Prof. Mario Monti
European Commissioner for Competition Policy
A time for change ? - Maritime competition policy at the crossroads
European Shipper's Council
Antwerp, 12 June 2003
Mr Chairman,Ladies and gentlemen,
I would like to begin by thanking Mr Van den Broek and Baron Delwaide for welcoming us to what promises to be one of most interesting conferences in this field in recent years. I would also like to thank Mrs Van der Jagt and the European Shippers' Council for giving me this timely opportunity to talk about the review of Regulation 4056/86, which, as you know, provides for an exceptionally generous block exemption for liner shipping conferences. Indeed, the exemption for horizontal price-fixing and limitation of output is so generous that it has no parallel in any other sector.
This generous exemption is not without significance for the European economy. In 1997, the most recent year for which complete statistics exist, 69% of all goods exported from the EU and 70% of all imports were carried by sea. Conferences operate on all major shipping routes to and from the EU. Since conferences fix prices on all major shipping routes to and from the EU, and as those prices are generally assumed to act as a benchmark for prices on those shipping routes, all EU imports and exports carried by sea are affected by the liner conference block exemption.
You will be aware that in March of this year the Commission published a Consultation Paper, inviting comments from governments and industry on a number of issues relating, mainly, to the liner conference block exemption. For those parties that have not yet submitted comments, my remarks today may help to provide some guidance as to what the Commission expects from them in terms of rigour of argument and analysis.
But first a few words about the ongoing reform of the competition rules. I believe that this will help to put the maritime review into perspective.
Reform of the competition rules
There are two main strands to our reform efforts: the modernisation of the antitrust procedural rules and the reform of the merger rules.
With the adoption of Regulation 1/2003 in December last year, the EU took a major step towards adapting the 40-year old antitrust procedural rules to the demands of a Union of 25 Member States or more. Although the new rules will not begin to apply until 1 May 2004, they are already beginning to have an impact on our handling of cases and setting of priorities. The maritime sector is no exception in this respect. The main difference that companies will notice is that it will no longer be possible for them to file restrictive agreements with the Commission in the hope of obtaining an individual exemption. Instead, companies will have to make their own assessment of whether their intended agreement qualifies for exemption under Article 81(3) of the Treaty. This will leave the Commission free to devote its resources to a more vigorous pursuit of cartels and to other infringements.
In the merger field, our efforts have been directed to refining and improving the current merger control system, both on substance and on procedure. On substance, we have, among other things, been weighing the pros and cons of maintaining the current 'dominance' test for the appraisal of mergers, which is currently applied by a majority of EU Member States. We have concluded that the dominance test is sufficiently flexible to be able to deal with the full range of mergers, regardless of the competition problems that they may give rise to.
We have also published, and invited comments on, draft guidelines on the appraisal of 'horizontal' mergers.
On procedure, the Commission has proposed that the timetable of merger cases should be made somewhat more flexible, in order to allow for sufficient consideration of remedy proposals and for investigation in complex cases. It has also submitted proposals to simplify and render more flexible the provisions governing the allocation of merger cases between the Commission and national competition authorities.
A brief history of Regulation 4056/86
Let me now briefly describe the history of Regulation 4056/86 the main competition regulation in the maritime sector.
Regulation 4056/86 marked the first step in imposing effective regulatory constraints on a sector that had previously been largely self-regulated. Although the sector has always been subject to the competition rules of the Treaty, little, if anything, had previously been done to curtail anti-competitive practices in the sector.
Regulation 4056/86 is predicated on the acceptance of liner conferences as a legitimate, and indeed the most common, form of organisation of liner shipping. When it was adopted it was intended to supplement the rules of the UNCTAD Code of Conduct for Liner Conferences, to which the EU Member States were signatories.
Central to the decision to accept liner conferences with all that this form of organisation implies in terms of very serious restrictions of competition was the assumption that, if unfettered by the peer pressure typical of liner conferences, individual lines would engage in 'destructive' competition, driving down margins to a level where there would no longer be any financial incentive for a carrier to maintain a regular service on those trades.
