The scale of operation, profitability based productivity and capacity utilization in seaports, the case study based on the Colombo Seaport in Sri Lanka, 1980-2005

Abstract

The Sri Lanka (formerly Ceylon), an island nation, is strategically located in the South Asian main sea routes as a gateway to the Far-East, the Middle-East, Europe, Africa and Australia. This supreme strategic hub location created commendable achievements in seaports in different magnitudes over time. More specifically, after 1977 economic policy reforms, the Colombo seaport has earned the reputation as the best managed and the most efficient hub port in the South Asia and the major transshipment center in the Indian Ocean. This success further strengthened by the liberalization of shipping in 1990 which was the land mark of changing the fundamentals of the Sri Lankan shipping and ports related activities. In terms of future prospects of transshipment activities in South Asia, it can be estimated that, with the size of vessels growing in the main routes and economic booms in India and China, there will be a concentration of transshipment activities on a very limited number of strategically located hub ports equipped to cope with future generation of vessels requirements and ensuring excellent operation conditions. Therefore it is obvious that the Colombo’s qualifications are deemed fit to become one of these major hub in the South Asia. In this context, the recent growth of the Colombo seaport is analyzed by using production function, profitability and capacity utilization approach to get more insights into the seaport operation and to find the possibilities for further expansion. This new approach may overcome the potential problems of port impact and cost benefits studies. First this study conclude that the analysis based on the Cobb-Douglas production function has shown that the operation of the Colombo seaport is an increasing return to scale during the recent past. The returns to scale depends to a larger extent upon changing demand for seaport services and corresponding development to cope with this demand. In view of the rapidly rising tonnage handled and the other services provided for ships and the related other business activities by the Colombo seaport after the 1977 policy reforms has reasonable evidences to find increasing returns to scale in our estimated models even with some what ambiguous data set. Second the profitability based productivity analysis shows the average profitability measures such as the marginal revenue product of labour (MRPI) is very high compared to the average wage rate paid for labour (W) and the marginal revenue product of capital (MRPk) is very high compared to the interest rate (r%) paid for the port development loans. Furthermore, the small fluctuation of the Lagrange multipliers in the estimated max-min model indicates the sustainable nature of profitability of operations in the Colombo seaport. Finally the capacity utilization analysis shows that annual rate of increase of tonnage at the Colombo seaport has been positive and, the rate has increased at an increasing rate over time and it shows the high rate of actual to preferred capacity utilization which can be used as a basis to expand seaport facilities without creating the problem of overcapacity. This new approach can be use to any seaports in any parts of the world to see their scale of operation, profitability based on the productivity and capacity utilization aspects before major expansion in capacity.