Research Summary - Governance and Operating Models

As part of the Pilotage Act Review

KPMG

January 2018

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. The four Pilotage Authorities are: the Pacific Pilotage Authority, the Great Lakes Pilotage Authority, the Laurentian Pilotage Authority, and the Atlantic Pilotage Authority.

In November 2016, the Government of Canada announced a review of the Pilotage Act to update the legislative and regulatory framework for the delivery of pilotage services into the future. Following the review of the Pilotage Act, Transport Canada identified an opportunity to further review the financial sustainability and self-sufficiency of each Pilotage Authority operating under a status quo model. Further, Transport Canada wished to review potential alternative operational models for the provision of marine pilotage services. This report includes the assessment of financial sustainability of the Pilotage Authorities and the alternative operating models.

Financial Sustainability Assessment

Together, the Pacific Pilotage Authority, the Great Lakes Pilotage Authority, the Laurentian Pilotage Authority, and the Atlantic Pilotage Authority have authority for all pilotage services in Canada. The Laurentian Pilotage Authority and the Great Lakes Pilotage Authority offer independent but coordinated services covering the same contiguous waterway. Conversely, the Atlantic Pilotage Authority and the Pacific Pilotage Authority operate in isolation along their respective coasts. Each of the four areas covers a unique geographical area and is driven by various commodity customers and their respective markets. All four use assets tailored for their respective waterways.

The four Authorities have distinct differences.

The Atlantic Pilotage Authority has the most varied service structure, as it covers a very broad geographic region (split into 17 sub-regions) with low overall volumes (as compared to the Laurentian Pilotage Authority and the Pacific Pilotage Authority).
The Laurentian Pilotage Authority and the Pacific Pilotage Authority have the highest volumes and revenues of the four, with 2016 revenues of $91M and $76M respectively. The Great Lakes Pilotage Authority and the Atlantic Pilotage Authority are significantly smaller and have revenues of $26M and $24M respectively.
The Pacific Pilotage Authority provides long distance coastal pilotage in additional to harbour pilotage. By contrast, the Atlantic Pilotage Authority is largely focused on harbour pilotage despite covering much of the eastern coastline.
The Laurentian Pilotage Authority and the Great Lakes Pilotage Authority focus on long distance river and lake pilotage assignments with actual harbour pilotage a much smaller portion of their service portfolio.
The shipping markets served by the four Pilotage Authorities are quite diverse:
- The Pacific Pilotage Authority services shipping focused largely on trade with Asia with high volumes of container trade (majority of Canada’s container volumes) and bulk product shipments.
- The Great Lakes Pilotage Authority focuses largely on movements of bulk products along the Great Lakes with a mixture of domestic and foreign cargoes.
- The Laurentian Pilotage Authority has a diverse traffic base including both bulk and container/general cargo with a strong focus on Europe, and exchanges traffic with the Great Lakes when origins or destinations involve a Great Lakes port.
- The Atlantic Pilotage Authority has a strong focus on ports serving European markets.

Due to this diversity in exposure to overseas/local markets, and different levels of port competition, the risk profile of each Authority is somewhat different. Nonetheless, all of the Pilotage Authorities face similar challenges in tariff setting and resulting challenges of adjusting charges in a timely fashion to respond to cost pressures and customers’ demand.

For all four Pilotage Authorities, revenues are driven by both tariff rates and the total number of assignments. Variable costs are generally driven by pilot compensation rates per assignment, pilot boat costs per assignment, and total number of assignments.

