PORT CONGESTION PRICING : THEORY AND PRACTICE

Abstract

Bennathan and Walters' study of port congestion, recommend that ports adopt a congestion pricing policy whereby a congestion levy is imposed on shipowners when heavy congestion occurs to reduce the level of traffic and hence maintain traffic at normal congestion levels. However, the recommendations made were based on an understanding of economic forces and the shipping industry, and have not been supported by case studies. This Exercise analyses the pricing practices of four ports in South-East Asia, namely Singapore, Penang, Port Klang and Hong Kong to determine how each port responds to congestion at their respective facilities. A common practice among the four ports was to resolve the congestion without raising port prices. It was observed that none of these ports imposed a congestion levy when there was congestion in their facilities and none had any intention to adopt a congestion pricing policy. Why are the pricing practices of these ports different from the one recommended by economic theory? An analysis of each port reveals that the operating environment of these ports are of a greater complexity than the one described in Bennathan and Walters' economic model. When choosing a particular pricing policy, the port has to consider not only the economic efficiency objective, but other factors as well. Each port has to take into consideration other objectives, the competition it faces, the type of services it provides, its operating environment and the present pricing policy that it has adopted. The congestion pricing policy has not been adopted by these ports mainly because it is in conflict with the ports' primary objectives of, for example, maintaining stable port prices, preventing domestic inflation, maintaining the competitiveness of exports or increasing its share of transhipment traffic. Furthermore, the difficulty in determining an appropriate size for the congestion levy has constrained these ports from adopting a congestion pricing policy. Rather than impose a congestion levy, the four ports in this study chose to resolve congestion in their respective facilities by other means, such as purchasing additional equipment, consulting with port users and/or by providing incentives to efficient port users and levying penalties on inefficient ones. In the long run, all four ports will expand their container terminals to meet the expected demand. An area of concern is whether these ports are in danger of expanding beyond the optimal size. In the case of Singapore and Hong Kong, these concerns are very real since land is a scarce resource in these two economies. The port should be expanded only if there are substantial benefits to be reaped and provided these benefits outweigh the cost of port expansion. Hence, port planners must carefully weigh the marginal social cost and benefit of further expansion. Standard cost-benefit analysis of port investments are usually conducted from a closed economy or nationalistic perspective. However, if the benefits which accrue to foreigners are also included in the cost-benefit analysis, then there should be no problems in justifying further port expansion in Singapore and Hong Kong.