Research Summary - International Comparisons

  • As part of the Pilotage Act Review

KPMG

January 2018

Canada’s position as a major trading nation depends on its ability to be competitive throughout all elements of the supply chain. Competitiveness not only considers cost but also the performance of each supply chain element in terms of safety, accountability, efficiency and timeliness. High performance marine pilotage contributes to Canada’s maritime transportation system which provides Canada with a competitive edge in the global marketplace. According to the Canadian Marine Pilots Association’s June 2016 submission to the Honourable Marc Garneau, Minister of Transport, Canadian pilotage services are among the most cost competitive in the world.

In Canada, the Pilotage Act was enacted in 1972 and provides the legislative framework for the provision of marine pilotage services. This Act created four Pilotage Authorities to operate and maintain safe and efficient pilotage services. These Authorities are Crown Corporations that operate at ‘arm’s length’ from the Government of Canada. Pilotage is compulsory within the designated areas with some exceptions for smaller vessels, some domestic vessels and those under the conduct of a certified mariner. The Pilotage Authorities set their own tariffs and are required to be financially self-sufficient. It is important to recognize that each Pilotage Authority is different – not just in terms of their tariff structures, but in a variety of other aspects of their operations as well.

Most jurisdictions, including the European Union, the United States and Canada, have concluded that the public interest and marine safety are best served through pilotage services being provided, on an exclusive basis, by a single group of pilots in any given compulsory area. In some cases these services are provided through government owned entities, while in other cases these services are provided by a single private provider. The state of the current pilotage system in Canada and the different approaches to pilotage already in place in other parts of the world, or being tested for potential application, provide an opportunity to examine the basis of the provision of pilotage services in Canada, including the potential use of technology, alternative operating and governance models, and regulation to achieve equivalent, or better, results.

The goal of this Study is to provide Transport Canada with an overview of relevant information regarding legislative frameworks, governance structures, and performance of marine pilot services, to the extent that information can be gathered from publically available sources, or disclosed by interviewees from agencies involved in pilotage services. This report presents the findings of KPMG’s study of the models used in sixteen selected pilotage jurisdictions around the world and identifies practices that could be adapted to the Canadian context.

Pilotage Models

Within the context of this report, “governance and operational model” is defined as the operation and management of the pilotage service. For example, in Canada, pilotage services are operated and managed by Crown corporations.

The research conducted suggests that there are three basic types of business and governance models used in the pilotage industry around the world:

  • Government – where the Government (either Federal or Local) operates and manages the pilotage service;
  • Crown Corporation or Government-controlled Entity – such as a port authority (which may be a public or private entity) which operates and manages the pilotage service; and
  • Private sector - where the private sector operates and manages the pilotage service.

There are a variety of ways that each of these three models could deliver pilotage services. Although each model is presented independently, in practice, boundaries between the different models can become blurred and additional ‘hybrid’ models could be considered. The responsibilities between the government and private sector vary with the business models. In total ten different models are considered and described in this Report. The key differences in responsibilities among the ten models can be summarized as:

  • Who assumes commercial risk (e.g. pilotage demand fluctuations, cost fluctuations);
  • Day-to-day operation of the pilotage service; and
  • Asset ownership (pilot boats / docks).

Not all of the models identified were represented by a case study selected for this Project. Notwithstanding, the description of potential models and their relative strengths and weaknesses is illuminating, and the fact that some of the potential models have not been adopted in any of the jurisdictions included in this report, potentially suggests that these models may be sub-optimal or have fatal flaws. The table below summarizes the key strengths and weaknesses that were hypothesized or observed among the ten potential pilotage service delivery models analyzed.

