Part X Investigation

Trade Facilitation Agreement
for
Australian Northbound Trades to SE Asia

Final Report

December 2000

Table Of Contents
Executive Summary	iii
1.	Introduction	1
1.1.	Background	1
1.2	Ministerial Reference	2
1.3	Investigation Procedure	2
1.4	Structure of Report	3
1.5	Terms of Reference	3
2.	Part X	4
2.1	Objectives	4
2.2	How does Part X achieve its objectives?	4
2.3	Types of agreements	5
2.4	Key Aspects of Part X	6
2.4.1	Registration of Agreements	7
2.4.2	Negotiation Process	8
2.4.3	Role of ACCC	9
2.4.4	Cancellation of Agreements	10
2.5	Amendments	10
3.	Characteristics of Liner Shipping Services in SE Asian  Trade	13
3.1	Characteristics of Supply	14
3.1.1	The TFA and the Australia-SE Asia Northbound Trade	14
3.1.2	Significance of SE Asian Trade	16
3.1.3	Recent Trends	17
3.1.4	Global Trade Factors	18
3.1.5	Barriers to entry	18
3.1.6	Conclusions on Supply Characteristics	20
3.2	Characteristics of Demand	20
3.2.1	Export by Volumes and Value	20
3.2.2	Countervailing Power	22
3.2.3	Conclusions on Demand Characteristics	22
3.3	Freight Rates	23
3.3.1	Services Provided at Internationally Competitive Freight Rates	25
3.3.2	Conclusions on Freight Rates	25
3.4	Profitability	26
3.5	Competition	28
3.5.1	Competition between TFA and non-TFA lines	28
3.5.2	Service and freight rate competition between members of the TFA.	29
3.5.3 The impact of new entry	29
3.5.4	Conclusions on Competition	29
4.	Assessment under the Terms of Reference	30
4.1	Services Efficient and Economical	30
4.1.1	Technical Efficiency	32
4.1.2	Allocative Efficiency	35
4.1.3	Dynamic Efficiency in the Provision of Liner Shipping Services	35
4.1.4	Conclusion on Efficient and Economical Services	37
4.2	Adequacy of Services	37
4.3.	Due Regard	42
4.3.1	Unbundling of Freight Rates	43
4.3.2	The Speed of Rate Restoration	44
4.3.3	Conclusions on Due Regard	46
5.	Conclusions on the Grounds for Deregistration	47
6.	Recommendation	49
Appendix A	Recent selected structural changes and entry & exit into the northbound Australian –     			SE Asian Trades	50
Appendix B	Scheduled Transit Times for all SE Asian Services from Melbourne and Sydney	52

Executive Summary
Following complaints from several exporters, the Minister for Transport, the Hon John Anderson, referred the Australian Competition and Consumer Commission (ACCC) to investigate the operation of the Australia/South East Asia Trade Facilitation Agreement (TFA), a discussion agreement registered under Part X of the Trade Practices Act 1974 (TPA).
The TFA authorises the parties to the agreement to discuss and exchange information with regard to matters of interest such as terms (ie freight rates) and conditions of service in the trade and the quantity or kind of cargo to be carried.  The agreement provides for a non-binding consensus on these matters. 
The purpose of the investigation is to report to the Minister whether or not there are grounds in relation to the matters referred to in section 10.45(a) (iv) to recommend deregistration of the TFA or for seeking undertakings that would make deregistration unnecessary.  
The ministerial reference required the Commission to report on matters contained in paragraph 10.45 (a) (iv), that is:
that parties to the agreement have given effect to or applied, or propose to give effect to or apply, the agreement without due regard to the need for outwards liner cargo shipping services provided under the agreement to be:
(A)	efficient and economical;
(B)	provided at the capacity and frequency reasonably required to meet 	the needs of shippers who use, and shippers who may reasonably be 	expected to need to use, the services.  
The Minister requested the Commission to give special consideration to the following matters when undertaking its investigation:
Does the operation of the TFA contribute to the provision of adequate outward liner shipping services at internationally competitive freight rates in accordance with the objects of Part X? and
Does the conduct of shipping lines operating under the TFA provide grounds for deregistering the agreement or for seeking undertakings that would make deregistration unnecessary?
The Commission has had considerable difficulty in conducting this investigation. 
The critical terms in this investigation against which the services of the lines are to be assessed are the terms “economic” and “efficient”.   These terms have not been defined in the legislation and their interpretation in the past has been a matter of considerable conjecture.
While the Commission has no great difficulty in providing its own interpretation of these terms to be useful for an investigation of this nature, the concepts economic and efficient must be translated into meaningful quantitative indicators.  This requires quality data. The Commission is concerned about the quality of data used in this investigation.
The Commission has had particular difficulty in getting adequate data from Liner Shipping Services.  Further, in testing data from this source against other available data, the Commission has been forced to question the veracity of capacity data provided.  
Given the available evidence as well as the minimalist requirements of the Part X regime the Commission is not in a position to recommend de-registration.
Here it should be noted that the Commission does not in general consider that the arrangements permitted under Part X are appropriate for the liner shipping industry or indeed other sectors of the economy.  In particular, discussion agreements, with their potential to include the majority of lines servicing a trade, represent a high level of cooperation within a regime that is already characterised by a significant level of permissiveness in terms of exemptions from the application of the competition laws of the TPA.
A number of complaints have centred on the fact that the fundamental problem with the SE Asian trade is that it is serviced by lines belonging to a discussion agreement.
The Commission does not disagree with the view that discussion agreements may have the potential to act as vehicles for limiting competition and delivering unfavourable outcomes for exporters.  However, discussion agreements are registrable under Part X and thus do not represent a breach of the provisions of Part X.  Nevertheless, the Commission is of the view that Part X and discussion agreements provide unnecessarily high flexibility to shipping lines in pursuing industry arrangements not available to other sectors of the economy.  The Commission has drawn attention in this report to aspects of Part X which it considers to represent major weaknesses of the regime.  In particular, Part X provides limited scope for meaningful negotiations that may result in agreed outcomes.  The Commission considers that the negotiation provisions of Part X should be strengthened to improve the countervailing power available to shippers.
The Minister’s reference however, relates to the way the TFA operates within the limited obligations and other constraints imposed by Part X.  It does not direct the Commission to investigate either Part X or discussion agreements.  So while the Commission does not sanction either Part X or discussion agreements it has only been able to investigate this discussion agreement in the context of what the Productivity Commission has characterised as a “permissive” regime.
In coming to the Commission’s overall conclusion, that it is not in the position to recommend de-registration, the following key points have been important:
•	The SE Asian trade is relatively important in the context of the Australian economy but small in global terms.
•	The SE Asia trade seems to be characterised by low entry and exit barriers. 
•	Competition from non-TFA lines is mainly at the fringes of the trade as most of these lines participate in the SE Asian trade as part of a larger global service and not to specifically service the needs of the trade.  However, non-TFA lines may offer alternatives.  Given the economics of liner shipping services generally, and the thin nature of the SE Asian trade in particular, this fringe may have an impact.
•	Freight rates charged by TFA lines for services provided to Australian exporters on the SE Asian trade do not appear to be out of alignment with rates charged on other international trade routes.
•	The fall in freight rates charged by TFA lines in the SE Asian trade since 1995 suggests that rates were initially sensitive to the effects of excess capacity.  After services were rationalised by lines and demand improved from early 1999, rates rose but not to their pre-1995 levels.  More recent evidence suggests that rates rises have not been able to stick. Rate increases foreshadowed by the lines for April and September 2000 were not implemented. October 2000 rates are below the indicative minimum rate agreed in January 2000.
Given this information and in response to the terms of reference, the Commission has drawn the following conclusions with regard to whether there are grounds for deregistration of the TFA:
•	In terms of the criteria of economical and efficient services, the Commission does not have evidence that proves that the costs of the shipping lines belonging to the TFA are excessive.  According to information received by the Commission, TFA member lines incurred losses on the northbound SE Asian trade in the nine months to March 2000. 
•	While the evidence is indirect and partial the Commission has not been able to determine  that services in the trade are being provided in a manner which is inefficient.
•	In general, Part X imposes minimal requirements on members of the TFA in relation to the provision of services.  The available evidence does not highlight a major problem with this minimal service provision. 
•	The Commission does not have evidence that indicates that the behaviour of the lines, including with respect to negotiations, has contravened the minimal  provisions of Part X.  While Part X talks about negotiation, there is no obligation on parties to actually agree on proposals.  The Commission considers that the negotiation provisions under Part X represent a weakness and provide minimal countervailing power to shippers. 
•	The Commission notes the rapidity with which lines attempted to restore rates.  The rate restoration program appears to have failed. If the rate restoration program had not failed the Commission may have had a different view on this matter. 

1.	Introduction
The Australian Competition and Consumer Commission (ACCC) has  received a reference from the Minister for Transport, the Hon John Anderson, to investigate the operation of the Australia/South East Asia Trade Facilitation Agreement (TFA), a discussion agreement registered under Part X of the Trade Practices Act 1974 (TPA).  The ACCC will report to the Minister on whether grounds exist for deregistration of the discussion agreement.
1.1.	Background
On 16 March 2000, the Minister for Transport, the Hon John Anderson, referred the ACCC to conduct an investigation under Part X of the TPA.  Members of the TFA, a registered discussion agreement under Part X of the TPA, had increased minimum benchmark freight rates  substantially in a period of nine months and announced further increases to be implemented in April and September 2000. The Minister was concerned that the operation of the agreement does not accord with the objectives of Part X as set out in section 10.01.
The TFA was initially registered in December 1996 and has been subsequently varied nine times.  Currently, it comprises 15 shipping lines that operate on the northbound South East Asian (SE Asian) trade routes, specifically between Australian ports and those in Singapore, Malaysia, Indonesia, Thailand, Brunei, Vietnam and Cambodia.  
The TFA authorises the parties to the agreement “to discuss and exchange information with regard to matters of interest and concern in the trade and to reach a non-binding consensus upon rates, surcharges, rules and other terms and conditions of service in the trade; the pooling or apportionment of earnings, losses of traffic; the restriction or other regulation of the quantity or kind of cargo to be carried by parties to the agreement; the restriction or other regulation of the entry of new parties to the agreement”.  It further authorises the parties to give effect to any consensus reached on these matters and authorises the parties to agree upon a common position on these matters to present in negotiations with shippers.  A decision by a line not to adhere to a new agreement requires a vote against the agreement.  A decision to discontinue adherence to a previous agreement, requires notification to the Agreement Chairman.
The purpose of the investigation is to report to the Minister whether or not there are grounds in relation to the matters referred to in section 10.45(a) (iv) to recommend deregistration of the TFA or for seeking undertakings that would make deregistration unnecessary.  
The investigation followed complaints to the Minister from several exporters, in particular from the peak shippers body, the Australian Peak Shippers Association (APSA) concerning recent rises in freight rates for South East Asian trades.  It was claimed that the minimum benchmark rate had risen from $450/TEU in mid 1999 to $800/TEU in January 2000 with a further rise to $950 planned in April.  The Minister has noted to the Commission that “whether or not a rate of $950 can be justified given the decline in freight rates in recent years, the real problem for exporters is that they claim to be unable to adjust to such a steep increase in rates”.

 1.2	Ministerial Reference
The Minister has referred the Commission to investigate whether there exist grounds to deregister the TFA.  The Minister’s reference was issued under section 10.47 whereby the Minister may request the Commission to investigate and report on whether grounds exist for deregistration of an agreement in relation to one or more matters referred to in paragraph 10.45 (a).  The ministerial instrument required the Commission to report on matters contained in paragraph 10.45 (a) (iv) (A), that is:
that parties to the agreement have given effect to or applied, or propose to give effect to or apply, the agreement without due regard to the need for outwards liner cargo shipping services provided under the agreement to be:
(A)	efficient and economical;
The Minister subsequently clarified that for the purposes of this investigation, the terms of reference should also include (B), that is:
(B)	provided at the capacity and frequency reasonably required to meet 	the needs of shippers who use, and shippers who may reasonably be 	expected to need to use, the services.  
The Minister requested the Commission to give special consideration to the following matters when undertaking its investigation:
Does the operation of the TFA contribute to the provision of adequate outward liner shipping services at internationally competitive freight rates in accordance with the objects of Part X? and
Does the conduct of shipping lines operating under the TFA provide grounds for deregistering the agreement or for seeking undertakings that would make deregistration unnecessary?
1.3	Investigation Procedure
The Commission’s approach to this investigation involved a number of steps.  Firstly, the Commission undertook preliminary discussions with some complainants with a view to ascertaining the nature of issues at the centre of the complaints.  Following the distribution of the Issues Paper to interested parties, the Commission sought submissions and comments on the Issues Paper.  A questionnaire to key shipping lines was also circulated in order to obtain relevant cost and revenue data.  The Commission held further public consultations on the basis of information received.  Finally, a report for the Minister was prepared on the basis of the Commission’s findings.
The Commission has relied on Liner Shipping Services, acting on behalf of TFA lines, to provide quantitative data relating to their operations in the SE Asian trade.  The quality of information provided by Liner Shipping Services has been the subject of attention during the course of this investigation.  Errors have been detected in the data, including figures on the capacity of individual vessels, capacity utilisation rates and actual tonnages lifted by TFA lines.  While it has become apparent that it is difficult to measure the capacity of ships, the inaccuracies contained in some data provided by shipping lines have been substantial.  In one case, figures have been revised three times.
The Commission is concerned that the processes adopted by lines and Liner Shipping Services to source, collect and report key information may contain the potential for significant errors.  In some cases, the detection of errors and subsequent revision of data has caused major disruptions to the Commission’s investigation procedure.  
1.4	Structure of Report
A description of Part X, in particular its objectives, key provisions and amendments recently introduced, is covered in the next section.  Section 3 presents a description of the characteristics of the liner shipping services in the South East Asian trade, including supply/demand characteristics, barriers to entry, profitability, the behaviour of freight rates and competition.  Issues arising from the Minister’s terms of reference are addressed in section 4.  The conclusions and recommendations are presented in sections 5 and 6 respectively.
1.5	Terms of Reference
Trade Practices Act 1974: Section 10.47
Reference to the Australian Competition and Consumer Commission
Pursuant to section 10.47 of Part X of the Trade Practices Act 1975, I John Duncan Anderson, Minister for Transport and Regional Services, hereby refer for investigation and report the question of whether grounds exist in relation to the Australian/south East Asia Trade Facilitation Agreement for me to be satisfied of the matters referred to in section 10.45 (a) (iv) (A) and (B). 
In undertaking the work required by this reference the Commission should give special consideration to the following:
•	Does the operation of the TFA contribute to the provision of adequate 	outward liner shipping services at internationally competitive freight rates 	in accordance with the objects of Part X? and
•	Does the conduct of shipping lines operating under the TFA provide 	grounds for deregistering the agreement or for seeking undertakings that 	would make deregistration unnecessary?

