Opinion on the Draft Commission Regulation on the Application of Article 85(3) of the EC Treaty to certain categories of agreements, decisions and concerted practices between liner shipping companies (consortia) (1) (94/C 195/09)

On 2 December 1993 the Commission decided to consult the Economic and Social Committee on the Draft Commission Regulation on the Application of Article 85(3) of the EC Treaty to certain categories of agreements, decisions and concerted practices between liner shipping companies (consortia).

The Section for Transport and Communications, which was responsible for preparing the Committee's work on the subject, adopted its Additional Opinion on 6 April 1994. The Rapporteur was Mr Whitworth.

At its 315th Plenary Session (meeting of 27 April 1994) the Economic and Social Committee adopted the following Opinion with no votes against and one abstention.

1. Introduction

1.1. On 25 February 1992 the Council adopted enabling Regulation 479/92 (2) which empowered the Commission to apply Article 85(3) of the Treaty by Regulation to exempt the joint operation of liner consortia from the anti-competitive prohibition contained in Article 85(1) - (the Competition Rules).

1.2. Prior to this, the Commission had submitted to the Council a document of general observations on conditions and obligations which the Commission envisaged attaching to the benefit of the block exemption (3). The Commission agreed to take utmost account of these guidelines in drawing up its implementing Regulation.

1.3. The Economic and Social Committee considered the enabling Regulation in draft form and adopted on 30 January 1991 its Opinion on the Commission's proposals in this respect (4).

1.4. It noted at that time that there had been widespread recognition of the value and usefulness of consortia as tools of rationalization in the container age and endorsed the findings of the Commission that 'The Community shipping industry needs to attain the necessary economies of scale to compete on the world liner shipping market' and that 'consortia can help to provide the necessary means for improving the productivity of liner shipping services and promoting technical and economic progress'.

1.5. Having noted that a block exemption from the Competition Rules had already been granted in respect of liner conferences by Council Regulation 4056/86 (1), the Committee reached the conclusion that a regulatory regime for liner consortia was necessary to replace the current legal vacuum by a climate of legal security for commercial undertakings. However, the Committee expressed the view that in implementing any new independent Regulation granting block exemption, 'the Commission should spell out more clearly the lines along which it intends to proceed concerning the terms and conditions of the exemption'. In its opinion, 'such conditions should safeguard free competition at three levels: within the consortium, within the conference and within the trade, as well as ensuring transparency'.

1.6. Accordingly, the publication of this draft Commission Regulation and the consultation procedure accord with the general conclusions of the Committee's earlier Opinion.

2. Value of consortia

2.1. EC shipping played a leading role in pioneering the development of consortia. The value of consortia to the economic and technological progress of the shipping industry through facilitating and encouraging the development and utilization of containers and the modernization of liner transport is widely understood. Containerization has allowed the development of multi-modal through transport systems which have played a large part in the increased efficiency of industry generally in recent years to the extent that companies can make use of global resources and distribute world-wide relying on prompt and efficient delivery.

2.2. In seeking to grant a block exemption to consortia, the Commission fully recognizes their value. Consortia agreements are seen as offering advantages to the participating shipping companies through cost reductions derived from higher levels of capacity utilization and economies of scale. They can also benefit users by ensuring more regular and higher-quality transport services.

3. Objective of the Regulation

3.1. The objective of this Regulation, as stated by the Commission, is 'to create a balanced and flexible legal framework to allow shipowners to operate within a framework of agreements which are restrictive of competition while guaranteeing that shippers retain a fair share of the benefit which results'.

3.2. To meet this objective, the Commission recognized in its 1991 document that the 'conditions which will enable consortia to operate in compliance with Community competition law, will obviously vary in nature and will have to reflect technical and commercial realities'.

3.3. The Committee supports this broad objective and in examining the draft Regulation has sought to determine whether its specific provisions provide sufficient protection for shippers and users of the services of liner consortia on the one hand and allow liner consortia sufficient freedom to carry out their business on the other. The importance of safeguarding the competitive position of non-consortia lines has also been borne in mind.

3.4. The Committee has also tried to distinguish between different types of consortia agreements by noting that some are designed solely to achieve technical improvement or cooperation (e.g. the joint use of transport equipment or facilities) and as such may not fall under the prohibition in Article 85(1) since they do not, as a general rule, restrict competition.

