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An estimated 13-minute read
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(Published in International Journal for Research in Law- Volume 1, Issue 2)

INTRODUCTION

The Indian competition watchdog, Competition Commission of India (CCI) came to the conclusion that its intervention is called for in the port sector as…several factors like insufficient hinterland connectivity, associated transport cost, inadequate availability of infrastructure at the competing port and quality of service offered by the alternative port restrict inter-port and intra-port competition.”(1) However, this intervention was called for through the analysis of a commissioned report of The Energy Resource Institute (TERI) way back in 2008. Since then, there has been no development in bringing the port sector within the relevant antitrust domain by means of any official consultations or discussions. One possible reason for the delay can be the diverse market structure of the industry which adds on to the vast dimensions of it, making it a herculean task for any ‘non-sector regulator’ to classify and de-fragment the industry. 

The present article aims at providing a glimpse of the port industry vis-à-vis the antitrust purview laterally with the antitrust loopholes that may be required to be considered worthy of official consultations (if any) by the CCI, alike its international counterparts (2).

STRUCTURE OF PORT INDUSTRY

A port is a multi-dimensional unit which is geographically secured but not independent of its diverse operations, however, it can be characterized by its governing edifice. It is one component of a vertical chain that carries a product from producer to customer(3). A port may not necessarily undertake a specific activity rather its functions may vary in accordance with the supply chains. 

The port history has witnessed break-bulk cargo ships, however, the challenging provision of capital intensive cranes and bounteous storage space modified the port dynamics and intensified the need of specialized container ports. As a port forms part of the maritime industry, it needs to have an effective functioning model which is established on the grounds of various factors, for e.g. its geographical location, number of subsidiaries (if any), Service providers, functions undertaken and etc.

Largely, the port functions fall under various heads and the accountability of the same lies either on the Terminal operators or the Port authorities; depending upon the nature of the function embarked upon. There are different types of antitrust issues that may be associated with the port sector, however, the basis of the same is dependent on the nature and working of the ports. Thus, in normal parlance it is easier to say that there are three types of port related competition; inter-port, intra-port and intra-terminal competition.

The Inter-port competition arises when two ports of a particular country or in different countries compete with each other for similar cargo. Intra-port competition refers to competition between two or more terminal operators within the same port, competing for similar cargo. The Intra-terminal competition is quite a rare situation as it refers to competition between two or more companies.There are a number of economic factors that drive inter-port competition, which are, namely:

  1. The low utilization along with high fixed cost of port operations
  2. Falling costs of internal transportation
  3. Increase in containerization.

However, it is hindered by insufficient hinterland connectivity and also because not all ports can offer similar facilities. Further, traffic of nearby ports cannot be tempted through value added services or reduction in tariffs due to the prevailing price rigidity practices(4). 

Clearly both inter-port and intra-port competition is at a growing stage in India and it becomes important to note that it is excess capacity that drives inter-port competition and intra-port competition. However, in case of Indian ports, most of the terminals operate at more than 100% capacity and hence, there is no compulsion for them to compete against each other for cargo. However, in the future one can expect Inter-port to emerge once the ports being developed by state governments, particularly in Gujarat and Andhra Pradesh come up and Intra-port competition will emerge once the new container terminals planned at the existing ports come up.

PROBLEM AREAS

The antitrust loopholes can be differentiated from the troublesome aspects that may escalate the antitrust issues in the port sector as the former are predominant in the sector, however, the latter may pose antitrust issues in the near future. The taxing concern is that the ‘sector regulator’ may face tough time because of privatization of ports in many countries. Dealing with the troublesome aspects (condition areas), it may be divided in the following broad heads: 

a) Risk of operating in International waters

•The maritime industry is subject to higher risk of fraud as it involves bribery and corruption to gain contracts or for obtaining requiste clearances

•The wisespread corruption in the maritime industry exposes it to the risk of transportation of illicit items

•Absence of fraud tackling mechanisms in the maritime industry 

b) Pricing strategies for capturing markets

•Ports may startegize their prices to capture markets

•Understating the value of the goods to avoid taxes and applicable duties 

c) Customs Authorities role

•A pertinent question is to think that are the Custom Authorities accomplice to this scenerio?

The subject matter of docking rights are governed differently in different jurisdictions but it is common for them to be regulated by the local port authority (5). Many modern ports contain several independently operated quays and terminals. Where two or more operators own these terminals, a degree of intra-port competition can exist. In these cases, port users may have several options of where to dock and which terminal to use. In addition, there can be intra terminal competition in some situations where multiple operators can provide competing services within the same terminal (6). However, the prominent issues that arises from this debate is whether the general economic interest exemption under EU anti-trust law (7) applies to them. In Case C-179/90 Merci convenzionali porto di Genova v Siderugica Gabrielli (8) it was held that dock work consisting of loading, unloading, transhipment, storage and general movement of goods or material of any kind is not necessarily of general economic interest exhibiting special characteristics compared with that of other economic activities.

