N GentleResea:rch Leade:rBureau of T:ransport and

Communications EconomicsCanber:raAustralian Capital Territo:r'Y

ABSTRACT

PORT AUTHORITY PRICING

Po.rt: aurhoriry pri'cing pracrices have rhei'rori'giIu; in rhe .lare 19rh and ear:1y 20U,cenrurie,s', Change,s in c'drgo hand.ling and shiprec/mo.loqy and rhe demand.. of governmenrs fora moz'e commez"c.ia1 or'1entati'on of t:be.lI'stat:utozy dut:hor.it.ie.S' have c'I'eat:ed pre,s,5ure,sfor'reform of por'r aurhoriry pric:ing"

:rhe major objecri'ves of porr aurhori'ry pri'cingare idenrified as achievemenr of financia.lba1ance, eC'onomi'c eff~·c.iency and equi'ty.. Hosepoz't: author~·t:.ies dchi'eve fi'naoC'.ia.l baLancewhen accvunt,s are prepared on a hi',scar.lea.lc'ost: bas.is ~ However,.if a more COJ11Jl1erc.ia.lapproach i'a caken and asset,s reva.lued,f.lnanc.ia.l pez'fonnance .i,s much .le.sssari'sfacrory.

Porr auUJoriry pricing pr'dcri'ce,s have .lirr.leinf.luence on UJe .leve.l of rrade rhrough a porrbur rhe paper argues rhar a move ro a morerari'ona.l prici'ng sysrem i,s .like.ly ro have amajor beneficia.l effecr on UJe behav.iour' ofpor'r auUJori'rie,s rhemse.lves a,s we.l.l a ....inf.luenc.inq the i'nve.S"t:ment and operati'ngdsc-i's.ions of' Po.z'c u.sers w.z"tb.in the port"

The paper' conc.ludes rhar ba....lng rhe pri'ce,s of.serv.ice.s· on the cost,s of pZ''Ov.iding them wou.ldbe a major' .z·mpr'Ovement over' t:be pZ'e,sent:,sysrem. Such a princip.le wou.ld .lead ro asubsranri'a.l reducr.l·on in wharfaqe charge.s andin,;-reases' in ship bas'ed charqe,s" Componenrsof pr.ic'e.s des.igned to r'ecovez' cap~·t:al co.st,sshou.ld be ba,sed on dep.··eciared currenr va.luesof. assers. Adoprion of ,such a srrareqy wou.ldencouraqe improved por'r aurhoriry effi'ciencyand .lead ro effic.i'enr qains rhrouqh improvedasset: management: and ~·nvest:.ment: apprai'.sa.l.

399

GENTLE

INTRODUCTION

Port authority pricing practices have been the subject ofcriticism over a period of many years, Many pricingpractices have their origins in the early part of thiscentury and possibly in the last century. The developmentof more capital intensive cargo handling facilities andthe push by governments for a more commercial approach bytheir business undertakings has highlighted the need forreform in port authority pricing practices, Indeed at thetime of writing the Port of Melbourne Authority (PMA) hasproposed a major' restructu.ring of its prices (PMA 1989)and the Maritime Services Board of New South Wales (MBE)was also planning reform of its p.ricing policies ..

This Paper is an overview of work by the BUJ:'eau ofTransport and Communications Economics in the port pricingarea" The Paper provides an assessment of the market forport services and current pricing practices and makes somesuggestions on the direction pricing reform should takeand the likely impact of change ..

THE MARKET FOR PORT AUTHORITY SERVICES

Port authority pricing is strongly influenced by thestructure of the waterfront industry and the bargainingpowers of the industry participants" The majorparticipants as far as port authority pricing is concernedare the port authority as a provider of the service, shipowners, stevedores and cargo owners as consumers of theservices and state governments who provide the legislativeframework within which port authorities operate"

While the port authorit,ies as a group are significantparticipants in the waterfront in terms of turnover andemployment levels their importance to the waterfront isgreater than the financial and employment numbers suggest"They have considerable influence over port development andoperations which they exercise t.hrough decisions on thetype and location of facilities to be provided and throughspecification of 'the conditions under which facilities areto be operated" The importance of this role has becomemore apparent ovex the last two decades with thedevelopment of more capital intensive cargo handlingtechnology ..

400

PORT AUTHORITY PRICING

401

of the most crucial determinants ofnumber and size of producers competing

users, The degree of competitionof services has obvious effects on

In any market, onemarket power is thefor the custom ofbetween the sellerstheir market policies,

In AustI:'alia, the most important potential competitionbetween capital city ports would appear to be betweenSydney and Brisbane and between Melbourne and Adelaide,for cargoes originating in or destined for the hinterlandsof Brisbane and Adelaide respectively (ISe 1988b, 349).Brisbane and Adelaide therefore have an incentive to keepport charges for container cargoes below those of theirrivals, t,aking into account the land transport costs andtransit times involved in centralising cargo ..

Geographic barriers limit competition between ports indifferent stat,es, However, distance is not generally asimportant in preventing competition within S~ates.

Institutional barriers become of increased importance inpreventing this form of competition" For example, theMaritime Services Board (MSB) having control of all NewSouth Wales ports has the power to prevent investment thatwould allow competition between ports" In States whereports are controlled by independent port authorities thereis usually State government oversight or coordination

In contrast North American and European ports tend to bemore competitive than Australian ports ,. An importantfactor contributing to this difference is that largeproportions of the manufacturing industry and of consumermarkets in those continents is located in regions remotefrom the ports" Transport costs can therefore be similarto ports which may be hundreds of kilometres apart thusproviding the basis for competition.,

Inter-port competition

In many countries, effective competition between ports ispossible and provides significant benefits" However, inAustralia the necessary conditions for inter-portcompetition are not generally present. The most importanthindrances to competition are the large distances betweenthe capital city ports and the fact that port business fornon-bulk commodities usually relates to the port cityit,self, or the immediate surrounding areas (ISC 1988a,141) . Land transport costs between port catchment areasare usually very large compared to differences in portcharges.

theLiningmajor:erned

shipf the,ative

iuof~icing

·t forsometake

,et of:'icing

this'pment5 and,ch byd forLt the,) has1989)(MSB)

"ieantrand1t is'gest.t and1 the.roughs areiacorne

thedling

number of users

relative size of users

intrastateinhibitto

GENTLE

which would genaI'ally servecompetition between ports

availability of credible alternatives"

Countervailinq power of useJ:'S

In theory, the bargaining power of users can operate inthe same way as int.er-port or inter-modal competition, byplacing restraints on the prices charged by a portauthority.

