Efficient Pricing of Maritime Infrastructure Use - What Does That Require from Demand Analysis?



Efficient Pricing of Maritime Infrastructure Use - What Does That Require from Demand Analysis?

Authors

C M Berglund, VTI, SE

Description

Abstract


The infrastructure used by shipping can be categorised into five groups. There are ports, fairways and the open sea. In Sweden as well in some other countries ice-breaking can be necessary for ships' passability in winter time. Also, the services provided by pilots are a part of the infrastructure. As a means to simplify the coming discussion, we define fairways and ice-breaking as follows:
* Fairways are the marked water area between the open sea and ports. Included in the fairway concept are all navigational aids provided for secure and safe traffic in and out of ports. While the fairway group includes these navigational aids, it is appropriate to consider ice-breaking and pilot services separate groups, as discussed previously, although these services may be used in fairways.
* Ice-breaking is only necessary and a part of the infrastructure during a limited time of the year. However, it provides the same type of infrastructure service whether the ice is broken in a port basin, in fairways or at open sea.

Given the restriction that the provider of the infrastructure must cover its costs, the study concerns the described infrastructure components and how efficient pricing of the services should be designed. For instance, the Swedish Maritime Administration (SMA) is an organisation that provides fairways, pilot assistance and ice-breaking services and is obliged to cover all its costs. At question is how the SMA and organisations/enterprises alike should price their services in an efficient way. We will leave the pricing of ports outside the study.

Infrastructure cost types for shipping ? Traffic-volume independent and marginal costs.

The paper will consider the theory of pricing-relevant costs in a general way. However, here the Swedish Maritime Administration is used as an example to point out some specific problems and questions concerning pricing-relevant costs for infrastructure providers who are obliged to full cost recovery.

Traffic independent costs and organisation of the Swedish Maritime Administration

Investment and capacity decisions regarding four of the five (the open sea is irrelevant for this matter) infrastructure components affect the costs for the service holders to a large extent. Decision-making regarding these matters could be based on theories and models of optimal investments. That research topic is outside the scope of this study. This study is limited to addressing pricing strategies which consider short-run marginal costs and include traffic-volume independent costs but consider these costs as (exogenously) given. However, one can ask if there is a clear-cut answer to the question of whether or not a cost is traffic-volume independent. This is addressed below.

The provision of infrastructure by the SMA means that it has organisationally split the operations into pilot services, ice-breaking, fairways (maintenance and investments), nautical charts, rescue services, ship inspections and other services (mainly administrative). It is not possible to unequivocally determine the distribution between traffic-volume independent and variable costs over these operational areas.

The chosen time line is a determining factor for the answer to the question. Of course, over a long enough period of time, all costs can be regarded as variable. And the shorter the time, the fewer of the costs can be regarded as variable. For instance, at the beginning of a new year, all capital costs for the coming year are independent of the traffic-volume during the year. Given the size and structure of the personnel, the costs for salaries are also virtually given. With consideration to normal weather conditions and wear and tear, a large part of the operational and maintenance costs is also given at the beginning of a new year.

As a rule for pricing the pilot services and a few other minor services, the SMA assigns all capital costs and 25 percent of the other costs to non-variable costs. In the present pricing system of the SMA, there is no fee for the use of ice-breaking services, and the fairway fees follow an entirely different rule. The present pricing of the maritime infrastructure in Sweden will be further discussed, however briefly, in the paper.

Pricing-relevant marginal costs of shipping and its use of infrastructure

One purpose of the paper is to review the literature on models that pay attention to the question of how infrastructure holders with a cost recovery responsibility should price their services in a socially economic efficient way. As there are large traffic-volume independent costs involved in providing maritime infrastructure, it is necessary to look for a second-best solution. Even though the price is not set equal to marginal costs at second-best solutions, in pricing the services efficiently, one usually has to take marginal costs into account.

One can ask what a marginal cost is for the SMA or a port. In the case of the SMA, it provides three infrastructure services. Each time a ship makes a call at a port, there are marginal costs for the use of the fairway and perhaps for the pilot- and ice-breaking services. However, as fairways generally can be regarded as public goods, this cost is generally very small. Remaining are the marginal costs for pilot- and ice-breaking services. Weather conditions and some other factors, which are outside the control of the SMA, affect the demand for both services. One can conclude that the more severe a winter is, the greater the demand for ice-breaking services, and the more severe the wind and sea conditions are, the greater the demand for pilot services.

On a rolling basis, the SMA makes three-year plans for its operations. The planning process considers so-called normal weather conditions and expected demand, i.e. the amount of traffic. In the early stages of the planning process the governmentally set goals for the levels of service by pilots and ice-breakers are also included. Among other things, the goals define which ports should be reachable all-year-round, and within what length of time, from the time of ordering, pilot assistance should be provided.

The politically set goals and the expected growth in demand affect the investments in pilot and ice-breaking facilities. Under these conditions short-run marginal costs can be defined as the costs for the extra use of bunker oil on pilot boats and ice-breakers, and perhaps the increase of payments to the staff in charge for the service. That is, then, the pricing-relevant marginal cost for a single ship's usage of the infrastructure provided by the SMA. Pricing-relevant marginal costs also include costs for negative external effects. The costs for waiting and queuing times, accidents and environmental damage are important examples of this cost type. In Swedish fairways, queuing situations seldom occur. On the contrary, waiting times for pilot and ice-breaking services occasionally occur, thereby increasing the infrastructure user costs. These should also be regarded as pricing-relevant marginal costs.

Ramsey-pricing and demand analysis

Taking as a starting point the current organisation and regulation of the SMA, the paper will review the state-of-the-art marginal cost estimates on maritime infrastructure usage. In that perspective the options for different pricing strategies are examined. The study focuses on the requirements the pricing strategies put on the demand models for sea transport.

A second purpose of the paper, therefore, is to discuss which models and methods should be modelled. Also, the implementation consequences for infrastructure providers, such as the SMA and organisations/enterprises alike, are considered in the study. One important question in this context is the choice of dependent variable used for the demand modelling. For instance, one can ask if it is best to use demand for transport in weight or volume, the demand for different types of tonnage (such as RoRo- and bulk ships), the demand for specific sizes/capacities of tonnage, or perhaps combinations of these variables.

Ramsey-pricing is a relevant pricing strategy for situations with the above discussed presumptions. There are a few versions of this pricing strategy. However, they commonly require elasticities with respect to price. It can be necessary to estimate own-price as well as cross-price elasticities. The estimated elasticities should correspond to a relevant timeline. Relevant substitution possibilities should be included as well as other relevant characteristics and presumptions. Further elaboration on these matters is the final part of the problem area that will be analysed in the paper.

Publisher

Association for European Transport