Forme di cooperazione nel settore marittimo-portuale: quale spazio per un’equa

competizione

E. Musso - C. Ferrari - M. Benacchio

University of Genoa, Faculty of Economics

SIET- Società Italiana degli Economisti dei Trasporti Palermo, 13-14 Novembre 2003

Competition and Co-operation

• Both affect firm’s efficiency (Beamish, 1998)

• Any co-operative behavior is not automatically a collusive move, affecting consumer’s surplus (Buckey-Michie, 1996)

• Cooperation often allows achieving a better competitive climate and enlarging the competition field by:

- widening operative borders of a single firm

- achieve adequate scale to compete in global markets

- quickly enter new markets maximising the output for each partner’s input (Ryoo-Tanopoulou, 1999)

Maritime industry

Stevedoring industry

Main

ch

an

ges

Technical:•Rate of containerization•Ships’ specialization•Growth in ships’ size

Organizational:•Routes/calls •Hub & Spoke•Transhipment

Operational:•Strategic alliances•slot agreements/ interlining

A TOP-DOWN RELATIONSHIP? Ext. Environment: Production, logistic and market

changes

(ALLIED) SHIPPING

LINESPorts

• Threat of services relocation by all the allied carriers (“take_or_leave” policies)

• Contracts with different terminal operators located in ports belonging to the same range (for different services)

• Search for dedicated terminals

ELEMENTS OF PRESSURE:

Which “responses” for counteracting liner industry’s

growing power?

Increasing bargaining

power

• In the medium-long run competition is mainly based on

• terminal capacity

• stevedores consolidation

1. In the short run terminal competition is mainly based on tariffs (since “plant” size is given)

Effects on terminal competition

STEVEDORES CONSOLIDATION and NETWORKING

• HPH

• PSA

• P&O Ports

• ICTSI

• SSA

• ECT

• Modern Terminal

• CSX World Terminals

• MAERSK-Sea Land

• HHLA

• EUROGATE

• HESSENATIE

1998: nearly 65 million of TEU

BIG 5drewry, 1998

CONTSHIP

NOORD NATIE

32% of the market

(top 20 carriers: 55%)

SOME ECONOMIC GROUNDS FOR CONSOLIDATIONSOME ECONOMIC GROUNDS FOR CONSOLIDATION

• The need for huge scale of investments (capital requirement, sunk costs);

• exploitation of economies of scale (fixed costs);

• exploitation of economies of scope (interrelated branches);

• exploitation of network economies (H&S, O/D);

• aims at expanding in new markets increasing the revenue generating capabilities (portfolio approach);

• available economies for multiplant units (i.e. investments in technology, R&D, promotion and operating synergies);

• possibility of managing supra-structures as resource pools (labour?);

• shareholders’ pressure for increasing rates of returns

Profit erosion

Quality improvement through product differentiation for increasing profits

MARKET CHANGES (TOWARDS

OLIGOPOLISTIC FORMS)

INCREASING PORT COMPETITION

Price and quantity strategies are not sustainable for core business

The role of cooperation?

(Heaver et al., 2000)

COOPERATION FOR DIFFERENTIATION COOPERATION FOR DIFFERENTIATION (1/2)(1/2)1. Improving the effectiveness of port service

to ships: the case of dedicated terminals

Terminals’ main opportunities:

• securing client loyalty

• processing vessels immediately upon arrival, eliminating time losses

• re-scheduling service timetables according to a free disposability of the terminal

• pursuing standardization of (faster) procedures due to common features of liner’s fleet

“Vertical” agreements (line-terminal) for “horizontal” competition (with other terminal operators)

• Outside the port:

• controlling (internal) nodes in the logistic network (e.g. inland terminals)

• controlling connections within the logistic network (e.g. railways operators)

2. Adding new functions to port services

• Within the port:

•value added logistic activities (VAS, e.g. distriparks, EDC, IT)

“Vertical” agreements affecting “horizontal” and “vertical” competition (terminals-carriers-logistic

operators)

Elements of conflict between main players?

COOPERATION FOR DIFFERENTIATION COOPERATION FOR DIFFERENTIATION (2/2)(2/2)

Is a trial of strength between stevedores Is a trial of strength between stevedores and carriers going on for logistic chain and carriers going on for logistic chain control?control?

