In brief - The Final Report of the Competition Policy Review has ignored key players' submissions on Part X repeal
The Competition Policy Review Panel's ("the Review Panel") Final Report has effectively ignored the submissions of the Australian Peak Shippers Association and Shipping Australia Limited. Liner operators will, justifiably, be concerned about what this will mean for them in terms of protections and additional costs.
Recommendations of the Final Report of the Competition Policy Review
The Final Report of the Competition Policy Review has recommended:
- A block exemption granted by the ACCC should be available for liner shipping agreements that meet a minimum standard of pro-competitive features (see Recommendation 39). The minimum standard of pro-competitive features to qualify for the block exemption should be determined by the ACCC in consultation with shippers, their representative bodies and the liner shipping industry.
- Other agreements that risk contravening the competition provisions of the CCA should be subject to individual authorisation, as needed, by the ACCC.
Repeal of Part X will mean that existing agreements are no longer exempt from the competition provisions of the CCA. Transitional arrangements are therefore warranted.
A transitional period of two years should allow for the necessary authorisations to be sought and to identify agreements that qualify for the proposed block exemptions.
Part X repeal and giving ACCC power to grant block exemptions among Review Panel's draft recommendations
As part of its draft recommendations, the Review Panel suggested in its Draft Report that Part X of the CCA be repealed and that the shipping industry should be subject to the normal operation of the CCA. However, it suggested that the Australian Competition & Consumer Commission (ACCC) should be given power to grant block exemptions and that in consultation with the shipping industry, the ACCC should develop a block exemption for conference agreements that contain a minimum standard of pro-competitive features.
As an example for such block exemption the Review Panel suggested this:
… conference agreements which co-ordinate scheduling and the exchange of capacity, while allowing confidential individual service contracts (ISCs) and not involving a common conference tariff and pooling of revenues and losses could be eligible.
The Review Panel went on to suggest in the Draft Report that other forms of agreement that do not meet a minimum standard of pro-competitive features should be subject to individual authorisation.
Shipping conference agreements: how and why they became acceptable
The Report of an earlier Review Panel chaired by Pat Brazil in 1993 (the Brazil report) noted that the first modern liner conference was formed in 1875 and they have operated in Australia since 1884. In an article in the Daily Commercial News dated 13 April 1991, the Honourable Justice Carruthers, as he then was, reminded us that 100 years previously "the shipping industry was breathlessly awaiting the judgment of the House of Lords in Mogul Steamship Company v McGregor, Gow & Co & Ors because this case was to determine whether the conference system would survive."
The facts in that case were that a group of ship owners had formed an association to raise their profits and agreed to limit the number of ships sent by the association to different ports, to give a 5% rebate on freights to all shippers of stock who dealt only with members, and that agents of members would be prohibited from dealing with anyone in the association if they did not deal exclusively with people in the association. In order to withdraw, they would have to give notice.
The plaintiff, Mogul Steamship Co Limited, had been excluded from this association and when it sent ships to the loading port to pick up cargo, the association sent more ships and underbid the plaintiff. The association also threatened to dismiss agents or withdraw rebates for anyone who dealt with the plaintiff. The plaintiff alleged in the proceedings that there was a conspiracy to injure its economic interests and sued for compensation. The House of Lords affirmed the Court of Appeal's decision and held that the acts were done with the lawful object of protecting and increasing the association's profits. It had not used unlawful means to do so and the plaintiff had no cause of action.
The plaintiff's argument was that the actions of the defendants were illegal as being in restraint of trade and therefore against public policy. In his judgment in the House of Lords, Lord Bramwell highlighted the fact:
… that a combination of workmen, an agreement among them to cease work except for higher wages, and a strike in consequence, was lawful at common law; perhaps not enforceable inter se, but not indictable. The legislature has now so declared. The enactment is express, that agreements among workmen shall be binding, whether they would or would not, but for the acts, have been deemed unlawful, as in restraint of trade. Is it supposable that it would have done so in the way it has, had the workmen's combination been a punishable misdemeanour? Impossible. This seems to me conclusive, that though agreements which fetter the freedom of action in the parties to it may not be enforceable, they are not indictable.
