India to renew exemption granted to vessel sharing pacts of container lines

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Category: Mercados - Fletes- Cotizaciones

Published on Friday, 28 November 2014 04:28

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Globally, vessel sharing agreements seek to improve productivity and frequency of sailings and port calls, improve scheduling through the use of more modern vessels and other equipment, including port facilities. Photo: Bloomberg

India is set to renew the exemption granted to vessel sharing agreements (VSAs) among container shipping lines from the provisions of the country’s antitrust law.

The initial exemption given for a one-year period ends on 10 December.

A meeting held by the government with the stakeholders earlier this month to review the functioning of VSAs took note of the fact that there were no complaints against such agreements during the year-long exemption period.

It did not put barriers for new entities into joining such agreements nor did it adversely impact the existing shipping business and hurt competition. In fact, VSAs offer a realistic prospect for small companies to emerge, operate and gain from tying up with larger lines.

VSAs promote free competition as most liner shipping firms render service under such agreements. In its absence, cargo will eventually be carried by only a few carriers in the liner shipping industry. Globally, such pacts seek to improve productivity and frequency of sailings and port calls, improve scheduling through the use of more modern vessels and other equipment, including port facilities.

About 90% of container services operating into and out of India work on VSAs among carriers, according to the Container Shipping Lines Association (CSLA).

India’s shippers (exporters and importers), who were earlier wary of such pacts, have now come to back the operation of VSAs as a way forward to ensure qualitative and quantitative service capability of maritime trade with the resultant benefits.

However, the shippers say future exemptions should be subjected to certain conditions and not a blanket exemption, as is currently the case, to safeguard their interests and foreign trade. This would be in line with the practice adopted by other nations while granting similar exemptions to VSAs.

With liner shipping companies increasingly resorting to the deployment of bigger ships to achieve economies of scale and cut costs in a market hit by cut-throat competition, shippers fear that circumstances could arise that induce the VSAs to unreasonably reduce services or raise rates. If that happens, exemptions would become counter-productive.

These concerns are not without basis. There are instances, globally, of artificially created mismatch in supply-demand, cancellation of sailings, roll-over of cargo, incremental price hikes, problems at port terminals and slow steaming, or the practice of running ships at significantly less than their maximum speed.

India can follow the example of the European Union in setting a threshold marketshare cap while granting exemptions to VSAs. Accordingly, in order to qualify for exemption, the combined marketshare calculated by the share of the agreement members in the trade lane in which the VSA operates shall not exceed 30% of the total volume of goods carried in freight tonnes or 20-foot equivalent units, or TEUs (the standard size of a container).

The European Union has set 30% marketshare as the threshold limit on the premise that carriers having a share beyond this level could be in a position to influence pricing of the trade.

In India, setting a threshold marketshare cap would be difficult because it is beyond the scope of Section 3 of the Competition Act under which the exemption is granted. Moreover, an ideal marketshare limit to check the dominance by lines is not generic and cannot be easily defined as it is subject to play of multiple elements, sector geography and is time specific, according to a government official.

There are also demands from the shippers to set up an oversight/monitoring mechanism on the data filed by VSAs to the authorities and to make public certain portions of such information. This is an extremely sensitive issue for the liner shipping companies who fear that such disclosures get undermined particularly when independent lines (not part of VSAs) are not mandated to file such details.

In the US, information filing is mandatory for the lines because it is regulated by a statute. India must have a law in place to effectively address such a situation.

With exemptions to VSAs becoming a regular feature now, there is a definite need for India to make a comprehensive regulation and set up a regulatory body to administer the regulations.

The regulatory authority would be vested with the task of registering the VSAs and monitoring the overall market and the activities of the agreement members.

A sectoral regulatory/ monitoring authority will ensure availability of timely and relevant information for the authority to act quickly should it be necessary.

The focal point of these measures is that VSAs, at any point in time, are not likely by a reduction in competition to result in an unreasonable increase in transportation cost or an unreasonable reduction in transportation services.

The US and the EU have a well defined and an equally well established mechanism to administer anti-competitive regulations.

Exemptions granted by these jurisdictions are subject to certain specific conditions and obligations.

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