NOTE NUMBER 260 P U B L I C P O L I C Y F O R T H E privatesector MARCH 2003 Market Power: Ports Lourdes Trujillo and A Case Study of Postprivatization Mergers Tomás Serebrisky A n e m e rg i n g i s s u e i n p r i vat i ze d i n f r a s t r u c t u re s e c t o r s i s h ow Lourdes Trujillo (lourdes@ reg u l at o r s s h o u l d d e a l w i t h p ro p o s e d m e rg e r s t h at c o u l d p o t e n t i a l l y empresariales.ulpgc.es) is with Universidad de Las i n c re a s e m a r ke t p owe r a n d l e a d t o a n t i c o m p e t i t i ve b e h av i o r. T h i s T H E W O R L D B A N K G R O U P PRIVATE SECTOR AND INFRASTRUCTURE NETWORK Palmas de Gran Canaria, N o t e l o o k s at t h e i s s u e s i n t h e p o r t s e c t o r, d i s c u s s i n g t h e reg u l at o r y Spain. Tomás Serebrisky (tserebrisky@worldbank.org) t re at m e n t o f ve r t i c a l a n d h o r i zo n t a l m e rg e r s . I t f o c u s e s o n A rg e n t i n a , is an economist with the one of the first countries to concession its ports. World Bank Institute. In the early 1990s Argentina restructured and minal 1, arguing equity irregularities in the con- privatized its port system. As part of this process sortium that won the bid. To avoid a judicial the government transferred ports to the delay, the government allowed the consortia to provinces, which could choose to operate, con- merge, then jointly awarded terminals 1 and 2. cession, or close them. The Port of Buenos Aires The regulatory framework for Puerto Nuevo was divided into two ports: Dock Sud, which was establishes no constraints on vertical integra- transferred to the province of Buenos Aires, and tion. So P&O, a multinational firm that operates Puerto Nuevo, which remained under national terminals and a maritime shipping company, jurisdiction. could be awarded terminals 1 and 2 as part of In 1994 Puerto Nuevo’s six terminals were the new consortium. But the bidding conditions offered to the private sector under long-term imposed by the government had implied a concessions (18–25 years), in a bidding process prohibition on horizontal mergers between open to international investors. The govern- terminals. ment showed a concern for competition throughout the concession process, imposing After the reform—higher productivity and a conditions that would result in a market struc- demand for mergers ture capable of sustaining competition: bidders The restructuring of the Port of Buenos Aires, were allowed to bid for more than one terminal, which accounts for more than 90 percent of con- but they had to express a preference and could tainer traffic in Argentina, has led to a notable be awarded only one. Yet the outcome departed increase in productivity (table 1). The average from this rule. The consortium that submitted terminal handling price fell from US$450 a con- the second highest bid for terminal 1 and the tainer before the reform to about US$220 in highest for terminal 2 appealed the award of ter- 2001. M A R K E T P O W E R : P O R T S A CASE STUDY OF POSTPRIVATIZATION MERGERS Table Performance indicators for Puerto Nuevo, selected years, 1991–2002 1 Indicator Tons per worker a year Average wait (days) 1991 900 1.5 1998 4,850 0 2000 5,250 0 2001 5,417 0 2002 4,136 0 Average stay (hours) 72 33 25 23 15 Capacity (thousands of twenty-foot-equivalent units [TEUs] a year) 500 2,500 2,500 2,500 2,500 2 Source: Administración General de Puertos. But the port’s container traffic fell signifi- nearby ports (especially Dock Sud) offer good cantly from its peak in 1998 because of the reces- alternatives for container shipping companies. sion that started that year—and fell even more Price discrimination can be ruled out by reg- after the devaluation of the currency in 2002 (fig- ulating prices. The regulation of Puerto Nuevo ure 1). Between 1998 and 2002 container traffic sets maximum prices (price caps) for some ser- in Puerto Nuevo declined by some 44 percent. vices, though these are not binding because ter- The operation of port terminals is character- minals give significant discounts to shipping ized by large fixed costs and very low marginal companies. As long as the regulatory agency con- costs. When there is excess capacity, price com- siders the price cap a fair price and market prices petition intensifies as operators seek to attract are at or below this price, price discrimination by more business. Moreover, there is a worldwide an integrated firm will not hurt competition. trend toward concentration in the maritime The vertical integration case analyzed by the transport market driven by the construction of Antitrust Commission did not lessen competi- larger container ships, which increase the risk of tion. But where an integrated firm has a signifi- the shipping business. For this reason shipping cant share of the market and prices are regulated, firms are forming alliances that allow them to the firm can still discriminate against rival ship- increase the number of ports served and reduce ping companies by adjusting the quality of termi- excess capacity in ships. nal services (lengthening waiting times, allowing