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2. Continuance of the Pool.-Once a Pooling Arrangement has begun to operate, it is imperative that it should continue to do so at least until the circumstances which brought it into being have changed radically. Whether or not a Pool can continue to operate depends largely on all the constituent Lines remaining satisfied with the conduct of their colleagues and at the same time securing a fair share of the trade. Even without malpractices or discrimination it might be possible for one Line to secure an undue proportion of highrated cargo which must inevitably be at the expense of some other Line or Lines. Subject to the proviso which I deal with later under the methods of establishing shares of a trade, it is clear that since one of the objects of a Pool would be to share out the trade in such a way that no Line was any better off, or any worse off, than it would have been, on average, had conditions and circumstances remained the same and no Pool had come into exist. ence, it is obvious that this object would not have been achieved unless some stability is attained over a period. It must be remembered that in entering a Pool, a Line throws away its possibility for growth relative to its colleagues and receives in return a reasonable guarantee of an assured income. Safeguards
Bearing in mind, therefore, that the system evolved must be practicable, acceptable and equitable to all Lines, also proof against malpractices and discrimination, further controls or limitations would require to be imposed, in conjunction with that limitation on earnings, to ensure that these basic requirements are met.
3. Control by Limitation of Sailing8.-Due to the incidence of part loaders and various other reasons, it is difficult to find any satisfactory solution where by regulation by the number of sailings could be fairly assessed or controlled. The same problem arises when endeavouring to use this method to control the quantity of high-rated cargo which might be secured by any one Line at the expense of another. A Line, by one means or another, might, when it had almost reached its limitation of earnings, put vessels into a port to load a token quantity of cargo only for the sole purpose of fulfilling its obligation regard. ing the number of sailings. The question of countering this by instituting a minimum tonnage limitation could be considered, but, if there is a high proportion of part loaders at the majority of the ports in the various proposed pooling areas, this proposition is usually not practicable. In addition, vessels could call at a port to discharge and at the same time might load a small quantity of cargo either to meet shippers' requirements or those of the ship.
4. Control by Space Provided.—Under this system, each Line would need to provide space at a particular port which entails that Line calling at that port and showing willingness and ability to load cargo to the extent of the space provided. Had the space provided not been filled, the Line would obtain credit to the extent of the whole space originally provided, including that unfilled. Quarterly summaries would then be issued to all members and from these it would be possible to see the relative position of each Line with regard to the space it should have provided in order to fulfil its share entitlement. If a Line obtained more liftings than necessary to fulfil its share entitlement it would become an over-carriers and the surplus liftings could be placed to its debit. If a Line provided less space than that which was required to maintain its share entitlement, its entitlement would be reduced to the extent of the space provided. At the end of each agreed period a reconciliation would be made and the appropriate under/over carriage can be carried forward to the succeeding period so that each Line could adjust its liftings to equate its entitlement.
The merit of this system is that each Line actually has to provide the space on the berth in order to qualify. The system also secures that no Line which by pressure, manipulation, discrimination or malpractice prevents other Lines from obtaining cargo, could ultimately succeed in forcing out of the trade those under-lifting Lines which have provided the requisite space but have not succeeded in obtaining the cargo.
However, this system is not suitable in Conference trades with numerous loading ports since the production of accurate space returns is extremely diffi. cult and liable to falsification. This can also be further complicated by draft restrictions at some ports which would render a proportion of the space unusable at these ports.
The objections are, in fact, very similar to those already stated in the paragraph dealing with Control by Sailings.
5. Control by Tonnage Lifting8.-The same problems which arise under a system of control solely by earnings occurs under this system. A Line could lift its agreed share of tonnage by concentrating upon low costings cargo in relatively large parcels, thus failing to give the requisite frequency of service or to deal with all the commodities to move. The ability to be selective would also create malpractices.
6. Summary.-In essence, it follows from the foregoing analysis that the pooling system has to ensure three fundamentals.
1. It must cover the trade adequately and not be a system to the detriment of cargo movement
2. Each Line must be entitled and able to get its agreed share of the pool
3. Each Line mumst earn its entitlement by doing its agreed share of the work in carrying the cargo
The main problem that emerges from this is firstly, how to achieve an arrangement which does not distort the trade movement to the detriment of that trade's requirements for an adequate and efficient Conference service. Secondly, how to operate such a scheme whereby each Line would be at least no worse off than heretofore, assuming that it continued to operate in the same manner as in the past. Thirdly, to ensure that where a Line did not so operate, it would, by over/under earnings and/or over/under carrying, be penalised/ compensated as the case may be. From this it seems that a pool including control of a combination of earnings and liftings is necessary and that the controlling factor in a percentage Earnings Pool should be that same percentage but of tonnage lifted. If the Member Lines' percentage share of the earnings is the same percentage as its share of the liftings it will need to lift the average run of cargo and thus cater properly in its duties to serve the overall Conference objective to the trade. If the Line has to carry a percentage entitlement of cargo to secure its percentage entitlement of earnings there could be no financial benefit in one Line endeavouring to secure more of any particular type of cargo in the future than it obtained in the past since any additional earnings would be shared among the other Lines and any lesser percentage of cargo carried would reduce the percentage entitlement of earnings.
From this it will be seen that the safeguards necessary both for the Shippers' interest and the Shipowners' interests are to include a control system of both tonnage and earnings. The returns made in such a pool are limited to figures returned to independent accountants shewing the exact earnings and liftings under each sailing. No cash is then passed over but at the end of the financial period-usually annually—a financial adjustment is made between the over/ under carriers/earners.
Obviously the pool functions best when there is a close correlation between the provision of ships and of cargo. This entails joint forecasting by Shipowners and the Shippers so that the trade requirements and the ship availabilities are married. Indeed, this is an essential function of Conference/ Shipper Council Consultation throughout the world (except in the U.S. trades).