4. General comments

4.1. Background to consortia and their development

4.1.1. Containerization has been one of the major technological innovations in transport in recent years. Containerization's immediate impact on liner shipping was to cut radically both shippers' and owners' expenses in terms of labour cargo handling costs which had been an increasingly significant factor up to that time. It has also altered the type of skills necessary to the industry. Rapid and highly mechanized handling with very little manual labour has enabled port calls to be much shorter, giving improved vessel efficiency. Larger vessels, tighter schedules and the use of computers for load planning and container tracking have provided great benefits for shipper and shipowner alike.

4.1.2. The changes illustrated led to the replacement of a labour-intensive industry by one which is now highly capital intensive. Competition in liner shipping since containerization (from the 1970s onwards) has therefore been based primarily on lowest operating costs. This requires use of the largest, thereby most cost-effective, ship sizes. The degree of investment in such vessels, their containers and specialized handling equipment is immense and far more than small and medium-sized companies can afford independently.

4.2. Definition of consortia

4.2.1. Consortia are one element in the organization of the modern liner shipping industry. Consortia often - but not always - work under the umbrella of a liner conference. A conference is a group of two or more shipping lines which provide international services on a particular route with specified geographical limits according to a published schedule and which have agreed to charge the same rates of freight. A conference may also fix trade shares enabling the adjustment of capacity to demand.

4.2.2. Consortia do not have a rate-fixing role. The various types of cooperative agreement covered by the term liner consortia are illustrated by the Commission in the Draft Regulation with reference to specific activities undertaken. These are categorized as either technical, operational or commercial.

4.2.3. In its earlier Opinion, the Committee considered that liner consortia can broadly be defined as 'cooperative ventures in the liner sector in which the lines involved engage in a range of activities on a joint basis in order to achieve the necessary advantages of economy of scale and of service rationalization in a particular trade, thus combining the concepts of vessel cost sharing and cargo pooling'. The Commission's definition in Article 1 of the draft largely accords with the Committee's.

4.3. Current trends in consortia

4.3.1. The changing and dynamic nature of consortia was recognized in the Council's enabling Regulation. The scope of the activities of both established and newly formed consortia have evolved and changed in response to the needs of their users. These needs mirror the developments in containerization outlined in section 4.1 above. When consortia were first conceived they were generally of a fairly integrated nature with complex freight-pooling arrangements with mechanisms to provide for the sharing of participants' freight earnings in pre-agreed proportions. Some consortia have found the degree of work and investigation necessary to identify and assess vessel operation and cargo-related costs to be enormously expensive in time and money. There has been a consequent trend towards much simpler accords such as technical agreements between carriers to form e.g. slot swaps and vessel sharing agreements.

4.3.2. Whereas previously partners might have undertaken joint marketing and made far-reaching financial commitments, the new type of accord will, in many instances, cover ocean and landside equipment and other facilities but the level of financial integration will be limited simply to accounting for services used and services given.

4.3.3. An indication of the form of consortia agreements currently in operation in trades to and from the Community is given in matrix form by the European Community Shipowners' Associations (ECSA). The Section for Transport and Communications has examined this matrix. Although not a totally comprehensive analysis - other agreements may exist: and not completely up-to-date - because of the dynamic nature of the industry - the matrix can be taken as indicative of the broad variety of consortium agreements. It can be seen that well over half the agreements listed are limited to technical aspects of fleet and terminal operation and do not include commercial provisions for pooling or marketing.

5. Specific comments on the Draft Regulation

5.1. Against the background in section 4 above and the Commission's own stated objective (3.1) the Committee, in an Article-by-Article analysis of the Draft Regulation, highlighted the following issues of particular concern about its impact on the effective operation of liner consortia, and suggested areas where the Commission might reconsider its current position:

5.2. Definition (Article 1)

5.2.1. The Committee is broadly in agreement with the definition of consortia in Article 1. However, for the sake of legal certainty, it would like clarification of the implications of the phrase 'chiefly by container'. Where liner services offered jointly are mixed container/non-container do they fall within the definition of consortia and therefore within the scope of the Regulation ?

5.2.2. The Committee would like to see an additional definition included to explain the terminology 'independent rate action' currently used in Article 5 without explanation.

