a study of dry port development in china

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Original Article A study of dry port development in China A. Beresford, S. Pettit, Q. Xu and S. Williams Logistics and Operations Management Section, Cardiff Business School, Cardiff University, Aberconway Building, Colum Road, Cardiff CF10 3EU, UK. E-mail: [email protected] Abstract This article reviews the development paths of dry ports in China. Dry ports have emerged as an integral part of trade facilitation in China in the last decade and have played an important role in regional and economic development. The emergence of dry ports (offshore ports) is driven partly by proximity to main population centres or industrial areas and partly by the need to support rapidly growing container flows. However, the development paths of Chinese dry ports show several differences, depending on their location, and this article highlights and explains these. Without a clear definition, the institutional and regulatory frame- work for dry port development is shown to be immature and complex. While the central government has dealt with relevant institutional matters under the existing regulatory frame- work, decision making at a local level is under the control of municipal bodies, providing ample space for officials to interpret the intentions of central governance. Innovative policies and relationship management are major tools for addressing different institutional problems; however, the lack of a uniform set of policy guidelines raises many legal challenges. This article suggests possible solutions to the problems identified during the establishment of mature dry port facilities, with priority being given to establishing a clear legal definition of what dry ports are. From this cascades their core purpose, responsibilities and modus operandi. Maritime Economics & Logistics (2012) 14, 73–98.doi:10.1057/mel.2011.17 Keywords: dry ports; China; intermodal; case studies; institutions Introduction In contrast with Europe and elsewhere in the world, where dry ports have been long established (Beresford and Dobson, 1989; Beresford and Dubey, 1990; Roso and Lumsden, 2010), in China they have become part of maritime logistics r 2012 Macmillan Publishers Ltd. 1479-2931 Maritime Economics & Logistics Vol. 14, 1, 73–98 www.palgrave-journals.com/mel/

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Page 1: A Study of Dry Port Development in China

Original Article

A study of dry port development in China

A . B e r e s f o r d , S . Pe t t i t , Q . X u a n d S . W i l l i a m s

Logistics and Operations Management Section, Cardiff Business School,Cardiff University, Aberconway Building, Colum Road, Cardiff CF10 3EU, UK.E-mail: [email protected]

Abst ract This article reviews the development paths of dry ports in China. Dry ports

have emerged as an integral part of trade facilitation in China in the last decade and have

played an important role in regional and economic development. The emergence of dry ports

(offshore ports) is driven partly by proximity to main population centres or industrial areas and

partly by the need to support rapidly growing container flows. However, the development paths

of Chinese dry ports show several differences, depending on their location, and this article

highlights and explains these. Without a clear definition, the institutional and regulatory frame-

work for dry port development is shown to be immature and complex. While the central

government has dealt with relevant institutional matters under the existing regulatory frame-

work, decision making at a local level is under the control of municipal bodies, providing

ample space for officials to interpret the intentions of central governance. Innovative policies

and relationship management are major tools for addressing different institutional problems;

however, the lack of a uniform set of policy guidelines raises many legal challenges. This article

suggests possible solutions to the problems identified during the establishment of mature dry

port facilities, with priority being given to establishing a clear legal definition of what dry ports

are. From this cascades their core purpose, responsibilities and modus operandi.

Maritime Economics & Logistics (2012) 14, 73–98. doi:10.1057/mel.2011.17

Keywords: dry ports; China; intermodal; case studies; institutions

Int roduct ion

In contrast with Europe and elsewhere in the world, where dry ports have been

long established (Beresford and Dobson, 1989; Beresford and Dubey, 1990;

Roso and Lumsden, 2010), in China they have become part of maritime logistics

r 2012 Macmillan Publishers Ltd. 1479-2931 Maritime Economics & Logistics Vol. 14, 1, 73–98www.palgrave-journals.com/mel/

Page 2: A Study of Dry Port Development in China

operations for only around a decade. Their initial development was stimulated

by the pressure from high inland transport and transactional costs and the desire

to extend the benefits of containerisation as far inland from ports as possible.

According to Carruthers and Bajpai (2002), for the China – US trade, more than

60 per cent of total transport costs are attributable to moving containers to or

from seaports. This indicates that there is ample room for improvement in the

functioning of the inland supply chain. The inland leg is clearly a crucial part of

the supply chain from the point of view of operational efficiency and total supply

chain cost (Stopford, 2009; Pettit and Beresford, 2010).

Many of these dry ports were first developed in order to improve local

economies in the west of China, consistent with the Grand Western Development

(Go West) strategy introduced in 2000 (Ogutcu, 2002). The idea of the logistics

cluster, which forms the backcloth of dry port development, encourages trade

flows by funnelling them into specific corridors. In turn, scale economies can be

enjoyed by means of freight traffic concentration and consolidation (Roso and

Lumsden, 2009).

In parallel, port competition has forced seaports to change their commercial

strategies. Competition among ports has largely been replaced, it is argued, by

competition between transport chains (Van Der Horst and De Langen, 2008).

Meanwhile, growing intra-regional port competition led ports to seek out

business opportunities in competitor ports’ hinterlands and deep hinterland

connections became a vital weapon in the competitive environment (Rodrigue

et al, 2009, 2010). Moreover, the intensification of port competition has made

ports vulnerable to ‘hub hopping’ where ‘footloose’ shipping companies move

their business to another terminal or port offering better terms (UNESCAP and

Korea Maritime Institute, 2008). Thus, ports have had to be competitive in all

areas including their hinterland operations. As a consequence, ports in China

generally use inland terminals as ‘extended gates’ for a seaport through which

flows can be better managed (Roso and Lumsden, 2010).

