Principes d'analyse des tarifs portuaires : Projet de renforcement de la réglementation portuaire du Cap-Haïtien

PRINCIPLES OF PORT TARIFF ANALYSIS CAP-HAITIEN PORT REGULATORY STRENGTHENING PROJECT February 2018 PRINCIPLES OF PORT TARIFF ANALYSIS Activity Title: Cap-Haïtien Port Regulatory Strengthening Project Sponsoring USAID Office: Economic Growth Office Contract Number: AID-521-C-16-00003 Contractor: Nathan Associates Inc. Disclaimer This document is made possible through the support of the American people through the U.S. Agency for International Development (USAID). The contents of this document are the sole responsibility of the author or authors and do not necessarily reflect the views of USAID or the United States government. CONTENTS ACRONYMS IV INTRODUCTION 1 1. PORT SERVICES AND CHARGES 3 Port Reform Impact on Port Logistics Chain Charge Flows 6 Pricing and Regulatory Concerns 8 2. ADJUSTING THE TARIFF 16 Tariff Adjustment Determinants 16 User’s Role on Monitoring Tariffs 18 3. APN TARIFF STRUCTURE 20 Tariff Structure in Port au Prince 20 Tariff Structure in Cap Haitien 22 4. TARIFF ANALYSIS TOOL 27 Input Components of the Tool 28 Output Components of the Tool 30 Instructions on the Use of the Tool 31 ILLUSTRATIONS Figures Figure 1. The Port Logistics Chain 4 Figure 2. Flow of Port Charges Before Privatization 7 Figure 3. Flow of Charges After Privatization 7 Figure 4. Captive Services in the Port Production Process 10 Figure 5. Ship-to-Shore Hatch Cover Move 11 Figure 6. Number of Tariff Items Introduced Post-Concession Award 14 Figure 7. Port Charges Flow in Port au Prince Marine Terminal 20 Figure 8. Input Components of the Tool for Generating Tool Output Components 29 Figure 9. Color Codes for Inputs and Formulas 31 Figure 10. Macroeconomic Assumptions section 32 Figure 11. Revenue Scenario Section 32 Figure 12. Revenue Impact of Scenario Selection 33 Figure 13. Container (in TEUs) and Non-Containerized (in tons) Demand Forecast Scenarios 33 Figure 14. Part C’s Port Revenue Forecasts 34 Figure 15. Part D Demand Forecasts 35 Figure 16. Port Authority Operational Expenses 35 Figure 17. Port Authority Capital Expenses 37 Figure 18. Snapshot Financial Results from WS1 – Inputs 38 Figure 19. Pro Forma Financial Statement 39 Figure 20. Graphical Depictions Pro Forma Financial Statement 40 Tables Table 1. Basis for Tender Award for Latin American Port Concessions 13 Table 2. Detail of Port Charges Flow at a Port au Prince Marine Terminal 21 Table 3. Approved Maximum Tariffs for the Cap Haitien Container Terminal Operator 23 Table 4. Tariffs to be Assessed on a ship-basis by the Port Authority in Cap Haitien 24 Table 5. Tariffs to be Assessed on a cargo-unit-basis by the Port Authority in Cap Haitien (levy on goods) 25 ACRONYMS ABS American Bureau of Shipping APN Autorité Portuaire Nationale CAPM Capital Asset Pricing Model CAPEX Capital Expenses GRT Gross Registered Tons OPEX Operating Expenses ROI Rate of Return RTG Rubber Tired Gantry TEU Twenty foot equivalent units INTRODUCTION Haiti aims to transform its port sector to reflect modernized institutional arrangements in order to boost trade and grow the national economy. This mirrors changes, commencing decades ago, where governments sought to change the nature of the port authority’s role in an effort to improve port performance. Introducing the private sector to provide port services in the arena of competition was viewed by most as the ideal solution for improving port efficiency and productivity, with the port authority playing a “landlord” role in port administration. Generally, this means that the port authority regulates commerce in the port by setting operational rules and regulations, monitoring terminal operator performance, providing common use facilities, and planning for port expansion as available capacity nears its maximum limits. Initially viewed as an experiment, the landlord form of port administration has become global best practice; in fact, greater than 95 percent of the world’s largest container ports and 80 percent of Latin American-Caribbean region ports are administered as landlord ports. The port of Cap Haitien, with USAID support, will have a modern container terminal to be operated by a private terminal operator in the near future. Because cargo volumes are relatively low, introducing competition to discipline port prices is not a practical option. Instead, Haiti has chosen a course where prices for a range of services will be regulated by contract. Haiti has defined a number of services, usually referred to as standard or basic services, and combined them as a “basket” of services whose prices will be subjected to the maximum limits imposed by the contract with the terminal operator. But as we show in this report, this is not without risk as terminal operators seek to expand revenues beyond what they expect to generate from regulated charges for the basket of services. The terminal operator contract will provide for fixed and variable payments to APN, the fixed payment covering the operator’s rent for the terminal and the variable payment constituting a royalty payment for each unit (container) or ton (non-containerized cargoes) handled by the terminal operator. In addition to these revenues, APN generates others from a wharfage charge on domestic containers handled in its ports and for services that APN provides, among them tug assist and pilotage. P R I N C I P L E S O F P O R T T A R I F F A N A L Y S I S | 2 APN is well aware of the potential pressures its ports face from competition, but also needs to cover its budget. The right prices can lead a port to prosperity and growth and cover budgetary commitments; the wrong ones can reduce demand for services and have deleterious effects on APN’s financial performance. So APN has an important role to fill in its regulatory role: APN must ensure fair pricing for terminal operator services and prevent circumventing the basket of services tariff limits; and APN must also ensure that its own prices render Haitian ports non-competitive. Chapter 2 first introduces the reader to the port