Short Sea Shipping: Practices, Opporutnities and Challenges

Short sea shipping is a concept that has as its genesis traditional coastal sea transport practices from ancient times. The early merchant vessels were small in cargo capacity and tended to sail within sight of the coastlines while moving goods and passengers from one sea port to another. Their schedules, owing to their dependency on the winds and tides, were flexible and thus their reliability was relatively low. Vessels and crews lost at sea were not an uncommon event.

During the many centuries that ensued, and especially during the past approximately two hundred years, coastal shipping evolved whereby larger vessels could carry increased cargo volumes as well as varied cargoes on a more fixed schedule. Advancing technological improvements increased safety. The merchant vessels became more fully integrated into their region’s economy.

With the advent of the automobile and truck leading to the development of national highway systems in many countries since the 1950s, coastal shipping entered a new phase, that of decline. The combination of governmental subsidies and reduced transit time for road transport had shifted cargo movement from water transport. Recently, increased road congestion; recognition of the extraordinary road construction and maintenance expenses; and technological advances of containerization and cargo handling have lead many to view coastal shipping, in its new incarnation as short sea shipping, an attractive complement to road and rail transport.

Dr. Gary A. Lombardo serves as an Assistant Academic Dean at the United States Merchant Marine Academy. He is the Founding Director of the Center for Maritime Studies and a Professor of Maritime Business. His academic and professional interests include international business, corporate strategy and corporate finance. He has served as a dean during two prior academic appointments. Dr. Lombardo has lived and worked in Europe and Asia. He has been invited to deliver numerous seminars and speeches; and has written more than seventy articles, book chapters and book reviews. Additionally, Dr. Lombardo has served as a business consultant and is a Foreign Expert invited to present lectures at various universities throughout the People’s Republic of China.

This white paper will examine short sea shipping by offering a series of definitions to describe the concept. The paper will then report on short sea shipping’s evolving practice in the European Union and discuss its opportunities for both the United States domestic and international markets. A conceptual model to describe increased short sea shipping competitiveness will be offered. The paper will conclude with commentary concerning what needs to be done for short sea shipping to develop in the United States.

One concise, unambiguous definition of short sea shipping does not exist. The concept has been defined in various ways. Short sea shipping has been defined:

An alternative definition is that short sea shipping encompasses maritime transport between the ports of a nation as well as between a nation’s ports and the ports of adjacent countries.^[4] Non-generic definitions are also offered that situate short sea shipping within a region.^[5] Musso and Marchese offer the definitions of numerous other authors that, in their entirety, provide a comprehensive view of the phenomenon; but a lack of consensus about its definition.^[6] This condition does not point to merely a semantic confusion; but rather the inability to analyze short sea shipping universally in such a way as to develop public policy initiatives and understand the market conditions essential for commercial success.

Short sea shipping is developing within the context of national and international transportation systems; primarily as a non-deep sea complementary segment to truck and rail transport. Thus, its importance increases as it finds itself at the nexus of a seamless intermodal transportation system that enjoys efficient cargo handling at each node. Short sea shipping is a beneficiary of technological advances related to the vessels it uses and the congested and increasingly costly land transport of goods. A fundamental question as to its viability does exist, “Can short sea shipping survive without extensive government subsidies?”

The European perspective concerning short sea shipping has been developed based upon considerable practice and study during the past approximately twenty or so years. A cursory examination of a European map leads one to understand the potential extensive reach of a comprehensive international short sea shipping network. The following map indicates short sea shipping trade routes in Europe; and selected short sea shipping trade routes are identified in the following table.^[7]

In 2000, short sea shipping accounted for approximately 41%, and road transport for approximately 45%, of ton-kilometers for cargo movement within the European Union (EU). However, short sea shipping accounted for only 6% of total tonnage movement within the EU, compared to 80% for road transport, given that the sea mode is used typically for longer distances. Short sea shipping accounted for about 70% of the cargo movement, measured in ton-kilometers, beyond its borders. The fact remains that although the sector is growing in size and importance; its growth rate and resultant market share is reportedly less than that of road transport. Road transport registered market shares of approximately 45% and 40% during 2000 and 1993 respectively.^[8] Although varying statistics are reported from multiple sources; which create challenges when attempting to reconcile the data, the reader is provided an insight as to the evolving market for short sea shipping compared to road transport.