5.3. Scope (Article 2)

5.3.1. The new Regulation, Regulation 479/92 and Regulation 4056/86 apply to liner shipping; however, the interaction between their respective scopes is not clear. It is noted that Regulation 4056/86 is restricted to international maritime transport services only whereas the scope of the proposed new Regulation is not so defined. The definition of consortium, on the other hand, quite clearly restricts member line agreements to international liner services. This ambiguity needs removing. The Committee wonders whether the scope is understood to cover the short sea feeder services, including those between the ports of a single Member State, which are a vital adjunct to the efficient operation of deep sea liner services. The Committee points out that short sea services are currently the focus of widespread promotion by the Commission in terms of their environmental and other benefits to the Community transport network. Clarification of the precise coverage of the new Regulation is required.

5.3.2. Most individual consortia lines offer multi-modal services, i.e. also supply land transport as part of the package for moving a container from point A to point B. Although the Commission originally intended the Regulation to cover multi-modal, the draft relates solely to maritime transport. Given the importance of multi-modalism, the Committee would like to see early clarification of its position under the competition rules. However, the question of the joint use of containers inland must be addressed. Consortium lines operating in the same trades sometimes have agreements to use each other's boxes. The Commission should consider granting a block exemption by means of another Regulation to cover this particular activity.

5.4. Technical agreements (Article 3)

5.4.1. Establishing legal clarity in regard to whether all consortia activities - technical, operational and commercial - are to be covered by the conditions and obligations of the Regulation is essential. As the draft is currently written the Commission includes purely technical agreements (e.g. joint schedules, space/slot exchange, equipment pool) within the Regulation's ambit. There is a clear precedent in maritime Regulation 4056/86 (Article 2.1) for excluding from the prohibition in Article 85(1) of the Treaty agreements whose sole object and effect is to achieve technical improvement. The Committee questions whether, where consortia agreements are of a purely technical nature and act to facilitate efficiency and productivity in the industry, they should fall within the scope of the Regulation at all. The Commission should re-examine this issue with a view to greater clarity and with reference to the earlier maritime Regulation.

5.5. Capacity Management (Article 3.3)

5.5.1. The Committee notes that trade imbalances and the large costs involved in handling and re-positioning empty containers make capacity management a vital part of running a successful liner operation. As currently drafted, the Regulation will remove the block exemption from a consortium when either the consortium or its members are parties to arrangements which 'significantly' limit or reduce capacity. This provision will affect not only consortia but also conferences - where consortia members also operate in conferences. However, Article 3.3 goes on to permit capacity management when carried out by all members in response to 'seasonal' or 'cyclical' changes in demand, or in the use of 'more efficient' vessels.

5.5.2. The Committee considers the terminology used in this provision to be very imprecise: it seeks an explanation of how the Commission would differentiate between the permissible and non-permissible forms of capacity management. Further, with reference to Regulation 4056/86 governing liner conferences which permits capacity management [Article 3(d)], it questions how the Commission foresees the interaction of the two Regulations.

5.6. Article 5

5.6.1. The Committee endorses the provisions of Article 5 as meeting the objective in the sixth preambular paragraph: to produce 'sufficient competition in the trades in which consortia operate' - a prerequisite for allowing 'users of the shipping services provided by consortia to obtain a fair share of the benefits resulting from the improvements of productivity and service quality which they bring about'.

5.7. Market share (Articles 6 and 7)

5.7.1. The Committee notes that one of the subsidiary conditions to be fulfilled if exemption is to apply provides for specific limitations on market share depending on the particular nature of the consortium, of 30 %, 35 % or 50 % of the direct trade in respect of the ranges of ports it covers. The Commission has made clear that in its estimation only some 6/7 agreements will fall outside these limits and that the option of individual exemption will be open to them. It is noted that the ultimate preambular paragraph on page 6 of the draft provides for individual exemption. However, there seems to be no directly corresponding provision in the draft articles and the Committee questions this omission. It is reassuring that the Commission has to some degree been willing to take into account the particular commercial circumstances of different trades where market share is, for sound economic reasons, presently higher than in others which are subject to greater actual competition.

5.7.2. The Committee sees the selection of the market share figures as arbitrary and in particular can find no justification for a limit on the number of participating lines in a consortium where market share is calculated between 30/35 % - 50 %. Indeed, it might be considered that such market share provisions may be superfluous as the conditions imposed in other Articles are sufficient to ensure adequate competition.