logistics chain, describing the main services that occur in a container terminal operation. We then explain how post-port sector reform has increased the complexity of transaction flows, with an exponential increase in the number of market players and charges that affect the total cost to port users. We then discuss regulatory concerns and introduce the reader to the fictitious Port Champignon and its two rival terminal operators, Grillé Terminal Company and Sauté Terminal Company, to describe abusive pricing practices and how they can be mitigated. While the port and the two terminal operators are fictitious, the risks described reflect reality. Chapter 3 briefly describes the concepts of tariff adjustments. Generally, adjustments can be made in accord with inflationary effects or in accord with operator profitability. For reasons explained, profitability-based adjustment is a difficult concept to accommodate in the port sector, with the Cap Haitien contract opting for the inflation index-based adjustment. The Chapter concludes by emphasizing the role of port users in tariff monitoring and the need for the regulator to establish a complaint procedure. Chapter 4 presents APN’s tariff structure. Using Port Lafito as an example, we illustrate the charge flows environment, which is generally reflective of the global post-port reform environment that Chapter 2 describes. Unfortunately, some of the lessons learned from the experience described in Chapter 2 are not reflected in the tariff provisions of the Cap Haitien contract, though the contract provisions addressing terminal operator tariffs are in accord with acceptable practice. In an effort to enable APN to make decisions about tariff levels and understand them in the context of price competitiveness and APN financial performance, we present in Chapter 5 the features of a tariff analysis model as a decision-support tool for APN. A stand-alone instruction guide to accompany the Tariff Analysis Tool has already been prepared. 1. PORT SERVICES AND CHARGES A port essentially consists of a production process involving a variety of activities performed by government authorities and terminal operators. The production process involves a series of links (when a container is moving) and nodes (where a container is being processed) upon which the government authorities and terminal operator will impose a charge. Generally, charges can be categorized as port dues, which normally cover navigation fees that are intended to cover the cost of providing and maintaining navigation aids, breakwaters, the navigation channel, terminal related charges (for activities occurring between the berth and the port gate), and other charges for services provided outside the terminal (e.g. pilotage and tug assist). Charges may also be applied by government authorities for common access areas, that is, areas commonly used by all or most port service providers, such as traffic routes, parking areas, perimeter gates, and anchorage. Common access area charges, normally charged as infrastructure or wharfage fees, are usually applied by port authorities. Port authorities may also provide tug assist and pilotage, in which case they also impose a charge. Excluding tug assist and pilotage, port authorities may apply the aggregate of port authority charges as port dues, while terminal operators apply charges for services provided between berth and gate through a tariff. Figure 1 is a graphic representation of the port logistics chain that identifies a range of basic services and who is charged for these services – generally, the shipper (the importer and exporter) and carrier (or ship’s agent). The graphic shows the sequence of 11 general activities in the port and is described as follows: 1. A navigation pilot boards the vessel and guides the vessel’s captain through the port’s entrance channel. If no berth is available, the ship is assigned to an anchorage area, the use for which the vessel operator may be charged, usually by another government entity, such as the port captain or maritime authority. As the ship reaches the berth, one or two tugs, depending on ship size and port regulatory requirements, will greet the ship to help it maneuver to the berth. Line handlers then tie two lines to the berth. At this point, the ship has incurred charges for navigation or port dues (to P R I N C I P L E S O F P O R T T A R I F F A N A L Y S I S | 4 cover the cost of dredging the channel and providing lights and buoys for navigation safety), pilotage, tug assist, and line handling. 2. Once the ship is secured to the berth, the port authority or terminal operator may apply a berthage charge (i.e., essentially, a “parking” fee applied to the time the vessel takes the berth space relative to vessel length), usually calculated on the basis of time and vessel size (length). The berthage charge stops when the last line is untied from the ship as it leaves the berth. The charge is applied to the vessel. In some cases, line handling may be incorporated into the berthage charge. Figure 1. The Port Logistics Chain 1 3. Inspection authorities (e.g. defense security, drug enforcement, immigration) may board the ship. Usually cargo is not loaded or unloaded until the authorities have completed their inspections. 4. The first shift of longshoremen or stevedores (referred to as a gang) loads or unloads cargo using a crane. Containers are “lashed” (secured to the crane) by gang members. Some ships have their own cranes, though vessel cranes (usually referred to as ship’s gear) are not as productive as gantry cranes; hence, many operators will impose the use of their gantry cranes on such vessels, though even in this case gantry crane productivity will still be lower than what it would be for vessels not having cranes as ship’s gear constrain gantry crane productivity. Productivity rates for gantry cranes are in the range of about 25-30 moves per hour. “Moves” are the movements of a container between the ship and the apron, the area at the berth set aside for loading and unloading. The charge for crane use, which is applied to the ship, can be on a per 1 Based on Kent, Paul E. and Alan Fox, “Is Puerto Limon a Real Lemon? The Impact of Port Inefficiency on a National Economy”, in The International Handbook of Maritime Economics , edited by Kevin Cullinane, 2011. P R I N C I P L E S O F P O R T T A R I F F A N A L Y S I S | 5 move basis and may differentiate between container type (20-footer, 40-footer), whether the container is loaded or empty, or if it is a transshipment container. 