2.	Part X
This section provides an overview of the salient features of Part X of the Trade Practices Act.  On the basis of comments and submissions provided to the Commission, it appears that industry participants do not understand some aspects of Part X.  In addressing and reporting on issues raised by the complaints that have led to this investigation, it has been necessary to ensure that the legal framework for assessing the complaints is well understood.
2.1	Objectives
There are three principal objectives specified in section 10.01 (1) of Part X:
•	to ensure that Australian exporters have continued access to outwards liner cargo shipping services of adequate frequency and reliability at freight rates that are internationally competitive;
•	to promote conditions in the international liner cargo shipping industry that encourage stable access to export markets for exporters in all States and Territories;  and
•	to ensure that efficient Australian flag shipping is not unreasonably hindered from normal commercial participation in any outwards liner cargo shipping trade.
Underpinning these objectives is an acknowledgment that the provision of liner shipping services is crucial for the development of Australian trade and therefore the Australian economy, but the economics of the industry may be such that provision of these services cannot be guaranteed at levels required by Australian exporters without some intervention to regulate the market.  The provision of liner shipping services in trades that exhibit the characteristics of many Australian trades, that is, long and thin, tends to be naturally oligopolistic.  Without allowing some coordination between lines it may not be possible for shipping lines to provide Australian exporters shipping services of an adequate standard.  Part X encourages provision of adequate liner shipping services to Australian exporters by permitting coordination between lines, but subject to some constraints.  
The Australian approach to liner shipping is broadly consistent with the approach adopted in most developed western countries.  Indeed, consistency with international practices is one of the key factors behind Australia’s regulatory approach.
2.2	How does Part X achieve its objectives?
Section 10.01 (2) states that the objects of Part X are to be achieved:
•	by permitting continued conference operations while enhancing the competitive environment for outwards liner cargo shipping services through the provision of adequate and appropriate safeguards against abuse of conference power, particularly by:
-	enacting additional restrictive trade practice provisions applying to ocean carriers;
-	requiring conference agreements to meet certain minimum standards;
-	making conference agreements generally publicly available;
-	permitting only partial and conditional exemption from restrictive trade practice prohibitions;  and
-	requiring conferences to take part in negotiations with representative shipper bodies.
•	through increased reliance on private commercial and legal processes and a reduced level of government regulation of routine commercial matters;  and
•	by the exercise of jurisdiction, consistent with international law.
Essentially, Part X gives concessions to providers of liner shipping services to behave in ways that would not otherwise be permissible under the TPA while imposing some constraints that limit the potential for abuse of market power.  Part X does this by providing liner shipping companies limited exemptions from trade practices laws to enter into co-operative arrangements in providing outbound shipping services to Australian exporters.  These arrangements include joint provision of services and agreements on capacity, service levels and prices charged.  In return for these exemptions, Part X imposes certain obligations and requirements on lines including negotiation with shipper bodies and information provision.  Part X also includes provisions that aim to enhance  the countervailing power of shippers in their dealings with shipping lines.
Part X provides exemptions from the anti-competitive provisions of the Act.  Specifically, from the application of section 45 (arrangements restricting dealings or affecting competition) and section 47 (exclusive dealing) but not in respect of third-line forcing.  Part X does not provide exemptions from section 46 on misuse of market power.
2.3	Types of agreements
There are various types of agreements between shipping lines on export trades that can be registered with the Registrar of Liner Shipping (Department of Transport and Regional Services) under Part X of the TPA .  Under sections 10.29 and 10.41 all types of agreements must comply with certain conditions for registration.  Among them, that lines jointly negotiate minimum service levels and other terms and conditions, such as freight rates, frequency of sailings and ports of call, for export trades with the Australian Peak Shippers Association, the designated shipper body, which acts on behalf of all exporters.   
The types of agreements between the lines vary in terms of the necessary implementation commitment and cost for the lines.  Discussion agreements typically include both conference and non-conference lines.  The parties to such agreements agree to charge common freight rates and adhere to defined service arrangements.  Discussion agreements usually take the form of a non-binding consensus.  Entry and exit costs from these agreements are usually low.  Members can withdraw on very short notice (between 48 hours and 30 days notice).  The TFA is an umbrella discussion agreement between lines that are members of 3 consortia, two other lines that are members of a slot charter agreement and one line that does not belong to any consortia or slot/space charter agreements.
Accords and discussion agreements differ from conference agreements in that they also include independent ocean carriers in the trade concerned.  As such, they reduce the ability of shippers to choose between lines inside and outside the relevant agreements.
There are various discussion agreements that are currently registered under Part X and operate in several Australian export trades.
An accord is similar to a discussion agreement, except that it is a binding agreement between conferences and previous independents, regarding freight rates, and agreed capacity.  There have been no accords in Australian export trades since the early 1980s, which at the time collapsed under market pressure.  
Under Part X conference agreements represent an umbrella agreement covering other types of agreements between lines and have an agreed constitution.  All conferences on Australian trades are closed, with the exception of those on US trades, which are open.  Closed conferences can control capacity provided by the conference but cannot bar entry to a trade (although it can raise the cost of entry).  There are no conferences in operation on the South East Asian trades.
Consortium agreements are technical/operational agreements that cover rationalisation of sailings, slot swapping or slots purchased on a used or unused basis.  They normally operate under the umbrella of a conference agreement registered under Part X.  There are three consortia in operation on the SE Asian northbound trades, none of which have an overarching conference agreement, but all are party to the TFA.  These are the Australia Asia Express Service (AAX), formally known as ANRO, the Australia/South Asia Agreement (ASA) and the Australia/Asia/Agreement (AAA). Joint service agreements are similar to consortium agreements but only involve two shipping lines.  The West Australia/Asia Agreement between Maersk and K Line is a joint service agreement on the South East Asian trade routes.
Pooling/Trade share agreements can range from rules for revenue pooling to trade share agreements that constrain cargo carriage to specific market share ranges and also normally operate under the umbrella of conference agreements.
2.4	Key Aspects of Part X
This section considers some of the key aspects of Part X.  These key provisions are particularly relevant as they provide the framework for considering the complaints that have given rise to this investigation.  It should be noted that the following is not an exhaustive and definitive commentary on Part X.  Rather it represents a summary of the Commission’s consideration of particular provisions that the Commission considers are important in the context of this investigation.
In broad terms, the key areas of Part X which are most pertinent to this investigation encompass the exemptions provided to both shipping lines and exporters from application of certain provisions of the Trade Practices Act;  the negotiation processes including the obligation of shipping lines;  the process for registering discussion agreements;  and the role of the Commission.  The process for cancelling an agreement is also considered.
2.4.1	Registration of Agreements
There are no provisions in Part X of the TPA that expressly provide for the right of shippers/shipper bodies to prevent either provisional or final registration.  Sections 10.28 and 10.33 of Part X provide for the Registrar to be satisfied of certain matters prior to provisional and final registration, including minimum standards of service levels; the process for provisional registration and particular negotiation obligations of parties to a conference agreement after provisional registration; and the process for final registration (section 10.33).  Among other things, Part X:
•	does not expressly require the Registrar to consult with shipper bodies in forming a decision that it is satisfied of the matters set out in section 10.28, prior to provisional registration;
•	does not provide for a copy of conference agreements to be given to designated shipper bodies prior to provisional registration, or for parties to agreements to take part in any negotiations in relation to “negotiable shipping arrangements” with shipper bodies prior to provisional registration;  and
•	does not provide for shipper bodies to request negotiations in respect of ‘negotiable shipping arrangements’ prior to final registration, but under section 10.41 they can do so after final registration.  However, under section 10.29 parties to a provisionally registered conference agreement are required to take part in negotiations with shipper bodies in relation to the minimum level of outwards liner cargo shipping services.  While, there may be some overlap between ‘minimum level of outwards liner cargo shipping services’ and ‘negotiable shipping arrangements’ under section 10.41 (for instance, frequency of sailings and ports of call are matters that could properly be described as both ‘levels of outwards liner cargo shipping services’ and ‘negotiable shipping arrangements’), freight rate charges are not a matter about which negotiations must occur prior to final registration but may occur after final registration.  
Thus, Part X does not provide for a mechanism for shipper bodies/shippers to modify or influence the terms of a conference agreement prior to provisional registration, or to prevent provisional registration.  It appears that the main purpose of the requirement for conference agreements to be provisionally registered is to give shippers advance notice of proposed arrangements and permit shipper bodies to participate in negotiations in relation to certain matters.
However, Part X does provide a mechanism for shipper bodies to negotiate the minimum level of shipping services between provisional and final registration of a conference agreement.  Further, there are no mechanisms under Part X providing shipper bodies/shippers with the power to prevent final registration of a conference agreement or apply for investigation of a conference agreement prior to final registration.
The Commission considers that the limited provision for notification and consultation on agreements prior to final registration is a weakness of current Part X arrangements.  It means that there is in practice little ex-ante scrutiny of such agreements from a public interest perspective (although the new amendments provide some scope for this in certain situations, see section 2.5).
2.4.2	Negotiation Process
Part X imposes some obligations on shipping lines in respect of the negotiation process as a counterbalance to potentially adverse effects the exemptions may have on outcomes for exporters.  
Section 10.41 of the TPA sets out the obligations of parties to finally registered conference agreements in relation to negotiations with shipping bodies.  Section 10.41 can be read as giving APSA (as the designated peak shipper body) or any designated secondary shipper body, the following limited rights:
•	requesting parties to a registered conference agreement to take part in negotiations in relation to negotiable shipping arrangements;
•	requesting parties to make information available for the purposes of the negotiations in relation to information that is reasonably necessary for those purposes; and 
•	agreeing to a lesser period of notice (i.e. less than 30 days) in relation to changes in negotiable shipping arrangements.  
The provisions require parties to a registered conference agreement to take part in negotiations with a relevant designated shipper body in relation to “negotiable shipping arrangements”.  Once established in a finally registered agreement, changes in negotiable shipping arrangements require 30 days notice to shippers.
The information requirements of section 10.41 allows shipper bodies to request any information reasonably necessary for the purposes of negotiations where the shipper body makes available any such information requested by the parties to an agreement.  Accordingly, section 10.41 appears to envisage a quid pro quo exchange of information between shippers and parties to an agreement in the context of negotiations.
The negotiation obligations/rights set out section 10.41 are limited to conference agreements that have been finally registered and excludes the possibility of negotiations taking place in respect of conference agreements that have only been provisionally registered, although under section 10.29, parties to a provisionally registered agreement are required to negotiate with shipper bodies with respect to minimum service levels.
Negotiation requests
Under paragraph 10.41(1)(a), parties to a finally registered conference agreement must take part in negotiations in relation to negotiable shipping arrangements whenever ‘reasonably requested’ by a relevant designated shipper body.  The Act does not specify or provide guidance on the circumstances where it could be said that negotiations are reasonably requested by shipper bodies.  It is likely that the purpose of such a limitation is to prevent shipper bodies making excessive requests for parties to take part in negotiations, or making vexatious requests, or requests in relation to trivial matters.  
Parties to an agreement are obligated to consider the matters raised, and representations made, by the relevant designated shipper body.  Thus, it can be argued that the negotiation requirement is not ‘hollow’, as parties are required to give genuine consideration to the views of shipper bodies.  However, parties to an agreement are not obligated to accept the views of a shipper body or any proposals put forward by a shipper body in negotiations, and shipper bodies do not have the right to veto any proposed changes in respect of negotiable shipping arrangements.  
Individual exporters cannot invoke the negotiation provisions of section 10.41.
Obligations relating to an authorised officer
Section 10.41 envisages the involvement of an authorised officer in negotiations between a shipper body and parties to an agreement.  An authorised officer is an officer of the Department of Transport authorised by the Minister for Transport.  
Parties are also required to give such information as the officer requires and consider suggestions made by an authorised officer.  The type of information that an officer may require is not specified in Part X.  This information requirement and the obligation to consider suggestions made by an authorised officer possibly indicate that the role of an authorised officer is more than that of a passive observer.  
However, it appears that parties are not bound by any suggestions of an authorised officer and, except for considering suggestions, are not otherwise limited with respect to any proposed change in negotiable shipping arrangements by the presence of an authorised officer at negotiations.  
It is understood that an authorised officer has been involved in a number of negotiations between the TFA and certain designated shipper bodies.
2.4.3	Role of ACCC
The investigation provisions of Part X allow the Minister or an affected person to request the ACCC to investigate finally registered conference agreements.  There are no similar provisions in relation to conference agreements prior to final registration.  
Part X does not expressly set out a role for the ACCC between provisional and final registration of conference agreements.  Until recently, the legislation did not provide that a copy of conference agreements be provided to the ACCC (either before or after provisional registration).  The ACCC considers that it is not obligated to conduct inquiries during that period.  
The Registrar alone has the power to make a decision in relation to matters to be considered prior to final registration, although it may not be prevented from seeking comments from the ACCC, or any interested persons on those matters.  However, it is not stated nor implied by the provisions of Part X that the ACCC has a role in ‘vetting’ conference agreements for final registration.  
2.4.4	Cancellation of Agreements
Part X provides for the cancellation by the Minister of finally registered conference agreements under specified circumstances.
Section 10.47 provides for investigation and report by the Commission on reference by the Minister.  Part X provides for the cancellation of a finally registered conference agreement whereby the Minister may direct cancellation of registration if, inter alia, the Minister is satisfied that parties have contravened, or propose to contravene, one or more of the matters set out in section 10.45 (a).  Even if the Commission recommended that there are grounds for deregistration in relation to one or more of the matters in section 10.45 (a), the Minister has discretion regarding whether to give such a direction (although in exercising the discretion considerable weight would likely be given to the Commission’s recommendations).  
The process for cancellation of a finally registered conference agreement may also be commenced by an interested person applying to the Commission for an investigation of the matters under section 10.45(a).  Under section 10.48 the Commission has discretion as to whether to conduct an investigation on application by an affected person.  If the Commission has reported to the Minister under section 10.48, the Minister is still the decision-maker regarding whether to direct the cancellation of registration of a conference agreement.  
Accordingly, Part X provides a mechanism for shipper bodies and shippers to apply for cancellation of final registration of a conference agreement in respect of a number of matters including a contravention of the negotiation requirements for negotiable shipping arrangements.  
2.5	Amendments
The predecessors to the ACCC, the Trade Practices Commission and the Prices Surveillance Authority, expressed concerns about Part X to the Brazil Review of 1993.  The ACCC reiterated these concerns to the Productivity Commission inquiry of 1999.  In all cases, it was argued that Part X could not guarantee outcomes which were in the public interest and that discussion agreements in particular contained the potential for uncompetitive outcomes.  The nature of discussion agreements was also the subject of comment by the Productivity Commission but in the final analysis it was of the view that they should be accorded no special treatment.
As part of its response to the Productivity Commission inquiry, the Commonwealth Government has introduced several legislative amendments to Part X, including the way discussion agreements operate.  These are intended to deal with concerns about the potential for discussion agreements to cover a large proportion of lines in a particular trade and to affect competition.  The legislative amendments grant increased powers to the Minister and to the Commission (including undertaking on its own initiative an investigation with a public benefit test) to deal with concerns about the operation of agreements which potentially cover a large proportion of a trade.  However, these concerns are expected to arise only in exceptional circumstances.  The Explanatory Memorandum accompanying the Minister’s Second Reading Speech states that this “option essentially provides a form of reserve power to deal with situations where conferences might act in a manner contrary to the national interest”.  It also provides a guide on what constitutes exceptional circumstances: 
•	an agreement has the effect of giving its parties a substantial degree of market power;
•	the conduct of the parties to the agreement has led to, or is likely to lead to an unreasonable increase in freight rates or an unreasonable reduction in services;  and
•	the anti-competitive detriment of the agreement outweighs the benefits to shippers flowing from the agreement.   