Revenues global players, 1998, in million USD

0500

100015002000250030003500400045005000

carr

iers

top1

0 (a

vera

ge)

carr

iers

top2

0 (a

vera

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PSA

P&O

Por

ts

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on W

ampo

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A

log.

Pro

v. T

-10

log.

Pro

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-20

ECT

(Rot

terd

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sena

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HH

LA (

Ham

burg

)

RM

PM (

Rot

terd

am)

Ant

wer

pen

Port

Aut

horit

y

Gen

oa P

ort A

utho

rity

carriers Terminal operators Port authorities

Can financial capacity be considered an important proxi of contractual power, source of external pressures and lobbying capacity?

Source: Bloome, Iame 2000

Cooperation in the maritime and port sectors as Cooperation in the maritime and port sectors as market-driven developments….market-driven developments….

But they affect the market structure and the But they affect the market structure and the conducts of an international industry conducts of an international industry

How are co-operation agreements (including How are co-operation agreements (including integration strategies) evaluated by antitrust integration strategies) evaluated by antitrust

regulation and antitrust policy?regulation and antitrust policy?

How do antitrust regulation and antitrust policy fit How do antitrust regulation and antitrust policy fit the changes in the maritime and port industry?the changes in the maritime and port industry?

EU Competition Policy and liner shipping regulationEU Competition Policy and liner shipping regulation

1) CONFERENCE AGREEMENTS1) CONFERENCE AGREEMENTS::

• CAPACITY CONTROL CAPACITY CONTROL

• RATE FIXING (freight rate)RATE FIXING (freight rate)

REGULATION 4056/1986REGULATION 4056/1986

2) CONSORTIA (ALLIANCES):2) CONSORTIA (ALLIANCES):

TECHNICAL, OPERATIONAL OR COMMERCIAL TECHNICAL, OPERATIONAL OR COMMERCIAL ARRANGEMENTSARRANGEMENTS

REGULATION 823/2000REGULATION 823/2000

Only horizontal co-operation agreements in the maritime sector Only horizontal co-operation agreements in the maritime sector are explicitly regulated for a possible antitrust block exemption are explicitly regulated for a possible antitrust block exemption

Logic framework of application of the block exemption:Logic framework of application of the block exemption:

1) Have the agreements the object or effect of restricting 1) Have the agreements the object or effect of restricting competition?competition?

2) … but contribute to improving the production or 2) … but contribute to improving the production or distribution of goods or to promoting technical or distribution of goods or to promoting technical or economic progress?economic progress?

3) … while allowing users a fair share of the resulting 3) … while allowing users a fair share of the resulting benefits?benefits?

4) … and do not impose on the undertakings concerned 4) … and do not impose on the undertakings concerned restrictions which are not indispensable to the attainment restrictions which are not indispensable to the attainment of those objects?of those objects?

5) … and does not afford such undertakings the 5) … and does not afford such undertakings the possibility of eliminating competition in respect of a possibility of eliminating competition in respect of a substantial part of the services in questions?substantial part of the services in questions?

Clearly demonstrate that benefits exceed costs

Are benefits from exemptions and immunities related to Are benefits from exemptions and immunities related to liner shipping still greater than costs?liner shipping still greater than costs?

Anti-trust exemptions

Does the arrangement restrict competition?

Do benefits to the community outweigh the costs?

Clearly demonstrate that they are not restrictive

Can the objective of legislation be met by better means?

Removerestrictions

Device alternativeapproach

Retain existingapproach

yes no

yesno

yes no

Some problems arise:

1) Conferences vs. alliances

Since Conferences’ price fixing (horizontal agreements having the object and not only the effect) and limitation of production are hardcore restrictions of competition, is price-fixing a necessary pre-requisite for the maintenance of a reliable scheduled service?

Consortia/alliances could be as well effective and less restrictive?

2) Efficient fleet sizing

does the block exemption encourages the maintenance of excess of capacity? Do shippers fund the cost of excess of capacity through supra-competitive freight rates?

3) transfer of a fair share of the resulting benefits to users

If rates are set at the level necessary to cover the average cost of the least efficient member of the conference, the efficient members reap benefits, while the cost savings and efficiency gains of these carriers are not passed on to shippers

4) eliminating competition in respect of a substantial part of the markets?External competition:- mainly other liner shipping services- limited for other mode of transport or tramp (to be evaluated case by case)

Internal Competition- by the same members of the agreement

5) Market definition

the need for re-assessing analysis of liner shipping markets:

- trade-by-trade basis (each trade is a relevant market)?