In 2000 the government eased the restrictions damage to ships and containers). Moreover, an on horizontal mergers. Around the same time integrated firm has access to detailed informa- the Argentine Antitrust Commission had to tion on rivals’ strategies and customers that it can review a proposed vertical merger between a ship- use to its advantage. To prevent such conduct, ping company and a terminal in Puerto Nuevo. the port authority must have good-quality infor- mation and the power to credibly punish firms Vertical mergers for any behavior that breaks the rules. Of course, In 2001 the Argentine Antitrust Commission not all vertical mergers are driven by anticom- approved the acquisition of terminal 4 by petitive aims. Some are motivated by a search for Maersk Sea Land, one of the world’s largest ship- efficiencies—such as better coordination, lower ping companies. transaction costs, and specific investments (such In a vertical merger the main competition as in cranes or berths with special characteristics). concerns are market foreclosure (access restric- tions) and price discrimination. If a maritime Horizontal mergers shipping company owns all port capacity as a In 2000, probably because of excess capacity, result of its integration with terminals, it can deny terminals 1, 2, and 3 proposed a merger. As orig- access to rival shipping companies. The Antitrust inally designed, the Puerto Nuevo regulatory Commission found that Maersk would not be framework explicitly prohibited such horizontal able to foreclose the market because the terminal mergers. But in 2000 the government issued two it acquired had only a small share (8 percent) of resolutions (215/00 and 309/00) allowing hor- the total capacity in Puerto Nuevo and because izontal mergers, though the implementation of port capacity and actual port utilization. Given Annual container traffic in Puerto Nuevo Figure and Dock Sud, 1995–2002 market shares, a Herfindahl-Hirschman Index, a common measure of market concentration, is 1 Thousands of TEUs 1995 calculated. For most antitrust agencies, a signif- icant change in the index triggers a detailed study of market characteristics to assess the 1996 potential impact of the merger on competition. Several key market characteristics determine 1997 the intensity of competition in ports. 3 1998 Barriers to entry When a merger increases the concentration in 1999 a market, firms are more likely to be able to exer- cise market power by increasing prices. But 2000 firms will not be able to raise prices if there are no barriers to entry. There are two types of bar- 2001 riers. One is strategic, such as when a firm signs exclusive long-term contracts with all shipping 2002a companies to prevent the entry (construction) 0 200 400 600 800 1,000 of a new terminal. The other is legal, such as Puerto Nuevo Dock Sud restrictions on the construction of new ports. Note: TEU is twenty-foot-equivalent unit. So, if there are no barriers to entry in the a. Authors’ estimation. relevant market, the threat of new entry or Source: Administration of Puerto Nuevo of Buenos Aires. expansion of existing competitors will prevent merging firms from raising prices. In the rele- the resolutions has been suspended pending a vant market for Puerto Nuevo the merging firms judicial decision. Is it advisable to allow mergers have several actual competitors—not only the between port terminals? To answer this ques- four firms operating in that port but also Dock tion, an antitrust agency needs to do a cost- Sud Port—as well as a potential competitor— benefit analysis assessing the effect of such Zárate Port. mergers on competition and consumer welfare. In the ruling on the proposed vertical merger Excess capacity between Maersk and terminal 4, the Antitrust The analysis of excess capacity in mergers of port Commission defined three relevant markets for terminals is complicated. Port infrastructure is Puerto Nuevo: international sea transport, port expensive to build, and it exhibits the problem services, and land transport services.1 For ports, of indivisibility: it is impossible to continually another key part of the definition of a relevant enlarge a port. Port infrastructure is built to market is the geographic dimension—the area accommodate actual and forecasted demand, where there is effective competition (between and excess capacity is therefore to be expected. ports if more than one port offers an economically From the point of view of an antitrust agency, feasible choice for port users). The Antitrust excess capacity has an ambiguous effect on com- Commission defined the relevant market as the petition. Excess capacity could increase compe- area of influence of Puerto Nuevo (including the tition, since it gives terminal operators an neighboring ports of Dock Sud, Zárate, Campana, incentive to reduce prices so as to operate at full and La Plata) for container port services. capacity. Or it could facilitate price coordina- Once the relevant market is defined, an tion, because it can back a credible threat to pun- antitrust agency identifies the firms in the mar- ish (by greatly reducing