The amendments cover six broad categories in total:
•	exemptions relating to rate setting are limited to terminal to terminal and thus include ocean transport as well as cargo handling at a terminal but does not include inland haulage;
•	specific provisions allowing shipping conferences to negotiate collectively with stevedores;
•	extension of provisions that apply to outward liner shipping conferences to inward conferences;
•	provisions granting increased powers to the Minister and the Commission to deal with situations that may lead to a substantial lessening of competition without a public benefit.  These increased powers are in the form of new grounds for deregistration of finally registered agreements;
•	provision for the Minister to direct the Commission to investigate and report on a refusal to admit a new member into a conference where this would be considered against the interests of Australian exporters;

•	other:
-	repeal of section 10.05 prohibiting price discrimination;
-	addition of national interest test in a determination as to whether Australian flag shipping is being adversely affected by the conduct of shipping lines with substantial market power;
-	provisions for more effective and flexible enforcement of undertakings;
-	provision for review by the Australian Competition Tribunal of decisions taken by Minister or Commission; and
-	formal review of Part X in 2005.

3.	Characteristics of Liner Shipping Services in SE Asian 	Trade
The aim of this section is to describe the characteristics of the liner shipping services on Australia’s northbound routes with South East Asia (SE Asia).
Section 3.1 will detail the supply characteristics of Australia’s northbound liner trade with SE Asia, which will set the context both for the description of the current trade and the assessment.  Section 3.2 describes the demand for liner services to SE Asian and examines the effectiveness of the shipper bodies in their dealings with the lines.  In sections 3.3 and 3.4 the evidence on freight rates and profitability will be considered.  Finally, Section 3.5 considers the level of competition in the trade.
It should be noted that in describing the supply characteristics of the trade, extensive use is made of data on the capacity of vessels.  In principle, there are several definitions of vessel capacity:

•	Design Capacity:  Container ships are designed so as to accommodate a fixed number of standard containers (i.e. twenty foot equivalent units or TEUs).  So a particular container ship may have a capacity for, say, 2,000 TEUs.  The design capacity is based on an average stowage factor for the type of cargoes to be carried by the vessel.
•	Deadweight Capacity:  International regulations forbid ships to sail when overloaded, i.e. when their ‘plimsoll line’ is under water.  Container ships can only carry that weight of cargo, fuel, stores and ballast that just leaves the plimsoll line exposed.  As noted above, container ships carrying dense or heavy cargoes may be loaded to their deadweight limit when carrying fewer containers than their design capacity allows.  A vessel is deadweight restricted when it carries heavier than normal cargoes such that it is unable to accommodate the number of containers it is designed to carry.
•	“Assigned Capacity”:  where container ships operate complex voyage patterns rather than simple ‘out and back’ shuttle voyages, owners may impose notional quotas on capacity for particular legs of the voyage.  For example, several TFA and non-TFA shipping lines providing capacity in the Australia-South East Asia trade operate to and from other trade areas via South East Asia (Australia-SE Asia-NE Asia, Australia-SE Asia-Europe etc).  Since such lines wish to make space available for both South East Asian and, say, European customers, they impose notional quotas.  They may, for example, limit the number of containers they will carry between Australia-South East Asia to, say, a third of vessel capacity.
The Commission has had considerable difficulty in using the capacity figures that have been supplied to it.  It has not always been clear which definition of capacity has been used and in some cases different definitions of capacity seemed to have been included together in the same series. The Commission is concerned about the quality of data available to it to conduct investigations of this nature.
3.1	Characteristics of Supply
The Australia-SE Asia trade fulfils a dual role:  as a carrier of trade between Australia and the increasingly important region of SE Asia, and as a feeder trade conveying Australian cargo to and from Round the World and Pendulum services via hubs such as Singapore.  This is a key characteristic of this trade and one that impacts, among other things, on competitive factors.
Another key distinguishing feature of this trade in particular and liner shipping services in general, is the dynamic nature of supply, such that it is possible to bring about significant changes in supply very quickly.  This is largely a reflection of the low barriers to entry and exit, discussed in section 3.1.5.
3.1.1	The TFA and the Australia-SE Asia Northbound Trade
Currently, there are twenty-one Liner shipping companies that provide northbound shipping services from Australian ports to those in SE Asia.  Of these 21 companies, 15 liner shipping companies (currently) are members of the TFA, a non-binding discussion agreement.  The other six lines are either small regional lines or round-the-world or European operators whose primary focus is not the Australian export trade to SE Asia.
TFA member lines are further organised into three groups of technical consortia and one slot chartering agreement.  Like the TFA, these agreements are registered with the Department of Transport and Regional Services (DTRS) and they involve varying degrees of service coordination between their participants.  These range from a fully integrated service provided by Australia/Asia Express (AAX), to a large slot chartering agreement provided by Australia South Asia Service (ASA).  The ASA has recently been amended to provide for members to agree on freight rates on a non-binding consensus basis.  So, in essence, the ASA consortia agreement is itself a form of discussion agreement, at least in terms of freight rates.
In annual capacity terms the TFA represents about 43 per cent of the northbound liner shipping market.  The annual TEU capacity of the 15 TFA lines is about 305,340 TEUs.  This includes an allowance for capacity used by the TFA lines to tranship cargoes bound for other destinations via Singapore and the figure also makes allowance for deadweight restrictions.  By comparison, an estimate of the northbound capacity of the non-TFA lines is about 399,353 TEUs per annum, or about 56 per cent of the trade.  In terms of trade cargo only, the share of capacity held by TFA lines is likely to be significantly higher than 50 per cent.
Table 3.1 shows the current market structure of the Australian SEA northbound trades, including trade and non-trade cargo for both TFA and non-TFA lines.

Table 3.1 - 	Structure of the Australian SE Asian northbound trades – Trade 		and non-trade cargo 1999-2000

Consortia / slot agreement	Liner companies	No of services (loops)	No of ships	TEU capacities of ships 	Average voyages per annum	Aggregate TEUS per annum	
TFA	15	8	18	29,289	10.4	305,340	
P & O Nedlloyd / NYK	P & O, NYK	1	5	5,000	11	55,000	
MISC / PIL	MISC, PIL	1	6	6,941	11	76,351	
Wallenius / Wilhelmsen	Wallenius, Wilhelmsen	1	9	20,058	3	60,174	
ANCL/ CMA_CGM / Contship /  Marfret	CMA_CGM, Contship / Marfret	1	8	17,720	4	70,880	
P & O Nedlloyd / Contship	P & O, Contship	2	12		4	110,448	
	NGPL	1	4	750	24	18,000	
	MSC	1	1	500	17	8,500	
	PAS / AAL	1	3			Na	
Total non TFA		9	48	78,581	74+	399,353	
Total Northbound				107,870		704,693	
Sources:  Liner Shipping Services, Contship, Wallenius Wilhelmsen.  ACCC estimates.
Note	1. Calculated by pro-rating the aggregate TEUs provided by TFA lines in the nine months to 		March 2000.  Data is adjusted for deadweight restrictions. 	
		2. Based on actual ship numbers as of July 2000.

There are a range of liner operations in the current market structure of the Australian northbound liner trades to SE Asia.  These can be characterised as: 
•	Dedicated liner operations.  The vessels of dedicated liner operations sail between Australian ports and those in the SE Asian region, principally Singapore and Port Kelang (Malaysia).  All of these member lines of the TFA provide call services.
•	Through operations.  These are operations where a line is primarily serving another trade such as Australia–Europe or Australia-North Asia or as part of a round the world service and these shipping lines carry some cargo northbound to SE Asia.  By definition of the geographic specificity of the TFA agreement none of these operators can be members of the TFA.  Three through type operations are provided by five shipping lines, which call at Australian ports. Characteristically the Australian port coverage of these services is smaller than those provided by TFA lines.
•	Regional operations.  There are five regional shipping services between Australia and SE Asia.  Three of these services operate shuttles between Fremantle and SE Asian ports.  Two other services operate out of Brisbane and form part of a trade leg between Auckland and Singapore. However, the primary interest of the latter service is the New Zealand-Singapore trade.
•	Multipurpose operations.  Multi purpose operations are defined as those carried by vessels that are primarily designed for cargoes other than containers. For instance, breakbulk or Ro-Ro operations.  But they can and do carry container traffic. There are three services of this type that operate between Australia and SE Asia, all of them by non-TFA members.  Their port coverage in Australia tends to be regionally focussed, with the exception of Wallenius Wilhelmsen, which call at every major Australian port (except Adelaide).
3.1.2	Significance of SE Asian Trade
As indicated by the following chart, the volume of liner shipping exports have continued to grow despite the Asian crisis.
Chart 3.1	Exports and Imports by Volume

Source:  International Cargo Data Base, Bureau of Transport Economics, accessed September 2000.

Since 1993-94, liner shipping exports to the SE Asian region have risen by an average of 20 per cent per annum to reach a peak of about 3.6 million tonnes in 1999-2000.  Similarly, liner shipping imports have continued to grow albeit from a lower base.  They reached a peak of almost 2.5 million tonnes in 1999-2000.
However, as Chart 3.2 indicates, the value of liner shipping exports fell from a peak in 1996-97 and fell for two consecutive years before recovering in 1999-2000.  Meanwhile the value of Australia’s liner shipping imports continued to rise to a peak of $6.2 billion in 1999-2000.

Chart 3.2	Exports and Imports by Value

 Source: International Cargo Data Base, Bureau of Transport Economics, accessed September 2000.

