'Coordination amongst competitors' sounds anti-competitive at the first blush and yet one particular sector, i.e. the ship liners industry has seen exemptions from various antitrust regulators when it comes to cooperation amongst competitors by means of 'consortia'.1 However, in the last three years, there has been a sudden surge of calls to increase antitrust scrutiny in this sector all across the globe.
Liner shipping services involve transporting goods and cargo from one destination to another by large ocean ships that move through regular routes on fixed schedules. This transportation involves substantial investments and are typically provided by multiple competing shipping companies operating together in consortia. These collaborative/ consortia arrangements include Vessel Sharing Agreements (VSAs)2 and Slot Charter Agreements (SCAs)3 which offer various benefits, including economies of scale and efficient vessel space utilization which are benign for ship liners, shippers and end consumers of the cargo transported.
While Consortia Agreements allow members to share space on the vessels used for the joint service, they market their services individually and continue to be competitors from the lens of competition law.
Until recently, the European Commission (EC), the Competition Commission of India (CCI) and the United States Shipping Act provided exemptions to various consortia agreements between ship liners. This scenario is now changing with the lapse of the exemption given to VSAs in India back in July 2021 and the European Union setting a cut-off date in 2024 whereby the Consortia Block Exemption Regulation (CBER)4 will expire.5
The Indian Perspective on exempting Ship liners' Consortia
Since 2013, the Ministry of Corporate Affairs (MCA) has taken steps to exempt VSAs in the Liner Shipping Industry from certain provisions of the Competition Act, 2002 with the condition that the Director General of Shipping would monitor such agreements. The persons responsible for the operation of these ships were also directed to submit copies of VSAs and relevant documents to the Director General of Shipping.
This exemption was renewed multiple times starting from February 2015, albeit with more restrictive conditions like introducing a specific carve out prohibiting concerted practices involving fixing of prices, limitation of capacity or sales and the allocation of markets or customers.
However, the shelter of the exemption lapsed and has not been renewed beyond July 2021. As a result, ship liners moving forward must exercise great caution when entering into such agreements to avoid antitrust scrutiny. Any agreement / understanding between competing ship liners should avoid conduct such as price fixing, production or market control, and territory or customer allocation, which are presumed to have an Appreciable Adverse Effect on Competition (AAEC) in India, and upon CCI inquiry, will have to be rebutted by demonstrating that the agreements benefit consumers, improve production or distribution, promote technical development, or foster competition etc.
It is pertinent to note that in the Shipping cartel case, the CCI penalised 3 ship liners (excluding the leniency applicant receiving 100% reduction) and their impugned individuals for violation of Section 3 (3) of the Competition Act, 2002 (Act) for collusion in bidding, coordination in price fixing, market allocation, respecting the incumbency etc. while supplying services to Original Equipment Manufacturers (OEM). While rejecting the plea that the services are being 'exported' and are thus, exempt in terms of Section 3(5)(ii) of the Act, the CCI held that the Opposite Parties are not the exporters, instead, they are providing maritime transport services to OEMs who are actually the exporters.6
Another indicator that India is moving towards greater scrutiny of anti-competitive practices in maritime sector is the 2047 Vision Document which observes that the dominant players in the Indian Maritime Sector acting either independently or through cartel may misuse their dominance and indulge in predatory pricing to nullify or reduce competition within India and accordingly made the following recommendations:7
- mandatory listing of tariff levied by enterprise in a port on public domain (including non-major ports and their PPP Concessionaire);
- setting lower threshold for scale of rates;
- restricting M&A leading to 50% or above market share in the sector; and
- tariff fixation by PPP Concessionaire in major ports should be consistent with the Act.
The European Perspective on exempting Ship Liners' Consortia
Historically, the EC allowed price fixing and capacity regulation by ship lines under the Conference Block Exemption Regulation introduced in 1986 on the grounds that collective rate-setting and other conference activities will lead to stable freight rates, which will in turn offer reliable scheduled maritime transport services to shippers.8
However, the EC repealed it deciding that price fixing should not be permitted, and the exemption shall only be retained to the extent of operational cooperation between shipping lines grouped in consortia and alliances, in line with the recommendations of the Organisation for Economic Co-operation and Development (OECD) Secretariat in 2002.