5. The charge for the “move” is intended to cover the use of the apron and other areas of the terminal where the container is moved to or from storage. This constitutes a wharfage charge. Wharfage is charged to the shipper (i.e., importer or exporter). 6. The container seal is inspected and a fee may apply. If so, it is also charged to the shipper. 7. This area as a whole constitutes “dispatch,” where the container is moved to or from an assigned slot (a space in the yard). Container storage operations occur in the yard. Dispatch fees are charged to the shipper. Some ports, particularly smaller ones, may not have a true storage area, but instead have a small area that serves as a buffer between the berth operation and the area behind the berth. In such cases, trucks quickly evacuate containers from the buffer storage area or the container may be loaded onto a truck directly from the vessel for immediate evacuation to an off-dock storage area, sometimes referred to as a satellite storage area. Cap Haitien and the Aleman container terminal in Puerto Limón, Costa Rica have very limited or no buffer storage capacity and hence require prompt evacuation of containers. 8. The container is stored until it is inspected and claimed by the shipper (importer). Ports having storage areas offer free storage, usually about 2-3 days, and the free storage period for exports is usually longer than for imports as some countries are promoting exports. After the free storage period expires, storage charges apply. In an effort to manage the storage operation, the terminal operator will lower prices when demand is low (and hence the storage area will have excess capacity) to encourage the use of available storage, while increasing storage charges when capacity is constrained to encourage shippers to have their containers quickly evacuated. Quick evacuation also helps mitigate terminal congestion when demand is high. Shippers may have other storage options if the terminal’s storage prices are too high, thus evacuating their containers and moving the containers to off-dock storage areas. Charges vary according to the direction of the container (import or export), whether it is full or empty, or by size. The storage fee is charged to the shipper. 9. The container is cleared or inspected by customs and moved onto a truck chassis. The operator will charge for moving the container to the Customs inspection area, which is also charged to the shipper. 10. Some ports may employ container scanners for which there may also be a charge applied to the shipper. 11. Gate processing includes weighing the container (for which there is a scale charge) and reviewing paperwork. These charges apply to the shipper. In facilitating the many processes taking place in the container terminal, terminal operators employ terminal operating systems (computerized process control systems) that ensure equipment readiness to carry a container and real time tracking of each container’s position in the terminal and stage of Customs processing. In this way, containers and equipment are optimally staged, reducing idle time of both equipment P R I N C I P L E S O F P O R T T A R I F F A N A L Y S I S | 6 and containers. Terminal operating systems today are designed to accommodate changes in documentation requirements imposed by countries and brought about by trade agreements. Additionally, data collected through the terminal operating system can be used to generate reports for the port authority or regulatory body charged with monitoring terminal operator performance and adherence to tariff and performance standards in concession agreements. PORT REFORM IMPACT ON PORT LOGISTICS CHAIN CHARGE FLOWS As earlier noted, port privatization has changed the nature of the accounting relationships of the various parties providing port services. In pre-privatization, the port authority, which traditionally served as both operator and regulator (generally over the carrier’s operational practices), provided the full range of services required for serving the vessel and the cargo. Hence, port service charges were made by the port authority to either the carriers or shippers. Generally, no other party was involved. 2 Figures 2 and 3 demonstrate the dramatic changes that privatization has brought relative to who provides the service and hence, who charges for the service. As Figure 2 shows, in the pre-privatization arena charges flowed from the port authority either to carriers or to shippers. Carriers in turn billed shippers for terminal handling charges the port authority charged to the carrier in the vessel handling operation (loading and discharging cargo); these charges were reflected on the carrier’s freight invoice to the shipper. Figure 3 provides the flow of charges in post-privatization environments, depicting a major shift of charge flows from the port authority to the terminal operator. As suggested earlier, the flow of charges is rendered more complex given the changed roles of both government and port service providers after privatization. The government no longer “touches” the cargo (as an “operating” port), but instead retains a port administration role while land and facilities are leased or concessioned to private sector parties (a “landlord” port). In the vast majority of privatization programs, the focus has been on concessioning existing terminal facilities (with requirements for improvements and/or expansion), but some countries have also granted licenses or even concessions for pilotage and tug assist (e.g. Colombia). 3 2 Of course, there are always exceptions. In some port authorities (e.g. Karachi Port Trust, Bombay Port Trust), workers were hired from labor pools organized to provide workers for vessel handling. 