Research Proposal to Department of Transport and Logistics Management - Australian Maritime Collage

A Model to Develop a Pricing Mechanism to the Use of Port Infrastructure deviating from marginal cost pricing principle A Study on Formulating a Logical Pricing Structure for Cargo Handling Tariff for the Sea Ports of Colombo Introduction Globalization and continuous development of international trade has promoted the maritime transport. Increased maritime traffic backed by increased demand for shipping services increases the relevance of ports in the development process of countries. Therefore providing competitive port services is particularly vital for developing countries to retain the demand for port related services. This is why most of governments in the developing world attempt and contribute to the financing of port infrastructure. Since the financing comes as a foreign aid or loan assistance, the return on investment is highly preferred by the donor agencies, therefore pricing port services is highly considered. In the last decade the port operations have been significantly transformed by radical changes in maritime transport. One of such change is the introduction of containerization from which an apparent cost reduction could be realized in terms of cargo handling. Second the production and introduction of large ships through which shipping lines were able to realize economies of scale by shipping large volumes of TEUs in bulk cargos. To the effectiveness of containerization and accommodating large ships require high investment in new port infrastructure and equipments. Therefore pricing the port infrastructure and services has been widely discussed as it involves the basic principle of cost recovery of the investment made to provide the port infrastructure and services and more importantly the cost is regarded as sunk cost. In addition, when pricing, it is important to distinguish the port infrastructure pricing and port services pricing. The use of port infrastructure is a multiplicative and a large multiplicity of services is associated with it. Therefore it is highly required to consider this nature of multitasking to make any decisions on regulating the use, including the pricing. Pricing port services has been well understood and it has no much an issue involve. It is commonly agreed that if the port is small and no competition involve, there need a regulatory framework, while competitive port just needed to be monitored in terms of pricing decisions. Nevertheless an issue persists when pricing a port infrastructure is required as all port service providers rely on a same port infrastructure which is costly to develop and operate. Pricing port services is substantial for a port authority as long as the price charged for the use of port infrastructure is sufficient to recover the cost of operation. But the earlier accepted criteria were that the use of port infrastructure must be priced at its marginal cost of operation. It is later agreed by all that pricing at marginal cost of the service generate losses and it does not support to recover the cost of investment. Thus, deviation from marginal cost pricing is
Mahinda S. Bandara - Department of Transport and Logistics Management - University of Moratuwa - Sri Lanka

Research Proposal to Department of Transport and Logistics Management - Australian Maritime Collage

suggested and there are several second best pricing models available mostly common to other modes of transport such as average cost pricing, Ramsey pricing, tow part tariff. More importantly it has been suggested mainly to the case of sea port pricing, long run marginal cost pricing along with a use of a rental fee from the concessionaires as a pricing model. The model envisages that short run marginal cost is paid by the ships which use the infrastructure and the marginal cost of the capacity is paid by the port service operator. The European Commission White Paper (2001) provides a direction for the future transport policy formulation with a shift towards the balance between all modes of transportation. One major concern that emerge from this an efficient cost based pricing formula that considers change. Contemporary pricing mechanism of road, rail, air and maritime transport in countries vary from one to the other. This variation may be due to the institutional set up of the ownership, regulatory frame work and other policy objectives of the governments that are concerned for the operation of transport activities. Traditional approach of pricing common to all three modes of transport was to implement the marginal cost based pricing of infrastructure. In water transport unlike other two transport modes the implementation of marginal cost pricing is the most difficult from implementation. Hence, a non marginal cost based pricing model is considered.

Literature Review The literature in Economics explains two basic models to achieve marginal cost pricing. One of which is through a competitive equilibrium given constant returns to scale persists within the operation. The second through which the operation is controlled and regulated by government as a natural monopoly. The practicality of these two approached are proved to be far from reality as the presence of technology and competition among firms can create oligopolies in which pricing will take place where marginal cost equals marginal revenue. Another approach to solve the pricing dilemma was whether to adopt short run or long run marginal cost. But again the approach become invalidated when the operation reached the optimal level in which there no difference between short run and long run marginal costs. Nevertheless two propositions gives an operator a two options where short run marginal cost gives an operator to reach optimal level of use of infrastructure whereas long run marginal cost gives incentives to reinvest on the given infrastructure. Despite the above two theoretical justification and its dynamic explanations, an efficient pricing of water born transport infrastructure has not received enough literature coverage. In general port pricing issues were first discussed by Heggie (1974) who researched on cost based tariff for port facilities. Thereafter Walters (1974) mentioned that efficient pricing for port based infrastructure can be based on long run marginal cost and it provides only the basis for pricing as the presence of economies of scale can results financial deficits as marginal cost is more likely to be below average cost of operation. Another study by Bennathan and Walters (1979) considered Ramsay pricing as a suitable pricing methods in terms of cost recovery. While

