Geopolitics and commercial seaports / By Olaf Merk

The relation between geopolitics and commercial seaports is relatively unexplored. Whereas the links between commercial seaports and economic, environmental and spatial development are well established, the geopolitical context is, oddly enough, absent from the large majority of port studies. Similarly, considerations about commercial seaports are fairly scarce in most works on geopolitics: ports form part of the instruments of economic statecraft, but are in most works only mentioned in passing.

Yet, insights in such links would be urgently needed. The last decade has shown the emergence of state-owned companies – predominantly Chinese – gaining control over a large set of strategically located world ports, a development made official government policy with the formulation of the New Silk Road, one of the parts of the Chinese Belt and Road Initiative (BRI). The official statements about this initiative are full of assurances about win-win collaboration, but many governments might be wondering about the real strategic intent of the initiative and related large investments in various world ports.

This paper wants to bring some more clarity into this subject. It will do so by answering the following four questions:

• In what sense are commercial ports strategic geopolitical assets?
• What is the involvement of states in foreign ports?
• What are the impacts of state involvement in foreign ports?
• What are the implications for policy?

Ports as geopolitical assets

There are three different ways in which ports could be considered geopolitical assets, namely related to their potential to stimulate industrial development, secure trade and energy needs, and enhance naval capabilities.

Industrial development

Ports have proved powerful tools to stimulate regional and national economies. Powerful recent examples include the port-based development of Singapore and of Shenzhen that was at the basis of China’s export-driven manufacturing boom since the 1980s. Investment in foreign ports could be the extension of such a strategy, namely to internationalise a national economy and the domestic firms related to ports that would be involved in developing all aspects of the foreign ports. So, ports could be ways to internationalise a whole domestic maritime cluster, from port engineering and design, port construction, dredging, port equipment, port operations, free trade zones, hinterland transport services, freight train infrastructures, pipelines. The idea here is that ports are entry points into a foreign economy.

Another way to frame this strategy is as a global stimulus programme destined to benefit its own firms. This is particularly relevant when the home market faces overcapacity and the possibilities for local investment are exhausted, for example in countries that have more than enough port capacity. The local development in the foreign nation could increase trade relations with the investing power, which could give the investing state bigger geopolitical clout and “soft power” in that region to achieve other ends.

Trade and energy security

Most countries are fairly to highly open economies, dependent on smooth maritime transport for much of their energy supply, imports and exports. Considering the presence of maritime chokepoints throughout the world – such as the Strait of Malacca, the Suez Canal, or the Panama Canal – most of the global trade flows come in the form of dense shipping routes, the Sea Lines of Communication (SLOCs). The powers that control SLOCs control most of the world’s strategic supply chains, including the ones that determine energy security.

Ports form part of this strategic network that controls supply chains. Control over a port means decision-power over which ships get priority in allocation of berths and port services. In times of conflict, this could also mean the possibilities to block ships. During the Cold War for example, the North Atlantic Treaty Organization (NATO) and communist countries did not have access to each other’s ports.

Four sorts of strategic ports could be distinguished:

• gateway ports to resource-rich areas;
• gateway ports to dense consumer areas;
• hub ports along dense shipping routes and maritime chokepoints;
• ports that could open up the possibility of an alternative route or corridor.

Naval capabilities

Commercial ports could fulfil functions for navies. Some commercial ports act as a naval base, in conjunction with their commercial functions. Traditionally naval and commercial port functions have been conflicting, with most large naval ports crowding out commercial port functions; e.g. in Plymouth (United Kingdom), Toulon (France). The US Navy has over the last decades shifted from concentration of naval ships in a few places, to de-concentration and eventually back to a more concentrated model [2]. Nowadays, there seems to be convergence between naval and commercial port functions, which makes the appearance of mixed commercial-naval ports more common [3]. Yet, major combat operations require logistics and support capabilities that go well beyond what commercial ports could provide; an analysis of China’s ports assets in the Indian Ocean concludes that only Chittagong (Bangladesh) would meet most criteria to characterise military port facilities used to support major US combat operations [4].

Ports do not need to be full-fledged naval bases to be useful from a naval perspective. Commercial ports can be the places where functions such as refuelling, provisioning, ship repair take place. Nor is a dedicated military basis needed to install sensitive communications and other equipment, such as radars or even weapon systems [5].

Involvement of states in foreign ports

Ports have long been public entities under control of the public authorities of that particular country. This has changed drastically over the last decades, due to two related developments: the privatisation of port operations and the emergence of global terminal operators.