Statutory history of shipping conferences
In an address given by my former senior partner John Bowen in 1979 "regarding shipping conferences", he reminded his audience that in 1964 the then Federal Attorney General commenced prosecutions against two British shipping companies, members of a Shipping Conference, alleging that they had committed breaches of the Australian Industries Preservation Act 1906. The prosecution alleged, among other things, that being a member of a Shipping Conference, being a party to a wool pool agreement, and being a party to loyalty agreements with Japanese wool importers, and having agreed with other conference member lines to fix rates of freight, the two British shipping companies had, among other things, engaged in a combination in restraint of trade, and thus were guilty of an offence under section 4 of the Act. As Bowen reported, the prosecutions were withdrawn. He then went on to refer to the same Attorney General, Billy Snedden, who introduced the Trade Practices Amendment Act of 1966. As described at the commencement of the Act, the amendment was "for the purpose of Controlling the Operations of Shipping Conferences in relation to the Carriage of Goods by Sea from Australia to other countries and for related purposes". It introduced a new Part XA entitled "Overseas Cargo Shipping".
These provisions were inserted into the regime established by the Trade Practices Act 1965, and were then reproduced in the Restrictive Trade Practices Act 1971 as Part XII, which was itself reproduced in Part X of the Trade Practices Act 1974.
Australia not a party to international code of conduct for liner conferences
Meanwhile in April 1974 at Geneva, a diplomatic conference agreed an international convention on a Code of Conduct for Liner Conferences. While some 83 countries have acceded or ratified that convention (including China, France, Germany, India, Indonesia, Italy, Malaysia, Spain, Sweden and the United Kingdom among major international traders), Australia is not a party to it. The Preamble to the Convention expresses the desire to improve the liner conference system, recognises the need for a universally acceptable code of conduct for liner conferences and took into account the special needs and problems of developing countries with respect to the activities of liner conferences serving their foreign trade.
The fundamental objectives and basic principles behind the code were to facilitate the orderly expansion of world sea-borne trade, to stimulate the development of regular and efficient liner services adequate to the requirements of the trade concerned, to ensure a balance of interests between suppliers and users of liner shipping; the conference practices should not involve any discrimination against the ship owners, shippers or the foreign trade of any country, that conferences hold meaningful consultations with shippers' organisations, shippers' representatives and shippers on matters of common interest, and that conferences should make available to interested parties pertinent information about their activities.
The definitions defined a "liner conference or conference" as being:
... a group of two or more vessel-operating carriers which provides international liner services for the carriage of cargo on a particular route or routes within specified geographical limits and which has an agreement or arrangement, whatever its nature, within the framework of which they operate under uniform or common freight rates and any other agreed conditions with respect to the provision of liner services.