Dry Port Funct iona l i ty

Deriving an all-embracing definition of a ‘dry port’ is difficult as the role of a

‘dry port’ varies from country to country and from region to region; dry ports

also vary in scale, complexity and area of specialism (Roso and Lumsden,

2009, 2010; Garnwa et al, 2010). Thus a broad definition, proposed by UNCTAD

(1982), is used here

a common user facility with public authority status, equipped with fixed

installations and offering services for handling and temporary storage of

Beresford et al

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any kind of goods (including containers) carried under customs transit

by any applicable mode of transport, placed under customs control and

with customs and other agencies competent to clear goods for home use,

warehousing, temporary admissions, re-export, temporary storage for

onward transit and outright export.

In practice, many dry ports have fitted into a coherent pattern of evolution,

which embraces both core port functions and broader logistics activities

(Figure 1).

Broadly, their management structures also follow the theoretical framework

which has been applied to seaports: that of landlord, tool and service ports. The

landlord model describes a structure within which the government provides the

infrastructure, while the concessionaire is responsible for the provision,

maintenance and operation of the infrastructure. Moreover, long-term conces-

sions, viewed as substantial investments, are expected from the private com-

pany (UNESCAP and Korea Maritime Institute, 2008). An intermodal terminal

operated under the tool port model means that the government provides both

the infrastructure and the operational superstructure with the operations being

carried out by the private sector. In case of the public service model, all

investment in the infrastructure and superstructure, as well as the operation of

the facility, is undertaken by the government (Table 1).

However, it is important to appreciate that, even though government

investment is an effective way of accelerating dry port development, the heavy

financial burden cannot be ignored, because few pure infrastructure projects

are truly profitable (Rodrigue et al, 2009). Perhaps, the best example of a

coordinated nationwide promotion of dry ports is seen in India, where facilities

Figure 1: Functional evolution of dry ports.Source: UNESCAP (2006a).

A study of dry port development in China

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have been established in several phases over a period of around 30 years

(Ng and Gujar, 2009). With the current ‘Go West’ strategy seen in China,

however, there are significant demands on the public budget for developing

the base transport infrastructure, such as highways and railways, which has

resulted in huge financial pressure on the government. In addition, growing

claims on the public purse for social spending are also endangering funding for

dry port developments.

Increasing private sector participation has thus become an important way

for reducing the financial burden on the state (Rodrigue et al, 2009, 2010).

Today, the public and private sectors cooperate through Public – Private –

Partnership (PPP) agreements (UNESCAP and Korea Maritime Institute, 2008;

SCRIBD, 2009). The options, which this form of partnership bring, are divided

into five types according to the share of their investment, risks, obligations

and duration. These are supply and management, turnkey, leaser, concession

and private ownership (Figure 2). Risk spreading, optimisation of asset utili-

sation, information sharing and an ensured rational pricing policy for all the

Table 1: Investment model for ports and terminals

Basic infrastructure Terminal infrastructure Superstructure

Landlord model Government Public/private Government /public/privateTool port model Government Government/public GovernmentPublic service model Government Government Government

Source: World Bank (2003).

PrivateOwnership

Supply andManagement

Turnkey

Leaser

Concession

Risk, Obligation and DurationPublic Sector

Private Sector

Private Sector

Investment

Figure 2: Public–private–partnership options.Source: UNESCAP (2009a).

Beresford et al

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stakeholders are substantial benefits that can accrue from such an approach

(Gujar, 2010).

Although the creation of a favourable economic environment by PPP is

clearly a sensible strategy, it has been suggested that government should only

play a complementary role rather than act as a direct participant (Porter, 1990;

Notteboom, 2007). To encourage more private and foreign investment, the

balancing point in the public–private relationship depends on the one hand on

the capacity and capability of the private company and, on the other hand, on a

sensitive regulatory approach adopted by government (ADB, 2008a).

Without private sector participation, general solutions to non-standardised

problems in different regions may divert services from being customer-oriented

(UNESCAP, 2009b). Nonetheless, developing a comprehensive regulatory

framework for dry port development using such an approach is fundamental to

a successful system (Rodrigue et al, 2009). The logistics regulatory system in

China remains fragmented: there are varying policies at each level of govern-

ment, covering a range of issues including land planning, project funding,

licensing, concession structure, inland customs clearance protocol and taxation.

Together, these are the main foci for review.

Research Methodology

In addition to generic desk research, here a case study approach is taken. This

is seen as an essential form of social science analysis (Yin, 2002). Such a

methodology can meet three requirements: defining the research topic; cov-

ering a broad range of variables and utilising multiple sources of evidence.

The key aspect of this approach is the use of interviews to support the case

studies and to capture information at a meaningful level (Kvale, 1996). The

primary objective of the interviews was to clarify the policies implemented

by the Chinese government, with a view to examine whether the approach

taken was encouraging or inhibiting a competitive environment. In addition,

although interviews are useful for obtaining in-depth knowledge of the par-

ticipant’s experiences, following up interviews with a questionnaire is an

effective way to investigate their responses in more depth (McNamara, 1999).

This approach was followed in this research.

Avoiding excessive ‘managerial consensus’ is a prerequisite for obtaining

meaningful views from discussion. Managerial consensus refers to a study,

which is only based on academic research but has no live experience. Hence, in

this research, the analysis has considered both ‘academic research’ and ‘lived

and experienced’ at the same time (Kvale, 1996). In the Chinese context, ethnol-

ogy cannot be ignored in the context of institutions. As evidenced in many

A study of dry port development in China

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cases, the government has been prone to too much intervention in operational

matters even at the micro level. It is very common in state-owned companies

and public capital controlled organisations for this to be observed. Although the

principle of ‘separate the governance from operation’ has been discussed for

many years, institutional implementation has never been successfully separated

from the political environment (Goss, 1976; Hoyle and Hilling, 1984; Goss,

1990; Frankel, 1991; Notteboom, 2007). The three cases highlighted here focus

on institutional implementation in dry port development in China, but other

aspects such as geography, economics, ownership, developer and expectation of

the government are also taken into account.

