Full cost recovery in EU ports operating as commercial undertakings*

Bernard Gardner, Peter Marlow*, Stephen Pettit

Cardiff Business School, Cardiff University, Aberconway Building, Colum Drive, Cardiff, CF10 3EU Wales, UK

Received 7 June 2004; revised 21 June 2005; accepted 27 June 2005

Available online 31 August 2005

Abstract

In their Green Paper on Sea Ports and Maritime Infrastructure the European Commission implies that full cost recovery pricing by ports

requires current users to pay for sunk costs. Consequently, if this pricing policy were adopted by EU ports, it is argued by the EC that this

would lead to strong increases in port charges.

This paper compares three EU ports (two in the public sector and one privately owned) where the port authorities currently determine their

charges on this basis. In doing so, it explains how full cost recovery works in practice and provides evidence which suggests the Commission

is mistaken in its view that, if adopted, large increases in port charges would necessarily follow.

q 2005 Elsevier Ltd. All rights reserved.

Keywords: Full cost recovery; Customer satisfaction; Marginal cost pricing; Externalities; Subsidisation

1. Introduction

An extensive literature on port pricing exists and

provides a wide-ranging discussion of the issues (see, for

example, Baird, 1999; Dowd and Fleming, 1994; Gilman,

1978; Martin and Thomas, 2001; Meyrick, 1989; Strandenes

and Marlow, 2000; Talley, 1994; Thomas, 1978). This

paper, which is concerned with the impact of full cost

recovery in ports, discusses the findings of research

undertaken by the authors as part of the ATENCO

project,1 a Fourth Framework study commissioned by the

European Commission Directorate-General for Transport.2

0967-070X/$ - see front matter q 2005 Elsevier Ltd. All rights reserved.

doi:10.1016/j.tranpol.2005.06.011

* The authors would like to thank the port authorities at Dover, Dublin

and Felixstowe and the respondents to the port users’ questionnaire at these

ports for providing the data on which this paper is largely based. They

would also like to express their gratitude to the European Commission for

funding the research. The views and the conclusions drawn are entirely the

authors’ own as is the responsibility for any errors or omissions in the

compilation, analysis and interpretation of the data.* Corresponding author. Tel.: C44 29 2087 6081; fax: C44 29 2087

4301.

E-mail address: marlow@cardiff.ac.uk (P. Marlow).1 ATENCO, Analysis of the cost structure of the main TEN ports, a

project commissioned by the European Commission, Directorate—General

for Transport (DG VII), under the Fourth Framework, Fourth Call.2 Haralambides (2001) contains an overview of the findings.

In doing so it draws upon the results of a survey conducted

as part of the wider study which gathered information from

both port authorities and port users on the pricing practices

of ports and related issues. The survey covered 13 port

authorities including the port authorities at Dover, Dublin

and Felixstowe, the ports whose pricing practices are

discussed in this paper. Representatives of the three port

authorities and 28 port users were also interviewed. The

selection of ports used for this comparison were chosen in

conjunction with EU DG VII who funded this study.

The discussion is organised as follows. The next section

sets the scene by providing a brief description of the three

ports and the services provided by the port authorities. The

following section outlines the main pricing principles

pursued by the three port authorities and discusses the

reasons for differences. How full cost recovery pricing

operates in practice is then discussed in Section 4, while

Section 5 examines customer satisfaction. Section 6

discusses what the impact of adopting marginal cost pricing

by the three port authorities might be and Section 7 then

considers the related issue of externalities. Unlike con-

tinental European ports, Irish and UK ports do not benefit

from the subsidisation of their non-commercial infrastruc-

ture. Section 8, therefore, discusses what the effects of

creating a level playing field for the three ports might be by

considering the hypothetical subsidisation of their non-

commercial infrastructure. Finally Section 9 provides a

summary of the main conclusions.

Transport Policy 13 (2006) 2–21

www.elsevier.com/locate/tranpol

B. Gardner et al. / Transport Policy 13 (2006) 2–21 3

2. Brief description of the three ports

The three ports are very different in character and their

main characteristics are compared in Table 1. Felixstowe is

a major container port providing facilities for deep-sea

container vessels operating services between Europe and the

rest of the world, particularly the Far East and North

America. The port also provides facilities for vessels

operating short-sea Ro-Ro services between the UK and

the continent, in particular Belgium, Holland and Scandi-

navia. The Port of Felixstowe has a long and interesting

history. Business began in 1875 under the name of The

Felixstowe Railway and Pier Company which was changed

twice in 1879 to become The Felixstowe Dock and Railway

Company as it is today. In 1951 the port was acquired by Mr

Gordon Parker, a grain merchant and has changed hands

several times since. In 1976 it was taken over by European

Ferries Ltd; in 1987 the P&O Group bought it; in 1991 75%

of the port was acquired by the Hutchison Whampoa Group

of Hong Kong who took over the remaining 25% in 1994.

Felixstowe is the largest container port in the UK and, in

1987, it became the first UK port to handle over 1 million

TEU in one year (see Baird, 1999; Felixstowe Port, 2005).

Dover Port is situated on the southeast tip of England and

its proximity to the continent has made it very important for

cross-channel traffic. The origins of the Port of Dover can be

traced back to Roman times. The Dover Harbour Board

received its Royal Charter in 1606 and, while the

constitution of the Board has been changed on a number

of occasions by Acts of Parliament, it continues to run the

port. The present Board was created and incorporated by

statute and is, therefore, a statutory body with no share-

holders. Although technically part of the public sector, the

Dover Harbour Board is not treated as such by the UK

Government, since it is a Trust Port and therefore an

autonomous body which is not owned by the State or by any

other public sector authority. Dover is a major ferry port

providing facilities for vessels operating cross-Channel

services between Dover and French and Belgian ports.

Despite competition from the Channel Tunnel it continues

to handle the greater proportion of cross-Channel business

moving through Kent (Dover Harbour Board, 1999, 2005).

