Monday, May 26, 2008

Pacific trade security

The recent spat in the news over the Pacific Forum Line saw shareholders register their extreme unease at the suggesting that the line (which is 29% owned by Papua New Guinea, 23% owned by the NZ Government with a similar share owned by Fiji) might be sold to competitors Pacific Direct Line. At the same time there is dissatisfaction from the smallest Pacific Islands ( Niue, Kiribati, Solomons, and Marshall Islands) over the costs of landing shipping containers compared to those at larger Ports. While it is inevitable that the smaller countries will not enjoy the same economies of scale as their larger neighbours it must make attracting business development to these already marginal nations all the more difficult when competitors can offer lower operating costs.

This is a matter of national security interest to New Zealand. We have already seen the effect of economic collapse in the Solomons and while there are no signs of the communal violence that occurred there in Niue or Kiribati whether it is through the deployment of troops on the ground or the increase in the need for aid, one way or another New Zealand ends up having to do something about the economically precarious islands of the remote Pacific - if its influence is not to be displaced by other nations.

Because it is so hide bound by tradition it is only now recognising its issues relating to safety and drunkenness the Royal New Zealand Navy has never looked beyond the end of its guns when it has come to New Zealand's greater security concerns. For the Navy the big excitement is pouncing on Dhows in the Persian Gulf or playing ASW with Indonesian "boomers" (old, loud submarines) in the Timor Sea. And while I'm sure everyone gets quite a rush from this kind of activity I for one fail to see how either has much to do with our regional security compared to the stability of our Pacific neighbours.

And when it comes to preserving security there is no better remedy to resentment and the politics of divide-and-rule than good old fashioned trade. Provide opportunities for trade and you reduce unemployment and the need for aid. Unfortunately there are a few basic economic facts that make trade in vastly dispersed, under-developed, and scantily populated islands unprofitable.

One could argue the PFL is an obvious take-over target with revenues of 62 million and net assets of $26 million. However the nature of inter-Governmental ownership makes this unlikely. On the other hand it is obvious that the current management, rightly, sees the role of the line as being a commercial business. And it would be hard to see a case for such an enterprise subsidising routes which simply don't stack up. To go down that path would be to invite the worst kind of political cronyism hich would ultimately fail, both economically and politically.

All of that aside there is no doubt that the remoter islands are suffering from market failure. Given their circumstances they may start to entertain novel ideas to generate income. Vanuatu for instance, has already become the Luxembourg of the South Pacific, if not in GDP/Capita and style then at least in terms of money laundering. Which islands will become the first to become Japan's Pacific whale processessing centre or China's new pacific air base. Just because the American's used to treat the Pacific as their 'lake' doesn't mean t will remain so for the rest of the 21st Century.

This is where in my view the role of the Navy as a long term strategic asset could have been realised. In my review I proposed not warships but aid/hospital ships for the Navy, modelled on the Chilean Navy's Transport 41 Aquiles. This is a very modest boat capable of carrying a company at a squeeze. But most of the time it carries containers (up to 36), cars, and other material along Chile's long coast or out to its Antarctic bases. The ship I proposed was slightly less modest incorporating a small surgical hospital as well. Nevertheless, in addition to providing aid, such ships could also carry a small commercial cargo for islands not served by commercial lines. The ships would then become a combination of floating clinic, market and, naturally source of intelligence, on the incredibly small but complex world of island politics.

Contrast this to the thrashing around of HMNZS Canterbury which so far has been marginally successful at the amphibious landings she was originally procured for.

My review concluded that for amphibious landings it was cheaper and simpler to procure a proper army landing ship - a big one (US$26m). Such vessels are built to land vehicles (eg 20 Abrams Tanks) direct on to a shore. No, they don't have facilities for crew (they would accompany in an aid/transport ship), but they can carry a lot of heavy material a long way and land it closest to where its needed. Good for military or disaster relief operations equally. But when they aren't needed for these things?

Well, the Government has recently announced it will be spending $36 million in support of its Sea Change coastal shipping policy in order to encourage the development of shipping lanes over highway lanes. The problem is they are trying to do this without reinstating cabotage (the rule that coastal ships fall under domestic ownership, pay rates and employment law). The result is that the foreign shipping lines will continue to dominate our coastal shipping industry because they simply don't face the same costs as local competitors and achieve greater economies of scale. The only development likely to assist New Zealand coastal shipping is the trend by major international lines to ever-larger ships which make fewer Port calls per country.

However the major difficulty with sea-lanes as opposed to road lanes is that of marginal costs. While ships can carry a lot they are much more expensive than trucks. It is easy to add one more truckload or take it away again. Not so ships. This means that each increment in lane capacity (ship) can only come when the need for that capacity is dire and the reliability of the existing service is in question.

While it is never a good idea for Government agencies to compete with the private sector the ships proposed in my review could have made a useful contribution to the development of coastal shipping by providing additional capacity on a semi-commercial basis to existing shipping lines. In effect the lines would bid for subsidised capital on the understanding that it could be withdrawn for emergencies. This would keep the crews and ships busy, increase the frequency of regular sailings for coastal shipping lines thereby encouraging more use of the mode. The only trick would be to avoid the situation where one operator relies on the subsidised service to hold out competition. Thus the contracts would be only of short duration so that where a route proves itself an operator will want to secure their own ship (either by lease or purchase) rather than be exposed to the possibility of losing a Navy ship to a competitors bid.

The Defence Force likes to somehow imagine that it lives in a world removed from the marts of trade. In fact the object of every defence force is to preserve them. There is no threat to New Zealand's trade from submarines or aircraft - and even if there were the RNZN would not make any difference to it. However by getting down and dirty and mixing in the world of trade the Navy could have delivered a lot more real security in our region then it thinks its doing at the moment.