Convention covers decision-making principles, self-policing and tariff policies, among others
The Convention consists of 54 Articles and an Annex containing model rules of procedure for international mandatory conciliation. Space does not permit a detailed summary of the contents of the convention but it is noted that the following topics are dealt with:
- membership by shipping lines of conferences (Article 1),
- participation in the trades covered by the conference by shipping lines (Article 2),
- the principles on which decision-making procedures are to be embodied in conference agreements (Article 3),
- sanctions which can be incorporated within conference agreements (Article 4),
- the self-policing of malpractices and/or breaches of the conference agreements required of conferences (Article 5),
- the availability to authorities of all conference agreements, pooling, berthing and sailing rights agreements (Article 6),
- the requirements in respect of loyalty arrangements between shipping line members of a conference and shippers (Article 7),
- the availability of dispensations to shippers by conferences (Article 8),
- the availability of tariffs and related conditions and/or regulations to shippers and shippers' organisations (Article 9),
- the provision of annual reports by conferences to shippers' organisations and to the appropriate authorities of the countries whose trade is served by the conference (Article 10),
- consultation machinery for discussion of common interest matters between a conference and shippers' organisations whenever requested by any of the parties and the ability of appropriate authorities to participate (Article 11),
- the principles to be applied in making decisions on questions of tariff policy (Article 12),
- the requirement that conference tariffs do not unfairly differentiate between shippers similarly situated and the requirement for strict adherence to rates, rules and terms shown in the tariffs and the manner in which conference tariffs should be drawn up (Article 13),
- how general freight rate increases are to be publicised and consultation processes to be undertaken (Article 14),
- the establishment of promotional freight rates (Article 15),
- the establishment of surcharges (Article 16),
- currency changes (Article 17),
- the prohibition of the use of fighting ships in the conference trade (Article 18),
- the adequacy of service provided by the conferences (Article 19),
- the establishment of a head office of a conference in a country whose trade is served by that conference (Article 20),
- the establishment of local representation in countries served by a conference (Article 21),
- the contents of conference agreements, trade participation agreements and loyalty agreements being required to conform to the code (Article 22),
- the provisions and machinery for settlement of disputes between a conference and a shipping line, the shipping line members, a conference or a shipping line member and a shippers' organisation or two or more conferences (Article 23), as well as provisions dealing expressly with conciliation.
Rights of exporters increased in 1989 under revised Part X
In September 1984, an industry Task Force was set up by the Minister of Transport to review Part X of the Trade Practices Act. Its recommendations formed the basis for the Trade Practices (International Liner Cargo Shipping) Amendment Act 1989. This represented a significant shift in policy. Unlike the previous regime, where conference agreements simply needed to be filed with the Clerk of Shipping Agreements, were confidential and did not have to meet minimum requirements, the revised Part X increased the rights of exporters. The objects of the legislation were described in section 10.01 as:
- to ensure that Australian exporters have continued access to liner services of an adequate frequency and reliability and at freight rates that are internationally competitive;
- to promote liner services that encourage stable access to export markets; and
- to ensure that Australian-flagged shipping is not unreasonably hindered in liner shipping.
Importantly, only certain anti-competitive provisions could be included, unless it could be established that they were necessary for the effective operation of the conference agreement and for the "overall benefit of Australian exporters." The certain provisions which could be included are contained in section 10.08(1)(c) and related to:
(i) the fixing or other regulation of freight rates;
(ii) the pooling or apportionment of earnings, losses or traffic;
(iii) the restriction or other regulation of the quantity or kind of cargo to be carried by parties to the agreement; and
(iv) the restriction or other regulation of the entry of new parties to the agreement.
Independent review in 1993 recommends keeping Part X and strengthening shippers' bargaining power
The Minister for Transport and Communications commissioned an independent review of Part X of the Trade Practices Act 1974 in April 1993, by a panel chaired by Pat Brazil, to which reference has already been made. This review described the changes made in 1989 as restricting the complete exemption, which had previously existed from Part IV of the Trade Practices Act 1974, "to s.45 (Contracts, arrangements or understandings restricting dealings or affecting competition) and s.47 (Exclusive dealing) and then only to particular conduct such as the fixing of conference freight rates." Such outward conference agreements were then required to be publicly registered, unlike the previous position where they were lodged under provisions of secrecy. In addition, they were required to meet certain specified standards, including frequency of sailings, ports of call, and available capacity.
The Brazil report was presented on 23 December 1993 and recommended continuation of the regulatory regime embodied in Part X and also the extension of Australia's regulatory influence to inwards liner trades, enabling closer scrutiny of accord and discussion agreements between conferences and independent ocean carriers in appropriate cases. It also recommended the establishment of a Liner Cargo Shipping Authority to carry out under the Minister for Transport and Communications all the functions currently entrusted under Part X to the Trade Practices Commission, the Trade Practices Tribunal and the Administrative Appeals Tribunal and to report to the minister as appropriate.
