Development Channel

Now You Can Find out What Happens to U.S. Aid In a bipartisan vote, Congress passed legislation to require U.S. agencies—the U.S. Agency for International Development and U.S. State Department among them—to measure the success (or failure) of billions spent on development and economic assistance programs—and share the findings on foreignassistance.gov. Once signed into law the Foreign Aid Transparency and Accountability Act will also make public program budgets by country, showing where and how U.S. money is spent. Notably exempt is security assistance, leaving details about how the United States funds, trains, and equips foreign militaries still opaque. Naming and Shaming in the U.S. Human Trafficking Report The U.S. State Department released its sixteenth annual Trafficking in Persons (TIP) report, ranking 188 countries’ efforts to prevent human trafficking from best (Tier 1) to worst (Tier 3). Myanmar and Uzbekistan joined six other nations downgraded to the U.S. blacklist—in Myanmar’s case for recruiting and using child soldiers, smuggling minority Rohingya migrants, and official complicity in forced labor. Thailand rose from the bottom rung, despite criticisms that labor abuses in its multibillion dollar fishing industry remain unchecked. Last year investigations revealed top U.S. diplomats manipulated TIP rankings for political ends; this year’s calling out of strategic partners may help restore the report’s credibility. UK Bribery Act Turns Five Five years ago the United Kingdom (UK) passed the Bribery Act. It not only makes it illegal for companies to bribe foreign officials (in line with the U.S. Foreign Corrupt Practices Act), it also holds them to task for failing to prevent bribery among subsidiaries and business partners within their supply chains. Others have followed the UK’s lead. Brazil passed its Clean Company Act in 2014, imposing fines of up to 20 percent of revenue for companies that bribe foreign or domestic officials. Ireland has proposed legislation that includes the UK’s rules and adds provisions to force stricter corporate due diligence. The UK Bribery Act’s first half decade only saw two cases resolved: convicting Sweett Group of bribing a UAE official, and settling with Standard Bank for bribery in Tanzania. Last year the Serious Fraud Office took on sixteen new investigations—expect more decisions before the law’s next milestone birthday.

Supreme Court Rules on Corruption The U.S. Supreme Court overturned former Virginia Governor Bob McDonnell’s bribery conviction for accepting over $175,000 worth of gifts and loans—including a Rolex watch, designer clothes, and luxury getaways—allegedly in return for favorable business treatment. The court said this did not count as an “official act” of bribery under U.S. law, raising the bar for federal prosecutions of public sector corruption. States can help fill the gap, as Virginia did in the wake of the scandal, setting a straightforward $100 annual cap on gifts from lobbyists and other individuals or businesses angling for government deals or support. Other states ban or set strict gift limits. In Florida, lobbyists (or those who hire them) cannot give more than a flower arrangement; in California, officials cannot accept anything valued over $250. Several states prohibit gifts with “intent to influence”—a hard case to prove. Check out your jurisdiction here. China’s Anticorruption Drive Goes Global? China says it needs help to take on corruption. Its antigraft unit asked Western countries to assist its “Operation Fox Hunt” efforts to repatriate corrupt officials that fled abroad. The nation seems less interested in abiding by widely-agreed upon international norms or helping set new ones. As G20 president, China scuttled the “Business 20” Anticorruption Task Force, established in 2010 to develop rules on transparency and shell company ownership. Working group members said China’s move sets back efforts to expose shell companies that conceal ill-gotten assets. And China has yet to follow through on a promise to join the Organisation for Economic Co-operation and Development (OECD) Working Group on Bribery, a necessary step toward signing onto the legally-binding OECD convention that would force China to hold its companies accountable for paying bribes abroad. Panama Canal Opens Amid Uncertainty The Panama Canal finally opened its nine-year, $5.4 billion expansion. The new canal permits ships carrying up to 13,000 containers—more than double its former capacity—to pass between the Atlantic and Pacific. It comes online amid slowing global trade and shipping industry woes. Only some East Coast ports are ready—others remain cut off due to too-low bridges for the new mega-freighters, too-small terminals, and a lack of modern railways and roads to get the goods to consumer markets. As former Port of Los Angeles director Geraldine Knatz explains in an interview with CSMD, to boost U.S. port competitiveness, the government needs to re-examine how it invests in them.

