Stevedore duopoly impedes growth

ACCC industry report finds a lack of competition between container stevedores at Australia's ports is still hampering productivity

By Anna Game-Lopata | November 10, 2010

A lack of competition between container stevedores at Australia’s ports is still hampering productivity, the latest Australian Competition and Consumer Commission (ACCC) report into the industry finds.

The ACCC's annual container stevedoring report says greater competition is needed to encourage stevedores to invest in terminals and make the best use of existing facilities.

The report confirms demand at the nation’s major ports is forecast to almost triple during the next two decades.

"If Australia is to meet the predicted boom in trade productivity must be improved," ACCC Chairman Graeme Samuel says.

"Competition is important for driving the stevedoring industry to invest in new capacity and use existing infrastructure to move containers on and off ships faster and in ever-increasing numbers."

"The ACCC has persistently raised concerns about the degree of competition in quay-side stevedoring services." Samuel says.

"The lack of competitive intensity at the ports raises important issues about whether stevedores have great enough incentives to provide a more efficient service."

Despite lower levels of demand over the last two monitoring periods compared to pre-GFC levels, the report reveals industry rates of return average around 18 per cent, which is significantly above existing benchmarks.

This, and the lack of switching of shipping line contracts, suggests that there are no major risks to either stevedore’s profitability.

"These latest results reinforce the ACCC’s previous concerns about competition in the market for stevedoring services," Samuel says.

"They show the ability of the stevedores to sustain price levels despite changes in demand and movements in unit costs, while also making strong positive returns.

"More broadly, the results indicate that competitive industry structures appear to be important in ensuring the benefits associated with investment are shared with users."

"The situation suggests stevedores don’t actually need to compete with one another to win new business such that they each offer existing and potential new customers a service that reflects the most competitive terms and conditions," Samuel warns.

A further implication is that incumbent stevedores don’t have sufficient incentive to invest in capacity that would enable them to win business away from each other.

"Historically, shipping lines have not tended to switch stevedores," Samuel says. "This could reflect several factors, including the existence of multi-year contracts between shipping lines and the stevedores.

"However, it could also reflect the possibility that each stevedore has invested in just enough capacity to meet growing levels of demand from existing customers rather than in sufficient levels of additional capacity to infuse overriding commercial incentive to win business away from its competitor."

"Signs of emerging quay-side congestion at DP World’s Sydney terminal as a result of additional new business during 2009–10 reinforces the ACCC’s concerns about the incentives of the stevedores to invest in additional capacity," Samuel says.

The report argues capital investment at existing terminals will result in more intense competition in the current duopoly where the incumbents face greater pressure to compete with each other to retain existing customers and win additional business away from the rival stevedore.

"Capacity expansion plans at Brisbane and Sydney provide opportunities for new entry and, in turn, is expected to further increase the competitive pressures on the stevedores to retain and attract new business," Samuel says.

"The costs of establishing additional container terminal facilities, which are expected to be significant, must be weighed against the longer term benefits that are expected to result from having an increased number of players involved in the supply of services.

"The benefits of competition in affecting the incentives of the stevedores to invest in a more productive stevedoring service are an important consideration when decisions about port expansion are being made.

The ACCC finds stevedores' profits increased in 2009–10, but this was largely due to improved economic conditions.

Some measures of capital productivity have not increased since June 2001.

"Opportunities for increased competition at container ports are important for aligning the incentives of the stevedores to invest in and provide a more productive stevedoring service to users, " Samuel says.

"The results of operational and investment decisions by the stevedores would be expected to be reflected in measures of productivity.

"They provide an indicator of the quality of the service being provided to shipping lines. It follows that if stevedores were undertaking efficiency-enhancing investment, the impact would be reflected in higher productivity outcomes. "

The ACCC says decisions to allow a third stevedore to invest in additional capacity at the ports of Brisbane and Sydney have already been taken.

"This will mean a new competitor, Hutchison Port Holdings, is introduced in those ports from 2012.

Samuel says the efforts by some state governments to address problems associated with barriers to entry in the are positive as they are intended to realign the incentives of the stevedores to invest in a more efficient, productive service.

"The Queensland and New South Wales governments, for example, have each tendered out the terminal operating rights for new container facilities at their respective capital city ports," Samuel says.

"In addition, the New South Wales Government has enacted legislation which provides a more accountable framework for all future port terminal leases.

"This enables the government to directly affect the incentives of the stevedores to invest in the relevant infrastructure.

"As new entry becomes practical at these ports, shipping lines can make credible threats to move their business elsewhere.

"The competitive pressure on the stevedores to invest in a more efficient, productive service is expected to increase. The same degree of competitive pressure would not be expected to exist at those ports (e.g. the Port of Melbourne) where such reforms have not been undertaken.

Melbourne is yet to decide on how it will meet the increasing demand.

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