Operational Model Key Strengths Key Weaknesses
Model 1- Pilotage Service delivered by Federal Government
  • Government retains control over quality and safety of service.
  • Potential synergies with department’s infrastructure and savings through lower borrowing costs.
  • Low flexibility for making short-term changes to the pilotage service.
  • Government remains accountable for actions of the pilotage service.
Model 2- Pilotage Services Delivered by Crown Corporation
  • Faster decision-making processes allow for greater flexibility compared to Model 1.
  • Different financing options available.
  • Government loses some control over the services provided.
  • Risk of complacency by Crown Corporation which could result in limited potential to pursue or implement innovation.
Model 3- Pilotage Services Delivered by Municipal, Regional or Provincial Governments
  • Local governments can tailor the service to meet their unique needs.
  • Potential to stimulate competition between regions to attract more shipping customers.
  • Requires a new policy framework and buy-in from other levels of government;
  • Reduced opportunities for economies of scale.
Model 4- Pilotage Services Delivered by Stand Alone Entity
  • Government could retain some control.
  • Potential for greater innovation with outside thinking.
  • Opportunity for value creation through transfer.
  • Difficult to make changes if initial terms of reference have shortcomings.
  • Limited potential interest given the small size of the industry.
Model 5- Pilotage Services Delivered by Port Model
  • Ports could tailor the service to meet port needs and plans, and would have incentives to modernize.
  • Opportunity for value creation through transfer.
  • Potential resistance from ports to taking on new responsibilities and costs.
  • Fragmentation reduces opportunities for economies of scale.
Model 6- Pilotage Service Delivered by Licensed Pilots; Regulated Monopoly
  • Government has no operating responsibilities.
  • Pilots could have incentives to improve the service, particularly working conditions.
  • This could help attract more candidates.
  • Need strong regulation to prevent abuse of monopoly power.
  • Pilots could act in self-interest, making decisions that don’t benefit the public.
Model 7- Pilotage Service Delivered by Licensed Pilots; Regulated Competing Pilot Organizations
  • Government has no operating responsibilities.
  • Competition could stimulate innovation, efficiency gains and ultimately lower user costs.
  • In pursuing lower costs, competing pilots might jeopardize safety of navigation.
  • Duplication of infrastructure could lead to higher costs.
  • Barriers to entry could limit emergence of competitors.
Model 8- Pilotage Services Delivered by Corporation; Regulated Monopoly
  • Government has no operating responsibilities.
  • Potential for monetization and new source of taxable income.
  • Innovative operating and financing options could emerge from outside-industry thinking.
  • Might be little or no interest within the private sector.
  • Risk of corporation abandoning the service.
  • Pilots might resist new employment arrangements.
Model 9- Pilotage Services Delivered by Corporation; Regulated Competition
  • Government has no operating responsibilities.
  • Competition could stimulate innovation.
  • Efficiency gains could be passed along in the form of lower user costs.
  • In pursuing lower costs, competing corporations might jeopardize safety of navigation.
  • Barriers to entry could limit emergence of competitors.
Model 10- Pilotage Services Delivered by Ship Owners
  • Government has no operating responsibilities.
  • Ship owners could initiate changes that would benefit shipping industry.
  • They could not complain about the service costs or quality.
  • Dominant players could freeze-out competitors.
  • Potential public opposition to foreign control of essential service.
  • Also potential perception among public of lower safety standards increasing risk of accidents.

Case Study Findings

To further research and analyse how these models operate in practice, 16 jurisdictions’ pilotage service delivery models from around the world were selected as case studies. As noted above, the case studies did not provide representative examples of all models discussed above. The table below summarizes the types of models represented in case studies selected for analysis.

Canada Alaska Brazil Brisbane, Australia Denmark (Baltic Sea crossings only) Denmark (Except Baltic Sea crossings) France Germany Japan Korea Louisiana Netherlands New York New Zealand Singapore UK US Federal Washington
Model 1- Pilotage Service delivered by Federal Government x
Model 2- Pilotage Services Delivered by Crown Corporation x x
Model 3- Pilotage Services Delivered by Municipal, Regional or Provincial Governments
Model 4- Pilotage Services Delivered by Stand Alone Entity
Model 5- Pilotage Services Delivered by Port Model x x
Model 6- Pilotage Service Delivered by Licensed Pilots; Regulated Monopoly x x x x x x x x x x x
Model 7- Pilotage Service Delivered by Licensed Pilots; Regulated Competing Pilot Organizations x x x
Model 8- Pilotage Services Delivered by Corporation; Regulated Monopoly
Model 9- Pilotage Services Delivered by Corporation; Regulated Competition
Model 10- Pilotage Services Delivered by Ship Owners x

For each of the jurisdictions selected, eleven aspects were researched and analyzed. Where there was no publically available information on specific aspects, KPMG conducted interviews with representatives from a jurisdiction’s pilotage authority or company to gather information to the extent that the interviewees were able to disclose the requested specifics. A detailed description of each jurisdiction’s findings are in the case study summaries, found in Appendix A.

High level findings for each of the eleven aspects of operations and governance are summarized below:

Governance and Service Delivery

For pilotage services, the role of the governing body is typically linked to the development, and sometimes enforcement, of safety regulations pertaining to pilotage. The governing body is typically separated from the delivery agency (though both the governing body and delivery agency may be public agencies), as this enable an arms’ length relationship to provide oversight on the delivery of pilotage services. The governing bodies were observed to have varied relationships with the service delivery agency – in some instances, governance and service delivery two may be carried out by separate entities; while in others, it may be the same entity.