The Brazil report justified the suggestion that there be an industry-specific regulator in the following terms:
The need for on-going specific expertise in monitoring the performance of some industries is an important part of the regulatory set-up in all important western economies, including the United States and the United Kingdom. This approach recognises that knowledge and experience of complex industries are not available "off the shelf", and that application of general principles and rules may require adaptation to the particular circumstances of an industry.
The argument that a monopoly of regulations should be given to a single arbiter of competition policy is unusual, perhaps even unique. There are many reasons for opposing the "one shoe fits all" approach to competition policies. One of these is that implementation by one monopoly authority proceeds on the assumption that the processes of that body, applied everywhere, are always best suited for the achievement or the objectives of that policy. If the processes are deficient, no demonstration of alternatives exists by which the effectiveness of the monopolists' processes can be assessed.
One example of such a potentially deficient approach is the authorisation process in Part VII of the TPA. Those submitters who argued for the substitution of the Part VII process for the current approaches in Part X assume that the benefits from application of this process always exceeded its costs. This was not the view of the majority of those who were directly engaged in the liner cargo shipping industry. They argued, and the panel agreed, that where conditions exist which make it possible to reach commercial solutions without intervention, and where significant elements of the public interest cannot be shown to be present, insistence on costly procedures with uncertain outcomes cannot be justified. The approach of Part X is to allow certain industry behaviour, until it can be shown to be in contravention of the established rules. … Many of the current processes, including the authorisation process under Part VII of the TPA, are predominantly legal and bureaucratic rather than commercial. As a consequence, competition is frequently seen as an end in itself rather than as a means to an end. Economic efficiency within a public interest framework is the objective, but the approach required by the TPA frequently results in this being obscured and frustrated.
The Brazil report also recognised that "shippers are more likely to have weaker bargaining power than ocean carriers" and thus recommended "additional measures which would put Australian shippers in a stronger position".
ACCC has sought repeal of Part X since 1993
The ACCC has long sought the repeal of Part X. It made submissions to that effect to the 1993 Review (through its forerunners, the Trade Practices Commission and the Prices Surveillance Authority) and also in the 1999 enquiry by the Productivity Commission. Professor Alan Fels, the Chairman of the ACCC, gave a paper on this topic in March 2001 and expressed the opinion that the:
… authorisation process provides a more appropriate context for assessing claims for immunity. A move to apply the authorisation process to liner shipping is not intended to result in the dismantling of shipping conferences. Exemptions for most of the conduct prohibited by the TPA can be provided through authorisations when the conduct is likely to result in a benefit to the public which exceeds the associated detriment. The conduct involved in typical industry agreements (joint venture provisions, price fixing, income pooling, self regulatory schemes and collectives of users to achieve countervailing balance of power) can all be allowed under the authorisation process. The relevant shipping companies would be required, like any other business, to demonstrate the benefits that offset the anti-competitive costs if the arrangements were to remain. But there is no justification in providing blanket immunity to all arrangements without a public benefit test. There is a real risk that in doing so arrangements will be allowed to exist which are against the interests of exporters and the Australian economy generally.
Another review was carried out in 2005 by the Productivity Commission, which recommended that Part X be repealed and replaced with ACCC authorisation for Conference Agreements. As the draft report of the Policy Competition Policy Review Panel noted, the 2005 review "contrasts with the PC's previous review in 1999 which concluded that, on balance, the regime served Australia's national interest at that time. The recommendation to repeal part X was repeated in the 2012 joint Australian-New Zealand study Strengthening Trans-Tasman Economic Relations".
