The previous sections presented the important considerations for determining conditions in which anticompetitive behavior may exist. The lack of transport options, congested facilities, relatively high prices, and high profits alone or in combination may encourage terminal operators and other port service providers to breach the threshold of what may be regarded as acceptable competitive behavior. This section provides a discussion of port sector restructuring strategies that can be used to enhance competition within the port sector, an overview of regulatory strategies and remedies to enforce port competition standards, and a decision framework for selecting port competition enhancement strategies and remedies.
Port sector reformers have two general strategies to choose from when considering how to enhance port sector competition (Box 6): structural and regulatory. Clearly, the preferred strategy is the one that results in more competitors. In a perfect market, characterized by a large number of buyers and sellers, the extent of competition is optimized so prices reflect market efficiencies. Therefore, port sector reformers, in contemplating port reform, should strive toward structural enhancements that increase the number of competitors before resorting to regulatory enhancements. Regulatory enhancements (particularly economic regulation) are intended to improve efficiency by correcting various market imperfections; essentially, they are aimed at forcing ports to behave as if they were competing in a competitive market. Due to high market concentrations, some form of regulation is often appropriate regardless of the structural strategy. Box 6 shows how structural and regulatory approaches give rise to potential competition enhancement strategies.
Experience suggests that many of the benefits from involving the private sector stem from competitive pressures, not just the presence of a private owner. Competitive pressures also affect the amount and appropriate form of sector regulation needed: the more competitive pressures are brought to bear on private operators, the less regulation may be required. So governments—even those with substantial regulatory capacity—stand to gain a great deal from introducing as much competition as the port’s traffic and facilities allow.
Competition becomes increasingly likely as an industry becomes more disaggregated. The more the system can be structured to allow entry at different levels, the more competitive pressure can be introduced. And the more competitive pressure there is, the less the need for regulatory intervention. As discussed later, extensive unbundling may mean sacrificing efficiencies the operator may gain through the bundling of services, particularly within the terminal area (defined as the area between the berth and the gate). For this reason, “terminalization,” where a single operator controls the berth-to-gate operation, is frequently the preferred approach (with the level of economic regulation depending on the competitive setting, either within the port itself or coming from the outside).
Establishing competition for port services requires three steps. The first step is to examine closely the structure of the sector, assessing market conditions and how the services may be restructured. The next step is to implement the port sector restructuring, creating opportunities for competition in one or more segments of the port sector. If unfettered competition is possible, the process ends. If only limited scope for competition exists, the third step involves establishing regulatory oversight to maintain fair competition and to protect port users. The extent of restructuring, the exact nature of competition, and the objectives of regulation depend upon the physical, institutional, and market characteristics of the sector.
Port restructuring involves trade-offs. Where economies of scope exist, it may be cheaper for a single terminal operator to produce and deliver two or more terminal services jointly than for separate entities to provide services individually. A bundled sector, where all services are organized under one umbrella, also known as a master concession as discussed in Module 4 of the Toolkit, allows exploitation of economies of scope and eases coordination and efficiency among intermediate input suppliers and final service providers. An argument against restructuring also applies when a single provider benefiting from economies of scale is split up to induce competition. However, even in such cases, gains from economies of scope and scale need to be weighed against benefits of cost-minimization due to competitive pressures.
Typically, the private sector would prefer to engage in interport or intraport competition rather than intraterminal competition, and this is understandable because modern cargo handling techniques most often do not actually allow for efficient intraterminal competition. Even though the private sector investment would normally be greatest under these competitive circumstances, the private sector also has the ability to capture a wider range of revenues. For example, in interport competition, ports will compete for the entire handling charge of perhaps $200 per container, which captures revenues from the sea buoy to the gate. The value of the handling charge when intraport competition is present might decline to perhaps $150 per container (berth to gate), and even further to $100 per container when intraterminal competition (berth only) is present. Competitors in an interport context have a much greater span of pricing strategies for capturing their markets, meaning that at the lowest level (intraterminal competition) rivals will have a much smaller range of pricing flexibility when it comes to their ability to formulate strategies for capturing the activity. In short, competition at this level is vying for a much smaller piece of the pie.