Defenders of liner conferences pointed to the experience of the 1870s, when the competition between steamships and sailing vessels led to a rate war that saw prices being set at very low levels. Now, some observers might perhaps wonder whether evidence of economic behaviour in the late nineteenth century was really an unquestionably solid basis for a decision to grant an exceedingly generous exemption in the late twentieth century but this, as they say, is history.
The adoption of Regulation 4056/86 was followed by a long period of conflict over the interpretation of the Regulation. The Commission, following the line advocated by my predecessors Leon Brittan and Karel Van Miert, strenuously defended a strict interpretation, consistent with the guidance for the application of Article 81(3) provided by settled caselaw. The carriers, on the other hand, sought on every occasion to have the broadest possible interpretation given to the wording of the block exemption provisions.
It took a string of prohibition decisions the TAA, FEFC and TACA decisions will be familiar to most members of this audience to make the lines realise that they had little hope of winning a war of attrition with a determined competition authority. The Commission, for its part, was eager to see a rapid improvement in the competitive structure of the market.
It was against this background that discussions took place in 1998 between Commission officials and representatives of carriers and shippers. The aim of these discussions was to reach agreement on a set of guiding principles for conference activity. The discussions bore fruit in late 1998, with an agreement between carriers and the Commission on a number of key principles. Among the most important of these principles from the Commission's perspective was the commitment by carriers to refrain from inland price-fixing and to permit confidential individual service contracts.
The revised Trans-Atlantic Conference Agreement ('the Revised TACA') was the first concrete attempt to put the agreed principles into practice in a comprehensive and coherent manner. As you know, the agreement was cleared in November last year, but only after the TACA lines had made substantial concessions in order to allay the Commission's concerns with regard to information exchange and capacity regulation.
We now expect all other conferences operating on trades to and from the EU to give effect to the principles agreed in 1998. Conferences may be guided in this respect by the example of the Revised TACA, with the caveat that some aspects of the Revised TACA qualified for exemption only because of circumstances peculiar to the market on which the Revised TACA operates. The collective fixing of terminal handling charges is one of those aspects.
I am aware that there is a degree of dissatisfaction within the ESC, and the shipper community at large, with the Commission's decision to clear the Revised TACA. I can understand those sentiments, but I remain convinced that the Revised TACA represents, by and large, the most competitive outcome that can be achieved under the current legal regime. Any further improvement in the competitive structure of the market requires changes in the regulatory regime. This is of course one option that we will be looking at in the context of the Review.
Finally, it would be churlish of me not to mention the very valuable work carried out by the OECD Secretariat over the last two or three years. I will leave it to the next speaker to describe that work suffice to say that it has provided an important source of inspiration and has contributed strongly to the Commission's decision to re-examine the justification for the EU liner conference block exemption.
The decision to launch a review
By way of introduction to the Review, I would like to reply to one of the most frequently asked questions: "Why is the Commission launching this review now?". Implicit in this rather plaintive query is the assumption that with the clearance of the Revised TACA, the Commission has established a definitive regulatory regime for EU liner conferences. "If it ain't broke, don't fix it", or so the argument goes.
This is to misunderstand the significance of the Revised TACA decision.
The Revised TACA decision was dictated by existing legal framework, which the Commission has a duty to apply, however imperfect it may be. The purpose of the Review, on the other hand, is to assess whether there is a need for new provisions or for amendment of the current regulatory regime.
It is now almost sixteen years since the liner conference block exemption entered into force. By way of comparison, the consortium block exemption is valid for only five years at a time, after which period it is reviewed to see whether the conditions for exemption are still fulfilled. Unlike wine, there is little evidence that block exemption regulations improve with age. Regulation 4056/86 was long overdue for review.
A review was all the more pressing because of the exceptionally serious restrictions of competition authorised by the Regulation. Agreements or clauses containing those restrictions horizontal price-fixing and limitation of output are normally blacklisted, meaning that they are completely ineligible for exemption. Further delay in launching a review would not, therefore, have been a defendable option.
