Article no. 3/2014.
Recently, the media has reported on shipping company collaborations aimed at increasing efficiency and reducing transport costs. Transport economist Páll Hermannsson initiated this in a guest article in Viðskiptablaðið on 31 July.
In a news article in the business section of Morgunblaðið on 7 August. it is reported that international shipping lines have been increasingly „co-sailing“ to increase efficiency, but in this country the Competition Authority is preventing shipping lines operating here from doing the same. An information officer for Eimskip is quoted as saying that competition authorities in Europe and America have blessed such cooperation, but the Icelandic Competition Authority views the matter differently and that other governments must therefore take the initiative on the issue.
These conclusions appear to be based on some misunderstanding. The fact is that, in accordance with Article 15 of the Competition Act No. 44/2005, the Competition Authority may grant an exemption for cooperation between undertakings and/or associations of undertakings which would otherwise be unlawful.
The conditions for such an exemption are, among others, that the cooperation contributes to the improvement of the production or distribution of a product or service, provides consumers with a share of the benefits resulting from the cooperation, and does not enable the companies concerned to prevent competition. The rationale behind this is that in certain cases, it may be necessary for the economy and for the benefit of consumers for competitors to cooperate in a specific, limited area.
The Competition Authority has granted exemptions of this kind in various areas of business. It should be noted that on more than one occasion, exemptions have been granted for cooperation in maritime transport. An example of this is Decision no. 46/2009, Application of Hf. Eimskipafélag Íslands and Samskip hf. for an exemption under Article 15 of the Competition Act for cooperation in sea transport between Iceland and North America. The collaboration consisted of an agreement for Eimskip to transport a certain amount of goods per year for Samskip on the transport route. The exemption was temporary, but a comparable arrangement has since been authorised. A more definitive position will be taken on this arrangement in an investigation into the two companies, which is currently underway and has been the subject of public discussion.
The Competition Authority's handling of these matters is based on comparable principles to those of European law, taking into account the local competition conditions. European competition authorities have investigated various cases concerning illegal collusion in maritime transport. A general exemption has been granted for shipping companies to cooperate for the purpose of rationalisation. The exemption is, however, conditional on the relevant associations not having more than 30% market share in scheduled services between specific destinations. Furthermore, the cooperation must not involve price-fixing, market-sharing or any restrictive limitation of transport capacity.
The call for greater economies of scale is a challenging issue in numerous cases before the Competition Authority. In its decisions, the Competition Authority seeks to create room for economies of scale, without sacrificing the public and consumer interest in competition. This is important, because without competition, there is a risk that the benefits of economies of scale will only benefit the relevant competitors. Consumers would be less likely to receive a fair share of the benefits. On the contrary, there would be a risk that they would face higher prices due to reduced competition.
This is specifically addressed in the proposals of the steering group of the government and business consultation forum on increased prosperity, which were published in May 2013 and can be accessed at www.samradsvettvangur.is. It points to the importance of economies of scale in increasing the productivity of the economy. Due to the small size of markets, companies often find it difficult to take advantage of economies of scale. However, competition is the single most important factor in promoting increased productivity. Competition reduces waste and leads to lower production costs. To promote maximum productivity, the right balance between competition and economies of scale needs to be found. The Project Board points out in particular that the consumer benefits of economies of scale will not increase unless they are accompanied by competition.
One can wholeheartedly agree with this.
From the above, it is clear that the current competition law does not preclude cooperation between shipping companies, contrary to what media coverage might suggest. On the contrary, competition law provides for such cooperation to be authorised. The condition for the Competition Authority to authorise the collaboration is that the companies involved can demonstrate the benefits and that consumers and businesses will reap them. In our small society, it is crucial to protect the public interest in this regard.
However, if there is a will to pursue collaborations for economies of scale that benefit only the companies involved while harming consumers, government intervention would be required to change competition law and/or the priorities of the competition authority as set out in the law.
Páll Gunnar Pálsson
Director-General of the Competition Authority
[This article was published as a piece in Morgunblaðið on 16 August 2014.]
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