Also from an efficiency standpoint, having a single operator per terminal tends to be preferable because of the direct control the operator would have over the range of activities from berth to gate. In addition, because of greater revenue capturing ability, a greater investment can be leveraged from the operator assuming a concession period adequate for full investment cost recovery. However, if cargo volume is sufficient to support only one operator, then government has to weigh the trade-offs between granting a monopolistic position to the sole operator versus the potential loss of efficiency resulting from intraterminal competition. For the intraterminal competition option, mainly prevailing in the tool port system (see Module 3) for general cargo traffic, revenues are collected only from vessel stevedoring. In France, intraterminal competition was promoted and terminal areas were dedicated to different operators. The result, however, was a very inefficient operation. Ultimately, because of competition from more efficient European ports, this arrangement was abandoned.
There are a number of actions governments and port authorities can take to enhance competition. Several key issues are discussed below.
One way to improve competition is to introduce new berths or terminals. The availability of this option is largely dependent on the existence of a suitable site for port expansion as well as sufficient volumes to justify capacity expansion. Many ports do not have expansion possibilities adjacent or in close proximity to existing facilities for a variety of reasons, including limitations imposed by terrain or urban encroachment, or lack of sufficient land. Alternative expansion possibilities may also be relatively costly, requiring substantial cargo volumes for cost recovery. This is particularly true if the port expansion is to be achieved via land reclamation, or if the new facility is a greenfield, requiring additional investments in land access and utility infrastructure.
Dividing an existing port into competing terminals, or terminalization, is another way of enhancing competition. Terminalization involves dividing existing port facilities into separate terminals, each leased or concessioned to a different operator. The facility’s configuration and structure may limit the ability to pursue this option, particularly for purposes of establishing gate access for each operator, and building heavy load bearing structures and berths (Box 7). This measure, of course, generally assumes there is sufficient volume to support more than one terminal handling the same cargo type (for example, two dedicated container terminals). For further information, Box 8 presents an example of how the terminalization may be implemented when traffic volumes do not justify two container terminals, and Box 9 discusses how subsidy bids may be used for management contracts when low cargo volumes would not otherwise generate bids.
Competition from the market occurs when private sector operators bid for a concession, lease, or management contract. Indeed, contracts typically contain minimum performance standards, which if breached, may result in contract termination or could bar the incumbent from rebidding at contract expiration.
Where markets consist of large cargo volumes, countries will not encounter difficulty in generating interest in concessions by the international maritime community. While there is a relatively small number of companies today engaged in operating terminals outside their native countries, there are also instances of smaller companies within a region that are seeking investment opportunities elsewhere. For example, smallerscale companies from Argentina and Colombia are seeking port investment opportunities elsewhere in Latin America. At the same time, both large international companies as well as their smaller regional counterparts will often seek local joint venture partners due to political considerations as well as the local partner’s clearer understanding of the peculiarities of the local law, culture, and operating environment.
Because of the mutual benefits accrued from joint local-international partnerships, governments should encourage such partnerships by minimizing overly stringent prequalification criteria. For example, some countries have in the past imposed the same qualification criteria on all parties of a joint venture when, in fact, it is only necessary for one of the partners to satisfy the minimum qualification standard.
Countries should also be aware that vessel operators might emerge as part of the responding bidders. Today, increasing numbers of carriers are emerging as terminal operating companies (for example, Maersk, COSCO, MSC, CMA-CGM, and APL). Although these carriers may create subsidiaries to operate terminals, there is an inherent conflict of interest in their participation in both shipping and terminal operations activities because there is the potential to engage in service or pricing discrimination: in the former, terminal operators owned by carriers (or their holding companies) may offer preferential berthage rights to their own carriers, while in the latter case they may offer discounts to their own carriers. More importantly, a carrier-operated terminal will have access to proprietary data (for example, cargo manifests) that identify shippers (importers and exporters) served by another carrier calling at the terminal. Carriers are thus reluctant to call at carrier- operated terminals if other options (other terminals) exist. Governments should be aware of such potential practices of carrier-operated terminals and can discourage such behavior in the concession agreements (for example, operator billings being subjected to audits). Box 10 presents a summary of some of the key issues and analyses that should be addressed when preparing a strategy for port sector restructuring.
