In this article LFMI’s Policy Analyst and Representative in Brussels Monika Kačinskienė analyses the situation with the sea-port sector in the EU, a specific and yet extremely closed market. The author sheds light on potential merits of a port services’ Directive, however, voted down twice by the European Parliament, and presents LFMI’s solutions for the only Lithuanian seaport in Klaipėda. The article was published in the Vakarų ekspresas daily, a leading broadsheet in the Klaipėda region, on the 22nd of June, 2006. Currently, transport policy is one of the strategic areas of LFMI’s activity.
Everybody clapped their hands when most of the EU member-states had finally okayed a compromised version of the Services Directive. They clapped even though the directive had become so pitiful and ineffective in the end that there was hardly anything to exult at. They clapped because with such a bitter opposition against anything concerning liberalization of services, even the adoption of a worn-out document like this was a glorious event.
Yet, entry to certain specific and extremely closed markets meets with an even greater resistance than the joint services package. Let us take as an example seaport services which also gather crowds of demonstrators outside European institutions and still owe the European Parliament several broken windows.
Despite the freedoms and competition rules enshrined in the founding Treaty, the seaport sector still poses high barriers to market entry denying a level playing field for new players. A lack of competition undermines both the quality and the prices. Attempts have been made to resolve this at the European level for several years now but to no effect as yet. Unlike the compromised Services Directive, a port services’ Directive, whose adoption would open up the seaport sector, was voted down a second time by the European Parliament.
The European Commission has set out to fill in an obvious hole in the internal market and to make the continental seaports more competitive and attractive and by doing so to enhance their role in the transportation chain. To achieve that, it has announced the start of another reflection process (a so much-liked procedure Europe-wide), this time on the future of the European policy framework for seaports. It is realized that Europe’s closed and obscure port services market has to be liberalized. Now they are reflecting on how to do that.
Is it worth waiting and contemplating in Lithuania together with the whole Europe? Wouldn’t it be wiser to start liberalization while all others are shilly-shallying and waiting for a new document to come up?
Common problems in European seaports
European seaports are generally regarded as one of the most obscure industries. First of all, they lack financial transparency. Many European ports are a mixture of private and public capital where real prices of services get obscured in the maze of cross- and direct subsidies, government tariff regulation, exclusive monopoly rights of private companies, and investment regulations. Barriers to market entry, the regulation of existing port service providers and public interests in the commercial seaport activities are just as unclear.
Today most of the ports represent a structure of private and public ownership with the germ of competition, but despite that, with the state stifling and dampening private initiatives. Interestingly, the activities of many of the largest European commercial seaports continue to be financed with the taxpayers’ money.
High barriers to market entry that are erected by public port authorities - an issue that was seriously addressed in the withdrawn port services’ Directive - are one of the main drags on the work of “European” seaports. There are certain types of port services that are still considered to be “natural" monopolies and where giving the go-ahead to private initiative is not discussed at all. These are sea entrance infrastructure, general services in the berth, mooring provision, and others. Yet, even most of the services that are widely recognized as commercial ones continue to be rendered by one undertaking, usually picked by the port authority through a selection procedure and not a public tender. Some services are provided by state-run companies operating in this peculiar whirl of public and private interests.
Due to their “exclusive” nature and usually small markets, plus safety concerns, technical maritime services in many seaports are still provided by public undertakings or private companies that enjoy exclusive rights. (In all but four European seaports there is a single, usually state-run pilotage provider, although pilotage is widely regarded as a purely commercial service today.). This creates another chain of problems: charges on such services are set by government authorities; cross-subsidies are a common practice; the ratio between tariffs and proceeds is unknown; and there is ample opportunity for the abuse of the dominant position and for raising fees.
In this rather gloomy context the Klaipeda seaport fares not so badly. The seaport is quite young and liberal. It is young because it was restructured not so long ago. And it is really liberal because the private sector plays quite a prominent role there if compared with some other seaports in the continent. There are more providers of the “exclusive” maritime services, towage and mooring, in Klaipeda than in other seaports on average.
On the other hand, the Klaipeda port suffers badly from a lack of financial transparency (which is caused by government tariff regulation, (cross) subsidies and the state playing a major investment role), a lack of direct links between the consumer and the seaport administrator, a continuously and highly closed market (pilotage services are still handled by the port authority, while pilotage fees are set by the Ministry of Transportation), and extensive regulation that erodes effectiveness of the port activity. So the Klaipeda seaport is afflicted, only on a smaller scale perhaps, with the same painful operational bottlenecks that are typical of modern European ports.
