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
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
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
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
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)
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
- 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
- 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
- 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
- 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
- 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
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.