Chairman Your ref

Head Office Our ref DER5901/L008

Port Qasim Authority
Bin Qasim 25 November 2022
Karachi 75020

Dear Mr Chairman,

Discussion – Economy of Scale in Shipping and potential benefits for Pakistan

It was a pleasure to meet you in Karachi last month and take the opportunity to discuss with you our thoughts
and observations on the question of ‘Economy of Scale’ in shipping and how this relates to our previously
completed channel feasibility study in 2018.

As requested, we (including our esteemed local partners, TCI) have prepared a briefing document summarising
the discussion and thoughts we shared with you and your team at the meeting on 03 November 2022. Please
see Annex 1.

It is our view that an initial course of action for PQA is to invest in the current channel infrastructure, through
the clearance of the existing maintenance dredging back-log, upgrading of Aids to Navigation, VTMS, support
craft and pilot training. It is our view that in the short to medium term, such investments will increase the
operational efficiency of the port with lower capital outlay than an immediate investment in a wider channel to
cope with ‘Economy of Scale’ vessels. This will also improve the accessibility (draught) to the port. In review
of the maintenance back-log, PQA may also take the opportunity to deepen the existing channel to allow
vessels with increased draught to access the port. The options for deepening (and widening) the existing
channel are explored at length in our relevant study report from 2018.

HR Wallingford Ltd, Howbery Park, Wallingford, Oxfordshire OX10 8BA, United Kingdom
Tel +44 (0)1491 835381 Fax +44 (0)1491 832233 www.hrwallingford.com
Registered in England No. 2562099. HR Wallingford Ltd is a wholly owned subsidiary of HR Wallingford Group Ltd.
 Page 2

Our channel feasibility study was completed, in accordance with the prescribed study Terms of Reference,
including necessary completion of the PC-1 document (please see Appendix F of PC-1). The question of the
wider economic impact of introducing significantly larger ships (particularly container vessels) at Port Qasim is
clearly beyond the original scope of the study, and would require specialist input from an experience Macro
Economist, Port Economist or similar not originally identified in the Terms of Reference.

Accordingly, we suggest that a route forwards for PQA, if there is a need to determine the wider-scale economic
impact of such a project on Pakistan’s national economy, is to commission such a study that undertakes a
detailed market assessment and feeds that analysis into a economic and financial assessment at a macro
(country) economic level.

The outputs of such a study will be useful for PQA in revisiting its own masterplan, which was last revised
some 20 years ago.

I trust that the discussions held and views shared on the considerations around ‘Economy of Scale’ in shipping
were useful to you and your technical team.

Yours faithfully

Mr David Middlemiss

Regional Manager – HR Wallingford

cc Techno-Consult International

Annex 1 – Requested briefing note

Potential impacts of PQA’s Channel Improvements on
Pakistan’s economy

Prospects of Channel Deepening to allow Economy of

Scale
Context and purpose
The following briefing paper is a general discussion on development concerns with regards to:

1. The potential impacts of PQA’s Channel Improvements on Pakistan’s economy

2. Prospects of Channel Deepening to allow Economy of Scale

As PQA’s Consultant for the 2018 channel deepening study carried out three years ago, PQA sought
the Consultant’s views with respect to the wider impact of the possible deepening and widening of
the PQ channel.

Therefore, the purpose of this paper, prepared at PQA’s request and in continuation of the strong
professional relationship between the organisations, is to share the Consultant’s views, knowledge
and understanding with respect to the above points. The paper seeks to make no specific
recommendations or assertions, and arises from discussion between HR Wallingford, TCI and PQA.

It is important to note at this point, the 2018 study recommended investment in the existing channel
prior to undertaking capital dredging for alternate / additional channels. This investment could take
the form of clearing the back log of maintenance dredging, improvements to Aids to Navigation, and
additional training for PQA pilots to enable improved night time navigation and handling of larger
vessels.

The implications of any macro-scale economic analysis due to the arrival of large ‘Economy of Scale’
ships or existing ships with deeper draft and associated reductions to Pakistan’s freight bill was
beyond the scope of the original study. Deriving any inferences as regards to impacts to national
economy from 2018 Study would be a contradiction of the scope and findings as they were confined
to a specific design vessel as opposed to a range of vessels.
Consultants therefore did not go beyond their zone of expertise as the TOR was clear in its objective
and focussed on channel dimensioning for a specific vessel, further the TOR had no provisions for
a financial / economic expert.