The privatisation of port operations is part of a world-wide wave of port reforms, in which cargo handling activities were left to private actors, with the port authority limiting itself to public roles: the landlord port model. This model is now widespread and applied in around 80% of world ports – and pushed for by organisations such as the World Bank, with their Port Reform Toolkit [6].

The result of this development is the emergence of global terminal operators. These are firms specialised in cargo handling – in particular with regards to containerised cargo – that have port terminals in various countries. The subsequent port reforms have provided them with ample opportunities to add new terminals in new parts of the world to their portfolio. The largest global terminal operators, such as PSA, Hutchison Port Holdings (HPH), Dubai Ports World (DPW) and APM Terminals, are now each operating in 20-30 different countries.

This development has been facilitated by limited public finances in emerging countries with large untapped potential for port development. It is the privatisation of port functions, as well as the need for new ports, especially in emerging markets, that has provided opportunities for states to become involved in the ports of other states. There are various ways in which this can happen, mainly via operating, financing, constructing and servicing foreign ports.

State-owned terminal operators

Most terminal operators are private firms, but a considerable share is stateowned enterprises (table 1); their terminal assets represent approximately a quarter of total global container port capacity. There are different shades of government involvement in these firms. Two of the largest global terminal operators, PSA and DP World, are generally considered companies that are purely motivated by commercial motives. E.g. Temasek, one of the two sovereign wealth funds of Singapore, holding 100 % of the shares of PSA, has shown better commercial results and higher quality corporate governance than those of listed firms in Singapore [7].

This is different for the Chinese state-owned enterprises, Cosco and China Merchants Holdings. These are closely aligned to Chinese government policy, so their actions are not only driven by purely commercial motives. This is evident in many ways: e.g. both companies are aligned to China’s Belt and Road Initiative, Cosco and China Shipping were pushed by the Chinese government to merge in order to form a national “champion” in container shipping, and the presentation of certain investment projects are synchronised with political events, such as Belt and Road Summits. The Chinese state-owned terminal operators currently have a portfolio of 33 terminals outside China, in 19 countries, representing 13 million TEU (twenty-foot equivalent unit) in volume (table 2).

Terminal operators that are daughter companies of container shipping companies are handling an increasing share of terminal operations. Some of these shipping companies have been bailed out by governments, so their terminal assets could also be considered to be linked to a government. This is for example the case of the container shipping companies CMA CGM and HMM. Finally, some terminal operators are owned by local governments, such as the city of Shanghai (SIPG) and the city of Hamburg (HHLA). The last two have limited terminal assets outside their home country, although SIPG has emerging ambitions in operating foreign port terminals. Certain public port authorities have also started to invest in foreign ports. This is for example the case of Rotterdam and Antwerp. The motivation for these investments seems to be to stimulate links with emerging markets.

The terminals operated by terminal operators could be owned by the operators, but in most cases this means the ownership of the right to operate the terminal, so a concession or a lease. Terminal operators hardly ever own the entire port. This is due to the fact that container ports are not often privatised. Even in case of privatisation of the port, this is in most cases for a determined period. Examples of countries that have fully privatised some of their ports include United Kingdom and Australia. Examples of ports that are – predominantly – owned by foreign states include Piraeus (Greece), in which Cosco has a 51 % stake, likely to increase to 67 % in the next five years. China has recently opened its first overseas naval base; it is located in Djibouti, next to the container terminals operated by Chinese state-owned operators.

Finance and development aid

Various states offer financial support for port construction in foreign nations. This can take different forms. Some countries have national development banks, sovereign wealth funds or other vehicles to invest in ventures that are considered strategic. For example, China funds many foreign port projects via its two national development banks: the China Development Bank and the China Exim bank (Export-Import Bank of China). It has also initiated a fund, the Silk Road Fund, to finance projects that form part of the Belt and Road Initiative. Finally, China has initiated the creation of a new multilateral development bank, the Asian Infrastructure Investment Bank (AIIB), that is also supposed to finance port projects along the New Silk Road. Financial support can also come in the form of development aid, such as grants and technical assistance. The Japan International Cooperation Agency (JICA) has consulted in many overseas port projects, as a first step in more extensive cooperation on port development. The involvement of China in Sri Lanka’s port sector started with China’s offer to have CHEC (China Harbour Engineering Company) repair the fisheries port in Hambantota after it was hit by a tsunami.