 ANTI-TRUST LOOPHOLES

In addition to the above aspects, the antitrust loopholes that may form the very basis for an active antitrust consultation in the maritime industry can be one of the following:

S. No. Parameters Antitrust loopholes
  Vessel Sharing Agreements (VSAs) Ports and Service providers must refrain from incorporating any anti-competitive clause in the VSA, along-with any clause through which the entities share prices, business related or customer information.
  Vertical Agreements The Service Providers and Ports must ensure to comply with the active antitrust law of the particular country and should not adhere to incorporating any anti-competitive clause without any economic or geographical validations.
  Meetings Sharing of privileged information during Trade Association discussions and official conferences, which may intensify cartel forming behavior or revealing confidential information.
  Pricing inputs and Loyalty contracts Controlling competition between member shipping companies for pricing inputs is anti-competitive in nature. Likewise, preventing non-member shipping companies from entering into contracts is against the antitrust rules.
  Role of agents The shipping industry often rely on agents for obtaining clearances but no formal due diligence process is carried out to shun out dubious agents. The role of such agents must be scrutinized and ensured that no honored information is being mishandled giving rise to cartel formation or antitrust behavior.  
  Disguised concession agreements These may in the form of entry/exit barriers or collusive behavior by any of the entities.
  Preferential agreements and transportation services Such agreements or services between Shipping Lines and Service providers or agents should not have any anti-competitive clause without any economic justification.

SECTOR REGULATOR

To counter the effects of the antitrust issues in the maritime industry, a single sector regulator is required which, is responsible for regulating all relevant issues in the sector including competition issues, which has a jurisdiction over all major and minor ports and ensures a level playing field to all players in the sector.

The main objective of an economic regulator in the port sector is to control anti- competitive behaviour of port authorities and terminal operator. To achieve this objective, they are often given the power to adjudicate disputes between port authorities, terminal operators or port users and are in charge of verifying and enforcing compliance with competition legislation. It further empowers the regulator to submit economic, financial and operational data of the concerned public and private entities and impose remedies/penalties in case of any violation of competition rules and regulations. In some jurisdictions the regulator has a legal right to start an investigation on its own initiative, without being triggered by a formal complaint of a port user (9).

Of course, there may be situations where regulation is not needed or may play a minor role, but this situation arises only when the competition is feasible. Whether competition is feasible and/or desirable will depend on the traffic volume moved within a port. However, with the increase in globalization, competition has increased within the port industry as a whole, but has not equally influenced all ports or its related activities. It largely depends on other facets, such as location, type, level and structure of traffic served, and so on.

However, the major issue concerning the implementation of this regime is the effectiveness of a port regulator in carrying out its duties, which is a result of whether it holds an independent position. A port regulator should have its own income independent from the National or State budget sufficient for an adequate remuneration of its staff as well as covering the costs of specialists to assists them in solving complex cases in order to avoid any complication or obstacles in the process.

In India, it has been observed that TAMP has been blamed for delays in issuing judgments on tariffs in the cases of large infrastructure projects in the middle of the bidding phase. The major reason behind this delay is due to the scarcity of personnel and the financial dependency on the Government budget (10). Hence, it is advised that a port regulator must operate independently from the states machinery while carrying out the aforementioned duties. 

INDIAN CONTEXT: CCI’S REPORT ON THE PORT INDUSTRY

Looking at the Indian Scenario, the CCI has already examined the current status with respect to competition issues in the port industry and observed that the port sector is largely regulated by state authorities, maritime boards and TAMP, but have no specific mandate to promote competition in the ports sector. TAMP was set up as an independent tariff regulator and its objective was to move towards competitive pricing and provide a level playing field to all the players at least on matters of pricing. However, it has failed to do the same, which brings us to the conclusion that there lies a need for a unified sector regulator to tackle the various aforementioned anti-competitive, anti-trust issues prevalent in India (11).

Moreover, over the years many organizational changes have been made in the infrastructure sector of developing countries, which have resulted in increased private sector involvement in the provision of services. However, such practices need to be regulated as to prevent the occurrence of a monopoly and to allow market forces to impact behavior of the players. This can be achieved through two regulatory mechanisms, namely, access regulation and price regulation. In the former, the access of firms to the facilities essential for competing in the market is regulated and in the latter, prices along with the quality of services are regulated so as to control the behaviour of private investors.