The growth of short sea shipping is consistent with the goals of the European Commission as expressed in a number of forums and documents over an extended period of time.^[9] The promotion of greater short sea shipping appears to be a continued expression of the Commission. Its research findings^[10] indicate that short sea shipping is:

environmentally safe in terms of producing less carbon dioxide compared to other modes of transport;
perceptually lacking in terms of its image to provide door-to-door service;
an administratively complex transport mode requiring varying administrative procedures across different European Union member states; and
harmed by port inefficiencies and port service providers’ relative inflexibility.

The difficulties expressed above have resulted in the European Commission’s resolutions to:

sponsor exercises to identify bottlenecks, potential solutions and best practices;
change perceptions of short sea shipping from that of a port-to-port service to one of door-to-door intermodality;
harmonize administrative and documentary procedures both across states and provinces within a nation as well as across nations; and
enhance port efficiency and operations.

Short sea shipping has experienced a decline in freight rates due to the intense competition of road and rail transport. The resultant reduced profitability is a serious strategic concern in capital intensive companies planning for growth. This concern is highlighted by the European Commission’s view that short sea shipping should be enhanced to:

achieve environmental goals as outlined in the Kyoto Protocol of the 1990s;
promote transport safety and sustainability;
strengthen relationships among European Union member states and between member states and non-member European states; and
meet current and future economic growth demands.

Thus, we find that the European Commission, in a number of documents,has expressed its view that short sea shipping is a key factor in the drive for economic cohesion within Europe.

Opportunities

A successful short sea shipping program offers an opportunity to add value to a national or international transportation network and, thus, increase the affected economy’s efficiency and ultimately the societal standard of living. These benefits will accrue when the short sea shipping program addresses the myriad issues inherent in the transportation infrastructure network.

U.S. Domestic Market

The characteristics found in the transportation network for the U.S. domestic market are similar to that of other domestic markets found in nations with advanced economies as well as in the international transportation networks where at least one member nation has an advanced economy.

Most developed nations rely on a national highway system to carry cargo. Due to the fact that annual freight movement increases far surpass that of annual highway mileage construction, highway congestion has become a significant problem. Highway congestion is apparent in terms of the increased travel time necessary to make a journey. Highway travel time also increases the social welfare cost due to resultant inefficiencies. Freight movement inefficiencies are projected to increase dramatically as US highways “. . . experienced a doubling of vehicle miles traveled in the past twenty years while the total highway mileage has only increased by 1%.”^[11] This general trend is expected to continue.

Most nations rely on a cabotage policy. In the United States, the Jones Act requires all vessels operating between US ports to be domestically built, owned, operated, and staffed. Many privately owned domestic shipyards in the United States operate with high cost structures, thus building vessels that are not always competitively priced. An extensive domestic short sea shipping network will require a tremendous fleet build-up and the shipyard costs of construction will be a competitive issue.

In addition to vessel construction costs, short sea shipping is dependent on achieving a competitive cost structure to vie with trucking and rail for the shippers’ contracts. One cost consideration is the requisite upgrading of port and terminal facilities currently geared for deep sea merchant vessels; not the needs of smaller short sea shipping vessels. Longshore labor rates are another factor that may cause increased costs for cargo shipped via short sea vessels. Further, the Harbor Maintenance Tax, as currently configured, will add to the cargo transportation costs for shippers selecting the short sea network. The tax is an ad valorem charge on exports, imports, other shipments, and passenger transportation involving use of a harbor.

Finally, as in all development projects, standards in the early stage have yet to emerge. Revenue and cost projections dominate data developed based upon actual experience. Strategic decision making is guided by modeling and forecasting rather than short sea shipping experience. Competitive advantages may possibly accrue to those successful organizations that first develop short sea shipping as a commercially viable enterprise and enter the various market segments. However, the firms that are the first in the market may enjoy potentially high rewards; but correspondingly high risks. If they are unsuccessful they may potentially push their organizations into bankruptcy.

