Australia: ACCC and competition between ports

The ACCC has clearly signalled its preference that State Governments protect opportunities for competition between spatially proximate port facilities in the context of privatisation.  This article explores some of the difficulties experienced with this model.

What is the ACCC's position?

The ACCC has, most recently, reiterated its warning to State Governments in its 2015 annual Container Stevedoring Monitoring Report1 that Governments should act diligently to protect  opportunities for future competition between port facilities – "for example, by separating (rather than integrating) potentially competitive facilities and avoiding clauses that impede the development of competition".2

The ACCC foreshadows the potential privatisation of the Port of Fremantle, and suggests that the WA Government may wish to consider whether this presents an opportunity to facilitate future competition between the existing container facilities in the inner harbour and possible new facilities in the outer harbour.

The ACCC has been critical of arrangements entered into by the NSW State Government in connection with the privatisation of Port Botany that sought to protect against "substitution risk" (the risk that a competing port facility might be developed as a substitute (i.e. competitor) by "bundling" Port Botany with Port Kembla, as well as providing certain confidential covenants in relation to the potential development of the Port of Newcastle as a competing container terminal.

Facility Optimisation

The ACCC's concerns are well founded to the extent that the adverse consequences of entrenched market structures mean that there may in time be insufficient capacity to service a particular transport and logistics market.

However, the simple notion that spatially proximate port facilities should be left to compete vigorously and freely for port traffic warrants interrogation.   The factual setting must be carefully considered, and certain international experiences support an alternative argument.

Competitor ports?

The factual setting requires an analysis of the inherent characteristics of each facility, and the extent to which they are, in fact, 'equal competitors', or whether in fact they should continue, over time, to remain competing ports.

It is not unusual to find the primary port servicing a city situated in a sub-optimal location. Often this is because of historical reasons – the city simply grew around the port.  The development of the larger ships will also often mean that channel or berth depth of an older port will not meet future demands.  Not all countries can do what Singapore is doing – moving one of the busiest ports in the world to a new location on another part of the island.

In the context of the Port of Fremantle, the inner and outer harbours have very different physical settings (constraints and opportunities for expansion) – including in relation to current and potential landside and harbour-side access, environmental sensitivities, and proximity to residential communities.  It would be imprudent to rule out the notion that they should not compete, but instead, be integrated – over time - to take into account the different physical constraints and opportunities attaching to each site.  This approach is, for example, consistent with the City of Kwinana's "Indian Ocean Gateway" concept to develop the outer harbour which it recommends be part of the divestment terms for the inner harbour.

Competition and inefficient investment

Potentially competing port facilities (i.e. competing for the same trades, in particular, container traffic) could therefore be operated as complementary facilities under a 'facility optimisation model'.

In the context of the potential privatisation of the Port of Fremantle (and the need for a second container facility which can only practically be located in Cockburn Sound in the outer harbour), a further rationale for the optimisation model is that  co-ordinated investment across both port facilities is more likely to produce an efficient allocation of resources to increase the collective capacity of both the inner harbour and the outer harbour.  Put differently, strategic collaboration between an inner harbour facility and outer harbour facility stands a better chance of avoiding unnecessary duplication of infrastructure investment – which is ultimately paid for by consumers.

The Puget Sound example

Recognition of the merits of an optimisation model between spatially proximate ports can be seen internationally in the recent example of Puget Sound.

At Puget Sound, the Port of Seattle and the Port of Tacoma, which sit approximately 30 miles apart (not significantly different from either the potential two port scenarios in Melbourne and Fremantle), have competed for container traffic for a number of years.  Each port authority (i.e. owner) has allowed and encouraged significant expansion of their respective ports in order to compete with the other. 

This has led to significant overcapacity and an overlap in the supply of port services for both ports.  Additionally, while a highly competitive approach has allowed the ports to "steal" each other's customers from time to time, this strategy has seldom generated larger volumes of container traffic from outside the region.3

pugent sound

Moreover, recent market conditions are not helpful.

  • There has been increased regional competition from Canada (at Vancouver and Prince Rupert, B.C.), as well as the West Coast (particularly in Southern California).4 This regional competition has been taking away market share from Seattle and Tacoma.
  • Shipping lines have been consolidating their operations and sharing cargo to eliminate duplication of efforts.  These consolidations have resulted in shipping lines calling on fewer ports, while also allowing them to play off one port against another.5
  • There is an increased demand for much larger 'mega-ships' to be serviced.  These larger ships require significant landside investment.

