On the benefits of public ownership of ports

The productivity commission some months back asked a series of questions relating to Port Ownership and port efficiency.  The Productivity Commission is a stalking horse for the “privatisation” of public assets, their agenda appears to be driven by Dogma, it is most improbable that true efficiency even comes to the hindmost parts of their consciousness when contemplating these matters.  The questions raised by the Productivity Commission speak for themselves.  As I hope do my responses to them.

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Q1   Are there important issues that may be overlooked as a result of adopting an economic efficiency perspective for this inquiry?

1.        Ports are “enabling” infrastructure, their existence allows other economic activities to occur.  The whole of system effect needs to be considered when considering the “economic efficiency” of current services.  A simple example of this for is that without a port with log handling facilities and without a log service whole log exports are uneconomic within quite a short haul from a port.  Rail or road transport to another port do not appear to be viable economic options.  The profitability of the log export market to the regional economy, with a port and bulk log carrier services, is probably more significant than the profit on the port yet without a port this sector of the economy is rendered unprofitable.

2.        Ports are public infrastructure.  In the short term Ports can be run as stand alone enterprises with profit as the primary motivation for the business activity but in the long term the business is there to facilitate regional trade in the same manner that the road network does, not to make a profit.  There are times when Port investment needs to consider the “whole of economy” value ahead of profitability, and overall regional economic performance needs always to be paramount.  The original investment in developing  most of the Port Infrastructure only occurred because they were constituted as local authorities and could invest community money.  On pure direct economic returns the investment in the creation of port facilities would unlikely ever have been viable, but the overall value to the economy of the investment in port infrastructure and of the wide variety of businesses that are now facilitated by that investment has made it more then a sound investment, in each community the Port is an essential element.

3.        Ports and airports removed from community control also lend themselves to “gate keeper” or “highway robber” roles in the economy.  They provide the owner control of an essential monopoly with the power to tax the economy dependent on the services of the Port.   This highway robber effect is evident with Auckland Airport. 

Q2   Is the framework described in Section 3.2 appropriate for this inquiry and are there any important issues that might be missed?

1.        The most important issue missing in this is that “economic efficiency” is not the primary determinant of a viable economy. Infrastructure services have a “whole of economy” effect that unlock potential or enable activity. Most of these services are not necessarily possible to provide profitably while also maximising the economic potential of the region, some of these services even provided at least cost do not realise the full potential in the economy.  

2.        The consideration of third party costs is missing.  Much “economic efficiency” in the narrow “Neo Classical” sense is actually a transfer of costs or a loss of economic opportunity onto a third party dependent on a service.  The cost reduction provides a saving to the “efficient” infrastructure provider but a cost to the infrastructure user.  That is why infrastructure is publicly owned, it is cheaper to aggregate costs to minimise them through collective or public monopoly enterprise than it is to undertake them individually.  Road networks are a classic example; telecommunications are another that should be.

3.        It is possible to maximise the economic efficiency of all of the individual components of the economy in isolation from one another while at the same time reducing the scale or capacity of the whole system.  New Zealand suffers badly from a lack of realised potential through an inadequate investment in infrastructure and through over pricing.   This is primarily because the narrowest of economic efficiency measures are applied to these infrastructures where privately owned with investment decisions and because existing infrastructures are increasingly being run for profit rather than for realising the fullest economic potential from the broader economy.

4.        New Zealand also suffers from a lack of strategic control over its supply lines.  The whole concept of dependency on the investment whims of third party maritime freight service providers for the provision of the most profoundly essential service to our trade dependent economy seems unsound to put it mildly.  We are price takers in everything we do.  The country needs to break out of that mind set.

5.        In most rural parts of New Zealand the community holds public ownership of these assets in very high regard.  The strong ethic of community ownership recognises the significant indirect economic values that this report fails to recognise.  Ports were built using community money, the fact that community ownership is not as coherently represented in the market as private investment is, does not mean that it holds any lesser rights.  Council also owns its share as a majority holding in a publicly listed entity.

Q3   Which components and component interfaces warrant greater attention? What is the evidence that they are inefficient? What contribution could changes make to an improvement in the overall efficiency of the freight system?

1.     Nationally we need a vision that identifies the potentials within the economy and how these might be realised.  Particularly the cross linkages and displacements

2.     There is no future proofing, no conceptualisation of trends and drivers for change in the manner in which the economy will function in the face of fuel cost increases and changes in technologies and changes in market place dynamics.

Q4   What environmental considerations should fall within the scope of this inquiry? What issues are of particular importance?