Finally, the review of Regulation 4056/86 must be seen as part of the previously mentioned general and ongoing overhaul of the competition rules. In addition to the modernisation of antitrust procedures and the merger review, I would also like to mention the reviews of the car, insurance and technology transfer block exemptions. Underpinning all of these various efforts is the ambition to create rules that are appropriate for current and future market conditions, easy to apply, and effective.
This brings me to the process that we envisage for the Review.
We have opted for a three-stage approach, with this first consultation paper being followed by a Green or White Paper and thereafter, if appropriate, by a proposal for legislation. This approach will, we hope, enable all interested parties to be adequately heard, while allowing us sufficient flexibility in reacting to developments.
Whether we lean towards a Green Paper outlining several possible options or a White Paper focusing on one particular option will depend to a large extent on the nature and quality of the response that we receive to the Consultation Paper. While we confidently expect to receive a high-quality input from governments and industry, a few words of guidance may be in order.
We would look forward to seeing well-developed arguments, supported by hard evidence. Unsubstantiated statements and allegations are not helpful and will not contribute to carrying the process forward. Bearing in mind the polarised nature of the debate that took place within the OECD, we now expect all parties to move beyond the rehearsal of well-worn clichés and to provide serious consideration of arguments made by the other side.
Let us now turn to the substance of the Review. You will no doubt have wondered where the Commission stands on the central issue of whether to maintain or repeal the liner conference block exemption.
In this respect, I would begin by stressing that we have no pre-conceived idea about what the outcome of the review process should be. We are still at a very early stage in the process; we have not yet received still less analysed all of the responses to the Consultation Paper. All options from preserving the status quo to a complete repeal of the block exemption are therefore still on the table.
Having said that, I do believe that the burden of proof lies firmly on those wishing to benefit from exemption to show that it is still justified. This is consistent with the basic principles, as established by the caselaw of the Court of Justice, for the application of Article 81(3) of the Treaty. There can be no difference between block and individual exemption in this respect.
The Commission will be looking particularly carefully at arguments and evidence concerning alleged cause and effect; that is to say, at the causal relationship between the restrictions authorised by the block exemption and the alleged benefits. It will not be sufficient to point to the existence of reliable scheduled services and stable rates on a particular trade it will also need to be demonstrated that these factors are the product of conference rate-setting and not simply evidence of well-matched supply and demand, or of other factors, such as the presence of consortia and alliances.
We will also be examining with a very critical eye arguments and evidence suggesting that price-fixing and the other serious restrictions authorised by the block exemption are indispensable to the achievement of the alleged benefits. We would want to see hard evidence that the benefits could not be achieved by less restrictive means, such as by an increase in the number of long-term individual contracts and a greater use of operational agreements such as vessel-sharing and consortia.
If it is argued that operational arrangements such as vessel-sharing agreements and consortia cannot operate in an environment where there is no collective rate-setting, that may force us to take a closer look at the case for maintaining the consortium block exemption. As you know, it has always been our assumption that consortia are less harmful to competition than conferences precisely because they do not involve price-fixing. If we were now to be told that an environment characterised by collective price-fixing and capacity regulation is an indispensable pre-requisite for the formation of consortia, that might lead us to question that assumption.
Finally, the Commission will keep in mind the need to look at the overall picture. Any benefits generated by the exempted restrictions must clearly outweigh the negative effects of those restrictions, otherwise there can be no possibility of exemption. The onus is therefore on the shipping lines to show that the benefits to users and consumers more than outweigh the price that the latter are paying.
The international aspect
I will now turn to one specific concern that is often voiced in the debate, namely the idea that because the liner shipping industry is a 'global' industry, operating in a series of overlapping jurisdictions, it needs a globally harmonised set of rules. It follows, according to this line of reasoning, that since other jurisdictions have decided to retain antitrust immunity or exemption, the EU cannot do otherwise without creating a conflict of laws.