5.7.3. The very concept of market-share conflicts with the earlier Regulation 4056/86 which had no market-share requirements. In the same way, there were no limitations on the number of lines which could participate in a conference. Neither limits on market share nor on number of lines are imposed by any of the EC's major OECD trading partners.

5.7.4. The Committee seeks clarification of the Commission's method for defining market share and is concerned in particular by the imprecise use of the phrases 'ranges of ports' and 'direct trade'. It is not clear whether the Commission intends to make an assessment of market share on the basis of the actual ports of call or is willing to take into account other ports which serve the same trade. There is also ambiguity over the use of 'direct' trade and whether or not the Commission intends to consider trans-shipment within its market share equation. To provide legal certainty and avoid future litigation, the Commission should spell out more clearly how it intends to assess and implement its market-share provisions.

5.8. Initial notice period (Article 8)

5.8.1. The Committee notes that in its 1991 document the Commission expressed itself willing to be guided by the practices already developed in agreements of this type. In particular it was recognized that a notice period regime which varied according to the degree of investment might be appropriate. As already noted, the degree of investment in a particular consortium may be of a very high order and in such cases, the 18/24 months proposed by the Commission would be too short to be commercially viable. The issue is one of commercial choice between co-operating partners and should be left to their judgment. Moreover, longer notice periods would provide a greater degree of certainty to users about the availability of particular services.

5.9. Consultation with shippers (Article 9)

5.9.1. The Committee considers this to be an important Article in terms of taking account of users' requirements. However, the Commission makes clear in its 1991 guidelines that the object of such consultations must be confined to the activities carried out by the consortia themselves without duplicating the consultation procedures provided for in Regulation 4056/86. These precepts should be followed. Essentially such consultation should be carried out as the article provides - on a face-to-face basis between the consortium and its component lines and their customers.

5.10. Entry into force (Article 13)

5.10.1. For the sake of clarity, the Committee would like to see re-drafting of Article 13 in regard to the particular treatment of those consortia agreements which exceed trade share and limits on participating lines. As currently drafted, it is unclear whether these will be required to adjust themselves within a six-month period during which time they will be protected by the block exemption, or whether they will be permitted to 'grandfather' their existing conditions until expiry of the relevant consortia agreements.

6. Summary and conclusions

6.1. The Committee welcomes the publication of this draft Commission Regulation and notes that it largely accords with the general conclusions of the Committee's earlier Opinion on the subject.

6.2. The Committee recognises that it is necessary to achieve a balance between providing sufficient protection for shippers and users of the services of liner consortia whilst allowing the consortia sufficient freedom to carry out their businesses and safeguarding the competitive position of non-consortia members.

6.3. Account needs to be taken of the fact that current consortium agreements vary considerably in scope and detail and that they must remain flexible to respond to the needs of their users.

6.4. The Draft Regulation contains a number of inconsistencies with the provisions of Council Regulation 4056/86 dealing with liner conferences and Regulation 479/92. These inconsistencies should, as far as possible, be eliminated.

6.5. A number of terms used in the draft Regulation require more precise definition in the interests of greater clarity and legal certainty.

6.6. The Commission should re-examine the following specific points in the light of the views expressed:

- whether purely technical agreements should be excluded from the scope of the Regulation as is the case with Regulation 4056/86 (Article 3);

- whether the proposed restrictions on capacity management (which will also conflict with Regulation 4056/86) may not prove to be unduly inhibiting to the provision of cost-effective services (Article 3);

- whether the proposed criteria for the definition of market share are correct and capable of application with any degree of precision, and whether the adoption of purely arbitrary percentage limits in this context is appropriate (Articles 6 and 7);

- whether the proposed limitations on the length of initial notice period are adequate to cater for the high levels of capital investment which may be involved (Article 8).

Done at Brussels, 27 April 1994.

The Chairman

of the Economic and Social Committee

Susanne TIEMANN

(1) OJ No C 63, 1. 3. 1994, p. 8.

(2) OJ No L 55, 29. 2. 1992, p. 3.

(3) Document 10280/91 (MAR 40 RC 11).

(4) OJ No C 69, 18. 3. 1991, p. 16.

(5) OJ No L 378, 31. 12. 1986, p. 4.