Even when structural strategies are employed to enhance competition in the port sector, regulatory measures may still be required. Economic regulatory measures typically used within the port sector fall within two categories:
In contemplating the need for regulation, it should also be emphasized that regulators should communicate with port planners to determine what regulatory and operational measures are most appropriate given the port’s operational setting and market outlook. Establishing a productive relationship between regulators and planners can be problematic given the sense of ownership that many port authorities have over their facilities. The port planner’s most efficient operational strategy may run counter to the antitrust concerns of the regulator. At the same time, the port planner and potential operators should be made aware of the regulatory environment that they can expect after contract award. The ultimate strategy selected would logically reflect a balance between the need to promote operational efficiency (the planner’s perspective) and the need to avoid antitrust behavior (the regulator’s perspective). This, in turn, reflects the conflict between the goal of efficiency gains from the scale of economies (size) versus increasing the number of competitors by dividing them into smaller units (for example, single port operator versus multiple terminal operators).
Box 11 presents a decision framework for selecting port competition enhancement strategies for a variety of port conditions and competitive environments. The decision framework includes three major elements:
Each of the elements of the decision framework is discussed in more detail below.
Setting. This is the port’s operational and physical environment as it pertains to the port’s relative size, the scale of its facilities, and the cargo volume handled. The scale of facilities is presented in terms of number of berths, but it should be emphasized that this is intended to represent only an order of magnitude. That is, while a port with only one to three berths is certainly small, a fiveberth port could be small as well. Similarly, a 22- berth port can be considered large, but so is a 50-berth port. The competitive conditions encompassed in the three elements are the same, be it a 22-berth port, or a 50-berth one.
For example, in determining if the relative volume of a port is low, the port planner will know the extent of excess capacity (if any) the port may have in quantitative terms given the existing throughput and projected outlook for a specific cargo type (for example, containers).
If there is significant excess capacity, then cargo volume is low relative to the port’s capacity and is so described in Box 11. If there are, or potentially could be, capacity shortages, then cargo volume is described as high.
Diagnosis. This identifies the most important criteria for assessing the extent of competition that exists. Recall from earlier in this module that the lack of existing or potential transport options, high berth utilization (as a measure of congestion), high tariff levels (relative to competitors), and high port profitability are conditions that may indicate or encourage anticompetitive behavior.
Solutions. The diagnosis of the competitive environment in light of the port’s setting defines the potential operational and regulatory solutions for enhancing port sector competitiveness. This represents the course of action that the port planner and regulator may take.
The decision framework can be used to select port competition enhancement strategies and remedies. Referring to Box 11, consider a small port consisting of three berths and high volume. This is the only port serving its particular hinterland; there is no potential for adding capacity, and there are no intermodal options. Berth occupancy is high and profitability is high. Here, we have a classic monopolistic setting—high volume, high berth occupancy, high profitability, and no competition. The preferred strategy is to divide the port into terminals (indicated by solution S2) and to impose tariff filing and limits, with the possible need for tariff monitoring (solution R2).
Looking at the other extreme, a one-berth, lowvolume setting, with low occupancy, no competition, and low profitability suggests entering into a short-term operating or management contract (solution S4), with the possibility for a subsidy bid.
Other scenarios include:
As demonstrated, the decision framework can be a useful tool for the port sector reformer to optimize the design of a competitive setting. It can also serve to curtail the government’s natural inclination to tightly regulate in circumstances where it is not needed. Overregulation would have the unintended consequence of constraining efficiency. Indeed, as Box 11 shows, only rarely is it necessary to actually set tariffs or profitability limits (solution R2) because of the structural remedies that are available.