All At Sea

Productivity Commission's Draft Report Into International Freight Transport Services

- Bill Rosenberg

Bill Rosenberg is the Economist at the New Zealand Council of Trade Unions Te Kauae Kaimahi.

The Productivity Commission’s Draft Report into International Freight Transport sadly fails to address the most important issues. It is mainly about port profitability and employment relations – yet its own data shows the big problems lie in high prices charged by the shipping lines. This is a critical mistake at a time when tensions over port management are so high. It results from thinking which has not sufficiently moved on from the 1980s and in doing so serves the interests of the international shipping companies rather than New Zealand. It misses the opportunity to address shipping company dominance and provide constructive advice to port management and staff on further increases in productivity.

The weight of the Report’s recommendations is to commercialise the ports. Despite strong local government views, the Commission’s position is summed up in the statements that “the optimum arrangement from a societal perspective involves a strict commercial focus for port and airport companies” and that the most desirable state would be that councils “treat these assets in an equivalent manner to other financial assets”. The Report recommends that being a successful commercial business should be a port’s principal objective; partial privatisation; removing local government representatives and staff from their boards; and more contracting out of operations.

Profiteering By Shipping Lines’ Oligopoly

Financial assets are easily sold. Governance and legislative changes are all aimed at strictly commercial management and tougher attitudes to port workers. That leaves little room for regional development aspirations, more productive employment relationships, or the non-commercial aspects of a port. The port focus might be understandable if ports were the major cost driver in the logistics chain. But they are not. Case studies provided in the Report compared international port-to-port freight charges for an importer or exporter in Auckland to one operating in Sydney. Average onshore costs – port terminal, customs and documentation – are dramatically lower in Auckland than Sydney – around half the cost – “mainly due to lower port costs in Auckland”. A 2010 report commissioned by the New Zealand Shippers Council showed a similar picture for the charges that ships pay. New Zealand port charges were less than half the charges in Australia and about two-thirds those in South East Asia.

Yet the total cost of freight in every case was much higher for New Zealand importers and exporters – by between 7% and an astonishing 87%. Why? Because the sea freight charges from shipping companies were between 43% and a gobsmacking 500% higher than for Australia. There would be some cost differences because of different travel distances to or from Auckland and Sydney, but far from enough to explain these huge price differences. For example, Long Beach, California, is closer to Auckland than Sydney – but sea freight costs were 25 to 63% more expensive for Auckland.

The Report does not investigate why shipping companies apparently charge us so much more than Australia, and appears to consider that because nine of the world’s largest 16 shipping companies are operating regular liner services to New Zealand there is sufficient competition. It does recommend that shipping pricing cartels like shipping conferences be subject to normal competition rules. This is welcome but largely immaterial if, as the Commission says, such arrangements are little used now. Shipping companies will still be free to keep other types of cooperation agreements that could limit capacity on routes or help coordinate bargaining against ports.

The increasingly concentrated shipping industry may have made pricing agreements unnecessary. A 2009 Auckland Regional Holdings report stated that the shipping industry in New Zealand was an oligopoly, “with the largest five players estimated to account for approximately 77% of the New Zealand market”. It estimated that the leader, Maersk, had about 30%, followed by Hamburg Sud with 17% and MSC with 12%. Other estimates have put Maersk’s share at 40%, a level normally attracting Commerce Commission attention.

Submissions from exporters and ports expressed concern that the shipping companies had excessive market power and were not fully passing on cost savings. Competition can be even less than it appears if one shipping line dominates a port or two or three lines have a capacity-sharing agreement for a route. Shipping company ability to twist arms to get port companies to invest in new facilities but then move their services to another port is given credence by the very low asset utilisation in ports – only 17% at Auckland and Tauranga for example.

Report Attacks Workers

Employment relations in ports also receive scrutiny. Tauranga, by most measures the most productive of the ports, is praised for contracting out its stevedoring services. But the Report provides no hard evidence to confirm the connection between contracting out and higher productivity. Many workers oppose contracting out because it increases insecurity of work and casualisation. The best measure of labour productivity given in the Report is the “vessel rate” – the number of containers moved per person per hour. But Tauranga and Auckland have very similar rates, suggesting that technology, equipment, port layout, ship and cargo types are much more important factors than contracting out. Indeed, Australian container ports contract out but have lower vessel rates than New Zealand. In fact Auckland, Otago and Tauranga have better vessel rates than the Australian top performer, Melbourne. On the whole, according to a Ministry of Transport analysis, “the container productivity of New Zealand ports appears at least comparable with, and in some cases better than, Australian and other international ports”.

Despite acknowledging that “there is no need for a wholesale change to the current employment relations framework because evidence suggests that the current framework works well at some ports”, the Report recommends legislative changes that would weaken employment rights generally. The treatment of employment relations highlights a fundamental weakness in the Report. The Commission declined to carry out its statutory purpose to consider not just economic efficiency but the “over-all wellbeing of New Zealanders”. Instead it assumes that economic efficiency automatically leads to that end. The credibility of that assumption ended with the global financial crisis.

The Report’s narrow financial aims for ports fail to grapple with wider regional and national wellbeing. Its treatment of employees primarily as costs fails to see them as sources of skills, experience and growing productivity, and as people with their own family needs and aspirations. It fails to investigate existing more positive methods of raising productivity by encouraging employee participation in the development of their workplaces rather than greater commercialism, privatisation and further weakening of employment rights. Neither does it show any knowledge of a growing body of research showing that raising wages and improving employment rights can lead to higher productivity, not lowered competitiveness.

Management and workers must jointly continue to raise the productivity of our ports. That should be “business as usual”. But reforming efforts should seek the higher returns available elsewhere. How do we lower the prices that shipping companies charge and stop them playing ports off against each other, wasting our scarce investment capital? With changing technologies and ship size, how do we obtain an optimal national network of ports taking into account national interest and regional aspirations? The Commission has shown little evidence of innovative thought. Colliding with the aspirations of regions and employees will not bring sustainable solutions.

For full details on the Productivity Commission, read Jeremy Agar’s “The Productivity Commission Is The Latest Name For Rogernomics: The Taliban Of NZ Capitalism” in Watchdog 128,December 2011, Ed.


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