3 Pilotage (considered a public safety function) remains a government responsibility in most countries that have undertaken port privatization. One exception is in the United States, where the majority of pilots are members of (private) pilotage associations authorized to provide service in a specific port. Each pilotage association is given monopoly jurisdiction over a specific coastal area or segment on a river. In Louisiana, for example, vessels sailing from the Gulf of Mexico to Baton Rouge must retain three different pilots. Pilotage associations in Louisiana are regulated as a public utility, with the requirement that rate increases must be sought from and approved by a public service commission. For more information on U.S. pilotage systems, and the Louisiana case in particular, see Kent, Paul E. and John H. Binkley, “State Oversight of Pilotage in the United States: Louisiana as a Case Study,” Transportation Quarterly , Vol. 44, No. 1, January 1990. P R I N C I P L E S O F P O R T T A R I F F A N A L Y S I S | 7 Figure 2. Flow of Port Charges Before Privatization Figure 3. Flow of Charges After Privatization Port Authority Carrier Vessel stevedoring Channel and navigation fees Tug assist Line handling Shipper Terminal handling charge Dockage Yard storage Stuffing-Destuffing Warehousing Cargo wharfage Empty handling/storage Crane service Pilotage Copyright © 2007, Paul Kent and Nathan Associates Inc. Port Authority/ Government Carrier Vessel stevedoring Channel and navigation fees Tug assist Line handling Shipper Terminal handling charge Dockage Yard handling/storage Stuffing-destuffing Warehousing Concession/Lease Empty handling/ storage Crane service Pilotage Terminal Operator Other Operators Dockage Lease Copyright © 2007, Paul Kent and Nathan Associates Inc. P R I N C I P L E S O F P O R T T A R I F F A N A L Y S I S | 8 Thus, in the post-privatization arena, the port authority is responsible for providing pilotage services and a safe navigation channel. The government or port authority collects concession payments from the terminal operator (the concessionaire), usually in the form of a fixed payment (e.g. annual rental) and/or a variable payment (e.g. a royalty on each unit of cargo handled). The terminal operator assumes responsibility for the berth-to-gate cargo handling operation, while other port service providers receive licenses or concessions to provide line handling and tug assist (unless these responsibilities are assumed by the port authority or operator). Hence, the port authority’s charge flows (minus the concession/lease payment) have been reduced from charges for at least 12 services to no more than two services. The terminal operator in turn may represent charge flows for at least nine main services, including leasing space on the terminal for the equipment of other operators as well as charging dockage fees to the tug assist companies, who in turn need space to berth their vessels. It is important to note that the terminal operator may in turn subcontract some of its business functions (e.g. warehousing, container lashing, vessel stevedoring, yard operations, etc.) to other companies. While the services shown here are only the main services available in a port, a privatized port involves a multi-layered system that could reach several hundred services and charges. 4 Thus, it is no longer just the port authority, carriers, and shippers involved in charge flows. Now, it is the port authority, carriers, shippers, and a host of third party service providers and the markets they serve. PRICING AND REGULATORY CONCERNS The port privatization waves of the 1980s, 1990s, and post 2000 have generally seen the avoidance of monopolies as the services managed by port authorities were transferred to the private sector. For the most part, governments have been able to create inter-terminal competition or understood that inter- port competition would prevail. However, given the scale and scope of port operations, we can at best expect that terminal operators exist in an oligopolistic environment. This means even where there are two or more operators competing for the same market that the risk of monopoly-like behavior exists. Hence, the risk of anti-competitive behavior that arises in markets characterized as having dominant players exists in the port sector as well; predatory pricing and market and pricing collusion may arise in a port environment. 5 In addition to the threat of anti-competitive behavior among a limited number of rival operators, to some degree terminal operators can exercise monopolistic tendencies among its own customers because of their dominance over a range of services. Let’s set a scenario to demonstrate how this 4 Ashar, Asaf, “Strategic Pricing in Newly Privatized Ports”, International Journal of Maritime Economics (IJME) , Volume III, No1, March 2001, p. 55. 5 For a thorough examination of the risk of monopoly behavior, how to induce competition to avoid it, and how to monitor for such behavior, see Kent, Paul E., “Monitoring for Port Antitrust Behavior: An Operational Model and Future Challenges”, Annual Conference Proceedings: International Association of Maritime Economists , November 2002, Panama. P R I N C I P L E S O F P O R T T A R I F F A N A L Y S I S | 9 happens. Let’s say that a port in France, which we will call Port Champignon, has two rival terminal operators, Grillé Terminal Company and Sauté Terminal Company. They both vie for the same market in the container trades. In competing for business, terminal operators typically place priority in attracting a carrier to the terminal – once the carrier makes a commitment to call a terminal, then the terminal operator knows it will get the container handling business. So these fierce rivals lower their berth fees, even matching each other’s prices. But Grillé’s terminal only has two gantry cranes, while Sauté’s terminal has three that it can deploy to serve the vessel. To compensate the carrier for its inferior crane productivity, Grillé lowers its