The first dry port to be considered is Shijiazhuang dry port, a seaport-based

dry port. This dry port serves as a satellite terminal of Tianjin seaport. Located

in the coastal area and dependent on public capital, Shijiazhuang dry port is

developing under municipal governance. As customs procedures underpin

terminal operation, the case of Shijiazhuang dry port is a good example which

highlights the cooperation that can exist between the dry port operator and

customs under overall government direction. The second case is Xi’an dry port,

which is a city-based dry port located in the heart of China. As the area is

considered to be an economic growth pole by the local government the dry port

was built to a high standard with a very large initial investment. This case

clearly shows how the Government can diversify funding channels by config-

uring relevant concession policies. The last example is a border dry port called

Kunming dry port in the southwest of China. As this case is viewed from

the perspective of a completely private operation, the focus is on how the

Government fosters the external environment in such a way as to attract private

Chinese and foreign capital to participate in the development and operation of

the dry port.

Ex is t ing Logis t i cs Inst i tut ion Deve lopment in China

Dry port development in China can be said to follow the principle of ‘dual

leadership mainly led by the local authorities’. The central government has

recognised the disadvantages of over-control that has the effect of enlarging the

distance between the decision making and operational units (Wang et al, 2004).

Thus, the Central Government acts as one stakeholder in the industry, whereas

local Government plays a more active role in logistics development in general,

and specifically, in dry port establishment and operation. The institutional

framework (Figure 3) in the industry follows a top-down approach, with a

three-tiered governance structure, namely central–provincial–municipal (ADB,

2008b).

Beresford et al

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Realising the complexity and diversity of the industry, the Central Gov-

ernment asks various ministries and appropriate agencies to handle the policies

and financial affairs of each specific sector. In the logistics industry, this gen-

erally involves the Ministry of Transport (MOT), Ministry of Railways (MOR)

and the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) (ADB,

2008b). Customs is an exception as it is a stand-alone department. Considering

several municipal governments are directly overseen by the Central Govern-

ment, both provincial and municipal governments are viewed as ‘local

governments’ in this study; less attention is given to provincial government.

Second, the concession policy is an important tool for local governments to

steer the development of dry ports. It is also a solution for countries with

regulations that do not allow private ownership of certain infrastructure assets

(Guislain and Kerf, 1995). In China, in particular, concession policies are a

useful tool for local governments wishing to include private sector participation

in infrastructure provision without losing total control.

An online survey was implemented and follow-up interviews with 12 dry

port managers were conducted during the period January to June 2010. From the

survey and interview programme, it emerged that the government, as a major

Central Planning & Policy

Investment Model

Provincial Government

MOFTEC CustomsMOT MOR Others

Municipal Government

Policies

Dry Port Operator

Seaport Local Customs Other Partners

Marketplace

Local G

overnment

Central

Governm

ent

Direct ControlRelationship Management

Figure 3: Dry port development in China: Institutional Framework.Source: Authors.

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player themselves, usually have a role in the nomination of border crossing

points. It is also evident that very few private sector companies directly invest in

dry ports. Rather, they generally participate in operations via concession agree-

ments. The role of port authorities in a seaport system is clearly defined by

Chinese port laws but the position of private companies in the dry port sector is

still ambiguous. The biggest role is played by the operating company that signs a

concession agreement with other partners. An operator can take various forms in

China including: a state-owned ‘inland port company’ a ‘Local Port or Export

Processing Zone administration committee’ (a bridge organisation of municipal

Government), or a privately owned logistics company.

Ex is t ing Dry Port Deve lopments in China

The definition of a ‘dry port’ includes the role as a fully functioning logistics

platform, and in order to assess existing dry port developments in China, this

article classifies them into three groups, namely: seaport-based dry ports, city-

based dry ports and border dry ports. The classification relates to the location,

function and local economic environment, and each group faces a different

suite of institutional challenges.

Seaport-based dry ports

Seaport-based dry ports in China refer to facilities which are sited at the coast

with a major function of pre-customs clearance. The initial purposes of a dry

port of this type are to capture more cargo flowing along the inland supply chain

and to relieve capacity constraints at the seaport. The sustainability of these

dry ports relies on the function of customs clearance and their consolidation

capacity. The convenience of customs clearance is a very important issue as the

close proximity of the seaport implies that their target is to restructure their

supply chain locally and shorten lead times. The functions of these dry ports in

the initial phase usually include

1. Modal shift (road/rail/inland waterway transport connection).

2. Cargo loading and discharging.

3. Handling and storage of containers with/without break bulk cargo services.

4. Pre-customs inspection and clearance.

5. Low-value added activities (optional).

6. Targeting of distributors operating on a just-in-time basis.

These basic functions can be put in place with a relatively small initial

investment. Under this situation, the concession agreement may not be the

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most important element. In China, such dry ports tend to be purely owned or

controlled by the public sector, typically the municipal government, as a stra-

tegic node. Apart from the municipal government, major stakeholders generally

include government, customs, seaports, shipping lines, freight forwarders and

Container Freight Station (CFS) operators. This small number of stakeholders

has simplified the coordination of activities at such sites.

Considering that customs clearance is the core function of dry ports, it follows

that the connections with customs are the most important in dry port operations.

Reviewing customs practices requires Government involvement, especially in the

initial phase. In most cases, for streamlined operation between seaport customs

and dry port customs, provincial and municipal government are active in

strengthening inter-customs relationships, inter-government relationships and

seaport–dry port relationships. A series of customs agreements have been secured

with the purpose of smoothing and simplifying customs procedures between dry

ports and seaports. Tianjin seaport, for example, has signed ‘The Memorandum of

Express Customs Clearance in China’, which embraces 12 cities for the creation of

a ‘borderless’ dry port system (Wang and Wei, 2008; CNSS, 2010).

In addition to customs, consideration is also given to synchronisation

within the seaport system, especially in the area of tactical support. Today, with

the help from both regional and local governments, many seaports participate

in dry port development by providing expertise or technical support to assist the

dry port’s daily operation.

