1.  INTRODUCTION

  1.1  Hutchison Ports (UK) Limited ("HPUK") is a member of the group of companies owned by Hutchison Port Holdings Limited ("HPH"), an independent port investor, developer and operator with interests in Asia, Middle East, Africa, Europe, and the Americas. HPH is a subsidiary company of Hutchison Whampoa Limited a multinational conglomerate based in Hong Kong. The HPUK group is the largest employer in the UK port industry and owns three ports in the United Kingdom—the Port of Felixstowe, Harwich International Port and Thamesport.

—  The Port of Felixstowe is the largest container port in the United Kingdom and the fifth largest in Europe. It is also one of the country's largest ports for roll-on/roll-off (Ro/Ro) freight ferry traffic. Approximately 2,500 people are directly employed by the Port with many more employed in related activities. The expansion of the port's Trinity Terminal is currently underway and there are further plans to increase capacity by 1.5 million TEU (Twenty-foot Equivalent Unit—the standard measurement of volume in the container industry) per annum through the reconfiguration of the southern part of the port.

—  Harwich International Port is a multi-purpose port, handling passenger and freight ferry services, cruise liners, containers, general and project cargo, dry bulk traffic, trade cars and hydrocarbons. HPUK has purchased a site known as Bathside Bay, adjacent to Harwich International Port, to develop into a major container terminal.

—  Thamesport is a deep water container terminal with the capacity to handle 660,000 TEU per annum. There is the potential to increase this capacity by 1.5 million TEU in future years. It is located near the mouth of the Thames Estuary on the Isle of Grain in Kent.

  1.2  HPUK previously submitted evidence to the House of Commons Environment, Transport and Regional Affairs Committee, Transport Sub-committee Inquiry into UK Ports in 2001. This short paper is submitted at the request of the Committee Chairman and relates solely to the differences in ownership, financing and structure between UK ports and many of those on the continent of Europe.

2.  COMPETITION AMONGST EUROPEAN PORTS

  2.1  The changing economics of sea transport in recent years has resulted in a change in the pattern of port calls in Europe, especially for container traffic. Increasing ship sizes and vessel operating costs have forced ship operators to reduce the number of direct ports of call, thereby leading to increased competition between port operators. It is now common for traffic from the peripheral parts of Europe to be transhipped at the major ports, a significant number of which are grouped within the North Sea region. For example, virtually no major deep-sea container services make direct calls in Scandinavia. Container traffic between Scandinavia and deep sea markets tends to be carried on "feeder" vessels (smaller container ships) to hub ports where it is transhipped onto deep-sea vessels.

  2.2  There is increasing evidence to show that due to the current cost/service constraints on the movement of containers by rail to the UK's major ports, shipping lines and agents are moving boxes to/from UK destinations via smaller ports on the East Coast of the UK and then transhipping via Rotterdam, Antwerp or Bremerhaven. The eventual consequence of this trend will be the loss to the UK trade of the frequency of direct services to North America and Asia, compared to competitors on the Continent.

  2.3  There is great competition between European ports to act as transhipment hubs. The major North European transhipment ports are Rotterdam, Antwerp, Hamburg, Bremerhaven and Felixstowe. The volume of transhipments handled at Felixstowe has grown from 95,000 TEU in 1989 to 906,000 TEU in 1999 before falling back to 641,563 TEU in 2002. The reduction in the last few years has been as a result of shipping lines transferring business to continental ports.

  2.4  In 2002 transhipments accounted for approximately 24% of all containers handled at Felixstowe, down from a peak of over 30%. The vast majority of these containers are not destined for the UK (although a small proportion do travel on coastal services) but provide a useful contribution to the UK balance of payments.

  2.5  Some UK container traffic is already "fed" through northern ports for transhipment on the continent. If UK ports fail to remain competitive or offer the necessary facilities, it is possible that a greater proportion of UK traffic will be transhipped over continental ports. In addition to increasing shipping costs and transit times, if UK ports lose their core deep-sea import/export traffic, they will no longer be viable options for transhipment business with negative consequences for employment and foreign earnings.

3.  PORT ORGANISATIONAL STRUCTURES

  3.1  In the past 20 years the UK port industry has gone through a period of major structural change. The previous Government promoted the privatisation of the former British Transport Docks Board, which was a nationalised industry, and is now Associated British Ports (ABP), a publicly quoted company. The ferry ports, originally operated by British Rail/Sealink and including Harwich International Port, were also privatised in the 1980s. That Government then encouraged the privatisation of the major trust ports, and as a consequence the ports of Clyde, Forth, Tees and Hartlepool, Tilbury, Medway, Ipswich and Dundee were privatised in the 1990s. Adding in ports such as Felixstowe which were already in the private sector, about three quarters of the industry, in terms of tonnage handled, is now in private ownership.