Accordingly, the Consortia Block Exemption Regulation (CBER) introduced by the European Commission in 2009, exempted consortia in the liner shipping industry from the application of Article 101(1) of the Treaty on the Functioning of the European Union (TFEU), under certain conditions:
- Consortia must not contain hard-core restrictions, such as price fixing, capacity or sales limitations, allocation of markets, or customers;
- The market shares of the consortia may not exceed 30%; and
- The consortia must allow members to withdraw with a notice period of up to 6 months (or 12 months for highly integrated consortia).
The Regulations also state that the Consortia will benefit users effectively only if there is sufficient competition in the trades in which the consortia operates. However, in due time, it was noticed that the expected efficiencies or the increase in competition in the market were not attained.
Accordingly, the EU decided not to extend the CBER. The CBER's expiry is set to begin from 25 April 2024 signifying a marked shift in approach, indicating that cooperation between shipping lines must now be assessed for compliance with EU antitrust rules.9
The US Perspective on exempting Ship liners' Consortia
The United States' Shipping Act of 1984 contains an antitrust exemption that applies to agreements amongst ocean carriers in the United States or foreign trade or with/ among marine terminal operators serving those carriers. It provides for exemption of consortia agreements from antitrust rules. This is restricted to agreements involving "foreign inland segments" and does not apply to agreements that have "a direct, substantial, and reasonably foreseeable effect" on United States commerce. Further, the antitrust exemption does not grant immunity to ship liners from other anti-competitive conduct, such as monopolistic behaviour.
However, considering multiple instances of cartel activity by ship liners10 and various complaints , the United States has enforced the Ocean Shipping Reform Actin 2022 giving the Federal Maritime Commission (FMC) greater powers to pursue container carriers.11 Further, another Bill has been introduced before the House namely the "Ocean Shipping Antitrust Enforcement Act" to remove the federal antitrust exemption enjoyed by the ocean carriers and to establish a process for the FMC to comment on the federal review of mergers and acquisitions by ocean carriers.
Other overseas jurisdictions
The UK's Competition and Markets Authority (CMA) may now be following the European Commission's footsteps, as it has provisionally indicated that it will also allow the exemption to lapse in the UK on the same date, without renewal, in light of the strong opposition to the CBER received from stakeholders.12
Antitrust investigations against ship liners are on the rise with investigation by the African regulator - Comesa Competition Commission (CCC), for allegedly coordinating in raising freight charges by price announcements.13 In West Africa, it has since emerged that Nigeria's Federal Competition and Consumer Protection Commission (FCCPC) has raided the local offices of five liners as it pursues its own price fixing investigations.
The Korea Fair Trade Commission (KFTC) is also investigating into the pricing activities of 20 local and foreign liner operators over potential price fixing concerns on routes linking South Korea with neighbouring Japan and China shortly after a recent decision where it imposed heavy fines on a host of liners over historic price fixing on routes from South Korea to Southeast Asia.14
Tracing the shift in sentiment
Of late, the global shift in seeking revocation/ non-renewal of antitrust exemptions granted to the ship lining industry can be attributed to some recent key developments:
Firstly, the three global alliances (2M, Ocean and THE Alliance) in which all major carriers are represented since early 2017 now account for around 80% of overall container trade and operate around 95% of the total ship capacity on East-West trade lanes, therefore giving them a powerful position in the market and making the market highly consolidated15 by presence of large players.
Secondly, the United Nations Conference on Trade and Development (UNCTAD) reports that there has been increased vertical integration in the market16 and this has raised concerns of dominance and its abuse by ship lines. Ship lines typically vertically integrate with rail, air freight, logistics and terminals.
Thirdly, the major customers of ship liners i.e. shippers and freight forwarders have raised stark opposition to these exemptions based on quality of service provided by ship liners. This raises concerns when tested in the backdrop of carriers reporting record, multi-billion dollar profits while complainants contend that schedule reliability remains at historic lows. A case in point is the British International Freight Association's remark that "by being able to enter into consortia agreements, shipping liners are effectively able to protect their core business and then use this to their advantage in other parts of their business, which freight forwarders simply cannot compete with", and concluded that there is no level playing field because of CBER.
