Operating differential subsidies: problems and alternatives for the United States

In this paper a proposal for a Competitive Rate of Return (CRR) based operating-subsidy system is made as an alternative to the existing US foreign-cost parity ODS system. Such an alternative, if adopted, could be successful in meaningfully relating US government maritime subsidy programmes to the legitimate financial needs of the industry. From the operator's viewpoint, the risk of drastic revenue fluctuations is removed, yet adequate opportunities are provided for firms with above average performance to be rewarded for their efficiency in higher than average profits. similarly, poorly run firms have an opportunity to lose money, in spite of government subsidies.

From the government's viewpoint, the CRR programme guarantees the provision of essential shipping services at the lowest possible cost. Because of substantial incentives to the operator on both the revenue and cost side of his profit equation, it is more likely that long-run government operating subsidies can be reduced under CRR than under the present system.

Although the CRR system has been described for use in determining subsidies for both bulk and general cargo carriers, it has been recommended that this system be considered first for implementation in the case of bulk vessels, because of the newness of the bulk subsidy programme. In addition, the 1970 Act gives MarAd the flexibility to initiate such a programme for bulk vessels without the necessity of new legislation.     

Impact of proposed federal limits on US bagged food aid shipments: reduction in MSF carrier profits—a risk assessment 1

This paper is a stochastic risk simulation of the impact of proposed federal tonnage limits on US Maritime Security Fleet (MSF) bagged food aid shipments. Only MSF (i.e. federally subsidized carriers/vessels for war, or emergencies) and non-MSF US carriers (therefore, at competitive disadvantage) can compete for such shipments—representing an indirect subsidy to both groups. To compensate, US Congress proposed a financial penalty (loss of voyage subsidy) on MSF carriers for food aid above a certain limit. Accordingly, certain carriers will be policy 'winners' (non-MSF—larger food aid shipments), and others 'losers' (MSF). By simulating loss-minimizing economic behaviour by MSF carriers—using five stochastic factors—I obtain losses substantially below those claimed by the MSF owners.

Simulated annual-average MSF profits reduction is $3.5 million—within a large confidence interval; if no carriers surrender their subsidies (as claimed by MSF owners), a reduction of $6.0 million. Only 16% of annual MSF voyages are affected by a 2,500-ton limit (3%; 5,000-ton limit). Minimizing losses, 25 (of 41 affected) annual MSF voyages replace 38,000 tons of food aid with 23,000 tons of other cargo—forgoing $2.1 million in yearly direct subsidies. Two assumptions explain most of this simulated loss reduction.     

The impact of US regularory practices on the productivity of ocean liner services?

This United States stands alone amongst the nations of the world in its attempt to unilaterally regulate transnational ocean linear services. The major reason for current US regularity policies with regard to scheduled ocean transportation lies in its fundamental distruct of any form of co-operation amongst competitors as demonstrated by its history of antitrust legislation.

The linear industry, because of its unique technical and economic charectersitics has given rise to the establishment of ocean conferences—co ordinating sgreements between the operators of linear vessels. Whilst ocean conferences are permitted—even encouraged—by the their most diluted form, the so-called 'open conferences.

This Paper offers a critical review of Successive US regulatory practices in maritime transport. It is argued that these practices result in excess costs in US trades to the order of $1 billion annually, and that the linear industry's efficient functioning is seriously impaired by these rules-rules imposed by a government administration which fails to recognize that the linear industry's technical efficiency is of far greater importance than its market performance.     

US shipping policy under conditions of a new world economic and political environment

The maritime policy of the US has evolved over more than 100 years from the support of US shipping through mail and fleet auxiliary contracts before the turn of the century, to the present array of direct and indirect Government aids and regulations based on the assumption that a strong maritime industry composed of both US-flag shipping and US-shipbuilding capacity is essential for the economic well-being and defence of the country. Notwithstanding massive direct and indirect aid to the US merchant marine, amounting to well over a billion dollars a year in recent years, US shipping and shipbuilding has declined dramatically and now comprises less than 3% of world shipping. Only 2.8% of US foreign trade by volume and 6% by value is today carried in US flag ships. Government aids constitute well over 33% of total revenues of US-flag shipping.

