The Genesis of an Impossible Situation: Australia's Ever Increasing Container Terminal Access Charges
This edition analyses the recent increases in container terminal charges, what allowed the situation to degenerate and potential options to address this issue.
DP World’s massive increase in terminal access charges across three of its Australian container terminals coupled with allegations that the company has been avoiding corporate tax for over eight years have sparked outrage in Australian logistics and supply chain operators. Terminal access charges are paid through terminal appointment systems by transporters wanting to pick-up and deliver containers at port terminals. These fees will increase by up to 52% from January 2024 to close to AU$ 200 per container for landside operations in Melbourne, Sydney, Brisbane. One can perhaps understand why these constant rates increases (that have quadrupled in the last five years) along with the allegations of tax avoidance have angered quite a few people. This is really a story about oligopoly pricing and technology-enabled rent extraction. As with many supply chain issues, the potential solutions to this problem are not necessarily cheap, straightforward nor immediate. To be clear, this isn’t a hit-job on DP World. All East coast terminal operators have engaged in similar pricing strategies.
In 2009, the booking fee was around AU$ 4. In 2017, this fee, rebranded as the TAC, was between AU$ 20 and 30. As of 1st of January 2024, the TAC will be between AU$176.90 in Sydney and $190.80 in Melbourne.
DP World operates four container terminals in Australia, in ports close to the country’s most populous cities: Melbourne, Sydney, Brisbane and Perth. One or two other competing terminals operate in each of these cities (although not necessarily owned by the same companies), namely: Patrick and VICT in Melbourne, Patrick and Hutchison in Sydney and Brisbane, and Patrick in Perth. Terminal operators lease land from port authorities (many of which have been privatized in the last decade – an important detail we’ll touch on further down the track) to provide stevedoring services – transferring containers from sea-going vessels to landside transport modes such as road and rail. In the process, terminal operators charge service fees, raising revenues from both sides. On the seaside (or quayside), these fees are generally called Terminal handling charges (THC) and on the landside they’re typically called Terminal access charges (TAC).
Terminal Access Charges and Terminal Appointment Systems
Terminal operators haven’t always charged high terminal access charges on the landside. This practice became increasingly used following the adoption of terminal appointment systems (TAS). TAS were introduced to manage truck congestion (Incidentally, I wrote my PhD dissertation on terminal appointment systems). Perhaps the most known example of TAS implementation is that in the Los Angeles ports. In Australia TAS (or vehicle booking systems – VBS) have been introduced since the late 1990s. The initial idea was for the appointment system to reduce truck congestion at terminals during peak times. Consequently, much of the focus fell on financial mechanisms to manage late arrivals, no shows, time-dependent slot pricing and so on. More recently however, terminal operators began to levy terminal access charges through the booking systems. These are charged per container and are simply the fee for a container to be picked-up or delivered without offering any other benefit. Of course, other fees (late arrival, no show, administration fees, etc.) are, nonetheless, still charged. Unsurprisingly, landside related fees now make up more than 40% of terminal operators’ revenues.
Landside-related fees for transporters – either trucks or rail operators – have risen consistently in the past years, but especially during the past decade. In 2009, the booking fee was around AU$ 4. In 2017, this fee, rebranded as the TAC, was between AU$ 20 and 30. As of 1st of January 2024 the TAC, will be between AU$176.90 in Sydney and $190.80 in Melbourne. Interestingly, Perth fees have increased very little during the same period (more on that in the latter part of this post). The TAC is just to pick-up or deliver containers. There are other fees too, a VBS administration fee charged per slot of almost AU$ 50, an energy charge of AU$ 6, no-show fees of AU$ 310 and late arrival penalties of AU$ 115. Transporters can pay up to 22 different fees to terminal operators just to pick-up and deliver containers.
How Did We Get Here?
Why the sudden cost rise and why isn’t there any blowback? I see two main factors: oligopoly pricing and technology-enabled rent extraction.
To understand how oligopoly pricing works for container terminal operators, it’s necessary to understand a bit about contracts in container shipping. Not all parties engaged in transporting containers by sea have a contract with one another. Clients (cargo owners) engage shipping lines or third-party logistics operators (3PLs) to transport containers by sea. The shipping lines contract terminal operators in the origin and destination country. The clients, 3PLs or shipping lines may contract the first and last mile delivery (usually by truck or rail). This peculiar way of operating has two consequences. The first is that cargo owners and transporters don’t choose where to pick-up or deliver containers to. This choice is somewhat implied in the choice of shipping line. This is particularly important for transporters because they genuinely don’t have a choice where to pick-up containers from. Second, the cargo owners and the transporters typically didn’t have contracts in place with terminal operators. With the introduction of the TAS, transporters and terminal operators began using service level agreements. However, these can be varied, almost unilaterally, by the terminal operators with limited control by the transporters.
Shipping lines are companies operating internationally with billions of dollars in assets, as are terminal operators. Consequently, negotiations between shipping lines and terminal operators are generally fierce. This may explain why, on a unit basis, they’ve dropped from AU$ 219 to AU$ 193 per container.