prices) firms that deviate ket and measures their market share. In the port from a price agreement. Antitrust agencies look sector, as the Antitrust Commission noted, mar- at this problem case by case, relying on the his- ket shares must be measured in terms of total tory of competitive interaction among firms. M A R K E T P O W E R : P O R T S A CASE STUDY OF POSTPRIVATIZATION MERGERS Intensity of competition Conclusion Another consideration in a merger case is the type Focusing on the case of Puerto Nuevo, this Note of firms that are merging. Where a merger will analyzes the consequences of allowing a vertical eliminate an innovative and intense competitor merger between a terminal operator and a mar- from the market, price competition is likely to itime transport company and the pros and cons decrease. The larger the market share of the of explicitly prohibiting horizontal mergers viewpoint “absorbed” company, the more important this between terminal operators. effect will be. But a small firm can also be an effec- All performance indicators show that the qual- is an open forum to tive competitor, especially in a dynamic market. ity of services at Puerto Nuevo has improved since encourage dissemination of privatization, reducing the cost of international public policy innovations for Potential efficiency gains trade. This success stems in large part from the private sector–led and When a merger still raises competition concerns efforts to design a competitive market structure market-based solutions for after an analysis of market concentration and based on competition within the port. But since development. The views the other market characteristics, the last—and sea transport markets are dynamic and sensitive published are those of the decisive—step is to look at efficiency gains. to economic shocks, the Argentine antitrust authors and should not be Merging firms must provide sound evidence to agency decided to allow terminal operators to attributed to the World the antitrust agency that the concentration will request approvals of horizontal and vertical Bank or any other affiliated bring about efficiency improvements that will mergers. In other countries facing similar merger organizations. Nor do any of benefit consumers through lower prices or bet- proposals, antitrust agencies should use the kinds the conclusions represent ter quality. Economies of scale and better access of methodologies set out in this Note. And in official policy of the World to capital markets are two efficiencies that merg- Argentina, independent of the antitrust agency’s Bank or of its Executive ing terminals could achieve in Puerto Nuevo. decision on the merger, the port regulator Directors or the countries should have expanded powers—especially in they represent. Potential benefits and risks of a merger information gathering—to guarantee open In the event of a merger proposal between ter- access to the terminals of Puerto Nuevo and thus To order additional copies minals in Puerto Nuevo, the Argentine Antitrust to maintain a competitive market structure. contact Suzanne Smith, Commission will have a legal mandate to deter- managing editor, Room I9-009, mine whether the merger would improve eco- The World Bank, nomic efficiency and consumer welfare. Some 1818 H Street, NW, market characteristics support greater concen- Note Washington, DC 20433. tration: the potential for economies of scale and 1. The ruling, “Maersk Argentina Holdings SA, the possibility of rationalizing resources to cope Terminal 4 SA y Terminal EMCYM SA S/notificación art 8 Telephone: with significant excess capacity (exacerbated by Ley 25156,” was issued by the Argentine Antitrust 001 202 458 7281 the current crisis in Argentina) and the pres- Commission in Buenos Aires in 2000. Fax: ence of actual (Dock Sud Port) and potential 001 202 522 3480 (Zárate Port) competition. Supporting an argu- References Email: ment against approval of a merger is the Briggs, María Cristina, Diego Petrecolla, and Verónica ssmith7@worldbank.org increased likelihood of price coordination and Vallés. 2001. “Efectos de la Regulación en las Condiciones the change in the rules of the game. When firms de Competencia de Puerto Nuevo de Buenos Aires.” Texto Copyedited and produced by competed for the market, the bidders assumed de Discusión 3. Centro de Economía de la Regulación, Communications that mergers were not an option. Subsequently Buenos Aires. Development Inc. allowing mergers damages the government’s U.S. Department of Justice and U.S. Federal Trade reputation by signaling that competition rules Commission. 1997. “Horizontal Merger Guidelines.” Printed on recycled paper can be easily modified. Moreover, because the Washington, D.C. [http://www.usdoj.gov/atr/public/ merger would increase the market power of the guidelines]. incumbent firms, firms participating in future concessions would have incentives to engage in strategic bidding—to win the market and then engage in renegotiations with the government to increase the value of the business. This Note is available online: http://rru.worldbank.org/Viewpoint/index.asp