The traditional argument for US Government support has been the need for cost parity to permit US-flag shipping to compete effectively in international trade against foreign shipping serving the same routes with presumably lower operating costs. This argument is difficult to sustain today, as vessel costs of many other industrialized nations are now about equal to those of US-flag ships.

In 1970 the US enacted a new, vastly more liberal, maritime act for the support of the US maritime industry. Notwithstanding its even more liberal terms and elimination of the strict cost-parity interpretation, the US maritime industry continues its decline. The recent bankruptcy of two old, established subsidized shipping companies has caused tremors in the industry, yet no new ideas, policies, or plans seem to be forthcoming. It is the objective of this paper to study the development and effects of various historic US Government policies relating to the support of the US maritime industry, and evaluate the positions taken by proponents or opponents of the maritime policy leading to the policy development.

The decision processes are studied by evaluating literature on the evolution of Congressional, administration, industry, and labour interest and positions on the issue of Government aid to the maritime industry. The impact and effectiveness of various elements of past and present US maritime policy is evaluated in relation to the stated objectives. The alternatives to these policies are reviewed in the light of the changing US position in international trade, military strategy, and political objectives. In addition the effectiveness of the present and alternative policies is evaluated as it is and will be affected by changing technology in use, composition of ownership, and operations of US-flag shipping and shipbuilding.     

Public subsidy of seaports

There is much contraversy regarding this issue. On the one hand there are the 'islanders' Which are generally the countries of Anglo-Saxon culture or influence in Which ports are often considered as mere commercial enterprises, and on the other hand the continentals where ports are instruments of national or local policy. The French belong by tradition to the latter. But a further examination of the subject would be useful; this article presents this reappraisal.

I would like first of all to examine what lies behind the notion of government subsidy for ports, and then to draw conclusions regarding 20 years of French law which have steadily reformed the status of French Ports.     

The bulk shipping business: market cycles and shipowners' biases

Despite a strong linkage with the macro-economic course, the bulk shipping market, in the short period, follows a typical cyclic pattern, where continuous freight adjustments balance demand and supply movements.

In this context—widely unstable but quite regular in its general scheme—the shipowners may have enough competencies and information to take logical and consistent decisions about ship purchasing and chartering.

Yet, why do they periodically make mistakes?

The analysis of shipowners' behaviour provides a reasonable answer: mistakes incur when they ignore or undervalue the market trends, following their personal intuition or even unwisely imitating their competitors.

The analysis of the Handysize segment among the bulk shipping business offers a significant example of the lack of timeliness in shipowners' behaviour: after a long period of disregard, operators began to notice the opportunities of this market niche and they are now heavily investing in minor units. Maybe it's not too late, but the market has already changed and only a few brave—or lucky—shipowners took advantage of the magic moment.     

Programming, optimal pricing and partnership contract for infrastructures in PPPs

The development of various forms of public-private partnerships for the financing, building and operating of public infrastructure has not fundamentally altered the economic calculations involved. This chapter examines to what extent it is necessary, however, to change the way that government uses socio-economic and financial evaluations, whether to optimise investment programming or pricing. Ensuring a coherent match between these two types of optimisation can provide a principle for determining the optimal programming price.We begin by showing that when projects are financed by both users (toll revenues) and taxpayers (subsidies), it is socially beneficial to plan these investments on the basis of the net present value (NPV) provided by each unit of public money invested. This NPV/subsidy ratio must obviously be higher than the public-funding scarcity coefficient or else the investment would destroy more wealth than it would produce.One of the ways of improving this ratio is also to optimise the toll level, since increasing it can lower the subsidy but has an adverse impact on the user surplus, it is essential to set the optimal toll.In the case of an approved project considered in isolation, we show that the optimal toll depends upon the public-funding scarcity coefficient. If there is no scarcity, the optimal toll is zero. As public-funding becomes scarcer, the optimal toll draws closer to the toll that optimises revenue.In the case of a programme of several projects subject to budget constraint, we show that the optimal toll no longer depends upon the public-funding scarcity coefficient and that there are several scenarios depending on the relative values of the maximum revenue and the total cost of the project:

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when, whatever the toll, revenue can no longer cover over half of the cost, it is socially beneficial to choose not to levy any toll;

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when there is a toll that covers the total cost, the operator may be left free to set it at the level he sees fit, with the issue of how the profits are to be shared between the franchisee and the franchisor being settled separately;

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when the maximum revenue of the project falls between half and all of the total cost, the value of the toll that maximises the welfare function is lower than the revenue-maximising toll and must therefore be set for the private operator by government.