Mahinda S. Bandara - Department of Transport and Logistics Management - University of Moratuwa - Sri Lanka

Research Proposal to Department of Transport and Logistics Management - Australian Maritime Collage

Button( ( 1979) stressed that pricing of ports should be based on costs, Talley (1994) argued that adaptation of marginal cost pricing in port is tedious as the determination of marginal cost of the service or operation is difficult. Pettersen-Strandenes and Marlow, (2000) stated in their work on port pricing that the existing pricing structures often suffer from trying to satisfy conflicting objectiveseconomists, port authorities, governments and port users will have different views on what constitutes an efficient port tariff. More recent work of Bergantino and Coppejans (2000) revealed a pricing mechanism based on gametheretic ratio equilibrium to allocate port infrastructure cost. Haralambides et al (2001) showed that efficient port pricing is possible under the conditions that statistics on port costs are accurately compiled with standardized accounting systems with greater presence of transparency. Further Goss and Stevens (2001) claimed that dues o cargos are taxes levied on the movement of commodities through ports but they do not reflect the port costs including the externalities. H. Meersman et al (2002), explanation on the literature review can be noted as a justification to carry out a comprehensive cost based analysis to determine the optimum tariff for cargo handling. In their wordings insight is urgently required into the real cost structure of a port call and transshipment. This is due to the nature of port performance highlighted in their work that is developing countries potentially face a congestion problem, whereas most European ports are confronted with significant overcapacity.

Current Situation of the World Sea Transport and Port Operations. The generally accepted criterion for pricing transport is that it should be based on marginal social cost which reflects all externalities. This has been considered as policy especially in European Union context since the publication of the Green Paper on fair and efficient pricing in transport in 1995 and the following White Paper in 1998 despite the fact that the pricing practices across many countries even within the EU has been irregular. In most cases, pricing to have a cost recovery has been the rationale in many transport operation including maritime transport except the attempt to adopt marginal cost pricing principle in railway transportation. Maritime transport is the deterministic activity to international trade facilitating the movement of 90% of cargo around the world ( Haralambides and Veenstra 2002). The Countrys port sector handles more than 90% of the European Unions trade with third countries and around 30% of intra-EU traffic as well as providing an essential interface between seaborne and land-based modes of transport (European Commission, 1997). The introduction of containerization in the late 1960s has paved the way to the development of ports and improves port productivity thus allowing ports to realize ships to achieve economies of scale. In turn this has resulted in the development of hub and port networks in maritime transport such as Singapore Hong Kong and Rotterdam feeding regional ports in Asia and Europe. In line with the
Mahinda S. Bandara - Department of Transport and Logistics Management - University of Moratuwa - Sri Lanka

Research Proposal to Department of Transport and Logistics Management - Australian Maritime Collage

ports developments, the use of port infrastructure and the associated costs have been subjected to a wide discussion and Green Paper on sea ports and maritime infrastructure in 1997 of EC stressed on the use pay principle to cover the maritime infrastructure costs. Also in a recent report by SEC (2001) on public financing and charging practices in the community sea port sector emphasizes on efficient functioning of ports is an integral parts of the door to door supply chain process which stimulate the development of maritime transport. It summarizes that financing g and charging practices in the EU port sector are linked to the level of public and private involvement in the ownership and the operation of a port as well as on the competitive position of the port in the market for transportation. Current port pricing practices have been understood by many researchers as a pricing practice which has a link to the cost structure and cost levels of both port operators and port user. In general port pricing today is criticized being not reflecting the actual costs of operation, but have resulted creating port congestion and sever financial losses to port operator.

