Global container shipping firms are lobbying with the government for exempting voluntary discussion and vessel-sharing agreements between carriers from India’s anti-competition law.
The economics of container shipping service in India calls for a regulated system of carrier discussion and vessel-sharing groups to provide reliable services at reasonable and predictable prices to exporters and importers, says a study conducted by UK maritime consulting firm Drewry Shipping Consultants Ltd. Drewry was hired by the Center for Asia Studies, a Chennai-based think tank.
Voluntary discussion and vessel-sharing agreements are not the same as liner shipping conferences—a group of container shipping firms that offer 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 Competition Commission of India prohibits shipping conferences because it considers price fixing and market sharing as cartelization.
Voluntary discussion agreements (VDAs) allow carriers, on a limited basis, to share market information, adopt common service standards and offer a single point of contact in discussions with government bodies and shipper organizations.
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Vessel-sharing agreements (VSAs) allow carriers to share space on each other’s vessels, consolidate duplicative services and share terminals to improve productivity and lower costs. These agreements are operational only; member lines market distinct services under their own brands, competing on price, reliability, specialized services, equipment and commodity expertise using VSAs to scale their overall operations to market demand.
The very nature of container trade requires services run by consortia or alliances of shipping lines.
Drewry warns that there would be unintended consequences if the government does not grant an exemption, given the range of carriers reliant on VDAs and VSAs in the country.
Drewry’s analysis of trade in the country reveals that of the 26 identified services in India’s highest volume container trade, to and from the Far East, 20 are operated by multiple lines through VSAs. These have proven to be better than single operators in maintaining available capacity with minimal service reductions. The VSAs include a number of mid-size regional and niche carriers, among them state-run Shipping Corp. of India Ltd, that leverage the scale and cost savings of an agreement to extend their service reach in the Indian market.
VSAs carry 75% of India’s intra-Asia container trade, but they also keep nine lines operating in the India-Europe market and six operating to and from North America, which might not otherwise participate in the market. They present additional route and schedule choices for Indian shippers and, in some cases, access to specialized services and even new markets.
Unlike liner conferences, which had created a great deal of tension between carriers and their customers, exporters, importers and shipping lines say the existence of liner consortia/alliances in the industry is a positive.
These consortia or alliances enable small- and medium-sized carriers to compete with larger carriers and provide quality service. Vessel-sharing agreements expand the service option available to cargo owners and promote efficiency and cost savings. VSAs have no role in setting rates or other commercial issues.
But voluntary discussion agreements could be a little tricky. VDAs recommend common guidelines to members for rates and other charges without actually setting them. All members of VDAs act independently and on a voluntary, non-binding basis. Both VDAs and VSAs have the backing of the shipping ministry.
Exporters and importers have urged the ministry to examine the issue ahead of issuing a policy direction to the Competition Commission to exempt these arrangements from the provisions of the anti-competition law.
Like the European Union, they want India to set threshold limits for such operational agreements. The EU has set a threshold capacity limit of 30% for vessel-sharing agreements. This means the aggregate capacity of a group of carriers operating a service should not exceed 30% of the total capacity in a particular trade route.
India’s growing trade requires a container shipping environment that can attract the widest possible range of global carriers and healthy price competition. At least 90% of India’s external trade by volume moves by sea and around 55% of the sea-borne cargo is containerized. Some well-regulated carrier coordination is essential to constructing a stable, lasting ocean transport infrastructure.
The Drewry report says banning the two cooperative structures would reduce services, choice and competition, exposing India’s exporters and importers to frequent rate changes and increased volatility.
India should put enough checks and balances to ensure that such arrangements don’t become a tool for carriers to indirectly manipulate the supply side and collude on fixing prices.
P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday.
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