With the ability to handle an increasing share of trade volumes linked

to political influence, it is clear that many dry ports will ultimately transform

into distribution centres. More value-added activities will be introduced into

the dry port in order to develop the logistics cluster, indirectly attracting

more manufacturing companies into the city. Generally, this expansion process

starts from the development of bonded customs zones within or close to the

dry port. Today, a large number of seaport-based dry ports serve as satellite

terminals of a seaport in the coastal regions. Although still in the develop-

ment stage, these dry ports benefit from proximity to seaports and strong

support from local Government due to their key role in future local economic

development.

Ci ty-Based Dry Ports

While the seaport-based dry port focuses primarily on the day-to-day provision

of logistics services, new logistics hubs are emerging in central China triggered

by the expansion of nearby cities. Although import and export activities are the

major driving force for coastal logistics development, the logistics markets in

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inland China are primarily driven by the growth of the domestic economy

(Chinaknowledge, 2010). The city-based dry port is typically positioned within a

larger logistics cluster which itself serves production and consumption.

Economies of agglomeration may then serve to attract additional manufactur-

ing-related investment. Therefore, city-based dry ports often have a wider range

of value-added logistics services than seaport-based dry ports. They tend to be

located in Logistics Parks or Export Processing Zones, which directly support

local trade. Transport support is also required and for this reason, locations near

road junctions, city gateways, industrial centres and other access points are

favoured. In summary they have the following characteristics:

1. Located in Mid- and West China, at strategic transport junctions

2. Long distances from seaports

3. Large facilities with diverse functions

4. Require sufficient land for future expansion

5. Mainly serve the export market

6. Tend to be located in metropolitan areas

7. Target both manufacturers and distributors with medium order lead times

From the above characteristics, it is clear that the initial investment required

will be significantly greater than for a seaport-based dry port. In the start-up

phase, major direct investment is expected to come from the government.

Moreover, in order to attract more private and foreign investment and thus

cushion the financial burden, the government has been flexible in its approach

to granting concessions. During the operational phase, the dry port operator

focuses on coordinating daily operations and increasing cooperation with the

relevant seaport. There are three reasons for this:

1. Long distances results in poor synchronisation between the two systems

2. To strengthen the confidence of shippers

3. To attract more logistics partners to the dry port

With Government assistance seaports will often set up an inland terminal

within the dry port area and operate it by themselves. To encourage demand,

some seaports have signed cooperation agreements with the local dry port in

order to promote the cargoes originating from these terminals. The physical

connection between the two systems relies heavily on the external transport

environment, especially road and rail. However, insufficient logistics capacity is

still a major restriction on trade development in inland China. Consequently,

dry ports also need the government to pay increased attention to the improvement

of external physical logistics infrastructure. Since dry port investment is directly

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related to the local economy, these projects are strongly supported by local

governments. Dry port development has already been accepted by many local

governments as a strategy for regional economic development. Xi’an dry port is

a typical example.

Border Dry Ports

A border dry port refers to a dry port located in the border area/city, with

the major function being as a transhipment centre or custom clearance service.

The introduction of border dry ports starts with their special geographical

characteristics. Generally, they are located in the border areas of western China

adjacent to Russia, Central Asia, South Asia and the ASEAN region, with long

distances to seaports (42000 km). Therefore, in many cases, these dry ports

will usually act as trans-modal centres for linking inland freight distribution

systems in different hinterlands. The landlocked location and the low levels of

trade development have restricted their development. The dry ports thus tend to

be small and they mainly serve domestic trade by road and rail.

Although it has many comparative trade advantages (for example rich re-

sources and low labour costs), private sector resources and foreign capital are

still scarce in the region. Weak logistics infrastructure and long lead times in

supply chains are the major reasons for this. For example, it takes more than

7 days to deliver freight from Kunming city to the major seaports of the Pearl

River Delta or Hong Kong. Thus, time-sensitive cargoes can only realistically be

organised around air transport, with consequent high costs. Further, limited

central government funds leads to reluctance by the local government to con-

sider participating in logistics development projects. On the other hand, the

local economy normally has a sound logistics environment as government is

‘hands-off’ towards the private sector. Thus, a large number of concessions are

made in these areas to encourage participation of the private sector.

In addition, concerns are also raised in terms of market competition. As

private operators usually pursue efficiency and profit maximisation, the loca-

tion and design of dry ports are specific to their clients with volume and profit

maximisation in mind. In the case of border dry ports competition is very

strong, with the result that the government has placed increased attention on

creating a sound external market environment and encouraging healthy market

competition. Important niche opportunities for border located dry ports also lie

in cross-border trades. However, the structural immaturity of China’s land

trades has held back the development of these dry ports with the exception of

Kunming dry port where trade is buoyant and commercial practices are

favourable (Doingbusiness, 2010).

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Case Studies

Seaport-based dry port: Shijiazhuang dry port

Shijiazhuang dry port is located at a regional transport confluence of Huabei

province in Northeast China, 1.5 km from the city’s eastern ring road and 29 km

from Shijiazhuang airport. It is close to the Shitai and Shihuang highways,

National Highway 103, and the Shijiazhuang–Dezhou and Beijing–Taiyuan

transport corridors. It directly serves Tianjin’s seaport, around 400 km away.

Shijiiazhuang city is also one of the most important industrial centres in

northern China, with a GDP of 311.5 billion Yuan and a trade value of US$5.5

billion (SIPC, 2009). The project was originally proposed by Tianjin Port

Authority and approved by the central, provincial and municipal governments;

it began operations in 2006. The facility has a land area of 26.2 Ha with a total

investment of 268 million Yuan (SIPC, 2009).