Table 1

Comparison of Felixstowe, Dover and Dublin ports—1998

Port Main trades C

Felixstowe (%age of Throughput), Container—75%, Ro–Ro—

23%, General cargo—23%, Liquid Bulk—2%

3

Dover Accompanied Ro–Ro, Unaccompanied Tourist

Vehicles, Passengers (Car/Coaches), General cargo/

Dry Bulk, Aggregates, Cruise passengers, Containers

1

0

p

to

Dublin (%age of Throughput), Containers—22.5%, Ro–Ro—

53%, Liquid Bulk—15%, Dry Bulk—7%, General

Cargo/Vehicles—2.5%, Passengers—5%

1

Source: Authors.

Dublin Port is the principal port in the Republic of

Ireland but a medium size port in European terms. It is

located on the east coast at the centre of Ireland’s industrial

heartland and is positioned at the hub of the national road

and rail networks. The port largely provides facilities for

vessels operating short-sea services between the Republic

and other EU countries, in particular the UK. The legal

status of the port was established under the Harbours Act

1996 which provides for the establishment of private semi-

state companies to manage the Republic’s main seaports,

and the port obtained limited liability company status in

March 1997 when the Dublin Port Company succeeded the

Dublin Port and Docks Board as the port’s managers. The

sole shareholder in the new limited liability company is the

Irish Government. Dublin Port Company is a self-financing,

semi-state organisation whose business has been increasing

in recent years. The total tonnage handled at the port

increased from 9.5 m tonnes in 1994 to 18.5 m tonnes in

1998 (Dublin Port Company, 1999, 2005).

These three ports also differ in the range of services

that the port authorities provide and in the scope of their

activities. At Dublin, the Port Company does not engage

in stevedoring. Nine independent companies are licensed

by it to provide such services. At Dover, although

Harbour Board staff normally load and unload cruise

vessels that call at the port and participate in the control

of operations relating to the loading and unloading of

ferries, they are not otherwise involved in passenger or

cargo handling services, apart from warehousing. Private

companies provide stevedoring services in respect of

general and dry bulk cargo handled at the port. At

Felixstowe, on the other hand, the port authority provides

all stevedoring and other cargo handling services.

However, maritime access to the port falls outside the

port authority’s jurisdiction and the Harwich Haven

Authority, a Trust Port, which controls the maritime

access, consequently provides pilotage services. Whereas

most of Felixstowe’s income is derived from the charges

it imposes for cargo handling services, that of both the

Dublin Port Company and the Dover Harbour Board is

derived largely from the port dues they levy on vessels,

goods and passengers.

argo volume Legal status

0 m tonnes of which 2.5 m containers Private statutory

corporation

7 m tonnes of which 1.4 m road haulage vehicles, 110,

00 trailers 3.3 m cars, 200,000 coaches, 19.4 m

assengers, 205,000 tonnes fresh produce, 300,000

nnes sea-dredged, 200,000 passengers

Public Statutory

Corporation

8.49 m tonnes of which 424,000 1.29 m passengers Limited liability

company

B. Gardner et al. / Transport Policy 13 (2006) 2–214

3. Main pricing principles pursued by these port

authorities and reasons for differences

According to their responses to the port authorities’

questionnaire (see Table 2 and Appendix A) all three port

authorities, in determining their charges, seek full cost

recovery at the level of their overall financial performance.

They also seek full cost recovery at the level of specific

designated profit centres within their businesses and

consider the achievement of this to be of critical importance.

Competition from national and international rivals is a

factor they consider, too, in pricing, although the port

authorities attach different levels of importance to it;

Felixstowe consider it to be of critical importance, the

Dover Harbour Board consider it to be of relatively high

importance and the Dublin Port Company consider it to be

of some importance. The ‘user pays’ principle, and taking

account of ‘what the traffic will bear’ are also factors to

which the Dover Harbour Board and Felixstowe give high

importance ratings when considering pricing, and the need

to increase capacity utilisation is another factor (although

Table 2

Pricing principle and objectives adopted by the port authority

1 2

No relevance/

not adopted

Limi

relev

seldo

Full cost recovery at the level of the port

authority’s overall financial performance

Full cost recovery for individual activity

categories conducted by the port authority (profit

centres) (e.g. nautical services, cargo handling,

etc.)

User pay’ principle, i.e. each individual user pays

prices which reflect the real costs of services

provided by the port authority to that user

Du

Pricing in relation to national and international

competition by rival ports

Promotional pricing to attract specific cargo,

promote selected industries or to keep valued

port customers

Du, Fe

Pricing to increase capacity utilisation Du

Pricing according to ‘what the traffic can bear’

(i.e. systematic adaptation of tariffs as a function

of the ‘value’ attached to the port by specific

users or cargo categories)

Du

Adoption of two part tariffs (e.g. one general part

to cover fixed costs and one user-specific part

according to ‘what the traffic can bear’, i.e. as a

function of the price elasticity of demand);

Do, Du, Fe

Pricing according to ‘time gains’ (e.g. higher

prices charged for those port facilities that allow

faster access and handling than other ones)

Do, Du, Fe

Peak load pricing Do, Du Fe

Marginal cost pricing Do, Fe Du

Pricing of port services as a function of overall

logistics chain costs faced by users as compared

to alternative logistics chains

Do, Du Fe

Source: Authors.

Felixstowe only considers this to be of some importance

whereas the Dover Harbour Board considers it to be of

critical importance). Promotional pricing too forms part of

the Dover Harbour Board’s overall pricing strategy and is

rated as being of relatively high importance.

