COST OPTIMIZATION MODELS OF PORT PERATIONS IN NIGERIA: A SCENARIO FOR EMERGING RIVER PORTS

 

ABSTRACT

This study attempts to optimize the cost of port operations in Nigeria. The quantitative estimates are concerned with the activities associated with the operations of Nigerian seaports and especially river ports, the costs and the benefits derived to users of these ports. A Linear Programming Model for sea port operations; and Integer Linear Programming for River terminals were formulated from the cost components associated with the vessel- port relationships. With the aid of QM for Windows Software, and TORA software respectively, optimal solutions were derived. An optimal cost of 231.38US dollars per ton cargo handled at the seaport is derived, while the optimal integer solution (obtained by TORA) for the River terminals gave a value of 1 for all variables which indicates that all the projects must be selected to attain the optimal Z value of 58256395.62 million naira. The result shows the minimum cost of port operations and as well determines the optimal time frames for the decision variables of port operations; and capacity utilization of the terminal equipment. This provides a basis for future projection to determine the range of values of the constraints and decision variables for which the solutions will continue to be optimal. More so, a structural equation model(SEM) of the river port operations is derived and estimated by the application of LISREL software to generate reduced form of equations and parameter estimates given as: Y = 1.183X1 – 1.390X2 +0.597X3. Economic and financial analysis is conducted to reveal significant cost savings of 26% by the IWT over road haulage. Furthermore, the analysis reveals a Cost-Benefit ratio of investment in IWT of 1:23 and a positive Net Present Value (NPV) of 176732870 million USD. The results of the SEM technique shows that available time for port operations is significant to handling cost, ship turnaround time and warehouse time. It further reveals that the demand for port services is significantly related to vessel supplies cost. It is proven that IWT will conveniently divert traffic from the congested corridors of road transport and that the river ports will yield significant benefits to the economic growth of Nigeria, which is revealed in the comparative scenario analysis that quantified the ratio of the magnitude of economic activities at the sea ports to the river terminals as 293:1, 336:1 and 359636:1 for ware house operations, gang operations and ship turnaround time respectively. The study concludes that Inland waterways transportation has a significant impact to the socio- economic development of Nigeria, if the potentials are fully harnessed. Therefore, it is recommended that government should enforce sustainable legislation to make IWT operations attractive to private organizations for optimal benefits.

Keywords: optimization, ports, capacity, utility, cost savings, inland waterways.

 

Table of Contents

CERTIFICATION…………………………………………………………………………….. ii

DEDICATION………………………………………………………………………………… iii

ACKNOWLEDGEMENTS………………………………………………………………… iv

Table of Contents…………………………………………………………………………….. vii

LIST OF TABLES……………………………………………………………………………….. xi

LIST OF FIGURES……………………………………………………………………………… xiii

 

ABSTACT……………………………………………………………………   xiv

CHAPTER ONE ……………………………………………………………………………………… 1 INTRODUCTION …………………………………………………………………………………… 1

1.1 Background Information ……………………………………………………………………… 1

1.2 Problem Statement ……………………………………………………………………………… 5

1.3   Objectives of the Study ……………………………………………………………………. 8

1.4   Research Questions………………………………………………………………………….. 9

1.5 Hypotheses ………………………………………………………………………………………. 10

1.6Justification of the Study ……………………………………………………………………. 11 1.7 Scope of the Study ……………………………………………………………………………. 11 CHAPTER TWO …………………………………………………………………………………… 13 REVIEW OF RELATED LITERATURE …………………………………………………. 13

