Marginal Cost Pricing in Sea Ports: How to Model and Assess Differences Between Ports?



Marginal Cost Pricing in Sea Ports: How to Model and Assess Differences Between Ports?

Authors

H Meersman, F Monteiro, T Pauwels, E Van de Voorde, T Vanelslander, University of Antwerp, BE

Description

This paper deals with the assessment of marginal cost of a port call, stressing what makes marginal costs differ between port settings. The hypothesis that marginal costs do indeed differ in port-specific characteristics is confirmed.

Abstract

It is generally accepted in economic literature that for sea ports, like for any other project which is used by one or more users, social marginal cost pricing is the optimal pricing paradigm to be adopted from a welfare point of view. If the use of the sea port?s infrastructure and services is priced at a tariff above (below) marginal cost, production will be lower (higher) than the optimal level.

The general principle is clear. However, the practical assessment of what the marginal cost of a port call consists of, how the actual marginal cost can be calculated, and what factors make marginal costs differ between different port settings is still surrounded by vagueness. This paper takes a deeper look into the real composition of marginal costs, develops a methodology for practical calculation and applies the calculation to a number of different port settings. The main research hypothesis states that marginal costs do indeed differ in a number of port-specific characteristics. The research was conducted in the frame of the GRACE project, where similar analysis were conducted and comparable hypothesis were posted for air transport and inland navigation.

For testing the hypothesis in a sea-port context, it is first indicated for what part of the maritime transport chain marginal costs should be calculated in a port case study. Different port zones are considered. Next, for the social marginal cost assessment, an engineering approach is used. An econometric approach cannot be applied due to lack of suitable data: maritime and port undertakings have absolutely no incentive to publish or make available what they consider to be commercially confidential data. Through the engineering approach, the social marginal cost is decomposed in its four main components: infrastructure costs, transport user costs, supplier/operating costs and external costs. Each component is assessed first in a theoretical way, indicating whether and under what form a component occurs in what physical port zone. It is found that marginal elements show up in infrastructure costs as a consequence of using locks in the port, costs of crew onboard the vessel, operating and maintenance cost of the vessel, tugboats and pilotage boat (or helicopter), accident costs (cargo damage as well as injuries of persons, and noise and air pollution costs.

The engineering approach allows, in a next step, building a simulation tool for modelling a vessel?s approach process. This simulation tool is not specific to one port type but features sufficient flexibility for being applicable to different port settings. Variation is allowed in various general, vessel-related, port-related and cargo-related characteristics. The relationships between variables are modeled as closely as possible to reality, although for a number of relationships, simplifications turned out to be necessary in view of usability of the model and of data availability for early applications. The model setup allows however further detailing all relationships.

In a subsequent step, the theoretical frame and the simulation tool are applied to a number of port cases. The ports under study are chosen in such way that they correspond to different port settings, which could allow for different social marginal cost levels to occur. The sample consists of the ports of Antwerp, Felixstowe, Genova and Bordeaux. The theoretical results of the research show that different port settings do indeed lead to a different social marginal cost composition.

Furthermore, the case-study assessment allows quantifying the impact of different port settings on actual social marginal cost levels. It is shown what different characteristics make up for a different marginal cost composition. Variables with most impact turn out to be port location (river or coastal), port layout and traffic level.

The latter variable is especially of interest in a context where congestion and scarcity costs occur. The simulation tool can be used to assess the impact of both phenomena. However, in the case of the ports that were investigated, congestion and/or scarcity seems not to be relevant nowadays, in most cases due to existing overcapacity. However, port economists start taking into account potential future capacity problems, whereby congestion and scarcity will come into play and will have to be included in a social marginal cost calculation.

The results are useful from a policy as well as from an operational perspective. From a policy point of view, insight into the real marginal cost levels should lead to more tariff transparency. From an operational perspective, insight into marginal costs should enable operators to take decisions that reach closer to the optimum.

Publisher

Association for European Transport