Cullinane 2006

Transportation Research Part A 40 (2006) 354–374
www.elsevier.com/locate/tra
The technical efficiency of container ports: Comparing

data envelopment analysis and stochastic frontier analysis
a,* b,1 c,2 d,3
Kevin Cullinane , Teng-Fei Wang , Dong-Wook Song , Ping Ji
a
School of Marine Science and Technology, Armstrong Building, University of Newcastle upon Tyne, Newcastle NE1 7RU, UK
b
Centre for International Shipping and Logistics, Plymouth Business School, University of Plymouth, Drake Circus, Plymouth PL4 8AA, UK
c
Centre of Urban Planning and Environmental Management, The University of Hong Kong, Pokfulam Road, Hong Kong
d
Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong
Received 29 June 2004; received in revised form 26 July 2005; accepted 26 July 2005
Abstract
The efficiency of the container port industry has been variously studied utilising either Data Envelopment Analysis
(DEA) or Stochastic Frontier Analysis (SFA). Given the strengths and weaknesses associated with these two approaches,
the efficiency estimates and scale properties derived from these analyses are not always convincing. This paper applies both
approaches to the same set of container port data for the worldÕs largest container ports and compares the results obtained.
A high degree of correlation is found between the efficiency estimates derived from all the models applied, suggesting that
results are relatively robust to the DEA models applied or the distributional assumptions under SFA. High levels of tech-
nical efficiency are associated with scale, greater private-sector participation and with transhipment as opposed to gateway
ports. In analysing the implications of the results for management and policy makers, a number of shortcomings of apply-
ing a cross-sectional approach to an industry characterised by significant, lumpy and risky investments are identified and
the potential benefits of a dynamic analysis, based on panel data, are enumerated.
Ó 2005 Elsevier Ltd. All rights reserved.
Keywords: Production; Data envelopment analysis; Stochastic frontier analysis; Efficiency; Container ports
1. Introduction
The container port industry has received increasing attention in recent years, concomitant with container-
ised transportation coming to the forefront of the international shipping scene. On the one hand, the contem-
*
Corresponding author. Tel.: +44 191 222 6218; fax: +44 191 222 5491.
E-mail addresses: kevin.cullinane@ncl.ac.uk (K. Cullinane), tengfei.wang@plymouth.ac.uk (T.-F. Wang), dsong@hkucc.hku.hk
(D.-W. Song), mfpji@inet.polyu.edu.hk (P. Ji).
1
Tel.: +44 (0)1752 233286; fax: +44 (0)1752 232862.
2
Tel.: +852 2241 5554; fax: +852 2559 0468.
3
Tel.: +852 2766 6631; fax: +852 2362 5267.
0965-8564/$ - see front matter Ó 2005 Elsevier Ltd. All rights reserved.
doi:10.1016/j.tra.2005.07.003
K. Cullinane et al. / Transportation Research Part A 40 (2006) 354–374 355
porary container transportation and container port industries play a pivotal role in the globalisation of the
world economy, while on the other the market structure of the container port industry has greatly changed
over recent years. One of the main challenges for the contemporary container port industry arises from the
complicated nature of its operations; this is a consequence of the number of different agents involved in
importing and exporting containers and the complex operational interactions between the different service
processes taking place at a port.
Another challenge for the container port industry comes from the increasingly competitive commercial
environment that has arisen in recent years. Unlike their predecessors, many individual container ports no
longer enjoy monopoly control over the handling of cargoes from within their hinterland. Individual container
ports are not only concerned with whether they can physically handle cargo, but also whether they can suc-
cessfully compete for it. In a competitive environment where shipping lines have the choice of using more than
just a single port for the facilitation of their door-to-door cargo movements, a port faces the constant risk of
losing its customer base. To maintain its competitiveness in such a market, a port has to invest heavily in
sophisticated equipment or in dredging channels to accommodate the most advanced and largest container
ships in order to facilitate cost reductions for the container shipping industry.
It is the intense competition which characterises the container port industry (see, for example, Liu, 1995;
Tongzon and Heng, 2005; Yap and Lam, 2005) that has stimulated an overt interest in the efficiency with
which it utilises its resources (Tongzon, 1995; Martinez-Budria et al., 1999; Coto-Millan et al., 2000;
Notteboom et al., 2000; Tongzon, 2001; Cullinane, 2002; Cullinane et al., 2004). Indeed, the analysis of the
performance of individual container ports or terminals is of great importance for the survival and competitive-
ness of the industry and its players. Not only can such an analysis provide a powerful management tool for
port operators, but also constitutes an important input for informing regional and national transport/port
planning and operations (Filippini and Prioni, 1994; Oum and Yu, 1994; Regan and Golob, 2000; Adler
and Golany, 2001). It is important to note, however, that the analysis contained within this paper is aimed
solely at deriving and comparing various estimates of the efficiency of the industry. Alluding to the significant
level of competition within the industry provides merely a justification for doing so. It should not be inferred,
therefore, that any direct causal relationship is purported to exist between changing levels of efficiency over
time and the degree of competition within the container port industry. Although this is certainly a hypothesis
that is worthy of testing, particularly because of the potential impact of market contestability (Baumol et al.,
1982), it is one of such complexity and import that it merits a separate study in its own right.
Traditionally, the performance of ports has been variously evaluated by numerous attempts at calculating
and seeking to improve or optimise the operational productivity of cargo-handling at berth and in the con-
tainer yard (De Weille and Ray, 1974; Edmond and Maggs, 1976; UNCTAD, 1976; Chang, 1978; Noritake
and Kimura, 1983; Schonfeld and Frank, 1984; Schonfeld et al., 1985; Chow, 1986; Bendall and Stent,
1987; Daganzo, 1989; Daganzo, 1990; Bischoff and Marriott, 1990; Dowd and Leschine, 1990; Noritake
and Kimura, 1990; Peterkofsky and Daganzo, 1990; Avriel and Penn, 1993; Taleb-Ibraimi et al., 1993; Lai
and Lam, 1994; Talley, 1994; Chen et al., 1995; Tabernacle, 1995; Tongzon, 1995; Evers and Koppers,
1996; Ashar, 1997; Gehring and Bortfeldt, 1997; Imai et al., 1997; Kim, 1997; Kozan, 1997; Kim and Bae,
1998; Kim and Kim, 1998; Kim and Kim, 1999; Robinson, 1999; Avriel et al., 2000; Wilson and Roach,
2000; Chu and Huang, 2002; Imai et al., 2002).
In contrast, there have been only a few attempts at deriving a summary evaluation of port productivity, for
example by measuring a single factor productivity (De Monie, 1987) or by comparing actual with optimum
throughput over a specific time period (Talley, 1998). In recent years, significant progress has been made con-
cerning the measurement of efficiency in relation to productive activities. In this vein, two more complex, yet
more appropriately holistic approaches, named Data Envelopment Analysis (DEA) and Stochastic Frontier
Analysis (SFA), have been increasingly utilised to analyse port production and performance. Both the
DEA and SFA approaches have their individual strengths and weaknesses. The SFA approach has the advan-
tage of allowing for random shocks and measurement error. Another advantage of the SFA approach is that
it is possible to analyse the structure, and investigate the determinants of, producer performance. Therefore,
it has a more solid grounding in economic theory. On the other hand, weaknesses with the whole family
of econometric approaches to efficiency measurement (to which SFA belongs) are, among others, as
follows:
356 K. Cullinane et al. / Transportation Research Part A 40 (2006) 354–374
(a) It is risky to impose strong a priori assumptions on the production technology by choosing a functional
form (e.g. Cobb–Douglas, translog, etc.), given that most of the distributional characteristics of the pro-
duction technology are a priori unknown.
(b) The precise specification of the error structure is difficult (sometimes even impossible) to ascertain. In
addition, such specification is likely to introduce another potential source of error.
(c) The continuity presumed in this approach may lead to approximation errors.
Compared with the stochastic parametric frontier approach, DEA imposes neither a specific functional
relationship between production output and input, nor any assumptions on the specific statistical distribution
of the error terms. In so doing, the data are believed to be able to Ôspeak for themselvesÕ and the DEA ap-
proach has the advantage of minimal specification error. However, the DEA model does not allow for mea-
surement error or random shocks. Instead, all these factors are attributed to (in)efficiency, a characteristic that
inevitably leads to potential estimation errors.
The two approaches of DEA and SFA have been widely applied in other industries, including in the wider
transport sector. A general critique of all forms of frontier approaches is provided by De Borger et al. (2002),
while DEA applications to the general transport industry are legion (Chu et al., 1992; Oum and Yu, 1994;
Kerstens, 1996; Odeck and Hjalmarsson, 1996; Gillen and Lall, 1997; Dervaux et al., 1998; Nozick et al.,
1998; Peck et al., 1998; Cowie and Asenova, 1999; Ramanathan, 2000; Adler and Berechman, 2001; Adler
and Golany, 2001; Cook et al., 2001; Odeck, 2001; Odeck and Alkadi, 2001; Pina and Torres, 2001; Fernandes
and Pacheco, 2002; Karlaftis, 2003; Pacheco and Fernandes, 2003; Juan et al., 2003). However, the application
of SFA in the field of transport has been somewhat less prevalent (Bruning, 1992; Filippini and Prioni, 1994;
Oum and Yu, 1998; Coelli et al., 1999; Inglada et al., 1999; McMullen and Lee, 1999; Lewis and Anderson,
2000; Sanchez and Villarroya, 2000; Vitaliano, 2002; Pels et al., 2003; Coto-Millan et al., 2004).
A thorough literature review reveals that there remains a lack of empirical evidence in relation to their com-
parative effectiveness in application to the port industry, particularly to the container port sector. This paper
aims to fill this gap. Given the strengths and weaknesses associated with each approach, such a comparative
study is not only necessary, but potentially yields important results and conclusions with respect to the relative
merits of the two alternative approaches and the circumstances under which each is most appropriately applied.
2. Methodology: DEA vs. SFA
Discussion of frontiers and efficiency measurement began formally with the seminal work of Farrell (1957),
who provided definitions and a computational framework for both technical and allocative (in)efficiency.
Based on FarrellÕs (1957) work, the measurement of efficiency and the estimation of frontiers have developed
explosively over the past several decades. DEA and SFA are the two most important alternative approaches in
this respect and have been extensively studied as methodologies in their own right and ubiquitously applied to
an eclectic range of industrial/organisational contexts.
2.1. Data envelopment analysis (DEA)
DEA can be roughly defined as a nonparametric method of measuring the efficiency of a Decision Making
Unit (DMU) with multiple inputs and/or multiple outputs. This is achieved by constructing a single ÔvirtualÕ
output to a single ÔvirtualÕ input without pre-defining a production function. The term DEA and the CCR
model were first coined in Charnes et al. (1978) and were followed by a phenomenal expansion of DEA in
terms of its theory, methodology and application over the last few decades. The influence of the CCR paper
is reflected in the fact that by 1999 it had been cited over 700 times (Forsund and Sarafoglou, 2002).
Among other models in the context of DEA, the two most widely used DEA models, named DEA CCR
(due to Charnes et al., 1978) and BCC models (due to Banker et al., 1984), deserve greater attention, especially
since they are utilised later in this paper. The DEA-CCR model assumes constant returns to scale so that all
observed production combinations can be scaled up or down proportionally. The DEA-BCC model, on the
other hand, allows for variable returns to scale and is graphically represented by a piecewise linear convex
frontier.
Formally, let inputs be xk ¼ ðx1k ; x2k ; . . . ; xMk Þ 2 RM N