2.1 Conceptual Framework ……………………………………………………………………… 13

2.1.1 Inland Waterway Transport Development in Asia ……………………………………. 13

2.1.2. Inland Waterway Transport Development in ESCAP Countries ……………. 15

2.1.2 Inland Waterways Transport and Port Development in Africa ………………… 26

2.2 Theoretical Framework ……………………………………………………………………… 37

• 1The Benefits of Inland Waterways Operation ……………………………………………. 37

2.2.1.1 Creation of business opportunities …………………………………………………… 38

• 2Renewable Energy Development Opportunities ……………………………… 43

2.2.1.3 Transport Routes and Level of Congestion …………………………………….. 45

2.2.1.4Provision of Public Utilities and Employment ………………………………… 48

2.2.1.5Regeneration ………………………………………………………………………………………. 51

• Regulating Benefits …………………………………………………………………………………….. 52
  • Carbon savings ………………………………………………………………………………….. 53
  • Drainage, Water Conveyance, Flood Protection and Alleviation ….. 56
  • Water Regulation and Pollution Dilution ………………………………………… 61
  • Habitat Provision ………………………………………………………………………………. 64
• Cultural Benefits …………………………………………………………………………………………. 65
  • Recreation and Consumer Surplus Values ……………………………………… 65
  • Recreation and Expenditure values …………………………………………………. 71
  • Visual Amenity …………………………………………………………………………………. 74
• Heritage and Cultural Benefits …………………………………………………………………… 75
  • Education …………………………………………………………………………………………… 78
• Community Empowerment and Benefits ………………………………………………….. 81
  • Non Use Values ………………………………………………………………………………… 82
  • Health ………………………………………………………………………………………………… 85

2.2.5.3Tourism ………………………………………………………………………………………………. 88

• Empirical Review of Literature ………………………………………………………….. 89

2.3.1 Estimation of Production and Cost Functions in Ports …………………………….. 89

• 2Factors Influencing the Level of Port Charges …………………………………………… 89

2.3.3 Port Pricing and Tariff ………………………………………………………………………………… 93

2.3.4 European Commission Framework for Charging and Pricing in Inland

Water Ways………………………………………………………………………………………………… 95

• 1Marginal Accident Costs …………………………………………………………………. 110

2.3.4.2Marginal Environmental Costs ……………………………………………………….. 110 2.3.4.4Marginal Congestion Costs ……………………………………………………………… 112

• Current Trends toward Handling Problems for Inland and Coastal

Shipping ……………………………………………………………………………………………………. 113

• ICT and the Marine Industry: Case of Ports and Terminals …………………… 115

• 7Review of Handling Systems for Port Terminals …………………………………….. 118

2.3.8 Categorisation of Handling Systems ……………………………………………………….. 119

2.3.9 Handling Systems and Performance Measure …………………………………………. 121

2.3.10 Non-Automated Handling Equipments …………………………………………………. 128

2.4 Summary of Reviewed Literature ……………………………………………………… 131 CHAPTER THREE………………………………………………………………………………. 133

RESEARCH METHODOLOGY……………………………………………………………. 133

• Introduction ……………………………………………………………………………………. 133
• Research Design ……………………………………………………………………………… 134

3.3Sampling Design Procedure ………………………………………………………………. 136

3.4 Sources of Data ……………………………………………………………………………. 136

3.4.1 Primary Data Collection …………………………………………………………………………… 136

3.5 Research Evaluation ………………………………………………………………………… 137

3.5.1 Evaluation ………………………………………………………………………………………………….. 138

3.6 Method of Data Analysis …………………………………………………………………. 139

3.6.1 The Linear Programming Model ……………………………………………………………… 139

3.6.1.2Definition of the Variables for Objective Function ……………………….. 140

3.6.2 Integer Linear Programming (ILP) Algorithm ………………………………………… 142

• 3Econometric Modeling ………………………………………………………………………………. 144

3.6.3.1 Single-equation Techniques. ………………………………………………………….. 144 3.6.3.2 Simultaneous-equation Techniques. ………………………………………………. 145

CHAPTER FOUR ………………………………………………………………………………… 147

DATA PRESENTATION, ANALYSIS AND DISCUSSION …………………… 147

4.1 The Nigerian Sea Port Operations Scenarios ………………………………………. 147

• 1Developing a Linear Programming Model of Nigerian Ports …………………. 148
• 2Data Analysis ……………………………………………………………………………………………… 152
  • The Nigerian River Port Operations Scenarios ………………………………… 167
    • Developing an Integer Linear Programming Model for River Ports in

Nigeria ………………………………………………………………………………………………………. 167

Source: TORA ……………………………………………………………………………………………………. 178

• The Structural Equation Modeling For River Port Operation In Nigeria 179
  • Developing the Structural Equation Model (SEM) for River Port

Operations in Nigeria ……………………………………………………………………. 179

• Test for Identification of the Structural Equation ModelOrder

Conditions ……………………………………………………………………………………… 182

• Analysis of the Parameter Estimates of the Structural Equation model 183

• Economic and Financial Appraisal …………………………………………………………. 187
  • Capital Investment ………………………………………………………………………….. 190
  • Operational and Maintenance Expenditures………………………………….. 196

