The case of public and private ports with two actors: Capacity investment decisions under congestion and uncertainty

• The port capacity investment decisions of two actors are studied under uncertainty. • Higher uncertainty and congestion costs lead to later and larger investment. • More public money involvement leads to larger and earlier investment. • The concession fee allows the port authority to modify the terminal operator's investment strategy. • The joint investment decision could also result from negotiation. Since port capacity investments involve expensive large projects with high uncertainty and irreversibility, we use real options calculations to study the optimal size and timing of the investment decision in new port capacity. This paper focuses on container port cases where the managing port authority (PA) is responsible for the investment in infrastructure on the one hand. On the other hand, the terminal operating company (TOC) that obtained a concession from the PA to handle the containers, invests in the superstructure. Moreover, the PA is often partly or fully publicly owned, leading to the consideration of social welfare among its objectives. Examples of such container ports include Gioia Tauro in Italy when it was developed, and the port of Luanda in Angola. In the type of ports considered, the PA's strategy could be to urge the TOC to invest in the PA's individual optimum. When a share of the PA is owned publicly, social welfare is to be considered in the maximisation. In this light, the PA and the TOC could agree to invest at the service ports’ single actor optimum and redistribute the additional aggregate gains. Higher public involvement leads to a larger investment that is also made earlier, augmenting benefits generated by the port. This relationship between investment size and timing is exceptional in the real options literature. Moreover, the investment decision is complicated by the fact that port users are averse to congestion and the costs it involves. When this cost or uncertainty is higher, it is found that more capacity will be installed, but at a later moment.