þ to produce outputs y k ¼ ðy 1k ; y 2k ; . . . ; y Nk Þ 2 Rþ . The
row vectors xk and yk form the kth rows of the data matrices X and Y, respectively. Let k ¼ ðk1 ; k2 ;
. . . ; kK Þ 2 RKþ be a non-negative vector, which forms the linear combinations of the K firms. Finally, let
e = (1, 1, . . . , 1) be a suitably dimensioned vector of unity values.
The output-oriented DEA model seeks to maximise the proportional increase in output while remaining
within the production possibility set. An output-oriented efficiency measurement problem can be written as
a series of K linear programming envelopment problems, with the constraints differentiating between the
DEA-CCR and DEA-BCC models, as shown in (1)–(5).
max U ð1Þ
U ;k
Subject to Uy 0k Y 0 k 6 0 ð2Þ
0
X k x0k 60 ð3Þ
k P 0 ðDEA-CCRÞ ð4Þ
0
ek ¼ 1 ðDEA-BCCÞ ð5Þ
The combination of equations from (1)–(4) and (1)–(5), respectively, form the DEA-CCR and DEA-BCC
models. The output-oriented measure of technical efficiency of the kth DMU, denoted by TEk, can be com-
puted by Eq. (6).
TEk ¼ 1=U k ð6Þ
The technical efficiency derived from DEA-CCR and DEA-BCC models are frequently used to obtain a mea-
sure of scale efficiency, as shown in Eq. (7) (Cooper et al., 2000).
SEk ¼ U CCR k =U BCC k ð7Þ
where SEk, indicates the scale efficiency of the kth DMU, while UCCR_k and UBCC_k are the technical efficiency
measures for DMU k derived from applying the DEA-CCR and DEA-BCC models respectively. SEk = 1 indi-
cates scale efficiency and SEk < 1 indicates scale inefficiency.
Scale inefficiency is due to either increasing or decreasing returns to scale which can be determined by
inspecting the sum of weights, ek 0 , under the specification of the CCR model. If this sum is equal to one,
the law of constant returns to scale prevails, whereas increasing returns to scale and decreasing returns to scale
prevail when the sum is less than, or greater than, one.
In recent years, DEA has occasionally been used to analyse port production. Compared with traditional
approaches, DEA has the advantage that consideration can be given to multiple inputs and outputs. This ac-
cords with the characteristics of port production so that there exists, therefore, the capability of providing an
overall evaluation of port performance.
Among the previous applications, that of Roll and Hayuth (1993) is probably the first attempt in this re-
spect. However, this work should be treated as a theoretical exploration of applying DEA to the port sector,
rather than as a genuine application. This is because no genuine data were collected and analysed.
In Martinez-Budria et al. (1999), 26 ports were divided into three groups; namely, Ôhigh complexity portsÕ,
Ômedium complexity portsÕ and Ôlow complexity portsÕ. After examining the efficiency of these ports using
DEA-BCC models, Martinez-Budria et al. (1999) conclude that the ports of high complexity are associated
with high efficiency, compared with the random mix of medium and low efficiency found in the other ports.
Using both DEA-CCR and DEA-additive models, Tongzon (2001) studies the efficiency of 4 Australian
and 12 other international container ports for the year 1996. Clearly plagued by poor data availability and
a small sample size (only 16 observations), Tongzon (2001) identifies more efficient ports than inefficient ports.
Realising this serious drawback, Tongzon (2001) suggests that further work should be done in collecting more
observations to enlarge the sample analysed.
In order to determine any relationship between port efficiency and particular types of ownership and organ-
isational structures, Valentine and Gray (2001) apply the DEA-CCR model to 31 container ports out of the
worldÕs top 100 container ports for the year 1998.
All the above research shares the common property that only cross-sectional, rather than panel, data is ana-
lysed using DEA. Realising that cross-sectional data might be inferior to panel data given the characteristics of
the container port industry and the random effects associated with each single measured value of production
and the level of measured efficiency associated with it, Cullinane et al. (2004) apply DEA window analysis to
panel data. In so doing, the development of the efficiency of each container port in the sample (summarised in
Table 1) can be tracked over time and, in consequence, the efficiency results are ostensibly more convincing.
2.2. Stochastic frontier analysis (SFA)
Introduced simultaneously by Aigner et al. (1977) and Meeusen and van den Broeck (1977), SFA assumes
that a parametric function exists between production inputs and outputs. As an alternative approach to DEA,
the great virtue of SFA is that it not only allows for technical inefficiency, but also acknowledges the fact that
random shocks outside the control of producers can affect output. For this reason, the essential idea behind
SFA is that the error term is composed of two parts; a one-sided component that captures the effects of inef-
ficiency relative to the stochastic frontier, as well as a symmetric component that permits random variation of
the frontier across firms, and captures the effects of measurement error, other statistical ÔnoiseÕ, and random
shocks outside the firmÕs control.
A stochastic frontier model can be expressed as Eq. (8), where the technical efficiency of firm k is Uk and
must be positive, whereas the statistical noise component Vk can be either positive or negative.
y k ¼ f ðx1k ; x2k ; . . . ; xMk ; U k ; V k Þ ð8Þ
The first step in solving a stochastic frontier model is to specify a functional form, with solutions most fre-
quently relying upon maximum likelihood estimation.
Among the applications of SFA to the port industry, Liu (1995) sets out to test the hypothesis that public
sector ports are inherently less efficient than those in the private sector. A set of panel data relating to the out-
Table 1
Window analysis summary of results for container port efficiency 1992–1999 (100 = ÔefficientÕ)
Port Summary measures
Mean SD
Hong Kong 91.51 11.17
Singapore 93.54 7.53
Busan 85.74 17.42
Kaohsiung 95.69 5.03
Shanghai 86.42 10.87
Rotterdam 68.30 8.99
Los Angeles 98.84 2.54
Hamburg 56.43 5.42
Long Beach 81.87 13.05
Antwerp 40.60 12.99
Port Klang 63.16 25.36
Dubai 71.43 17.84
New_York/New Jersey 83.26 18.73
Bremen/Bremerhaven 84.34 10.83
Felixstowe 66.74 14.14
Manila 66.04 13.51
Tokyo 54.09 5.43
Qingdao 97.51 6.05
Yokohama 49.41 6.05
Laem Chabang 94.32 8.91
Tanjunk Priok 96.23 5.69
Kobe 39.23 8.91
Nagoya 97.24 5.78
Keelung 100.00 0.00
Colombo 100.00 0.00
puts and inputs of 28 commercially important UK ports over the period from 1983 to 1990 was collected for
analysis.
Notteboom et al. (2000) apply a Bayesian approach based on Monte-Carlo approximation to the estima-
tion of a stochastic frontier model aimed at assessing the productive efficiency of a sample of 36 European
container terminals located in the Hamburg-Le Havre range and in the Western Mediterranean. The data ana-
lysed relates to 1994. The robustness and validity of the estimated model was tested by comparing the results
with those of four benchmark terminals in Asia (Singapore, Kaohsiung and Hong KongÕs MTL and HIT
terminals).
Coto-Millan et al. (2000) applied a stochastic frontier model to estimate the economic efficiency of 27 Span-
ish ports. Panel data for the period 1985–1989 were collected and analysed using the Cobb–Douglas and Tran-
