Incentives to reduce port inefficiency: a theoretical approach

Over the last decades, the European Union (EU) has devoted a large amount of effort and money to projects aimed at boosting some of its maritime corridors as a modal alternative to road or rail freight transport. However, the overall design of most of these programmes has ex post revealed as very ineffective. This paper suggests that promoting port efficiency might be a more suitable target to increase the modal split of Short Sea Shipping (SSS) than subsidizing firms to transfer cargo from road to sea. But defining ‘port efficiency’ is a complex task and, therefore, granting money directly to port authorities could also generate perverse moral hazard effects, particularly when the improvements are difficult to monitor and many investments are non-refundable. The European Court of Auditors points out that millions of EU public port finance was wasted on empty terminal and other unused infrastructure. The objective of this paper is to design a proper subsidy to promote SSS by encouraging port improvements through a proper system of incentives. As a policy recommendation, in this paper we propose the development of a subsidy per inefficiency-reduction unit.