Felixstowe and the Dover Harbour Board largely agree

on which pricing principles are important, although not

always on their relative importance. It should be noted

however that Felixstowe, as a private sector company, sees

full cost recovery, the ‘user pays’ principle, the need to take

account of ‘what the traffic will bear’ and of competitors in

pricing, and pricing to increase capacity utilisation, as all

being factors which are consistent with its overriding

objective of maximising profits for the benefit of its

shareholders; whereas the Dover Harbour Board, as a

Trust Port with no shareholders, sees the same factors as

being consistent with its overriding objective to maximise

traffic for the benefit of its stakeholders, subject to the

constraint of generating sufficient profits to meet its capital

plans in the long term. This is why the Dover Harbour Board

argues that charging ‘what the traffic will bear’ means only

3 4 5

ted

ance/

m adopted

Some

importance

Relatively

high

importance

Critical

importance

Du Do, Fe

Do, Du, Fe

Do Fe

Du Do Fe

Do

Fe Do

Do, Fe

3 Access to the port is controlled by the Harwich Haven Authority which

is a Trust Port (like Dover).

B. Gardner et al. / Transport Policy 13 (2006) 2–21 5

being sensitive to any deterioration in market conditions

facing customers and adjusting price accordingly down-

wards to a minimum limit and not raising charges up to

‘what the traffic will bear’ in other circumstances. More-

over, being a traffic maximiser explains why promotional

pricing is consistent with the Dover Harbour Board’s overall

pricing strategy, yet not with Felixstowe’s. Felixstowe sees

promotional pricing as assisting other industries, which it

regards as being outside its remit because it considers this

would be against its shareholders’ interests as it would

reduce profitability.

The Dublin Port Company did not explain why it

considers the ‘user pays’ principle to be of no relevance,

despite operating a cost based pricing policy. Since it raises

much of its revenue (74 percent in 1998) from levying port

dues and does not provide many services where a large

proportion of the costs are directly attributable, such as in

stevedoring, a possible explanation may be that any

apportionment of indirect costs and other common fixed

costs (such as depreciation charges on infrastructure) it

makes to particular traffics, which it must do to arrive at its

schedule of charges, is purely arbitrary and does not reflect,

therefore, the real cost of the services or facilities it provides

to the user, except by chance.

On the other hand, the Dublin Port Company and its

predecessor the Dublin Port and Docks Board, have

benefited considerably from EU funding which has assisted

the port’s capital expenditure programme over recent years,

e.g. in 1998/1999 the port received IR £2.5 m in EU grant

aid (Dublin Port Co., 1999). Hence, an alternative

explanation might be that the port authority takes the view

that the ‘user pays’ principle has been compromised by such

subsidies for expenditure on port infrastructure and

facilities. This is because its charges are now lower than

they otherwise would have been if such assistance had not

been forthcoming and, consequently, they would not reflect

the real cost of services provided to the user. The Chief

Executive of the Dublin Port Company acknowledged, in a

statement made in the company’s Yearbook for 1999

(Dublin Port Company, 1999), that EU assistance for capital

expenditure in the port has enabled the Dublin Port

Company to provide users ‘with the most modern of

facilities. at competitive prices’ and, in tonnage terms,

throughput almost doubled between 1994 and 1998. This

perhaps explains why the port authority considers that

promotional pricing has no relevance as part of its pricing

strategy and also why it feels there is little need to provide

inducements to increase capacity utilisation anywhere in the

port by selective price cutting. The Dublin Port Company,

unlike Felixstowe and the Dover Harbour Board, also does

not consider ‘charging what the market will bear’ to be part

of its pricing strategy. Although it offered no explanation for

this, it is probably because it regards this practice as

discriminatory and thus incompatible with the cost-based

principles on which its present charges are based.

4. How full cost recovery pricing operates in practice

All three port authorities operate their businesses as ‘on

going’ commercial undertakings. They are, therefore,

required to publish annually properly audited financial

accounts verifying their ability to do this. Operating as a

‘going concern’ requires them to generate sufficient revenue

from their business activities to create a surplus, after

recovering their direct and indirect operating costs, to

enable them to meet their present financial obligations,

including the repayment and servicing of debt relating to

past capital expenditure and any provision that needs to be

made for dividend payments to shareholders where this is

relevant, and make provision for any planned future

commitments, such as the financing of capital expenditure

on new and replacement assets. This, of course, implies full

cost recovery because in order to recover the cost of assets

employed in the business which they will need to replace

eventually, depreciation has to be allowed for nominally in

determining their prices.

Like all port authorities in the UK Dover and Felixstowe

have a statutory right to levy dues. Dublin also levies dues.

These charges, collectively known as port dues, consist of

charges levied on the ship, namely conservancy and harbour

dues, and on goods and passengers. Conservancy dues are

levied for the provision and maintenance of access channels,

buoys and lights between the open sea and the docks

(berths) in the port and for the regulation of maritime traffic

in this area. Harbour dues are levied for the provision and

maintenance of the dock water area in the port and the quay

face and the regulation of maritime traffic in this area.

Passenger dues are levied for the provision, maintenance

and operation of passenger facilities, and goods dues for the

provision and maintenance of the quay apron, transit sheds,

port roads and railways, fencing and all other general port

infrastructure as well as for the provision of security,

emergency and other sundry services. Where port auth-

orities are responsible for the port’s maritime access as well

as the dock water (berthing) area itself, it is usual practice to

amalgamate conservancy and harbour dues and levy them as

ship (tonnage) dues, as is the case at Dover and Dublin. At

Felixstowe where the maritime access to the port falls

outside the port authority’s jurisdiction3 and where

stevedoring, which is generally conducted on a contract

basis, is provided by the port authority itself, harbour and

goods dues are consolidated with the contract charge for

stevedoring, although the port authority also publishes a

schedule of rates and charges for those dues separately as

well as for non-contract stevedoring.

Cost based pricing results in a complex schedule of

charges for port dues, particularly where the port handles the

whole range of different types of cargo, like Dublin, and

4 One shipping line respondent to the questionnaire did not answer this

particular question because it had transferred its operations from Felixstowe

to Thamesport in 1998.

B. Gardner et al. / Transport Policy 13 (2006) 2–216

therefore provides facilities for most types of vessel. This is

not only because cargo and vessels of a different type impose

different costs on a port but also because ships and cargo

belonging to the same category but with different dimensions

do so too. Devising therefore a schedule of charges for

levying port dues on ships, goods and passengers which

reflects the ‘user pays’ principle is a task that involves

considerable skill, since it entails fixed costs to be allocated

where they are common and thus finding appropriate bases

for doing so.