  3.2  Within continental Europe the majority of ports are publicly owned and structured according to what is known as the "landlord" model. This is the case for all the major continental ports bordering the North Sea. The port infrastructure is normally developed and owned by the local City council (eg Antwerp, Rotterdam) or the citystate (Bremerhaven, Hamburg). Concessions to operate the cargo handling terminals within the ports are let to the private sector.

  3.3  Ports in the UK receive virtually no financial support from central or local Government. Their operating and maintenance costs have to be financed from revenue, and new investment has to be commercially financed. The situation in most Continental ports is different. Although precise arrangements vary from country to country, in its evidence to the Committee, the United Kingdom Major Ports Group observed that the general pattern is that financial assistance is available towards the maintenance and development of the port infrastructure (ie land, sea approaches, breakwaters, quays etc). It also stated that the dredging of navigational channels, which can be a major component in port costs, is frequently funded by public authorities on the basis that a navigational channel is a piece of public infrastructure like a road and should therefore be supported from public funds.

  3.4  The problem is compounded by the system of light dues, whereby shipping using UK ports has to pay towards the costs of lighthouses and other navigational aids, whereas no equivalent charge is levied in most Continental countries. Around £60 million pa is raised in this way and it is estimated that on average a container imported into the UK attracts a light due charge of £7. It is a further distortion of competition that users of UK ports have to pay these charges.

4.  SUBSIDIES/STATE AID

  4.1  There is widespread acceptance within the industry that not all public financing in ports within Europe is provided on commercial grounds and that, to varying degrees, state aid is available. As competition between ports has increased, the provision of state aid has become of greater concern.

  4.2  State aid can take any one of a number of forms. The following provides a non-exhaustive list of examples of various forms of state aid:

—  grants;

—  loans and guarantees at less than a commercial rate of interest;

—  total or partial exemption from charges, taxes or social contributions;

—  fiscal advantages resulting from accelerated or enhanced depreciation schemes;

—  contributions to operating costs (including training); and

—  benefits in kind such as free provision of services.

  4.3  The interpretation of what is considered to be State aid in the port sector has tended to differ from Member State to Member State. For example, it is understood that in certain countries, quay walls are classified as flood defence works and therefore funded by government with no intention of cost recovery. Other ports operate labour pools where dockworkers are provided from a central pool that is, effectively, subsidised by taxpayers. In other cases national railway companies offer favourable rates for shipping goods to ports within their own country when ports in neighbouring countries may be better placed to handle the traffic. All of these have the effect of creating an uneven base for competition.

  4.4  The fact that the Commission is not at present receiving many notifications from member States on aid schemes, or complaints about state aid, should not be taken as indicating that there is not a problem, but rather that the rules have lacked clarity and that competitors rarely have access to sufficient information to know whether or not state aid is being made available.

  4.5  There does not appear to be any reliable comparison of the level of public funding of port infrastructures in Europe. A report (in Dutch) by the National Ports Council of the Netherlands published in December 1994, Threat to the Competitivity of Dutch Ports, did compare levels of funding at Dutch and Flemish ports. It found that significantly greater levels of public funding were available in Belgium. There is no doubt that the levels of public funding vary within Europe. In many cases it is not known how much is recovered from charges on users, and whether they comply with state aid rules. It is widely accepted within the industry that the degree of cost recovery varies widely between EU member states.

  4.6  Despite the issue of state aids being repeatedly highlighted by European port organisations, the Commission has been slow to take action. In recent months however, and as a result of pressure arising from the debate within the European Parliament and Council about the proposed Directive on Market Access to Port Services, there has been some progress.

  4.7  On 16 January 2003 the Commission published a Vademecum on Community rules on state aid and the financing of the construction of port infrastructures. Then, at the end of May 2003 the Commission sent a letter to the permanent representations of all maritime EU member states regarding the application of Commission Directive 80/723 on transparency of financial relation between member states and public undertakings. The enquiry relates to the 25 largest (in volume terms) European seaports. In the letter, the Commission asks Member States to forward to the Commission details of public funding for the financial years 2000 to 2002.

  4.8  Recent moves by the Commission are encouraging but the Vademecum still leaves certain questions unanswered and it remains to be seen how successful the attempts to improve transparency will be—in the past certain states have stated categorically that they cannot separate port accounts from those of the city in which the port is based. It is clear that more work will be required before the problem of state aids in European ports can be eliminated. It is hoped that the Commission will continue to be pro-active in establishing what is permissible under state aid rules, and identifying transgressions.

August 2003