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Productivity commission part of 'red tape' problem

By Alan Moran - posted Tuesday, 25 October 2005


It is ironic that the Prime Minister has chosen Productivity Commission Chairman, Gary Banks, to head his new Red Tape Task Force when the Productivity Commission has recently issued a report calling for new regulatory intrusions in the provision of liner shipping.

Reversing the position it took five years ago, the Productivity Commission (PC) now says that liner shipping conference agreements should be subject to the general provisions of the Trade Practices Act.

Regular liner shipping carries nearly half of Australia’s exports and 80 per cent of our imports. Conference agreements between independent shipping companies involve them collaborating to service a particular route with a uniform freight rate and a schedule of sailings. In addition there are other agreements between shipping companies which involve looser arrangements.

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The PC argues that all such agreements, including about a dozen conference agreements plus 70 other agreements, should be individually scrutinised by the Australian Competition and Consumer Commission (ACCC). Its rationale is that agreements of this nature can be price-gouging exploitative monopolies.

Conferences do not have a place on the very thin routes like those between Australia and the Pacific Islands where capacity cannot justify multiple providers. Nor are they as important for densely served routes (like Europe-China and China-North America) where sailings are so frequent and competition so fierce that agreements on prices and schedules are unnecessary. But they are ideal for many of the relatively thin routes serving Australia - they dominate our trade with West Coast US and Europe and, together with looser agreements, with Asia.

The conference system has evolved over time as a means of allowing greater certainty and risk management. It is about risk sharing for independent shipping businesses that do not wish to put too many eggs in one basket of ports. And it provides trade enhancing risk reduction on the part of the producers who have greater certainty about the price required for carrying their cargos and that the capacity will be there to transport them. In short, the conference system adds major trading benefits, especially to Australia with its relative remoteness from the world’s key markets and production centres.

The PC recognises benefits from conference agreements may be evident and argues that only agreements with explicit price fixing and or capacity management should require authorisation. Even if looser agreements were to be exempt, in many cases without price and capacity components, supplier and hence domestic and overseas consumer benefit of a conference is much reduced.

The PC’s mind-change on shipping conferences shifts it towards a crude parody of Adam Smith’s economics and it has slavishly adopted a line that firms allowed to make agreements will naturally collude to exploit the consumer. The PC considers that such agreements could hold. Unlike Smith they think they may not collapse from being assailed by outside competitors sniffing a chance for good profits or from their own internal tensions due to the willingness of their participating firms to steal marches on each other if this pays better than co-operation.

The PC also has a touching faith in the ability of an institution as demonstrably cumbersome as the ACCC to exercise tutelage efficiently over a market with hundreds of different suppliers. It considers the ACCC’s bureaucratic systems would be superior to the profit searching activities of rival shipping providers.

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As well as defying logic, the PC’s fears defy a hundred years’ experience of shipping conference arrangements whereby excess prices have never been able to be maintained by the participants.

Market forces will always unravel consumer exploitative monopolies. This is especially so where the industry comprises a relatively homogeneous capital base (most liner ships are standard designs) and a straightforwardly organised marketing structure. Globalisation and the ease with which information is transmitted and to which producers can react has reduced the need for the heavy handed oversight that institutions like the ACCC provide except, arguably, in supply dominated by an monopolistically provided essential facility like an electricity line.

One factor behind the more recent push by some exporters to have the ACCC regulate prices is a steep increase that occurred on the freight rates for exports to Asia. Because most of the liner trade is into Australia, competition meant that exports from Australia benefited from very low rates. This has changed as the world suddenly, in 2003, experienced a shortage of capacity and rates more than doubled in some cases. The response has been a massive new ship building program and doubtless in real terms rates will decline in future. It is this, not regulation by the ACCC, which would bring lower prices.

The fact is that the parties in a shipping conference are independent and undercut the prices agreed with their associates should those prices prove over-attractive. They will do so even if this means the conference dissolves. Moreover there are multiple non-conference shipping providers eager to muscle in on a business that might offer higher than normal profits. Both of these factors ensure that conferences will remain pro-consumer without any intercession by consumerist government-appointed busybodies building bureaucratic empires and gumming up the wheels of commerce.

Mr Banks may well be the best man to head the Government’s Red Tape Review but the recent PC recommendations on the regulation of liner shipping show that his own agency is often part of the problem.

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Article edited by Melanie Olding.
If you'd like to be a volunteer editor too, click here.

First published in The Age on October 17, 2005.



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Alan Moran is the principle of Regulatory Economics.

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