slog versions of the model.
Cullinane and Song (2003) assessed the success achieved by KoreaÕs port privatisation policies in increasing
the productive efficiency of its container terminals. The stochastic frontier model was justified as the chosen
methodology for estimating productive efficiency levels and is applied to cross-sectional data under a variety
of distributional assumptions. A panel data model was also estimated.
Finally, Cullinane et al. (2002) analyse the administrative and ownership structures of major container
ports in Asia. The relative efficiency of these ports was then assessed using the cross-sectional and panel data
versions of the stochastic frontier model.
3. Efficiency analysis
3.1. Definitions of input and output variables
A thorough discussion of variable definition is provided in Cullinane et al. (2004), but can be summarised as
follows. The input and output variables should reflect actual objectives and the process of container port pro-
duction as accurately as possible. As far as the former is concerned, the observed performance of a port might
be closely related to its objectives. At the extreme, for instance, a port is more likely to utilise state-of-the-art,
expensive equipment to improve its productivity if its objective is simply to maximise cargo throughput.
Similarly, a port may be tempted to use cheaper equipment if its objective is simply to maximise profits.
The objectives of a port are of crucial import to the definition of variables for efficiency measurement. For
instance, if the objective of a port is to maximise its profits, then employment or any information on labour
should be counted as an input variable. However, if one objective of a port is to increase national or regional
employment then, despite the fact that it may appear to be somewhat counter-intuitive, labour should be
accounted for as an output variable.
In this paper, the main objective of a port is assumed to be the minimisation of the use of input(s) and max-
imisation of the output(s). Because of the extreme difficulty of obtaining confidential data that is often incon-
sistent between corporate entities, nations, etc., the respective prices of inputs or outputs are not taken into
account in the empirical analysis contained herein. In consequence, this assumed objective may not be entirely
consistent with that of profit maximisation. However, this assumed objective is justified not only by its ana-
lytical tractability but also by, inter alia, the facts that (i) contemporary container ports rely heavily upon
sophisticated equipment and information technology rather than being labour-intensive. In applying the
empirical analysis contained herein to determine how well the assumed objective has been attained, the level
of utilisation of state-of-the-art assets and, therefore, the overall quality of the management can be inferred.
This has obvious implications for, and likely a high correlation with, the achievement of more orthodox cor-
porate objectives such as profit maximisation; (ii) in the light of the fierce and ever-increasing competition
faced by each container port, to achieve this objective is likely to be more urgent than any other. Container
ports compete on both their direct costs (in that, where possible, these are passed onto customers) and their
indirect costs related to productivity levels. Given a standard unit cost, price competitiveness is undermined by
the failure to minimise the use of inputs. Similarly, a failure to maximise outputs for a given input level will,
irrespective of prices charged, undermine a portÕs ability to achieve maximum productivity through scale econ-
omies and through the inability to accumulate reserves for further investment; (iii) this objective also conforms
to the findings of most research in the field.
Container port production depends crucially on the efficient use of labour, land and equipment. Therefore,
the total quay length, the terminal area, the number of quayside cranes, the number of yard gantry cranes and
the number of straddle carriers are the most suitable elements to be incorporated into the models as input vari-
ables. In the light of the unavailability or unreliability of direct data, information on labour inputs is derived
from a pre-determined and highly correlated relationship to terminal facilities. It is very important to note that
any pre-determined relationship is not generally applicable to all types of ports with different characteristics of
production. It is also dangerous to apply this relationship to container ports at different scales of production
because of the different equipment and labour configurations employed.
On the other hand, container throughput is unquestionably the most important and widely accepted indi-
cator of port or terminal output. Almost all previous studies treat it as an output variable, because it closely
relates to the need for cargo-related facilities and services and is the primary basis upon which container ports
are compared, especially in assessing their relative size, investment magnitude or activity levels. Another con-
sideration is that container throughput is the most appropriate and analytically tractable indicator of the effec-
tiveness of the production of a port.
3.2. Data collection
The sample comprises the worldÕs leading container ports ranked in the top 30 in 2001. This sample size was
determined as a function of data availability and in line with recommendations on the minimum sample size
required to estimate the number of parameters in the models being tested (see Staat, 2001; Zhang and Bartels,
1998). Out of these 30, the Port of Tanjung Pelepas in Malaysia and San Juan are excluded; the former be-
cause it did not officially open until 2000, and the latter because the required data are simply not available.
As some container ports include more than one container terminal (e.g., the Hong Kong container port in-
cludes HIT, MTL, Terminal 3 and COSCO-HIT terminals), the sample for analysis comprises a total size
of 57; either container ports or individual terminals within container ports. The required secondary data
are mainly taken from various issues of both the Containerisation International Yearbook and Lloyd’s Ports
of the World. As these trade publications collect information directly from the ports under study on an annual
basis, and the data compiled for this analysis is based on their surveys, it is regarded as the most reliable and
comprehensive available. Important statistics relating to the sample are summarised in Table 2.
3.3. Definition of DEA and SFA models
DEA models can be distinguished according to whether they are input- or output-oriented. The former is
closely related to operational and managerial issues, whilst the latter is more related to planning and macro-
economic strategies. Both orientations have their usefulness in the container port industry context. As far as
Table 2
Summary statistics for the sample
Output Inputs
Container Terminal Terminal Quayside gantry Yard gantry Straddle carrier
throughput length (m) area (ha) (number) (number) (number)
(TEU)
Mean 2,293,516 3208 139 22 32 27
Standard error 347,730 414 23 3 7 5
Median 1,732,855 2071 86 14 15 3
Mode 1,828,460 350 15 6 0 0
Standard deviation 2,625,305 3125 171 20 55 40
Kurtosis 13 3 12 4 18 4
Skewness 3 2 3 2 4 2