A Liberal Klaipeda Seaport: With or Without a Directive?
The port services’ Directive was tailored to address the above problems, to guarantee a free movement of services once already stipulated in the founding Treaty and to ensure free entry to the seaport market. Indeed, the system would become more flexible if some of the measures that were defined in the directive were simplified and adjusted for ports. Flexibility could be enhanced (and prices lowered) by opening the market to new entrants and eliminating limitations of the number of service providers, by delegating the function of granting authorisations to an independent institution, by allowing self-handling (especially with a vessel’s crew), and by spelling out the guidelines on state aid.
One of the key proposals delineated in the withdrawn directive – abolishing limitations of the number of service providers – can (and must) be easily implemented at the port level. Some countries have already gone along these lines, but the Klaipeda seaport authority continues to use this regulation at its own discretion. Private undertakings cannot enter the scene freely without being given permission from the port authority. In addition to that, clashes of interests and influences are possible in the selection process.
In order to have a more transparent seaport and fair competition among port service providers, it is essential to allow private undertakings to freely enter the market without a selection procedure and approval from the port authority (for safety considerations a specific regime might be applied only to pilotage services which require special knowledge and skills). It is equally important not to limit the number of service providers. A model like this has long served and shown a good performance in the nearby port of Copenhagen.
The directive proposed limiting the number of port service providers only in highly exceptional cases (e.g. for reasons or constraints relating to available space) and delegating this authority to independent institutions. Yet, it would be simpler and wiser not to highlight exemptions so that they do not become rules one day. Some small seaports cannot accommodate more than one service provider, while too big a congestion might impair the effectiveness of service provision in the short-term. Yet, even with space restrictions in place, it is crucial to open up the market and, by doing so, to prevent monopolistic practices of the existing port service providers.
The mechanism of seaport activity, especially the bureaucratic authorisation granting and re-licensing procedures, should not be entangled with new regulations. This could happen in rearranging the system for issuing authorisations in accordance with the directive. The directive defined a much-needed objective to have authorisations issued quickly and effectively, but it was not clear what this meant and what terms were implied. Still, the proposed authorisation requirement was no better than that applied in the Klaipeda seaport today. And the competent authority responsible for granting permissions was given almost as much power as the port authority wields today, not to mention several other regulations posing additional drags on the system. All this should be avoided if the aim is to create a more flexible system and a more attractive seaport.
It is equally important to reduce the state’s role in the port management by delegating decision making to a board composed of seaport companies. State investment should be limited, and the guidelines on state aid should be spelled out in order to prevent irrational and ineffective investment decisions. Today’s practice of ad hoc financing of investment projects distorts competition. On the other hand, the opposite principle of equality (which means providing state funding for all) would support unprofitable projects. In any case, the state’s active but unspecified participation in investment projects frequently results in failure.
The abolition of the existing pointless ban on sublease would also act as a spur to greater seaport activity and flexibility. Today port land users may not sublet land plots even if such rental agreements would be commercially beneficial for the company and for the seaport development. Or if some unused land plots would be put to other uses and bring objective improvements into the seaport infrastructure. After all, at some time or other a company may find some of its resources useless or commercially profitless, so it would be wiser to sublet them for a certain period of time rather than keeping them out of use. By putting such resources to use, other companies could create value added. Also, opportunities might open up for businesses that are ready to expand their business activities but do not wish or do not have resources for long-term investments in the seaport.
Most importantly, all this could be achieved without adopting a separate directive. We can have an open and competitive seaport without specific instructions from Brussels. While all others are reflecting on whether they have to move on and if so, in what direction, the Klaipeda seaport might forge far ahead. After all, we ourselves can create equal conditions for market entry, boost investments and improve the quality of port services, increase the effectiveness and flexibility of service provision, lower costs, and enhance transparency.
We can and should accomplish many of the goals defined in the EU transport policy of seaport liberalization with our own efforts. Even if Brussels comes up with a new liberal initiative, its final version is very likely to be as bad as the present Services Directive, a document that will hardly give any visible stimulus to the market.