rates to $0 for both berth fees and container handling charges. Sauté responds by offering free berthage to the carrier, as Grillé has done. The carrier is seduced by Sauté’s higher productivity and signs a one-year service agreement with Sauté. As long as the carrier calls only Sauté’s terminal, then no charges will be applied to the carrier. The Port Champignon scenario begs the question as to why the operator is willing to forgo revenues from the carrier. It is because Sauté exercises dominance, essentially a monopoly, over a range of other services that the terminal provides. Let’s revisit Figure 1’s port logistics chain to show how this happens. Figure 4 shows the port logistics chain again, but we’ve added the types of main services offered at each point of the terminal operation, dividing them between two categories, standard and special services. Standard services comprise those that are applied to all carriers and the containers that are loaded or discharged and moved through or stored in the terminal. Special services are those requested of the carrier (e.g. hatch cover removal or re-stowing a container on the vessel) or the shipper (e.g. storage) that are not typically provided to every vessel or every container. So when a carrier calls, and a container is discharged from the vessel, it is not possible as a practical matter for the shipper (the importer) to have its preferred service provider send equipment into Sauté’s terminal and move the container from the berth to Grillé’s terminal for processing and/or storage. First, such a move would hamper Sauté’s berth and terminal productivity and second, a truck would charge a drayage fee to move the container from one terminal to the other and each of the two terminal operators will charge a gate fee as the container exits one terminal and enters another. Customers are thus held captive by virtue of the carrier’s decision to call a terminal. Figure 4 shows what may be considered a representative depiction of the proportional revenue allocations terminal operators generate from the range of standard and special services provided in the container terminal. As Figure 4 shows, 88 percent of terminal revenues are generated through captive services from charges that the terminal operator applies. To offset the revenues lost from berthage fees, Sauté can increase the charges on captive services. P R I N C I P L E S O F P O R T T A R I F F A N A L Y S I S | 10 Figure 4. Captive Services in the Port Production Process Let’s assume that the regulator anticipates the possibility of abuse of captive services, so it imposes maximum tariff restrictions on Sauté and Grillé for these services. Normally, a good regulator will precisely define what the service is so that it is clear Sauté, Grillé, and the regulator are on the same page. To get around such restrictions, Sauté or Grillé may be tempted to charge fees for a range of services not addressed by the regulator, some of which in fact may be unusual given prevailing tariff practices. Such an example lies in hatch cover moves. Likened to a lid on a box to protect its contents, hatch covers are used to cover and protect containers that are stored in the hulls below a ship’s deck (Figure 5). Before a ship arrives to a terminal, it is required to have submitted its stowage plan in advance of its arrival, usually 24 hours before. Containers may be stored below the ship’s deck or on the ship’s deck. The stowage plan reflects the position of all the containers the ship is carrying relevant to the specific port of call. Receiving the stowage plan in advance enables the terminal operator to prepare an operations plan, that is, a plan for container loading and discharge, before the vessel arrives. Copyright © 20 14, Paul Kent and Nathan Associates Inc. CONTAINER YARD GATE BERTH APRON Standard Services Special Services Berth Usage Load/Discharge, Transfer to Patio & Truck, Storage 48hrs Hatch Covers / Re - stows Storage Import/Export Extra Handling Heavy, OOG, Hazardous Others Storage Empty, Transshipment Reefer Line HARBOR Legend Reefer Shipper Contested Revenue 12% Captive Revenue 88% 2% 70% 3% 6% 8% 1% 6% 1% 1% 2% P R I N C I P L E S O F P O R T T A R I F F A N A L Y S I S | 11 Figure 5. Ship-to-Shore Hatch Cover Move So let’s assume a vessel’s stowage plan shows that containers are to be unloaded from below the ship’s deck. In this instance, the terminal operator cannot generate revenues without lifting the hatch. So the operator, as long as it is keeping with the carrier’s submitted stowage plan, should not be permitted to charge the carrier for hatch lifts. However, in circumstances where the carrier requests a container below the deck to be discharged that was not part of the filed stowage plan, then the terminal operator will charge a hatch lift fee. The regulator typically will not understand the nuances between the “normal” hatch cover moves and the exception described above. So Sauté or Grillé will seek authorization from the regulator to charge a hatch fee, arguing that hatch moves are not covered by charges assessed for loading/discharge, although the norm suggests otherwise. A question arises, however, as to why Sauté would on the one hand provide free berthage and on the other charge the carrier a hatch fee. Let’s take a look at the relevant components of a real tariff for the Puerto Caucedo container terminal in the Dominican Republic. 6 The berth charge there (referred to as dockage in the tariff) is based on the vessel’s length at a rate of $1.39/foot of the vessel’s length per day. 7 So a Panamax container ship, say of 4500 TEU capacity, can have a length of up to about 290 meters, or about 951 feet. So the berthage charge would be about $1,322/day. The same tariff indicates a hatch move charge of $120/lift (each 6 DP World Caucedo Port Charges, available at https://en.caucedo.com/rates/port-charges/ ; accessed July 29, 2017. 