Submission to Competition Commission - Block Exemption Regarding Certain Liner Shipping Agreements
10 June 2016
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1. The Hong Kong Liner Shipping Association (HKLSA) submitted an application for a block exemption order to the Competition Commission (the Commission) in December 2015 stating that agreements, i.e. - voluntary discussion agreements (VDAs)1 and vessel sharing agreements (VSAs) - engaged in by a collective group of shipping lines which provide container liner shipping services to Hong Kong shippers (importers/exporters) could enhance overall economic efficiency. It is understood that the agreements, referred to as VDAs and VSAs, are determined and imposed by competing liner members of collective groups of shipping lines.
2. The Consumer Council (the Council) has a concern with any exemption that might be given to the HKLSA, given the effect that any market distortion could have on consumer welfare, through increased costs for Hong Kong businesses that could be passed on to consumers. It is therefore crucial to examine whether the agreements may result in unusually high tariff rates, low quality of services and less choices. In particular, the shipping liner agreements should be examined to ascertain whether:
i. the practices of shipping liners, in co-operating under the agreements, do not have an appreciable effect of restricting competition in terms of Section 6 of the Competition Ordinance;
ii. where a shipping liner agreement exists, the terms of the agreement allow each individual liner to offer individual services, outside the agreement, if the liner so chooses; and
iii. where a shipping liner agreement exists, the parties to the agreement demonstrate that the agreement enhances overall economic efficiency while allowing consumers a "fair share" of the resulting benefit (in terms of the provisions of Schedule 1 section 1).
3. An examination of the different approaches to exempting shipping liner agreements by antitrust regulators indicates that the process could be treated through a sector-specific regulatory approach, for example legislation enforced by the Federal Marine Commission (FMC) in the US2 or through a block exemption approach, for example in the European Union. Singapore, for example, follows the European approach by granting exemptions to certain shipping liner agreements. Since Hong Kong has adopted the European competition regulatory model, the Council considers that the development and the experience of block exemption regimes in Europe and Singapore could be used as an important reference point for the Commission in making its decision on the application by the subject shipping liners.
4. The Council thinks a distinction should be made between VDAs and VSAs. VSAs (essentially capacity sharing agreements) are less contentious and remain block exempted in the EU as of today and also in many jurisdictions, but VDAs (essentially agreements by which shipping companies can voluntary disclose to each other their charges, shipping schedules and other competitively sensitive information - they are hard to distinguish from exchange of future price/quantity information which is normally viewed as "cartel conduct") must be handled with care - they are no longer block exempted in the EU. It is understood that new competition law jurisdictions such as India, Malaysia and Singapore exempt liner shipping agreements which do not have terms related price fixing and market sharing3. The Council does not see if VDAs with elements related to price fixing and market sharing should be exempted.
5. In 2009, the European Union (EU) Commission revised its Regulation (EEC) No 479/92 of 1992 on the application of block exemptions to certain categories of agreements, decisions and concerted practices between liner shipping companies agreements. It only allowed certain categories of agreements4 between shipping liner associations (of undertakings and concerted practices) that had the object to promote or establish cooperation in the joint operation of maritime transport services between liner shipping companies, for the purpose of rationalising their operations by means of technical, operational or commercial arrangements; with the exception of price fixing agreements.
6. In 2014, the European Commission extended by another five years until 2020 the validity of the existing legal framework exempting certain liner shipping agreements (so called "consortia" or "alliance"), if certain conditions are met under EU competition rules. After a public consultation, the EU Commission concluded that the exemption has worked well by providing legal certainty to agreements, which bring benefits to customers and do not unduly distort competition, and that current market circumstances warrant a prolongation.
7. The EU maritime consortia block exemption regulation allows shipping lines with a combined market share of below 30% to enter into cooperation agreements to provide joint cargo transport services (so-called "consortia"). Such agreements usually allow liner shipping carriers to rationalise their activities and achieve economies of scale similar to features of VSAs. It is understood that with sufficient competition, and on the proviso that the agreements are not used to fix prices or share the market, users of services provided by the exempted agreements should usually be able to benefit from improvements in productivity and service quality.