A comparison of charts 3.1 and 3.2 since 1990-91 reveals that while the volume of imports and exports has grown substantially, growth in the value of imports has outstripped the value of exports.  A possible factor in this may be the inducement to Australian importers provided by the relative fall in currencies of SE Asian countries relative to the Australian dollar.
3.1.3	Recent Trends
The Asian financial crisis, which began in late 1997 contributed to significant supply imbalances in Asian trades.  Some Asian currencies collapsed in value, encouraging exports from the region and discouraging imports.  This exacerbated existing oversupply of liner shipping services, particularly in northbound trades and contributed to a collapse of northbound freight rates in 1998 and 1999.  By contrast, cargo volumes out of Asia had increased by 20 percent and ships bound for Europe were full. 
As a consequence of the Asian financial crisis, the growth of liner export volumes on the Australia–SE Asia trades slowed down considerably.  The rate of growth slowed to 6.4 per cent in 1997-98 compared with 24 per cent increase the previous financial year. Accentuating the effect of this slowing of demand growth, was a large increase in capacity over the three years to 1998 on the northbound routes to SE Asia.  The AAX consortium replaced their fleet with larger ships in 1997 and by 1998 the AAX consortium was well over twice the size of the ANRO group it had replaced in 1996. 
Also, in 1998 there were several significant entries into the trade, resulting in large increases in capacity.  By 1999,  it appears that the trade was significantly over supplied.  Modelling carried out for the purposes of this investigation suggests that the annual northbound capacity for TFA lines (including space allocated for trade and non-trade cargo) in June 1999 was 400,582 TEUs.  This compares with annualised capacity of 305,340 TEUs for the nine months to March 2000, suggesting there has been rationalisation of the way TFA lines service the SE Asian trade. 
A discussion of entry to and exit from the SE Asian trade follows in section 3.1.5.
3.1.4	Global Trade Factors 
World trade on several major east-west and north-south routes has increased significantly during 1999-2000.  Across the world’s largest east-west trade route, North Asian exports to the US have increased markedly, mainly driven by Chinese and Korean exports  predominantly directed at the US consumer and industrial market.  Containerised shipments from the US westbound to Asia are also recovering after a 1998 downturn.  European–Asian trade volumes are growing at a healthy rate in both directions as a result of the Asian economic recovery and aided by a low EURO.
3.1.5	Barriers to entry 
There is a history of entry and exit in the SE Asian trade.  Maersk entered the trade in February 1998, at the same time Evergreen Marine became a slot charterer with its partner Lloyd Triestino and later joined ASA.  The AAA consortium was formed in April 1998.  Added to this, PAS Swires entered the trade in early 1998 and Hyundai Marine also entered the trade as a slot charterer with AAA in January 1999  .
Details of recent entry and exit in the SE Asian trade are provided in Appendix A.
There are a number of factors that may contribute to this apparent ease of entry into the trade.  Some are related to the nature of liner shipping services generally while others are specific to the SE Asian trade.  The key general characteristics of liner shipping services that contribute to low entry barriers in the SE Asian trade include:
•	Relatively low sunk costs.  It is generally accepted that although there are high fixed costs in liner shipping, the cost of moving ships in and out of trades is low.  The mobility of shipping assets makes it easy to relocate ships to different parts of the world.  This means that shipping services can be reconfigured at short notice in response to changes in the relative conditions in various trades.
•	Established shipping agency business.  Shipping agencies facilitate entry of lines into trades by providing specialist marketing services.
•	Chartering.  Entry into particular trades is also possible by chartering slots or chartering vessels.
•	Low charter prices for container shipping during the recent past (Drewry (1999).  The economics of shipping services is affected in part by the buy/lease/charter decision.  The degree of difficulty of entry increases as the buy option becomes progressively more relevant.  With charter rates at historically low levels during the 1990s, entry was accordingly facilitated into most trades.

In addition, there are trade specific factors that encourage entry into the SE Asian trade:
•	The close proximity of Australia to SE Asia.  The transit time to Singapore varies between 5 to 11 days, depending on the Australian port.  Details of transit times for all SE Asian trades from the ports of Melbourne and Sydney are presented in Appendix B.  By comparison, the average steaming time to Europe is about 20 days.  This means that fewer ships are required to provide services of a given frequency in SE Asia compared with Europe.
•	The importance of SE Asia as a hub.  The SE Asian trade is to a large extent a feeder service for lines involved in Northern Hemisphere Round the World and Pendulum services to the Northern Hemisphere.  This creates economies of scope in the provision of liner shipping services in this trade.  The involvement of lines in trades to Singapore means that it is possible for these lines to service the Australia-SE Asian trade more cheaply than if they attempted to service the trade by itself.
The relative ease of entry may explain why this trade seems to be characterised by such a large number of lines.  As already noted, there are twenty-one liner shipping companies servicing the SE Asian trade.  By contrast, on the European–Australian trades there are twenty lines and only nine lines serving Australian-US trades.  The importance of Singapore as a transhipment centre is a key factor.  While there are a relatively large number of lines servicing the trade, the number of lines would be smaller if the trade were solely confined to cargo moving  to/from Australia-SE Asia.  Among lines on the Europe-Australia trade, a relatively large number offer tranship services via Singapore.  There are relatively few lines sailing directly from Australia to Europe.
Fundamentally, it will be the profitability of a trade that attracts entry to it.  Hence high freight rates in the early and mid 1990s and rapid growth in demand for freight services attracted lines to the trade.  But it is likely that there may be other factors explaining the presence of so many lines. Other strategic factors may attract entry.  For example, a material strategic factor may be the need to reposition containers in Asia.  It is understood that a major factor behind MSC’s recent small-scale entry into the Fremantle to SE Asian market is the need to reposition containers back from Africa to SE Asia.  Another reason may be, as Liner Shipping Services has argued, that entry has  less to do with the actual trade itself and more to do with having a comprehensive geographical presence.  According to Liner Shipping Services, lines enter the SE Asian trade to position themselves for business that requires a presence world wide:
“…a number of international carriers entered the trade to ensure that they could meet the demand of global tenders, which included countries like Australia and New Zealand.”  [Liner Shipping Services, supplementary submission, p 1]
There is little evidence of entry by significant independent operators.  Lines that aim to provide a dedicated SE Asian trade service have joined the TFA.  On the other hand, lines that have operated independently of the TFA have tended to concentrate on servicing specific ports.  For example, recent entry such as MSC’s entry into the Fremantle-Singapore/Jakarta trade represents an attempt to fill a market niche rather than a dedicated full-scale service to all Australian ports.
There is also evidence of exit from the trade.  In response to excess supply in the trade in the mid 1990s lines commenced to reconfigure services.  A total of 10 ships were withdrawn from the trade in the three months to September 1999 .  Six months after its entry in February 1998, Maersk withdrew its SE Asia service from the East Coast, and in June 1999 the AAA service dropped its twice-weekly calls to Sydney and Melbourne due to lack of cargo.  More significantly, in May 1999 ASA transferred an entire loop (half of its service to SE Asia, a total of 4 ships) to North Asia  and in September 1999 AAX reduced its services by withdrawing one of its five ships.  At the same time, K Line and Maersk rationalised their services from Fremantle to SE Asia and replaced seven ships with two larger capacity vessels.
3.1.6	Conclusions on Supply Characteristics
The SE Asian trade is relatively important in the context of the Australian economy but small in global terms.  Some of the lines operating in this trade are among the largest operators in the world.  For these lines, the SE Asian trade represents a small part of their overall business.
Capacity in the SE Asian trade expanded in the early 1990s.  Larger ships were introduced and new lines entered the trade in anticipation of continued high rates of growth in Asia and likely strong profitability of the trade.  
The Asian financial crisis of 1997 and the ensuing fall in demand resulted in significantly lower growth rates for exports to SE Asia than had been experienced previously.  This led to falling freight rates and rationalisation of tonnage as lines attempted to deal with the effects of excess supply.
The SE Asia trade seems to be characterised by low entry barriers.  The existence of significant economies of scope due to the close proximity of Australia to SE Asia probably contributes to low barriers to entry.  Profitability and strategic factors may also be important in explaining the presence of a large number of lines in what is essentially a small trade in global terms.
Low barriers to entry and exit promote opportunistic entry and mean that it is possible to effect significant adjustments to capacity in response to changes in demand.
There is little evidence of significant independent entry.  Lines providing full scale services in all Australian ports have joined the TFA.  Independent entry has targeted specific ports.
3.2	Characteristics of Demand
3.2.1	Export by Volumes and Value
The SE Asia northbound trade has a low unit value by liner standards.  The average unit value of liner exports to SE Asia as of 1999 is about $A 1400 per tonne compared to the average unit value of the European southbound trade which in 1997-98 was $A4390 per tonne. 
The SE Asian trade is primarily a commodity-based trade and Australian exporters are price takers on world markets. Consequently exports are likely to be sensitive to large rises in freight rates to any particular market.  The concomitant increase in the volume of Australian exports on a weight basis and the fall in its value may indicate a significant increase in the proportion of low-value commodities such as cereals and wastepaper shipped to SE Asia.  This is shown in the following chart.
Chart 3.3	Export Volumes by Commodity
 Source: International Cargo Data Base, Bureau of Transport Economics, accessed April 2000.

The key changes in volumes of commodity exports since 1997 are:
•	Cotton exports rose steadily through the period of the Asian crises – from 5.8 per cent of total export volumes in 1997 to 9.2 per cent in 1999. 
•	Wastepaper – a low-value high-volume product - rose to 6.1 per cent of total export volumes in 1999. In 1997 it represented 2.6 per cent of export volumes.  
•	Cereals rose to 16.4 per cent by volume in 1999 from 7 per cent in 1997.
•	Fruit and vegetables demand fell in 1998, but recovered in 1999 to a similar share of the market by volume (6.8 per cent).
•	Dairy products also fell in 1998, but recovered in 1999. Its market share rose from 5.8 per cent in 1997 to 10 per cent in 1999. 
•	Export volumes for iron and steel fell from a share of 8.5 per cent in 1997 to 5.4 per cent in 1999.
•	Exports of aluminium fell in 1998 and then rose to a similar proportion of total volumes in 1999, viz 5.8 per cent.
•	The share of chemical exports fell marginally from 4.5 per cent of total export volumes in 1997 to 4.1 per cent in 1999.
It is expected therefore, that shippers using the liner services to SE Asia would have a greater demand elasticity in response to changes in the freight rate than Australian shippers who ship to European/US markets.  Consequently, there may be a greater resistance against rising freight rates in this trade than in other trades from Australia.  Low-valued products such as wastepaper and cereal products, which are normally sent by bulk, can represent significant proportions of the total volume.  This is due to the effect of low freight rates that make transportation of low value-added products by container economic.  
3.2.2	Countervailing Power
A key aspect of Part X is the exemption provided to shippers from application of Trades Practices laws in respect of their ability to collaborate and form buying groups.  This is intended to provide countervailing power to exporters in their negotiations with lines.
The Commission understands that the majority of freight rates in this trade are not established as a result of formal negotiations under Part X.  Apart from APSA the main bodies which conduct formal negotiations with the TFA are the Australian Horticultural Exporters Association and the cotton shippers.  
Seemingly, many exporters in this trade have not relied on collective negotiations with the TFA to set freight rates.  Exporters who are not members of a registered shippers body cannot invoke the negotiation provisions of Part X, so it would appear that many exporters have preferred not to join a designated shippers body.
It is difficult to ascertain just how effective countervailing power has been as an offsetting influence on the coordinated actions of shipping lines.  The low proportion of cargoes effected at collectively negotiated rates could be indicative of a number of factors.  It could suggest that exporters prefer individual negotiation because of their unique circumstances, lower cost or other reasons.  If so the provisions of Part X relating to collective negotiation are of little benefit to them.  Perhaps, it may be that the need for collective negotiations over the last few years has been lessened by the low rates that were available in the second half of the 1990s.  Alternatively, it may be a positive reflection on the effectiveness of APSA in negotiating general rates.
The current ACCC investigation may be acting as a deterrent on lines’ behaviour and this in itself can be seen as a form of countervailing power. 
3.2.3	Conclusions on Demand Characteristics
The key observations on the characteristics of demand for liner shipping services in the SE Asian trade are:
•	demand for liner shipping services in the SE Asian trade may be more price sensitive than other trades such as US or Europe;  
•	it is difficult to assess the effectiveness of countervailing power as the evidence is mixed;  and
•	the majority of the trade currently does not seem to have used the opportunity to negotiate rates with lines and this may tend to suggest that countervailing power is not being widely used.

3.3	Freight Rates
Freight rates charged by TFA lines for northbound trade to SE Asia fell significantly from 1996-99 and recovered somewhat in late 1999/2000.  The following table shows changes in minimum benchmark blue ocean freight rates since 1995 for a number of commodities in the northbound SE Asian trade.
Table 3.2	Indicative Minimum Ocean Freight Rates – Melbourne to 			Singapore/Pt Kelang
	Fruit & Vegs
$A/TEU	Meat in Cartons
$A/TEU	Cotton

$A/FEU#	Waste Paper

$A/FEU	Milk Powder
$A/FEU	General NOE
$A/TEU	
							
Aug 1995	3,950	3,775	1,900	1,750	1,200	1,525	
Jan 1996	3,975	3,775	2,075	2,585	1,355	1,525	
Jul 1997	3,350	3,100	1,800	1,400	900	1,000	
Jun 1998	2,700	2,600	1,200	1,400	650	750	
May 1999	2,350	2,350	950	950	900	600	
Jul 1999	2,550	2,550	1,300	1,300	800	800	
Aug 1999	2,350	2,350	950	950	550	600	
Jan 2000	2,600	2,600	950	1,270	800	800	
Apr 2000*	2,600	2,800	1,520	1,270	800	950	
							
% Change	-34%	-26%	-20%	-27%	-33%	-38%	
	Source:  Liner Shipping Services, submission, p 4.
	Note:	  * Planned but not implemented at time of report.
		  # Forty foot equivalent unit.

A restoration in published rates is evident from July 1999 but as at April 2000 rates are lower than they were in 1995, in some cases considerably lower.  Another feature of the above table is the volatility of rates in the trade of some commodities, notably cotton and waste paper, in which rates fell markedly in the twelve months to May 1999 then rose and fell again in the following two months.
Table 3.3 shows changes in actual blue water rates for selected commodities in the northbound SE Asian trade.
Table 3.3	Indicative Actual Ocean Freight Rates – Melbourne to 				Singapore/Pt Kelang

	Fruit & Veg
$A/TEU	Minerals
$A/TEU	Cotton

$A/FEU	Waste Paper

$A/FEU	General NOE
$A/TEU	
						
Jun 1995	3,880	1,240	1,960	1,990	1,300	
Jun 1997	3,210	1,010	1,680	1,380	1,000	
Jun 1999	2,270	600	780	580	580	
Apr 2000	2,520	830	1,260	1,080	750	
Oct 2000	2,460	755	1,160	1,005	745	
% Change	-35%	-33%	-36%	-46%	-42%	
Source:	Liner Shipping Services, submission, p 22;  supplementary data.

As with the minimum benchmark rates, actual rates have also trended downwards.  Rates for the selected commodities shown above are significantly lower in early 2000 than in 1995 despite the rise recorded in the late months of 1999 and early 2000.  With some exceptions, notably rates charged for Waste Paper in 1995, actual rates are generally lower than announced minimum benchmark rates.  According to APSA, base rates for general cargo Melbourne to Singapore had fallen to $A 450/TEU prior to August 1999.  Here it should be noted that the attempt by lines to restore rates appears to have stalled as average actual rates of $745 in October are lower than the minimum rate agreed in January 2000 of $800/TEU.  
Chart 3.4 shows a comparison of actual freight rates with the minimum benchmark rate agreed by TFA lines since 1995.  The chart highlights the apparent tendency for individual lines to not stick with minimum benchmark rates agreed by the TFA.