4.2.3.2a Operational Expenditure per Terminal ………………………………………… 197

4.2.3.2b Operational Expenditure per River Vessel ………………………………….. 198

4.2.3.2c Operational Expenditure by NIWA (via Navigational aids,dredging

& maintenance) ……………………………………………………………………………… 202

4.2.3.3Revenue ……………………………………………………………………………………………. 203

• Cargo Flow and Cost Saving Analysis …………………………………………………….. 207 2.4.1 Logistics Chain Cost Comparison …………………………………………………. 216

• Comparative Scenario Analysis ………………………………………………………… 227 4.4 DISCUSSION OF RESULTS ………………………………………………………….. 228 CHAPTER FIVE ………………………………………………………………………………….. 236

SUMMARY, CONCLUSION AND RECOMMENDATIONS …………………. 236

• SUMMARY OF MAJOR FINDINGS ……………………………………………. 236
• CONCLUSION …………………………………………………………………………….. 238
• RECOMMENDATIONS ……………………………………………………………… 238
• CONTRIBUTION TO KNOWLEDE ……………………………………………. 239 5.5 FURTHER RESEARCH AREAS …………………………………………………….. 240 REFERENCES …………………………………………………………………………………….. 241

 

CHAPTER ONE

INTRODUCTION

1.1 Background Information

Inland waterways have been used as important corridors of transportation in different parts of the world from pre historic times. The important ancient civilizations developed along the banks of major rivers like the Nile, Indus, Euphrates and Tigris because water could be used not only for agricultural and drinking purposes but also for transportation of goods and people. As civilization progressed and new technologies were developed, rivers were made and canals were constructed to provide an intricate system of waterway networks through which agricultural, industrial, mineral and energy products could be transported (Dogarawa,2012).

 

Many of the industrial centers in Europe during the Industrial Revolution developed along the various rivers, since it provided easy availability of water for industrial processes, discharge of waste products to the rivers at minimal costs and transportation of raw materials to factories and manufactured goods to customers (Ashraf, 2013).

 

According to Biswas (1987), important waterborne inland transportation networks have developed along major rivers over some centuries ago, including their tributaries and lakes. For instance, the Ganges, Brahmaputra, Narmda,

Chang Jiang and Mekong in Asia; the Nile in Africa; the Rhine, Main,Seine,

Danube, Elba, Volga and Don in Europe;  the Mississipi  and the Great Lakes in North America. Naturally, as technological and economic conditions have changed, the importance of inland transportation in some countries have changed as well (Field, 2008). The advent of air transportation and the construction of extensive highway and railway systems have sometimes reduced the importance of inland waterways (Ndikom, 2013).

 

However, the increase in energy prices has given inland waterways an added advantage during the past decade, and many countries – especially the oil importing developing countries that have potentials for this type of transport – are now making a determined effort to expand and modernize their existing waterways transportation (Biswas, 1987). It should be noted that inland waterways transportation, coastal and ocean shipping are often interrelated. Sometimes transportation of goods begins and / or ends in inland waterways, but the rest of the journey could entail coastal and ocean shipping. Similarly, there are complementary relationships between road and rail transportation and waterway carriage of goods (Brenthhurst, 2010). This therefore, reveals the importance of river ports as terminals and nodes of water transportation for the carriage of goods and persons.

A port is a place that provides for the vessel transfer of cargo and passengers to and from waterways and shores (Iris, 2006). A port is a node in transportation network – a spatial system of nodes and links over which the movement of cargo and passenger occurs (Iovanna and Griffiths, 2006). A port is also an economic unit that provides a (transfer) service as opposed to producing a physical product (Tally, 2006). The amount of this transfer service is referred to as the port‟s throughput. In a competitive environment, ports not only compete on the basis of location and operational efficiency, but also on the basis of fact that they are embedded in the supply chains of shippers (Robinson, 2002).Port economics is concerned with the study of the economics of port services. Users of port services are those that utilize the port as part of the transportation process of moving cargo and passengers to and from origin and destination locations. Users include transportation carriers such as shipping lines, railroads and trucking firms that perform these movements coupled with shippers and individuals that provide the cargo and themselves as cargo to be transported. Port users demand port services, whereas port service providers supply port services to port users. The primary port-service provider is the port‟s terminal operator that operates the port or one (or more) of its marine terminals. Other port-service providers include, for example, stevedores, ship agents, custom brokers, freight forwarders, ship pilots, and towage, dredging and government customs-service providers (Yusuf, 2010).

