Back to Basics
Australian Shipping and Stevedoring
Let me begin by asking what 'Back to Basics' might mean when applied to shipping and ports. My starting-point is the recognition that transport services are not desired for their own sake. With the exception of cruise shipping (presumably desirable as an escape in its own right), we value transport services because they carry goods from the point of production to a location where they are more highly valued---the point of consumption. Shipping exists to transport raw materials from mine or farm to place of processing, and manufactured commodities from factory to consumer. Viewed in this light, ports are merely points of transfer between land and water-based transport.
To begin in this way is to emphasise (correctly in my view) the primacy of Australian trading interests. It is to focus on Australian trading interests rather than those of the shipping industry. To use a 19th century term that now appears faintly sexist, shipping is (or should be) the 'handmaiden of trade'.
What kind of shipping services do we require? In the words of the 1964 Trade Practices Act, we require services that are 'efficient, economical and adequate'. That is, we need ships of the right type (modern, fuel efficient, labour saving, etc.) to carry our exports and imports; we want them to arrive at the right port at the right time; and we want them to charge freight rates which are related to the cost of providing the service. Shippers should not have to pay for a 'Rolls-Royce' service that they do not require; rather, they should have access to a range of services offering various quality/price options. Of course, we recognise that there are 'trade-offs'. Shippers differ in their needs. Some look for a low-quality service and can afford only a minimum price; others require their commodities to be handled with kid gloves and can afford to pay a premium for the service.
Many of the sessions in the 'Back to Basics' Conference focus almost exclusively on industrial relations issues. Whilst I too will be concerned with industrial relations, my canvas is somewhat broader. When I compare the shipping and stevedoring services actually offered with those that appear desirable from a national standpoint, I note that the deficiencies that occur in the real world appear to be linked to the possession of market power and/or to economic regulation. In turn these are linked to labour market problems, especially to rent-seeking behaviour. For example, we complain about the high cost and inefficient work practices found in coastal shipping. But we should not be surprised at this, given the institutional environment in which the industry operates. The Navigation Act effectively bestows a monopoly of coastal trades on a handful of Australian shipping lines. In effect, the import quota is zero. Equally unsurprising, given the strength of the maritime unions and the weakness of coastal shipping operators, is the fact that the real beneficiaries of cabotage appear to be the maritime unions. Would work practices in the Australian shipping industry have developed as they have in the absence of such protection?
In general, Australia has benefited from an intensification of competition in world shipping markets during the past decade. Whilst the rate of growth of world seaborne trade declined after 1974, the world's bulk and liner fleets continued to grow relatively rapidly. Subsidisation of shipping and shipbuilding by governments has resulted in a shift to the right of the supply curve of shipping. At any given freight rate level, more shipping services are supplied than would be the case under a more commercial regime. Inevitably, overcapacity has given rise to price competition. Shippers (as well as the labour employed in shipbuilding and shipping) have been the major beneficiaries of subsidy programs.
Australian shippers have benefited from low freight rates. Low time and voyage charter rates have enabled Australian exporters to sell steaming coal, iron ore and bauxite to Europe, a market which would normally not be open to low-value commodities. In the liner trades, freight rate increases in the 1980s have been considerably lower than those prevailing in the 1960s and early 1970s. Discounting has been prevalent as outsiders have provided competition for the conference lines.
We cannot rely on such favourable conditions continuing indefinitely. The depression in shipping markets will end eventually. In the meantime we should put our house in order. Two areas of concern stand out: first, the question of liner shipping policy; secondly, the question of Australian flag shipping.
Australian shipping policy has recently been reviewed. Traditionally, Australia's liner shipping policy has been based on the belief that the national interest is best served by 'closed' conferences operating rationalised services. Consequently, shipping conferences operating in Australia's outward liner trades are exempt from Part IV of the 1974 Trade Practices Act (TPA). Part X of the Act allows shipowners to enter into agreements which, inter alia, determine freight rates, pool earnings, allocate ports of call and restrict or regulate sailings. Clearly such agreements confer substantial market power on shipping conferences. Part X envisages that this market power will be countered by the monopsonistic bargaining power of a quasi-public shipper group, the Australian Shippers' Council. A pragmatist might say that the policy has worked well, though it has certainly not worked in the way envisaged by its architects. As noted above, the quantity and quality of liner services has been perfectly acceptable over the past decade. Competitive forces have held down freight rate increases. However, the Australian Shippers' Council has not proved a particularly effective countervailing power. In practice, the intensification of competition in the liner trades has ensured the provision of satisfactory services. Ironically, the benefits of competition between carriers has no role to play in the 'official' policy. The widening gulf between the way the policy was supposed to work and the commercial realities of an intensely competitive liner shipping market led to pressure for a review of policy.
