Fran O'Sullivan: Beware the super-port beast

The spin merchants have been hired and are fast peddling an argument to justify why New Zealand's robust competitive regime should be put aside so our two biggest ports can get into bed.

There is little of a substantive nature on the table (yet) to support the rationale for creating yet another major local monopoly to help New Zealand exporters take on the world. Instead, the spin merchants are promoting the fear of the bogeyman - in this case the international shipping giant Maersk - as the reason Ports of Auckland and Port of Tauranga must merge or form a close cooperation that would inevitably test rules against cartel behaviour.

The ports say they were caught short when Maersk announced in July that it would axe either Auckland or Tauranga from its New Zealand shipping route as it sought to rationalise its operations here.

The ports' first step was to bid against each other to secure Maersk's container business for the upper North Island. Maersk has a 40 per cent share of the New Zealand container market. The argument is that there are not many other shipping companies which can easily inject more competition into the market here given Maersk's dominance.

The relatively small export volumes do not make for efficient trade - so the shipping line's own spin goes - hence the desire for rationalisation, which, it argues, supports New Zealand's need to get its exports overseas in an efficient fashion.

Realising that getting into a bidding war with Maersk could lead to uneconomic under-pricing of their services (or so the spin goes), the ports instead decided to examine the rationale for a merger where they could control the play rather than the foreign shipping giant doing so.

So far, so good.

The spin has been lapped up, judging by the raft of headlines and supportive comments from lobby groups who have received briefings on the issue. It would take pressure off the roads, free up land for Auckland's redevelopment, particularly around the waterfront and, would ensure the country had a competitive super-port capable of handling next-generation container ships.

But both the Government and the Commerce Commission must test the ports' arguments thoroughly before agreeing to the creation of a Fonterra-style entity.

Many of the metrics used by the dairy industry to justify the Government's special legislation to form Fonterra, from a merger of the Dairy Board with the two major New Zealand dairy companies, have in retrospect proven to be spurious. The claimed benefits did not materialise at the levels promoted in the pre-merger hype in 2000-2001.

Even the European Union, long cast as the bogeyman of international trade by our free-market agricultural lobby, has now decided to remove one of Fonterra's legislated privileges - the ability to control the import of New Zealand butter into Europe.

Supply chain rationalisation is also at the heart of the shipping/ports imbroglio and similar arguments are being mounted by Air NZ/Qantas as they seek to persuade the Minister of Transport to approve their back-door proposal to combine their operations on the transtasman routes.

Ports of Auckland and Port of Tauranga have indicated they are prepared to put a case to the Commerce Commission basically arguing a public benefit will emerge as they will be best able to secure a lower transport cost for New Zealand's exporters if they make the decisions on how much should be invested, and where, in the infrastructure which will be necessary to service the bigger container ships that are increasingly servicing world trade.

Maersk managing director Tony Gibson has long argued that New Zealand is over-invested in ports (there are 13 with 10 containerised and competing for trade) and under-utilised capacity. He has also made the case for a roundtable discussion between Government, local authorities, ports companies and other interests to chart what the environment might be like some 30 years out so that the best decisions can be made on New Zealand's behalf to ensure it can best utilise its place in the global supply chains.

The two ports companies now argue that New Zealand must create a super port which can handle the container ships which can carry 6000 twenty foot equivalent units (teu) compared to the 4000 teu ships which currently visit - although Maersk itself is cagey on just when such ships will visit here.

A Dutch academic estimates that an increase in liner size from 4000 to 6000 teu reduced average crew costs by 30 per cent, average fuel costs by 20 per cent, average port and canal charges by 15 per cent and average insurance costs by 10 per cent. So there are efficiencies for New Zealand exports if sufficient volumes can be amassed in an efficient manner.

What is not clear is whether Maersk and other shipping companies want to bring such ships to New Zealand or use feeder services into other regional ports - such as Sydney or to new shipping hubs in Asia - where they can be loaded for export on to Europe and further afield.

Will Maersk and other shipping lines bring the 6000 teus here? Or not?

More information needs to be divulged from the shipping industry before a decision is made to invest in infrastructure for a super port.

There is another side of the equation.

Some within the shipping industry have long been suspicious of the monopolistic tendencies of New Zealand ports.

The Captive Port Customers Group, which is aligned to the Shipping Federation, has (so far) reserved its position on the proposal to form a super-port company.

It was set up in 1997 to represent the interests of a number of shipping, stevedoring, shipper and shipping agency customers of New Zealand ports companies.

While it is so far holding its counsel, it did argue to the Australian Productivity Commission in 2004 that New Zealand port companies are "abusing market power" and making excessive returns through "over-pricing" on non-contestable services.

The group - which represented the Shipping Federation, Golden Bay Cement, Southern Cross Stevedores and Paac Forest Products - said the New Zealand regulatory regime is inadequate to protect port users. It wants a review of port companies' market power and pricing, and a regime aligned with Australia's tougher restrictions.

The call was rejected then.

A 2002 review for the Ministry of Economic Development found there was no justification to the industry's claims.

A report by Charles Rivers Associates suggested some customers were captured by their local ports but the limited situations of market power were not sufficient to warrant industry specific intervention by Government. The MED recommended no intervention or additional regulatory measures were necessary.

A 2004 infrastructure audit also pointed to the impact of further containerisation on the country's ports infrastructure but ironically noted the ability of Auckland to respond in a positive fashion, even though hampered by surrounding land uses.

All this was on the table well before Maersk upped the ante in July. The shipping giant is now considering the decision by the two ports to try to get into bed together. It must work out whether the ports are bluffing.

The Government and the Commerce Commission must work out whether to play along with the ports companies, ensure competition is maintained, or go down the route of voluntary price restraints so ports consumers do not get ripped off if the merger eventuates.

It's not a simple decision - but legislating for yet another Fonterra-type beast is not the answer.