Shipping Australia Limited highly critical of review panel's draft report
In its response to the Review Panel's Draft Report, Shipping Australia Limited (SAL) stressed the fact that this report contained "no consideration whatsoever of the implications of removing Part X from the CCA". It is highly critical of the fact that the Panel had no meetings with SAL or the peak shipper bodies designated under Part X and corrects errors in the Review Panel's report, such as the statement that "much of the liner shipping to and from Australia is organised along conference lines, though this is becoming less common", and pointed out that "[t]he norm now is the Discussion Agreement which does not pool revenues as stated in the draft report nor fix prices in the way the old Conference system did. As pointed out in the SAL submission, there are no public tariffs as the vast majority of freight rates are subject to strict individual and confidential service contracts and any agreement on surcharges, for example, is by consensus, without compulsion to collectively apply".
In its submission, SAL also emphasised that the draft report "states that Part X does not require an assessment of the Anti-Competitive Effects of the Agreement. This is completely wrong." SAL then went on to quote from section 10.01(2)(a) of the Act, which expresses the intention of the Parliament that the objects of Part X should be achieved "by permitting continued conference operations while enhancing the competitive environment for outwards liner cargo shipping services through the provision of adequate and appropriate safe guards against abuse of conference power...".
SAL was also critical of the Review Panel's sweeping generalisation that other industries have similar economic characteristics to the liner shipping industry, and its exemplification of the international airline industry, without referring to bilateral air service agreements and the fact that most air freight is carried in passenger aircraft, thus strictly regulating that industry. SAL also pointed to Australia's major trading partners such as China, Japan, Republic of Korea and the USA who maintain exemptions for liner conferences.
Australian Peak Shippers Association warns of adverse affects if Part X repealed
Reference should also be made to the submission to the draft report by the Australian Peak Shippers Association Inc, which also suggested that face-to-face consultation would have benefited the Review Panel. It concludes its submission by contending that the long period of time that Part X has been in operation in its present form:
... has served this industry well, being the vehicle that has afforded shippers a high degree of stability and the knowledge that they can confidently pursue contracted sales with their international customers. We also recognise that the time has come for a full and detailed review but we strongly urge the Review Panel to ensure that if changes are to be made they are made for the right reasons, that being to strengthen even further the ability of Australian shippers to prosper in their endeavours. The notion that this industry needs to be brought into line with all other industries from a legislated competition point of view just to streamline the system could and will have lasting adverse affects. (Emphasis added).
What both SAL and the Australian Peak Shippers Association Inc were saying in effect: that the "one size fits all" approach which appears to be the ACCC view of life which has been adopted in the Review Panel's Draft and Final Report, casts aside over 100 years of developing practice and experience in this important area of trade.
How will liner operators be affected by repeal of Part X?
The recommendations in the Final Report of the Review Panel suggest a two-year transitional period.
The Final Report suggests that the ACCC is to be given power to grant block exemptions that meet a minimum standard of pro-competitive features. Recommendation 39 suggests that a Block Exemption Power be introduced, to operate alongside the ACCC's authorisation and notification frameworks. In the words of the Recommendation this is to create a "safe harbours where conduct or categories of conduct are unlikely to raise competition concerns". The critical question is what will such block exemptions look like? The Draft Report referred to such matters as:
1. co-ordination of scheduling,
2. the exchange of capacity,
3. confidential individual service contracts (ISCs),
but not, apparently, a common conference tariff and pooling of revenues and losses.
This will mean that agreements that stray into such areas will need to obtain individual authorisation from the ACCC on the basis of a net public benefit test. The question that carriers will be asking is: at what cost? In an industry which is, by all accounts, over tonnaged and failing to make profits, this is a valid question, which like the so-called reforms to coastal shipping by the former government may come back to hurt Australian consumers.
Will the government ignore industry bodies' submissions?
The Review Panel has ignored the submissions of the two largest industry bodies involved in this debate and has proposed that Part X be repealed. It would be a courageous (with apologies to Sir Humphrey Appleby) government that chose to ignore the wishes of those key players in this industry and accepts the Panel's recommendation.