The unsung heroes

Earlier this month, in a criminal case, the Federal Court of Australia pinged Kawasaki Kisen Kaisha Ltd (K-Line) A$34.5 million, the highest ever criminal cartel fine in Australia, though just adrift of the highest civil penalty, Visy's A$36 million in 2007.

K-Line was the second Japanese shipping company to have its collar felt for the longstanding rort of rigging the cost of shipping Japanese cars to Australia, following the earlier criminal conviction and A$25 million fine for NYK Line (see 'The Shipping News'). The K-Line judgment is here (handy hint - you can safely skip paras 86 through 169).

The only reasonable response to the fine is, jolly good. This fell squarely within the 'hard core' kind of cartel conduct that criminalisation was intended to punish and deter, complete with the usual cloak and dagger contrivances. NYK had had a version of Maxwell Smart's 'cone of silence', and K-Line had "reports ... often marked with words to the effect of “Confidential. Dispose of after Reading”. You can imagine some hapless manager in Tokyo trying to eat the files as the lads from Japan's Fair Trade Commission arrived.

The only smidgen of mitigation that, as an economist, you might feel for them is that, as the judge noted

41 ... the market for ocean transport service for roll-on, roll-off cargo was characterised by high capital costs with ‘lumpy’ investment, meaning that capacity could not be smoothly adjusted in response to demand.

42    The market was also characterised by long investment lead times. That was because the length of time required to commission and build a specialised car, or car and truck vessel was approximately two to three years per vessel. Such vessels were also not generally available for short term lease or charter, though in some instances space on vessels was made available between particular carriers pursuant to space chartering arrangements

But workably competitive markets are inventive enough to come up with licit solutions to these kind of problems. One is long-term 'take or pay' contracts, as you see every other day in (for example) the commercial property market, where developers line up leasing precommitments before they turn the first sod.

Lawyers should probably have a look at the bits of the judgment that discuss the extent of K-Line's cooperation with the ACCC, as described in the agreed statement of facts. The judge at [193] pointed to the "rather general and anodyne nature of some of the facts recited in it" and at [341] said it was "a statement of facts which appears to have been the product of detailed discussion and agreement between the respective legal teams. The result is a lengthy and detailed document which has no doubt been carefully crafted as a result of the negotiations, but which is nonetheless rather unhelpful in a number of important respects. The Court is left in the rather unenviable position of having to decipher and draw inferences and conclusions from that rather bland and sanitised document". You can be too clever by 'arf, in other words.

Other than that, there isn't too much to take away from the sheeting home of a particularly large, global and brazen cartel.

Except for two unsung heroes at K-Line.

One pops up at [79], where we read that "The Car Carrier Business Group General Manager was particularly distrusted by some NYK and Mitsui employees because he would sometimes compete aggressively for market share and on occasion attempt to depart from agreements reached with the other carriers" (he subsequently got sat on).

The other appears in [81], where "a Manager in one of the regional teams in the Car Carrier Business Group proposed to the Managing Executive Officer of the Car Carrier Business Group that K-Line should consider ceasing its communications with other carriers because such communications were risky for K-Line and its employees and K-Line should focus on having a strong sales force" (he - almost certainly a he - was ignored).

Well done, guys. And hopefully for their companies' sakes there aren't honest New Zealand executives in the same ignored and sidelined boat. Cartel criminalisation goes live in New Zealand from April 2021.

Dear Kris...

Welcome to your new role as competition czar and overlord of the Commerce Commission.

It's now up to you to make sure that consumers continue to get a good choice of goods and services at fair prices, and that businesses can compete vigorously for their custom.

You'll find that the Commission, and the competition policy bits of MBIE, are full of talented people with their hearts in the right place. You'll also find that many of them are frustrated by the glacial pace of policy change.

So my first suggestion is: don't be another obstacle in their way. Move things along.

What things? Start with these.

Currently the plan is that the Commission will - sometime - be allowed to look into competition problems, but only if asked to by the government (the jargon is "market studies").

By all means keep the option for you and your colleagues to ask the Commission to look at stuff. You'll find (for example) there's a lot of support for a study of our petrol industry.

But a much better plan would be to let the Commission also look at things off its own bat. That's normal overseas, by the way, and if you want to see a good example of how it works, look at the Australian Competition and Consumer Commission's series of  reports on petrol markets in Oz. Here's their latest media release, 'Lack of competition driving high Brisbane petrol prices'.

Keep a budget lid on it, though. Currently the plan is, the Commission will get $1.5 million a year, max. That's plenty, and will give them the right incentive to be efficient.

Next there's cartels. We were going to jail 'hard core' cartelists, the guys who secretly get together in hotel rooms at trade shows and conspire to fix prices, rig auctions, and carve up the world's markets among themselves.

One of your predecessors said, Nah, let's not feel their collar. He was wrong. The Aussies - and others - who can jail these crooks have the right end of the stick.