402

In contrast, bulk grains are pot,entially subject t,osignificant inter-port competition. Gz:ain is grown ininland areas often with transport links to two or moreports. The physical basis therefore exists forcompetition between ports" For example, the majorcompetition between POI'ts in Victoria is t,hat betweenPortland and Geelong for grain. Institutional barrierstend to limit inter-port competition for grain exports(Royal Commission into Grain Storage, Handling andTransport 1988).

Bulk minerals are probably the least susceptible to inter­port competition as t.hey are usually dependent ondedicated port facilities and land transportinfrastructure. They may also be subject to agreementswith State governments to use specific facilities.

ownership links between different user categories

The strengt,h of the bargaining power of port users isdetermined by several factors:

Owners of non-bulk cargo are large in number which is notconducive to bargaining'" power and they tend to have littleinfluence over the level of port charges, There are onlya small number of non·';'bulk vessel operators andstevectoring companies which suggests they may have greaterinfluence over port charges than cargo owners" However,the concentration of non-bulk cargo origins anddestinations in t.he capital cities and the cost of landtransport limits the possible alternatives available tovessel operators and stevedores.

~astate

inter­nt onmsport!ements

,ct to)wn inI:' more

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and.land

le to

PORT AUTHORITY PRICING

In the major bulk ports a reverse situation applies Thenumber of cargo owners is small (there may only be one)and the number of vessel operators may be large, But bulkcargo owners are not in a superior bargaining position totheir non-bulk counterparts" A major reason is that theyare usually locked-in to a specific port through theirinvestment in port facilities and the transportinfrastructure linking t,hem to the port" Bulk grainexporters have potentially greater flexibility butinstitutional factors limit the extent to which thispotential can be achieved.

The fact is, of course, that most ports operate inmonopoly or near monopoly markets and consequently thereis little or no scope for customers to take their businesselsewhere if port charges are unsatisfactory, The lack ofcredible alternatives for port users outweighs any otherfactor which might otherwise confer market power uponthem ..

Government policies

The ultimate and most effective constraint on the marketpower of port authorit,ies rests in the legislative andexecutive powers of the State governments" Governmentsare able to dete~mine the limits to which port authoritiesmay pursue their policies, including the pricing of theirvarious services.

The policy of State governments towards the portauthorities takes account of their own economic,financial, social and political interests" In practice,this means that State governments have no desire to allowport authorities to exploit their market power to themaximum,

PRICING PRACTICES

Port authority prices are conveniently classified ascharges on ships or charges on cargo" There is littleuniformity in the nomenclature used for the charges, andconsiderable variation in the basis for some charges amongAustralian ports"

Ship based charges

State governments in all States, except Tasmania, and theNorthern Territory levy a conservancy charge which isdesigned to cover the cost of channels and navigational

403

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facilities on the approaches to ports" This charge isbased on ship's size as measured by gross registered tons(GRT) and is levied for a specific period of time. Theperiod of time varies from 30 days in Queensland to sixmonths in New South Wales" Once paid the ship can make aunlimited number of additional visits without additionalcharge ..

Port authorities also levy a charge usually called atonnage or berthage charge which is for the use ofchannels and navigational facilities and berths. Thecharge is usUally based on Gross Registered Tonnage (GRT)and length of stay in the port, Brisbane is an importantexception where the charge is based on ship's lengt,hinstead of GRT, The charge generally involves an initialrate for a specified period of time after which lowerrates apply The initial charge applies fo~ a period ofthree days in some Tasmanian ports and for shorter periodsin most other ports.. The basic time period for chargingvarious from one hour at Westernport to 24 hours for portssuch as Bundaberg ..

It is common for charges in this category to be uniformthroughout a port and in South Australia and New SouthWales the charges are uniform across all ports within thejurisdiction of the relevant Authority No distinction ismade between high and low cost berths.

In addition there are a range of other ship charges suchas harbour improvement charges (based on tonnes of cargo)in Western Australia, berth facilities charge at Geelong,and ship service charge the purpose of which is not clear.

Cargo based charges

The most common cargo charge is the wharfage charge whichis based on the amount and type of cargo loaded ordischarged" It is a charge on the cargo owner but in mostliner trades is incorporated in the freight rate" Thecharge usually involve~ discrimination between commoditytypes, import and export cargoes, coastal and overseascargo" However, the recent Port of Melbourne Authority(PMA) proposed charges remove these fo~ms ofdiscrimination entirely.

The charges are loosely related to the value of thecommodity in question and probably have an even poorerrelationship to the elasticities of demand for transportof each commodity. Wharfage is generally a charge which is

404

harge islred tonsne" Thej to sixn make alditional

:alled ause of

~. Thege (GRT)mportant

lengthinitial

:h lower3riod ofperiods

charging:)r ports

uniform,w Sout,h:hin the::tion is

res suchcaIgo)

;ee10ng,clear"

e whichLded orin most

ThemmodityverseasthoritytlS of

of thepoorer

ansportich is

PORT AUTHORITY PRICING

unrelated to any specific cost,s and does not appear to bein return for any specific service It is more of ageneral revenue rai sing charge. Even in the revi sed PMApricing system wharfage is described as a charge torecover costs not recovered by any other charge" Thesewere mostly general port overheads not readilyattributable to specific facilit.ies but also include somecargo related costs (PMA 1989) .