Container shipping also involves quite a number of large institutional actors with significant negotiation power and predominantly small and medium companies on the landside which makes up for a significant power differential. Shipping lines are companies operating internationally with billions of dollars in assets, as are terminal operators. Consequently, negotiations between shipping lines and terminal operators are generally fierce. This may explain why, despite a consistent increase in container volumes in these terminals, revenues from seaside operations have remained relatively constant. In fact, on a unit basis, they’ve dropped from AU$ 219 to AU$ 193 per container.
On the other hand, few trucking or rail operators can boast this asset base and global reach as shipping lines or terminal operators. In fact, a large proportion of trucking companies are small businesses. To give a sense of proportion, there are 59,000 trucking businesses in Australia that employ 200,000 people. The average trucking business employs less than 4 people. Granted, not all these businesses interact with container terminals, but the proportions are likely to stay the same. This size differential combined with the fact that transporters don’t really have much of a say or power to influence landside charges means that they’re finding themselves between a rock and a hard place. If they do want to continue to operate with container terminals, they must pay. Some of the TAC fees get passed on to the cargo owners and some don’t. Hence ultimately, these fees can endanger transporters’ financial viability, increase prices on the consumer side, or both.
The appointment system technology alongside optical character recognition (OCR) have also enabled the rent seeking behavior which has come to be expected from big tech (e.g., Facebook, Google, Amazon, Apple, etc.). Terminal appointment systems have significantly reduced the costs and resources required to track landside flows through container terminals to the point to which it is now possible to monetize behaviors that were previously impossible to monetize at scale. This new area of possibility combined with pressures to fin revenue sources independent from seaside operations have created a perfect storm.
Addressing an Impossible Situation
The rise in terminal access charges seems to have no limits so one must wonder what some potential levers to address these issues can be. If the last year of worldwide inflation has taught me anything is that it is rather unreasonable to expect companies to self-restrict profits. Quite the contrary. If there are limited prospects for terminal operators to cull the terminal access charges growth from within, the pressure to curb these fees must come from without, mainly from governments, competition or the transporters. As we’ll see neither option is particularly straightforward to implement and neither option is a silver bullet, definitely not in isolation.
Regulatory Oversight
I mentioned at the start of this post that DP World operates four terminals, but fees are dramatically increasing in three of them. The container terminal in Perth, in the Western part of Australia will only experience minimal fee increases. This is because the Western Australian Government has maintained regulatory control over the extent to which fees, such as terminal access charges, can be levied. In contrast, the states where the remainder of terminals are based, Victoria, New South Wales and Queensland, have not retained the same regulatory oversight over these fees. Hence the respective state governments consider themselves with their hands somewhat tied behind their backs.
Competitive Pressure
The traditional economic doctrine suggestions that competition is the mechanism to reduce prices as economic actors engage in bidding to attract clients. Expanding the ports in Melbourne, Sydney or Brisbane to attract additional terminal operators seems unlikely, mainly because all three ports operate within cities hence have limited prospects to expand. Greenfield developments (building ports from scratch) seem unlikely because of the large capital expense involved. Alternative locations in existing ports seem feasible only in New South Wales, where the port of Newcastle has been proposed as a development site for a new container terminal. However, although a feasible option, the project has been repeatedly delayed. Recall the privatization of port authorities I mentioned earlier. Through the privatization contract of the NSW port authority, the NSW government had to pay a penalty to the NSW port authority if the port of Newcastle surpasses 50,000 containers/year. The legislation concerning the penalty was removed in November 2022. There is therefore hope that the terminal will be built sometime in the future.
A Unified Response from Transporters
Transporters can also look to provide a unified response to terminal operators. This response may resemble a form of unionization that has proven somewhat more effective at countering power imbalances than ‘the market’. A unified response may also entail some sort of industrial action, i.e., the temporary suspension of deliveries to terminal operators. The key issue in these cases is how long can some transport companies hang on without revenues in the case of an industrial action. Unlike workers that receive (partial) wages even when going on strike, companies often don’t. The other issue that I’ve often encountered is disagreement on who and how a unified response will be led. Is this a likely scenario? Probably not. Ultimately, companies often fail into collaboration, meaning that they turn to it as a last resort after exhausting all options.
Doing Nothing is Not an Option
The power imbalance between terminal operators and transporters seems to be one of the key reasons for the massive increase in landside terminal access fees. Power imbalances are seldom corrected by technology, rather they are often amplified as it provides the terminal operators the ability to monetize multiple aspects of the transporters’ behaviors. Potential solutions to correcting power imbalances include government intervention, increased competition through alternative ports and a coordinated response from transporters. Solutions must be explored and implemented although it is unlikely that individual solutions in isolation will resolve power imbalances and it’s clear that a nuanced, context-dependent approach is required. One thing is clear, however, doing nothing is really not an option.