Lastly, consortia between small or medium-sized carriers (SMCs) were seen as a way for them to maintain their ability to compete with larger carriers. This was one of the main justifications that made CBER/ VSA exemption pro-competitive. However, such SMC consortia are constantly decreasing in number. Accordingly, the EC in its Staff Working document noted "evidence tends to show that block-exempted consortia have become a tool for large carriers, which appear to have scale on their own, to complement their offerings rather than a tool for smaller carriers to reach scale and remain competitive in terms of costs and frequencies."
These reasons have been a common trend across the world and have triggered antitrust scrutiny of this sector.
Conclusion
As competition law evolves across jurisdictions including India, the treatment of vessel sharing agreements in the liner shipping industry is undergoing significant changes. While the EU has chosen to eliminate its block exemption in 2024 and UK has provisionally indicated following this approach, and India deciding not to renew the availability of the exemption since 2021 shows that there is convergence and harmony in approach amongst antitrust regulators worldwide.
Companies operating in this sector must remain vigilant in light of the tightened scrutiny to ensure that antitrust safeguards are in place, as any violation can result in significant penalties and reputational damage, especially in India, since the penalty will now be linked to the global turnover as per the amended provisions of the Act besides provisions for award of compensation to shippers to offset the damage caused.
Footnotes
1. Consortia are agreements among liner shipping companies for the cooperative operation of services, which typically result in economies of scale and more efficient use of the vessels' space.
2. When many container shipping lines agree to run a liner service over a given route with a specified number of boats, they typically come to a vessel sharing agreement.
3. A slot charter agreement is an agreement between partners to purchase and sell a specified allocation (space, weight) often on a "used or unused" basis for a predetermined minimum amount of time at a predetermined price.
4. Commission Regulation (EC) No 906/2009 of 28 September 2009 on the application of Article 81(3) of the Treaty to certain categories of agreements, decisions and concerted practices between liner shipping companies (consortia EUR-Lex - 02009R0906-20200414 - EN - EUR-Lex (europa.eu).
5. EC, 'Commission decides not to extend antitrust block exemption for liner shipping consortia' Antitrust (europa.eu).
6. In Re: Cartelisation by Shipping Lines in the matter of provision of Maritime Motor Vehicle Transport Services to the Original Equipment Manufacturers, Suo Motu Case No. 10 of 2014 1020141652426768.pdf (cci.gov.in).
7. 'Maritime Amrit Kaal Vision 2047' Amrit kaal 2047 | Ministry of Ports,Shipping and Waterways (shipmin.gov.in).
8. Council Regulation (EEC) No 4056 / 86 of 22 December 1986 laying down detailed rules for the application of Articles 85 and 86 of the Treaty to maritime transport eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:31986R4056.
9. EC, 'Commission decides not to extend antitrust block exemption for liner shipping consortia' Antitrust (europa.eu).
10. US Department of Justice, 'Two International Shipping Executives Indicted for Participating in Long-Running Antitrust Conspiracy' Office of Public Affairs | Two International Shipping Executives Indicted for Participating in Long-Running Antitrust Conspiracy | United States Department of Justice.
11. United States, Ocean Shipping Reform Act 2022 S.3580 - 117th Congress (2021-2022): Ocean Shipping Reform Act of 2022 | Congress.gov | Library of Congress.
12. UK CMA, Retained Liner Shipping Consortia Block Exemption provisional decision Retained Liner Shipping Consortia Block Exemption provisional decision - GOV.UK (www.gov.uk).
13. CCC, 'COMESA Competition Commission Commences Investigations into Price Announcements by Shipping Companies operating in the Common Market' Revised-Press-Release-of-Investigation_Shipping-Sector74613.pdf (comesacompetition.org).
14. Splash, 'Liner pricing investigations multiply across the globe' Liner pricing investigations multiply across the globe - Splash247.
15. International Transport Forum, 'The Impact of Alliances in Container Shipping' impact-alliances-container-shipping.pdf (itf-oecd.org).
16. UNCTAD, 'Consolidation and Competition in Container Shipping' Review of Maritime Transport 2022 - Chapter 6: Consolidation and Competition in Container Shipping (unctad.org).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