As the first ship goes through the expanded Panama Canal, the Development Channel sat down with Geraldine Knatz, former director of the Port of Los Angeles and now a professor of policy and engineering at the University of Southern California’s Price School of Public Policy. Dr. Knatz talked about changes in the shipping industry, trends affecting U.S. ports, and what the canal expansion will mean for trade globally.   1)  What will the Panama Canal expansion mean for the shipping industry and for global trade? The biggest change with an expanded Panama Canal is that it will allow larger ocean carriers to pass through. Pre-expansion, the canal was limited to containerships that could handle about 5,000 TEUs (one TEU is equivalent to a twenty-foot long container). The expanded canal will allow ships of up to 12,000 TEUs to transit. Shipping companies will be able to unlock economies of scale by sailing these bigger ships, and the cost of moving goods from Asia to the East Coast of the United States will drop. In addition to industries that rely on containers and big ships to move their goods, other types of commodities can benefit from more capacity through the canal, such as grain exports and liquid and natural gas (LNG) exports. The Panama Canal expansion will also create more routing options for ocean carriers bringing containerized goods to North America. Currently there are three main routes for goods moving from Asia to the United States. From China and northeast Asia, most goods come across the Pacific to a West Coast port where they are offloaded, transferred to rail, and then carried to the Midwest—roughly an eighteen-day trip. Or, cargo can move via the all-water route from Asia, go through the Panama Canal, and enter the United States through an East Coast port like Savannah or Charleston, which can take as long as twenty-six days. The second all-water route is from Asia through the Suez Canal—a twenty-eight day trip to the East Coast, with cargo often ending up in the Port of New York. In the past, goods from Southeast Asia and India took this route, but as ships got bigger and fuel prices dropped, some north Asian cargoes also started transiting to the U.S. East Coast through the Suez. One of the first things that will happen when the expanded canal opens is North Asian cargoes moving in larger ships through the Suez will switch back to the Panama Canal for cargo coming from north Asia. And the West Coast will try to prevent losing market share to the East Coast. 2) How has the shipping industry changed in recent years and what are other trends to watch going forward? To fully understand how the canal expansion will affect shipping and trade we have to first look at what has happened to the ocean carrier industry. Two major trends have affected it—the increased size of vessels and the consolidation of the ocean carriers. After losing money for years because of overcapacity and industry one-upmanship, ocean carrier companies started transitioning to bigger and bigger ships to achieve economies of scale (and these bigger ships are what the expanded Panama Canal is counting on for business). Then, because big ships only make money when they sail at full capacity, the competing ocean carrier companies formed alliances to share space on ships. Some ocean carriers have also merged. So a port that may have once courted twenty ocean carrier lines may now only have four big customers. Just recently, there was an announcement of a new alliance forming: the Ocean Alliance. If approved by the Federal Maritime Commission, the European Union (EU), and China, the Ocean Alliance will control 35 percent of the Asia-to-Europe market, and nearly 40 percent of trans-Pacific trade. For the ports, consolidation has had a big effect on business. The ports of Los Angeles and Long Beach have thirteen container terminals that serve numerous lines. As the alliances pool their cargo on larger ships, they will seek to call at the larger and most efficient terminals. That means when a container port loses a customer, they lose big. This industry consolidation has weakened the ports’ bargaining power and hurt their individual market share. It also makes it difficult for ports to finance major terminal improvements. In the past a port would typically enter into a thirty-year lease with an ocean carrier company to ‘lock in’ its cargo. And once ports had a thirty-year commitment, they had the flexibility to go out and finance improvements. Now the alliances seek short-term arrangements, maybe three years, and ports are in constant negotiations to keep the business. Meanwhile, the alliances are constantly seeking terminals with high productivity and threatening to go to the port next door. We can see the effects of the changes in the industry and the decreasing leverage that ports have by examining what has happened at the ports of Seattle and Tacoma. Both had lost market share in recent years, and rather than continuing to spend billions going after the same business and using predatory pricing practices to shift cargo back and forth—which did nothing to boost the regional economy or create jobs—they merged their cargo operations, and created a new entity. Tacoma and Seattle realized the market power of their customers was stronger than their own and they took strategic steps to try and deal with that. The hope is that their new collaboration, called the Northwest Seaport Alliance, will have better leverage in negotiating with the alliances. It will be interesting to watch what actions other ports take to address their decreasing leverage. 