In general, most jurisdictions pilotage services are ultimately overseen by a government agency, and the structure of pilotage service delivery agencies can vary from public-sector, to Crown Corporation, or may be established as a privately-held company. Common to all pilotage delivery agencies is some form of elected representation from pilots on the Board of Directors, which are typically members/employees of the agency.

Legislative framework

The legislative framework of pilotage services typically involve an Act of government, and generally describes matters such as safety requirements and training provisions for pilots, how regulations will be enacted and how tariffs will be set. The scope of the legislative frameworks described varies substantially. Not surprisingly, pilotage acts generally fall within the responsibility of a ministry related to transportation.

In general, safety provisions and the designation of compulsory pilotage areas are established at the national-government level, with the exception of Brisbane and United States among the case studies. In Brisbane and the US pilotage, in contrast, are legislated at the state level. For jurisdictions where the pilotage act is legislated by its national government, local laws and regulations may stipulate further requirements, for example, regarding pilotage licencing criteria and labour laws.

Regulatory scope

Among the case study jurisdictions, various relationships exist between the regulating body and pilotage delivery model. In some instances, the same body oversees both regulation and the pilot service delivery; in others, the two functions reside within separate organizations. Among the case studies reviewed, regulatory scopes were noted to generally cover compulsory pilotage areas and other ship / cargo attributes that would require obligatory pilotage services. The breadth and depth of regulations varied across case studies, with some jurisdictions observing a more centralized model while a few jurisdictions have delegated the determination of pilotage services and exemptions to local levels of governments or the port authority.

Some of the specific regulatory matters are further discussed below.

Training and licensing criteria

In most case studies, the regulating body determines the minimum qualifications that an individual needs to be eligible for the pilot licensing program. Generally, the regulating body also determines the training program that candidate pilots must complete in order to receive a full pilot license. In many jurisdictions, training and licensing is delivered and controlled by the regulating body (e.g., Brazil, Louisiana), however some jurisdictions allow training and licensing to be administered by the private pilotage associations, in accordance with government standards set by regulation (e.g., Netherlands). The greatest variance in training requirements among the case study jurisdiction relates to ongoing training, after a pilot has been certified. That is, each of the case study jurisdictions reviewed have set different aspects and frequency (if any) of ongoing training for qualified pilots, in order for the pilot to maintain their qualification.

In most cases, licenses are issued to pilots for specific compulsory pilotage areas (defined as geographic regions in the case studies profiled in this report) and in some jurisdictions (e.g., New Zealand), it is possible to qualify for the provision of pilotage services in several areas. This is generally observed for jurisdictions with varied geographies, or where regulation of pilotage is at the state or port level.

Licensing systems vary across jurisdictions, with some jurisdictions using a graduated licensing system. A graduated system allows junior pilots to obtain experience on smaller or less hazardous ships before being qualified to handle all types of assignments. This could be another way to strengthen the safety of the Canadian pilotage service.

Labour model

In many case study jurisdictions, pilots operate as independent businesses (e.g., throughout the United States and many other jurisdictions) and are then often affiliated with a pilot organization. The role of the pilot organization is diverse, ranging from advocacy of pilot regulation, acting as a referral service, to more direct involvement in establishing pilotage regulation and service levels. While affiliation to a pilot association is not mandatory in all jurisdictions, some pilots, such as those in New York are required by law to be part of a pilot association in order to provide pilotage services. Some pilot associations may act as labour union-equivalent structures in order to advocate and negotiate on behalf of pilots on topics such as regulation, training, and compensation.

For jurisdictions where pilots are not required to be part of pilot associations, the organization typically plays a more passive role and its activities less directly impact the day-to-day activities and income levels of pilots. In New Zealand for example, all pilots are employees of port authorities or local councils, but they all are members of a trade association.

The case study jurisdictions generally held unique competition objectives. To achieve these competition objectives, some jurisdictions have elected different regulatory models in order to manage the number of pilots, and indirectly the level of income per pilot. Labour models have also been observed to evolve over time, though the reasons for these changes have been attributed to a wide range of factors.