The first and second construction phases have been completed and cus-

toms, inspection and quarantine, port agents, shipping companies and other

units are now stationed in the dry port. Currently the services provided include

K Cargo consolidation, storage, distribution

K Freight forwarding

K Export declaration

K Intermodal transfer (Rail-Road)

K Bonded warehouse

The third construction phase from 2011 onwards will focus on improving the

accessibility of rail and road, capacity building and the construction of ancillary

facilities. It is expected that the design capacity can reach 205 000 TEU per year

when the construction is complete (SIPC, 2009). This will improve both cost

and service levels by increasing scale economies and allowing expansion of

its hinterland from Shijiazhuang to Huabei province, embracing the cities of

Yulin, Taiyuan, Yangquan and beyond.

Shijiazhuang dry port serves as an extended gateway for Tianjin port.

The development of Shijiazhuang dry port has already enabled Tianjin port to

increase their export volumes from Huabei province, a major industrial pro-

vince in China. The dry port has been built as the largest dry port in the Huabei

region, in the hope of attracting more trade volume through the city. Promoted

by the municipal government, the dry port is also expected to operate as an

economic growth pole in the Huabei region. Strong support is being given by

both the provincial and municipal governments. The project is listed in the ‘The

11th Five-year Development Program’ and ‘The plan for Modern Logistics

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Development’ of Huabei provincial government. The dry port is a state-owned

corporation (Shijiazhuang Inland Port Company Ltd – SIPCL), with ownership

split between three companies that have a strong relationships with the

municipal government and it is being developed following the tool port

investment model. Except for one crane which is provided by Tianjin port, all

the infrastructure and facilities are owned by the SIPCL (Doingbusiness, 2010).

Along with the support by municipal government, it receives significant

preferential treatment, including a 50 per cent discount on land purchase prices

and direct financial support. With support from local government, the dry port

has effectively resolved the land and financial problems that it faced.

The SIPCL is principally responsible for daily operations and delivering

concession agreements with partners such as shipping lines and other logistics

operators. They do not, however, participate in any investment in facilities

(see Figure 4).

As a satellite terminal of Tianjin port, Shijiazhuang dry port firstly provides

pre-customs services for local exporters; this makes its connection with the

seaport and relationship with customs critical. For this reason, the government

has engendered cooperation between the dry port and the customs office. Under

its intervention, agreements have been signed with customs as follows:

K In 2004, Huabei province and Tianjin province tightened up inter-customs

clearance services and signed a ‘Memorandum for Express Customer

Clearance’ for container transport.

K In 2005, a letter of intent with Tianjin customs was signed for developing a

long-term mechanism for regional customs cooperation.

K In 2007, a further memorandum with Tianjin customs was signed for express

customs clearance (Liping, 2009).

Municipal Government

Port Authority Committee

Stated-Owned Joint Venture

Facilities Infrastructure OperationsLand Use

Figure 4: Investment structure of Shijiazhuang dry port.Source: Authors.

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These initiatives sought to simplify and standardise inter-customs declaration

processes by simplifying the checking process within the clearance procedures.

In this context, first, the cargoes of importers or exporters who have ‘A’ or

‘AA’ certification can be declared and released at the dry port, and no further

check is required at the seaport. In addition, cost reductions can also be

achieved by this ‘One Check’ system. According to a report about the dry port,

cost reductions can reach 300 Yuan per FEU and 200 Yuan per TEU, respectively

(Shijiazhuang Daily, 2007). Subsequent commercial experience has confirmed

the principle and scale of these savings. The reduction comes from the saving

made in transport and customs costs. More importantly, the time for tax

reimbursement can be reduced from 20 to 7 days (Liping, 2009). It has thus

improved the cash flow of exporters. Second, for the convenience of shippers

and in the interests of efficiency of operations in the dry port, a 24 h customs

clearance system has been developed. Further, a dedicated ‘green channel’ for

fresh perishable products has been established. These actions have effectively

reduced disturbances in the supply chain, thereby saving time and money.

Third, to improve the management of container operations, Jijin International

Logistics Company Ltd was established using the agreements outlined above.

This company plays a major role in the management of the container operation

by transferring managerial expertise to dry ports and providing knowledge and

training. The company has also strengthened the confidence of shippers, inland

freight transport companies, and shipping lines, helping to develop partnerships

with the dry port.

Ci ty -Based Dry Por t : X i ’ an Dry Por t

With an ambition to become the leading dry port in China, the Xi’an dry port

acts as the main conduit for trade through Xi’an International Trade and

Logistics Park (XITLP). It also undertakes the mission of promoting the city’s

status as a leading logistics hub in Central China. The dry port is part of a

logistics park with an area of about 6 km2. It consists of five components,

including a new-build CFS, a B-type bonded logistics centre, an international

logistics zone, a domestic logistics zone and a logistics cluster area. The CFS is

one of the railway container centres invested in by Chinese Railway Interna-

tional United Container Ltd (UNESCAP, 2006b). This CFS will improve the

operation of two rail terminals, namely Xi’an East Railway Station, which

services more than 80 per cent of international maritime containers for the

region and Xi’an West Station which is responsible for domestic container

transport. The dry port also enjoys a unique location as a critical transport

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intersection at the heart of the country, with a tri-modal transport network of

highway, railway and airway.

Xi’an metropolitan area is a very large production and consumption centre

in Central China, with a GDP of 217.9 billion Yuan in 2009 (Chinadaily, 2009).

A significant amount of international trade is processed in, or passes through,

Xi’an City and Shan’xi province. In 2009, trade values reached US$7.5 and

8.4 billion, respectively (Chinadaily, 2009). With the ongoing national ‘Go West’

strategy, secondary industries will increasingly be attracted from the coastal

cities to central and western areas in the interest of cost reduction.

As a manufacturing centre, the trade around Xi’an city is export-orientated

and relies heavily on rail transport. Apart from a small volume exported by

rail via Alashankou and some high-end technology, high value-added cargo

exported by air, 75 per cent of exports from Shan’xi province are transported by

rail to major sea hubs. These hubs include: Qingdao, Tianjin, Shanghai,

Lianyungang, Shenzhen and Alashankou, accounting for 53, 16, 11, 8, 4 and

less than 1 per cent, respectively. The imbalance in trade is significant and the

ratio of exports to imports is at least 2:1 (Xiao, 2009). However, there is still no

direct rail connection to the dry port.