To base charges solely on cost recovery would not be a

rational policy for any commercial undertaking to pursue.

Port authorities also need to consider how charges so

determined might affect traffic volumes in the port and make

adjustments to charges where necessary to retain the

goodwill of their customers. They are, therefore, obliged

to take account of what the traffic will bear in deciding

whether they can set cost recovery charges, for to do

otherwise could mean the loss of traffic to competitors.

The degree of competition a port faces places a ceiling on

individual charges and, consequently, not all traffic within a

profit centre can necessarily be expected to make its full

contribution to cost recovery. Indeed, if it were expected to

do so, this could be a recipe for disaster, since it could result

in falling traffic volumes, which would mean overheads

would have to be borne by a shrinking traffic base.

Where any facility in a port, moreover, is underutilised, it

makes commercial sense to try to remedy the situation

initially by pricing, as long as the charges that are set are not

below escapable cost (i.e. those costs that could be avoided

if the traffic was not handled), since the revenue earned

would either contribute to increasing profitability or

reducing losses. Selective price cutting and promotional

pricing are thus both sensible policies for a port authority to

pursue in the short-run to increase capacity utilisation where

facilities are underutilised. Over the longer term, however,

such a facility must be treated as any other profit centre in

the port and the revenue it generates must cover full costs or

the site should be redeveloped for some alternative purpose

with better earning prospects which would allow the

opportunity cost of the investment to be recovered. At

Dover, for example, exports of grain from the port ceased

because the quantities available for export did not justify the

investment by the port authority in dedicated facilities to

enable the port to compete effectively in this trade (Dover

Harbour Board, 1999).

Given the above discussion, it may be argued that full

cost recovery is compatible with other pricing principles

which a port authority feels it has to adopt in order to

continue to survive as a commercial entity.

Managerial discretion can also be an important aspect of

cost-based pricing in practice. As mentioned earlier, the

Dover Harbour Board tries to be sensitive to any

deterioration in market conditions facing its customers and

thus, where it considers it necessary, will adjust charges

accordingly, thereby exercising discretion. Moreover,

because pricing margins, that is the mark-ups that are

applied to direct costs to determine charges, are based on

annual estimates of traffic volumes the Harbour Board may

be prepared to negotiate a volume rebate on subsequent

charges where the business a customer brings to the port

exceeds an annual agreed minimum level. Such discre-

tionary rebate payments, which are a mechanism to correct

overcharging, can be important as they may involve

substantial sums of money.

At Felixstowe, where port dues are consolidated with the

contract charges for stevedoring services, there is plenty of

scope for the port authority’s managers to exercise

discretion over contract details, since the contracts are

negotiable and confidential. Such contracts for stevedoring

services are for an indefinite period but are subject to one

months, two months or three months notice of termination.

Where customers decide to transfer their operations to

another port and fail to give sufficient notice before doing

so, the port authority is entitled to claim a penalty payment

for breaking the terms of contract. However, this entitlement

to claim is another area where the port authority’s managers

can exercise discretion by waiving the claim, which

normally happens at Felixstowe as the port does not wish

to jeopardise its prospect of winning back these lost

customers in the future.

5. Customer satisfaction

Although ports have a number of stakeholders, in respect

of pricing it is only the views of customers that really matter.

The perspectives of other stakeholders are not important.

Satisfying customers’ needs at a price they are willing to pay

is essential as this determines whether a port will attract

sufficient traffic to prosper. Of course under a cost-based

pricing regime, besides satisfying customers’ needs at a price

they are willing to pay, the port authority and other service

providers in the port have to recover their costs and satisfy the

interests of their shareholders too, where this is relevant, and

this has implications for efficiency.

The pooled responses of respondents to the port users’

questionnaire (See Appendix B) at Dover, Dublin and

Felixstowe reflect their answers to the question: ‘To what

extent are you satisfied with the port authority’s present

pricing policy?’ The respondents in the sample were three

port service providers and seven customers, namely

shipping lines.4 The majority of respondents (six) at these

three ports were moderately dissatisfied with the port

authority’s present pricing policy. One of the shipping

company respondents, though, was very dissatisfied. On the

other hand, another shipping company respondent, although

B. Gardner et al. / Transport Policy 13 (2006) 2–21 7

not very satisfied, considered he was more than moderately

satisfied. Both of these respondents represented shipping

lines that operated ferry services from Dover. The

remaining respondent, who also represented a shipping

line operating ferry services, but from Dublin not Dover,

was moderately satisfied. It is pertinent to note, however,

that the shipping company respondent who was very

dissatisfied was referring not only to the port authority’s

pricing policy at Dover but also at Calais and was more

dissatisfied with Calais’ pricing policy than Dover’s. This is

hardly surprising as the company’s port user costs at the

continental ports to which it operated ferry services from

Dover were, in aggregate, almost twice as high as they were

at Dover. This respondent also expressed the view that

“[the] benefits of Dover are that they are relatively open and

transparent., [producing] financial statements and

[having] meetings to which [my company] are invited”.

It is important to point out here that while customers may

express dissatisfaction about a port authority’s pricing

policy or some aspect of it, it can, nevertheless, still retain

their goodwill. This is because before transferring their

business elsewhere, customers have to assess whether the

opportunity cost of doing so is too high. For example, before

a shipping company, such as a ferry operator or a container

line, transfers its operation to another port, it must first

establish whether that port is better suited to meeting its

requirements and can do so at a competitive price.

Consequently, it has to consider whether such a move will

increase its overall utility and not just its satisfaction over

price. If it cannot do this it will, of course, stay put.