The pitfalls of an approach focused solely on intra-regional competition, rather than collaboration, seem apparent.  A report commissioned by the Port of Seattle in August 2013 noted that the problem of increased competition for the Ports of Seattle and Tacoma has been exacerbated by a lack of communication and coordination, and the existence of periodic intraregional competition.6 In this respect, while Puget Sound is the USA's third-largest container gateway, the current combined marine terminal utilisation of these ports is less than 50%, with Seattle at just 38%.7 Additionally, while trans-Pacific cargo business grew in 2013 by 2-3%, the combined market share of Seattle and Tacoma fell by 4-5%.8

Against this background, the two ports in 2013 applied for and received antitrust approval from the Federal Maritime Commission to engage in information exchanges aimed at boosting container traffic in the Puget Sound region.  This information sharing revolves around key topics including "container facility planning, development; management, operational costs at container facilities; federal, state, local government co-operation, funding for transport infrastructure; container business rates of return on port-owned terminals, such as rates, tariffs, leases; port facility utilisation; and expenditure of funds for the ports' container business."9 Additionally, although at the time the ports noted that considerations around a future potential merger would not be included in (then) current discussions, they indicated that consolidation of the ports was a matter that should be considered.10 In August 2015, however, the two ports formed the Northwest Seaport Alliance – a marine cargo operating partnership for the joint operation of the two ports, formalising the view that a collaborative approach is needed in order to:

  • rationalise existing investments and streamlining facilities;
  • optimise planning to cater for larger ships that shipping alliances intend to utilise; and
  • counter regional competition from Southern California and from Canada in an effective and co-ordinated fashion. 

The Puget Sound example arguably illustrates the importance of optimisation, and how intra-regional competition and a lack of coordination regarding investment can lead to significant overcapacity and an unsustainable competitive spiral, within which port authorities (or owners) compete for each other's customers, but fail to increase market share.  There may be many reasons why this illustration does not directly relate, in all material respects, to the situation facing Melbourne or Fremantle – in particular that Western Australia (or Victorian) cargo exports are not contestable in the same manner as in Tacoma and Seattle - but we would suggest that the pivotal lesson to be taken is that an optimisation approach and the potential benefits flowing from it should be carefully considered at the outset of a planning process for divestment, and certainly interrogated to the same degree as the proposition that consumers will benefit from vigorous competition between such proximate ports.  (More generally, there has been a move towards the establishment of regional port authorities in other states, particularly Western Australia.11)

Implementing the model

Broadly, there would seem to be two ways to implement the optimisation model:

  • Under a unified ownership structure, in which the parties that control both ports are essentially the same; or
  • Separate ownership structures, but with extensive regulatory or other intervention to ensure that the two ports are individually and collectively economically efficient (much like the Puget Sound example).

A separate ownership structure model would require, in our view, a significant and perhaps practically unworkable level of long term regulatory and policy intervention in order to avoid an inefficient allocation of State resources, substantially different to typical infrastructure regulation.  For example, to avoid the State of Western Australia facing competing demands in due course by separate facility owners and their stakeholders to develop access to both the outer harbour (which is in the contemplation of the Perth Freight Link proposals) and to overcome the last mile-bottlenecks at the inner harbour to allow that facility to be maximised it would seem that we would now need long term planning and development ground-rules which seek to moderate expectations within an enforceable legal framework.

We also wonder whether the stevedoring market in Australia is sufficiently deep to support the competition argument – that is, is the likely scenario for competing spatially proximate ports that ostensibly the same stevedores will operate at both facilities, nullifying (for container traffic at least) the potential benefits of competition?  It is inconceivable to think that current stevedores will not appear in a material way at a new 'second' port in Melbourne or Fremantle when developed.

None of this should be taken to suggest, however, that a unified ownership structure (which, all things being equal, will entrench a natural monopoly) will not require regulatory intervention.  But the intervention necessary – access and pricing oversight, monitoring or setting (whatever is necessary) – is the core business of infrastructure regulation and relevant regulators.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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