Thus, the partnership contract must be given a different content in these three cases of optimal pricing.

Preamble

Most of the theoretical studies devoted to optimising public investment programming and infrastructure pricing have, since the work of Jules Dupuit (1844), focused on the salient issues of the transport sector, even though this work was relevant to all sorts of public infrastructure. The analysis presented in this paper deals with transport economics, but in line with this tradition, is also applicable to any field in which public-funding is combined with commercial revenue. For example, the question of determining how the financing of an opera should be shared between taxpayers and opera-goers raises the same type of issues as the optimal combination of tolls and subsidies for financing a motorway project. This report will be focused on these issues. We shall see that certain precautions are called for in investment programming together with some new thinking on pricing principles.     

The impact of the Merchant Marine Act of 1970 on subsidized US ship construction

The United States Congress reasserted the desire for continued financial support to domestic merchant-ship construction when in 1970 it amended the Merchant Marine Act of 1936 [1]. With regard to the shipbuilding industry, the most significant changes contained in the Merchant Marine Act of 1970 [2] are those designed to reduce the construction differential subsidy and to increase the variety of vessels that might be subsidized. Sections 501(a), 502(a), and 502(b) of the 1936 Act were amended to facilitate the reduction in subsidies; Section 905(a) was modified to encourage the subsidized construction of liquid and dry bulk cargo vessels. After a cursory review of the 1970 amendments to the 1936 Act, this paper is directed to ascertaining the results, in general, of the changes and whether they have generated increased domestic shipyard productivity and lower subsidy rates.     

A model for forecasting future supply of shipping services at Australian ports

This paper aims to develop an integrated model for forecasting both the number of ship visits and their characteristics in the medium and long term. Knowledge of future shipping trends for any port is no doubt important, as the future number of ship visits and their characteristics may have implications for the physical facilities of a port. In addition, more reliance on tonnages as a revenue source has made this knowledge more valuable. The proposed model identifies such major economic determinants as the expected trade throughput, world shipping trends, standards of facilities and future plans of shipping companies/agents. The model examines three possible scenarios for the Port of Melbourne and produces a range of shipping forecasts based on certain assumptions. From the model the major findings were:

world trends in shipping did not have any immediate impact on the shipping trends at the Port of Melbourne;

Future shipping services at the Port of Melbourne in the next 11 years are most likely to be determined by trade demand rather than by technological developments overseas;

there has been no evidence to indicate that the Port of Melbourne has been excluded from the schedule of general cargo ships due to the Port's physical constraints.     

Currency adjustment factors

The manner in which CAFs have been applied to cargo carried by lines appears to be both arbitrary and secretive. This note intends to give some clarification as to how the CAF is calculated and the manner in which it is applied.

The operation of the two methods, i.e. the monthly review and the radical review, is merely a device which enables conferences to adjust effective charges so as to leave lines without a loss in real revenue, although minor losses and gains will be inevitable as the operation of the CAFs take time to be implemented.

Finally it is hoped to point out the volatilc nature of CAF changes impinges upon the uncertainty of lines' costs.     

1981 air-cargo market penetration

This paper examines the depth of air-cargo market penetration being made in the UK by the air-transport industry, following the collapse of I.A.T.A.-constructed fares a nd rates in the wake of de-regulation on the US domestic market in 1978.

It looks at statistical evidence from H.M. Customs and Excise for 1978, 1979 and 1980, and in particular makes a distribution costs analysis by comparing sea and air costs together. In the current economic climate, given today's freight rates and the fact that air-freight is rapidly turning towards bulk unitization with a frequent scheduled delivery service, a reassessment of company distribution costs could be financially beneficial to many exporters traditionally using sea transport.     

Delphi forecast of the dry bulk shipping industry in the year 2000

Technological forecasting in general, and the Delphi method in particular, are new decision making tools which so far have not gained wide acceptance in shipping circles.