Total cost comparisons

Because port facilities vary in capacity and handlingrates the total charge at two ports with the same apparentfee structure can be considerably different. Thuscomparisons based on unit prices provide only a partialpicture of the total level of charges. Comparisons basedon aggregate charges incurred during a typical port visitcan take into account varying port capacities.

The Bureau estimated charges for a number of ports fortypical port calls for the loading of grain, coal andcontainers.. The maximum and minimum aggregate charges forthe ports chosen are shown in Table 1" The ratio betweenmaximum and minimum rates are lower for the total chargesthan for the individual charges. The table illustratesthe importance of some charges" Cargo changes tend to bethe dominant charge with Commonwealth light dues andtowage charges also being very significant.

In summary port authority prices generally exhibit a wider'ange in the level of i.ndividual charges levied. Thecharges, with the exception of some proposed revisedschedules are generally not based on clearly identifiablecosts and wharfage in part,icular is not identifiable withany specific service received by port users.

ASSESSMENT OF PRICING PRACTICES

The objectives of a port authority's pricing policies arestrongly influenced by the important fact that most portauthorities in Australia are public bodies controlled byState governments. The pricing of public sector serviceswill generally be determined using criteria different tothose applied in private organisations due to the widercommunity interests of government.

405

TABLE 1 COMPARISONS OF TOTAL PORT CHARGES FOR SELECTED COMMODITIES, 1985-86

Source BTCE estimates based on port authority charging schedules and Department ofTransport and Construction computer mOdel.

Melbourne

PortKembla Fremantle

Containers"Coal b

HayPoint

15 900 15 900 5 830 5 830

4 650 5 955 950 1 925

'"1 200 4 104 1 860 1 755 0:0187 32 045 13 454 15 134 ..,

7 048 5 620 1 614 4 730 ;J>c:..,:>:024 000 15 032 8 840 12 120 :0H..,

2 552 1 088 3 048 ><250 250 250 250 '":0

H()

54 927 81 458 33 886 44 792 Hz0.99' 1. 47' 169' 224' Gl

graln.coal.

Newcastle

Grain"

13 250 13 250

1 140 2 978

4 464 3 07813 612 47 508

1 614 4 436

9 760 7 000

1 088 2 148250 250

45 178 80 6481.69' 3.02'

Fremant.1e

Government feesCommonwealthlight duesState conservancycnarge

Charge

Port authority feesShlp basedCargo basedPilotage

Other feesTowageMoorlng and launchfeesMiscellaneous

TotalUnit cost

a. 30 000 GRT bulk snip loading 26 700 tonnes ofb. 60 000 GRT bulk snip loading 55 250 tonnes ofc. 25 000 GRT containershlps excnanging 200 TEU.d. $/TEU.f. $/tonne of cargo.

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GENTLE

Financial pe%'formance

State governments usually specify that port authoritieswithin their jurisdictions should aim to meet a givenfinancial target each year.. This target can bejustifiably regarded as the major driving force behind theeconomic and financial policies of port authorit,ies Thecurrent t,argets for the five major Australian port,s areshown in Table 2.

The common theme is that port authorities are expected toachieve at least financial balance" Financial balancerequires a set of prices which achieves the full recoveryof financial costs of commercial services from thecommercial users of port facilities Cost recovery, orfinancial balance, is aimed at allowing port authoritiesto be self-financing enterprises with no net cost togovernment budgets, The financial balance objective ofport authority pricing may be pursued separat,ely from anycommunity service obligations in the port's operations"This objective is also consistent, with current communityviews on financial responsibility and constraint"

Assessment of financial pezo'formance

Most port authorities earn sufficient revenue to covertheir operating costs, but when capital costs (interestand depreciation) and other non-operating expenditures areincluded a significant number incur deficits. Table 3summarises income and expenditure for some of the largerport authorities" All port authorities report on ahistorical cost basis but there are differences in themethods of depreciating fixed assets" For example, theMarine Board of Hobart does not depreciate assetspurchased from loan funds, while other port authoritiesdepreciate assets irrespective of the source of funds"

Table 4 provides estimates of rates of return of selectedport authorities using data provided in annual reports interms of operating surplus before finance charges andextraordinary items as a percentage of total assetsemployed POJ:'ts which are required to make a payment toState governments equal to a percentage of Ievenuegenerally show this as an expenditure item. This item hasbeen ignored in calculating operating surplus for the sakeof consistency" No other attempt has been made to removeinconsistencies in the treatment of depreciation or otheritems"

407

408

GENTLE

Financial target and dividend requirementPortauthorityC

MSB (NSW)

PMA (Vie)

PEA (Qld)

DMH (SA)FPA (WA)

Global revenue targets with 6 per cent ofrevenue to the State Government as dividend"Real rate of return of 4 per cent on writtendown current value of assets~

To be self--financing after' 5 .. 5 per cent ofgross revenue paid to Ha~bours Marine FundTo match expenditure with revenue overallTarget rate of ret,urn after a Statut.oryContribution of 3 per cent of gross revenue"The Authority is required to declare adividend to the Minister which may be acceptedor varied.

Source Annual reports and personal communications"

a" Legislation has been introduced to change the basis ofdividend to a return on equity, at a rate to be set bythe State government.. Thi s may be implemented for the1988-89 financial year.

b, Based on a 5 per cent real return on equity and a 3per cent real interest rate and with equal debt andequity financing"

c" Abbrevia,tions are: MSB (MaI'itime Services Board); PMA(Port of Melbourne Authority); PEA (Port of BrisbaneAuthority); DMH (Department of Marine and Harbours);FPA (Fremantle Port Authority) .