It is suggested that a separate economic and financial based study is therefore required to examine
greater impacts to Pakistan’s national economy which considers the transition of PQA channel, port
and associated logistics to accommodate ‘Economy of Scale’ vessels in future.

Background – 2018 Study

The study completed in 2018 by HR Wallingford and TCI met with the requirements set out by PQA
in the Study ToR.

Two critical aspects were considered early on in the study, to inform:

1. The need for an additional channel

2. The dimensions of the channel required, including expansion of the existing channel.

First, an estimate of the existing channel capacity was made, to determine the requirement for an
additional channel. The analysis performed indicated that the channel is not at capacity, and based
on expected trends in vessel calls it is unlikely to reach capacity for the next 15 years or so. (Figure
1).

Therefore, the driver for an increase in channel size is due consideration of expected trends in
shipping technology.
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Figure 1 – Present channel capacity and expected trends in vessel calls.

Considering present and anticipated future trends in shipping technology and vessel usage, a design
vessel of 400m LOA, 59m Beam and 15.5m draught was specified. This size of vessel, in terms of
TEU, is shown on Figure 2.

The maximum size of container vessels has increased dramatically over time, the average size of
container vessels within the world fleet has also increased significantly, to order 4,500 TEU.

The ‘trickledown’ effect of increase in mean size of container vessels on to secondary shipping routes
should not be ignored as this will impact on smaller ports not on mainline routes.

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Figure 2 – Development of Container Vessel capacity through time

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Example effects of ‘Economy of Scale (EoS)
Economy of scale is offered by the use of larger vessels, for example, analysis offered by
Germanischer Lloyd indicates an order 25% reduction in freight costs over a specific route for an
18,000TEU vessel compared to a 6,000TEU vessel (Figure 3).

Figure 3 – USD cost per TEU by vessel capacity for a specific transport route.

It is well recognized that such information on savings in vessel operating costs and overall shipping
cost remains proprietary information. How much of the savings are passed on to Pakistani trading
customers remains at behest of the shipping line. Shipping lines will determine transport fees based
on internal model against equipment, fuel and crew costs PLUS port handling costs and commercial
considerations (competitiveness). The latter is for PQA to determine as this forms part of the recent
feedback on freight charges obtained from stakeholders. However, it seems logical that in most
cases larger vessels will reduce overall transport cost per TEU.

References consulted on Maritime Shipping Economics have indicated that determination of freight
rates by shipping lines are (a) very sensitive to balances in supply and demand and (b) they also
rely on competitiveness of the route and commercial desirability. [Ref: 1., 2.]

The savings offered by an increase in vessel size, are offset by the requirement to invest (Capital
and Maintenance) heavily to provide a navigation channel, deepened berths, and associated
infrastructure (quay wall structures, cranes and backup area and transport methods and routes) at
Port Qasim to safely and productively accommodate this much larger vessels.

At the present time the need for bringing in larger vessels (aimed towards ‘EoS’) is indicated by less
than a handful customers at PQA. The entire investment in additional deepening of channel may not
be affordable for such a few customers.

An example is Pakistan Deep Water Container Port (PDWCP) or South Wharf as it is now called
within Karachi Port. The facility offers 18 m channel and deep berth capability alongside, one of
deepest facilities of this type in Pakistan. However, at present this facility is underutilised, despite
the facility being operated by a private entity, SAPT (Hutchison group).

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The specific cost recovery model applied by PQA is unknown, but likely includes vessel charges,
pilotage charge, TEU handling charge etc. With larger EoS vessels, the number of vessels need to
visit for the same TEU throughput becomes lower. Hence, fees do not always go up, as initially the
shipping technology may change more quickly than an increase in demand, the total number of
vessel calls reduces. However, over time as the capacity is significantly increased and total
throughput increases and fee recovery increases, as the throughput responds to economic growth.

PQA channel is not short of capacity, increasing the size of which unlikely to increase the number of
vessels calling directly. This is driven by market demand. However, deepening the existing channel
will allow more heavily loaded ships to access the existing facilities it is understood that the current
container terminal operators would benefit from an increase in maximum allowable draught and
larger tidal windows. Deepening the existing channel will first increase the partial loads to full loads
on vessels, then moving on to further widening to allow bigger vessels once it is established the
shipping lines have an appetite for this. Widening the channel will allow shipping lines more flexibility
(and greater range in size) of vessels calling at the port. However, vessel calls remain closely related
to growth in throughput.