7 The length of a ship is usually referred to as LOA (length overall), as measured by the length of the vessel’s parallel to the waterline. Photo Source: SMS Marine Systems. Note hatch covers can be lifted and placed on the ship or on the berth, depending on operational requirements. The charge for hatch lift to berth is usually higher than moving elsewhere on the vessel. P R I N C I P L E S O F P O R T T A R I F F A N A L Y S I S | 12 hatch normally requires two lifts) for a total charge of $240. 8 Let’s put these numbers into perspective. We make the following assumptions: the carrier company makes two calls per week, spends 24 hours or less at berth, and has one normal hatch move (meaning two lifts) per call. If charged, annual berthage costs would be just over $137,000 each year, while hatch lift charges would be about $25,000 each year. Berthage charges are far higher to the carrier than a hatch move charge, so the carrier still wins out. In addition to hatch cover charges, there are other charges that some terminal operators like Sauté may apply in an effort to recover the cost of the berth discount. These include re-stow fees 9 , tally and data verification charges 10 , and berth reservation fees 11 , which usually fall outside the norm of pricing practices in Latin America and the Caribbean. We acknowledge the possibility, however, that terminal operators may impose one or two such charges, but the Latin American and Caribbean experience shows very few terminal operators imposing all these charges. Because of concerns about abusive pricing practices in oligopolistic environments, countries have turned to low-tariff bids as a bid criterion for concession award. The bid is normally tied to the total “all-in” charge for a basket of services defined by the government. The terminal operator offering the lowest all- in charge would be awarded the concession, with the all-in charge offered by the bidder serving as the maximum charge the concessionaire may impose for the life of the concession contract, though typically allowing for inflation-adjusted prices each year. Table 1 provides a summary of bid terms for relatively recent terminal concession programs; as the Table shows, there is a movement away from upfront payments (based on the highest bid to the government) to low-bid tariffs in an effort to control the costs to port users. Even in the case of Chile, where Table 1 indicates an upfront payment, these payments were stipulated as requirements in the bid terms, intended to finance retirement obligations of affected port authority workers from prior concession programs 12 ; hence, because these payments were prescribed, and not a term to which bidders could bid, these payments were not a determinant of the 8 DP World Caucedo Stevedoring Public Tariffs, available at https://en.caucedo.com/rates/maritime-public-tariffts/; accessed July 29, 2017. 9 A re-stow is the process of removing a container from the allotted slot/cell to a temporary location elsewhere on the vessel and then moving it back. Generally, a re-stow occurs when a vessel has multiple ports of call and the containers have not been stowed in proper sequence with the ports of call. Some containers thus have to be moved temporarily moved to another location on the ship to allow access to the container that has to be discharged. After the targeted container has been discharged, then the re-stowed container is placed back into its original slot on the vessel. 10 This involves registering the identification number of each container discharged from the vessel. As this is done for the benefit of the terminal operator for invoicing purposes, it would normally be considered as a part of the container handling fee charged by the terminal operator. 11 This charge is for reserving a time window for vessel arrival and departure from the berth. Ironically, berth reservation systems (usually referred to as berthing window system) are really intended to benefit the terminal operator to avoid risk of capacity shortages and congestion while maximizing revenue opportunities. Hence, carriers are likely to resist industry attempts to impose this charge. Though at least one terminal operator in Latin America has introduced this charge in its tariff, it has yet to impose this charge. 12 “Ex trabajadores de Emporchi demandaron al Fisco por 33.000 milliones de pesos,” Mercurio , August 10, 2000. P R I N C I P L E S O F P O R T T A R I F F A N A L Y S I S | 13 outcomes of the tenders. Thus, the Valparaiso and San Antonio tender procedures are comparable to other ports in Table 1. Table 1. Basis for Tender Award for Latin American Port Concessions Port (Country) Terminal Operator Date of Concession Upfront Payment Required Basis for Tender Award San Antonio (Chile) Puerto Central 2011 $25,000,000 Low tariff bid Valparaiso (Chile) OHL 2013 $13,000,000 Low tariff bid Cortes (Honduras) ICTSI 2013 None Per TEU fee for the government Puerto Moín (Costa Rica) APMT 2012 None Low tariff bid, high canon for regional development, high labor assimilation Lazaro Cardenas (Mexico) APMT 2011 Prescribed upfront payment Low tariff bid Manta (Ecuador) Not yet selected NA None Low tariff bid, high investment offer, and high annual concession fee and canon Pisco (Peru) Consorcio Paracas 2014 None Low tariff bid and high investment Source: Authors’ compilation from San Antonio: Puerto Central Annual Report 2011, p. 70; “Grupo Matte será uno de los tres mayores grupos portuarios del país,” Diario La Tercera , May 6, 2011); Valparaiso: Puerto de Valparaiso Annual Report 2013, p. 133; “Chile: OHL gana concesión de la Terminal 2 de Valparaíso por US$350M,” America Economia , April 2, 2013; Cortes: “PUERTO CORTES Comunicado-Adjudicación-Terminal- de-Contenedores”, p. 2; Puerto Moín: Decretos, Concesión de Obra Pública con Servicios Públicos para el Financiamiento, Diseño, Construcción, Operación y Mantenimiento de la Nueva Terminal de Contenedores de Moín, No-36443-MOPT-H (February 28, 2011) and No. 018-MOPT-H (March 1, 2011) (Exhibit 66); Lazaro Cardenas: “APILAC Auditoria 2012_0018_a Administración Portuaria Integral de Lázaro Cárdenas”, p. 9; Manta: “Pliego de Selección Concurso Público Internacional para la Concesión de las Terminales de Contenedores y Multipropósito del Puerto de Aguas Profundas de