Opinion: Leading the (sur)charge

By: Adam Vhranos


Transport operators should proceed with caution when responding to surcharges

Opinion: Leading the (sur)charge
Adam Vrahnos

 

One of the most significant issues facing Australia’s transport and logistics sector for 2019 is increased port terminal infrastructure surcharges placed on road transport and logistics operators collecting containers at various port terminals.

Surcharges are a commercial reality in many sectors and certainly aren’t a recent phenomenon for the Australian transport and logistics sector, especially when it comes to infrastructure surcharges.

Patrick was the first stevedore to adopt an infrastructure surcharge in 2010, with competitors such as DP World following suit soon after.

However, what has been an area of concern for the Australian transport and logistics sector is how significantly those transport surcharges have increased in recent years. As an example, DP World raised its infrastructure surcharge in Melbourne from $3.45 per container in April 2017 to $85.30 per container as of January 1, 2019.

So, what is the rationale behind the significant increases?

Container stevedores imposing the surcharges have had increased container volumes over the last year, up by 8.1 per cent, being the highest increase over the last decade.

However, while the volume is up, the profit margin for container stevedores is tightening. The stevedores point mainly to increased property-related costs, the need to recover costs associated with significant infrastructure projects and increased competition as being the main drivers behind the increased surcharges.

Property-related costs

Property-related costs remain a significant concern for stevedores. Patrick, DP World, Hutchison and others have all announced that the surcharges are in place partially in order to recover significant increases in operating costs that are outside of their control.

Council rates, land taxes, lease fees, etc. have all put the squeeze on stevedore prices and those costs have for the most part been absorbed by the big players in recent years, until now. An increase in total property costs per lift for Patrick by 74 per cent since 2009/10 and 38.2 per cent over the same period for DP World, has undoubtedly added pressure to recover those costs through surcharges.

Port infrastructure

Stevedores have also said that they needed to recover significant existing and/or planned capital investment in quayside and landside facilities.

Significantly larger ships being brought to Australia’s shores require ports to respond accordingly to ensure that they are providing sufficient capability and competitive services. Stevedores say that the surcharges help pay for those services and rebalance the recovery of the cost of significant past investments in truck facilities, yard equipment and rail infrastructure that has been necessary to respond to increasing trade volumes.

Increased competition

While positive investments in port infrastructure and property costs are no doubt significant and influence the decision to raise surcharge prices, the major stevedores aren’t exactly solely hanging their hats on these issues in support of the increases. Another stated reason for the increases is to offset revenue losses.

The two major players in the market are DP World and Patrick. They have traditionally been the two main players in the market and continue to hold the majority of the market share.

However, that market share dropped from 88.2 per cent to 85.9 per cent over the last year with the introduction of Hutchison and VICT into ports on the eastern seaboard. A four per cent drop in market share doesn’t sound like the end of the world, but when the players in the market double within a year, this puts a significant downward pressure on stevedore prices to keep customers happy or risk losing their customers to a new competitor.

Patrick and DP World lowering their prices further tightens the margins and surcharges are an attempt to address the shortfall.

Pay it forward

Australia’s road transport and logistics sector has for the most part absorbed much of the costs of the surcharges.

However, the recent dramatic increases in port terminal surcharges means that transport operators cannot continue to absorb those costs and will inevitably have to pass the costs onto consumers.

The issue then becomes what should road transport and logistics businesses do in order to pass those costs on to consumers?


Read the ACCC's statement on container terminal access charges, here


Well, we know what not to do – don’t pass the cost onto consumers in concert with other industry participants.

Trade associations and advocacy groups have an extremely important purpose, but they can sometimes create a forum for competitors to discuss pricing matters or co-ordinate their commercial activities to achieve a common interest, and make no mistake, the ACCC is onto it.

In recent years the ACCC has brought cartel conduct prosecutions arising from the activities of members of various trade associations.

The ACCC has sought to impose significant penalties for those guilty of the cartel conduct provisions and will continue to seek higher pecuniary penalties to deter business from falling foul of Australia’s competition laws.

So, whatever decision you make on absorbing or passing on costs, make it alone.

Looking forward

The Victorian government has recently announced that it will conduct a review of port access terms, including terminal surcharges. There are loud calls for other States to do likewise. Until the outcome of any such reviews, terminal surcharges are a commercial reality and must be addressed on a commercial basis – but be mindful to ensure that you don’t yourself fall foul of competition laws in the process.

Adam Vrahnos is a lawyer with Holding Redlich

 

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