Observable trends in operating performance include:

The total number of assignments for most Authorities has remained relatively constant over the last 16 years. The exception is the Atlantic Pilotage Authority, for which assignments have decreased by ~30% over this period.
Despite flat or declining assignment volumes, revenues for all Authorities have trended upward. This is a direct result of tariff increases, compensating for increasing expenses, as well as larger vessels.
The Laurentian Pilotage Authority is the only authority that has consistently turned a profit for the last 10 years. In 2016, the Atlantic Pilotage Authority and the Laurentian reported a surplus while the Pacific Pilotage Authority and the Great Lakes Pilotage Authority reported a deficit.
The Pacific Pilotage Authority has purposefully run a slight deficit for the past few years in order to reduce cash reserves to an appropriate level and has a plan to return to breakeven in the coming year.
The Atlantic Pilotage Authority has managed to turn a profit as a result of large tariff increases over the past few years that have countered the drop in traffic. The Authorities generally hire pilots as either contract or salaried employees or a combination of both. The Great Lakes Pilotage Authority hires all pilots as salaried employees, while the Laurentian Pilotage Authority hires all pilots as contract pilots. The Pacific Pilotage Authority and the Atlantic Pilotage Authority both hire a combination of contract and salaried pilots. However, the majority of the Pacific Pilotage Authority’s pilots are contract pilots, while the Atlantic Pilotage Authority hires 90% of their pilots through a salary model, due to its low volume ports.^{Footnote 1} These differences in labour models are highly correlated with fixed vs. variable cost distribution and contribute to the ability/inability to adjust costs in times of decreasing traffic volumes

Alternative Governance Models Assessment

Six alternative models were assessed quantitatively and qualitatively, relative to each other:

Model A: Status Quo – four Pilotage Authorities;
Model B: Partial Amalgamation – the Great Lakes Pilotage Authority and the Laurentian Pilotage Authority are amalgamated into one Pilotage Authority, the Pacific Pilotage Authority and the Atlantic Pilotage Authority continue status quo;
Model C: East-West Amalgamation – the Great Lakes Pilotage Authority, the Laurentian Pilotage Authority and the Atlantic Pilotage Authority are amalgamated into one Pilotage Authority, Pacific Pilotage Authority continues status quo;
Model D: National Amalgamation – the Great Lakes Pilotage Authority, the Laurentian Pilotage Authority, the Atlantic Pilotage Authority, and the Pacific Pilotage Authority are amalgamated into one Pilotage Authority;
Model E: Management Corporation – a separate entity is formed to deliver pilotage services, and the Federal Government retains ownership of assets (i.e. commercialization of pilotage services). This is similar to the St. Lawrence Seaway Management Corporation model; and
Model F: Private Corporation – a separate, private entity is formed to oversee delivery of all pilotage services across Canada, including management of assets and tariff setting (i.e., privatization of pilotage services). This would be similar to the NavCanada model.

The six models were assessed against criteria which were determined to be important considerations by Transport Canada. Key features and disadvantages of each of the models assessed are summarized below.

Model A: Status Quo

Advantages: Safety and reliability records are likely to continue to be high and the organizations would preserve the ability to respond to local concerns and issues. As these are Crown corporations, there would be no change in the Federal Government’s current role with respect to marine pilotage.

Disadvantages: Standard implementation of technologies across all Pilotage Authorities can be challenging as each Authority has its own local circumstances which may or may not support the technology. Further, the Pilotage Authorities, individually, have to deal with dips and peaks in service demand.

Model B: Partial Amalgamation

Disadvantages: Standard implementation of new technologies across all Pilotage Authorities can be challenging as each authority has its own local circumstances which may or may not support the technology. The amalgamated Authorities are likely to have limited abilities to withstand fluctuations in traffic than a larger organization and unlikely to realize significant cost savings through economies of scale.

Model C: East-West Amalgamation

Advantages: Safety and reliability records are likely to continue to be high and the organizations would preserve some ability to respond to local concerns and issues. As these are Crown corporations, there would be no change in the Federal Government’s current role with respect to marine pilotage. There may have some financial savings as a result of the amalgamation, which could provide the organizations with some ability to support the standardized adoption of new technology.

Disadvantages: The amalgamated Authority may lose the ability to respond to local concerns in the same way as separate organizations. Implementation of the amalgamated Authority may be challenging, as this may require changes to the labour models currently adopted by the separate authorities.