Range 15,740,297 15,413 995 96 337 171
Minimum 204,496 305 6 3 0 0
Maximum 15,944,793 15,718 1000 99 337 171
Count 57 57 57 57 57 57
input-oriented models are concerned, the port industry is normally associated with long-life facilities and a
long-term planning horizon and once the port is built, its potential output (capacity) is roughly fixed within
some range. A port is normally able to approximately predict its container throughput for the ensuing year at
least. This is because a container port has a fairly stable customer base of shipping lines. Over the fairly short-
term, container terminals should even be able to predict impending dramatic changes. A container terminal
can also attempt to predict its future throughput by studying historic data or regional economic developments.
In that case, how to efficiently use the inputs is the key to saving costs in port production.
On the other hand, with rapid expansion of global business and international trade, many container ports
must frequently review their capacity in order to ensure that they can provide satisfactory services to port
users and maintain their competitive edge. Sometimes, the need to build a new terminal or increase capacity
is inevitable. However, before a port implements such a plan, it is of great importance for the port to know
whether it has fully used its existing facilities and that output has been maximised given the input. From this
point of view, the output-oriented model provides a benchmark for the container industry.
Finally, it has been decided that output-oriented models should be chosen as the basis for the analysis
undertaken herein. From a purely pragmatic point of view, all available alternative models cater for the case
where there is a single output. Hence, the choice of an output-oriented approach greatly facilitates the direct
comparison of all alternative models on a one-to-one basis.
For the application of the SFA model, the estimation of relative terminal operator efficiency is conducted
by assuming the appropriateness of the log-linear Cobb–Douglas case. The logarithmic stochastic frontier
model specified for the container terminal operating sector in the cross-sectional case is defined by
ln Y k ¼ b0 þ b1 ln TLk þ b2 ln TAk þ b3 ln QGk þ b4 ln YGk þ b5 ln SCk þ vk uk ð9Þ
where k = 1, 2, . . . , 62 and Yk represents the output of the kth container terminal (or port), as measured by port
or terminal throughput. TLk, TAk, QGk, YGk, and SCk denote, respectively, the terminal (port) quay length,
terminal (port) yard area, number of quayside gantry cranes, number of yard gantry cranes and number of
straddle carriers, associated with the kth terminal (port). b0 through b5 are input coefficients associated with
the independent variables in the model and are the object of estimation. The disturbance term vk represents the
symmetric (statistical noise) component and uk (P0) is the one-sided (inefficiency) component. The goodness
of fit of the estimated regression equation evaluated by R2 for the least squares method looks reasonably high
at 0.8027. This implies that the five inputs to the model do satisfactorily explain the modelÕs output. In addi-
tion, at 45.56, the F-statistic shows that the relationship between exogenous and endogenous variables is sig-
nificant at the 1% level.
4. Empirical results
4.1. Efficiency results derived from DEA models
The software DEA-Solver-PRO 3.0 (Cooper et al., 2000) is employed to solve the DEA models. Without
precise information on the returns to scale of the port production function, two types of DEA models, namely
the CCR and BCC models, are applied to analyse the efficiency of container terminals.
In line with formulae (1)–(7) and the relationship (discussed in Section 2) between scale inefficiency and the
sum of weights, ek 0 , under the specification of the CCR model, Table 3 reports the efficiency estimates, the
scale efficiency and scale properties of each container terminal (port).
It is clear from Table 3 that, as one would expect, the DEA-CCR model yields lower average efficiency esti-
mates than the DEA-BCC model, with respective average values of 0.58 and 0.74 and where an index value of
1.00 equates to perfect (or maximum) efficiency. Respectively, 9 and 22 out of the 57 terminals (ports) included
in the analysis are identified as efficient when the DEA-CCR and the DEA-BCC models are applied. This re-
sult is not surprising since a DEA model with an assumption of constant returns to scale provides information
on pure technical and scale efficiency taken together, while a DEA model with the assumption of variable re-
turns to scale identifies technical efficiency alone. An ANOVA of the efficiency for the DEA-CCR and
DEA-BCC analyses (F = 10.77) indicates that the efficiency measures calculated using these two different
approaches are significantly different at the 1% level (with a critical value of 6.87). A SpearmanÕs rank order
Table 3
Terminal efficiency under the DEA-CCR and DEA-BCC models (1 = ÔefficientÕ)a
Port Port/terminal DEA-CCR DEA-BCC Scale efficiency Returns to scale
Hong Kong Hong Kong 0.6922 1.0000 0.6922 Decreasing
HIT 0.8267 1.0000 0.8267 Decreasing
MTL 0.4942 0.6940 0.7121 Decreasing
Terminal 3 1.0000 1.0000 1.0000 Constant
Cosco-HIT 0.6200 0.7510 0.8256 Decreasing
Singapore Singapore 0.8999 1.0000 0.8999 Decreasing
Busan Busan 0.2861 0.5435 0.5264 Decreasing
Jasungdae 0.2505 0.3515 0.7127 Decreasing
Shinsundae 0.3045 0.4536 0.6713 Decreasing
Uam 0.3111 0.3185 0.9768 Decreasing
Gamman_G 0.2686 0.6416 0.4186 Increasing
Gamman_Hanjin 0.4187 1.0000 0.4187 Increasing
Gamman_Hyundai 0.4477 1.0000 0.4477 Increasing
Gamman_K 0.3339 1.0000 0.3339 Increasing
Taiwan Kaohsiung 0.9959 1.0000 0.9959 Decreasing
Shanghai Shanghai 0.7541 1.0000 0.7541 Decreasing
Rotterdam Rotterdam 0.4601 0.8045 0.5719 Decreasing
Home 0.7394 0.8318 0.8889 Increasing
Los Angeles Los Angeles 1.0000 1.0000 1.0000 Constant
Shenzhen Shenzhen 0.4513 0.6386 0.7067 Decreasing
Yantian 0.6469 0.7578 0.8537 Decreasing
Shekoui 0.4239 0.4437 0.9554 Decreasing
Chiwan 0.2987 0.3067 0.9739 Decreasing
Hamburg Hamburg 0.4774 0.7781 0.6135 Decreasing
Burchardkai 0.7146 0.7561 0.9451 Decreasing
Eurokai 0.6662 0.6688 0.9961 Decreasing
TCT Tollerort 0.4789 0.7114 0.6732 Increasing
Unikai 0.1907 0.1959 0.9735 Constant
Long Beach Long Beach 1.0000 1.0000 1.0000 Constant
Antwerp Antwerp 0.3310 1.0000 0.3310 Decreasing
Europe Terminal 0.6424 0.6642 0.9672 Increasing
Seaport 0.1545 0.1782 0.8670 Decreasing
Noord Natie 0.5481 0.8411 0.6516 Increasing
Noordzee 1.0000 1.0000 1.0000 Constant
Port Klang Port Klang 0.2867 0.4596 0.6238 Decreasing
Klang Container 1.0000 1.0000 1.0000 Constant
Klang Port 0.2097 0.3148 0.6661 Decreasing
Dubai Dubai 0.4447 0.5526 0.8047 Decreasing
New York/New Jersey New York/New Jersey 0.6841 1.0000 0.6841 Decreasing
Bremen/Bremerhaven Bremen/Bremerhaven 0.6094 0.9679 0.6296 Constant
Felixstowe Felixstowe 0.3776 0.6056 0.6235 Decreasing
Manila Manila 0.3748 0.5099 0.7350 Decreasing
South Habour 0.4027 0.4149 0.9706 Constant
Manila International 0.2536 0.3306 0.7671 Decreasing
Tokyo Tokyo 0.5119 0.6533 0.7836 Decreasing
Qingdao Qingdao 0.4999 0.6303 0.7931 Decreasing
Gioia Tauro Gioia Tauro 1.0000 1.0000 1.0000 Constant
Table 3 (continued)
Port Port/terminal DEA-CCR DEA-BCC Scale efficiency Returns to scale
Yokohama Yokohama 0.3541 0.3796 0.9328 Decreasing