Capital dredging costs need to be balanced against this change in revenue model. This requires
further insight into the shipping regime.

A more holistic view shown in figure 4 below demonstrates that like other forms of transportation,
container shipping benefits from economies of scale in maritime shipping, transshipment and inland
transportation. The rationale of maritime container shipping companies to have larger ships becomes
obvious when the benefits, in terms of lower costs per TEU, increase with the capacity of ships.

There is thus a powerful trend to increase the size of ships, but this may lead to diseconomies to
other components of container shipping. For port terminals the growth in ship capacity comes with
increasing problems to cope with large amounts of containers to be transshipped over short periods
of time as shipping companies want to reduce their port time as much as possible (improved ship
asset utilization and keeping up with schedule integrity). Larger cranes and larger quantities of land
for container operations, namely temporary warehousing on container yards, may become
prohibitive, triggering diseconomies of scale to be assumed by port authorities and terminal
operators.

For inland transportation congestion growing capacity, such as more trucks converging towards
terminal gates, leads to diseconomies. Because of technical innovations and functional changes in
inland transportation, such as using rail instead of trucking to move containers from or to terminals,
it is unclear what is the effective capacity beyond which diseconomies of scale are achieved. [Ref: 3.]

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Figure 4 – Effect of vessel size on economy of scale according to operating model (Ref.3).

To get a feel of the sensitivity of EoS in shipping, an example in this respect would not be out of
place to mention:

With regards to cost assumptions, assuming that larger vessels do create cost savings on overall
consumer and transport costs for Pakistan, at an example rate of 5%, or by respected Chairman’s
calculations order $113 m USD based on Pakistan’s current national shipping freight bill.

This saving will not be realised instantaneously. In reality things will ramp up as shipping lines modify
the vessels call, throughput of the port adjusts and revenue models are applied to the change in
vessel regime.

Hence, proper economic evaluation is required to support the above hypothesis.

The following table shows a comparison of merits and demerits of having an Economy of Scale
channel vs. Nominal Economy of Scale Channel (2018 study)

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 Further Deepening for Economy of Scale Vessels Draight 15.5m (outer 20.2 m inner 17 m)
Pros Cons

Only FOTCO, QICT, PIBT & LNG terminal qualify for deepening to
Increased potential shipping efficiency & savings to shipping
EOS levels. However Pakistan's economy must match these trade
line, better likely hood to pass on to Pakistan shipping market.
values.

Increased potential earnings through royalty payment and port Pakistan Economy has to match the trade throughputs required
charges to PQA due due to higher volume of TEU's exchanged. for EoS Vessels

PQA will work its way towards becoming a 'Competitive Port' in Economy of Scale vessels preferred over long shipping routes
region such as trans-Pacific & trans-Atlantic

Increased potential for Transshipment becomes high for PQA

Decreased Port Charges due to less ship calls owing to EoS

Very High investment & Time to improve PQA infrastructure of

berths and channel

Very high capital costs & high maintenance costs to maintain

deepened channel to meet draught of EoS vessels

Major Problem: Non-Availability of Deep berths & wide cranes to

allow EOS vessels to be tied alongside

Nominal Economy of Size Deepening as per TOR Design Vessel (outer 18.2m inner 15.4m)

Pros Cons

Many terminals will reap benefits of channel improvements,

PQA increases competitiveness and there is some degree of
future proofing.

Most berths will be capable to handle draught. PQA must afford deepening project for base case dredging

More vessel calls & higher revenues from Port charges & high
cargo volume throughputs.
For Design vessel dredging PQA can avail No waiting time and
24/7 port. There is an increase in effciency, as the same vessels
that are currently depth restircted can come in at deeper
draught.
Easy shifting from Paramax to Post Panamax class therefore
only nominal freight decrease.

Relatively less capital & maintenance dredging.

Higher chances of attracting vessels on short shipping routes.