In late 1984 the Minister for Transport announced the appointment of a Task Force to review Australia's overseas liner shipping legislation. The Report of that Task Force, the Liner Shipping Report, was released in February 1986. A period of public discussion followed before the proposals disappeared into the bureaucratic maze and were fought out in IDCs. In November 1987 Senator Gareth Evans announced that the Cabinet had adopted a package of reforms designed to produce greater competition between carriers.
The major change is the application of much of Part IV of the TPA to liner shipping. Hitherto liner operators have been exempt from the application of Part IV of the TPA, that is from the sections of the TPA that deal with restrictive trade practices. It is now proposed that conference agreements will be exempted only from sections 45 (anti-competitive agreements) and 47 (exclusive dealing) of the TPA. Moreover, exemption is to be made conditional on conference agreements being placed on a public register.
Other changes include strengthening the rights of shipper bodies in negotiations with shipowners and provision for the Trade Practices Commission to investigate complaints made by shippers; Australian flag shipping will continue to have access to the TPA where its operations are unfairly disadvantaged.
Whilst I have some reservations concerning the detail of the new proposals, their general thrust appears sound. They should indeed help to ensure the continuation of today's more competitive shipping environment. In contrast to the Part X approach, the proposals recognise the vital role of competition (actual and potential) in liner shipping. The contestability of liner markets is enhanced by the proposals.
Let me turn briefly to the vexed question of Australian flag shipping operating in overseas trades. Problems arise because, given its relatively high cost structure, Australian flag shipping is 'in general' unable to operate profitably in overseas trades. I emphasise 'in general' because there appear to be some trades (e.g. BHP's triangular trade involving overseas and coastal legs) which are worthwhile. Given the interest of the maritime unions in expanding the Australian flag fleet, the concern has been that Australia will adopt some form of maritime protectionism (e.g. cargo reservation), effectively making trades less contestable and raising the price paid by shippers. During the late 1970s and early 1980s this appeared a legitimate fear, although the prospect now seems more remote. The proposed legislation properly retains legislative provisions preventing the hindrance on non-commercial grounds of efficient Australian flag shipping. Earlier fears that the Government might acquiesce to union pressure and adopt a more protectionist stance have not been realised.
Australian coastal shipping operators face a high cost structure relative to the cost structures confronting foreign shipowners; however, they are able as a result of the protected environment in which they operate to pass on the high cost to shippers. High-cost coastal shipping inhibits the development of Australian industry with a consequential impact on our living standards and employment prospects.
In some industries the high cost of coastal shipping impacts more than once. In the aluminium industry, Weipa bauxite is shipped to Gladstone, converted to alumina and shipped to Bluff (NZ) or Bell Bay (Tas). Aluminium is shipped from Bell Bay to various coastal destinations. This vertically integrated operation involves three separate coastal shipping legs---and does not take account of the cost of servicing the isolated mining community of Weipa and the use of Bass Strait shipping in supplying Bell Bay. No wonder the Study Group on Structural Adjustment concluded that '. . .for many of Australia's raw materials it is apparently less expensive to move them in a raw state several thousand kilometers before processing, than to bring them together in this continent.'
The cost of shipping commodities round the Australian coast is high by world standards. Freight rates payable for the carriage of coastal cargo are very much higher (on a tonne-km basis) than those charged for international cargoes. Coastal freight rates reflect an inflated cost structure. Comparisons of the cost incurred by the shipowner in operating Australian vs. foreign flag vessels highlight the magnitude of the cost discrepancy. For example, my own estimates of the revenue needed to cover the capital and operating costs of a 'handy-sized' Japanese-built bulk carrier suggest that an Australian flag vessel would require a notional freight rate 60 per cent above that of a Philippine flag vessel (and, I should add, a freight rate above that obtainable under today's market conditions).