6. The impact of adopting marginal cost pricing

If ports are to retain the goodwill of their customers, they

must have sufficient capacity to meet demand and avoid

delays to vessels, cargo and passengers. This is especially

important where a port is primarily or largely engaged in

providing facilities and services for shipping lines offering

scheduled services, such as at Dover, Dublin and

Felixstowe, because the retention of such customers’

goodwill is highly sensitive to avoiding delays. As

instantaneous capacity adjustments are not possible in

reality, port authorities tend to build reserve capacity into

their facilities and plant to allow for fluctuations and

expansion in demand which, indeed, is the current situation

at Dover, Dublin and Felixstowe. It follows that the short-

run marginal cost of the production of services ports provide

is below the full cost recovery level, other than in very

exceptional circumstances.

On the basis of the assessments made by the port

authorities themselves charges would be 20 percent lower at

Dover and 14 percent lower at Dublin if based on short-run

marginal cost. Felixstowe declined to make such an

assessment in responding to our questionnaire. These

assessments appear to be based on deducting the historic

depreciation charge from full cost; for at Dover the

deduction is roughly equivalent to this charge, whereas at

Dublin it is exactly equivalent. Thus, if such an assessment

were made for Felixstowe the charges would be 13 percent

lower if based on short-run marginal cost. However, these

assessments are far too conservative. In reality if their

charges were actually based on short-run marginal cost, they

would be significantly lower, since the proportion of their

operating costs that varies directly with output tends to be

small, given that labour costs are largely fixed at these ports.

This proportion includes such costs as power and non-

planned maintenance costs, and incentive and overtime

payments to labour. Hence, even at Felixstowe where direct

labour costs are a significant factor, operating costs are only

likely to vary to any extent with changes in output where

large incentive or overtime payments are made. If the three

port authorities were therefore required to base their charges

on short-run marginal cost, the consequence would be that

they would almost immediately find themselves facing a

cash flow crisis. This would be so even if they were meeting

their current financing costs for capital expenditure and

other commitments solely out of retained earnings.

Consequently, unless substantial revenue subsidy payments

were made to them to compensate for their loss of earnings,

they would be forced into receivership as they would be

unable to continue as ‘on-going’ business concerns.

On the other hand, if they were required to base their

charges on long-run marginal cost, this might not cause

them any difficulties at all as it could be what they are doing

now. It has already been explained that, because the three

port authorities are commercial entities, they must generate

sufficient revenue annually from their business activities to

create a cash surplus after recovering their direct and

indirect operating costs to meet their financial obligations

and commitments. However, it is essential to grasp that in

charging for services and facilities in order to generate this

cash surplus, the port authorities do not seek to recover the

cost of past capital expenditure other than the financial costs

associated with money borrowed to pay for any such

expenditure, i.e. the cash now required for the servicing and

repayment of outstanding debt. Besides providing for

dividend payments to shareholders, where this is relevant,

the remaining cash surplus is used largely to pay for the

financing of capital expenditure that the port authorities plan

to make in the immediate or not too distant future. This

expenditure, of course, may be on new or replacement

assets, but the port authorities in creating such cash

surpluses do not make any provision for capital expenditure

on assets they do not need to replace. To do so would be

entirely pointless from a commercial standpoint and simply

makes no sense at all. Past capital expenditure is water

under the bridge. The Commission (1997) is thus clearly

mistaken in suggesting in the Green Paper on Sea Ports and

Maritime Infrastructure that full cost recovery pricing, as it

is actually practised by port authorities in the UK and the

Republic of Ireland, requires current users to pay for sunk

B. Gardner et al. / Transport Policy 13 (2006) 2–218

costs. It is also mistaken to imply that if adopted by port

authorities elsewhere in the EU it ‘would lead to strong

increases in port charges as past investments in ports

would. have to be fully recovered’. Such increases might

occur but not for this reason (see Baird, 1999).

Of course, the three port authorities, like other

commercial entities in the UK and the Republic of Ireland,

are obliged to charge for depreciation on the basis of historic

cost in their financial accounts and nominally allow for it in

the setting of their charges. But depreciation is merely an

accounting book entry cost and makes no difference to the

size of the gross cash surplus required, nor to the gross

pricing margins that are applied to direct cost in determining

charges. However, the fact that it is nominally allowed for

and covered, albeit on an historic cost basis, possibly

explains the Commission’s confusion.

Dover, Dublin and Felixstowe are constrained from

exploiting any spatial monopoly they might have by the

degree of competition they face. It may be argued that the

three port authorities set their charges on the basis of their

short-run costs of production by adding mark-ups to their

direct costs that reflect the prices at which they will be

prepared to offer their services in the long-run. They thus

price as though their long-run average costs of production

are constant. If this represents the reality of their actual

situation then they are, in fact, charging on a long-run

marginal cost basis. If it does not, and economies of scale

could be gained by increasing their scale of production then

they would be charging prices that result in an optimal

departure from long-run marginal cost under circumstances

where they have to recover the full cost of their long-run

opportunity costs of production in order to stay in business.

(Baumol and Bradford, 1970)

5 Such infrastructure includes navigational aids and dredged approach

and access channels which have the properties of a public good.

7. The issue of externalities

All three port authorities undoubtedly share the view that

the costs they have incurred through their compliance with

EU, national and international legislation on safety, health

and environmental standards and their commitment to

various related voluntary codes of practices have resulted, to

some extent, in internalising the external costs that their

business activities impose upon society and are thus

reflected in their present charges.

There is a wide divergence of opinion though, between

Dublin and Dover, in the extent to which they consider that

present charges reflect the internalisation of such external

costs. It is clear, on the basis of the assessment the two port

authorities made concerning the effect of their present

prices on marginal cost recovery and marginal social cost

recovery, that whereas Dublin appears to consider that all

such costs have been internalised Dover does not. In fact,

Dover considers if it were to adopt a pricing policy of

short-run marginal social cost recovery instead of one of

short-run marginal cost recovery its charges would differ

by as much as 25 percent. This divergence of opinion may

be explained partly by where the respondents consider the

port’s responsibility for the external costs imposed on

society by port related activities, or to which such activities

might be considered as contributing, ends and thus whether

it extends beyond the limits of the port’s jurisdiction. One

of the key issues here is whether or not port authority

charges should reflect the external cost of congestion to

which port related traffic undoubtedly contributes during

the morning and evening rush hour traffic peaks in Dublin

and Dover, and how this should be done to reflect the

‘polluter pays’ principle. Furthermore, what proportion of

the external cost, if any, should it be if a value can be

imputed for it?