Laem Chabang Laem Chabang 1.0000 1.0000 1.0000 Constant
Tanjunk Priok Tanjunk Priok 0.5493 0.7771 0.7069 Decreasing
Algeciras Algeciras 0.9022 1.0000 0.9022 Decreasing
Kobe Kobe 0.2749 0.4694 0.5856 Decreasing
Nagoya Nagoya 0.6037 0.6809 0.8866 Constant
Kinjo Pier 0.4332 1.0000 0.4332 Increasing
NCB 0.9267 1.0000 0.9267 Increasing
Keelung Keelung 1.0000 1.0000 1.0000 Constant
Colombo Colombo 1.0000 1.0000 1.0000 Constant
Average 0.5759 0.7382 0.7831
a
Alternative efficiency results and returns to scale are calculated by Eqs. (1)–(7). The estimates presented here are based on output-
orientated DEA-CCR and DEA-BCC models.
correlation coefficient between the efficiency rankings derived from DEA-CCR and DEA-BCC analyses is
0.80. The positive and high SpearmanÕs rank order correlation coefficient indicates that the rank of each firm
derived from applying the two approaches is similar. A combination of ANOVA and SpearmanÕs rank order
correlation coefficient leads to the conclusion that the efficiency estimates yielded by the two approaches
follow the same pattern across firms.
4.2. Efficiency results derived from SFA models
In order to ensure that it is appropriate to utilise maximum likelihood estimation (MLE) to solve the sto-
chastic frontier model, the first step in the estimation procedure is to check the sign of the third moment and
the skewness of the OLS residuals associated with the sample data (Waldman, 1982). The skewness for the
port production frontier model is 0.42; the negative sign implying that the residuals of the sample data pos-
sess the correct pattern for the implementation of the MLE procedure. This is reflected in the histogram of the
residuals shown in Fig. 1, which is clearly negatively skewed.
As with all of the parametric frontier models, the first objective is to estimate the coefficients of the different
variables in order to obtain the structure of the production frontier. On the basis of checking the covariance
matrix of the input variables for the presence of multicollinearity (Greene, 1993, 1997), the significance of indi-
vidual estimates of the coefficients was assessed by applying the likelihood ratio statistic in a process of
18
16
14
Frequency
12
10
8
6
4
2
0
-1.49 -1.14 -0.78 -0.43 -0.08 0.27 0.63 More
Efficiency Component
Fig. 1. Skewness of the OLS residuals.