However, both the mechanisms provide an expensive alternative in developing countries due to the presence of weak institutional structures that are unable to facilitate unbiased decision-making processes and the collection of information (12).

This gap in the current regulatory set up in Indian ports sector raises the following two issues:

  1. Whether there should be a newly formed independent sector regulator for the ports sector or TAMP’s scope and jurisdiction should be increased to make it responsible for overall port regulation?
  2. Whether the independent regulator be entrusted with competition related powers?

Ideally, at least in the commission’s opinion it should be left to the competition authorities to promote and maintain competition across the entire economy. However, in most jurisdictions including India, competition authority has only ex-post powers to enforce and maintain competition i.e. after there has been a violation of competition provision. Moreover, the promotion of competition by the competition authority is restricted to only advocacy (13). This becomes problematic as it will prove to be a huge burden upon the commission to manage an entire industry as they currently lack the personnel to undertake such a task. 

CONCLUSION

Therefore, we can conclusively state that in emerging economies like India where infrastructure services are traditionally provided by public utilities or government departments, it is necessary for a regulator to introduce competition and create a level playing field for new entrants. Moreover, it is required to operate proactively to prohibit anti-competitive practices rather than reactively to violations of competition rules. A sector regulator who has a better understanding of the sector is probably the best equipped to introduce competition in the same, wherein it could lie within the supervision of the Competition Commission of India and could also be withdrawn once competition is well established in that sector.


[1] Available on http://www.cci.gov.in/competition-issues-regulated-industries-case-india%E2%80%99s-transport-sector, last accessed on 22nd December, 2015

[2] The Ireland Competition and Consumer Protection Commission engaged in extensive public consultations through Market Studies with regard to Competition in Irish Ports Sector and published its recommendations in 2013. Likewise, in 2015, the Portugal Competition Authority published its preliminary findings on a study entitled "Competition in the port sector" for public consultation.

[3] Bonacich and Wilson (2008)

[4] TERI 2008, Competition issues in regulated industries: Case of the Indian Transport Sector New Delhi: The Energy and Resources Institute. 149 pp. [Project Report No. 2007CP21]

[5] Section 41 of the Maritime and Port Authority of Singapore Act provided for the regulation of docking rights via the local authority with the prior approval of the Minister.

[6] Competition in Ports and Port Services, OECD, 2011, http://www.oecd.org/regreform/sectors/48837794.pdf, last accessed on 31 December 2015, at page 30

[7] Article 106(2) TFEU stipulates that an undertaking entrusted with the operation of services of general economic interest shall be subject to the rules on competition in so far as the application of such rules does not obstruct the performance of the tasks assigned to it

[8] Merci convenzionali porto di Genova v Siderugica Gabrielli, [1991] ECR I-5889

[9] Christiaan Van Krimpen, Regulation Of The Indian Port Sector, May 2011, http://www.ppiaf.org/sites/ppiaf.org/files/publication/Regulation_of_Port_sector_India.pdf, last accessed on 22nd  December 2015

[10] ibid

[11] Supra 4

[12] Supra 4 at page 66

[13] Supra 4 at page 69

*The blog has been written by Shuchi Singh, Ikleen Kaur and Parth Sehan*

Shuchi Singh - Shuchi is a practising Competition Lawyer based in New Delhi. Shuchi completed her Master in Laws (LL.M.) from National Law University, New Delhi with a specialization in Corporate and Competition Law. Shuchi also holds B.S.L.LL.B degree from University of Pune.

Ikleen Kaur - Ikleen is a practising Competition Lawyer based in New Delhi. Ikleen completed her Master in Laws (LL.M.) from King's College, London with a specialization in Competition Law. Ikleen also holds degrees in Bachelor of Laws (LL.B) and B.A.(Hons) Economics from the University of Delhi.
 
Parth Sehan - Parth is a fourth year student at JGLS. 
Shuchi Singh - Shuchi is a practising Competition Lawyer based in New Delhi. Shuchi completed her Master in Laws (LL.M.) from National Law University, New Delhi with a specialization in Corporate and Competition Law. Shuchi also holds B.S.L.LL.B degree from University of Pune.

Ikleen Kaur - Ikleen Kaur is a practising Competition Lawyer based in New Delhi. Ikleen completed her Master in Laws (LL.M.) from King's College, London with a specialization in Competition Law. Ikleen also holds degrees in Bachelor of Laws (LL.B) and B.A.(Hons) Economics from the University of Delhi.
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