 

Therefore, economic impact assessment of ports is aimed at capturing the effects arising from the demand and supply of port services with respect to other sectors of the economy. Such port related activities produce direct, indirect, and induced and multiplier effects. The economic activities that sea ports generate may be likened to that of river ports but may differ in magnitude and throughput values of the ports. Therefore, it may be possible to model the economic effects of emerging river ports in Nigeria and as well, optimize cost of operation using the seaport model as a benchmark. Thus creating scenarios of the degree of economic impact of river ports on their adjourning communities, at futuristic period when they will be fully operational in Nigeria. Hence, it is equally pertinent to note that inland waterways make a valuable contribution to peoples‟ quality of life. The benefits they provide are diverse and include transport, recreation opportunities, drainage services, regeneration benefits and non-use values (World Bank, 2007).

 

The full range of benefits is rarely considered in decisions over the use or development of inland waterways and their surrounding areas; this can result in incorrect or inappropriate decisions being made. Where the wider value of inland waterways is not fully appreciated there is a risk that opportunities to realize important benefits are missed or that other benefits provided by the waterways network are compromised (Glaves et al, 2007). It is important therefore, that the benefits provided by inland waterways are identified so that they may be maximized. O‟Gorman et al (2010) derived a comprehensive list of inland waterways benefits for their project using an Ecosystem Service Approach (ESA). The ESA identifies four categories of services and benefits: provisioning, regulating, cultural and supporting.

 

Provisioning services include food, water, resources and other economic benefits; regulating services include climate and flood alleviation; and cultural services provide recreational and aesthetic benefits. However, the dis-benefits might be associated with increased exposure of properties to flood risks or health and safety concerns such as accidents and increased potentials for associated crimes, related to improved access. Therefore, the purpose of this study is to optimize the cost of operations at the ports and x-ray the possible cost savings arising from the use of the Inland waterways as against the road transport operation in Nigeria as well as estimate structural equation models for the river ports in Nigeria.

1.2 Problem Statement

Numerous challenges have been encountered in suggesting Inland and Coastal Shipping (ICS) solutions e.g. the lack of intermodal liability regime, unequal distribution of incentive measures, lack of comparable statistical data on ICS and other issues in relation to vessels speed and capacity, up to terminal handling and management issues. Managing cargo flows between ports and inland destinations has remained a challenge for terminal operators.   For shippers, delay in ports means rising costs, adding to customer pressure for goods to be delivered just in time.

 

Most of the studies indicate that it is difficult to model the entire container terminal in a single integrated optimization model. Consequently, most of the studies have focused on developing models to solve individual problems related to specific terminal equipments (especially the quay crane) and not integrated or combine problems relating all handling equipments. It is necessary for the terminal yard and quays to be managed in an integrated fashion i.e. with simultaneous regard for parallel processes. Such problems, as selecting which equipments to invest on or to deploy, may need to be approached from an integrated perspective since they concern the entire terminal. The decision about which equipments to invest on may not be difficult for terminals handling small volumes of cargo. However such a decision can be difficult to consider for different types of equipments, with increasing cargo volumes and stricter customer requirements, when several factors, such as congestion, performance, safety etc needs to be taken into accounts. Since the decision about selecting which handling equipments to use have a Boolean (true or false) character, this makes such a system suitable for modelling with an Integer based optimization model. To make use of advanced optimization tools (e.g. TORA), the model can be formulated using linear relationships, thus we model the entire system using

Integer Linear Optimization Model (ILP).

 

With ILP based models, the modelling task can greatly be reduced since ILP models have a natural and accurate representation of many practical

optimization problems. Partly due to their simplicity, and partly because of their potential in arriving at solutions for problems with a multitude of constraints (of the order of hundreds), container terminals can be a land of opportunities for applying ILP based models. One important thing to consider in the use of such models is their high computer memory resource demand.  An ILP model for selecting handling equipments will enable port terminals such as the emerging River ports at Lokoja, Oguta Lake, Degema, Onitsha, Owerrinta jetty, Ndoni jetty, Idah, Baro, Ondo and Idogoto preview what kind of handling tools shall be required as freight volumes increases at a strategic level. Based on demand forecast the tool can be suitable for choosing handling systems to deploy at tactical level.Thus the stiff competitions among port operators have increased in the sense to attract port uses. Hence, port operators will have to optimize the cost of their operations if they must benchmark good productivity and performance for their terminals.