In practice, many of these instruments provide ways to stimulate new port development to be designed and constructed by the nation that provided the finance. So the finance comes with strings, more or less subtle. In some cases this is clear from the outset, e.g. when the financial commitment comes with the consortium that will construct or develop the port. In other cases, the transfer of port assets takes place after the foreign state defaults on its payments on the loan. In some cases, loans are provided with repayment in kind: the loan of the China Exim Bank to construct the port of Bata in Equatorial Guinea will be repaid in oil. The banks also frequently finance the Chinese state-owned construction companies directly, without the money going into bank accounts of the host governments [8].

Port construction

Many new port development projects come into the form of a contract in which the port is designed and built by a private construction company before being operated, e.g. in the form of build-design-transfer (BOT) public-private partnerships (PPPs). The way foreign states can get involved in this – in addition to owning global terminal operators that bid for such projects – is via state-owned construction companies, active in port construction. Examples are the China Harbour Engineering Company (CHEC) and China Communications Construction Company (CCCC), active in dozens of port development projects throughout the world. In almost all cases the construction by these companies is accompanied by finance from a Chinese state-owned bank, such as the China Exim bank, and followed by operation by a Chinese state-owned terminal operator, e.g. China Merchants Holding.

Port services

Another way in which states – via their state-owned enterprises – can become involved in foreign ports, is via the provision of port services and equipment, e.g. dredging, towage services and port equipment. For example, the Chinese state-owned CHEC and CCCC have both dredging subsidiaries. The Chinese port equipment manufacturer ZPMC is one of the subsidiaries of the state-owned CCCC. China has given container-screening equipment to various emerging and developing countries. State-owned enterprises involved in port construction are often the same that are engaged in linking these ports to their hinterlands: e.g. CCCC is involved in many hinterland corridor projects in Africa.

One of the ways in which state-owned companies have managed to get a competitive advantage in port development is by providing a comprehensive package to foreign states, including attractive loans, construction, dredging, operation and equipment. New coalitions start to emerge: e.g. CCCC and ZPMC bidding together for an ideas competition on developing part of the Steinwerder terminal in the port of Hamburg.

A wide range of impacts

The fact that states are involved in foreign ports could have various impacts on these ports, their cities and states. We identify here local employment effects and geopolitical loyalties.

Local development

Port construction, operation and service provision have the potential to create local economic value in foreign ports. This local development effect could arguably be lower when these activities are carried out by state-owned enterprises: employment and economic opportunities for their nationals could be one of their goals, whereas fully private entities would be indifferent to the nationality of workers or sub-contractors. There is anecdotal evidence that supports this claim. Many of the jobs involved in constructing the port of Kribi (Cameroon) went to Chinese workers, rather than local Cameroon workers. Of the 1,125 workers in the port in August 2013, only around half were reported to be from Cameroon [9]. An additional concern is that the imported labour might corrode local labour rights and trade unions.

Geopolitical loyalties

Investment by state-owned enterprises in a foreign state creates leverage vis-à-vis policies of the foreign state. The foreign state might feel obliged or pressured to align to policy preferences of the state that has invested in it. This could be support for that state’s foreign policy in supranational organisations. For example, the absence of Greek support for European Union (EU) condemnation of human rights issues in China has been associated by the Chinese investments in the port of Piraeus [10]. In other ports, the foreign investments of states like China and Russia create different geopolitical loyalties that could complicate common EU positions.

The investment of state-owned companies in foreign ports could in some parts of the world be considered as a geopolitical threat. This is for example the case in the Indian Ocean, where Chinese port investments in foreign ports have been labelled “a string of pearls” encircling India. Whether this is a real threat or not, it has stimulated India to align with Iran in joint construction of the Iranian port of Chabhadar, not far from the Chinese constructed port of Gwadar (Pakistan), Indian investment in the port of Sittwe (Myanmar) and the Japanese to construct a port in North Sri Lanka (Trincomalee), to counter-balance the Chinese constructed port of Hambantota in the South of Sri Lanka.

Policy implications and risk mitigation strategies

Various states have put in place policies to mitigate risks related to their port assets. This includes scrutiny of foreign investments, regulation on majority shares and port governance.