The rate of return based on historical costs does not givean accurate assessment of the economic return of theauthority" The economic return is the sum of t.he changein value of the assets plus net operating income" Thechange in value can be measured in nominal teIms byestimating the values of the assets in prices current atthe beginning and end of the accounting period. Thechange in value in I'eal terms would be the difference inasset values at the beginning and end of the accountingperiod measured in prices current at a single point intime" Asset values measured in historical costs clearlygive no guide to economic retuI'ns in either nominal orreal terms

TABLE 2 FINANCIAL TARGETS AND DIVIDEND REQUIREMENTS OFMAJOR AUSTRALIAN PORT AUTHORITIES, 1988-89

OF

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:~tory

7enue.re a,epted

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PMAsbane,urs) ;

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The:e in,tingt in:arly1 or

PORT AUTHORITY PRICING

TABLE 3 FINANCIAL PERFORMANCE OF SELECTED PORTAUTHORITIES, 1986-87

Expense($' 000)

SurplusRevenue Non- (deficit)'

Port authority $ (' 000) Operating operating' $ (' 000)

Maritime ServicesBoard 300 032 166 998 83 347 49 687Melbourne 105 207 58 332 64 113 (17 238)Geelong" 28 838 17 763 3 003 8 072Brisbane 41 834 19 807 14 527 7 500Gladstone 48 817 13 723 20 284 14 810Fremantle 42 688 36 698 5 174 816Port Hedland 7 139 5 769 1 502 (131)

South Australianports 40 565 26 427 18 508 (4 370)Hobart 7 397 5 453 770 1 174Launceston 10 002 4 221 5 355 426Darwin 4 888 5 081 3 696 (3 889)

a" Includes finance charges and depreciation, but notabnormal and extraordinary items"

b, Figures refer to 18 month period ended 30 June 1987,c. Before statutory contribution to consolidated revenue

(where applicable),

Source Annual reports.

Data are available for two authorities which allowestimates of rates of return based on a revaluation offixed assets to reflect current replacement costs. ThePMA includes rate of return calculations in its annualreports on a basis of depreciated replacement costs of itsfixed assets, In 1987-88 its rate of return on totalassets was a profit of 6" 9 per cent based on historicalcosts but this became a loss of 0 .. 6 per cent when based onreplacement costs"

409

A70107-Z7

410

GENTLE

Surplusreturn on

totalassetsC

(per cent)

Totalassets

($' 000)

Surplus(deficit)

beforefinancecharges~

($'000)Revenue($'000)Port authority

TABLE 4 RATE OF RETURN FOR SELECTED PORT AUTHORITIES ONHISTORICAL COST BASIS, 1986-87

Maritime Sez:vicesBoard 300 032 12 399 1 004 549 11 .. 2Melbourne 105 207 33 406 527 102 6. 3Geelong' 28 838 8 109 81 667 6 6Brisbane 41 834 14 348 135 967 10 6G1adstone 48 817 25 298 240 749 10 .5Fremantle 42 688 4 961 60 619 8 .. 2Port Hed1and 7 139 924 150 885 o. 6South AustralianportsO 40 565 11 757 130 712 9 .. 0Hobart 7 397 1 764 44 921 3 .. 9Launceston 10 002 2 800 46 780 6.0Darwin 4 888 (1 743) 46 653 (3 .. 7)

a. And before extraordinary and abnormal items"b, Based on asset values at end of financial year"c" Revenue and surplus are for the 18 month period ended

30 June 1987" Rate of return is estimated on anannual basis ..

d. The Depaz:'tment of Marine and Harbours in SouthAustralia prepares its accounts on a cash basis withthe exception of depreciation"

Source Annual reports.

Similarly the Curran Report (New South Wales Commission ofAudit 1988) estimated the effect of revaluing the assetsof the MSB The effect was to reduce the rate of returnon total as sets after finance charges from 4" 9 per cent to0 .. 99 per cent.. On a before finance charges basis thereduction is estimated to be from the 11" 2 per cent shownin Table 4 to 4 .. 4 per cent ..

IES ON

Surpluseturn on

totalassets'

er cent)

11.26.36 6

10 .. 6105

8 .. 2o 6

9 03.96.0

(3.7)

od endedd on an

n Southsis with

ssion ofe assetsf return

cent toisis t.hent shown

PORT AUTHORITY PRICING

Economic efficiency

A second major objective of port authority pricing is toseek a pricing system that produces an efficient outcome,To achieve efficiency in an economic sense requires theachievements of both allocative efficiency and technicalefficiency"

Assessment of allocative efficiency

The price elasticity of demand for port services isprobably very low so that demand cannot be diverted orincreased by the level of prices" At current price levelsport author'i ty pricing practices are unlikely to have muchinfluence on the overall allocation of resources to ports

In States where one authority or department administersseveral ports it is common practice to set uniform chargesacross all ports.. A particular example is South Australiawhere many of the ports export, wheat, are reasonably closeand therefore potentially competitive.. It is unlikelythat the operating costs of these pOI'ts are identical, Ifprices were related to costs, exporters and shipownerswould have some incentive to choose the lower costfacilities and thus enhance efficiency (Royal Commissioninto Grain Storage, Handling and Transport 1988)Clearly, the choice of port involves more than portprices: land transport costs and relative voyage times arealso important factors. While generally there is littlecompetition between ports, there are some limitedcircumstances such as those in South Australia wherepricing could be used to influence the choices of users"Inappropriate pricing policies in these circumstances canlead to investment decisions which may be incompatiblewith the most efficient allocation of resources betweenports ..