Table 4
Frontier production function of container terminalsa
Variables parameters OLS MLE
Half-normal Truncated normal Exponential Gamma
Constant 11.644 12.008 11.891 11.889 11.903
(60.917) (42.916) (17.802) (56.349) (27.713)
ln QG 0.791 0.787 0.797 0.797 0.797
(10.922) (10.497) (10.131) (11.087) (10.396)
ln YG 0.169 0.166 0.162 0.162 0.162
(3.976) (3.406) (3.404) (3.440) (3.437)
P2
m¼1 bm 0.96 0.953 0.959 0.959 0.959
l – – 99.080 – –
k – 1.176 13.049 0.647 0.649
rv – 0.371 0.380 0.380 0.379
ru – 0.436 4.954 0.246 0.246
r – 0.572 4.969 0.452 0.452
h – – – 4.069 4.270
P – – – – 1.105
Unrestricted log-likelihood function – 35.687 35.309 35.306 35.300
Restricted log-likelihood function – 80.010 79.934 80.012 79.354
LR – 88.646 89.25 89.412 88.108
a
t-ratios are shown in parentheses.
systematic elimination, starting from the full specification of the production frontier. Since the maximum like-
lihood method is a large-sample estimation procedure, an asymptotic test statistic is required. The likelihood
ratio test is one of the general large-sample tests based on MLE and has a v2 distribution with degrees of free-
dom equal to the number of restrictions imposed (Engle, 1984). Three input variables (TL, TA and SC) were
ultimately eliminated from the model. The final estimated coefficients for the reduced form of the model using
alternative approaches are, therefore, reported in Table 4. As an alternative approach to MLE, Ordinary
Least Squares (OLS) yields consistent estimates of the coefficients. It is interesting to point out that the MLEs
differ only marginally from the OLS estimates and each other.
The calculated likelihood ratio test statistics of 88.646, 89.25, 89.412 and 88.108 respectively correspond to
the assumptions of half-normal, truncated normal, exponential and gamma distributions. Although the expo-
nential model has the largest likelihood value, this is only marginally so. As such, without the possibility of
any a priori justification of a single, specific assumption to be imposed on the efficiency component, all of
the four assumptions (half-normal, truncated normal, exponential and gamma distributions) are examined.
The estimation of terminal efficiency is conducted using the LIMDEP 8.0 econometric software package. Be-
cause estimation procedures yield merely the residuals e rather than the inefficiency term u, as suggested by
Jondrow et al. (1982), the conditional expectation of uk, conditioned on the realised value of the error term
ek = (vk uk), was an estimator of uk. Finally, the technical efficiency is calculated by Uk = exp(uk).
Under each of the four assumed possible distributional forms for the inefficiency term in the model, the
efficiency of each terminal at different ports is reported in Table 5. It is clear from Table 5 that the efficiency
results differ significantly from each other. ANOVA reveals that F = 7.11, which is significant at the l% level
(with a critical value of 3.87). A SpearmanÕs rank order correlation coefficient between the efficiency rankings
derived from the four models with different distributional assumptions ranges from 0.98 to 1, indicating a high
level of consistency between model estimates.
5. Discussion: comparing empirical results
5.1. Efficiency estimates
Fig. 2 shows the efficiency distribution yielded by various non-parametric and parametric approaches, the
boxplot of which is taken from Tables 3 and 5. It is clear that the variation of efficiency scores across DMUs
Table 5
Efficiency estimates yielded by alternative SFA distributional assumptions
Port Port/terminal Half-normal Truncated normal Exponential Gamma
Hong Kong Hong Kong 0.8551 0.8555 0.7914 0.8327
HIT 0.8539 0.8543 0.7888 0.8376
MTL 0.8262 0.8267 0.7476 0.8129
Terminal 3 0.9098 0.9100 0.8769 0.9086
Cosco-HIT 0.8200 0.8206 0.7379 0.8292
Singapore Singapore 0.8755 0.8758 0.8233 0.8682
Busan Busan 0.7893 0.7899 0.7002 0.7882
Jasungdae 0.7245 0.7253 0.6265 0.6892
Shinsundae 0.7881 0.7888 0.6966 0.7830
Uam 0.7433 0.7442 0.6438 0.6970
Gamman_G 0.7233 0.7242 0.6226 0.6951
Gamman_Hanjin 0.8205 0.8212 0.7374 0.8033
Gamman_Hyundai 0.8283 0.8289 0.7483 0.8387
Gamman_K 0.7902 0.7909 0.6972 0.8025
Taiwan Kaohsiung 0.8821 0.8824 0.8341 0.8732
Shanghai Shanghai 0.8961 0.8963 0.8554 0.8813
Rotterdam Rotterdam 0.8192 0.8197 0.7407 0.8109
Home 0.8354 0.8359 0.7635 0.8408
Los Angeles Los Angeles 0.8122 0.8127 0.7314 0.8139
Shenzhen Shenzhen 0.8220 0.8226 0.7425 0.8136
Yantian 0.8482 0.8486 0.7795 0.8412
Shekou 0.7607 0.7615 0.6636 0.7562
Chiwan 0.7336 0.7345 0.6338 0.7081
Hamburg Hamburg 0.7844 0.7850 0.6968 0.7819
Burchardkai 0.8416 0.8421 0.7721 0.8417
Eurokai 0.8366 0.8371 0.7634 0.8256
TCT Tollerort 0.7413 0.7421 0.6457 0.6966
Unikai 0.5413 0.5421 0.4802 0.5274
Long Beach Long Beach 0.8389 0.8393 0.7682 0.8313
Antwerp Antwerp 0.6764 0.6771 0.5901 0.6614
Europe Terminal 0.8460 0.8465 0.7791 0.8523
Seaport 0.3071 0.3066 0.3404 0.3077
Noord Natie 0.6530 0.6538 0.5668 0.6262
Noordzee 0.7957 0.7964 0.7084 0.7815
Port Klang Port Klang 0.7561 0.7568 0.6613 0.7494
Klang Container 0.8515 0.8520 0.7867 0.8406
Klang Port 0.6886 0.6895 0.5924 0.6580
Dubai Dubai 0.8121 0.8127 0.7297 0.8249
New York/New Jersey New York/New Jersey 0.8329 0.8334 0.7620 0.8228
Bremen/Bremerhaven Bremen/Bremerhaven 0.8574 0.8578 0.7975 0.8597
Felixstowe Felixstowe 0.8284 0.8290 0.7509 0.7902
Manila Manila 0.7867 0.7874 0.6965 0.7753
South Habour 0.7290 0.7299 0.6307 0.7216
Manila International 0.7178 0.7186 0.6197 0.6844
Tokyo Tokyo 0.8241 0.8246 0.7459 0.8120
Qingdao Qingdao 0.8475 0.8479 0.7780 0.8560
Gioia Tauro Gioia Tauro 0.8930 0.8932 0.8523 0.8665
(continued on next page)
Table 5 (continued)
Port Port/terminal Half-normal Truncated normal Exponential Gamma
Yokohama Yokohama 0.6762 0.6770 0.5855 0.6601