Manta”, p. 60; Pisco: “PISCO – OSITRAN ACTA DE APERTURA SOBRE 3 Y ADJUDICACION BUENA PRO,” p. 3. Because of the monopoly position of the future operator, the government has structured the bid terms on the basis of a low tariff bid from a maximum tariff in the bid terms. So this would set the pricing terms for the life of the concession for a basket of services, similar to what was discussed above. But the government needs to be aware of how operators can react to maximum price limits, usually looking for ways to generate more revenues through other services. So let’s go back to our terminal operator Sauté. To expand its business, Sauté decides to pursue another concession opportunity. Sauté’s board members advise Sauté management this opportunity is a must-win bid and has instructed management to be aggressive in pursuing an award. Reflecting Table 1’s trends, this bid opportunity would consist of P R I N C I P L E S O F P O R T T A R I F F A N A L Y S I S | 14 a low-bid tariff format for award. As good companies do, Sauté’s management conducts its due diligence on the opportunity. It examines the basket of services the government expects the operator to provide and the maximum all-in tariff within which the operator must cover the cost of its services. In reviewing the definitions of the all-in charges the government has provided in the bid terms, Sauté notices that this time the government has defined the basket of services to include hatch moves and re-stows. Sauté must now identify services not encumbered by the defined basket of services; in so doing, Sauté will determine how much potential revenue it can generate from services not bound by the basket of services. Sauté will prepare its financial spreadsheets, define services that it can provide that are not bound by the government’s basket of services definition, and conduct a sensitivity analysis to determine the lowest price it can offer while still making reasonable profit, aided in large part from services not covered by the basket of services. In fact, the results of this process can be seen from a real transaction experience in a South American port. Figure 6 tracks the number of items a terminal operator published in its published tariff for special services during its first 2.5 years of operation. At concession award, the operator had 54 different tariff items for special services, but at the end of the reporting period this had grown to 100, with the largest growth in services to shippers. These services, in fact, may be additional offerings that the basket of services does not cover. But the regulator must have a very tight definition of the basket of services to prevent operators from carving out a service from the basket and offering it as a separate service. Figure 6. Number of Tariff Items Introduced Post-Concession Award Source: Author’s Research. 16 29 30 30 38 52 68 70 0 20 40 60 80 100 120 May 2010 April 2012 June 2012 December 2012 Number of Special Services Published Tariffs Shipper Line P R I N C I P L E S O F P O R T T A R I F F A N A L Y S I S | 15 This behavior, in fact, has not escaped the concerns of some regulators. For example, Australia’s Competition and Consumer Commission, which is charged with monitoring the pricing behavior and performance of terminal operators, monitors the use of such services and charges, acknowledging the risk that operators may be introducing unjustifiable fees imposed by terminal operators. In a recent report, the Commission calculated the proportion of non-standard services relative to standard services of Australia’s container terminal operators was 18.5 percent. 13 As Haiti will control pricing via a regulation-by-contract approach, it is imperative that it has clear definitions for the services encompassed in the basket of services. Service definitions should not only include what they cover, but also what they exclude. The intent is to reduce the operator’s wiggle room for re-interpretation of the intended definition. Additionally, the terminal operators may in fact wish to offer other services that are legitimately separate from the basket of services. There should be a tariff review process in place that would confirm the proposed service is not covered by the service basket. 13 Australian Competition and Consumer Commission, Container Stevedoring Monitoring Report Number 10 , October 2013 (Exhibit 57). http://www.accc.gov.au/system/files/Container%20stevedoring%20monitoring%20report%20no.%2015%20- %20October%202013.pdf . 2. ADJUSTING THE TARIFF Following privatization of port services, some form of tariff regulatory control needs to be introduced to prevent any non-competitive behavior in a business environment dominated by a single or few service providers. The role of the regulator, then, should also focus on monitoring tariff levels and approving tariff adjustments for the regulated tariffs, and to some extent non-regulated tariffs. Here, we present a discussion of tariff adjustment methodologies to illustrate how regulators approach their regulatory function regarding tariff monitoring. TARIFF ADJUSTMENT DETERMINANTS The concession contract between the government and the concessionaire may set tariff ranges for a group of standard services. These standard services are defined by the regulator as the services whose prices are set in the concession contract and will be monitored to protect users against pricing abuses. All other services (the non-standard services) are set freely by the private operators or service providers. Therefore, the beginning of a concession is seen as an instance when the tariff is “reset” and, disregarding how tariff items were estimated, port users and other stakeholders accept its “reasonableness”. However, port users want to be assured that two other key issues related to tariffs are also made clear: the tariff adjustment mechanism and the periodicity of the adjustments. The regulator is the entity that should define these procedures. Tariff Adjustment Periodicity The issue of tariff adjustment periodicity is less complicated than the tariff levels adjustment per se. After