Unlike many overseas ports Australian ports place a heavyreliance on cargo charges.. Although much revenue isderived from cargo charges it is difficult to identifyspecific services provided in return for these charges"Apart from the recent PMA (1989) proposals there are nospecific costs that wharfage charges are intended torecover. Table 5 summarises the reliance on wharfagecharges of the major capital city ports

411

GENTLE

TABLE 5 SOURCES OF REVENUE FOR SELECTED PORT AUTHORITIES,1986-87

Percentage of revenue'~

Source of revenue MSB PMA PBA SA FPA

Charges on ships 11 .6 13 3 23 .. 6 19 6 19. 7Charges on cargo 43 .. 0 67. 4 51 .. 7 56. 3 30 2Charges on services 8 .. 7 19 .3 24 .7 9 8 18. 9Handling of cargo 36.6 14. 3 31 1

Total 100.0 100.0 100 .. 0 100.0 100 .. 0

a Only revenued derived from servicing ships on cargo isincluded" Main revenue sources excluded are rents andinterest"

Sources Annual reports ..

The generally poor relationship between prices and costs,as exemplified by wharfage charges, results in poorinformation to port managers on the economic performanceof specific assets" The difficulty in matching revenueand costs means that investment appraisal tends to focuson cost minimisation rather than a more commercialobjective of profit maximisation (Joy 1987).. As aconsequence the allocation of resources to specificfacilities is unlikely to be as efficient as it could beunder a more rational pricing structure

While shipowners have only limited options on the choiceof port to visit, they have much more flexibility in thechoice of ship technology" Current pricing structureswith their emphasis on wharfage and uniformity of berthcharges irrespective of costs, provide little incentive toshipowners to choose technology which optimises overallsystem costs rather than ship costs alone.. A cost basedpricing system would provide increased incentive toshipowners to choose the service or facility which bestmeets their needs and in the longer run would encouragethe choice of technology by shipowners, stevedores andport authorities which optimises overall system costs ..

412

PORT AUTHORITY PRICING

Assessment of technical efficiency

While the degree of cost recovery varies among portauthority assets it is unlikely that prices are belowmarginal costs for most services" While the degree ofcross subsidisation as defined in economic terms is likelyto be small, price discrimination is certainly widelypracticed by port authorities" Allocative efficiency isunlikely to be affected by cross subsidisation

There are some technical efficiency implications of thecurrent pricing structure" Port authorities generallyoperate in markets in which there is little evidence ofcompetition" This has given port authorities considerablefreedom in the setting of prices" This freedom has alsomeant that there has been only limited pressure to controlcosts and little incentive to relate prices for servicesto the costs of providing them ..

improveavoid

Many users criticise the pricing policies of portauthorities because they are thought to lead to extensivecross subsidisation. It is important in this context todistinguish between cross subsidisation and pricediscrimination The economic definition of a crosssUbsidy requires that the service being cross subsidisedis priced at less than marginal cost and some non­subsidised services are priced at above stand-alone costs.

A port's technical efficiency may be influenced by thepricing policies it adopts, in several ways" First, thestructure of charges could be designed to encourage higherproductivity of port facilities, For example, chargeswhich are based on the time involved in the use offacilities may be effective.. If such charges were appliedto berthing or cargo handling it could improve theutilisation of port facilities and raise portproductivity. In the longer run such pOlicies mayinfluence the choice of vessel used in particular trades.However, in general, this approach is likely to be limitedin its effectiveness by the fact that port charges formonly a fraction of ship costs in port, the cost of ship'stime being more significant and providing most of theincentive for the minimisation of delays. Joy (1989)argues that high reliance on wharfage charges reduces theincentive for stevedores to improve the operationalefficiency of leased facilities.

413

Second, pricing policies of port authorities cantechnical efficiency if they can be used to help

19 .. 730.218.931 .. 1

~,.

100 .. 0

cargo isrents and

\ FPA

:ld costs,in poor

rformanceJ revenueto focus

ommercialAs a

specificcould be

le choice.y in the:'ructuresof berth:mtive to

overalllst basedLtive to.ich best:!ncouraqeores andsts

'HORITIES,

GENTLE

excess capacity developing at port facilities Pricingpolicies may only cause excess capacity (or converselyonly help eliminat,e excess capacity) if demand forrelevant facilities is sensitive to price changes,

A third way in which port authority pricing policies maybe related to technical efficiency is through the methodby which price increases are determined Charges based oncosts will not on their own be conducive to theachievement of technical efficiency, In a near monopolymarket there is ample scope for the padding of costs andthe toleration of internal inefficiencies; particularly ifit is known that any cost increases can be assuredlypassed on to port users in t,he form of increased charges"Consequently, if t,echnical efficiency is to be a majorobjective it would be prudent to accompany cost basedpricing policies with other measures which createpreSSUI:'es to reduce t,hose cost,s"

The equity objective

The major difficulty with an equity objective for portpricing policies is that there is no single definition ofwhich concept is perceived; it can mean different t,hingsto different people, However a common concept, of equityis that it requires that there should be an equaltreatment of equals. That is, all customers in a marketpay according to the benefits they receive from theservice.

The question of incidence is closely related to equity asthe actual burden of port charges will not necessarilydepend upon where t,he charge is levied in the firstinstance, but also on the degree to which the users socharged can pass on these charges to other users orcustomers" The degree to which charges can be passed ondepends on the relative elasticities of demand for, andsupply of, the services available within the port.

Given that, Australian pprts are generally chaI:'acterised bylow levels of inter-port and intra-port competition andrestricted choice of service provider, and also that portcharges are a small percentage of the landed value ofgoods, it is probable that the great bulk of the incidenceof port charges falls on cargo owners, For many equityissues, such as the balance between cargo and ship basedcharges, alterations to current pricing structures mayhave little effect on which major groups ultimately bearthe burden of the charges ..