And while you're dealing to cartelists, take away the special treatment for the shipping lines. They still get their own cosy bit of the Commerce Act. They shouldn't, especially since they've been revealed to be global cartelists (you'll enjoy this). If they need to coordinate things, have them get an authorisation from the Commission, just like everyone else.

Now a trickier one. It's tricky here, and everywhere, but now you're The Man who's got to make the call.

It's what to do when a big company is using its size to impede or eliminate smaller competitors ("abuse of market power"). We have a law against it - section 36 of the Commerce Act. But the law is broken. It's incapable of pinging anything except in very rare cases. It's like nailing jelly to the wall. Disclosure: I've been one of those jelly-nailers.

But you don't have to take my word for it: you'll be having a early coffee, I dare say, with Mark Berry at the Commission, the current chief jelly-nailer. He'll tell you that s36 is knackered, and he's right.

Answer? The Aussies have turned their minds to this (their "Harper review") and fixed their law. So the answer is, import their wording holus bolus into our own Commerce Act. And strike a blow for trans-Tasman harmonisation while you're at it. The media release writes itself.

While you're having your first meet and greet coffees, have a natter with Murray Sherwin and the guys at the Productivity Commission. Your colleagues with economic portfolios will soon be tearing their hair out over New Zealand's poor productivity performance: as Murray and his mates will tell you, one of the answers is stronger competition to put the heat on business performance.

One last thing.

It's easy to get into an anti-business mindset in the competition and regulation game - all these cartels and abuses of market power and whatnot.

Don't go there. The thing that you've got to stay focussed on is the competitive process itself. That's what delivers the benefits to consumers, and to the businesses who best meet their needs.

And if anyone down the big end of town starts giving you gyp about an anti-business stance, quietly remind them that the primary victim of cartels and other rorts is often other businesses. They want an example? The cardboard box rort in Australia: every company on either side of the Tasman  (including some very large ones) who wanted to put their stuff in a box was being ripped off.

That's enough to be going on with - good luck!

A blast from the past

A reader who'd liked my post the other day on The Shipping News pointed me towards something I'd forgotten (or possibly missed at the time). It's the European Union's submission on shipping cartels, made to our Productivity Commission's 2012 inquiry into freight forwarding.

Why, you may wonder, was the EU bothering with a freight inquiry at the far end of the world?

Two reasons. The EU - through its competition arm, 'DG Comp' as it's known - had an interest because it had relatively recently (2008) abolished the shipping lines' exemption from cartel laws in Europe. And because it wanted to tell us that it thought the case for allowing shipping cartels (as we were doing at the time) was a load of cobblers.

DG Comp said that more countries were bringing shipping under the competition law or had never exempted them in the first place: "exempting container shipping cartels can hardly be described as the global regulatory standard" (para 9). And it pointed out that "the EU repeal is very significant in that it expressed the unanimous agreement of the then 25 EU Member States. Any Member State could have vetoed the proposed legislation. Yet all Member States chose to support" (para 7). In other words, getting the whole 25 to agree on anything is normally a colossal exercise in cat herding, but the case for getting rid of shipping cartels was so obvious that even the fractious 25 were all on board.

DG Comp also said that if the shipping lines' argument for cartels - "stable rates and reliable services" (para 12) -  had any merit, then exporters and importers would support them, but they don't: "the shippers have repeatedly stated that they would rather have competitive prices than stable high prices" (para 12). And the shipping lines' claims about the downside of abolishing cartels - "exemption would lead to "destructive competition", increased concentration, lack of investment and reduced service" (para 13) - had not been borne out by what had actually happened in Europe when cartels got the flick.

And it made the excellent general point (para 14b) that

the liner industry is no different from other fixed-schedule, high-fixed costs transport industries (such as the airline sector or the rail sector) that function well under the standard competition law regime.

So the good news is that we did, after navel-gazing for nearly six years, see the sense of views like DG Comp's, and we finally brought shipping cartels within the general competition law. The bad news is that we continued to give the shipping lines special treatment, in particular allowing them to cooperate on "capacity adjustments in response to fluctuations in supply and demand for international liner shipping services" (s44A(8)(e) of our amended Commerce Act). If they end up having the ability to jointly determine capacity, then effectively they will have ended up with the ability to jointly determine prices, so we'd be back to square one as if price-fixing had never been outlawed. And there's a further bit of leeway in s44B relating to an exemption for "price fixing in relation to space on ship".

Another oddity of the special treatment for the shipping lines is that the amended Act (in sections 65A through 65D) introduced a new clearance regime for cartel provisions that are "reasonably necessary" for the purpose of a collaborative activity. If there is indeed, as the shipping lines argue, a necessary link between cartel provisions and running a shipping service, they, like any other group of businesses, have now got this new avenue to get the official seal of approval.

But no: it's one law for the rest of the country and one law for the shipping lines. And this for a sector that's been revealed to have been a global competition scofflaw.

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?