a concession or service contract enters in effect, a first period of stability should be granted (two to three years) where, if strictly needed, minor adjustments for inflation can be made annually. Then, a periodic adjustment or tariff revision should be scheduled (three to five years) to analyze the continued relevance of having controlled tariffs and to assess an overall adjustment. The rationale is that tariffs cannot be static and should reflect market conditions. Two main issues need to be considered: • Market dynamics could have changed: P R I N C I P L E S O F P O R T T A R I F F A N A L Y S I S | 17 - a more competitive environment is now in effect and a monopoly for providing a service is not prevalent anymore; or - a less competitive environment has been created and a monopoly for providing a service is not prevalent anymore; and • Productivity losses or gains could have changed the operators’ profitability in such a way that tariff levels have to be increased or decreased to regain certain equilibrium between the market actors. Tariff Level Adjustment A common role for the regulator is to approve tariff adjustments. Tariffs adjustments are needed to adjust for inflation, for gained/lost efficiencies, or to cap tariffs set by the operators that risk being unjustifiably high. The objective is to maintain the market balance between reasonable profitability for the service providers and competitive prices for the users. The following discussion presents the main principles involved in these processes. Tariff Adjustment for Inflation The most common practice when adjusting tariffs is to account for inflation. Operators and regulators would have agreed to adjust periodically (often annually) current tariffs by reviewing local and/or foreign inflation indices. The most common international inflation index used is that of the United States. The adjustment factor is estimated by calculating the weighted average of the local and international indexes, with a higher factor applied to the international inflation index (e.g. [0.8 x international inflation index] + [0.2 x local inflation index]). Regionally, countries with recent concession contracts (starting in 2010) that specify an adjustment factor apply the adjustments automatically every year. Tariff Adjustment by Calculating the Operator’s Profitability Regulating the profitability as measured by a service provider’s Rate of Return (ROI) is common in utilities, but rarely applied in ports. The concept is quite straightforward: an abnormal profitability of a port operator indicates excessive tariffs in an environment of limited or no competition. Implementation of this concept is difficult because of two unrelated problems: a. required cost accounting system; and b. determining the “normal” rate of return. Controlling ROI mandates an “open” accounting system, whereby providers allow the regulator access to its books. In some control systems the regulator mandates the use of a global standard accounting system, including the name, number and type of income / expense entry allowed in each account. In the most extreme cases, there are limits on expenses based on percentages of revenues, similar to those allowed by the Internal Revenue Service (income tax). For example, there are regulations to determine how depreciation is calculated and what car expenses are considered as legitimate. Implementation of such a system may first be cumbersome and costly to both providers and regulator (auditing). P R I N C I P L E S O F P O R T T A R I F F A N A L Y S I S | 18 But, even with a detailed accounting system, the determination of the allowed ROI (percentage) is a difficult figure to estimate. The price control system of electricity distribution and telecommunication, as well as that suggested for transport infrastructure like airports, employed the Capital Asset Pricing Model (CAPM) to determine the reference ROI. CAPM is a theory developed in the mid-1960s by three economists (Sharpe, Lintner and Treynor) in an attempt to link risk and return. Key assumptions underlying their theory are that the market is competitive and investors always hold efficient portfolios. Under these assumptions, a risky investment is expected to be compensated by a premium relative to its risk. The calculation of the expected return is based on a simple algebraic equation. Unfortunately, while conceptually appealing, the CAPM has not performed well in recent years when capital markets have been undergoing wild fluctuations. This simplistic model could perhaps provide a good estimate for large and well-diversified segments of the market. However, using it to calculate a “fair” ROI for a specific investment, such as a highly-risky investment in a port project, is dubious at best. In any event, it cannot serve a regulator who needs to make a clear judgment regarding a presumably excessive profitability of a port operator. Still, there are a few countries that have devised tariff adjustment procedures by using as an adjustment parameter the operator’s reasonable profitability. Elaborated analyses have been produced recently in Peru by the transport regulatory entity (OSITRAN) to adjust regulated tariffs for the two main container terminals in the country. USER’S ROLE ON MONITORING TARIFFS The participation of users is key to monitoring tariffs. The port authority should require service providers to install a mechanism to formally record and respond to complaints. This system will respond to complaints related to damages, invoicing, or other service related problems. Typically, such a complaint system is implemented by the operator through a Procedure Manual drafted by the operator (where it describes what the users have to do) and revised/approved by the regulator. The regulator can ask for periodic (quarterly, annual) summary reports that include statistics about all the cases so if a systemic problem exists it can be identified and addressed. Some port systems have implemented, in the regulatory dynamic, the participation of users to monitor tariff increases. This “complaint based” procedure is structured