Wednesday, 23 August 2017

The Shipping News

Earlier this week I mentioned that it had taken the thick end of six years for the Commerce (Cartels and Other Matters) Amendment Bill to work its way through the parliamentary grinder. It didn't help along the way that the government had second thoughts - or cold feet - about one of its original provisions, to criminalise hard core cartels, and yanked that bit. But on August 14 what was left of the Bill finally staggered over the finishing line.

There are various summaries around the place - take your pick of Russell McVeagh's, Chapman Tripp's, or Bell Gully's - but the bit I'd like to pick up on is the new regime for shipping. Up to now, the shipping lines had been exempt from the Commerce Act, in my view for no good reason, and our Productivity Commission was absolutely right when it said as part of its 2012 inquiry into international freight services that
Current exemptions for shipping companies from the Commerce Act should be removed so that normal competition laws apply. This change would outlaw any agreements between shipping lines that fix prices and/or limit capacity unless the Commerce Commission judges that their public benefits outweigh any anti-competitive detriments
In the event the Bill dealt to shippers price-fixing, but it did allow shipping lines to cooperate to do these "specified activities" listed in s44A(8) (provided they improve the service):
(a) the co-ordination of schedules and the determination of port calls;
(b) the exchange, sale, hire, or lease (including the sublease) of space on a ship;
(c) the pooling of ships to operate a network;
(d) the sharing or exchanging of equipment such as containers;
(e) capacity adjustments in response to fluctuations in supply and demand for international liner shipping services.
No doubt some of these activities could well be efficient and helpful for both the shippers and their customers. But you're also left with the feeling that if shipping lines are able to jointly set capacity, as in subsection (e), they've effectively been left with the ability to set price in any event.

Does it matter? Oh yes. In another of those odd coincidences that have been happening recently, shortly before our shipping provisions become law the Aussie courts fined NYK, a Japanese shipping line, A$25 million for being part of an enormous and long-running global shipping cartel. It was the second highest cartel fine in Australia (behind the A$36 million fine on Visy Board in 2007 for a cardboard packaging cartel) and the first case under Australia's criminalised cartel regime.

As the judgment makes clear, NYK and a bunch of other shipping lines had been operating a global cartel since 1997. At [46] it says
From at least February 1997, NYK and a number of other shipping companies, including the [eight] Carriers [servicing Australia], had arrived at an arrangement or reached an understanding to the effect that, as a general proposition, they would not seek to alter their existing market shares or otherwise win existing business from each other. That overarching arrangement or understanding was generally referred to as “maintaining the status quo” or giving and receiving “respect”. It may conveniently be called the “Respect Agreement”.
The "Respect" agreement - I rather like the overtones of Mafia protocol - had everything a cartel prosecutor could ask for: not just the  'freight rate provision' (price-fixing) but also a 'bid rigging provision' and a 'customer allocation provision'.  And it had all the cloak and dagger stuff of your hard core cartel. At one point NYK's internal compliance people got antsy, for example, so the managers involved decided to tighten up security. At [158]
NYK employees in the Car Carrier Group continued to engage in communications with their counterparts at the other Carriers. Those communications were generally conducted orally over the telephone or in face-to-face meetings. They were rarely documented. Where the discussions were conducted by telephone, the employees generally conducted the conversations away from their desks, in hallways, lift lobbies, outside the office or in a room referred to as the “phone booth”. The phone booth was a small, glass enclosed room about the size of a phone booth. Some employees were specifically instructed to conduct such telephone calls away from their desks to minimise the risk of junior staff overhearing the conversation and reporting the conduct to the Fair Trade Promotion Group.
NYK was lucky in a way. It has been up to its ears in proceedings in other jurisdictions: the judgment mentions Japan, the US, South Africa, Chile and China, and it is likely others have yet to surface. But in Australia it pleaded guilty, fully cooperated with the Director of Public Prosecutions and the ACCC, expressed genuine contrition, and explained that it have made real efforts to improve head office culture, including withdrawing from all shipping line 'conferences' it used to be party to. As a result it got a 50% discount on what would otherwise have been a stonking A$50 million fine. As Justice Higney concluded at [300]
Cartel conduct of the sort engaged in by NYK warrants denunciation and condign punishment. It is inimical to and destructive of the competition that underpins Australia’s free market economy. It is ultimately detrimental to, or at least likely to be detrimental to, Australian businesses and consumers. The penalty imposed on NYK should send a powerful message to multinational corporations that conduct business in Australia that anti-competitive conduct will not be tolerated and will be dealt with harshly. That is so even where, as here, the decisions and conduct are engaged in overseas and as part of a global cartel. As has already been explained, but for NYK’s cooperation and willingness to facilitate the administration of justice, the penalty would have been substantially higher. That should serve as a clear and present warning to others who may have, or may be considering or planning to, engage in similar conduct.
You'd wonder, though. If the NYK judgement had come out a year or two back, rather than this month, would the Minister at the time (Paul Goldsmith) still have flagged away criminalisation, at least for cases like this? And would the Commerce Select Committee has been as willing to give the shipping lines such a soft pass on collaboration?

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