Success a just answer to critics

By BARRIE SAUNDERS*

'We find that the New Zealand ports industry is generally competitive, and that the market power of ports is limited," said Government-commissioned consultancy Charles River in its report of April 29.

The consultants also said "most major port users, and those international benchmarking studies we have been able to obtain, report that service quality and price for New Zealand ports compare favourably with overseas counterparts".

It said the New Zealand Shippers Federation noted that New Zealand ports are competitive and efficient while overseas costs are horrendous, particularly in Japan, the United States and Australia.

New Zealand's ports are one of the great success stories of reforms over the past 20 years.

Service has dramatically improved, ship turnaround has dropped significantly and prices per tonne generally lowered. This is great for an economy heavily dependent on trade, particularly when so many exports are bulky and not of high value.

Despite this progress and the high general level of customer satisfaction, the industry has a few noisy critics whose arguments break down to: (1) alleged excessive profitability; and (2) some customers are captive and not treated fairly.

The first point was dismissed by Charles River, who in respect of the second considered no problems cited required a significant policy response.

It is interesting that the report specifically commented on an analysis written by Simon Terry Associates for one group of critics, which has since been promoted to the media as a quality contribution to debate.

On this document Charles River said, "After careful consideration of the STA report we have reached the conclusion that it provides no plausible evidence that the port companies have market power or earn returns above the competitive level."

Charles River went on to detail why they rejected the STA analysis and at one point said, "the STA report contains assertions that undermine the credibility of the report".

"The STA report bases its conclusions entirely on a calculation of the internal rate of return of port companies. Our assessment is that these calculations are flawed or biased in a number of respects."

There are many ways of looking at profitability. Roger Taylor, an expert in this area, says the most objective method is to look at net profit to net assets.

On that basis he estimates the profitability of the total port industry varied between 9 per cent and 13 per cent over the decade 1990-2001. Good but hardly super profits.

And as he pointed out, many do not realise that when the port companies were established in 1989, the asset values determined at the time did not purport to be depreciated optimised replacement cost.

They were the best estimate of the net present value of expected cash flows. Much was going on in the reform process at that time and too much significance should not be read into those values.

It is acknowledged some port customers have sought legal redress where they thought issues were not handled correctly.

There is nothing remarkable in this. It happens in other industries too. Where plaintiffs have won the port industry has learned something. In others such as Pacifica versus Centreport, where the port company won, other lessons will have been learned.

The notion of a captive customer is not a one-way proposition. A port company that invests in facilities dedicated to one customer is also captive to that customer.

In both cases long-term contracts offer a way of mitigating risks. There is a lot of capacity and competition in the port industry. Unreasonable pricing can result in reduced business, which is hardly a profit maximising strategy.

Charles River suggested that the alternative dispute resolution (ADR) mechanism be examined or there be an industry code of conduct to deal with the few problem areas mentioned.

We will respond to the Government on this matter. It should be noted that mediation has been used already in disputes, which have led to mutually beneficial outcomes.

It is noteworthy that the report went on to point out the risks of the ADR option. It said, "A legitimate policy response is to continue with the current arrangements."

There is a risk ADRs could become little industries in themselves, distracting managers from the real jobs of running their business. That would be an undesirable return to the past when lobbyists in Wellington spent large quantities of money and time seeking favours from the Government, which had to be paid for by others.

New Zealand businesses generally would be the losers from this.

* Barrie Saunders is a consultant to port company chief executives.

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