The dry port acts as a comprehensive service platform, which includes

customs clearance, goods distribution, warehousing and distribution, interna-

tional and domestic freight forwarding, intermodal transfer, value added

activities and bonded warehousing. Consequently, this dry port can be classi-

fied as a pure inland loading centre since it is located remotely from the seaports

and targets supporting manufacturing industry by providing a wide range

of logistics services. These services involve a significant initial investment of

60 million Yuan (Chinadaily, 2009).

In summary, as the core facility of the logistics park, the Xi’an dry port has

three main objectives:

K To strengthen transport capacity and capability by introducing more private

and foreign logistics partners into the dry port;

K To extend the seaport’s hinterland and its capacity by also performing a role

as an inland gateway; and

K To attract more goods into, from, and through the city area by encouraging

the development of a mature logistics cluster.

The project has been the subject of considerable attention by the National

Development and Reform Commission. It is listed as one of the major

projects in the provincial ‘11th Five Year Plan (2005–2020)’. Under the plan, the

project of XITLP was approved in 2005 by Xi’an Municipal government. The dry

port is jointly supported by the Municipal Government and four state-owned

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companies, thus it is purely state-owned in nature. Following the landlord

model, the municipal government has directly invested in land, infrastructure,

basic facilities and superstructure. This direct government participation has

helped the dry port enjoy a land price of around one-third as much as that

charged for commercial use (see Figure 5).

The overall operation of the park is subject to control by the XITLP

Committee, a branch organisation of Xi’an Municipal Government. Its compo-

nents include 11 divisions and two sub-companies (XITLP, 2010a). The com-

mittee, on behalf of the municipal government, has made considerable effort to

attract private and foreign investment into the dry port. First, the government

allows diverse PPP models for attracting private investments, ranging from

supply and management, to turnkey, leasing and concessions. Relying on

these partnerships, private or foreign investors can directly participate in the

construction and operation of the facilities. For the dry port, these flexible

partnerships can mitigate financial constraints; for the partners, they can

Municipal Government

Port Authority Committee

Facilities Operation InfrastructureLand Use

PPP

Model 1 Model 2 Model 3

Figure 5: Investment structure of Xi’an dry port.Source: Authors.

Box 1: Preferential policies on bonded zone of XITLP

1. Domestic goods entering the bonded logistics centre are deemed as exports and entitles to anexport tax rebate;

2. Foreign goods entering the bonded logistics centre can process any value-added activitieswithout customs control;

3. In line with customs and foreign exchange regulations, the bonded Logistics Centre providesflexible payment methods, with the purpose of separating business flow, goods flow andcapital flow.

Source: XITLP (2010c).

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improve integration into their supply chain by investing in facilities according to

need. Second, concession policy is also an effective means of attracting

more investment (see Box 1). To attract investors to B-type bonded zones

in the dry port, participants can be exempted from rental fees in the first

year (XITLP, 2010b). In addition, the committee and local customs are

committed to providing a ‘no border delay service’ in the longer term and

creating a series of preferential taxation policies. Third, a lot of concession

policies are also jointly provided by ‘Entry-Exit Inspection’ and Quarantine

Bureau. These policies are also aimed at developing the ‘no border delay

service’ (see Box 2).

Furthermore, in light of the ‘Go West’ policy employed by Central Gov-

ernment, foreign investors stationed in the dry port are entitled to enjoy ‘dual

preferential treatment’, namely, favourable policies from both central govern-

ment and the dry port at the same time (see Box 3). These policies have created

a positive environment for attracting foreign capital. Singapore CWT Logistics

Company and Xian Shi Gao Logistics Company have recently signed contracts

for the investment of US$38 million and US$100 million, respectively. They are

Box 2: Preferential policies on inspection and quarantine of XITLP

1. Goods which enter/exit the centre are only inspected or quarantined once.2. Domestic goods do not need physical inspection within the zone, but they remain subject to

legal inspection.3. Goods for domestic trade are generally not subject to quarantine but are subject to legal

inspection.4. Subject to the related laws and regulations of China, foreign goods exiting/entering the centre

should be subject to inspection and quarantine according to the kind, packaging, shipmentand state regulation.

Source: XITLP (2010d).

Box 3: Dual preferential treatment policy

1. ‘Foreign-investment enterprises enjoy an income tax rate of 25 per cent. Foreign manufactureenterprises, which meet the legislation requirements are entitled to a special income tax policywith a rate of 15 per cent between 2001 and 2010 y. These policies are aimed at thedevelopment of western China’.

2. ‘Foreign manufacturing enterprises, with an operation period of more than 10 years, areentitled to enjoy exemption from corporate income tax for the first 2 years after the firstprofitable year. From the third to fifth years, income tax will be levied with a 50 per centdiscount. The enterprises which have benefited from a 15 per cent income tax rate, can enjoya further income tax rate reduction of 10 per cent from the third year’.

Source: XITLP (2010e).

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participating in the construction of a ‘container operating zone’ and a ‘com-

prehensive bonded zone’ (XITLP, 2010b).

On the other hand, the XITLP committee is also devoted to fulfilling the dry

port’s ambitions as a ‘port’. First, the Committee cooperated with the seaport in

the start-up phase of its construction. Early in 2005, the Xi’an Municipal

Government signed a cooperation agreement with Shanghai Port Authority and

this was followed by another ‘Memorandum of Cooperation’ with Lianyungang

Port Authority and Qingdao Port authorities, respectively.

These agreements are aimed at gaining more technical and management

support from the seaports. From the point of view of the seaports, it is hoped

that the effective operation of the dry port will shorten transport distances by

consolidating consignments to/from western China. Diverse PPP (turnkey,

leasing and concession) models are available to improve cooperation. One of

the first ports to follow such a path, in August 2010, was Tianjin port, which

officially inaugurated its dry port at that time (see Box 4).