8. The Council suggests that the Commission should adopt the underlying EU reasoning that VSAs should only be allowed where they allow liner shipping carriers to rationalise their activities and achieve economies of scale but are not used to fix prices or share the market. Accordingly, there must be sufficient competition in the market as a whole to satisfy users of services provided by the exempted agreements, the Commission should not grant the exemption.
9. Unless economies of scale are insufficient, there is no guarantee that the cost-saving benefits will be passed on to consumers. Hence if the exemption application is based on the fact that relevant agreements would result in cost efficiency, it must be demonstrated that such efficiency will result in benefit to consumers (i.e. user of shipping service) in terms of lower prices or more convenient or better quality services.
10. The liner shipping market has a unique market structure; historically the industry was characterized by long standing and legal price fixing cartels known as conferences and agreements. Having regard to recent regulatory developments in the EU and Australia in that closer examination of agreements between liner companies have taken place, the Council sees that close scrutiny is essential in order to safeguard against anti-competitive effects of shipping liner agreements on markets, shippers and consumers.
11. Shipping companies registered in Hong Kong own and manage 10 per cent of the world's merchant fleet in terms of deadweight tonnage. There are about 700 shipping related companies in Hong Kong, offering a wide range of services such as shipping agency, ship management, ship owning and operations, ship brokering and marine insurance. Besides, the business portfolios of many other companies include ship finance, legal services and arbitration which are related to the industry. The Council notes that the existence of liner shipping agreements could not only affect competition in the direct shipping markets but also have spillover effects on other direct or indirect shipping related undertakings.
12. According to the World Trade Organization (WTO), the dollar value of world merchandise trade was almost US$19 trillion in 2014, US$1.12 trillion of which (over 6%) was accounted for by Hong Kong5, which is 24% of the total trade value of China. Moreover, the OECD projects that trade-related international freight will expand by a factor of 4.3 by 2050. While international trade through Hong Kong port accounted for around HK$1.36 trillion in 2015, which is 56% of the nation's economic output (GDP), this figure is expected to increase as China continues to grow at 6-7% per year6. The Council believes that any examination of block exemption in shipping should also consider macro-economic fficiency (both static and dynamic) on the trade sector rather than only the welfare of the shipping liner sector.
13. Liner shipping is the most economically important type of oceanic shipping and a vital component of the global economy. Most sources estimate that liner shipping carries 60-70% of world trade by value (Hummels 1999). In 2014, the container throughput mode of ocean transport in Hong Kong accounted for 70% of 22.2 million TEUs7. Ocean cargo vessels only accounted for 16% of the sea travel in terms of arrivals and river cargo vessel accounted for 42%, which ocean cargo steadily decreased at an annual rate of 1.9% and river cargo also steadily decreased at a rate of 2.7% in the same period over the period 2009-2014. However, in terms of net registered tons and cargo throughput, ocean cargo trade in Hong Kong increased at annual rates of 1.4% and 4.1% over the same period respectively. In terms of net registered tons and cargo throughput, river cargo trade also increased at annual rates of 2.7% and 4.3% respectively.
14. Since most of the sea trade will be re-exported from Hong Kong, it is important to understand how ocean carrier operations relate to river carrier operations. Since the Council does not have any detailed information on VDAs and VSAs, it is impossible to assess the extent to which international ocean liners agree with local ocean liners, and which in turn are likely to have business alliances with river liners operating in the local market in order to facilitate and maintain efficiency and profitability in the re-export business. Moreover, it is understood that river liners and regional berth operators are also in close alliance with shipping liners. In the Council study into shipping agreements in 20028, it was found that the liner shipping agreements have terms and conditions related to tariff adjustment for container terminal and berth operators. The Council strongly recommends that a detailed analysis of possible vertical restraints along the complete supply chain and subsequent competitive effect should be conducted to evaluate the implication of granting block exemption on different modes of sea transport in Hong Kong.
15. A product's mode determines the form of packaging, which is classified into four categories of cargo: dry bulk, liquid bulk, general and special cargo. Freight transportation vessels are specifically designed to transport certain types of cargo. There is very little supply substitution between different cargo vessels and the scope of the market is therefore determined by the form of packaging. It is also noted that few liner companies operate across all major trade routes. Any competition and market analysis should take into account the geographical aspect of the market. In addition to different routes associated with the application, the Council also expects the Commission to look into the effect of the block exemption decision on different liner type carrier markets.