In responding to the port authorities’ questionnaire

Felixstowe chose not to assess how its present prices would

be affected by the adoption of marginal social cost

recovery. As mentioned above it also declined from

doing so in respect of marginal cost recovery. However,

it is clear from its own publicity documents that the port

authority is properly concerned about the external costs

caused by its business activities and treats matters relating

to health, safety and environment very seriously. Felix-

stowe has its own established separate safety and

occupational health departments, and the former will

advise the port’s customers as well as the port’s manage-

ment and employees on current UK, EU and international

legislation relating to fire, health, safety and the environ-

ment. The port authority says it meets or exceeds all EU,

national and local environmental requirements, and its

published brochure which discusses among other things,

measures that have been taken on pollution abatement and

on contingency planning in the case of an environmental

emergency, makes the claim that ‘no other UK port has

devoted as much time or money to the environment as the

Port of Felixstowe’. As compensation for the loss of

wading bird and wildfowl habitat that occurred when the

port’s Trinity Container Terminal was extended, the port

authority, for example, paid for the creation of the Trimley

Marsh Nature Reserve and is currently paying for its

management by the Suffolk Wildlife Trust. (Port of

Felixstowe, 1999)

8. The impact of subsidising the non-commercial

infrastructure

8.1. Subsidisation

It is estimated that subsidisation of the non-commercial

maritime infrastructure5 at Dover would cost £lm and at

Dublin IR£2.5 m annually (1998 prices). The cost is not

B. Gardner et al. / Transport Policy 13 (2006) 2–21 9

large as neither port is located on a major river estuary and

although Dublin is located at the mouth of the Liffey, both it

and Dover are coastal ports with short approach channels.

Moreover, the bedrock at Dover is chalk. On the other hand,

at Felixstowe where the main approach channel to the port

from the open sea is 16 nautical miles (29 km) in length, and

more prone to silting, such subsidisation would cost an

estimated £9 m on the basis of the revenue that the Harwich

Haven Harbour Authority earned in 1998 from the dues it

levied for conservancy.

If the benefits from such a subsidy were fully passed on

to its customers at Dover by the Harbour Board, this would

result in a 10.31 percent across the board reduction in ship

(tonnage) dues levied by the port authority. At Dublin on the

same basis it would result in a 20.83 percent reduction in

such dues. At Felixstowe there would be no reduction in the

Port of Felixstowe’s charges at all as the maritime access

falls outside its jurisdiction, but port user cost would fall as

no conservancy dues would be levied by the Harwich Haven

Authority.

The effects of such subsidies on port user costs at the

three ports now need to be considered, and this question will

be explored initially in relation to the predominant traffic at

each of the three ports. At Dover, where mixed tourist and

accompanied ro–ro traffic predominates, the subsidy would,

if passed on, result in a 2.53 percent reduction in port user

costs for a typical ferry cross-Channel operator using

conventional vessels, that is, a saving of 28.81 Euros per

sailing. At Dublin, where ro–ro traffic predominates, the

subsidy would result in a 5.45 percent reduction in port user

costs for a typical Irish Sea ferry operator using

conventional vessels and carrying a mix of such traffic

(accompanied and unaccompanied vehicles) and some

tourist traffic too; that is, a saving of 317.34 Euros per

sailing. At Felixstowe where lo–lo container traffic

predominates the subsidy would result in a 5.4 percent

reduction in port user costs, that is, 5.93 Euros per TEU for a

typical deep sea container operator calling regularly at the

port and using 2700 TEU vessels, assuming a part container

exchange (loading/discharging) of 725 loaded boxes (800

TEUS) per call.

The effects on port user cost of such a subsidy would,

of course, vary among similar operators at all three ports

according to such factors as their traffic mix, cargo

volumes and stevedoring costs. Hence, the estimates

given, which were based on information provided by

respondents to the ports users’ questionnaire, are

representative of an approximate order of magnitude for

similar operators. They, therefore, apply only to operators

using vessels of more or less the same size. For example,

the subsidy would result in a reduction of 1.5 percent in

port user costs, that is, 0.80 Euros per TEU, for a short-

sea container operator that called at Felixstowe using 200

TEU lo-lo vessels, assuming a part container exchange of

42 boxes (68 TEUS) per call. This is because

conservancy dues at Felixstowe are levied at a rate per

gross ton (gt) that increases according to the category of

size to which a vessel belongs. It is also worth noting

here that ship dues are normally levied at a different rate

for different types of vessel. This, of course, applies at

the other ports, too, in respect of such dues.

8.2. Effects of subsidisation

In assessing the effect of subsidisation of the non-

commercial maritime infrastructure on port user costs at

the three ports the issue of light dues must also be

considered. Light dues are levied on vessels calling at

ports in the UK and the Republic of Ireland for the use

of navigational aids in the coastal waters of the British

Isles lying outside port limits. Such dues are not levied

on vessels calling at other northern European ports for

the use of coastal non-commercial infrastructure. Light

dues are levied on a flat rate net registered ton (nrt) basis

for a maximum of seven calls per year that a vessel

might make at ports within the UK and the Republic of

Ireland, regardless of the port of call. They, therefore,

have very little effect on port user costs at the three ports

when a vessel, such as a ferry or a short-sea vessel, calls

frequently and are thus only significant in respect of port

user costs for deep sea operators where vessels belonging

to their fleet call less than eight times a year at such

ports. The effect of subsidising such charges on port user

costs will therefore only be explored in the context of

vessels employed by deep-sea operators.