Chart 3.4	Minimum Benchmark and Actual Freight Rates, 
		General Cargo NOE – 1995 to 2000
	Source:  Liner Shipping Services, submission, pp 4 and 22.

The fall in the northbound freight rates in the late 1990s appears to be consistent with the supply-demand imbalance that came about as a result of the excess supply that coincided with a fall in demand for Australian exports to the SE Asia region.   
The evidence on recent rate developments is significant because it means that rate discipline does not appear to have been maintained at a time when lines have been operating at a loss in the northbound trade (see section 3.4 for a discussion of profitability). 
It is uncertain at this stage whether rates will continue to rise or have reached some sort of plateau.  Some evidence suggests a levelling out of freight rates.  The April 2000 rate rise announced by the TFA has not been implemented and it appears that planned increases for the remainder of calendar year 2000 have also been abandoned [LLDCN, Sept 4 2000, p 1].  The announcement of this investigation in March 2000 may have been a factor in the abandonment of announced rate rises for April 2000. 
3.3.1	Services Provided at Internationally Competitive Freight Rates
This is a matter to which the Minister requested the Commission to give special consideration in addressing the terms of reference.  As both the 1999 Productivity Commission (PC) and 1993 Brazil reports noted, drawing meaningful conclusions from international comparisons of freight rates is fraught with difficulties.  According to the Brazil report, simple comparisons of rates ignores relevant differences due to “different locations, and relationships to other trade routes as well as different lengths, volumes, cargo commodity mixes and many other factors” [Brazil review, 1993, p 69].  Indeed, the PC concluded that such comparisons provided little information and were thus futile [Productivity Commission inquiry, 1999, p 67].  Nevertheless, while refraining from reaching generalised conclusions, both reports pointed to evidence suggesting rates were internationally competitive at the time of their respective reports in 1993 and 1999.
The peak shippers’ group, APSA, has submitted that local freight rates were generally considered internationally competitive three years ago and are still internationally competitive, though not across all commodities. [APSA, submission, pp 2-3]
Information provided by Liner Shipping Services suggests that both dry and reefer cargo rates were comparable in 1996-97 across trades to Japan, Korea, Europe, North America and SE Asia.  Present rates for dry and reefer cargo rates were lower in the SE Asia trade compared to other trades, and in the case of dry cargo, substantially lower. [Liner Shipping Services, submission, p 13]
Further information supplied by Liner Shipping Services provides the following comparisons:
Table 3.4	Indicative Minimum Blue Ocean Freight Rates – general cargo, 		selected trades
	Europe/Asia
Eastbound
US$/TEU	US/Asia
Westbound
US$/TEU	Asia/US
Eastbound
US$/TEU	Asia/Europe
Westbound
US$/TEU	Melb/Singapore
Northbound
US$/TEU	
4Q 1996	1,137	1,384	1,548	1,281	9911	
4Q 1999	775	733	2,195	1,612	4802	
% change	-31.8	-47.0	41.8	25.8	-51.6	

Sources:	Liner Shipping Services, submission, pp. 4, 15 and 22.
Notes:	1:  Exchange Rate US$1=$A0.65
		2:  Exchange Rate US$1=$A0.60 applied to a rate of $A800/TEU.

The above table suggests that from 1996 to 1999, rates in the SE Asia trade have fallen proportionately more than in Europe/Asia and US/Asia trades.  By contrast rates in the Asia/US and Asia/Europe trades have recorded rises.
3.3.2	Conclusions on Freight Rates
The behaviour of freight rates charged by TFA lines in the SE Asian trade since 1995 suggest that rates were initially sensitive to the effects of excess capacity.  After services were rationalised by lines and demand improved from early 1999, rates rose but not to their pre-1995 levels.
More recent evidence suggests that rates may have stabilised.  It is too early to say whether this represents a halt to recent rises or a temporary pause in a longer term upward trend.  Rate increases foreshadowed by the lines for April and September 2000 were not implemented.  Furthermore, as at October 2000 rates are still below the indicative minimum rate agreed in January 2000.  This is significant because it indicates that rate discipline may not be holding within the TFA.
It seems likely that rate discipline among members of the discussion agreement is less effective when there is significant excess capacity.  This has been the case for much of the post-1995 period when rates have fallen to relatively low levels.
Further, freight rates charged by TFA lines for services provided to Australian exporters on the SE Asian trade do not appear to be out of alignment with rates charged on other international trade routes.
3.4	Profitability
The Commission has obtained from member lines cost and revenue data relating to their northbound operations in the SE Asian trade.  The data covers the nine month period from July 1999 to March 2000.  Aggregated financial data are presented in the following table.
Table 3.5	Costs and Revenues – Northbound SE Asian Trade, Jul 1999 to 
		Mar 2000
			TFA Lines
$A 000	
Total Revenue			127,525	
Costs	Ship Costs	Manning	3,477	
		Repairs, Maintenance and Survey	898	
		Insurance	464	
		Stores and Provisions	728	
		Bunkers	13,351	
		Vessel Costs	34,575	
		Miscellaneous	8,424	
			Total Ship Costs	61,918	
				
	Land Based	Cargo	- Australia	30,591	
	Costs		- Overseas	29,305	
		Port	- Australia	2,871	
			- Overseas	1,103	
		Container Costs	28,903	
		Repatriation of Empty Reefers	1,163	
		Agency and Commission	8,865	
		Shore Administration	11,588	
			Total Land Based Costs	114,390	
					Total Costs	176,308	
Operating Profit			(48,783)	
Operating profit				
as % of revenue			-38.3%	
Source:  Liner Shipping Services, confidential submission.

There are difficulties in only considering partial profitability data.  Ideally, for example, it would be better to have data covering both north and south bound legs of the trade.  However, the above data suggests that the northbound SE Asian trade has not been profitable for the TFA lines in the nine months to March 2000.  Of the sixteen lines that provided financial data, only two recorded positive results, with a combined profit of $120,000.  The total loss during this period was $48.8 million which represented over 38 per cent of combined revenues.
If lines had been successful in implementing freight rate increases as planned for April and September 2000, it is likely that they would have experienced an improvement in profits.  Table 3.6 shows the likely impact on profits in two cases, the first assuming an average actual base rate of $700/TEU and the second, assuming a base rate of $900/TEU.
Table 3.6 – Notional Profits for TFA Lines – 2000-01
	Jul 1999 to Mar 2000
	Jul 2000 to Jun 2001
	Jul 2000 to Jun 2001
	
Revenue ($)	127,525,000	222,199,600	285,685,200	
Costs ($)	176,308,000	235,077,654	235,077,654	
Volumes (TEUs)*	238,071	317,428	317,428	
Average Freight Rate ($)/TEU	535.66	700.00	900.00	
Unit Cost ($)/TEU	740.57	740.57	740.57	
Operating Profit/(Loss)  ($)	(48,783,000)	(12,878,054)	50,607,546	
				
Note: Volumes for 2000-01 are annualised and estimated from capacity utilisation data.  

Data in the above table is based on the assumption of constant volumes and unit costs.  The results flowing from these assumptions are of course speculative but they provide indicative results.  An average freight rate of about $A900/TEU for the northbound trade from Melbourne to Singapore, would mean that the performance of TFA lines could be expected to move from combined losses of $48.8 million to profits of $50.6 million.  On the other hand, if the average rate were $700/TEU then the combined result for the TFA would be a loss of $12.9 million.
Despite the uncertainties associated with these estimates, it does not seem unreasonable to argue that if the rate restoration had proceeded as planned by the TFA lines, then the financial position of the TFA group could have improved.  The estimates in Table 3.6 also show that with current average freight rates of around $750/TEU, lines may be moving to a break-even situation.
It is difficult to make an overall assessment of the level of profitability on the trade on the basis of the snapshot of available data.  Profitability is likely to be highly sensitive to the balance of supply and demand and the level of freight rates.
Conclusions on Profitability
According to information received by the Commission, TFA member lines incurred losses on the northbound SE Asian trade in the nine months to March 2000.  At average rates currently about $750/TEU, TFA lines may be moving to a break even position.  It would be necessary for the Commission to have more extensive data over time to make proper judgements as to the appropriateness of current profit levels.  
3.5	Competition 
The general rationale for cartels is to reduce competition between cartel members.  This tends to have the effect of raising prices as firms manipulate quantities to maintain prices above competitive equilibrium levels.  The evidence suggests that there are low entry and exit costs in the SE Asian trade.  So while the cartels aim to lower competition, in the case of the TFA, their capacity to achieve this has been be reduced by:
•	the presence of non-TFA vessels in the trade;
•	the willingness of TFA members to cut rates especially when excess capacity is present; and most significantly by
•	the ease of entry of new lines and capacity to the trade.
These matters are discussed briefly below.
3.5.1	Competition between TFA and non-TFA lines
Lines that are not members of the TFA do not offer a dedicated full-scale service covering a number of Australian ports in competition with TFA lines.  Rather, competition from non-TFA lines is confined to selected ports.  For example, there is some competition provided to TFA lines for services between Fremantle and Singapore by a new entrant, MSC.  Also there is marginal competition for slots ex-Brisbane to Singapore provided by two NZ–Singapore services.  Finally, there may be some competition between multi-purpose operators and TFA members.  However, again the primary focus of these services is break-bulk or Ro-Ro (cars etc), not container traffic.
Since the Australian port coverage of the non-TFA lines is not as comprehensive as that provided by the TFA, competition in smaller Australian ports may be somewhat muted.  For example, the Port of Adelaide is served by three TFA services (a total of 8 ships), each with a fixed weekly call frequency.  These lines face competition from only one alternative service, the P&O Nedlloyd/Contship Eagle Round the World service (a total of 6 ships) with a fortnightly call frequency and far less assigned slot capacity to SE Asia.
The principal interests of non-TFA lines are in other markets such as Europe or North Asia.  The allocation of slots for SE Asia northbound cargoes made by these lines is residually determined by the need for these lines to reposition containers to SE Asia for use as export boxes to other destinations.  Because the decisions by non-TFA lines about participation in the SE Asian trade are to some extent independent of the trade itself, there may be reduced incentive to offer low rates as a means of attracting business.  Nevertheless if these lines have spare capacity between Australia and Singapore they may be willing to sell spare capacity relatively cheaply, relying on their core business for profitability.
Anecdotal evidence suggests that in those ports where European/round the world operators offer competing services, they offer lower rates than TFA lines, even in times of rising demand.  Liner Shipping Services have submitted that:
“Rates have also, on occasion, been reduced below the benchmark in response to competition from operators using this trade as a way-port trade through to other destinations.  [Liner Shipping Services, submission, p iv]
This may be an example of competition for existing business in the face of lower service quality rather than an attempt to compete for additional business. This seems to be competition at the margin at least in those ports where through operators provide shipping services.
3.5.2	Service and freight rate competition between members of the TFA.
It is likely that the willingness of members of the TFA to adhere to agreed freight rates will vary with the degree of excess capacity in the trade.  When the trade is tight, higher rates can be obtained.  But when there is spare capacity, there will be a strong incentive for individual members of the agreement to cut rates to attract more custom and fill otherwise empty spaces. 
Rates have fallen in response to excess capacity in the 1990s.  Actual rates have been lower than agreed minimum rates and the TFA failed to restore rates as planned in 2000.  This suggests that the TFA has had some difficulty in maintaining internal rate discipline.  
3.5.3 The impact of new entry
Another source of competition is from potential new entrants.  As already noted, liner shipping is characterised by frequent opportunistic entry as a result of low barriers to entry and exit.  While the relatively thin Australian trades may not be as attractive as, say, intra-Asian trades, it is likely that a trade with payable rates will attract entry.
Also, it is possible that at the margin, competition is provided from operators of breakbulk and a range of specialist shipping services (such as ro-ro and car carriers).
Ease of entry to a trade can undermine an agreement that causes freight rates to be higher than otherwise.  New entry will continue if incumbent firms attempt to hold rates above the competitive equilibrium level.  Eventually rates are likely to fall, whether by agreement of members of the TFA or by individual lines not adhering to established minimums.  However, in the meantime there can be a tendency for capacity to be maintained for longer periods at a greater level than otherwise.  This can have the effect of increasing average unit costs of supply on the trade.  
3.5.4	Conclusions on Competition
Competition from non-TFA lines is mainly at the fringes of the trade as most of these lines participate in the SE Asian trade as part of a larger global service and not to specifically service the needs of the trade.  However, in times of rising demand non-TFA lines may offer alternatives.  Given the economics of liner shipping services generally, and the thin nature of the SE Asian trade in particular, this competitive fringe may have an impact.  The evidence also suggests that there may be some competition within the TFA.  
4.	Assessment under the Terms of Reference 
Given this detailed outline of the characteristics of the liner shipping services in the South East Asia Trade it now necessary to use this understanding to address the grounds for deregistration that are in the terms of reference in the Ministerial Direction.