1.     The cost of fuel and the introduction of a carbon cost is going to enhance the value of coastal shipping as the most fuel efficient form of bulk transport.

 Q5  To what extent is there effective competition for customers between New Zealand ports? Has this led to lower prices and incentives for productivity improvements?

1.        The small ports and national rail freight capacity do seem to be used by the major customers of the country’s ports to effectively develop competitive freight arrangements.  However non-freight cost components do seem to play a significant role in port users’ freight decisions.  Particularly space for port related facilities such warehousing and bulk storage and regional business opportunities seem to drive port freight flows.  The report does not seem to contemplate “whole of journey” costs. 

2.        Most major commercial relationships relating to port activity appear to be negotiated by parties with reasonably equal market power and that would indicate that the outcomes are likely to be fair and competitive.  The service decisions of the individual shipping companies seem to have a far greater influence on service levels and costs than the cost of port operations.

Q’s 6 – 12 Relating to Port productivity

1.        Most of the measures of port productivity are spurious for the greater proportion of NZ’s ports.  Many NZ ports are still based on infrastructure that was built prior to containerisation.  Substantial parts of the asset base are either fully depreciated or have a minimal residual or salvage value.  Most of the smaller ports have less sophisticated freight handling capacities but also have lesser overheads and most have intermittent services than these being mentioned in the benchmarking measures.

2.        Profitability is also a misleading measure.  The residual value or current value of port company assets is unlikely to bear any resemblance to their replacement value.  The key measure is the level of service provided to the regional economy.  A satisfaction survey would be the most effective means of achieving this.

Q 14 Does New Zealand have too many ports for a small country? If so, what barriers are inhibiting rationalisation?

1.        Given that each port appears to be economically viable the answer is clearly no.  The existing port assets are “stranded”, even if fully depreciated and run at a minimum of reinvestment they are clearly providing sufficient operating surplus to justify their existence.  The fact that ships still visit and freight still passes through them and given that there is no constraint on road or rail freight to other ports and that there is a clear cost advantage in the existing coastal freight network indicates quite clearly that we do not have too many ports. 

2.        If there were too many ports freight forwarders and shipping services would sort that out rapidly as there would be cost savings in freight aggregation at fewer larger ports.  If anything the smaller ports are keeping the bigger ones honest.  It is also important in this discussion to remember that a number of regional industries are port dependent. 

3.        The removal of elements of the coastal trade from a port may only result in higher overheads for the residual industry dependent port activity. If Bluff was only operating to service Tiwai and the fishing fleet it would still need nearly the same operating assets as it does with container and break bulk trade.  It would still need channel maintenance, pilots, tugs and an administration but it would have less than half the vessel berthings to carry the over head.

Q15     Has local-authority ownership of majority stakes in New Zealand’s commercial ports inhibited, enhanced or been neutral for the development of a more efficient and productive port sector?

1.        Most Ports are run on a day to day basis, on a commercial model at arms length from their local government owners.  An independent Board of Directors is likely to be the most important aspect of governance and ownership.

2.        Local government as owner is important for the same reason as the local government ownership of roads is important.  There is a greater strategic purpose to ownership that warrants for public ownership of the asset.  This does not mean that substantial elements of the commercial function of a Port cannot be conducted by private enterprise either as owner or contractor but ownership and determination of levels of service needs to be determined by the community for the community’s greater interest.  The asset also needs to be administered in a way that maximises the hole of community benefit from the infrastructure.

Q16     What changes in governance, regulations or ownership would offer the best means to improve port performance for exporters and importers?

1.        Elected members and staff of the owning authority need to be excluded from membership of the board of the port operating company.  Port companies need professional boards otherwise there do not appear to be any significant issue around port ownership other than that there needs to be regional infrastructure plans that tie port investment into long term strategic objectives for regional infrastructure.

Q 29    The objective of a port company under the Port Companies Act is to ‘operate as a successful business’. Should airport companies owned by local authorities have the same single objective rather than the multiple objectives specified in the Local Government Act?