For a deep-sea container operator calling at Felixstowe

regularly with a 2700 TEU vessel (17,870 nrt) employed in

the UK/Europe Far East trade and assuming a part container

exchange of 725 boxes, the effect, additionally of taking

account of a subsidy on light dues which are levied at a rate

of £0.41 per nrt, would be a reduction in port user costs per

call of 18.07 percent instead of one of 5.4 percent, that is a

saving of 19.84 Euros per TEU for the operator instead of

one of 5.93 Euros. For a deep-sea reefer operator calling at

Dover, on the other hand, with a part cargo of 2500 tonnes of

fresh produce from South America on a 10,000 gt vessel

(5500 nrt) the effect of a subsidy that took account of light

dues as well as the port’s own non-commercial infrastruc-

ture would be a reduction in port user costs per call of 5.89

percent instead of one of 1.59 percent, that is, a saving of

1.88 Euros per tonne of cargo discharged instead of one of

0.51 Euros.

A number of general conclusions may be drawn from the

analysis so far. Firstly, because payment of light dues is

limited, subsidisation of the non-commercial infrastructure

at all three ports would have a greater impact per call on port

user costs for operators of deep sea vessels than short-sea

vessels. Secondly, other things being equal, because

conservancy dues are often levied on a gt (or nrt) basis at

a higher rate per gt (nrt) for vessels belonging progressively

to larger size categories, the impact on port user costs would

B. Gardner et al. / Transport Policy 13 (2006) 2–2110

be greater for operators of larger vessels than smaller ones.6

Thirdly, other things being equal, because conservancy dues

are levied at a different rate on different types of vessel, their

impact on port user costs would depend on the type of

vessel. Fourthly, because subsidisation would reduce ship-

related costs, which may be wholly or partly determined by

ship size characteristics, the impact would vary with cargo

volume and thus normally be greater when part cargoes are

loaded/discharged than when full ones are. Finally, for the

same reason, the impact on port user costs would be greater

where cargo handling costs form a smaller component of

overall port user costs than where they do not. So, for

example, other things being equal, the impact on port user

costs would be greater when accompanied ro–ro cargo is

loaded on a ferry than when unaccompanied ro–ro cargo is

loaded.

Since subsidisation of the non-commercial infrastruc-

ture, if it were to take place, would apply across the board to

all ports in the UK and the Republic of Ireland, and not only

at Dover, Dublin and Felixstowe, it is safe to conclude that

such subsidisation would not provide any of the three ports

with a competitive advantage/disadvantage vis-a-vis

national ports; nor would it provide Dublin with any such

competitive advantage/disadvantage vis-a-vis its main

international competitor, namely Belfast. This is because,

although the effects of such subsidisation in port user costs

would obviously differ among ports, it is clear from the

analysis that the relative change would be much less than

G5 percent and any impact, therefore, would be neutral

as far as relative changes in market share are concerned.7 At

Dover, however, where ferry tourist and freight traffic

appear to be particularly sensitive to competition from the

Channel Tunnel, which would not benefit from such a

subsidy, a decrease in port user costs of 2.5 percent could

perhaps lead to a moderate increase in such traffic for ferry

operators at the expense of the Tunnel.

8.3. Effects on competition

With regard to international competition Dover and

Felixstowe, in particular, compete with the main continental

European ports in the Hamburg to Le Havre range for UK

imports and exports which are transhipped at these ports

instead of being imported or exported directly and for the

transhipment of overseas cargo bound to or from other

northern European ports. Dover also competes for cruise

traffic with Amsterdam and Copenhagen.

6 At Dover ship dues are based on a gt related charge which has a fixed

component for ferries, but for vessels carrying general cargo the dues are

based on the ship’s length and the tonnage of cargo to be loaded/discharged

at the port.7 Evidence gathered from port users in the survey suggests that cargo

volumes are generally insensitive to relative changes in port user costs of

G5%.

Dover mainly competes with these ports, Antwerp and

Rotterdam in particular, for fresh produce that is imported

into the UK. Deep-sea reefer vessels bound for Antwerp or

Rotterdam will not normally call at the port unless they

have a part cargo for the UK that is more than 400 tonnes,

although some shipowners require a greater inducement

and will not call unless the cargo is 800 tonnes. Let us,

therefore, consider the impact of subsidising the non-

commercial infrastructure at Dover on this decision taking

the example of a vessel of 10,000 gt (5500 nrt) bound for

Antwerp from South America with a part cargo for the UK

on board. To call at Dover would cost the operator an

estimated 13,045 Euros in ship related costs (pilotage,

towage, mooring, ship dues and light dues), assuming a

part cargo of 400 tonnes for the UK and 14,752 Euros

assuming a part cargo of 800 tonnes. Subsidising the non-

commercial infrastructure (including light dues) would,

however, result in a reduction of 3,800 Euros in these

costs, that is a saving of 29.13 percent to the operator, if

carrying 400 tonnes and a reduction of 3972 Euros that is a

saving of 26.92 percent to the operator, if carrying 800

tonnes. Consequently, the part cargo tonnage necessary to

induce such an operator to call at Dover would also fall as

a result of these savings. It is estimated the impact would

be that an operator who previously would have required a

part cargo of 400 tonnes to call would now call if the part

cargo is at least 280 tonnes, whereas an operator who

would have required previously a part cargo of 800 tonnes

to call would now call if the part cargo is 580 tonnes. It is,

therefore, the impact of the subsidy on the ship-related

component of port user costs that would be avoided

(escaped) if a ship does not make a call at Dover that

matters and not how the subsidy affects average overall

port user cost which was estimated above as being 5.89

percent. It should be pointed out, though, that if such cargo

is discharged at Antwerp or Rotterdam and then

transhipped, it might enter the UK as ferry freight traffic

imported through Dover, so the subsidy would benefit the

port service provider, that is the stevedoring company,

more than the port authority.