The Commission is to report on matters contained in paragraph 10.45 (a) (iv), that is:
that parties to the agreement have given effect to or applied, or propose to give effect to or apply, the agreement without due regard to the need for outwards liner cargo shipping services provided under the agreement to be:
(A)	efficient and economical; and
(B)	provided at the capacity and frequency reasonably required to meet 	the needs of shippers who
	use, and shippers who may reasonably be expected to need to use, 	the services.  
The Minister requested the Commission to give special consideration to the following matters when undertaking its investigation:
Does the operation of the TFA contribute to the provision of adequate outward liner shipping services at internationally competitive freight rates in accordance with the objects of Part X? and
Does the conduct of shipping lines operating under the TFA provide grounds for deregistering the agreement or for seeking undertakings that would make deregistration unnecessary?
Here it should be clear that the Ministerial request for special consideration are not matters on which the ACCC is required to investigate and report in addition to matters set out in the first paragraph of the reference.  In other words, these are not in themselves separate grounds for deregistration but issues to which the Commission should give special when discussing grounds for deregistration specified in the terms of reference.
4.1	Services Efficient and Economical
This section considers the issues arising from the Minister’s terms of reference in respect of whether, in terms of section 10.45 (a)(iv)(A) of Part X:
that parties to the agreement have given effect to or applied, or propose to give effect to or apply, the agreement without due regard to the need for outwards liner cargo shipping services provided under the agreement to be:
	efficient and economical  
An assessment of liner services against this criteria will require a “clear” definition of the words efficiency and economical.  However, Part X does not provide such a definition.  
The Trade Practices Tribunal (TPT) considered the meaning of these terms in the context of its investigation of the Australian/Eastern USA Shipping Conference in 1975.  On 3 June 1975, the Minister for Transport referred to the TPT for inquiry and report, certain matters concerning the Australia/Eastern U.S.A Shipping Conference.  The reference was made pursuant to s.132 of the (TPA) and was on the following terms: -“…whether the conference agreement…does not have due regard to the need for services by way of overseas cargo shipping to be efficient, economical and adequate”.  
In that case, the TPT argued that shippers of overseas cargo are directly concerned not with the costs of overseas cargo shipping, but with the freight rates that they have to pay.  But the freight rates will tend to be uneconomically high unless, among other things, freight rates reflect efficient costs and normal returns on capital.
Another key question according to TPT was the following:  if excess capacity on conference vessels exceeds a certain percentage of the available cargo space, can it be inferred that the service is not being operated economically?  According to the TPT, a figure of 15% excess capacity on northbound voyages was regarded by the industry as being reasonable and industry evidence suggested that “if the actual percentage of excess capacity significantly exceeded 15%, this indicated an uneconomical service”.
Similarly with “efficient”, the TPT did not find the term easy to interpret.  The TPT argued that in one sense it is a general term which comprehends both the adequacy of service and the extent to which it can be said to be economical, and relates these two factors to each other.  In another sense, it may refer particularly to the need for technical efficiency in the design, construction and operation of conference vessels, to the need for efficiency in cargo loading, stowage and discharging, and for managerial and marketing efficiency in the conference lines.
The TPT concluded that given the definition of an economical service , it follows that if the service is economical, it is also likely to be efficient in the narrower sense.  But if it can be shown that a given Conference agreement does not have due regard to the need for an economical service, this would not necessarily prove that the service was not efficient in that sense.
The TPT concluded the following as part of its approach in its inquiry.
…we do not pursue the matter of efficiency further. Rather, the approach followed is to assume, in the absence of contrary evidence, that the individual Conference lines do operate efficiently, and then consider whether the present service is economical and adequate. [TPT, 1975, p 16]
The difficulties associated with interpreting the terms “efficient and economical” were also recognised in the 1993 Brazil Review and the 1999 Productivity Commission Inquiry.  Advice to the Brazil Review from Mr CP Comans noted that:
…there may be some difficulty in the application of the principle that the services be provided in an “efficient and economical” manner.
…there is… no easy substitute for the words “efficient and economical” in so far as those words are used to pick up economic principles. [Brazil Review, 1993, Appendix D, p 12]
Acknowledging these difficulties, the approach adopted in this investigation is to view the concepts “efficient and economical” as are typically considered in economic theory.  From an economic perspective, an outcome is economically efficient when the output is maximised given a limited supply of resources, technology constraints and consumer preferences.  Such an outcome requires that production takes place at the lowest cost possible (technical efficiency) and that prices equal marginal cost of production (allocative efficiency).  Economic theory predicts that perfect competition will produce these outcomes.  If firms adapt to changes in technology and consumer tastes such that the conditions for technical and allocative efficiency are met in the long run, firms are also said to achieve dynamic efficiency.
Due to its underlying assumptions the perfectly competitive model does not always provide a realistic benchmark.  In industries where competition is not perfect but is nevertheless effective, outcomes tend to approximate those of the competitive model in the sense that they are characterised by maximising and optimising behaviour.  That is, firms will tend to direct resources to producing goods and services that consumers most desire and opt for the lowest cost production methods.
It is not the objective of this investigation to assess the potential for the TFA to approximate the competitive model.  However, for the purposes of this investigation, it may be useful to consider whether liner shipping services provided in the SE Asian trade are consistent with the key characteristics of economically efficient outcomes. 
4.1.1	Technical Efficiency
Evidence of technical efficiency typically includes indicators that firms are low cost suppliers.  For the purposes of this investigation, information on capacity utilisation and average cost benchmarking have been used.  
Capacity Utilisation
It is difficult for firms in contestable markets to operate at excessively low levels of capacity utilisation.  If a firm has over invested relative to the industry’s needs it will not be able to recoup the cost of its investments and in the long term its viability will be adversely affected.
In the case of liner shipping, there are sound reasons why lines will not typically operate close to full capacity.  Both the Brazil and the Productivity Commission reports argued that it would not be expected for liner vessels to operate at or close to 100 per cent of capacity.  In its report on Part X, the Productivity Commission said:
At the macro level, excess capacity exists when the carrying capabilities of the global liner fleet exceed the volumes of cargoes shipped. At the micro or trade level, excess capacity exists when vessels operate at relatively low levels of capacity utilisation. Liner shipping operators run regular services along a predetermined route and vessels sail according to a prearranged schedule whether or not they have full cargoes. Thus, it would not be expected for liner vessels to operate at or close to 100 per cent of capacity (Productivity Commission, “International Liner Cargo Shipping:  A review of Part X of the TPA 1974”, 1999, p 12).
Chart 4.1 shows the level of capacity utilised in the transportation of dry cargo by various vessels operated by individual lines in the TFA. 

 Chart 4.1: 	Capacity Utilisation for Dry Cargo – Australia SE Asia Northbound 		Trade July 1999 to March 2000

Source:	Liner Shipping Services, Submission, Table 4.1.
Note:	It is likely that when capacity utilisation rates of over 100 per cent arise, a vessel carries more 	than its “assigned capacity” (because lower than anticipated cargoes are carried for other 	destinations, enabling a higher volume of SE Asian cargo to be carried) or that the cargo mix 	carried is unusually light for the trade, enabling a vessel to carry more containers than normal.

The above chart indicates that for the period 1/7/99 to 31/3/00, most vessels employed in service on the Australia/SE Asia trade route operated at or above 80% capacity utilisation.  Altogether, 75% of vessels employed in the period 1/7/99 to 31/3/00 utilised 80% or more of their existing capacities.  
Chart 4.2 shows the level of capacity utilised in the transportation of reefer cargo by various vessels operated by individual lines (or consortia).

Chart 4.2:	Utilisation for Reefer Cargo – Australia SE Asia Northbound 			Trade July 1999 to March 2000

Source:	Liner Shipping Services, Submission, Table 4.1.
Note:	For scheduling reasons, during the review period some vessels did not call at Adelaide through 	which large volumes of citrus fruit is exported to SE Asia.  Hence their lower reefer utilisation.  	These vessels include:  Bunga Teratai Satu, Bunga Teratai Dua, Bunga Teratai 3, Jitra Bhum, 	Kama Bhum, Itha Bhum, Patsy N.

Chart 4.2 indicates that for the period 1/7/99 to 31/3/00, 50% of vessels employed in service on the Australia/SE Asia trade route operated at or above 60% capacity utilisation. 
Charts 4.1 and 4.2  should be viewed concurrently due to the fact that both figures depict the operations of same vessels but reflect the transportation of different types of cargo.  
These  indicators should ideally be considered as trends over a period of time rather than snapshots, as is the case here. Also, here it should again be noted that the Commission is concerned about the quality of data available to it in using such indicators.  
However, on the available evidence, it is not clear that the lines were operating inefficiently in terms of capacity utilisation for the period 1/7/99 to 30/6/00. 
Average Cost Benchmarking
Information available to the Commission suggests that estimates of the break-even cost of providing liner shipping services may range from $800 to $950/TEU.  These estimates are based on advice from a specialist consultant engaged by the Commission and on preliminary work previously undertaken by the Department of Transport.  These estimates are not founded on detailed cost modelling but are consistent with generally accepted notions held in the industry.
On the basis of information considered in section 3.4, it was estimated that the unit cost of providing shipping services by TFA lines in the nine months to March 2000 may be about $750/TEU.  Caution is required in interpreting the information available to the Commission on average costs and in reaching definitive conclusions on the basis of this information.
Conclusions on Technical Efficiency
Based on the above evidence, the Commission can not conclude that the TFA lines are cost-inefficient in the most recent time period.  
4.1.2	Allocative Efficiency
Allocative efficiency takes account of the willingness of customers to pay for services supplied.  If prices significantly exceed costs over time it suggests that not enough services or capacity are available to meet customer needs.  On the other hand, if the trade incurs losses on a sustained basis it suggests that fewer services or capacity are required to be allocated to the trade.
Information considered in Section 3.4 indicated that lines in the SE Asian trade are not presently earning excess profits and may at best be achieving break-even. 
On balance, available data suggests that the TFA lines are not currently excessively profitable and may at best be breaking even.
4.1.3	Dynamic Efficiency in the Provision of Liner Shipping Services
Dynamic efficiency ensures that technical and allocative efficiency is achieved over time.  The dynamic component of economic efficiency ensures that, over time, consumers are offered new and better products as well as existing products at lower cost.  In assessing the dynamic efficiency of the operations of TFA lines in the SE Asian trade, consideration is given to global trends in the way shipping lines have operated and provided shipping services.  Evidence on dynamic efficiency from financial data provided by lines is also considered.
Global Trends
The liner shipping services industry world wide has been characterised by attempts to improve dynamic efficiency over time.  This has involved  technological and strategic factors.
Recent global trends in shipping services suggest that lines have undergone structural and strategic changes over a considerable period of time aimed at improving the quality and level of services provided by these lines as well as creating the environment to offer services at lower cost to shippers.  Some of the key elements of such changes include the withdrawal from major container markets, disposing of non-core businesses, and the rationalisation of corporate structures and staffing arrangements, containerisation of new routes, and the substitution of inefficient modes of carriage by alternative more efficient modes.  For instance, it was observed in Section 3.1.5 that some shipping lines have withdrawn from areas which either proved unprofitable, or inconsistent with the company’s strategic direction.  
Some liner firms have sought global status through bigger ships, larger fleets, changes in route structures and expanded services or through mergers or strategic alliances with other liner shipping firms.  The emergence of hubs and the development of networks of feeder services are also relatively recent developments.  Liner operators have sought larger vessels in order to capture the benefits of scale economies. Mergers, alliances and other forms of concentration in shipping  are aimed at reducing unit costs through productivity improvements and scale economies.
Computerised documentation, equipment control and financial systems and subsequent developments in data processing and transmission have permitted reductions of staff in such traditional functions as booking, coding, inputting, rating, and controlling. As crew numbers have reduced, so overall staff numbers on shore have also declined, and container shipping has become an increasingly capital intensive business [Drewry Report, November 1991]. 
Fixed Costs 
In liner shipping, fixed costs may be an indicator of dynamic efficiency.  A shipping line that is dynamically efficient will tend to experience a rising proportion of fixed costs to total costs.  If the trends in liner shipping described above are an accurate representation of the factors that have been relevant in the industry in the last few years, then the industry should be characterised by rising fixed cost ratios.  Drewry (1991) and Hoffmann concur that the proportion of fixed costs within total costs has increased over the years as lines have invested in technologies and systems aimed at reducing operating costs and in capacity expansion to capture scale economies.  Hoffmann said:
According to one estimate (Leif Loddesol of Wilhelmsen Line), “the ratio between fixed and variable costs is shifting from the traditional 50:50 to more like 90:10 in the container industry.  [Hoffmann, “Concentration in Liner Shipping – its Causes and its Impacts for Ports and Shipping Services in Developing Regions”, p 54].
While it can be argued that a ratio of 90:10 may be unduly high, one approaching 60:40 or 70:30 may be a more realistic target for a dynamically efficient firm.  Confidential cost data provided by shipping lines suggests on average a relatively low level of dynamic efficiency although it should be noted that the data exclude capital cost.
Conclusions on Dynamic Efficiency
The evidence on dynamic efficiency is mixed.  Cost data pertaining to TFA lines indicate that the level of dynamic efficiency may be low.  On the other hand, the global shipping industry has and is still going through different phases of change aimed at improving the quality and levels of service provided to shippers as well as the cost of providing these services.  
It should be noted that many of the lines provide services in the SE Asian trade as part of a service covering a wider geographical area than simply the SE Asian region, and are among the largest operators in the world.  There is no evidence to suggest that the global trends described above have not also permeated to lines and ships involved in servicing the SE Asian trade. 
On balance, the issues discussed so far point to the fact that lines operating under the TFA are likely to exhibit some degree of dynamic efficiency in the provision of northbound shipping services to SE Asia.  However, insufficient evidence is available over an adequate time period to reach a strong conclusion as to whether this performance is adequate or whether without the TFA it could have been better.
4.1.4	Conclusion on Efficient and Economical Services
The evidence considered is indirect and partial.  The Commission is concerned about the quality of data available to allow it to form a judgement.  However, the Commission has not found strong evidence to suggest that services in the trade are being provided on an inefficient and uneconomical basis
4.2	Adequacy of Services
This section considers the issues arising from the Minister’s terms of reference in respect of whether, in terms of section 10.45 (a)(iv)(B) of Part X:
that parties to the agreement have given effect to or applied, or propose to give effect to or apply, the agreement without due regard to the need for outwards liner cargo shipping services provided under the agreement to be:
	provided at the capacity and frequency reasonably required to meet 	the needs of shippers.
This is closely related to the matter of adequacy of services to which the Commission was requested by the Minister to give special consideration.
The capacity available to service a particular trade is determined by the number of ships, the capacity of each vessel and the frequency of the service.  Due to the opposing effects of, on the one hand, the economies of scale in various aspects of liner shipping, and thus the benefits of larger ships and, on the other, the higher shore-based costs of lower service frequency of large ships, there is a trade-off between ship size and service frequency.  This means that neither total vessel capacity nor service frequency by themselves can be used as reliable indicators of absolute service levels but both must be considered conjunctly.
For the purposes of this term of reference, indicators of both sailing frequency and average capacity are used.  Comparisons are made with the respective minimum service levels stipulated in the TFA as a measure of the extent to which they meet the requirements of Australian exporters.
There is not strong evidence to suggest that the overall quality of liner shipping services provided to Australian firms that export to SE Asia is inadequate.  The following table provides details of changes in indicators of service frequency for the SE Asia trade.

