Are You Ready For Competition?

July 2006

The beginning of 2006 has seen specialist shipping well and truly placed on the Europe's competition agenda. With its announcement that the exemption from the competition rules for liner conferences is to be repealed, the European Commission also stated that it will be actively applying the competition rules to the specialist shipping operators. This means that restrictive arrangements between competitors in any part of the shipping sector will be illegal. 

Many pool managers and specialist ship-owners, however, may think that the European Commission's interest in specialist shipping does not affect them. Whilst the European Commission labels the sector "tramp" shipping, such labels can be misleading. The European Commission actually defines "tramp" shipping as 

"Non-regular, maritime transport of non-containerised bulk cargo.... including economically important services such as the transport of oil, agricultural and chemical products". 

This definition catches any and every category of shipping. It is therefore no longer viable to argue that the competition rules simply don't apply to your activities. 

Ship operators discussing capacity management or price related issues could therefore face fines and/ or criminal sanctions for breaching these rules. Chemical carriers, have already fallen foul of the competition rules in the United States where some of their directors have served prison sentences of 3-4 months for price fixing. The European Commission is also investigating a complaint about anti-competitive behaviour by a pool which prevented one ship-owner from withdrawing their vessels. 

How should specialist ship operators and pool managers deal with the current attention the sector is receiving from European competition authorities? 

Help The European Commission 

This may not seem the most obvious move, especially when the European Commission's interest in specialist shipping concerns many who believed their activities were safe from the arm of competition law. To help alleviate those concerns the European Commission has stated that it will issue guidelines on how the competition rules actually affect specialist-pooling arrangements. However for the European Commission to issue effective guidelines, it needs to understand properly how the sector operates. Specialist vessel operators therefore have a unique opportunity to help the European Commission to understand the commercial environment in which they operate. In the long term this will result in the competition rules being applied effectively and fairly to the specialist shipping sector. 

European Commission Study 

As a first step in understanding the specialist shipping sector and shipping pools, the European Commission is commissioning a study into the sector. This study, will be undertaken by consultants with legal and economic expertise and will focus on both the demand and supply aspects of the sector such as: 

• the types of vessels used for commodities such as liquid bulk (crude oil, oil products, other chemicals), major dry bulk (iron ore, grain, coal, phosphates), refrigerated cargo, forestry products, motor vehicles (both used and new, including machinery and ro-ro goods), gas liquids and small parcel chemicals; 
• the pool operators and independent carriers, involved in operating the above vessels; 
• the pool agreements and other arrangements in the specialist shipping sector, including the function and operation of vessel pools and the role of the pool manager. The European Commission also wants to understand the rules that are applied to pool members, including non-compete clauses, notice periods, long vessel withdrawal notices and other conditions attached to membership; 
• the size of specialist shippers and their buyer power in such markets as energy, agricultural goods, metal trades, forest products and industrial and manufactured goods ; 
• the importance to specialist shippers of price, speed, reliability, security, schedule requirements and regularity of demand. 

In undertaking this study the European Commission hopes to end up with a clear understanding of the markets in which specialist ship owners operate. In order to ensure that the European Commission achieves this, shipowners, pool managers and their trade bodies should be communicating openly with the European Commission now. Indeed they should be considering whether to lobby for a block exemption similar to that which is in place for liner shipping consortia. They should also be prepared to cooperate with the consultants selected to undertake the study. Only by ensuring that the European Commission is supplied with accurate and correct information about how the sector works, will it be able to draft guidelines that are effective and practical. Helping the European Commission now can only benefit the sector in the long run. 

Help Yourself - Be Fundamentally Compliant 

Not only should the specialist shipping sector be prepared to help the European Commission, those operators involved in pooling and other cooperation arrangements need to ensure that none of their activities blatantly breach the competition rules. In practical terms this means assessing their arrangements to ensure, for example, that there are no price fixing or market sharing activities, which are considered to be hard-core activities. Some would argue that it is not possible to take such compliance steps in the absence of guidelines from the European Commission. However Neelie Kroes, the European Commissioner for Competition, speaking recently to the energy sector noted that, " Prevention is better than cure". 

More conscientious pool managers and ship operators should therefore be looking to ensure that their practices are fundamentally compliant with European competition rules. Whilst the European Commission may not have issued guidelines on how competition rules apply to specialist shipping, it is not too early to take steps to ensure that your activities are compliant. 

As a first step, a company should ensure that it has a compliance programme in place to ensure that all those involved in the business, from management down, understand what it means to comply with the relevant competition rules. In the UK, the OFT has stated that : 

"if a compliance plan is in place this may be taken into account as a mitigating factor when calculating the appropriate level of a financial penalty". 

A compliance plan does not have to be detailed or complicated but should include the following basic elements: 

• a brief overview of the relevant competition rules; 
• a statement, endorsed by the Board / Management of the business, that the company aims to comply with the relevant competition rules; 
• a bullet point list of "dos" and "don'ts"; 
• a clear statement that it will be a disciplinary matter if any employee breaches the compliance requirements; 
• details of the compliance officer or person to whom all queries on competition issues can be referred; 
• details of any training or seminars organised by the company for its staff, including employees and / or agents; 
• advice on what to do if the company receives an unsolicited approach from competitors who wish to discuss matters relating to prices and the relevant market; 
• guidance on how to deal with dawn raids. 

As part of a compliance assessment it is also necessary to undertake a risk assessment to identify any arrangements or agreements, which could involve anti-competitive activities. This requires a review of all arrangements and agreements to ensure that they do not include any provisions which are blatantly anti-competitive, such as price fixing or market sharing arrangements. 

For specialist operators and pool managers, having a compliance programme in place now, will mean that they should not be faced with any surprises once the European Commission has completed its study and begins to apply the competition rules to specialist shipping pools. 

Conclusion 

The European Commission is clearly focussing its attention on the application of competition rules to the specialist shipping sector generally and pooling arrangements specifically. Whilst many in the industry may be alarmed by the Commission's attention, if the sector responds positively to the Commission's study, it will be in a position to ensure that the competition rules are applied fairly to the sector, taking into account its commercial characteristics. Individually ship operators and pool managers can be one step ahead of the game by undertaking risk assessments and implementing compliance programmes now to ensure the Commission does not spring any surprises when it starts to apply the competition rules. 

With thanks to Marjorie Holmes and Lesley Davey of Richards Butler's Competition and EU Department for preparing this article