The government’s policy managers deserve a pat for drafting legislation that seeks to introduce much-needed transparency in the functioning of service providers in the maritime transport logistics chain dealing mainly with containerized cargo, despite strong lobbying by business groups opposed to such a move out of fear that it will harm their interests.
The proposed legislation makes it mandatory for service providers to be registered in India to be able to do business. They include container ship owners, non-vessel owning common carriers, forwarding agents, freight forwarders, cargo consolidators and other multi-modal transport operators providing warehousing services, including container freight stations, inland container depots and services relating to stuffing and destuffing cargo containers.
These service providers will also have to publish their rates, including the breakdowns, and display it on their premises, or on their website. Such rates are now set by the service providers themselves, which India’s exporters and importers say are arbitrary.
For instance, container shipping firms, a key part of the maritime transport logistics chain, levy a slew of supplementary charges on customers in the form of surcharges to offset fluctuations in currency, rise in ship fuel costs and congestion at ports without consulting the shippers. This is despite the fact that such costs are part of their operating expenses and should reflect in the base ocean freight rates charged from customers. Moreover, service providers in the maritime transport logistics chain are extremely reluctant to share information on their tariff structure with the clients.
The Union shipping ministry says that the government has no plan to regulate the tariffs levied by these service providers. The intention behind the new legislation is to introduce transparency so that shippers benefit from competition. As the rates are known in advance under the proposed regime, customers can chose their service providers depending upon the rates charged.
So far so good, until you look at what another arm of the government is doing to prevent the emergence of price cartels and monopolies. The Competition Commission of India (CCI), India’s antitrust body, prohibits operation of liner shipping conferences, saying it would make exports and imports more expensive and was against the interests of trade.
A liner conference such as the London-based India, Pakistan, Bangladesh, Ceylon (IPBC) Conference is a group of 18 container shipping firms offering equitable freight rates, standardized shipping practices and regular scheduled services between designated ports.
Member lines of such conferences agree on freight rates irrespective of market conditions, a decision that is acted upon by all the members. The IPBC Conference, which operates between Europe and the Indian subcontinent, will cease to exist from 17 October as the European Commission has decided to repeal the antitrust immunity given to such groups operating from Europe.
Starting 18 October, shipping firms that are a part of the IPBC Conference will have to stop the practice of coordinating freight rates and other supplementary charges. Instead, they will have to negotiate freight rates with individual customers based on market conditions.
CCI also favours a free market regime where the rates will depend on demand and supply. But the shipping ministry wants service providers to publish rates and furnish a break-up of such charges to an agency authorized by it.
The proposed legislation thus runs the risk of helping price cartels to emerge as service providers may start coordinating on rates and sharing market to retain customers, because they would be mandated by the law to publish their rates. In the absence of a regulator, nothing stops them from doing so, going by what happened in the case of liner conferences, which are considered cartels. No service provider would like to lose customers by quoting rates higher than those offered by rivals.
If this happens, such price fixing will have far serious repercussions for India’s exporters and importers than what they are facing now. The country ships some 7 million standard cargo containers a year and this is growing at an average of 13-15%.
The ministry has to put in place measures to prevent possible price cartels before the draft is signed into law.
Instead of working at cross-purposes, the Competition Act and the proposed Shipping Trade Practices Act need to be aligned with the aim of lowering logistics and transaction costs and improving India’s competitiveness in the global market. Logistic costs as a percentage of gross domestic product is 13-15% in India, while the same is 9% in the US, 10% in Europe and 11% in Japan.
It costs $1,148 (Rs53,612) to import a standard cargo container into India, while exporting a container costs $820. In comparison, importing a container costs $367 in Singapore, while exporting a loaded container costs $390 in China.
P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday. Respond to this column at email@example.com