Table 4.4	Sailing Frequency – Voyages Per Month
	1999	1993	
Actual	28	36	
Minimum	17.08	8.83	

Source:	Liner Shipping Services, submission, p. 4.
		Productivity Commission, International Liner Cargo Shipping: A Review of Part X of the Trade 		Practices Act 1974, September 1999, p 70.
Notes:	Jun 1993 : Aust/SE Asia Shipping Forum – 8 members
		Dec 1999: Aust/SE Asia TFA – 17 members

While the requirements under the minimum service level arrangements stipulated in the TFA and in the former conference agreements have been raised since 1993, actual sailing frequency appears to have deteriorated.  Total number of voyages per month declined from 36 in 1993 to 28 in 1999.  This may be due to rationalisation of services following the economic crisis in SE Asia in 1997 and the ensuing drop in demand for northbound liner shipping services.  Nevertheless, actual sailing frequency still exceeds the minimum requirements of the trade.  
A similar trend seems to characterise indicators of capacity.  Table 4.5 shows changes in measures of capacity since 1993.
Table 4.5	Average Monthly Capacity - TEUs
	July 2000	Jul 1993	
Actual	32,735	36,103	
Minimum	12,500	6,679	

Sources:	Liner Shipping Services, submission, p. 4.
		Productivity Commission, International Liner Cargo Shipping: A Review of Part X of the Trade 		Practices Act 1974, September 1999, p 71.
Notes:	Nov 1989: Aust/SE Asia Outward Ship Conf – 8 members
		Jun 1994 : Aust/SE Asia Shipping Forum – 8 members
		Dec 1996: Aust/SE Asia TFA – 12 members
		Jul 2000  : Aust/SE Asia TFA – 16 members
		Capacity is adjusted for deadweight restrictions but includes space allocated  				for non-trade cargo.

The capacity requirements in terms of the minimum service levels have increased since 1993 but actual capacity appears to have fallen.  The latter may reflect the effects of decisions by members of the TFA to reconfigure services to SE Asia in response to an excess of supply that developed in the mid 1990s.  According to Liner Shipping Services, the objective of member lines’ strategy was to achieve “… a rationalisation of tonnage in a number of trades serving Australia which reduced the gap between capacity and demand..." [Liner Shipping Services, submission, p 13].  As with indicators of service frequency, the capacity at which services are actually provided exceeds the minimum requirements.
Data provided by shipping lines suggests that there may be some scope for current capacity to accommodate increases in demand in the short term.  The following table shows that usage of dry containers is high with a utilisation rate of over 89 per cent but refrigerated containers are being utilised at just over half capacity.
Table 4.6	Weighted Average Capacity Utilisation 
	July 1999 to March 2000		Annualised	
		Dry		Reefer	Total	Total	
Total Capacity (TEUs)		 188,543		 40,462	229,005	305,340	
Spare Capacity (TEUs)		   20,389		 18,390	  38,779	 51,705	
Capacity Utilisation (%)		     89.2		  54.6	    83.1	83.1	

Sources:	Liner Shipping Services, submission, Table 1.1.
Note:	Capacity is adjusted for deadweight restrictions but includes space allocated to non-			trade cargo.

The above data indicate that in terms of both frequency and capacity, services provided to exporters into the SE Asian region by members of the TFA does not appear to be inadequate.  This observation is consistent with the lack of adverse comments received by the Commission on general service levels both in an absolute sense and relative to standards prior to the TFA.  
This is not to say that specific problems do not occur from time to time.  For example, the Commission has received submissions from shipper bodies in Western Australia and South Australia arguing that services to those States has deteriorated compared to the standard enjoyed by exporters in the eastern States.  The Western Australian Shippers’ Council (WASC) has submitted that:
“The level of service has also suffered in recent times for Western Australian shippers.  All too often vessels take on extra cargo at eastern state ports leaving insufficient space for booked cargo at Fremantle.  On occasions vessels bypass Fremantle, particularly if the vessels’ captain has trimmed the ship in the east.
Cargo would arrive at the port to be turned away, even when the shipping lines had taken firm bookings and allocated containers.  A recent move by shipping lines has been to refuse to take bookings on certain vessels until the very last moment.  This lack of service by shipping lines causes considerable uncertainty and inefficiency for the shipper”. [Western Australian Shippers Council, submission, p 2]
Furthermore, the WASC argues that due to the fact the TFA encompasses all lines servicing SE Asia “…alternative arrangements are generally not available to the Western Australian shipper” [Western Australian Shippers Council, submission, p 2].  
In their supplementary submission, Liner Shipping Services specifically addressed the matter raised by WASC and acknowledged “…that on a few occasions there have been short shipments ex-WA” [supplementary submission, p 3].  Liner Shipping Services claims that lines took steps to rectify these problems, but offered to “…having more detailed consultations with WASC with a view to removing any service deficiencies” [supplementary submission, p 3].
Similar comments were made by the South Australian Co-operative Bulk Handling Limited (SACBH) in the context of grain traders.  They argued that :
“South Australia has been isolated as the worst State to source shipping containers, even in comparison to Western Australia.
Grain traders and direct exporters have become frustrated with Adelaide to the point where South Australia is only considered for bulk shipments.”  [South Australian Co-operative Bulk Handling Limited, submission, p 1]
SACBH further argue that the inability to have access to containers adversely affects the potential to develop export markets:
“The development of export markets by grain traders for these niche crops is hindered due to the uncertainty of supply.  This translates into uncertainty placed upon growers as to whether such crops should be grown which then translates into uncertainty as to whether significant capital outlay should be spent on infrastructure upgrades to process larger volumes more effectively and efficiently.”  [South Australian Co-operative Bulk Handling Limited, submission, p 2]
It might be suggested that that these problems are about the distribution of services between the different States rather than the overall adequacy of services.  However, the Commission is concerned about suggestions that the TFA is not ensuring adequate service in the eyes of users in some of the relatively smaller Australian ports.  The registered TFA allows the lines to collude on freight rates essentially as a quid pro quo for maintaining reasonable service levels.  If the lines are not meeting required service levels, it is appropriate to question continuing registration.
According to information provided by shipping lines, Fremantle appears to be serviced by a number of lines.  In fact, fifteen member lines call into Fremantle.  For two of these, K Line and Maersk, Fremantle is the only port of call in Australia operating three weekly services to Singapore.  Seven lines sail to Adelaide as part of a service linking other Australian ports with SE Asia, although none go to Adelaide exclusively [Liner Shipping Services, submission, Table 1.1A].  
In assessing service levels in specific ports, it is pertinent to note the size of those markets, the types of products being shipped and their relative distances from other Australian ports as well as their destinations.
For example, the market in SA is small and its geographical location relative to other Australian ports and SE Asia may mean that there is probably less incentive in servicing it to the same degree as other Australian ports.  Shipping services in Adelaide for products for which bulk shipping would be expected to provide a more economical form of transportation than containers is also an issue.  The increasing use of containers for some low-value specialised grains may have been triggered by low freight rates prevailing in the trade in the late 1990s.  On the other hand, containers may be the only option in trades where destination ports are not equipped to handle bulk shipping.  It is understood that in the case of grains, there are a number of overseas markets that cannot take delivery in bulk.  In such cases, the possibility of landbridging to another port, say Melbourne, assumes relevance as a means of enhancing the interport competition between those two ports.  A rail service linking Adelaide and Melbourne operated by Patricks is used by some SA exporters.
Lack of adequate access to containers is another quality of service issue of importance to some exporters.  Comments from some exporters indicate that ships are not always fully loaded with containers.  APSA has submitted as follows:
“Containers are viewed as part of the vessel’s equipment and sufficient containers should be applied and made available by the operator of the vessel to fill the vessel.  [APSA, submission, p 5]
The WA Shippers Council has contended that this issue is of particular concern to shippers in WA:
“Given Western Australia’s geographical position, makes our shippers particularly vulnerable to inefficiencies of shipping lines and their inability to provide suitable equipment.  Containers are viewed as part of the agreed freight rate and sufficient numbers should be supplied by the vessel operator to fully load the vessel” [WA Shippers Council, submission, p 2]
Lines have argued that the supply of containers on a ship is subject to a number of space management considerations.  Liner Shipping Services have stated that:
Availability by container type varies considerably between ports and there is no port with a balanced flow.  There is a constant need to reposition between ports and internationally.  The import dry volume pan-Australia will always exceed the export dry volume by at least 15 per cent.  This is further complicated by the need to reposition empty reefer containers into Australia of some 85 per cent of total requirements”. [Liner Shipping Services, submission, p 27]
The Commission has also received comments from exporters regarding container repositioning surcharges applied to accommodate requests for additional containers to be made available when there are insufficient containers in a ship.  APSA has claimed that:
“…there have been a number of instances recently where lines have made demands on exporters for the re-positioning of empty containers.  This charge is known as the Equipment Re-positioning Surcharge.  APSA deplores this practice and any cost for repositioning containers should be part of the operator’s voyage costs and an item for negotiation at the time of rate negotiations.” [APSA, submission, p 5]
TFA lines have denied applying this charge and indeed agree that “…any costs for repositioning containers should be part of the operator’s voyage costs”  and as such should be negotiable [Liner Shipping Services, supplementary submission, p 4].
The Commission acknowledges that there may be an optimal way of configuring space on a ship given requirements which may vary depending on ships, destinations, ports, etc.  This is a matter for lines to determine, possibly in consultation with exporters.  However, it does seem likely that there might be periods of adjustment where shipping lines adjust their space management policies in response to changes in the demand-supply situation.  To the extent that a surcharge needs to be applied to cover unexpected situations, the charge should be subject to negotiation between the relevant parties.  The fact that there may be differences of views on this issue among key industry participants indicates that consultation may be less than optimal.
Conclusions on capacity and frequency of service
The Commission has taken account of the available evidence and in particular evidence provided by the peak shippers’ body, APSA.  From the available evidence there does not appear to be a major problem with service provision.   Some evidence suggests that minimum service requirements are exceeded.  However, there are some problems perceived by shippers from smaller ports.  These should be addressed through appropriate negotiation and consultation, as envisaged in Part X.  
4.3.	Due Regard
As noted, the Commission is to report on whether shipping lines implement the terms of the TFA:
without due regard to the need for outwards liner cargo shipping services provided under the agreement to be:
	(A)	efficient and economical; and
	(B)	provided at the capacity and frequency reasonably required 		to meet the needs of shippers who
			use, and shippers who may reasonably be expected to 			need to use, the services.  
In sections 4.1 and 4.2, issues arising under A and B were considered.  Attention was focussed in those sections on whether services were actually provided efficiently, economically and at a reasonable capacity and frequency without also giving weight to the requirement of lines to have due regard for the need to do so.  To the extent that any services are efficient, economic and adequate, this may be evidence of “due regard”.  However, in view of comments by exporters about the attitude of TFA lines to the negotiation process, this section looks at the issue of negotiation and whether lines have given due regard to the needs of exporters.  The process of due regard is also relevant to consideration of the conduct of lines, one of the matters to which the Commission was requested to give special attention by the Minister.
Issues raised under this particular aspect of the terms of reference are among the most contentious brought to the attention of the Commission in this investigation.  Apart from the increase in freight rates, exporters have mostly voiced concerns about perceptions of changes in the way that the lines have negotiated with exporters.  These changes have been most noticeable since early to mid 1999 when members of the TFA appeared to act in a more disciplined collective manner.
It has been submitted that member lines were willing negotiators when demand for shipping services was low in the mid to late 1990s relative to capacity.  The Australian Horticultural Exporters Association (AHEA) have argued that during this period member lines were:
“…competing with each other, and with non-members, in a healthier environment where the TFA adhered to the spirit of Part X of the Trade Practices Act and followed the agreed process of consultation and negotiation”. [AHEA, submission, p 4]
According to AHEA, the present attitude of member lines is different.  Lines are now taking advantage of the loose nature of the Part X regime and approach the negotiation process with an “arrogant” manner from a “position of strength” (AHEA, submission, p 4).  So while lines and exporters once negotiated mutually acceptable outcomes, they now seek regular rate adjustments “which are far too hasty and done with little or no consultation with or regard for the customer, the exporters” (AHEA, submission, p 3).
A similar observation about the apparent inability of shippers to negotiate acceptable outcomes was made by the Sea Freight Council of Western Australia (SFCWA) which has submitted that:
“Comment has been made that the real negotiating ability of many exporters is effectively negligible under present circumstances”. [SFCWA, submission, p 3]
Two major arguments were put to the Commission in support of their concerns about negotiations.  One is the recent tendency by shipping lines to unbundle pricing and the other is the speed with which lines wanted to restore rates following their fall in the late 1990s.
4.3.1	Unbundling of Freight Rates
Lines have begun to unbundle prices and apply separate charges for the non-freight components of charges in a much more systematic and uniform manner than had previously been the experience for many exporters.  Examples of such charges include Terminal Handling Charges, Currency Adjustment Charges and Bunker Adjustment Factors.  Liner Shipping Services has claimed that these charges were introduced to:
“…increase the transparency of these charges in the freight statement in order that shippers can clearly see the level of these third-party costs and to assist lines in applying pressure for their reduction.”.  [Liner Shipping Services, submission, p 26]