The minimization of cost and optimum port performance is anchored on reducing ship turnaround time. Therefore, a regression model may be developed to relate turnaround time and port cost which may have a positive correlation with allocation of port facilities. This may also be studied by means of cost and production functions, with the overall objective of determining optimal port structure in order to minimize the cost of port operations. In the light of the above, this research tends to bridge the gap created by past researchers by developing optimization and econometric models for river port operations in

Nigeria and as well attempt the quantification of the cost savings of Inland Waterways Transport (IWT) in Nigeria.

            1.3    Objectives of the Study

The overall objective is to identify the range of benefits provided by inland waterways; the extent to which these can be quantified and valued and to provide guidance to users on valuing these benefits. The specific objectives are:

1. To model the optimal cost of river ports operation in Nigeria.
2. To optimize the relationship between available time and capacity utilization of River Ports Operation.

• To develop a Structural Equation Model (SEM) of River port

operations in Nigeria.

1. To establish the degree of the relationship among ship turnaround time, Warehouse time and available time for port operations.
2. To determine the degree of relationship between the demand for ports service and vessel supplies cost.
3. To reveal the efficiency level of port performance in Nigerian ports.

• To determine the cost savings by IWT as against road transport.

            1.4     Research Questions

In line with the specific objectives, the research questions include the following:

1. What is the optimum cost for river ports operation?
2. What is the optimal relationship between available time and capacity utilization of river ports Operation? iii. Does this study produce a good Structural Equation Model (SEM) of river port operation in Nigeria? iv. Is ship turnaround time and ware house time significantly related to available time for ports operations?
3. At what level of significance is the demand for port services related to vessel supplies cost?
4. Is the efficiency level of ports performance in Nigeria significant? vii. What is the value of the cost savings by IWT against the road transport?

1.5 Hypotheses

1. H₀: The optimum cost of port operations in Nigeria is not quantifiable.
2. H₀: The relationship between available time and capacity utilization of

River Ports Operation is not optimal.

• H₀: The structural equation model of river port operation in Nigeria is not identified to be structurally unique.

1. H₀: Ship turnaround time and ware house time are not significantly related with available time in port.
2. H_0: The demand for port services is not significantly related to handling costs.
3. H₀: The efficiency level of ports performance in Nigeria is not significantly optimized.

• H₀: The value of cost savings by IWT against road transport is not

significant.

 

1.6Justification of the Study

The findings of this research will in no small measure be of utmost importance to shippers, terminal operators, policy makers and government; the academia and World Bank, in the areas of river port development and pricing in developing countries. The study will also extend the frontiers of knowledge and thus stimulate avenues for further research. If grants are available from the relevant government agencies and the World Bank, to assist companies with meeting the additional costs of transporting goods by water. This will however offset costs and do not necessarily provide financial gains to the companies concerned. Instead, these grants are intended to capture the environmental and social costs and benefits of road versus rail / water freight transport. The values of these grants are based on the disbenefits of congestion, accidents, noise, climate change emissions, air pollution, infrastructure, taxation and „other‟ costs arising from each mode of transport. For the purpose of this study, it is assumed that the marginal external costs of water and rail freight movements are broadly similar in comparison to equivalent lorry miles.

1.7 Scope of the Study

This study models the performance and costs associated with the operation of Nigerian ports with emphasis on the optimization of operations at the river terminals in Nigeria. This involves the cost of doing business at the ports and the level of service offered and the utility obtained by users of the ports. This study concentrates mainly on optimization techniques and econometric methods to achieve the set objectives. This study was carried out with the peculiarities of the sea and river ports in Nigeria which are assessed from 1994 to 2013 in isolation without regards to ports of neighboring countries and other global ports. However, review of related literature covers global and domestic perspectives.

 

1.8 Limitations of the Study

Limitations of the study include the inaccessibility of data to compare performances within the West and Central African region. The research was also conducted in a time constrained environment which affected the optimal time spent advanced reading to unravel the basic rudiments in research as extracted from earlier works. The last limitation, but not the least is finance which would have aided in the visitation of several ports both within and outside Nigeria for proper benchmarks. We had no direct access to the STEP- B grant from the World Bank that we are beneficiaries of, except for the provision of key research materials by the managers of the fund in FUTO.

 

COST OPTIMIZATION MODELS OF PORT PERATIONS IN NIGERIA: A SCENARIO FOR EMERGING RIVER PORTS

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