- additional product (port services, logistics and inland carriage)

- geographic market definition (port competition)?

6) Mergers

- mergers between members and non members may strengthen the dominant position for the conference/alliance

- mergers between members of the same conference/alliance could lead to a reduction in competition between its members and a increasing “singleness” of purpose and conduct of the market

7) Alliances

- positive attitude towards alliances/consortia (purposes otherwise achieved through mergers)

-alliance within a conference: concern for super-imposing of price-fixing activity (Conference) on co-ordination of shipping operations and joint marketing (Alliance)

- REG 823/2000 In order to qualify for the exemption, a consortium must possess on each market upon which it operates a market share of under 30 % when it operates within a conference, and under 35 % when it operates outside a conference.

Current EU debate:Is Reg. 4056/86 still rationale?

See “Consultation paper on the review of Council Regulation (EEC) Nov 4056/86”

http://europa.eu.int/comm/competition/antitrust/review/marine_transport_comments.html

• is the scope of the regulation• cabotage / tramp services

• are the reasons for the block exemption • Stability• Reliability• adequate efficient scheduled maritime transport services • benefits to transport users• indispensability

still valid? [see also OECD “Competition Policy in Liner Shipping” DSTI/DOT(2002)2]

Public Hearing: Review of Council Regulation 4056/86 governing maritime transport - 4 December 2003

Recent cases by the Commission and Court of First Recent cases by the Commission and Court of First InstanceInstance

Trans-Atlantic Conference Agreement – TACA Trans-Atlantic Conference Agreement – TACA

The First Match (Decision The First Match (Decision 19991999/243/EC, case IV/35.134)/243/EC, case IV/35.134)

the Commission imposed fines of 273M.Euro on the 15 TACA parties the Commission imposed fines of 273M.Euro on the 15 TACA parties for altering the competitive structure of the market for altering the competitive structure of the market

• inland price fixinginland price fixing

• fixing of brokerage and freight-forwarder remunerationfixing of brokerage and freight-forwarder remuneration

• collusion and abuse concerning the terms and availability of collusion and abuse concerning the terms and availability of individual service contracts (ISC)individual service contracts (ISC)

Trans-Atlantic Conference Agreement – TACA Trans-Atlantic Conference Agreement – TACA

The Revenge (?) (Court of First Instance – The Revenge (?) (Court of First Instance – 30 September 200330 September 2003))::

• The Court has upheld both the Commission's finding that the TACA infringes the competition rules and its refusal to grant exemption to the member companies

• The Court has essentially upheld the Commission's finding that the restrictions in relation to service contracts constitute an abuse (the first abuse), but has set aside for lack of evidence and infringement of the rights of defence that part of the decision concerning the measures inducing competitors to join the conference (the second abuse).

• the Commission had not demonstrated that the specific measures, rather than particular commercial considerations, had induced the only two shipping companies who joined the conference between 1994 and 1996 - Hanjin and Hyundai - to become members of the conference.

Trans-Atlantic Conference Agreement – TACA Trans-Atlantic Conference Agreement – TACA

The Revenge (?) (Court of First Instance – The Revenge (?) (Court of First Instance – 30 September 200330 September 2003))::

•The Court further held that the Commission had infringed the rights The Court further held that the Commission had infringed the rights of the defence by using documents in support of its complaints of the defence by using documents in support of its complaints without giving the TACA parties the opportunity to comment on the without giving the TACA parties the opportunity to comment on the interpretation which the Commission intended to place on them. interpretation which the Commission intended to place on them. Consequently, since those documents were the only evidence of Consequently, since those documents were the only evidence of those specific measures, the Court found that those measures were those specific measures, the Court found that those measures were not validly proved.not validly proved.

• The Court therefore annulled the Commission's decision in so far as The Court therefore annulled the Commission's decision in so far as it found that the TACA parties had abusively altered the structure of it found that the TACA parties had abusively altered the structure of the market, together with the fines imposed in respect of the second the market, together with the fines imposed in respect of the second abuse.abuse.