The high cost levels incurred by Australian shipowners arise as a result of the high cost of Australian finance, Australian taxation provisions which are in general somewhat less generous than those abroad, high crew costs (see below), and the additional cost of building vessels to Australian specifications. Australian crew costs are amongst the highest---if not the highest---in the world. Australian ships are overmanned by world standards. True, Australian manning levels have been reduced from the 34+ level ruling in the early 1970s to around 30 in the late 1970s, as against a post-Crawford figure of 26, and 21 under the latest MIDC proposals. But other maritime countries have reduced their manning levels, with the result that Australia still lags behind European best-practice level of 15-18 and the 'experimental' crew sizes of 14 and under adopted by some major maritime countries.
Australian leave arrangements are also generous by world standards. Under the Maritime Industry Seagoing Award, officers and ratings accrue leave entitlements at the rate of 0.926 of a day for each day an employee is on articles. Total leave entitlement per year served on articles is therefore 338 days. To operate continuously, an Australian vessel must therefore have two complete crews. In practice, between 2.1 and 2.2 crews must be employed to allow for sickness and other contingencies. This ratio is appreciably higher than in other maritime countries. A typical European maritime power would have a ratio of about 1.5.
A variety of other labour-related costs must be added to complete the equation. Australian shipowners face onerous payments for travel and accommodation. Medical expenses are high. The cost of the ships themselves is greater than that incurred by overseas owners as a result of the demanding standards of crew accommodation. Finally, Australian shipowners---in common with Australian industry generally---face on-costs which are high by international standards.
How might the high cost levels be reduced? There appear to be two possible paths: through an improvement in the efficiency of the Australian coastal fleet by the introduction of new, cost-reducing technology and a reduction in manning levels; and by increasing competition through the adoption of full or partial deregulation, thus putting pressure on owners to 'shape-up' or go out of business.
The Hawke Government has opted for the former strategy. The Ships (Capital Grants) Bill 1987, in offering incentives for the introduction of modern, technologically advanced vessels, builds on the earlier Crawford 'revitalisation' package. The 'carrot' takes the form of a taxable grant of 7 per cent of the purchase price of an eligible vessel. Eligibility is tied to a reduction to 21 in crew size from the current best-practice level of 26. Vessels qualifying for such grants will also qualify for depreciation over five years, commencing in the pre-delivery year, under section 57AM of the Income Tax Assessment Act.
The purpose of introducing grants and accelerated depreciation is to encourage investment in new, technologically advanced vessels. Their introduction should lead to significant economies. However, if society as a whole is to benefit, we must ensure that some part of these cost savings are passed on to the shipper. In a relatively thin and poorly contested coastal shipping market, we cannot be sure that the benefits will be shared---that there will be sufficient competition to ensure economic efficiency. Hence I would argue that there is a case for introducing measures designed to ensure greater competition alongside the Ships (Capital Grants) Bill.
Australian coastal shipping has been criticised for its low productivity, high cost structure and lack of competitiveness. These failings have been attributed, in part, to the effects of the Navigation Act (1912) and the Customs (Prohibited Import) Regulations. Under the Navigation Act coastal trades are open only to shipowners complying with Australian award rates of pay, manning levels and standards of crew accommodation. In practice, if not in theory, these restrictions have reserved coastal trades for Australian owned, registered or chartered vessels. The Customs (Prohibited Import) Regulations ban the permanent importation of certain classes of vessel unless written ministerial approval is obtained. Together these regulations impose a cost disability on the users of coastal shipping, forcing them to buy shipping services in a thin and relatively uncompetitive market, while denying them access to competitive foreign flag shipping and to the relatively cheap secondhand vessels available from time to time on world markets.
Deregulation (i.e. the opening of coastal trades, in whole or part, to overseas flag shipping) could lead to the employment of vessels with lower cost structures than those currently in service and, perhaps more importantly, create a more contestable market. There are a variety of options:
- extend the Single Voyage Permit system. Currently SVPs are only granted when no suitable licensed vessel is available (price not relevant!);
- introduce partial deregulation. Open up some subset of Australian coastal trades to all shipowners regardless of flag. Specific routes and/or cargoes might be open to foreign flag shipping, specific ports designated, or specific back-loadings made available to shipping engaged primarily in international trade. Alternatively, a quota system might be introduced under which a specified proportion of trade growth would be open to all to carry; or
- introduce full deregulation, i.e. open coastal trades to all shipowners regardless of flag. This is least likely to be adopted for political reasons and is perhaps only of academic interest.