MARAD has taken the lead public policy role and dedicated substantial effort during approximately the past three years to understand and educate key personnel in the transportation sector about the short sea shipping potential. The government agency hosted its second annual Short Sea Shipping Conference during November 2003 to advance the discussion by interested transportation and maritime executives, governmental officials and foreign dignitaries. The Conference included a breakout session, “Obstacles and Solution Strategies for Effective Short Sea Shipping (SSS) in the Western Hemisphere.” The objective of the session was to identify and propose specific solutions to the major obstacles impeding SSS implementation and growth along coastal routes, between coastal ports, along navigable rivers and across the Great Lakes. Participants represented consulting groups; engineering/design firms; federal, state and local government agencies; port authorities; shippers; shipyards; terminal operators; and vessel operators. Their candid remarks contributed greatly to the discussion that took place. Three obstacles were identified and discussed^[12] during the session:

Obstacle #1: A Lack of Awareness. The session participants suggested that three equally important and critical activities will build awareness. Increased coordination and prioritization are needed among local, state and provincial authorities in Canada, Mexico and the United States. A greater understanding of the complementary interests and relationships among the various transportation nodes is needed. Further, increased knowledge about the costs of short sea shipping is needed. Participants recommended that increased education and outreach to governmental leaders, organized labor, and the general public were essential as well as increased participation in shipper organizations to make short sea shipping’s beneficial aspects known. Advocacy, R&D, outreach materials and research study cost categories were identified.

Obstacle #2: The Need for Competitive Shoreside and Port Capital Costs. Four equally weighted solutions were recommended to overcome this obstacle: 1) identification of short sea shipping costs and assessment of these costs in relation to other transportation modes; 2) reduction of both operational costs and the Harbor Maintenance Tax burden; 3) public and/or private investment for shoreside infrastructure; and 4) extension of loan guarantees. The expected benefit would be to reduce costs to make short sea shipping competitive with alternative transportation modes. R&D and tax policy cost categories were identified.

Obstacle #3: Increased Public Funding Needed to Complement Private Investment. A series of four equally important recommendations were offered: 1) gain initial support for vessel construction; 2) secure funding for start-up costs; 3) receive funding for inland waterway and landside improvements; and 4) use existing Harbor Maintenance Tax infrastructure fund balances to support short sea shipping initiatives. Expected benefits include public transportation improvements, highway congestion relief, environmental and health and welfare benefits and the growth in the short sea shipping industry with a commensurate increase in employment. Vessel, start-up, facility and infrastructure cost categories were identified.

U.S. International Market

MARAD, undaunted by the potential obstacles, advocates the development of an international short sea shipping network to complement the emerging domestic network. The U.S. is pursuing the development of a distinct international short sea shipping network with Canada and Mexico. To this end, the three countries signed a Memorandum of Cooperation during November 2003 to . . . “collaborate and cooperate with each other in sharing knowledge and information on Short Sea Shipping . . . “ and . . . “to aid in each other’s efforts to promote the concept of Short Sea Shipping . . . “.^[13] In addition, the United States, the Gulf of Mexico States Accord and the Gulf of Mexico States Partnership signed a Memorandum of Cooperation during November 2003 to “ . . . address the common goals of advancing short sea shipping . . . “.^[14]

Challenges:

Two interrelated challenges exist: one, to master an understanding of the short sea shipping concept and two, to develop short sea shipping as an efficient and effective complement to the existing transportation system. The conceptual model is offered to focus discussion and eventually enhance understanding concerning the short sea shipping concept as a commercially viable enterprise.

The challenge is to develop the appropriate commercially viable business model for short sea shipping in the Western Hemisphere and an enhanced business model for Europe. This challenge must meet the inflexible demand of time sensitivity in a just-in-time commercial environment. The fundamental issue of freight mobility to satisfy the market place must be addressed by the short sea shipping business model.

The critical success factor for adopting the short sea shipping concept is that it must facilitate cargo movement as an inexpensive, seamless component of an integrated, intermodal transportation system. This business model must also overcome the tyranny of current practices which heighten resistance to change.