• 29/01/1999:29/01/1999:

notification of the revised TACAnotification of the revised TACA

• 14/11/200214/11/2002::

Commission decision on the Revised TACA Commission decision on the Revised TACA

(Case COMP/37.3962/D2 - Revised Taca)(Case COMP/37.3962/D2 - Revised Taca)

Last but not least…Last but not least…

““Pursuant to Art. 81(3) the provisions of Art. 81(1) of the Treaty are Pursuant to Art. 81(3) the provisions of Art. 81(1) of the Treaty are declared inapplicable to those aspects of the Revised TACA falling declared inapplicable to those aspects of the Revised TACA falling within the scope of Reg. No 4056/86 and Reg. No 1017/68, for a within the scope of Reg. No 4056/86 and Reg. No 1017/68, for a

period of six years from May 1999”period of six years from May 1999”

The Revised TACA decision (2002)The Revised TACA decision (2002)

The relevant market evaluated in the decision:

- product: “containerized liner shipping between North-EU and USA using the sea routes between ports in North-EU and the ports in the USA and Canada- geographic: “the area where these services are marketed, i.e. the catchment area of the North-EU ports”Mediterranean ports have been considered not substitute

Land transport services which shippers acquire as a part of a multimodal transport operation for the carriage of containerized cargo between North-EU and USA don’t fall under Reg. 4056/86 and will be dealt under a separate procedure (e.g. regulation No 1017/68).

The Revised TACA decision (2002)The Revised TACA decision (2002)

The structure of the market:

60,7

39,4

61,7

38,5

59,8

40,2

58,3

41,7

59,5

40,5

49,0

51,0

48,5

51,5

47,7

52,3

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1994 1995 1996 1997 1998 1999 2000 2001

TACA / Revised TACA Others

More External Competition

The Revised TACA decision (2002)

Applicable regulation• art 81• Reg. 4056/86

• which does not cover the inland on- or off-carriage of cargo supplied in combination with other services as part of an intermodal transport operation (e.g. cargo handling services for which there is specific supply and demand distinct from that of maritime transport)

Application of the block exemption to: - price-fixing for liner services tariffs

(provide commercial stability)- regulation of the carrying capacity offered by each of the members

(capacity arrangements have involved the withdrawal of vessels and have resulted in significant cost savings)

“always provided that the Parties shall not increase any tariff rates in conjunction with any capacity regulation program on any trade covered by such program or create an artificial peak season”

The Revised TACA decision (2002)

Through intermodal freight rates: the “not-below-cost” rule (application of exemption ex Reg. No 1017/68)

- the Parties are not authorized to agree prices with each other for inland transport services supplied to shippers as part of a multimodal transport operation for the carriage of containerized cargo;

- the Parties are authorized to agree that, where they provide maritime transport services pursuant to the Tariff, no member may charge a price less than the direct out-of-pocket cost incurred by it for inland transport services supplied in combination with those maritime transport services (“not-below-cost-rule)

The Revised TACA decision (2002)The Revised TACA decision (2002)

Provisions not covered by the block exemptionProvisions not covered by the block exemption: : - service contracts- service contractsIndividual exemptionIndividual exemption (antitrust immunity) ex art 81(3) (antitrust immunity) ex art 81(3)

TACA TACA

• The Parties agreed terms The Parties agreed terms and conditions under which and conditions under which they might enter into service they might enter into service contracts with shippers; andcontracts with shippers; and• placed restriction on the placed restriction on the availability and contents of availability and contents of these contracts (mainly these contracts (mainly individual service contracts - individual service contracts - ISC)ISC)

Revised TACARevised TACA

• The availability of ISC is not The availability of ISC is not restricted (and indeed they restricted (and indeed they constitute the preferred form constitute the preferred form of arrangement on the trade of arrangement on the trade covered by the Revised covered by the Revised TACA TACA

• more internal competitionmore internal competition

ELEMENTS FOR FURTHER RESEARCHELEMENTS FOR FURTHER RESEARCH

• Relationships consolidation-integration-profitability (stevedoring is not a price setting industry)

• The role of freight forwarders, shippers and other service suppliers in the supply chain integration

• Forms of co-operation involving Port Authorities:

with other port Authorities

with the stevedoring/logistic industry

with carriers

with shippers