In response, may I first put to rest the idea that the removal of the EU liner conference block exemption would create a conflict of laws. A conflict of laws arises only when one jurisdiction requires something that another jurisdiction prohibits. No country with jurisdiction over lines operating on EU trades actually requires those lines to engage in horizontal price-fixing and capacity regulation. The removal of EU authorisation to engage in those activities would therefore not create a conflict of laws.
In any event, it is precisely the fact that other jurisdictions have undertaken their own reviews that makes it all the more necessary for the EU to carry out its own. Other jurisdictions have reached their own particular conclusions about the justification for continued exemption or immunity on the basis of interests and considerations that may be peculiar to those jurisdictions and which may have little or no relevance for the EU.
We are at the very beginning of what is likely to be quite a protracted process, the outcome of which is anything but certain. It is not implausible that the situation in other jurisdictions will evolve during this time. Indeed, the fact that the EU is undertaking a review, and the arguments and evidence presented in the context of this review, may prompt some other jurisdictions to re-examine the assumptions underlying their own liner shipping legislation. We may therefore see a convergence of views in the not-too-distant future.
You may in any event rest assured that we will consult with our main trading partners throughout the review process.
Life without the block exemption
Although we are at the very beginning of the review process, and no option including maintaining the status quo has yet been excluded, there has already been some speculation about what consequences a repeal of the block exemption might have for the organisation of liner shipping on shipping routes to and from the EU.
In this respect, all I can say is that we have no plans at present to abolish or restrict the scope of the consortium block exemption. Shipping lines would therefore still be able to enter into consortium agreements and other types of operational arrangements, such as vessel-sharing and slot exchange agreements. Unlike conference agreements, they focus on reducing costs and generating efficiencies, rather than on simply maximising gross revenue. It should therefore not surprise you to hear me say that from the perspective of a competition policy-maker, the arguments for maintaining the block exemption for consortia appear, at first sight, to be much stronger than those most commonly advanced in support of liner conference price-fixing.
One of most often heard arguments is that a repeal of the liner conference block exemption would lead to greater consolidation amongst shipping lines, and that this consolidation would be far more detrimental to transport users than conference price-fixing.
I do not find that argument convincing. Our investigations in merger cases in the liner shipping sector have shown that the levels of concentration in terms of ownership of individual shipping lines are still quite low. I would also remind you that any consolidation would be subject to the usual merger control procedures, possibly in more than one jurisdiction. The fear that a monopoly or collectively dominant oligopoly would be created in the foreseeable future therefore appears to be somewhat exaggerated.
Further, I must confess that I have some difficulty in understanding the intellectual case for permitting horizontal price-fixing as a safeguard against excessive consolidation. There are standard regulatory safeguards against too high a degree of concentration horizontal price-fixing is not one of them. The case for horizontal price-fixing must succeed on its own merits, by meeting the conditions for exemption set out in Article 81(3) of the Treaty, or not at all.
It has also been suggested that antitrust immunity or exemption for liner conferences could advantageously be replaced by some form of exemption for 'discussion agreements', that is to say, 'voluntary' agreements to observe guidelines for freight rates or levels of vessel capacity.
I would firmly reject that suggestion. While the Commission may have shown some ambivalence in the past due to a lack of experience of the effects of these agreements it would be completely contrary to our policy in this and other sectors to permit this type of agreement now.
In conclusion, if the conference block exemption were to be repealed something which, I must repeat, is far from certain that would simply have the effect of placing the liner shipping sector on the same footing as any other sector. Shipping lines would be obliged to compete on the merits, but would be able to enter into agreements not caught by Article 81(1) of the Treaty such as agreements on purely technical matters and agreements eligible for individual exemption under Article 81(3) or covered by the block exemption for consortia.
Mr Chairman, Ladies and Gentlemen,
I hope that this brief exposé has given you a better understanding of why the Commission has embarked on a review of Regulation 4056/86, and of what it expects from that review.
I would like to conclude by stressing how vital it is that all of the main players carriers, shippers and governments should participate wholeheartedly in the review process. You now have a unique opportunity to make your voice heard and to shape the future of liner shipping.
Thank you for your attention.