414

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maybear

PORT AUTHORITY PRICING

The practice of levying charges on a periodic basis,rather than a usage basis, for Conservancy charges raisesan equity issue which is not reduced by t.he incidenceeffects di scussed above" State conservancy charges aregenerally levied on a Gross Registered Tonnage basis,covering a period varying from 30 days (Queensland) to 6months (New Sout,h Wales, Victoria and South Australia).Tasmanian ports generally incorporate conservancy in theTonnage Rates levied for each port use.

The periodic basis of charges obviously benefits vesselsmaking frequent use of port facilities, and disadvantagesthose which make only one or two port visits within theperiod for which the charges are current, Coastal vesselsthus gain greater benefits for the amount they pay than dooverseas trading vessels, especially those on voyagecharter as is common in bulk trades C:ross subsidisationis probably not involved, as the ma~ginal costs ofnavigation aids and bUoys are zero or close to zero"

Apart from the issue of periodic payments the removal ofperceived i.nequities in the charging system is unlikely tohave a significant effect on the final incidence of thosecharges"

other' characteristics of pricing structures

Generally simplicity is a desirable characteristic ofpricing structures. Port users benefit from a clearlyunderstood structu~'e and predictable overall charges"Port authorities benefit from the lower administrativecosts of a simple system. The long history of currentport authority charges has led to an unnecessarily complexsystem.. Wharfage charges, especially, are noted for theircomplexity ..

The objective of as si sting economic development throughlow port charges, especially for exports, is based on therelationship between the ports and the rest of theeconomy" Government may wish to adopt port pricingpolicies designed to have an effect on economic activitywithin the port's catchment area and promote exports,However, these objectives are more effectively pursuedthrough direct economic grants or subsidies ..

415

GENTLE

DIRECTIONS FOR CHANGE IN PORT AUTHORITY PRICING

In economic terms the power of a pricing system is theinfluence it can have on the behaviour of economic agents"As noted earlier the elasticity of demand for portauthority services is, with few exceptions, very low" Itis important, therefore, in recommending changes toexisting pricing systems that behavioural aspects areconsidered. There is little point in making a change to apricing system if the change has no effect on providers orconsumers of the relevant services ..

Cost-based pricing

The most significant proposed change involves a move tocharges based on the costs of providing individual portservices, rather than relying on general charges toachieve financial balance.

Most writers favour this approach (Joy 1988, Heggie 1974)and the PMA (1989) and the MSB have announced theirintention of moving to systems based on this principle.;The arguments in favour of cost-based pricing rest on itsinfluence on the behaviour of participants in the portindustry" A cost based pricing is unlikely to have anysignificant effect on port throughput because of the lowprice elasticity of demand for port services, In the longrun it may have some influence on ship owner's choice oftechnology as a cost-based pricing system is, for mostAustralian ports, almost certain to result in a muchgreater emphasis on ship based charges"

A cost-based pricing system in Australian port,s willresul t in higher prices to shipowners (the proposed PMAnew pricing structure includes an average increase intonnage charges of 358 per cent (PMA 1989)). While theelasticities of supply and demand ensure that the burdenof these increases will fall largely on cargo owners, arational shipowner would respond to the higher charges byseeking out those facilities and operating procedureswhich reduce the charges levied by port authorities on hisships. In the longer run productivity enhancinginvestment in port facilities by stevedores and portauthorities would become more attractive. Overall at themicro level within the port many changes which improveefficiency could occur,

A pricing system based on costs and a requirement. to earna commercial rate of return on assets would encourage portauthorities to become more efficient and to be carefulmanagers of the assets under their control. A cost-based

416

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PORT AUTHORITY PRICING

pricing system requires that port authorities know whattheir costs are" Many authorities are presently unable toobtain this information in other than aggr~gated terms, Anumber are developing systems which will provide thisinformation, A knowledge of costs and the setting ofprices to cover them can provide pressure for controllingthem" A requirement to achieve a target rate of return oninvestments also implies that port authorities would needto take account of prices and costs when investments arebeing evaluated, Thus a rational pricing system has thepotential for providing a driving force for improved portauthority efficiency"

The adoption of cost-based pricing, in conjunction withcost control measures and price cap fOI:mulae, willcontribute to the achievement of the goals of portauthority pricing" Financial balance will be easier toachieve when the costs of services aI:'e clearly identified,and thus more clearly amenable to management control,especially in an environment of low trade growth,government-imposed price increase limits and financialstringency generally,

Asset valuation

The high proportion of port authority costs represented bycapital charges indicates the importance of assetvaluations in the setting of prices" Commercial practiceis for non-current assets to be revalued regularly.If port authorities are to adopt a more commercialapproach to their operations they too will need to revaluetheir assets on a regular basis,

There are also good economic reasons why assets should berevalued regularly, Primarily this is to ensure that theassets employed by a port authority more closely reflectthe opportunity cost to society of employing resources inport applications rather than some alternative use"

There is evidence that some pOrt assets are greatlyundervalued at present, and that if replacement costs oropportunity costs were used, considerable increases insome port charges would be required to meet those costs"A mOre likely outcome is that port authorities would haveto examine the performance of their assets morecritically, Those assets found to be under-performing andunder-used would be disposed of or consolidated so thatthe asset base would be more appropriate to the demandexpected for the authority's seI:vices" That is, asset

417

\

GENTLE

valuations based on market or replacement costs can leadto fairly rapid gains in efficiency

Land deserves separate consideration" Port authoritiesoften had land vested to them at no cost or else obtainedby them in the past at costs which bear no relationship tocurrent values" Land obtained in these ways attracts nofinancing or depreciation charges, The port authoritydoes not incur any direct costs of owning this land.However the opportunity cost of using land for portauthority purposes can be high particularly in landlocated close to the central business districts of majorcities" In these circumstances port authorities shouldseek to earn a target rate of return on the use of portland to indicate that port use is at least as valuable asany alternative use. If port users are unwilling to paycharges which achieve a target rate of return then clearlywelfare can be improved by releasing the land foralternative uses where appropriate rates of return can beachieved"

Rate of return

Rates of return are important from two points of view:from the standpoint of the port authority's investmentpolicy, and from the standpoint of 'dividend' payments toState governments by port authorities.. In principle thetarget rate of return should equal t,he rate of returnachieved in the private sector for investment ofequivalent risk"

It can be argued that port investments are not risk freeon the basis that port throughput and revenue are stronglycorrelated with general economic conditions, Target ratesof return should therefore include a premium above therisk free rat,e of return.. Investments in port developmentshould only be undertaken, fx'om an economic point of view,when the expected rate of return equals or exceeds therate of return target ..