Advocates of short sea shipping in the United States need to move beyond the discussion stage. The next stage requires applied research to develop short sea shipping’s commercially viable feasibility. Short sea shipping should investigate opportunities to gain market share, initially at the expense of current profits. If the business model is sufficiently attractive, the profits will flow during the subsequent time periods. Advocates are deluding themselves to think that short sea shipping will be profitable at its introduction stage. This tension between striving for market share or profitability is faced by virtually all entrepreneurs who are involved in business start-ups. The general rule is that profitability will ensue after sufficient market share is gained. The lack of scale economies and experience at the enterprise’s onset detract from its ability to earn a profit. The importance of strategic planning, effective budgeting, and milestone development is paramount. Responsible maritime professionals are the ones to make short sea shipping a reality in the Western Hemisphere and a larger presence in Europe.

Please consider this white paper as a continuum in this subject area, succeeding white papers will address common issues and address them with common solutions. We encourage our readers to direct any specific questions or comments to papers@transportgistics.com.

[2]The views expressed in this article are those of the author and do not necessarily represent the views of the United States Merchant Marine Academy, the Maritime Administration, the Department of Transportation nor any other U.S. Government agency, or TransportGistics, Inc.

[3]The United States Department of Transportation’s Maritime Administration (MARAD), (http://intramarad.dot.gov/internetsite/Programs/sssbroc.htm; December 4, 2003).

[4]Balduini, G. (1982): “Short-Sea Shipping in the economy of inland transport in Europe: Italy” (paper presented at the ECMT, Gothenburg, 1-2 April).

[5]Marlow, P.B., S.J. Pettit; and A. D. Scorza (1997): “Short Sea Shipping in Europe: Analysis of the UK and Italian Markets” (Department of Maritime Studies and International Transport, University of Wales, Cardiff). Peeters C., A. Verbeke, E. Declercq, and N. Wijnolst (1995): Analysis of the competitive position of short sea shipping. Delft University Press.

[6]Musso, E. and U. Marchese (2002): Chapter 13, Economics of Short Sea Shipping, in The Handbook of Maritime Economics and Business, Grammenos, C. T. (editor), LLP, London.

[7]Author’s note: the map and selected short sea shipping trade routes are provided courtesy of Dr. Walter Vassallo, Transport Economist, AMRIE, The Alliance of Maritime Regional Interests in Europe.

[8]Author’s note: three representative sources are provided for the reader’s review: 1) Commission of the European Community (September 2001): “White Paper on European transport policy for 2010: time to decide.” 2) Eurostat. 3) Commission of the European Community. Communication from the Commission (April 2003): “Programme for the Promotion of Short Sea Shipping.”

[9]Three Communications of the Commission of the European Communities dated 1995, 1999 and 2003 address short sea shipping issues.

[10]Commission of the European Community (1992): “White Paper on Common Transport Policy.” Commission of the European Community (1995): “Commission Communication.” Commission of the European Community (1997): “Green Paper on Sea Ports and Maritime Infrastructure.” Commission of the European Community (1999): “Communication on Short Sea Shipping.” Commission of the European Community (September 2001): “White Paper on European transport policy for 2010: time to decide.”

[11]National Chamber Foundation (2003): “Trade and Transportation – A Study of North American Port and Intermodal Systems, p. 3.

[12]Lombardo, G. A. (2004): “Short Sea Shipping: Planning for its Future in the Western Hemisphere.” Guest Editorial in World Wide Shipping. February/March, pp. 30-31.

[13]Memorandum of Cooperation on Sharing Short Sea Shipping Information and Experience between the Transportation Authorities of the United States of America, Canada and Mexico, signed November 2003, at the 2^nd Annual Short Sea Shipping Conference, hosted by the United States Maritime Administration, Sarasota, Florida.

[14]Memorandum of Cooperation among the Maritime Administration of the United States, the Gulf of Mexico States Accord, and the Gulf of Mexico States Partnership, Inc., signed November 2003, at the 2^nd Annual Short Sea Shipping Conference, hosted by the United States Maritime Administration, Sarasota, Florida.

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