Sea Port Operation in Sri Lanka and its need for a logical structure for Cargo handling Tariff Seaports of Sri Lanka are administered by the Sri Lanka Ports Authority (SLPA) according to the Sri Lanka Ports Authority Act No. 51 of 1979 and its amendments. Initially the SLPA had been empowered to fix charges with the approval of the Minister in charge of the subject of seaports, and to levy & collect revenue based on these charges. In . The Act was amended to permit the participation of private sector organizations in selected areas of port management and operations. Specifically the privatization of the management and operation of container terminals was commenced with the privatization of the Queen Elizabeth Terminal to form the South Asia Gateway Container Terminal (SAGT). This move has initiated the functioning of two tariff structures for the government and private sector operators. Currently the SLPA is developing seven port sites in different districts around the country, in Colombo (South Port), Galle, Hambantota, Oluvil, Trincomalee, Point Pedro, and Kankasenthurai. This development of the seaports will result in new container terminals, general cargo berths, dry & liquid bulk terminals, yacht marinas, ferry and ro-ro terminals etc. Presently the charges for the services rendered by the government managed terminals, quays, warehouses and berths of the ports are collected based on a government approved and published tariff. Analysis of the tariff structure indicates a multitude of charges for the various services rendered, and apparently not on a cost-based tariff. Sri Lanka located strategically at the cross roads of east-west international shipping routes needs to tap this potential to attract international shipping lines, to develop as a transshipment megahub in the region. A logical tariff structure is a sin-qua-non to achieve this objective. It is

Mahinda S. Bandara - Department of Transport and Logistics Management - University of Moratuwa - Sri Lanka

Research Proposal to Department of Transport and Logistics Management - Australian Maritime Collage

observed that the practice of offering rebates and concessions to providers of transshipment traffic has comparatively increased the charges for local imports and exports. This practice has given rise to a dilemma for the SLPA, by not being able to provide a lowered rate for imports or exports, in spite of the quick handling and fast turn-round times achieved due to improved port performance. Coupled with the complicated Customs Tariffs, the improved port services have had no impact on the prices and on the general cost of living thus deriving no noticeable tangible benefits from port development. In order to overcome these anomalies the tariff structure for cargo handling has to be viewed from a rational perspective. For Sri Lanka faced with this specific problem of rationalizing tariffs for local and transshipment cargoes, finding any effective solution will depend on a broader understanding and cooperation among the Ship Operators and Agents, Port Authorities / Private Terminal Operators, and Shippers & Consignees. With the development of regional ports, SLPA should be able to offer customer specific terminals/ ports catering mainly for specific type of cargo traffic, transshipment, or local import/export cargo or passengers/ ferries. The main-line mega-carriers could be provided with dedicated terminals while local cargo operators could be given regional ports with links to the hub-ports. Further the port development envisaged through large capital investment requires drawing new industries and investment in port-related activities like Multi-Country Consolidation of cargo and other value addition services. It may be necessary to identify appropriate and suitable port locations which are under construction and introduce Customs-Free Regimes / Free Port etc in strategic locations and link them by land transport with transshipment terminals of the country or even with other international sea ports in the region. This scenario for Sri Lanka necessarily involves the investigation to find answers to the specific problem of setting- up an acceptable, logical and fair cargo-handling tariff. The study will be focusing on the Role & Significance of Seaports, Financial and Economic objectives of Seaports, also the Objective Struggle in port management, appropriate prizing structures and models, comparative port finance of regional References Bennathan, E. and A. A. Walters, 1979, Port Pricing and Investment Policy for Developing Countries, Oxford University Press. Button, K. J., 1979, The economics of port pricing, Journal of Maritime Policy and Management, 6 #.3 201-207.
European Commission (1995) Towards Fair and Efficient Pricing in Transport: Policy Options for Internalizing the External Costs of Transport in the European Union, COM (95) 69, Brussels. http://europa.eu.int/comm/off/green/index_en.htm#1995

Mahinda S. Bandara - Department of Transport and Logistics Management - University of Moratuwa - Sri Lanka

Research Proposal to Department of Transport and Logistics Management - Australian Maritime Collage

European Commission (1997) Green paper on seaports and maritime infrastructure, COM (97) 678 Final, European Commission, Brussels. http://aei.pitt.edu/1234/01/sea_ports_gp_COM_97_678.pdf European Commission (2001) Green paper on public financing and charging practices in the community sea port sector, COM(2001) 35 Final, European Commission, Brussels. http://ec.europa.eu/transport/maritime/infrastructure/doc/com_2001_0234_en.pdf

EU (2006) Public financing and charging practices of seaports in the EU final, Institute of Shipping Economics and Logistics. http://ec.europa.eu/transport/maritime/studies/doc/2006_06_eu_seaports_study.pdf Bergantino and Coppejans (2000 Haralambides et al (2001) ( Haralambides and Veenstra 2002) Heggie (1974) Pettersen-Strandenes and Marlow, (2000) Goss and Stevens (2001 Walters (1974) SEC (2001)

H. Meersman et al (2002),

Mahinda S. Bandara - Department of Transport and Logistics Management - University of Moratuwa - Sri Lanka