Dividends to State governments should be in the form of arate of return on net equity rather than a percentage levyon revenue, as is current practice in some States. A levyon revenue is, in effect, a tax on port users rather thana reward for investment.. Port services are anintermediate good, the demand for which is a deriveddemand" It is a well established principle in taxationtheory that taxation of intermediate goods should beavoided

418

:an lead

10rities)btainedlship to·acts nolthoritys land ..)r port.n landf major

shouldof portable asto pay

clearlynd for

can be

view:estment~nts to'le thereturn

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PORT AUTHORITY PRICING

Achievement of the t,arget rates of return stipulated bythe relevant State governments is not by itself, in alargely uncompetitive environment, an indication ofoperational efficiency. In the absence of governmentprice controls, target rates of return can be met merelyby increasing prices. Other measures are necessary toensure that port authorities have incentives to reducecosts as well as using the pricing system to achieve rateof return targets. These could include specifying targetlevels of performance to be achieved by port authorities,or setting price-cap formulae to be adhered to or somecombination of these"

Pricing to recover fixed cost,s

The previous section discussed the level of fixed coststhat should be recovered by a port authority's prices,The next issue is how these costs should be distributedamong users" Two basic approaches are often suggested byeconomists" These are the use of Rarnsey prices and two­part tariffs" Both approaches require that each usercover marginal costs but diffex:' in the manner of chargingfor fixed costs ..

Ramsey prices are derived from the elasticity of demandeach user has for the service" The portion of the priceabove marginal cost is set, according to this principle,in inverse proportion to the user's price elasticity ofdemand" In practice, elasticities of demand are difficultto measure with any accuracy and ihstead some proxy isoften used.

The proxy chosen should be easy to measure as well ashaving some logical relation to the elasticities, Inpractice earning capacity of the ship is a useful proxy"Port authorities in the past often chose NRT as the proxy,it being argued that it was meant to be a measure of theearning capacity of the ship. In more recent times NRThas been replaced with GRT mainly because NRT has becomeless reliable as an indication of earning capacity(Corkhill 1977). Length of ship and draught may have somerelationship to the i.nitial capital costs incurred inproviding berths and channels. However, these measuresare not as strongly related to earning capacity and inturn the price elasticity of demand, the relevant measurefor Ramsey pricing (Heggie 1974).

419

GENTLE

The other pricing approach, two-part tariffs, requiresthat each user pay a lump sum as a type of entry fee (orperiodic charge) to cover fixed costs and a separatecharge to cover the marginal cost of each serviceconsumed" Some conservancy dues appear to be based on asystem of this type The marginal costs are close to zeroso that once the lump sum charge (based on GRT) is paid nofurther charges are levied during the specified timeperiod. This approach can given rise to some equityissues between different classes of ship operators asdiscussed previously. The use of Ramsey type prices wouldavoid the equity problem while still being consistent withfinancial balance and efficiency objectives,

When new investments are requested by port users adifferent basis for charging may be appropriate dependingon the type of investment requested. Heggie (1974), forexample, suggests that if shipowners request that achannel be deepened then the costs of the channel could berecovered by levying a surcharge on all ships benefittingfrom the deeper channel" Where a particular traderequests the channel deepening then the charge could bebased on the volume of cargo benefitting from theinvestment ..

Cargo or wharfage charges have traditionally been based onprice discrimination principles" However, an importantresult of moving to cost based pricing would be to shiftcharges more towards ship based charges, Cargo-basedcharges would be set to recover only those costs directlyassociated with the movement of cargo, These couldinclude the costs of storage space, cranes (if they arenot charged for separately) and possibly all or part ofthe horizontal surface of berths. The net result of cost­based pricing would be a much smaller proportion ofrevenue derived from wharfage charges" The need for pricediscrimination for cargo based charges would be reduced orpossibly eliminated. Other approaches are possible. Forexample, the PMA (1989) has proposed that wharfage be usedas a balancing item ~o recover costs not recovered byother charges (which are cost based), These remainingcosts are mostly overheads .. Under the PMA proposalwharfage charges are reduced substantially and all formsof cargo discrimination based on commodity or trade areeliminated, SUbstantially reduced wharfage chargesprovide the opportunity for a greatly simplified chargingsystem with lower administrative costs ..

420

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PORT AUTHORITY PRICING

Leasing policy

Port authority leasing practices currently involve longleases (20 to 25 years typically). The long leases confera degree of market power on the intermediate suppliers ofport services. Port users and some port authorities haveexpressed concern t,hat long leases have resulted inreduced quality of service and high prices (ISC 1988a).

Goss (1987) among others has proposed that short-termleases (about five years) be adopted by port authoritiesto encourage so-called ' serial' competition betweencontenders for the right to provide specific portservices" In this way it is considered that the portauthority could provide an incentive to improve efficiencyand lower prices charged to users"

Such an approach would have implications for portauthority investment, given that lessees would be lesswilling to make capital investments in facilities theshorter the lease period involved" Specialised equipmentand infrastructure may have to be provided by portauthorities rather than by the operators to make themarket for the right to provide the services morecontestable.