An attempt was made to use the Delphi method to obtain the views of industry leaders on a host of issues governing dry bulk shipping. A three-round Delphi exercise became the basis for a scenario of the industry in the year 2000.

In addition to dating future events, the exercise tested the respondents' attitudes towards investment and innovation in the field of 'bulking' new edible commodities. The scenario and other data were used as input to the process of selecting an optimal vessel for the carriage of the relevant commodities.     

Do maritime passengers’ subsidies in Europe affect prices?

Some European governments subsidize their residents when they travel at sea. This paper seeks to analyze the impact on prices of maritime passengers’ subsidies in Europe. Following a review of the scarce academic literature on this topic and the subsidy scheme in Europe, a sample of firms’ prices and other characteristics of 40 European routes for 2016 are analyzed. Both an estimation of a price equation and a matching approach are applied and reach the same conclusion: prices per kilometer are around 40 per cent higher on those subsidized routes due to subsidies. This outcome reduces the potential subsidy gain to consumers.     

Currency adjustment factors: some alternative strategies

The purpose of this paper is to consider some of the issues arising from currency fluctuations or currency disparities and in particular their effects upon freight earnings through the application of a currency adjustment factor (CAF).

The operation of CAFs has been a source of great concern to shippers and shipper's councils since their introduction some seven years ago. The basis of this concern has been the widening differential of applicable CAFs as a surcharge on basic freight rates. The CAF system has been regarded by many as iniquitous and punitive. Conferences have been accused of insulating themselves from currency losses due to exchange-rate variability consequent upon the introduction of flexible exchange rates in 1971. However, this mounting pressure has brought the operation of the CAF formula under close scrutiny especially from four sources.

(a) Some member Councils of the European Shippers' Council (ESC).

(b) The Japanese Shippers' Council (JSC).

(c) The question of the legality of differential CAFs under the Treaty of Rome

(d) Complaints from North Continental Maltsters.     

The comparison of general cargo ship economic performance by simulation

Cargo ship designs offered by shipbuilders differ in characteristics such as deadweight, speed, fuel consumption and cargo equipment. The best vessel for high freight markets and high fuel prices may not be the best for low freight markets and low fuel prices. A model has been developed to compare by simulation a number of multi-purpose general cargo vessels suitable for the trade of a Turkish shipowner. The model simulates the operation of each vessel under a variety of operating scenarios, e.g. fuel prices and freight profiles over the ships' lives, and estimates the distribution of resulting net present values. The techno-economic simulation model incorporates variables including ship size, speed, first cost, fuel consumption, load factor and port days.

Results are presented for six standard vessels of around 20 000 dwt operating over a long and a short route. Although the ranking of the six varies with assumptions, one design is shown to be superior under most operating conditions.     

An analysis of decision-making processes in multicultural maritime scenarios

With three research studies recently carried out the pros and cons of multicultural, multilingual crews have given a 'second' food for thought:

• The Seafarers' International Research Centre (SIRC): 'Transnational Seafarer Communities' and the research, 'Finding a balance: companies, seafarers and family life', linked to this [1]. The latter presented in Maritime Policy & Management, no. 1, January-March 2003.
• The Swedish National Maritime Museum (SNMM): Isolde av Singapore [2]. This research and sociological documentation will be reviewed in a later issue of Maritime Policy & Management.
• Horck, J., 'A culturally mixed student body; the WMU experience in fostering future decision makers' [3].

There is a growing conviction among seafarers and persons working in the land-based sector of the maritime industry (including ex-seafarers) that staff onboard and on shore should be prepared to work with crews and groups whose members come from different countries and cultures and speak different languages. The problem, though, is which culture will have to surrender and which will dominate? Will a third culture become the norm for common survival? Perhaps to understand oneself and be knowledgeable about others is a better way to avoid eventual conflicts.

There are nearly no research findings on how a programme should comprise the aims of facilitating comprehension and appreciation of influences, from differences in cultural backgrounds, on group performance and decisions.

This paper reports on the research carried out on students in the Shipping Management and the Maritime Education and Training courses at World Maritime University (WMU). How do post-graduate students holding unlimited certificates of competency, as well as holders of university degrees with experience in the maritime industry and maritime administration, come to a consensus decision?