Ownership of assets

Assets for the delivery of pilotage services are typically owned by the association that possess economic regulation of the service. It was generally observed among case studies that the entity with in control of tariffs charged for pilotage services would also be in control of assets to deliver pilotage services – with few exceptions. Examples of assets owned by some entities include pilot launches, communication infrastructure, and office space. As such, the types of assets that are controlled by pilot organizations (or pilots, directly), vary depending on the functions and services carried out. The ownership of assets pose additional overhead costs related to asset replacement, maintenance, and amortization over time. As such, pilotage services have different preferences in ownership of assets. The extent to which these costs are shared among pilots likely also impacts tariff rates and financial performance of pilotage services in different jurisdictions. Asset ownership also has downstream implications, in areas such as pilot safety and service quality.

Pilot organizations that also own pilot launch assets are directly vested in the safety, efficiency and quality of service that well-maintained assets enable. As such, these organizations, both through the direction of their Board (or equivalent) and general assembly (pilot members), have anecdotally been noted to have fewer challenges than a model where service delivery is almost entirely decoupled from asset ownership.

Tariff structure

In most jurisdictions, tariffs are regulated and must be calculated via a standardized methodology. In cases where pilots or pilot organizations have the ability to directly set or negotiate pilotage fees, the government is sometimes involved as a third-party arbitrator. That is, where a pilot or pilot organization and the ship owner cannot agree on a rate, the government has put in place provisions for a theoretical “maximum” or arbitrated charge. Generally, this enables the continued movement of vessel traffic and provides some assurance that vessels will be able to berth or navigate specific waters.

Our research has indicated that mechanisms for price control, by changing tariff rates or structures, are a key element of any regulatory approach used in the jurisdictions considered and have a large impact on the pilot wages. Further, they are usually a contentious element of regulation from consumers’ (ship owners / agents) perspectives, which has resulted in appeals processes as they relate to new prices being implemented.

Financial performance and management

As the organizations responsible for pilotage services reviewed vary in corporate structure, the level of financial performance information that could be gathered from publically available sources and the interviews also varied. Anecdotally, it was determined that agencies which are more closely linked to public services, typically adopt a cost-recovery financial structure and thus are less profit-seeking in nature. The converse appears to be true: pilotage services that are delivered via private businesses tends to result in corporations that are driven towards profit seeking. Ultimately, the corporate set up of the organization responsible for delivering pilotage services will drive the organization’s financial goals. For example, pilotage in Australia is delivered by a partnership organization and Singapore’s pilotage services are delivered as part of a for profit, private corporation where the Singaporean government is the majority shareholder (thus classified as “Crown Corporation” above). Anecdotally, these organizations have indicated goals to maintain profitability as a duty to their shareholders and partners.

The range of financial management tools and opportunities for a pilotage service to survive business downturns also varies depending on the diversity of other services provided by the organization. For example, pilotage services delivered as part of port authorities (e.g., New Zealand and the UK) may generally have more capacity to absorb fluctuations in traffic, revenues and costs, as the organization’s sources of income are more diverse, thus resulting in the authority managing risk on a portfolio basis.

Safety and efficiency performance

Limited information was available to indicate a pilotage service agency’s safety and efficiency performance record. In comparison, the Pilotage Authorities in Canada consistently present their safety records to the public.

Generally, it was observed among case studies that a jurisdiction’s regulating body set safety standards for the pilot organizations. Such standards provide a minimum level of safety, but pilot organizations sometimes implement more stringent standards if desired by ship owners or the regulatory body. Among the case studies jurisdictions, there appears to be some trends for jurisdictions to move toward the use of International Standard for Maritime Pilot Organizations (ISPO). Using international standards is seen by some as a way to clarify the rule-setting process, with regulators enforcing internationally recognized standards instead of locally-developed rules.

Other key issues

Four other recurring issues were raised with reference to pilotage services in the case study jurisdictions:

  1. Succession planning: Many jurisdictions have challenges in attracting the number and quality of candidates to fulfill pilot positions. This impacts a number of areas of the organizations from operating model, compensation, cost structure, training, certification standards and staffing levels;
  2. Introduction of new technologies: Some pilotage associations noted the risks of reducing apprenticeship or practicum hours of pilot candidates as simulators alone do not provide training of pilots to utilize non-visual cues (sounds, weather, and traffic patterns). Many people in the industry are already talking about the advent of the autonomous ship, though, anecdotally, some interviewees indicated that the technology may not provide enough safety assurance at present; thus, adoption has been slow and the industry has remained somewhat lukewarm to its prospects;
  3. Safety: The safety of marine pilots boarding ships has also become an increasingly discussed issue. It was generally noted that the most critical and high-risk activity within a pilotage assignment occurred at the point where pilots board ships. While helicopter pilot launches can be a relatively safer, and more flexible option from a scheduling perspective, this method also requires higher operating costs which may not be feasible for some pilot regions to consider; and
  4. Infrastructure investments and shipping vessel trends: Ships (particularly container ships) have increased in size significantly over the past decade. While pilots can be trained to navigate increasingly large vessels, much of this training would be wasted if port authorities do not invest in the necessary infrastructure (navigational aids, vessel traffic systems and terminal infrastructure) to accommodate vessels of this size. This presents a particularly challenging topic, requiring the co-operation of industry, pilotage associations, port authorities, and government.