1.        The concept of these infrastructures as strategic asset is as valid as it ever was.  Airports function as significant community gateways and air services have a much greater import to the community they serve than the direct value to the airline operator.  Air services are essential to business viability in provincial New Zealand and to the entire domestic and international tourism industry.   Airports are the entry point to the regional and national economy.  The most “commercial” of the nation’s airports do not operate for the benefit of the broader economy and exercise significant gate-keeper power and act as revenue collectors rather than service providers.

s5 Interpretation Local Government Act 2002

Strategic asset, in relation to the assets held by a local authority, means an asset or group of assets that the local authority needs to retain if the local authority is to maintain the local authority's capacity to achieve or promote any outcome that the local authority determines to be important to the current or future well-being of the community; and includes—

(a)     any asset or group of assets listed in accordance with section 90(2) by the local authority; and

(b)    any land or building owned by the local authority and required to maintain the local authority's capacity to provide affordable housing as part of its social policy; and

(c)     any equity securities held by the local authority in—

(i) a port company within the meaning of the Port Companies Act 1988:

(ii) an airport company within the meaning of the Airport Authorities Act 1966

Q31 Should the future size and shape of New Zealand air freight services be left to market forces and individual airport owners, or do lumpiness and interdependence (including with investments in connecting parts of the overall supply chain) call for a more deliberately coordinated approach?

1.        Certainty of freight service is essential to investment in export-based industries.  Airfreight-dependent Horticulture and manufacturing in particular needs to be assured of certainty of access to export markets for years into the future before an investment decision can be made.  Some services may also be seasonal.  International freight via regional centres, a number of which are international flight capable or could be made so with a modest investment would create opportunities for much higher value crops to be grown on land that traditionally the highest value use has been pastoral agriculture or dairying.

Q57 Should decisions on investments in ports and in the associated infrastructure links to ports be left to the judgements of the individual suppliers of the separate components? Or would some sort of overall strategic plan provide useful guidance and some assurance that complementary investments will happen?

1.        Strategic infrastructure planning is essential.  This should be conducted at both regional and national levels and be integrated across all infrastructures.

Q58     What is the scope for greater consolidation of ports, greater vertical integration of ports with domestic transport operators, or more use of long-term agreements between shippers and port companies, as possible means to overcome coordination problems and achieve more efficient international supply chains?

1.        At a national level it may be of benefit to negotiate multi year shipping service agreements however these could interfere with existing good working relationships between port companies and shipping lines and exporters.   These could disappear with little reference to the regional economic impact of their loss.  This lack of self determination as to levels of services is a root cause problem.

2.        If hub ports are to be used it is probably more logical to use existing hubs in Australia or Asia as tends to happen anyway.

Q64     Are import and export opportunities excluded or constrained by the lack of access to international freight transport services? Are there changes in institutions, policies or regulations that could lead to better outcomes?

1.        The lack of reliable airfreight particularly between the regional airports and markets in the eastern seaboard of Australia is considered to be preventing or limiting the development of horticulture.  This is an example of the enabling potential of infrastructure.  Without a reliable airfreight service from the South to potential markets the horticulture industry cannot develop and there will not be a freight service while there is no industry.  A very substantial potential for export of high yielding crops is left unrealised because there is no mechanism for establishing the freight links necessary for growers to establish businesses. 

2.        This is the classic infrastructure issue; without the necessary infrastructure there can be no businesses and without the businesses there is no demand for the infrastructure.  This is where political leadership, public investment and strategic vision come into play.  It is these components that seem to be missing from the picture.  Efficiency isn’t the problem it is the lack of strategic leadership and strategic investment that are the problem.

Q68     Are import and export opportunities excluded or constrained by the lack of access to international freight transport services? Are there changes in institutions, policies or regulations that could lead to better outcomes?

1.        A number of export activities are dependent on specific freight services being available regionally.  Bulk log exports are a simple example.  A broader issue is the unrealised potentials issues that come from there being no regional airfreight and the effects that has on the horticultural potential of the region.  The only way this could be realised is for a government funded development strategy with guarantees of freight services being established. The market left unaided would not initiate this. Certainty of access to international markets is not possible under the present arrangements.

Q74     What factors would favour the choice of decentralised vs. centralised strategic planning?

1.     Integrated infrastructure plans are required at both regional and national levels.  The regional level is the primary level for integrated “whole of economy” planning.

Q78 Has this issues paper covered the key issues? What other questions need to be asked?

1.     The paper has failed to consider the whole of economy value and the whole of economy function of freight infrastructure focussing instead on the narrowest measure of value.

Q79     What are the most important issues for the Commission to focus on to achieve the greatest improvements in the efficiency and productivity of New Zealand’s international freight transport services?

§   Invest in freight infrastructure for its whole of economy value

§   Freight infrastructure must be publicly owned at least at the extent of the serviced community determining service levels.

§   Plan for freight infrastructure as a set or system of interrelated economic functions at both the regional national level.