Exporters do not favour unbundling of rates.  It appears that exporters see the increasing trend towards unbundling of charges as just another means of raising revenue.  APSA has explained its position as follows:
“…exporters are unable to apply surcharges to commodity price contracts because unlike a price or a freight rate, surcharges are not fixed for any particular period.  This generally means that the exporter has to fund any increases in surcharges out of his own pocket.  APSA has a perception that surcharges are de-facto freight rate increases.  Exporters have always called for all inclusive freight rates without surcharges.  [APSA, submission, p 4]
The WA Shippers Council has submitted that:
“Surcharges are not fixed for any specific period and can be imposed at any time.  Any such increases cannot be added onto shippers’ sales contracts which inevitably means the shipper has to absorb the additional cost”. [WASC, submission, p 2]
The issues are that the introduction of add-on charges is not being compensated by lower freight rates, and that the component of charges that are open to negotiations, viz the blue ocean rate, is diminishing as a proportion of total charges.  As the Sea Freight Council of WA has argued:
“The fact that  these add-on charges are not negotiable and not subject to time limits raises some concerns, as the proportion of shipping costs over which cargo interests have a level of commercial influence continues to diminish.”  [SFCWA, submission, p 2]
According to the WA Shippers Council:
“If these surcharges are divorced from the freight rate and simply passed onto the shipper then there is no real incentive for the shipping lines to negotiate as strongly as they might otherwise do.  These charges should be part of the freight rate and as such subject to negotiation with individual shippers” [WASC, submission, p 2].
The key point has been that it has not been possible for exporters to negotiate over the levels of the add-on charges because as APSA has maintained, “…exporters and APSA are unable to gain access to agreements between lines and their contractors so that the information contained in a surcharge cannot be verified”  [APSA, submission, p 4].  In a supplementary submission, Liner Shipping Services have denied refusing to provide such information.
The Commission considers that exporters are reasonably entitled to expect shipping lines to negotiate on the levels of add-on charges and provide information to enable their verification.  This would improve exporters’ knowledge base and promote meaningful negotiations over blue ocean rates.  It is of concern to the Commission that there appears to be misperceptions about the actual positions adopted by parties due to inadequate consultation in the industry.
4.3.2	The Speed of Rate Restoration
The pace at which lines have attempted to raise rates has concerned exporters to the point where they have claimed that stable access to export markets was being threatened.  Stability of access is considered a key objective of Part X.  It is one that encompasses the needs of both suppliers of liner shipping services and of exporters.  It can be argued that for exporters to have stability of access, services must be provided in such a way that the overseas buyers of Australian goods can have a reasonable level of assurance that goods will be transported reliably and efficiently.  Services must generally allow exporters to be able to meet the expectations of importers in other countries such that they can be reasonably confident about the quality of the shipping services used by Australian exporters.  Essentially, stability of access is an important ingredient of long term success in export markets.  From the perspective of shipping lines, a pre-condition of their services being of a standard that ensures stable access to export markets, is adequate profitability.
At a general level, the perception seems to be that the TFA has not had a detrimental effect on stability of access to export markets.  For example, APSA has commented in its submission that “exporters in all States and Territories generally have stable access to export markets” [APSA, submission, p 5].
Liner Shipping Services have submitted that the reduction in rates may have  “led to serious instability and the withdrawal of some lines, as well as a significant reduction in service levels” [Liner Shipping Services, supplementary submission, p3].  They contend that the recent rate restoration has “undoubtedly had a positive effect on maintaining access to export markets” [Liner Shipping Services, submission, p 17].
Exporters have acknowledged that freight rates fell to such low levels that restoration was inevitable.  For example, AHEA has argued that:
“The horticultural industry has recognised this was inevitable and in fact support rate stability which in turn ensures the services we need to remain in place with sufficient specialised equipment to meet industry needs.”  [AHEA, submission, p 2]
Exporters, however, have found the rapidity with which the rate restoration programme was implemented disruptive and a threat to stable access to markets.  The key point of concern is that lines have raised rates without regard for the fact that in many cases exporters’ contracts with their overseas buyers tend to be fixed in the short term without possibility of recovery of escalating shipping costs.  The WA Shippers Council has submitted that:
“The WASC has received numerous reports of concern from Western Australian shippers regarding the rapid increase in shipping rates to South East Asia… .Instances of contracts lost and threats to continued business viability have been reported”.  [WASC, submission, p 1]
The Sea Freight Council of WA has expressed similar concerns:
“The speed with which rates have increased this year has reportedly caused problems for a number of WA exporters, particularly those with long term contracts at fixed prices on overseas markets.  There have been claims of losses on those contracts because of the rapidity and significance of rate increases.  [SFCWA, submission, p 2]
It is noted however, that what seems to have driven many complaints is not only the rise in rates recorded from mid 1999 to January 2000, but also the promise of further rises planned by TFA lines for 2000.  The abandonment of freight rate rises planned for April and September 2000 may be an indication that lines were sensitive to the ACCC investigation.  Or, cartel instability may have threatened cohesion within the TFA at rates that were planned to be charged.  Without these planned rises, the speed of the rate restoration programme appears more moderate.  This is not to underestimate the position of some exporters, especially those of low-value commodities, who may have experienced hardships with higher rates.  However, this does not necessarily represent evidence of failure by TFA lines to have “due regard”.  It may reflect the enhanced viability of certain commodities in the global market place when freight rates are particularly low.
4.3.3	Conclusions on Due Regard
The issue of due regard is a complex one.  The Commission notes the rapidity with which lines attempted to restore rates.  This could be seen as evidence of failure to have due regard for exporters’ needs.  On the other hand, lines would probably not provide services that met exporters’ needs without adequate returns.  The attempt to increase rates may be seen as a result of the effect low rates had on profits.  On balance, taking all the available evidence into consideration, the Commission considers that the TFA has not failed to have due regard to the needs of exporters particularly taking into account the fact that proposed rate increases were not implemented.  However, the Commission may have had a different view on this matter if lines had proceeded with the increase in rates as planned.  
The Commission does not have evidence that indicates that the behaviour of the lines, particularly with respect to negotiations, has contravened the provisions of Part X.  The Department of Transport, the Government body overseeing these negotiation provisions, considers that the negotiations followed due process according to the provisions of Part X.
However, it appears that there may be a perception that the negotiation requirements may be insufficiently stringent to result in meaningful negotiations when market conditions favour shipping lines.  This perception may be exacerbated by the fact that while Part X talks about negotiation, there is no obligation on parties to actually agree on proposals.  The Commission considers that the negotiation provisions under Part X provide minimal countervailing power to shippers. 

5.	Conclusions on the Grounds for Deregistration
Part X imposes minimal requirements on members of the TFA in relation to the provision of services and negotiation over these with shippers.  Within the context of the requirements of Part X, shipping lines seem to have had due regard for the needs of shippers. With regard to the criteria of economical and efficient services, the Commission has not been presented with sufficient evidence to conclude that the lines are operating in an uneconomic and inefficient manner.  There is evidence that member lines of the TFA have recently been making losses on the trade and some rate increases might have been expected.  The speed of rate restoration considered was to the disadvantage of some exporters.  However, this rate restoration program appears to have stalled, due to resistance from shippers and the failure of the lines to maintain rate discipline.  It is possible that sensitivity to this investigation may have also had a part in influencing the behaviour of lines.  In addition, while it is difficult to make definitive conclusions about relative competitiveness of rates, there is not evidence that these rates were internationally uncompetitive.  Generally, services seem to be of an adequate standard although shippers in some small ports have expressed concerns.  Taking into account all the information considered in this investigation, the Commission does not have sufficient evidence to recommend deregistration of the TFA.
Here it should be noted that, the Commission does not in general consider that the arrangements permitted under Part X are appropriate for the liner shipping industry or indeed other sectors of the economy.  In particular, discussion agreements, with their potential to include the majority of lines servicing a trade, represent a high level of cooperation within a regime that is already characterised by a significant level of permissiveness in terms of exemptions from the application of the competition laws of the TPA.
A number of complaints have centred on the fact that the fundamental problem with the SE Asian trade is that it is serviced by lines belonging to a discussion agreement.  For example, APSA has submitted that:
“APSA believes the TFA should be deregistered as it is anti-competitive and there should be a return to the situation pre-TFA.
Discussion agreements worldwide are deplored by shippers generally because of the fact that they lead to the elimination of competition.  APSA is an associate member of the Federation of Asean Shippers Councils and all its members are of the view that discussion agreements eliminate or significantly reduce competition and should be prohibited..  [APSA, submission, pp 2 and 5]
The Commission does not disagree with the view that discussion agreements may have the potential to act as vehicles for limiting competition and delivering unfavourable outcomes for exporters.  However, discussion agreements are registrable under Part X and thus do not represent a breach of the provisions of Part X.  Nevertheless, the Commission is of the view that Part X and discussion agreements provide unnecessarily high flexibility to shipping lines in pursuing industry arrangements not available to other sectors of the economy.  The Commission has drawn attention in this report to aspects of Part X which it considers to represent major weaknesses of the regime.  In particular, Part X provides limited scope for meaningful negotiations that may result in agreed outcomes.  The Commission considers that the negotiation provisions of Part X should be strengthened to improve the countervailing power available to shippers.
The Minister’s reference, however, relates to the way the TFA operates within the limited obligations and other constraints imposed by Part X.  It does not direct the Commission to investigate either Part X or discussion agreements.  So while the Commission does not sanction either Part X or discussion agreements, it has only been able to investigate discussion agreements in the context of what the Productivity Commission has characterised as a “permissive” regime.

6.	Recommendation
The Commission finds difficulty in concluding, on the basis of the available evidence, that the members of the TFA have not had due regard for exporters’ need in terms of the grounds contained in the terms of reference.  The Commission therefore considers that it is not able to recommend deregistration of the TFA at this time.

Appendix A	Recent selected structural changes and entry 			& exit into the northbound Australian – 				SE Asian Trades 
•	January 1997, the ANRO consortium (ANL, NOL, Royal Inter Ocean Line & OCL) is renamed the AAX consortium and NYK moves from the ASA consortium to AAX.
•	Evergreen Marine begins buying space from Lloyd Triestino, which is a member of the ASA consortium (Hanjin, Lloyd Triestino, & RCL).
•	October 1997, K Line commences five vessel shuttle services between Fremantle and SEA. 
•	March 1998, Maersk commences a fortnightly service between the eastern seaboard of Australia and Singapore, with two ships northbound and four ships southbound.
•	In early 1998, Nedlloyd moves from MNM (MOL, Nedlloyd Lines & MISC) after Nedlloyd Lines and P & O Containers found themselves competing against each in different consortia a year after their merger in January 1997. 
•	April 1998 MNM amalgamate with OOCL / PIL to form the triple A (AAA) consortia, with a double loop service from Australia to SEA. The two services employ a total of 8 vessels. All four Asian lines significantly expand their ship tonnages with faster and larger vessels in early to mid 1998.
•	In early 1998, AAX replace some of their existing vessels with faster and larger vessels.   
•	June 1998 ASA add a second service string and ASA service expands from 4 vessels to 8. Evergreen become a vessel provider, initially contributing one vessel, while LT contribute two ships.
•	AAL enter the Australian – SEA southbound trades (northbound via North Asia) with the new PAS service.
•	K Line becomes a slot charterer with ASA  
•	July – August 1998 Taiwanese line Evergreen acquire its ASA partner Lloyd Triestino.
•	September 1998, AAA consortium reverts to once a week Sydney & Melbourne calls, due to scheduling and cargo booking difficulties.
•	November 1998, Maersk withdraw from the East Australian – SEA trades after only six months.
•	December 1998, AAA restored twice weekly calls to Melbourne, but not to Sydney.
•	January 1999, Hyundai Merchant Marine (HMM) enters the SEA trades by becoming a slot charterer from AAA.
•	PAS / AAL services cut back from two service loops to one service loop.
•	May 1999, MSC withdraws from southbound SEA trades.
•	ASA consortium switch one of their two service loops from Australia – SEA trades to Australia – North Asia trades. Five ships move out of the trade, (the Ever Able, the Ever Ally, Ever Apex, LT Ascent and Hunsa Bhum) Only four ships remain in ASA.
•	September 1999, Maersk and K Line rationalise their Fremantle – Singapore shuttle services and enters into a joint agreement.  Seven small ships are removed from the trade (K Line – Orchid Bridge, Malaysia Bridge, Singapore Bridge, Java Bridge and Fremantle Bridge) (Maersk – Kelang Reefer, Swan Reefer) and replaced by two larger ships (Swan River and the Maersk Aberdeen).
•	AAX withdraw one vessel (the Australian Enterprise) from their fleet of five vessels. 
•	February 2000, Evergreen Marine withdraws from the ASA and Australian – SEA trades.
•	MSC enter the WA – SEA trades by introducing fortnightly shuttle service with one vessel. (MSC Victoria)
•	April 2000, APL enter the WA – SEA trades by introducing a weekly shuttle service with one vessel. (the Cape Coldbeck)
•	August 2000, AAL and PAS restore their services to two loops between Eastern Australia and SEA.  

Appendix B	Scheduled Transit Times for all SE Asian 				Services from Melbourne and Sydney

•	Scheduled transit time from the Port of Sydney
•		•	Singapore	•	Port Kelang	•	Jakarta	
TFA				
AAX	15 days	14 days	-	
ASA	14 days	-	-	
AAA	15 days	13 days	-	
Non  TFA				
Contship / P & O (Eagle)	20 days (sails to NZ first)	-	-	
Contship / CMA –CGM / Marfret	14 days	-	11 days	
NGPL	26 days	25 days	22 days	
P & O / Contship (Med) 	20 days (sails to NZ first) 	-	-	
PAS (Newcastle)	31 days	28 days	34 days	
Wallenius Wilhelmsen	14 – 16 days	-	-	
•	Source: LLDCN

•	Scheduled transit time from the Port of Melbourne
	Singapore	Port Kelang	Jakarta	
TFA				
AAX	13 days	-	-	
ASA	11 days	-	-	
AAA	14 days	12 days	-	
Non  TFA				
Contship / P & O (Eagle)	11 days 	-	-	
Contship / CMA –CGM / Marfret	11 days	-	8 days	
Wallenius Wilhelmsen	10 – 12 days	-	-	
P & O / Contship (Med) 	9 days  	-	-	
•	Source: LLDCN