The findings in this research are discussed in balance with the results from both the SIRC and the SNMM research which is interesting because the results, in some significant issues, are not the same.

A phenomenographic approach has been used to find out that a multicultural group is not free from working problems. Can cultural differences, perhaps, be developed from an assumed hindrance into a catalyst for stimulating national appreciation and cooperation? Perhaps the opposite is true; it might be a bottleneck for improvements in safety as formulated in the STCW95 and the ISM Code.     

On the beaten track: a view of US West-Coast container port competition

More than a century ago far-sighted railroad builders and steamship operators were seeking the shortest intermodal itineraries between the eastern United States and the Orient. A combination of locational fact and the factual outcomes of 19th century railroad building left Chicago roughly equidistant in railway mileage from what became the four great US West-Coast port complexes in the Los Angeles, San Francisco, Portland and Seattle regions. Their nearly equivalent rail access to Chicago and points east has renewed significance in the container era.

This paper concerns the efforts of US Pacific seaboard ports to stay 'on the beaten track' with respect to container shipments between Asia and the eastern United States. The West-Coast ports are transit points dividing the transcontinental and transoceanic segments of long intercontinental journeys. From origins to destinations there are, in fact, many possibly feasible itineraries, including all-water routes.

The West-Coast ports have considerable control over their own site improvements. On the other hand, with respect to transiting container traffic, the ports may influence, but are unlikely to control, their own situations. Since the major container port facilities are very often on long-term lease to large intermodal carriers, the latter are making the important shipping and routeing decisions. The carriers tend in fact to set the tone and level of port competition.

What is the nature of the competition between container ports? Is it a figment of the publicist's imagination and perpetuated by irrelevant statistical boasting? Is it perhaps something forced on the ports by carriers eager to play one port off against another in a 'lowest bid' game? At what geographical scale might port competition be most useful or, maybe, least wasteful?     

Conference-shipper loyalty contacts: Time for a re-think?

This paper examines the purposal by the British Shipper's Council (BSC) and the UK government to place a statutory limit, by means of a regulations implementing the EEC rules for competition, upon the proportion of a shipper's cudstom that may be demanded in a loyalty agreement with a liner conference.

The development of 70% loyalty is traced through the following the various drafts of the EEC competition rules for sea transport; the department of trade investigation which found freight rate disparities that were caused partially by the less competitive environment in the UK than on the Continent; and evidence given on 70% loyalty beforew the house of Lords Select Commitee on the European Communities.

By considering the precise proposals, as suggested by the BSC, and means of enforcing them, 70% loyalty is found to be eminently practicable. the short-term consequences of its introduction are unlikely to be great, considering the shippers' needs for a good quality service; but in time the additional competition fostered by a less-than-100% tie would cause radical changes; conferences would have to aopt limit-pricing and respond to competition loyalty ties might be restricted to service contracts with large shippers. These effects would be felt far more in the UK since the continental environment is in any case more competitive.

It is concluded that 70% loyalty should be imposed upon conferences by means of the EEC Regulations in order to enhance the competitive environment of linear shipping.     

Economic policies and seaports: The economic functions of seaports

This paper argues that the economic functions of seaports are to benefit those whose trade passes through them, i.e. through providing increments to consumers' and producers' surpluses. Whilst recent developments in the technologies of seaports (containers, bigger ships, more rapid handling of bulk cargoes) have increased technical efficiency, they have also provided such economies of scale as to reduce some opportunities for competition and, therefore, the probability that cost reductions are actually passed on in this way. For this purpose port costs need to be considered in their entirety, i.e. as generalized transport costs per tonne, comprising money, time and the risks of loss, damage and delay. Such cost reductions will lead to expanded trade in a variety of ways.

This statement of the economic function of seaports is contrasted with views that they should try to increase employment in their locality, or that they should maximize profits.     

Maritime language: quest for simplicity

This brief paper examines some of the problems of interpretation of documents and procedures given in English faced by non-English seafarers, and suggests the use of 'controlled' English to simplify these problems.

' Speak English ', said the Eaglet, ' I don't know the meaning of half those long words, and what's more, I don't believe you do either. '

Alice's Adventures in Wonderland

Lewis Carroll