Nevertheless, the costs and benefits of short-term leasesshould be considered, as an alternative to long-termleases. An increase in the competitive pressures onlessees would have beneficial effects on the operationalefficiency of ports, especially in the area ofstevedoring, as well as direct effects on port authorityrevenues" Factors which influence the feasibility of amove to short term leases include the availability of asufficient number of potential operators to ensurecompetitive tendering and whether all potential operatorswould have equal access to waterside labour" This latterpoint is relevant under current waterfront labourarrangements but may be of less importance following theoutcome of the ISC Waterfront Strategy Inquiry.

Impacts on ~sers

There are implications for users of the inefficienciesarising from current pricing practices" Inefficienciesincrease the level of costs that must be met from revenuederived from users" That is, an inadequate pricing systemincreases the prices paid by users for port authorityservices on average"

421

GENTLE

However I the major impact of port pricing reform on portusers would be redistribution of charges between differentclasses of users, the most important example being a movefrom cargo based charges to ship based charges.,An important issue is whether pricing refo~m will berevenue neutral" More rat,ional asset pricing wouldincrease the revenue requirements of a port authority butthis could be offset in some states by a move fromdividend policy based on a proportion of revenue to atarget rate of return on equity" A rationalisation of theasset base by disposing of underperforming assets is alsoa likely consequence of a more commercial approach whichwould also serve to reduce the revenue needs of the portauthority.. The PMA (1989) has indicated that its pricingreform will be revenue neutral and that any shortfall inachieving its rate of return target will be met byefficiency gains. This approach has merit as it indicatesto users that the authority is willing to share in thecosts of moving to an improved system" However where portauthority assets were substantially undervalued,efficiency objectives might not be compatible withcontinued revenue neutrality"

The move from an emphasis or cargo based to ship basedcharges might initially appear to result in a majorreduction in costs for cargo owners" However, shipownersare able to pass higher ship charges costs on to cargoowners in t~e form of higher freight rates with the resultthat the final incidence of the charges may not differgreatly from the current incidence, For bulk commoditiessubject to wharfage charges and sold fob, reduced Wharfagecharges may be reflected in lower fob prices as a resultof higher port charges on ships and higher freight chargesto overseas buye.l:'s"

Users would benefit from a greater clarity of the chargingsystem. They would also benefit from improved investmentpolicies of port authorities and improved efficiencygenerally,

CONCLUSION

The major impact of an improved pI'icing system would be onport authorities themselves. The improved costing systemsrequired by the reformed pricing syst.em would allow bettercontrol of costs.. A major outcome would be a betterassessment of potential investments and management ofexisting assets ..

422

423

REFERENCES

PreliminaryEvidence to

Preliminary FindingsIndustry Structures,

M, (19 77), ,T~h=:e"--,To,:0"n~n",a",g~e,-..':M:::e"a=:s=:u~r=e~m~e,,no:t=--_.oo~f=-:--,S~h=:1~'p",s:o..;.:Universal System, Fairplay publications, London.

AGPS, Canberra"

(1988b), Waterfront Investigation:and Discussion Papers, Volume 4,

Date, AGPS, Canberra

ISC (1988a), Waterfront Investigation:Findings and Discussion Papers, Volume 2, The

Corkhill,Towards a

PORT AUTHORITY PRICING

Heggie, I. (1974), Charging for Port Facilities, Journalof Transport Economics and Policy, 8:no 1,3-25"

BTE (1986), A Study of Liner. Shipping Services into andout of Australia, Volume 2, Report 60, AGPS, Canberra.

The final incidence of the reform on users may not differgreatly from the current incidence but there are likely tobe some users more disadvantaged than others" Onepossible source arises from the fact that GRT or othermeasure of ship size is an imprecise proxy for elasticityof demand for port services. Some modifications to thereformed pricing schedules may be required in practice toreflect elasticities which may differ significantlybetween ship categories or trades.

Joy, S .. (1981), The Port of Melbourne: Future Prospects &

Problems, Ministry of Transport"

_ & Ministry of Transport, NZ (1987), Review of Trans­Tasman Shipping,AGPS, Canberra"

BTCE (1989), Characteristics and Cost Structure of the,B~u~1~k~S~h~1~'p~p~i~n~g~~F~1~e~e~t, Occasional Paper 93, AGPS. Canberra,

A major requirement of pricing reform is to base prices onthe costs of providing the relevant services" A downwardpIessure on cost,s through performance targets, possibly incombination with price cap formulae is a necessarycorollary to cost based pricing" The costs to berecovered should be based on asset valuations whichreflect current market or replacement values Financialpayments to State governments should also be based on acommercial approach in the form of a rate of return on netequity rather than a proportion of revenue.

be

nt

majorlowners

m portfferenta move

lrges.ill be

would.ty but= from

to aof the

.5 alsowhich

,e port,ricing'all in,et byiicatesin the''e portralued,

with

__ (1989), Potential for Increased Competition, Hy1and Joy& Associates, Sydney.

Port of Melbourne Authority (1989), New PI'icing structure:A Final Position Paper Outlining the Port of MelbourneAuthority's New Pricing Structure and Level of Rates,Melbourne,

Wales,Joy &

SouthHy1and

(Mr C, P, Curran A"Q.,Report on the State's

424

port Pricing and Investmentand Transpo:rtation Review, 15:

into Grain Storage, Handling andVo1u""m"e,--,3:c.:..:_.::S:.:;u"p"p",o",r::.t=i.:;n",9,--,P:.;a"p=e.::r""s , AGPS,

(1979) ,Logistics

GENTLE

Maritime Administration in Newthe Minister for Transport,Sydney,

Wales Commission of Audit(1988), Focus on Reform:

Sydney

H" G,The

Wilson,Planning,401-418,

Royal CommissionTransport (1988),Canberra.

(1988) ,Report toAssociates,

New SouthChairman)Finances,