Model D: National Amalgamation

Advantages: Safety and reliability records are likely to continue to be high. As the Authority is a Crown corporation, there would be no change in the Federal Government’s current role with respect to marine pilotage. There may be some financial savings as a result of the amalgamation, which could provide the organization with the ability to support the standardized adoption of new technology. The amalgamated Authority can also have greater abilities to withstand business downturns, as it would be faced with a relatively more diversified demand-base for pilotage services.

Disadvantages: The organization may lose some ability to response to local concerns. Implementation of this governance model may be challenging, and could result in pressures to normalize pilotage wages across Canada. This may result in potential fee increases.

Model E: Management Corporation (Commercialization of Pilotage Services)

Advantages: Safety and reliability records are likely to continue to be high and the organizations would preserve some ability to respond to local concerns and issues. The Federal Government’s current role in marine pilotage would change, as pilotage services would be delivered and managed by a management corporation. There may be some financial savings as a result of the amalgamation, which could provide the organization with the ability to support the standardized adoption of new technology. The amalgamated Authority can also have greater abilities to withstand business downturns, as it would be faced with a relatively more diversified demand-base for pilotage services.

Model F: Private Corporation (Privatization of Pilotage Services)

Advantages: Safety and reliability records are likely to continue to be high and the organizations would preserve some ability to respond to local concerns and issues. The Federal Government’s current role in marine pilotage would change, as pilotage services would be delivered and managed by a private corporation. There may be some financial savings as a result of the amalgamation, which could provide the organization with the ability to support the standardized adoption of new technology. The amalgamated authority can also have greater abilities to withstand business downturns, as it would be faced with a relatively more diversified demand-base for pilotage services.

Disadvantages: Implementation of this governance model may be challenging, and could result in pressures to normalize pilotage wages across Canada. This may result in potential fee increases. The public may perceive this model to not respond (or make less effort to respond) to local needs as the governance model represents privatization of services. This could also be perceived as a loss of control over pilotage services.

Summary

Based on the evaluation framework and results, the current Status Quo model poses a number of benefits and challenges:

The safety and reliability records for Canadian pilotage services is relatively high (consistently greater than 99.9% annually). As such, it is generally expected that the alternative delivery models will be able to maintain the current records and standards. This criterion was not a defining factor among the assessment of alternative governance models.
The current delivery model is advantageous over amalgamated models in local responsiveness because pilotage authorities have worked closed with industry representatives and clusters in their respective regions. This has created a sustained working relationship between Pilotage Authorities and local agencies. While this model is de-centralized and therefore slightly more difficult to implement technologies or regulations nation-wide, it is likely to respond to local needs the best, among other models considered.
As Pilotage Authorities are directly responsible to Parliament through the Minister of Transport Canada, and the government has influence over the direction of these entities and as the Pilotage Authorities are well-established with operational and planning protocols within each entity, the system is generally not well set up to accommodate nation-wide changes.

In contrast, a private corporation model (Model F) results in significant reduction in the level of direct influence and control the Government retains in pilotage service delivery. While this model may present opportunities to increase financial sustainability of pilotage service delivery, the actual benefits that could be realized may be limited by the fact that pilotage is a highly regulated and regimented service and the actual management and administration costs of providing pilotage services are very low. That is, the private corporation is likely to have limited opportunities to optimize service delivery through cost reduction while maintaining compliance and adherence to policies, regulations, and labour compensation models.

The nationally amalgamated models (Models D and E) presents an interesting compromise between the Status Quo and a private corporation model. These two models provide opportunities to leverage cost savings from consolidation, while maintaining the beneficial attributes of the Status Quo model. In principle, Model D and E differ in mechanisms that the Government uses to maintain influence over pilotage service delivery – Model D is a Pilotage Authority, while Model E utilizes contractual mechanisms to influence service delivery.

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