Expected Effects of the Block Exemption
16. As argued by Sagers in his study9 in 2006, over its 100-year history, US ocean liner shipping has enjoyed an antitrust exemption permitting ocean carriers to fix rates through shipping conferences on the grounds that without the exemption destructive competition would arise and thereby bankrupt the industry. However, containerization, introduced in the 1960s, subsequently enabled ocean container ships to reduce excess capacity and to operate and compete in an intermodal environment, without shipping conferences, by interchanging containers with railroads and motor carriers. The Ocean Shipping Reform Act of 1998 in the US therefore took a first step toward ending conferences by allowing shippers to enter into contracts with carriers, causing rates to decline on certain routes.
17. It was estimated that disbanding all ocean liner rate conferences would effectively end the remaining price-fixing arrangements and could cut ocean-shipping rates at least 30%10. It was expected that prohibiting rate or term setting amongst some discussion agreements would enable competition in the market place to thrive and would drive down rates, and having regard to HKLSA claims that VDAs and VSAs do not set rates or terms with carrier customers nor determine individual carrier pricing, this result remains to be found.
18. In 2012, the US FMC initiated a study (FMC Study) assessing whether the repeal of the liner conference block exemption from EU Competition Law in 2009 had made European rates more competitive in regard to US liner trades. The analysis of the effect of the repeal was complicated by two factors that, taken together, produce a substantial challenge to reaching clear and persuasive findings. These were;
i. That there was an occurrence (nearly simultaneously with the repeal's implementation) of a massive exogenous shock, i.e., - a global recession that produced the largest decline in trade volumes in liner history; and
ii. The fact that any changes arising from the repeal were likely to be relatively modest (that is, have a minimal effect) because the market power arising from carrier agreements had already been severely limited by earlier regulatory reforms and legal interventions terminating agreements in the EU and in the US.
19. Based on an analysis of available information from 2006 through to 2010, the FMC Study's primary finding was that no significant change in rate levels occurred between EU and US liner trades due to the repeal. In short, any effects of the repeal of the block exemption on liner shipping were likely to be not only small but also masked by the deeply felt effects of the global recession. It would only be when the global market had recovered enough that a proper assessment of the impact of the repeal (in isolation from the recession) could take place.
20. The FMC Study also compared the performance of the route between the Far East to US and the route between the Far East and Europe. The analysis of the two Far East-based trades showed:
i. The impact of the repeal on average revenue per TEU appears to have been trivial - A result that suggests that the repeal likely did not, independent of the global recession's impact, produce a relative decline in average rate levels in EU trades as compared with US trades from October 2008 through 2010.
ii. There appears to have been an increase in rate volatility in the EU trades - A result that suggests the possibility that the activities of the discussion agreement in the Far East/US trade may have had a dampening effect on rate volatility. However, other factors, such as the prevalence of annual contracts in the Far East/US trade and the difficulty in redeploying very large vessels from the Far East/North Europe trade, may also have contributed to the differences in rate volatility.
iii. Following the repeal, there appears to have been a small increase in market concentration – A result that suggests that, in the absence of a forum for carrier discussions and information sharing, market concentration may increase slightly more rapidly.
iv. There was a relative decline in market share stability that may be related to rate volatility and market concentration – Market share stability noticeably declined in the Far East/North Europe trade in the post-repeal period. That was also the trade in which relative rate volatility and market concentration appeared to have increased. In contrast, there was increased market share stability in the Far East/US trade.
21. In summary, the FMC Study found that the repeal of the block exemption did not appear to have resulted in any negative impact on rates. Average revenue per TEU (a proxy for all-in rates) declined to the same degree in both the US and EU import trades that were being compared. Average revenue per TEU increased to a similar degree in both the US and EU export trades that were being compared. While the activities of carrier rate discussion agreements in US trades do not appear to have increased, average rates relative to rates in EU trades (nor to have improved carriers' revenues), they may have contributed to modestly reduced rate volatility.