This approach appears to confirm that the Chinese national and provincial

governments are primarily focused on using their strong political position to

leverage different public relationships but primarily through concession policies.

The flexibility of concession models can meet different partners’ service expecta-

tions on the one hand, and open up greater flexibility for finance on the other.

Border Dry Port : Kunming Dry Port

The dry port is a part of an Export Processing Area within Kunming National

Economic and Technological Development Zone (KETDZ), with a total area of

47.33 Ha (FIL, 2010). The dry port is in a primary geographical location at the

convergence point for four modes of transport: road, rail, air and inland wa-

terway (goods can be shipped to South Asia via the Lancang River and Mekong

River). Furthermore, it sits within the Yunnan province strategically located

close to southeast Asia, and south Asia, bordering Laos, Vietnam and Myanmar.

Box 4: Preferential policy for Xi’an Dry Port

1. Three forms of priority in the seaport can be enjoyed by the cargo owner from the dry port,including: port procedures, terminal facilities, loading and unloading.

2. To provide a competitive rate in seaport charges.3. To introduce more shipping companies, shipping agents and freight forwarders who operate in

the dry port to customers.4. To provide support in equipment, technology and staff training.Source: CNSS (2010).

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The dry port’s main responsibilities include: domestic trade, material distribu-

tion, international distribution, value-added services, cargo loading, storage,

tallying and bonded logistics. Both general cargo and containerised cargo are

catered for (FIL, 2010).

Similar to the XILTP, the KETDZ receives direct investment from the

Government and the entire operation is overseen by the government. The

KETDZ committee is a branch organisation of Kunming Municipal Government,

which is responsible for land planning, basic infrastructure construction and the

coordination of daily operations in the zone. Yugang Logistics Company is

the dry port’s operator, which is a joint venture with the private sector

(see Figure 6). Through a concession agreement the company owns and oper-

ates a bonded warehouse covering 7000 m2, a 50 000 m2 general warehouse and

two railway sidings. Total investment in the dry port is about 26 million Yuan

(FIL, 2010).

Many efforts have been made by the company to improve its operational

efficiency. The company has developed a logistics management system for the

integration of human resources, finance, road haulage, rail scheduling, ware-

house management and other resources. Taking an holistic approach, cost-

savings can be achieved through better coordination of container movements. It

is expected that efficiency savings of 5500 Yuan per TEU can be achieved

(Yunnan, 2010). This was broadly confirmed by the field interviews.

Clearly, optimising the operation is the priority goal of private operators.

However, the sustainability of the dry port is still unclear, since it is difficult

to leverage the relationship with the customs authorities, and this remains a

weakness. In this ‘private operation’ model, the government is more ‘hands-off’

towards companies and development is mainly market-driven. Numerous efforts

have been made by the local government to attract more private and foreign

investment in order to boost local trade and logistics development. Such policies

were first presented in the policies of Yunnan Provincial Government (Opinions

on accelerating Non-State-Operated Economic Facilities) and by Kunming

Municipal Government (Consensus of further development of Non-State-

Municipal Government

KETDZ Committee Stated-Owned Joint Venture

Facilities OperationsLand Use Infrastructure

Figure 6: Investment structure of Kunming dry port.Source: Authors.

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Operated Economic Facilities). To increase the impact, a series of incentives for

example tax exemptions, rent reductions and so on have also been provided

inside the zone. Total foreign investment has reached more than 170 million Yuan

(KETDZ, 2010). An industry cluster including tobacco processing, machinery

manufacturing, electronic information and biotechnology has emerged.

Although these policies are not unique to the development of dry ports,

they have indirectly affected the dry port in a positive way by allowing

diversification of financial channels and improving transport demand. The dry

port has been in operation since 2009 and its trading volume in its first month

was over US$10 million (Yunnan, 2010).

Discuss ion

The cases discussed above have highlighted particular challenges facing the

development of dry ports in China. The study of the Government’s interventions

Table 2: Main characteristics of three cases studies

Shijiazhuang dry port Xi’an dry port Kunming dry port

Cooperation modeland major operator

Tool Port, publicoperator

Landlord, PPP Landlord, private operator

Policy expectationfrom dry port

Land subsidy, specialcustom policy

Land, directinvestmentConcession policy,subsidy (land,finance, tax)

Concession policyCompetition policy

Function of dry port Extended gateway,Growth pole oflocal economy(future)

Growth pole of localeconomy (current)Attracting privateand foreigninvestment

Growth pole of localeconomy (future)Attracting private andforeign investment

Major issues Mismatch of customspolicies

Land, competitionpolicy

Lack of market regulationInsufficient systematicplanning

Major stakeholder LimitedLocal Government,Seaport, Custom

ManyProvincial andLocal GovernmentSeaport, Custom,LogisticsCompanies

LimitedGovernmentShippers

Competitor Seaport Inland logistics hubs(for exampleChengdu dry port)

Diversify inland logisticsnodes

Political culture Very strong Strong Not muchMajor policy

approachesSpecial custom

corporation andpolicy

Land policiesConcession policies

Provincial and MunicipalplanConcession policies

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has pointed towards possible solutions to the problems and Table 2 summarises

the main characteristics of the three cases.

Shi j iazhuang Dry Port

Under government direction, Shijiazhuang dry port has been operating

successfully with the full cooperation of the local customs agency. The custom

integration policies, however, still have room for improvement as the existing

‘one check’ custom policy cannot cover all the shippers. Only companies

owning an ‘A’ or ‘AA’ certificate are entitled to the convenience of the one-check

customs procedure in the dry port. According to online surveys, only about

50 companies in the Shijiazhuang City qualify for ‘A’ or ‘AA’ status. Further-

more, the customs regulations also allow these companies to declare their

cargoes at their warehouses and to directly release consignments at the seaport.