Let us now consider the impact of subsidising the non-

commercial infrastructure at Felixstowe on the ship related

component of port user costs by considering again the

example of the deep sea operator who calls at the port and

provides a regular service with 2700 TEU vessels. The

impact of the subsidy (including light dues) would be that the

operator’s ship related costs would fall by 15,872 Euros per

call, a saving of 67.94 percent. Such a saving in costs would

not induce the operator, however, to discharge/load any more

containers at the port than he did before its introduction, since

it has no impact on any costs he can avoid (escape) as he has

already made the decision to include Felixstowe in his

itinerary. It would thus require a reduction in stevedoring

costs at Felixstowe, i.e. the variable component of port user

costs relative to such costs at another northern European port

in his itinerary in respect of cargo that could possibly be

B. Gardner et al. / Transport Policy 13 (2006) 2–21 11

transhipped at either port, to induce him to increase the

number of containers exchanged at Felixstowe.

The above example raises another and more intriguing

question, which is whether such a large reduction in the ship

related component of port user costs at Felixstowe would

induce other deep sea container operators who do not

presently call at the port, to substitute it for one of the main

European continental ports in the Hamburg to Le Havre

range now included in their itineraries for worldwide

services. Although this is an impossible question to answer

with certainty without insider knowledge, a judgement may

nevertheless be made. The answer depends, of course, on

whether the savings in ship related costs an operator would

achieve by transferring his operations from say Hamburg to

Felixstowe (which, incidentally, would involve a saving of

813,250 Euros per annum on the basis of information

provided by one of the respondents to the port users’

questionnaire, assuming a fixed day weekly service with

2700 TEU vessels) more than offset any increase in network

costs that might arise from such a transfer of operations.

Even though, prima facie, the savings appear large on the

basis of the Hamburg/Felixstowe comparison from an

operator’s standpoint, in terms of getting such a strategic

decision wrong, they are, however, probably insufficient to

induce a transfer of operations. This is because, according to

a report by Drewry Shipping Consultants (1999), the UK

accounts for around 20% of the North European deep-sea

container market and most deep-sea container operators

who do not call at Felixstowe already call at another UK

port instead and thus the savings would be considerably

reduced.8 Consequently, given the UK’s market share, the

risk exposure they would face by transferring part of their

continental operations to Felixstowe and including two UK

ports of call in their service itineraries instead of one would

be far greater than that which they would face by

transferring their UK operations to Felixstowe. So, the

likelihood that subsidisation of the non-maritime infrastruc-

ture would induce any significant change in trade patterns, it

may be argued, is small.

There is one final question that needs to be addressed and

that is whether subsidisation of the non-commercial

infrastructure at any of the three ports would induce any

change in the port authority’s market strategy. It is clear from

the analysis that it would not. Even if the judgement made

above relating to the likely effect of such a subsidy at

Felixstowe on trade patterns concerning container flows

proved wrong it would not, for example, change the Port of

Felixstowe’s present market strategy, which is to maintain

the port’s current position as a major container port providing

facilities for the maximum size of vessel employed in deep-

sea trades as well as facilities for feeder vessels and ro-ro

8 In fact, this 1999 report on Northern European container ports showed

that all services in the Europe-Far East and transatlantic trades provided by

major carriers/alliances in 1998 included a call at a UK port in their

itinerary.

services. The same applies at the other two ports: where

Dover’s strategy is to maintain its predominance as the

leading UK cross-Channel port while at the same time

increasing the volumes of fresh produce and cruise passenger

traffic it handles, and where Dublin’s present strategy is to

maximise its market shares for all types of traffic it handles.

9. Conclusion

This paper has shown that ports that practise full cost

recovery, in generating the net revenue surpluses they

require to survive as commercial entities, do not make any

provision for capital expenditure on assets that they do not

need to replace. Hence, they do not try to recover any sunk

costs. Moreover, being subject to the discipline of the

market place requires them not only to increase their

managerial efficiency but also to set their prices at the level

at which they will be prepared to offer their services in the

long-run. Thus they set prices as though their long-run

average costs of production are constant. So, if this

represents the reality of their actual situation then they are

charging on a long-run marginal cost basis. If it does not,

and economies of scale are possible by increasing their scale

of production, then they are charging prices that result in an

optimal departure from long-run marginal cost because they

must recover their full costs to stay in business.

Furthermore, full cost recovery is probably essential if

external costs are to be internalised so that port prices reflect

marginal social cost. However, it is not clear how such a

market based incentive approach to dealing with external

costs can be made operational and to what extent it can be

substituted for the present command and control approach

of setting standards.

The paper has also shown that it is the escapable

(avoidable) element of port user costs which is important to

vessel operators, and this can vary depending upon the

context. In the case where the choice is whether or not to call

at the port then it is the ship-related component of such costs

that are important. On the other hand, where the ship is

committed to call at the port because it has a fixed itinerary, as

in the case of deep-sea container operators, it is the variable

component of such costs, namely the cargo handling costs

that matter.

Price, however, is only one of the factors that determines

the demand for port services. Customers’ goodwill also

depends on the quality of the services provided and time

costs are often critically important in this respect. Hence,

port user costs are only part of the total port costs which also

include time costs. Time costs affect ships, goods and

passengers and explain why ports build reserve capacity into

their facilities in order to avoid delays that could cost them

dearly in losing business, particularly where they impact

upon the network costs of scheduled services provided by

container and ferry operators.

B. Gardner et al. / Transport Policy 13 (2006) 2–2112

Appendix A. Analysis of the cost structures of the main TEN ports—port authorities questionnaire

B. Gardner et al. / Transport Policy 13 (2006) 2–21 13

B. Gardner et al. / Transport Policy 13 (2006) 2–2114

B. Gardner et al. / Transport Policy 13 (2006) 2–21 15

B. Gardner et al. / Transport Policy 13 (2006) 2–2116

B. Gardner et al. / Transport Policy 13 (2006) 2–21 17

Appendix B. Analysis of the cost structures of the main TEN ports—port users questionnaire

B. Gardner et al. / Transport Policy 13 (2006) 2–2118

B. Gardner et al. / Transport Policy 13 (2006) 2–21 19

B. Gardner et al. / Transport Policy 13 (2006) 2–2120

B. Gardner et al. / Transport Policy 13 (2006) 2–21 21

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