Transhipment potential may be increased

Pak economy will have to match these throughput values

One potential way of incentivising the shipping lines in to passing on the savings attributable to EoS
in Pakistan shipping bill is by incentivising the port facilities. These include providing land for
construction of Off Dock terminal easily linked to national highway and rail networks, promoting block
chain concepts. Offering other intermodal facilities at port may attract larger volumes and may steer
towards Economy of Scale type ships.

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Its not only in Port Qasim, but other ports like KPT and Gwadar as well. The federal government
should regulate this aspect through a Policy Package for all ports. For e.g., slight decrease in
royalties or port dues may compel ship transport companies to offer / pass on the savings due to
EoS in Pakistan shipping bill.

To enable PQA channel to receive Economy of Scale vessels, the channel has to be deepened and
widened from its present state. The 2018 study provided options for a staged development program
in acknowledgement of the likely steady growth of the port through time, and is cognisant of the need
to consider future shipping design and size.

QICT/DP World, FOTCO PIBT and LNG terminals are prime candidates for upgrading to large size
vessels to promote EoS, it is suggested that PQA hold discussions with these entities to discuss the
mechanisms fund improvements to the channel for deeper draught vessels, a first step towards
Economy of Scale.

Suggestions for development of PQ to facilitate move

towards ‘EoS’ vessels
1. By policy any further development in quay side works and other associated infrastructure
improvements should consider future growth particularly economy of scale in shipping,
incentivise downstream operational prospects with a view to promote inter modal
operations and better connectivity.
2. Initiate discussions with major terminal operators qualifying for EoS vessels to become
stakeholders / partners under PPPP model in improving channel and port infrastructures.
Master Plan should chalk out a course of development bearing Economy of Scale vessel
capability and improvements to port’s infrastructure.
3. Introduce a Hybrid Solution (first step toward EoS):

PQA needs to make itself attractive to global shipping lines in the future – an approach
such accommodating ULCS is key – ships are not getting smaller, particularly container
vessels primarily in a timeframe of say over the next 5 to 10 years:

a. Remove existing maintenance back log and deepen the existing channel to facility same
class of vessels at fully loaded draught. This will likely maximise revenues for the port
authority and reduce overall transport costs.

b. Consider a programme of upgrading the existing channel to facilitate full night time
operations, pilot training and improved Aids to Navigation etc. This will reduce the capital
investment required whilst improving the operability of the channel – specifically, reduce
the need for an alternate channel by reducing separation distances between cargo and
LNG vessels. This offers a better rate of return on a short-term dredging project.

c. Engage with a full market assessment including PSAA, Freight and shipping line
operators, and wider economic and financial assessment to determine wider (National)
economic benefits of larger channel as studied by HR Wallingford and TCI in 2018 study.

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Determination of wider benefits of ‘Economy of Scale’
vessels and implications for PQA
To identify the benefits and disbenefits to the Pakistan Economy of larger vessels accessing Port
Qasim, beyond immediate impacts to PQA’s revenues and costs as considered in the 2018 project
PC-1 form, it is suggested that the following is considered by PQA:

1. A detailed market evaluation, financial and economic specific forecast study is undertaken to
evaluate growth and change in the cargoes at Port Qasim. This will require input from a
specialist team of economists and port operations experts. The results of the study will
identify the wide-scale impacts and wide scale economic viability of commissioning a channel
to accommodate ‘Economy of Scale’ vessels, such as ULCSs.

2. The existing port master plan, developed in 2000, is reviewed and aligned with the outputs
from the above study along with current thinking in terms of shipping technology,
development in terminal operation, port spatial requirements and hinterland and connectivity
requirements.

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References:
1. Port Economics by Wayne K. Talley who is the Frederick W. Beazley Professor of Economics and Executive Director of the
Maritime Institute at Old Dominion University, Norfolk, Virginia, USA. First published 2009 by Routledge Part of Taylor & Francis
Group, 2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN United Kingdom
2. Maritime Economics by Martin Stopford, Third edition published 2009 by Routledge Part of Taylor & Francis Group, 2 Park
Square, Milton Park, Abingdon, Oxon OX14 4RN
3. Blog The World of Shipping SCM Logistics. Source: Hostra Edu Thursday, 22 September 2016 PAPER On DISECONOMIES
OF SCALE IN CONTAINER SHIPPING Article Posted by Raghunandan Ramachandran professional from Shipping & Logistics
industry

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