CALL FOR TERMINAL CHARGES’ REDUCTION: MATTERS ARISING
The recent call by the Nigeria Shippers’ Council (NSC) for a downward review of charges by terminal operators makes a topical reading. As a stakeholder in the maritime industry I would like to elucidate the economic characteristics of terminal operators before concluding on the propriety or otherwise of the NSC’s demand.
From the perspective of market competition, port terminal operation has the salient characteristics of a monopolistic competitive market. The operators’ services – cargo handing – though similar, are differentiated in terms of the nature and type of cargo being handled. The existence of bulk terminal operators, container terminal operators and roro terminal operators spread round our ports lends credence to this. This service differentiation remains the key element in market competition amongst the operators.
To a large extent, the companies operating in this market are price makers; they determine what they charge the users of their terminals and could make abnormal profit (or loss). Characteristically each firm watches the actions of rival firms since the average revenue of each operator is considerably influenced by the price, output and product policies of its rivals which produce “near” close substitutes (remember their services are differentiated, not exactly the same). Usually under this market condition, market leaders (a la APMT (container service), ENL (bulk service), Grimaldi (roro service)) would do anything to maintain market lead amongst their group. This they do through innovation that always leads to slightly better service delivery over their rivals. The competition also do not let go as they strive to improve service delivery to match the “leaders” so as to earn abnormal profits too.
This “struggle” implies that in the short run (which for obvious reasons our terminal operators are still passing through), all the operators would be earning abnormal profits (or losses). In the long run however, the large profits will be competed away, both by rival companies that have improved on their service or by new entrants. But here lies the snag: entry remains restricted by the privatization law. And it is understandable that the present crop of operators need time to grow their business while also fulfilling their obligations under the law to develop terminal infrastructure.
What then is the way out of this current high terminal charges? How do we price the services right?
To answer this question, it is important to understand that years of careful study by transport economists have shown that there is no such thing as “right pricing”. This is because of the fluctuation of traffic (goods and passengers) which could attain a peak and also reach rock bottom almost without notice. Many a time, what a company has gained as excess profit during a boom could be spent into deficit during a recession, especially if the recession is prolonged. Several factors are responsible for this unpredictability but they are outside the scope of this write-up. But suffice to know that instead of “pricing right”, the body of operators, users and regulators of transport service each have pricing objectives which align with their individual interest vis-a-vis the market trend. For our terminal operators, their objective at this time is to cream as much abnormal profits as possible, knowing that in the long run they will have to contend with marginal profits; the shippers on the other hand want to pay the least cost so that they can maintain good margin in their trade and without jeopardizing service efficiency. The third party, the regulator – wants to protect the interest of its members against undue exploitation. Each party’s objective is reasonable, one could see.
I would not be sure if the Shippers’ Council is “constitutionally empowered” under the privatization law to regulate the operators. If so, then we are on course. But if without legal bite, not even a fiat by the honourable minister of transport would force the charges down effectively; at best maybe a cosmetic review. Don’t forget that the operators are in business to make profit and most of them are schooled in the art of international business dealings.
This is why a legally empowered body, who would check the operators’ books and work out the statistics (direct and indirect costs of operation, etc) with them from time to time, negotiate and agree on acceptable charges, and whom they will respect while doing so, is the only way out. Anything short of this is sentiment.
Postscript:
This article was sent on 27/09/2011 to: Ships & Ports Communications Company's story as a rejoinder. In early March 2014, government upgraded the Shippers' Council of Nigeria (SCN) to the status of economic regulator for the maritime industry. The modalities for maintaining their new responsibility is still being worked out.
