Second helpings on terminal concessions

This may not be a second common user container terminal but nevertheless such an arrangement does reflect recognition of the fact that there comes a point when specific commercial needs have to be addressed.

Usually, there are only two reasons to maintain a one operator container port. Operations can be so small scale it is impractical to introduce a second operator. Or, to put it another way, to do so without sufficient volume would be for both parties akin to cutting their own throats. The other reason is that the existing incumbent wants to maintain a monopoly and the ‘strong’ pricing that goes with it.

There is a point when volume reaches a certain level that most port authorities see it as logical to introduce a second terminal operator. This ‘point’ moves around according to whether it is a high, medium or low throughput container port but, for example, in the second instance – a medium throughput port – it would be typically be around the 500,000 teu mark.

Usually, the port authority, at this juncture, wants to introduce more competition into the container handling arena and as part of this to see stevedoring prices scale down. It is a step that is designed to play a part in reducing the cost of import and export operations. Experience shows that this has been a major goal of port privatisation around the world – through both tariff reduction and service efficiency improvements.

The issue is can a level playing field be created to facilitate the introduction of a second terminal operator? “Rarely” is the answer but despite this if there is adequate traffic growth this should not present a major problem.

Specifically, it is usually the second incoming terminal operator that is worrying whether he can compete on an equal footing with the original operator who is probably a significant way down the track in terms of achieving an adequate return on investment. If it is the other way round, then it is probably the case that the original cost of market entry accepted by the first operator was too high. This need not be the fault of the port authority setting the hurdle too high but can be the result of the investor/operator bidding too much.

Painful decisions

There have been examples of this over the years and experience has shown this is a tough situation to resolve. The original operator usually has to live with the pain of his earlier poor decision to invest at a high level.

Typically, however, an astute ‘first through the gate’ operator will have modelled the impact of a new competitor being introduced at a given point in the lifetime of his concession. To not do so and thus not account for this possibility is quite simply poor due diligence.

It is normally the duty of a port authority to introduce new competition into the service mix. In an emerging market situation it may initially be to keep pace with shipping system development and to introduce the more specialised port facilities such as a container terminal operation. Thereafter, logically, the priorities change, a typical second level goal being to promote competition to the benefit of port users, not just at a pricing level but at the key service level, a big determinant of overall port cost.

There have been incidences of concession holders complaining that port authorities’ agendas have changed since the time they negotiated their respective concession agreements. History shows, however, this should come as no surprise – it is evolution. The only guarantees they can really rely on are the ones embedded in the terms of their concession agreements.