Innovative approaches to service delivery

Shore-based (remote) pilotage has been considered and/or tested in places such as Sweden, Denmark, Netherlands and Portugal in a variety of guises from a back-up solution during bad weather (when boarding a pilot is not possible) through to regular use. Among feedback gathered from interviews with pilots, pilot associations, and some regulatory bodies, significant scepticism exists around the feasibility of implementing shore-based pilotage in the jurisdictions researched. A scan of recent research on shore-based pilotage indicates that serious consideration of this service delivery model peaked about 6 or 7 years ago and very little research has since been undertaken.

Current research appears to focus more on improving Vessel Traffic Service (VTS) and the human factors involved in pilotage. A number of jurisdictions have explored, or are in the process of implementing, technologies to improve safety and efficiency of pilotage services. These technologies assist in dispatch, monitoring, and the safety of pilotage services delivered. While it appears a wide range of technologies currently used in other navigational systems could be considered for application to pilotage services, most authorities and companies have remained conservative in their investments.

Summary of findings

The jurisdictions reviewed for this Report involve a wide spectrum of pilotage service delivery models. Many of these do not follow one single model as described in this report; rather, most models are built from components of two or more models. Through desktop research and interviews conducted, it is clear that each case study face a range of challenges and advantages – these challenges and advantages are often the result of local economic and regulatory conditions. Through the comparison of jurisdictions, it is also evident that many models, while different in nature also share similar characteristics.

The key findings of the research are summarized as recurring themes or findings among the different jurisdictions considered. Particularly, these findings can lend themselves as relevant considerations in the Canadian context, should alternative governance models, or components of pilotage service delivery, be considered in the future. The four findings are:

  • Separating regulatory and service delivery functions: these are related functions, but there are benefits to having these functions separated, in independent bodies;
  • Benefits to aggregated pilotage services: The jurisdictions with one aggregated service delivery, however, tended to have fewer financial, operational and consistency issues (though there are exceptions). Several jurisdictions have highly disaggregated delivery models. For example in the case of the UK, pilotage is provided and regulated at the port level, which has resulted in a number of problems with rates, safety and accountability. A similar situation occurred in Queensland Australia that resulted in the state government having to alter the regulatory and service delivery model;
  • Independent pilot businesses versus collective organizations: a wide range of financial and risk trade-offs were observed among the various operational models analyzed. While a labour model comprising of mostly independent contractor pilots could result in theoretically more competitive rates, the combination of what appears to be relatively the same demand for pilotage services in the market, and the uniqueness of pilot skillsets have resulted in a scenario where competition is limited in reality;
  • Economics of regulated monopolies: while limited competition raised the potential of more competitive rates, the experience has been that the competitive models have often failed (e.g. Alaska and Queensland) and that even if competition is theoretically allowed, in practice it doesn’t appear to be practical or attractive to participants. Although natural monopolies can have negative impacts on consumers in some industries competition in pilotage can have greater negative impacts compared to a monopoly. When pilots or pilot organizations compete, there could be an incentive to cut costs through reduced focus on safety and quality; and
  • Safety and training: pilotage services are generally aligned in safety and economic interests through regulation. This highlights the ongoing role of government in setting safety standards, and the shared responsibility between pilots, industry, and government to ensure adequate training is provided to pilots to safety navigate waterways within a jurisdiction.

In conducting research and interviews to understand the various pilotage service delivery models used by jurisdictions around the world, it is clear that no singular model presents absolute and obvious advantages among others. However, it was apparent that pilotage service delivery models in these jurisdictions have been established to protect the economic and safety interests of marine traffic in that locale. These models are also dynamic, and have evolved over time to respond to changing industry needs and government regulations. The challenges faced by different pilotage service delivery authorities / companies are often tied to economic conditions, historic precedents, and a jurisdiction’s regulatory authority’s level of involvement to influence the various aspects of pilotage service delivery.

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