Laem Chabang Laem Chabang 0.9089 0.9091 0.8760 0.8909
Tanjunk Priok Tanjunk Priok 0.8573 0.8577 0.7934 0.8553
Algeciras Algeciras 0.9038 0.9040 0.8675 0.8910
Kobe Kobe 0.6236 0.6242 0.5425 0.6061
Nagoya Nagoya 0.8335 0.8339 0.7620 0.8143
Kinjo Pier 0.6840 0.6849 0.5895 0.6598
NCB 0.8543 0.8547 0.7900 0.8448
Keelung Keelung 0.8557 0.8561 0.7946 0.8544
Colombo Colombo 0.7857 0.7864 0.6946 0.7763
Average 0.7900 0.7905 0.7157 0.7785
1.0
0.8
Efficiency (1='efficient')
0.6
0.4
0.2
0.0
N= 57 57 57 57 57 57
D
Ex
tr u
EA
EA
al
am
po
nc
f-N
-B
-C
at
ne
or
a
C
ed
C
nt
m
C
ia
N
al
l
or
m
al
Fig. 2. Comparison of efficiency estimates yielded by various approaches. *The median for each dataset is indicated by the black centre
line (i.e. where 50% of the data is above it and 50% below it). The first and third quartiles of the data are at the edges of the grey box where,
respectively, 25% of the data falls below it and 25% of the data is above it. The total length of the grey box is known as the inter-quartile
range (IQR). The extreme values (within 1.5 times the inter-quartile range from the upper or lower quartile) are the ends of the lines (or
whiskers) extending beyond the grey area. Points that lie at a greater distance from the median than 1.5 times the IQR are plotted
individually and may be regarded as outliers.
yielded by the SFA models is less than that from the DEA models. The DEA-CCR yields the lowest average
efficiency. It is clear that the variation of efficiency scores across DMUs yielded by the SFA models is less than
that from the DEA models. The DEA-CCR yields the lowest average efficiency. With the exception of the
model based upon the assumption of a half-normal distribution, the average efficiency estimates derived from
SFA yield higher efficiency scores than those from the DEA-BCC model. ANOVA reveals that F = 12.74 for
these six sets of efficiency, which is significant at the 1% level (the critical value is 3.07).
Table 6 reports the SpearmanÕs rank order correlation coefficient of different levels of efficiency calculated
by various models. The mostly high values of the coefficient indicate that these alternative approaches yield
rather similar estimates of efficiency in terms of the rankings of the firms under study and, as such, confirm
the findings of Bauer et al. (1998).
Table 6
SpearmanÕs rank order correlation coefficient
DEA-CCR DEA-BCC Half-normal Truncated normal Exponential Gamma
DEA-CCR 1
DEA-BCC 0.7985 1
Half-normal 0.7993 0.6393 1
Truncated-normal 0.7957 0.6382 1.0000 1
Exponential 0.8002 0.6437 0.9989 0.9989 1
Gamma 0.7851 0.6276 0.9772 0.9768 0.9779 1
This high degree of correlation between the efficiency estimates produced by the different techniques makes
it feasible to draw inferences from the results shown in Tables 3 and 5 which are largely independent of the
technique that has been employed to derive the efficiency estimates.
While frontier techniques do not identify the specific causes of why inefficiency should exist, the results they
provide do form the basis for the analysis of relationships between the estimated efficiency estimates and other
more structural characteristics. Typical of the sort of relationships that have received considerable attention
are those between technical efficiency and the extent of government deregulation of the industry under study
or the level of private-sector participation in the ownership and operation of industry entities. For applications
to ports see Liu (1995), Tongzon and Heng (2005), Song et al. (2001) and Cullinane et al. (2002). Other
applications to the broader transport sector may be found in Filippini and Prioni (1994), Oum and Yu
(1994), Adler and Golany (2001) and Pina and Torres (2001).
The raison dÕêtre for their proliferation is that the results of this form of efficiency analysis have the poten-
tial to inform government on the provision or implementation of appropriate incentives or policies for enhanc-
ing the competitiveness of ports for which it is responsible. Obviously, the ultimate objective would be to
reduce both the direct and indirect costs of trade that transits the port(s) in question and, thereby to raise
the economic welfare of citizens, whether this is at national, regional or municipal levels.
With the obvious exception of Singapore, the results obtained in this analysis imply that there is a tendency
for ports with greater private-sector participation to be more technically and scale efficient than those with
greater public sector involvement. Having said that, when the results are analysed with respect to the presence
within the sample ports or terminals that are dedicated to what are invariably private-sector container shipping
lines, there appears to be no evidence of any difference in technical or scale efficiency between ports that do or
do not adopt such a policy of devolving dedicated terminal operations. Rather than implying anything about
the relative merits of public vs. private-sector management, however, this may more realistically reflect the
comparative lack of managerial competence in container terminal operations amongst shipping lines and
the inevitable slack periods of inactivity associated with the dedicated terminal exclusively servicing a single
shipping line.
Another implication of the results achieved in the analysis herein is that gateway ports appear to exhibit
lower levels of technical and scale efficiency than ports that specialise in transhipment. This result is partially
explicable by the quasi-captive nature of gateway traffic that is sourced from or destined for well-defined hin-
terlands, as opposed to the footloose nature of transhipment traffic. Clearly, in the case of the latter, there
exists more of an incentive for increasing efficiency so as to enhance competitiveness in a competitive environ-
ment. In the case of the former, however, the rapid expansion and overlapping of hinterlands is fast eroding
the extent to which traffic can be assured (Cullinane and Khanna, 2000). By implication, this result also
implies a relationship between hub or feeder port status and technical and scale efficiency.
Related to this point, it is also important to recognise that the estimated efficiency estimates may also be a
function of the pressure or incentives that exist upon management in order to be efficient. Where resources are
less scarce, there is a likelihood of lower levels of efficiency. This goes some way to explain why city ports,
where land is at a premium, are invariably more efficient than where this is less of a constraint. Most partic-
ularly, in the study undertaken herein, the ports of the West Coast United States have emerged as extremely
efficient, both technically and in scale, even though it is well known that they face extreme problems of port
congestion. In other words, despite a surfeit of demand for the use of these ports, it would seem that every
effort is being made to service their customer base to the maximum of their ability.
Methods by which the management of ports or terminals can and should benchmark their activities and
operations should be consistent, objective and potentially applicable to all ports (Heaver, 1995). Using the
frontier approach to efficiency estimation, the management of ports or terminals that are deemed inefficient
can benchmark themselves against ports that are deduced to operate on the efficient frontier for the industry.
This benchmarking process can obviously be undertaken across as many characteristics that are relevant, and
for which the information required lies in the public domain. In addition, a sensitivity analysis in the case of
SFA, or an analysis of slacks and/or shadow prices in DEA, may be undertaken to determine what changes in
underlying factors can exert the greatest influence over the efficiency of any of the sample ports or terminals.
In other words, it is possible to determine which specific input and/or output variables are the sources of the
identified inefficiency.
Ports may also use the results from this sort of analysis to benchmark the performance of individual ter-
minals within their jurisdiction and this they can then relate to any number of characteristics of those termi-
nals (e.g. the level of private-sector participation in each, whether or not they are dedicated terminals, etc.).
The efficiency of a terminal within a port is a matter of concern to the management of any port authority,
especially since in most cases it is a government entity with wider objectives in terms of economic development
and social welfare. At the very least, the efficiency of an individual terminal within a port may impact upon the
nature of the contractual arrangements in which it might find itself. From the results derived from the analysis
presented in this paper, it is interesting to note that Hong Kong Terminal 3 emerges as the most efficient ter-
minal within the port and, perhaps not coincidentally, was recently the subject of a takeover battle between
PSA International and Dubai International Container Terminals.
The issue of scale of operation is problematic. Given the homogeneity of the container cargoes that con-
stitute the output variable within all the models tested herein, the analysis does allow the identification of
the relationship between scale and efficiency. It seems clear that economies of scale do exist in port operations.
Commensurate with this, ports with the largest throughput do tend to exhibit the greatest levels of technical
efficiency. However, the largest ports are not necessarily scale efficient, with significant container ports such as
Busan, Rotterdam and Shanghai all exhibiting below average scale efficiency. Ostensibly, this might seem to
suggest that appropriate management decision making on the utilisation of existing resources seems not to go
hand-in-hand with sound decisions on the timing and nature of infrastructure investment.
5.2. Economies of scale
Table 3 also reports the scale properties of port production yielded by DEA. Of the 57 terminals (ports), 13
show constant returns to scale, 10 show increasing returns to scale, and 34 show decreasing returns to scale.
Among those terminals (ports) found to be scale-inefficient, all except for one of the large ports (classified as
having annual container throughput of less than 1 million TEU) show decreasing returns to scale. On the
other hand, scale-inefficient terminals (ports) having annual container throughput of less than 1 million
TEU exhibit a mix of both increasing and decreasing returns to scale, but are almost four times as likely to
exhibit the former as the latter.
Although a rather arbitrary dichotomous classification of the sample has been made between large and
small ports on the basis of a cut-off throughput of 1 million TEU per annum, these results do suggest an asso-
ciation between large ports and decreasing returns to scale and between small ports and increasing returns to
scale. On the other hand, the proportions of large and small ports (or terminals) that exhibit constant returns
to scale comply almost perfectly with probabilistic expectation.
These findings are likely to be explained by a combination of the indivisible and lumpy nature of port
investment, the consequent commercial risks involved and the level of competition in the market. The sample
of large ports will probably have evolved as the result of successfully pursuing strategies aimed at attaining
container hub status. This would inevitably mean that these ports have, over the years, invested heavily in
expensive and evermore advanced equipment in order to attract new container shipping services to the port
and to enhance the technical efficiency of their operations.
