transport fares. The results attained from this comprehensive analysis can constitute a useful knowledge base for regional initiatives aimed at stimulating new port hinterland container logistics solutions addressing modal rebalance and the pursuit of social welfare.

The rest of the paper proceeds as follows. Section 2 contains a review of literature contributions dealing with green logistics and the external costs of freight transport, with a focus on port hinterland container logistics research and the original features of the model-based empirical analysis presented in this article. Section 3 provides a conceptual description of the interport model, including its early formulations as well as its assumptions and limitations. Section 4 presents the sea-land container logistics system of the Campania region and illustrates and discusses the general features and main results of the applications of the interport model to the inland distribution of import and export containers through the Campanian seaports and interports. Section 4 addresses conclusions and possible future research developments.