3) Who will be the winners and losers in the Panama Canal expansion? The biggest winner may be the Panama Canal Authority (ACP), which makes the largest share of its revenue money from container traffic. As long as traffic goes up, the ACP will be poised for growth. The ocean carrier companies are also well positioned. After the expanded canal opens, they will shift even more to bigger ships and improve their economies of scale. For the ports the question will be: where will the big ships stop? A lot of East Coast ports are vying for that business. Since the canal expansion was approved in 2002, there has been a perception that it will benefit all ports—large or small—and many have made improvements to get ready. But big ships make money at sea and not at port, where they want to spend as little time as possible. On the West Coast, large vessels call at two, maybe three ports. The carriers will adopt the same pattern on the East Coast once the expanded canal opens. Inevitably, some East Coast ports are going to lose vessel calls. The economy of scale driving ocean carriers will make that happen. 4) After the Panama Canal expansion, what will a U.S. port need to do to win business? Ports use the term “big ship ready,” which means they can handle the large ocean carriers. That usually requires having at least a fifty-foot navigation channel. Channel-depth is not the only factor that makes a port “big ship ready” however. There are other major investments needed to upgrade port facilities and infrastructure. For example: in addition to deepening the channel, wider ships need new cranes to reach and offload cargo. These longer-reach cranes are heavier than the old ones, so the port then has to upgrade the wharf—another major expense. And once the port facilities are in shape, the containers need to get from a port to their final U.S. destinations, which requires a good rail system. Given shipping companies take all of these factors into consideration when deciding where to drop their goods, ports should also consider the regional infrastructure when deciding how to invest. 5) What U.S. policies are being implemented so that U.S. ports and the broader public can capitalize on the Panama Canal expansion? When the canal expansion construction started, it was a wakeup call for U.S. ports to get ready. It was also a wake-up call to the federal government on policy changes necessary to expand and invest in U.S. ports. One example of government action is the Obama administration’s “We Can’t Wait” initiative that prioritized the dredging of new channels, expedited the modernization of five ports, and allocated investment to upgrade transportation. Another is new funding from the Department of Transportation (DOT), particularly the Transportation Investment Generating Economic Recovery (TIGER) grant program, which allowed ports to apply directly to the DOT for funding. The Federal Maritime Commission—which for many years was an organization that only a port’s attorney might deal with—has also stepped up to be more active, especially in dealing with port congestion. Finally, the latest surface transportation legislation, the Fixing America’s Surface Transportation (FAST) Act, created a dedicated fund for freight infrastructure. It also created a program for monitoring port performance by the Bureau of Transportation Statistics that will report to Congress annually. However, there is still a need to re-examine the way the U.S. government decides which ports to invest in—and in particular, which channels to dredge. Now the process is managed by the Army Corps of Engineers, which runs economic models to look at the “federal interest,” or the maximum benefit for spending federal money that results in reduced transportation costs. But the shipping companies now wield the power. They are less concerned with where the U.S government spent money dredging a port, and more with lowering their own costs. At the same time, ports have a have a hard time securing financing because they are not able to lock in business and customers for long terms. For both lenders and the U.S. government, investing in ports is getting riskier. Ultimately, the U.S. government should decide which ports to invest in according to the long-term commitments from multinational ocean shippers the port is able to secure. Using this criteria, instead of focusing on helping ocean carriers save on each container they move, would ensure the investments pay off.