Cruising ahead

OECD Observer

Port cities can benefit from leisure cruises to boost their economies, while at the same time avoiding pitfalls and safeguarding the environment.

Ports used to go hand in hand with heavy industry, and over recent decades many suffered the same fate. Rusting cranes stood silent at the dockside, the city’s population aged and its young folk drifted away.

But now some of the more go-ahead port cities are looking to the booming tourism industry, leisure cruises in particular, for new life and economic renewal. Diversification has become the buzz word on everyone’s lips.

Cruising is one of the fastest growing sectors of tourism. Nearly 9 million passengers from America and three million from Europe took cruises in 2004. According to the Passenger Shipping Association, this figure was over 5% up on 2003. Britons, the most avid cruisers, passed the 1 million mark for the first time in 2004, followed by the Germans, Italians and Spanish. The industry is also booming in Asia and Australia.

Since the 1990s, the cruise industry has become highly concentrated, with the world market dominated by a handful of large players, such as Carnival Corporation, P&O Princess Cruises and Royal Caribbean Cruises Ltd. Ports compete hard to attract operators like these. The operators then exploit their economic clout to drive a hard bargain with receiving ports and agencies.

This is hardly surprising since the economic impact on local economies can be considerable. Cruise lines spend money. They order new ships, some of which can be formidable in size. Currently, the largest passenger liner, weighing in at 150,000 tons, is the Queen Mary 2. Built at the French port of Saint Nazaire and owned by Carnival, it cost more than $1 billion to construct. Royal Caribbean is planning another even larger liner, Ultra Voyager, for 2008. Decking out and furnishing these liners is a business in itself. Also, cruise ships generate local employment in the ports where they berth. And their passengers and crews are potential spenders.

Port cities have traditionally provided cruise line companies with considerable incentives to attract their customers. In 2001 Panama offered $12 to cruise ships for every passenger landed, and San Juan reimbursed a portion of port charges to cruise lines in return for investment in the cruise terminal. Many ports have expanded piers and terminals, and they spend millions of dollars in great expectation that cruise ships will generate useful income. Maintenance costs are also high. In 2003, the US city of Portland, Maine, earmarked $1.2 million in waterfront renovations and improvements because of wear and tear caused by visiting cruise ships.

According to a recent OECD territorial review on the Korean port of Busan, cruises hold potential benefits for ports, but they have to be properly managed and planned. Busan is Korea’s second largest city and a major shipbuilding port, yet it still faces competition not just from abroad, but from expanding Korean ports like Gwangyang. The OECD review suggests that Busan can exploit the potential of the cruising industry, but it also offers some realistic advice to help the city keep its feet on firm land.

One step is to enhance on-shore amenities to capture any spillovers from the cruise industry. While the economic impact of cruise lines on hosting ports remains undoubted, the report warns that income expectations have sometimes proved to be overstated. Ports have to compete with the cruise lines themselves, which promote their own onboard shops and services, such as bars and restaurants, casinos, even phone and internet services and so on.

Moreover, cruise lines have been reported to sell excursions to passengers at a higher price than the price paid to on-shore merchants (as much as three times higher), and this reduces the economic benefits of the cruise industry for local businesses. Competing by enhancing on-shore amenities and stepping up arrangements with cruise lines can help those local businesses to reap the full rewards.

While large cruise companies can drive a hard bargain, so too can the ports. After all, the cruisers need them. But competing ports can unwittingly undercut each other, so the report recommends developing co-operation among hosting ports and among port merchants. By standing together they can defeat efforts by cruising companies to drive prices down artificially. For instance, Busan and its neighbouring ports could agree on minimum prices for shore excursions, the OECD territorial review suggests. In this way each port can avoid being played off too much against the others.

At the same time, cruise ships are not all good news, and their environmental effects in particular are a growing concern. One US-based civil society group, Bluewater, describes cruise ships, which can carry as much as 5,000 passengers and crew, as “floating cities” producing large volumes of waste: “A typical cruise ship on a one-week voyage generates more than 50 tons of garbage, one million gallons of graywater (waste water from sinks, showers, galleys and laundry facilities), 210,000 gallons of sewage, and 35,000 gallons of oil-contaminated water. Most of this waste is dumped directly into the ocean, some treated, some not.”

According to the OECD’s Busan review, ports often overlook the environmental costs (and therefore the consequential economic costs) incurred in hosting cruise ships, such as waste cleanup, or wear and tear on port infrastructure. The report says that Busan should make sure that “no-discharge” zones are designated around and within its harbours, that clear standards are set for cruise ship discharges to the air and the water, and that a monitoring system is established to ensure compliance with these standards.

Reference

OECD (2005), OECD Territorial Review: Busan, Korea, available at www.oecdbookshop.org.

©OECD Observer No 250, July 2005




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