To common user shippers, the ‘twice clearance’ procedure in both the dry port

and seaport results in cumbersome customs procedures, extra time and hand-

ling costs. All of these factors militate against using the dry port. The incoher-

ence of customs policies has thus limited the customer base of the dry port.

Xi ’an Dry Port

Xi’an dry port is a perfect example of an institution-driven facility, which is

strongly driven by central government expectations. Thus investors, shippers

and carriers benefit from diverse concession policies and a flexible PPP.

Whether these policies have violated fair competition rules remains to be an-

swered as these policies have been implemented by the Government without

uniform guidelines. Besides, institutional systems have some other elements

that may influence performance. According to interviews with senior manage-

ment in the dry port, the existing official performance measurement system has

significantly influenced the development of the dry port. One of the principal

problems is created through the allocation of land to develop the dry port and a

greater knowledge of how the measurement system is affected by this allocation

by local officials and local government could help better understand this

problem. Currently, the performance of local government officers and govern-

ment itself is measured by the level of local economic development, with jobs

and local economic output being the major indicators. In this system, their

actions may work against the goal of dry port development as they could turn to

real estate investment for higher returns. First, the existing land price for dry

port development is one-third of the charge for commercial use, which means

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less income for business rates. In addition, dry port construction is a 10-year

investment with different construction phases. Therefore, it is hard to see a

major contribution to the local economy in the short term. As land allocation is

controlled by the provincial and municipal governments the business plan can

easily be configured for long-term development. Although the link between

expanding transportation infrastructure and a region’s rate of economic

development can clearly be understood, development directly in the short term

is still the primary metric and motivator.

Kunming Dry Port

Operated by the private sector, Kunming dry port has only a loose link with

the Government. The dry port aims to maximise its profitability based on

market principles within a trade zone dominated by large shippers rather than

industrialists. Rather than using direct intervention, the municipal government

tends to operate indirectly, employing policies which encourage private and

foreign investors to engage in logistics development. Therefore, the regulatory

framework is critical in that it must allow enough freedom for customs

authorities to interact properly with the private operators. As a critical link in

international trade, it is not surprising that efficient customs has become one of

the major factors in defining a ‘dry port’, otherwise becoming a barrier for

market access for the private sector.

In the vicinity of Kunming City the municipal Government has made

little progress in updating market regulations. Compared with local economic

development, transport development is, rather, the ‘poor relation’. Around

Kunming City many CFS run by small logistics companies have emerged. These

CFSs term themselves ‘dry ports’, though they operate at a lower standard and

have much lower levels of integrated technology. The existence of numerous

CFSs implies a lack of consistent market standards regarding services and

policies. High levels of competition but low levels of efficiency characterise the

local logistics industry, putting pressure on the local trade and economy.

A Common Chal lenge : The Lack of Inst i tut iona lCoord inat ion

The Chinese Government has made some progress in structuring and organising

the logistics market, but there remain some conflicts between planning, oper-

ating and regulating inland intermodal systems; these in turn hinder achieving

their performance goals. Rail is seen as a key part of the development strategy

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for dry ports, but rail access is not always available. The Ministry of Railways,

who dictate the country’s rail construction, has been singularly unsuccessful in

pressing the case for integrated rail container services away from seaports;

there is still not a single dry port with on-dock rail in China. These missing links

have resulted in long container turnaround times and inconvenience for ship-

pers as they must interface with different logistics operators when moving

cargos to seaport networks. Hence, in many cases shippers are reluctant to use

dry ports (especially seaport-based dry ports).

Considering the variety of existing institutional challenges facing dry port

development in China, a uniform governance standard is needed to encourage

their development. Some of the key areas where change is required, stemming

from the research presented above are

K To develop a legal definition of dry ports: The purpose of tightening the

institutional framework is to better protect stakeholder interests. This means

all the reforms of the institutional and regulatory framework should start

from the legal definition of a dry port combined with a good understanding of

its service scope. The policy makers should identify all stakeholders and their

interests. Without such a definition, it will be hard to create a ‘fair’ policy

framework.

K To develop a unified top-level institutional approach: An integrated

government approach at ministerial level could help ensure the long-term

success of dry ports by developing efficient intermodal interfaces and

logistics centres. This suggested improvement is also the starting point for

addressing the existing rail freight access problems.

K To establish a ‘Dry Port Code’; namely, a systematic regulatory framework

aimed at providing legally binding guidelines for stakeholders’ roles. The

framework should address several key areas:

J The definition of the major elements of a dry port system.

J The regulation of stakeholder behaviour.

J The regulation of macro–micro relationships.

J The development of a standard legal and technical regime for dry ports.

K To assist dry port operators to better connect with different administrative

sectors. More attention should be paid to the small private dry port operators,

since their restricted political position has made it hard for them to maintain

an effective relationship with customs, seaports and logistics companies.

Moreover, the municipal government should assist dry ports in building up

connections with these major stakeholders under the principles of openness

and fairness.

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Conc lus ions

This article has addressed the question ‘How has the existing institutional and

regulatory framework influenced dry port development in China?’ by outlining

existing structures and how they could be adjusted to encourage the effective

operation of Chinese dry ports. A top-down system was identified with

three major characteristics: first, the lack of a unified top-level institutional

coordination body. Three ministries operate independently with different roles

in planning, operating and regulating inland intermodal transport systems,

and this has hindered dry port development. Second, local government has

considerable autonomy in interpreting Central government policy according to

local need. Third, a comprehensive regulatory framework for dry port devel-

opment is still absent.

In respect of the second question: ‘How have existing dry ports developed

in China?’ this research shows that different dry ports in China are at different

stages of development. This is determined by their core functions and institu-

tional expectations. Under such a loose institutional structure, government in-

tervention has become necessary to solve the financial problems and leverage

public relations. However, other legal problems have made the situation worse

and a systematic policy framework is the fundamental solution, but this will

require a standard dry port definition.

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