22. It was found that the repeal of the block exemption in the EU may have resulted in a modest increase in market concentration. Given the lack of concentration in the liner trades studied, the FMC did not see an increase in market concentration was likely to present competition issues. Given the results for average revenue per container in the two trades, the FMC study did not find any significant adverse effects to carriers or shippers if a block exemption or antitrust immunity is granted or withheld for conferences or rate discussion agreements. Given the results of the rate volatility comparison, discussion and information sharing among rate discussion agreement member liners may have a separate and distinct economic benefit apart from the success or failure of the liners' common pricing proposals (i.e., pricing guidelines).
Service Quality Effect
23. Vernimmen, et al. (2007)11 reported, before the repeal decision of the EU Commission in 2008, on a large survey which revealed that "over 40% of the vessels deployed on worldwide liner services arrived one or more days behind schedule". The recently commenced SeaIntel12 schedule reliability database also provided a useful insight into more of the detail of schedule reliability. It comprises more than 35,000 arrivals, 44 carriers and 16 trade-lanes. Reliability is measured as arrival on the same calendar day or the day before. In late 2011 it showed that some reliable players could achieve 67% to 74% of its vessels arriving on time. The schedule reliability on trade-lanes between North and South America and from Asia to the Mediterranean improved.
24. It is understood that the terms and conditions of service contracts are bounded by legal instrument. Amongst the VSAs and VDAs (if the common service contract term is allowed within the body of rules contained in antitrust laws of both the US and the EU) this would facilitate container shipping companies entering into direct transport contract arrangements with exporters, defined in their scope in terms of service frequency and coverage, through provisions on commitments to reliability by both cargo owners as well as shipping companies. If the principal reason to enter into these agreements is to reduce potential uncertainties of cargo volumes and thus ensure more consistent and reliable deployment of ships in a particular trade route to be served by container shipping companies, then in assessing the potential benefit of these sharing agreements, the Commission should also look into whether these agreed provisions of the VSAs enhance their commitments to service quality for scheduled services. So far there is no evidence demonstrating the reliability is any better than if a block exemption or antitrust immunity is granted or withheld for conference or rate discussion agreements.
25. Without solid evidence from overseas studies on any adverse effect in both rates and service quality due to the withholding of a block exemption, the Council suggests the Commission should take a precautionary approach not to grant an exemption, unless quantitative evidence is put forward that clearly demonstrates the economic benefits that will accrue from maintaining the arrangements found in the subject VSAs.
1. According to the handout of HKLSA to the Council, they claimed that (i) VDAs share trade and commercial information between carriers and establish playing field and allow small carriers to compete; VDAs do not set rates or terms with carriers’customers and do not determine individual carrier pricing; and (ii) VSAs promote efficiencies that vessels and port facilities are used more efficiently when shared resulting cost savings lead to greater competition on rates and services.
2. Such Acts includes Ocean Shipping Reform Act of 1998, Shipping Act of 1984, Foreign Shipping Practices Act of 1988 and Section 19 of the Merchant Marine Act, 1920.
3. Malaysia Competition Commission does not exempt actions of agreements "containing any element of price fixing, price recommendation, or tariff imposition." and Singapore also does not exempt agreements "require liner operators to mandatorily adhere to a tariff and disclose, whether to other liner operators or otherwise, confidential information concerning service arrangements".
4. Exempted agreements should not have the combined market share of the liner members to the agreement exceed 30% and liner members to the agreement must have the right to withdraw, subject to a maximum period of notice of 6 to 12 months without any penalty.
6. Hong Kong Census and Statistics Department, Analysis of Hong Kong's External Merchandise Trade by Mode of Transport, March 2016.
9. Sagers, Chris. The Demise of Ocean Shipping Regulation: A Study in the Evolution of Competition Policy and the Predictive Power of Microeconomics, Vanderbilt Journal of Transnational Law 39 (3):779 –818, 2006.
10. Fink, Carsten, Aaditya Mattoo, and Ileana Cristina Neagu, Trade in International Maritime Services: How Much Does Policy Matter? World Bank Economic Review 16 (1): 81–108, 2002.
11. Vernimmen, B. et al. Schedule unreliability in liner shipping: Origins and consequences for the hinterland supply chain, Maritime Economics & Logistics 9(3), pp. 193-213, 2007.
12. SeaIntel Maritime Analysis Global Liner Schedule Reliability Report, available from: http://seaintel.com/images/stories/downloads/port-port-brochure.pdf accessed 8th March 2012.