Having achieved a certain level of operational scale, large ports are eventually faced with potential limits to
their further growth. The level of investment required to further enhance the design capacity of what is already
a large container port becomes very significant and may ultimately deter the port from taking the decision to
expand. There may even be physical constraints such as the unavailability of land to facilitate any further
expansion. At the very least, the decision to opt for further investment in throughput capacity is deferred until
such point that all potential sources of improved technical efficiency have been utilised.
What this has meant is that many large ports typically operate at, or quite often even beyond, the level of
throughput capacity for which existing facilities have been designed. With increasing concentration in the con-
tainer shipping industry and the formation of strategic alliances between them, container shipping companies
can exert considerable market power over the prices that ports or terminals are able to charge, especially where
competition within the locale is intense and/or where a particular shipping company or alliance of such com-
panies is dominant within a port or terminal. Hence, competition between ports is rife. In consequence, there is
very little opportunity for ports to avoid following this pattern if they wish to retain their competitiveness and
to maintain their hub port status.
At the other end of the scale continuum, ports with lower throughput levels are also likely to have the
objective of attaining or maintaining hub status. As implied above, this requires a certain minimum scale
of operation, however, whereby network connections between mainline and feeder services can be facilitated.
In consequence, small ports too are motivated to increase the scale of their operations. Since a larger scale of
operation invariably means greater network connectivity, this is particularly the case given the level of com-
petition in the market.
At the same time, small ports need not necessarily face any greater difficulty than large ports in gaining
access to the requisite capital resources to make major investments in infrastructure. This is especially so
given that the sums involved at this lower level of scale are also likely to be smaller. Hence, the risks asso-
ciated with such investments are concomitantly less, even though they bring about significant proportionate
growth in design capacity. Obviously, as is also the case with large ports, access to capital is even less of a
problem where national or regional economic or social considerations are at stake (such as, for example,
where local employment is an issue). Ports with lower levels of throughput are less likely to be faced with
physical constraints on their expansion, especially since the small port sample is almost certain to contain
new ports or terminals that are in the early stages of their evolution. On inspection of the samples, many
relatively newly developed terminals have indeed been classified as small in throughput terms. The corollary
of all this is that the throughput level of a small port is more likely to fall below design capacity than is the
case for their large port counterparts and, as such, the potential exists for benefiting from increasing returns
to scale. P
The scale properties yielded by SFA can be observed by examining the results of 2m¼1 bm , as reported in
Table 5. It is clear that all the sums of coefficients are less than one, indicating that port production generally
follows the law of decreasing returns to scale. However, it is also clear from Table 5 that the sums of coeffi-
cients corresponding to the assumptions of truncated
P2 normal, exponential and gamma distributions are rather
close to one. As such, the null hypothesis of m¼1 bm ¼ 1 should be examined. The likelihood ratio test sta-
tistics of 0.484, 0.386, 0.384 and 0.388, corresponding respectively to the assumptions of half-normal, trun-
cated normal, exponential and gamma distributions, arePnot significant at the 5% level (the critical value is
2
3.841). Thus, the null hypothesis that the coefficients m¼1 bm ¼ 1 cannot be rejected. Consequently, the
implied null hypothesis of constant returns to scale for container port production cannot be rejected according
to the findings from applying the SFA model under different distributional assumptions.
6. Conclusions
This study applies the two leading approaches to efficiency measurement, DEA and SFA, to the same data
set for the container port industry and compares the efficiency and scale properties derived from the two ap-
proaches. In the context of DEA analysis, the output-oriented frontiers are estimated under the specifications
of constant and variable returns to scale. Under the stochastic method, the efficiency measures are estimated
under the specification of a Cobb–Douglas production frontier. In the absence of any a priori justification for
the appropriateness of the assumptions imposed on the efficiency component, all of the four assumptions of
half-normal, truncated normal, exponential and gamma distributions are examined.
Given an assumption of constant returns to scale, DEA yields the lowest efficiency scores. On the other
hand, the estimated mean technical efficiency derived from applying the stochastic frontier under the assump-
tions of truncated normal, exponential and gamma distributions is larger than those obtained from the DEA
analyses under the assumption of variable returns to scale. This is in contrast to the mean technical efficiency
derived using SFA under the assumption of the half-normal distribution, since this yields a lower result than
its DEA counterpart under the assumption of variable returns to scale.
SpearmanÕs rank order correlation coefficient of the technical efficiency derived from applying the alterna-
tive DEA and SFA approaches ranges from 0.63 to 1.00, indicating that these, apparently alternative, ap-
proaches yield similar efficiency rankings. The hypothesis of constant returns to scale in the production
frontier for the industry could not be rejected when applying the stochastic frontier model. The application
of the same sort of hypothesis test to the results yielded by the application of the DEA model is not appro-
priate, however, as the mathematical programming nature of DEA means that the underlying model does not
possess any statistical assumptions or properties per se. Applying the DEA approach does, however, yield the
results that the terminals (ports) in the sample were found to exhibit a mix of decreasing, increasing and con-
stant returns to scale at current levels of output.
Although the major objective of this work is to compare the results obtained from applying the two main
alternative methodologies for the estimation of technical efficiency, such estimates can be employed for the
purpose of informing government ports policy (national, regional or urban) or management decision making,
either at the level of the port authority or by individual terminal operators.
In relation to the issue of regulation and the provision of state aids and incentives, these results on efficiency
might be used to determine the extent either of delegated decision making authority or of private-sector par-
ticipation in the ownership of ports or individual terminals within ports. As such, the results from an estima-
tion of technical efficiency such as that undertaken herein can supplement or even supplant the more standard
bases upon which public policy on incentives is typically based, for example financial indicators or simple mea-
sures of traffic, etc.
Irrespective of their inability to yield categorical evidence on this issue, it is precisely the evidence provided
by frontier studies on relative efficiency in other countries or industries and its relationship to private-sector
participation that may actually prompt governments to alter their national ports policy in order to facilitate
changes in the regulatory environment and to attract private-sector capital. A recent prime example of this has
been the shift in policy towards greater private-sector involvement within the Chinese ports sector, motivated
by the perceived benefits to its trade and economy (since port efficiency supports trade-oriented economic
development) and operationalised by changes to its rules on allowing Foreign Direct Investment (FDI) into
its strategically important ports sector (see Li et al., 2003).
A major problem to emerge from the results rests with the fact that in any capital-intensive industry,
the application of these frontier techniques, especially in a non-dynamic single-period, cross-sectional context,
may not be wholly appropriate to capturing multi-period optimisation, nor the very great levels of risk
associated with the industry and the size of investments that are required to engage, or compete successfully,
within it. It should also be recognised that the results from this analysis do not account for environmental
differences and any interpretation which relates to managerial competencies may, therefore, yield misleading
results.
All this suggests that a dynamic application of these frontier techniques, utilising panel data approaches,
may be more germane to ascertaining the relative efficiency levels of the international ports industry. In a dy-
namic context, technical efficiency can be separated not only from scale efficiency, but also from technological
take-up. Further improvements to the analysis could also be invoked by accounting for environmental or
instrumental variables which, in the context of the ports industry, would most usefully include geographical
location (as potentially proxied by accessibility to the major East-West trade lanes) and connectivity (as
measured by some function of the number, frequency and reach of the liner services that call at individual
ports).
In final conclusion and returning to the public policy agenda, assuming that promoting greater technical
efficiency is one of the objectives behind the imposition of port policies, a comparison of efficiency estimates
over time, interpreted as a lagged response to the implementation of specific public policies, may provide in-
sights into the efficacy of those policies. The perceived objectivity of such an evaluative process would high-
light those ports or terminals where greater impetus on the part of government, regulatory authority and
management, is required in securing improvements in technical efficiency.
Acknowledgements
The authors wish to acknowledge Hong Kong Polytechnic University for providing the funding (Project
No. G-T647) to support the research reported in this paper. The authors are grateful to an anonymous referee
for some very constructive suggestions for improving the paper and also to Prof. Phil Goodwin for contrib-
uting his usual wisdom, vision and insight to the further benefit of the paper.
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Transportation Research Part A 40 (2006) 354–374

The technical eﬃciency of container ports: Comparing

2. Methodology: DEA vs. SFA

2.1. Data envelopment analysis (DEA)

Formally, let inputs be xk ¼ ðx1k ; x2k ; . . . ; xMk Þ 2 RM N

2.2. Stochastic frontier analysis (SFA)

3.1. Deﬁnitions of input and output variables

3.2. Data collection

3.3. Deﬁnition of DEA and SFA models

4.1. Eﬃciency results derived from DEA models

Yokohama Yokohama 0.3541 0.3796 0.9328 Decreasing

4.2. Eﬃciency results derived from SFA models

Fig. 1. Skewness of the OLS residuals.

5. Discussion: comparing empirical results

5.1. Eﬃciency estimates

Yokohama Yokohama 0.6762 0.6770 0.5855 0.6601

5.2. Economies of scale

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