Scrutiny of foreign investments

Some countries apply a screening process to the foreign direct investments in their territory. The screening process in the US required some notoriety due to a case involving terminal operator Dubai Ports World, a state-owned company from the United Arab Emirates. Although the screening did not find arguments to block the acquisition of P&O Ports by DP World in 2006, the political process related to the screening played up fears related to national security that in the end became so pervasive that DP World withdrew its bid. This case is generally considered a textbook case of politicisation of a screening process leading to an undesirable outcome, namely de facto blockage of a foreign investment that did not seem to be problematic from a national security perspective [11]. This does not mean that such screening processes cannot be useful. The EU is currently reflecting some sort of a foreign investment screening mechanism.

Regulations on majority shares

Some countries limit the foreign participation in port terminals to 49% and require foreign operators to form local joint ventures with local partners. This is for example the case in Mexico [12]. Even if a country does not have such regulation in place, it could in practice still be very difficult for foreign operators to access that market. Until the early 2000s, Chinese law required that foreign terminal operators had to enter a joint venture with local Chinese partners, and could not hold more than 49% of the shares in that joint venture. Despite reform that removed these restrictions, there is still no foreign terminal operator that has a majority stake in any Chinese terminal [13]. Inversely, countries do not need a law or regulations to avoid foreign majority shares of strategic port functions. The Sri Lanka government renegotiated an agreement with the Chinese, in which Chinese Merchants Holding would get an 80% of the terminal operations in Hambantota port, but only a 49% share in Hambantota International Port Group Services Co., a separate entity in charge of port authority functions such as security operations [14]. A related notion is reciprocity: so allowing the same market access conditions to the investor from a state as exist in that state for foreign investors.

Re-appraisal of public port functions

Another strand of measures relates to a clear division of task between foreign port operator and a local public entity in charge of strategic public functions, related to security, safety, territorial planning and port-city relations. Part of the renegotiation of the privatisation of the Piraeus port was about the need to keep some strategic port authority functions in the public domain. However, a movement of corporation of port authorities has led them to focus on commercial functions, sometimes ignoring their strategic functions to protect and serve the public interest. The same changes in port governance that have increased the possibilities of states to become active in foreign ports, have also stimulated these ports to ignore their strategic role in safeguarding national security vis-à-vis such states.

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• [1] This article represents the views of the author and not those of the ITF / OECD.
• [2] Brian Slack and John Starr, “Geostrategy, resources and geopolitics: implications for the US Navy and naval port system”, Marine Policy, vol. 21, n° 4, July 1997.
• [3] Hance D. Smith and David Pinder, “Geostrategy and naval port systems: frameworks for analysis”, Marine Policy, vol. 21, n° 4, July 1997.
• [4] Christopher D. Yung and Ross Rustici, “‘Not an Idea We Have to Shun’: Chinese Overseas Basing Requirements in the 21st Century”, China Strategic Perspectives, n° 7, Center for the Study of Chinese Military Affairs, Institute for National Strategic Studies, October 2014.
• [5] Ibid.
• [6] World Bank – Public Private Infrastructure Advisory Facility, Port Reform Toolkit, 2nd edition, 2007.
• [7] Christopher C. Chen, “Corporate Governance of State-Owned Enterprises: An Empirical Survey of the Model of Temasek Holdings in Singapore”, Singapore Management University School of Law Research Paper, n° 6 / 2014, 21st Century Commercial Law Forum: 13th International Symposium 2013, December 2013; Isabel Sim, Steen Thompson and Gerad Yeong, “The State as Shareholder: The Case of Singapore”, Centre for Governance, Institutions & Organisations – Chartered Institute of Management Accountants, June 2014.
• [8] Deborah Brautigam, The Dragon’s Gift. The real story of China in Africa, New York, Vintage Books, 2009.
• [9] Shannon Tiezzi, “What’s It Like to Have China Build You a Port? Ask Cameroon”, The Diplomat, 27 February 2015.
• [10] Helena Smith, “Greece blocks EU’s criticism at UN of China’s human rights record”, The Guardian, 18 June 2017.
• [11] Deborah M. Mostaghel, “Dubai Ports World Under Exon-Florio: A Threat to National Security or a Tempest in a Seaport?”, Albany Law Review, vol. 70, 2007.
• [12] OECD, Review of the Regulation of freight transport in Mexico, Paris, OECD Publishing, 2017.
• [13] Theo Notteboom and Zhongzhen Yang, “Port governance in China since 2004: Institutional layering and the growing impact of broader policies”, Research in Transportation Business & Management, vol. 22, March 2017.
• [14] Shihar Aneez, “Sri Lanka’s cabinet ‘clears port deal’ with China firm after concerns addressed”, Reuters, 25 July 2017.