Ports and Stevedoring
The cost of getting non-bulk freight onto and off ships in Australian ports is far too high. Port and cargo handling services are the weakest segment in the chain linking Australia to world markets. The problems are generally recognised and have been the subject of numerous inquiries over the past forty years. But we have had too little action. Costs remain excessive.
In the time available, all I can do is put forward a personal view of the problem in note form and suggest a possible line of attack. I suspect that it will draw a host of flack!
In my view the low productivity/high cost problem stems from:
- the low level of competition between and within ports. European-style interport competition lacking in Australia. Effective competition within ports (e.g. between container terminals in a given port, etc.) also lacking;
- an absence of communication between the various players in the port and cargo-handling game. Appears to be of critical importance at some key interfaces, especially the container terminal-road transport interface; and
- a rigid industrial relations environment. Inflexible working hours. Incentive structures poorly conceived or non-existent. Archaic work practices.
Ports and port authorities: Three key problem areas:
- a low level of competition between ports. Lack of
inter-port competition means that ports do not have
to strive to retain custom. Management can get away
with inefficiency. Possible solutions?---simulate competition.
Divisionalise. Encourage different divisions of the
port authority to compete amongst themselves. Restructure
managerial incentives to encourage competitive behaviour.
Give divisions considerable pricing freedom, etc.;
- where possible, encourage real competition between ports. Remove remaining artificial barriers to interport competition. Get rid of last vestiges of State protection. I recognise that such competition limited by Australian geography;
- the establishment of some private ports might be beneficial. In the United Kingdom, Felixstow provided a marvellous spur to the nationalised ports!
- the low level of competition in port and cargo-handling services, e.g. among container terminal operators, tug operators. Can port authority influence the performance of terminal operators, towage firms, etc.? May be able to do so through a tendering process. Scope for port authority to influence productivity levels if it requires guarantees regarding performance/price as part of the tender. Admittedly there is a problem where an operator's performance does not meet its tender specifications. This problem is serious where there is only one container terminal, since revoking a licence would impose costs on the port users. However, it should be possible to devise a system in which the terminal operator is penalised financially by poor performance.
- port pricing. In general ports levy charges on both the ship and the cargo. Since the charges ultimately accrue to the shipper, such pricing practices are not sensible from the economist's perspective. Nor is price necessarily related to the cost of the services the port authority provides.
Container terminal. Several problem areas:
- low level of productivity (judged by international standards). High charge for loading and unloading containers;
- high degree of concentration in most ports (i.e. most ports have only one or two terminals). Relatively high barriers to entry to terminal ownership (access to a suitable site, access to labour, capital cost of necessary equipment);
- terminal operators appear to give higher priority to ship turnaround than to other aspects of their operation. In particular, interface between terminal and road transport generally unsatisfactory. Terminals impose costs on road operators.
Present policy appears to emphasise modest reform of selected aspects of terminal operation, e.g. terminal-road interface. Are these reforms sufficient to ensure a quantum leap in terminal performance? Perhaps we shall have to consider more fundamental changes, such as the suggestion that port authorities tender out the right to operate container terminals every five years. Economies of scale in terminal operation suggest that we are not likely to see a further proliferation of terminals.
Towage. Problems include:
- high level of concentration. Small ports usually served by a single tug owner, large ports may have two or three tug operators;
- little competition. Seemingly high charges;
- tendency for over-supply of tug services. Number of tugs employed appears to be determined by requirements under worst weather conditions; and
- tugs appear overmanned. Two-crew system operates, despite the fact that crews live at home.
The solution to the high cost of towage would not
appear to lie in encouraging further entry into the
industry: the market is too small. Here again a possible
approach is for the port authority to put the right
to provide tug services to tender. The tender period
should not be too long (five years), and the port authority
might wish to specify the level of service required
as well as a price ceiling.