PROPOSED CONCEPTUAL FRAMEWORK AND METHODOLOGY

METHODOLOGY

1.6.1 PORT PRICING FROM A MULTI-FACETED VIEW

Seaports are similar to firms offering multi-products; a range of port services are provided to port users under different institutional and management structures, competitive environments and geographical locations (Wilmsmeier 2012). Thus port prices in general can be influenced by the same factors which may be internal or external to the port. Within the port jurisdiction the port cost situation, port governance and the seaport policy pursued impacts on the way the port sets prices for its infrastructure and services. Beyond the port’s control perimeter, the market environment within which the port operates (which includes the port market, geographical location and shipping market) exerts some influence on the port’s pricing decisions. The Figure 1.1 summarises the key factors influential to port pricing policy that are explained below.

16 Figure 1.1: A multi- faceted view of port infrastructure pricing.

Source: Developed by the author.

Impact of port competition, dynamics of foreland seaport ind ustry and port terminal operation on port infrastructure pricing

Similar to other sectors, the port sector is exposed to competition. The level of competition in the port sector is primarily determined by characteristics such as the geographical location of the port, the number of ports in the region under consideration and the extent to which port hinterlands are overlapped, the nature of the shipping market each port serves and the level of regulation of port activities by the government. Competition may also exist within a port that has more than one terminal operated by different operators, often private companies. Within ports, occupation of terminals by two or more private sector terminal operators has produced intra-port competition for capturing port traffic. As discussed earlier, the formation of a network of terminal operators within port foreland areas and regions has created a new form of port market in which port authorities can respond by

17 reforming tariff policies. These terminal operators strategically occupy port terminals in a port area and operate within a system of hub and spoke so as to guarantee that their facilities are fully utilised. The simultaneous occupation of terminals in feeder ports and hub ports secures the operators cargo handling business while the respective seaports receive adequate vessel traffic.

Dynamism of the shipping industry

The dynamics of the global logistics networks and the international nature of shipping operations have subsumed seaports in terms of their significance, role and institutional arrangements. Nevertheless seaports often strive to establish their position and identity in the global logistic chain by incorporating 'corporate governance' within the port jurisdiction. Also seaports around the world endeavour to establish efficient and cost effective port services in the face of expanding international trade. In this regard, seaport authorities have begun to reshape the organisational setup of seaports. For instance major seaports in India have considered a series of reforms in order to establish flexible organisational models ranging from the existing port authority system to a more corporatised model with corporate governance (WTO 2001).

In the presence of mergers and acquisition among shipping lines, inter-port competition and the desire of seaports to increase port efficiency, an integrated package of lower port charges along with new value-added services for vessels and adequate port infrastructure is vital if a seaport wishes to gain competitive advantage over its rivals. The increasing influence of global shipping alliances on seaports has also resulted in the declining dominance of ports in the maritime network and most ports can no longer be considered as monopolists. It is important for a seaport to account for the factors that affect the competitiveness of the port from the perspective of the shipping lines. The port selection decision taken by a shipping line can greatly affect the performance of a port in both operational and financial terms. Tongzon & Sawant (2007) claim that port charges and the efficiency of port services are among the important factors influencing port selection by shipping lines. Fung (2001) revealed that the prices ports charge to shipping lines and the extent to which they facilitate the requirements of shipping lines are functionally related to the market share of ports serving o verlapping port markets. This implies that port tariff structure has a significant impact on the port costs of shipping lines, and port

18 authorities need to be aware of the impact of their charges on shipping companies especially when they are revising their tariffs and setting tariffs for new services. Cost recovery in port infrastructure investments

According to Braeutigam (1980) a port should set its tariffs based on the costs of running the port as well as its characteristics, e.g. economies of scale and the presence of joint and common costs. Since the use of port infrastructure demonstrates lowering unit cost of production with time, port charge can be set to represent fall in average cost of infrastructure. Further, since maintenance costs of some port infrastructure are joint/common, for instance, deepening channel and berth alongside, the setting port channel dues and berth occupancy charge need to consider these two cost as common and the charge need to reflect it. Financing port infrastructure with public funds is rationalised on the basis that port development generates macroeconomic effects on the economy from which tax payers are indirectly benefited. However the need to recover the cost of port operation is at the forefront of the port authorities especially if the construction of port infrastructure has been financed from loan facilities. The influence of these two scenarios on determining port charges is a matter of concern for a port authority.

The methodological frame work presented in this study considers only certain aspects of the above multi- faceted view of port infrastructure pricing. These aspects are referred to as determinants of port infrastructure pricing. The next section briefly presents the methodology adopted in the study.

1.6.2 METHODOLOGICAL FRAMEWORK

There are three aspects to the methodological framework to be adopted by this study. First is the need to understand the present port infrastructure pricing policy and related issues; the study takes into consideration the nature of infrastructure pricing policy and related practices and issues. This will be undertaken from the information gathered from an extensive literature review on port pricing, which will be presented in Chapter 2.

Second, the study develops a quantitative framework from which the relationship of port infrastructure charges to port costs, port demand, the administrative structure, trade flow and the port area or region are estimated. To achieve this objective, the study develops an econometric model explaining the relatio nship between port

19 infrastructure tariffs and the key influential factors such as ownership structure, port infrastructure specifications and prices of infrastructure related services. The econometric analysis is carried out using an equation system for two main types of port infrastructure tariffs, namely berth due and channel due as the dependent variables, and the data are collected from 159 major ports.

Third, the study also attempts to examine how port infrastructure tariff design is influenced by the port management’s knowledge of the issue and applicability of port pricing approaches, cost recovery consideration, port demand, port tariff objectives, inter-competition and shipping market dynamics. In addition, the study seeks to analyse the key factors influential to port infrastructure tariff practices such as the level of transparency, stakeholder participation in tariff setting, tariff regulatory control and a port’s tariff policy. The analysis is carried out using data gathered from an online survey of 67 international seaports across different regions. Both exploratory factor analysis (EFA) and confirmatory factor analysis (CFA) methods are used to aid the analysis. The conceptual framework, data analysis and results, and the discussion are presented in Chapters 4, 5 and 6 respectively.