I now return to my earlier comment, on pools in general, i.e. the possibilities of-(a) over rationalisation; (b) lack of competition causing inadequate services, both of which can arise in inefficiently pooled trades.
Over rationalisation can arise when Lines see their income secure. Three safeguards are necessary against this:
(a) centralised control within the Conference to ensure that adequate overall services by way of space provision and sailings frequency are maintained by each Member and are allocated in accordance with pool shares. This entails producing a strict programme so that a running reconciliation is made between assessed intentions and actual performance.
(b) A requirement that the receipt of pool income equivalent to the share of the trade held, is obtained only by doing that share of the work assessed by the whole Conference in terms of space and sailings to be provided.
(c) Allowing compensation for over-lifting so that cargo is not left behind.
Lack of Competition arises when Lines feel their income is inevitable but is limited. Certain safeguards are necessary against this:
(a) The compensation for over lifting by the overcarrier is made not so highas to make it rewarding but is especially also a penalty against the undercarrier for not lifting at all, thus a proper trade flow is maintained.
(b) A complementary system of returning the Lines' pool earnings and costings on a formula basis to an independent authority employed by the Conference, so that rate levels can be established on an average basis of costs/ income.
The first safeguard is obtained firstly by means of a non recurring penalty against a deliberate under-carrier i.e. a Line which fails to provide the agreed space/sailing within an agreed period loses that proportion of its share of the trade to the remaining Lines which do perform adequately and secondly, to compensate the fortuitous overcarrier by means of an agreed carrying allowance to be used in a liftings reconciliation at the end of the agreed pool period and retained by the orercarrying Line to offset stevedoring expenses on that overcarried cargo. The second safeguard is obtained through the financial earnings/costs returns whereby each Line can compare its own trading result with the Conference average and, having the natural instinct to increase its own profitability, will see in which cost areas it is above average and thus will strive towards a reduction in those costs and thus become more competitive and economic in operation. As a safeguard to Shippers, these financial returns to independent accountants are also used as a basis for negotiation with Shippers' Councils for rate increases, when costs outside the Shipowners' control have risen due to inflation or other factors.
I turn now to the final point of Needs for a Pool and deal there also with the problem of establishing shares in a pool. Needs for a pool
It seems that the ability of some nations or Lines to operate ships better than others is unlikely to be accepted as the sole reason to operate in a particular trade. The growth of nationalism creates demands and entitlements which increasingly are enforced nationally. The most recent evidence of this is seen in the UN Code of Conduct for Liner Conferences where trade can be allocated in an arbitrary way irrespective of operational economics.
If that is symptomatic of the likely developments in the world's liner business there must be some method of allocating trade and this can be controlled only by means of a pool which ensures the sharing system agreed can operate, hopefully not to the detriment of trade.
Commercial Shippers will sometimes argue that a pooling system prevents their choice of ship and it enforces upon them rationalisation of the services designed by the Shipowners and not by the trade.
It is of course not possible for countries to demand a share of their trade to be carried in their ships without some system which ensures that arrangement operates and at the same time does not impinge unreasonably upon the sovereignty of the other parties in the trade. That this is arbitrary and perhaps not using the most economic operator is beside the point. If the UN Code enforces sharing of trade on a national basis it becomes impossible to enforce the other clauses in that Code which demand efficiency by each operator whether that efficiency criteria is performance or economic operation. If nationalism comes first, then efficient economics comes second.
But the objectives of nationalism seem today to be overwhelming and thereby control systems such as a pool seem the inevitable result.
There is of course the problem of shares. How much of the trade should each Member hold? Should it be by, for example, an arbitrary 40/40/20 system or some other method ?
An immediate 40/40/20 system might cause a national recipient of 40% to have to obtain ships which it cannot afford. Equally it will cause ship redundancies in those which have to concede the room for that entrant. Neither development seems sensible economics although the objective might be desirable. On the other hand, it is also difficult to quantify a fair share if the applicant has no previous performance in the trade. The best answer in the interest of the trade is probably a share growth method over a period instead of immediate radical changes, so that as the newcomers grow, the present holders recede, both towards an eventual position which reconciles the aims and justified entitlements of each. It is to this system I was referring in my earlier proviso regarding a pool needing to maintain a Lines' previous position.
Generally, however, the translation into pool shares must be based to a large extent upon past performance this can vary in respect of assessment. for example, of past earnings or past liftings, each of which can produce a different answer.
Probably past earnings is the greater factor since, if that is the financial position achieved in the past, then that is the position Lines will seek to retain.
Probably that performance needs assessing over a reasonable past period in order to even out changing traffic flows or special contracts or market variations, but the recent past is obviously the most vital area.
If the ambitions as well as the past experience of Lines is included, then the answer exceeds 100% of the trade, whereby negotiation becomes necessary but such negotiation will probably centre around past performance.
On the aspect of market competition from non-Conference Lines, such a situation is accepted by Conferences as a natural consequence of the Confer. ence system and has to be faced reasonably and fairly. The Conference merely seeks that restraints placed upon the Conference Members by other authorities are placed reasonably upon others in the trade who would not otherwise conform to a code of behaviour.
Where applicants have sought to join the Conference, those applications have been discussed by the Conference Members firstly from the angle of whether such services are necessary in the interest of the trade or of the nations concerned since excessive coverage causes excessive costs, and secondly from the angle of the willingness and ability of the applicant to invest adequately in the trade so that the trade is supported in good times and in bad times and that the Lines carry the low rated cargoes as well as the high rated cargoes.
The characteristics of a highly controlled volume/revenue pooled conference trade are:
(a) Dealing satisfactorily with the claims of new entrants or existing Members of the Conference.
(b) Providing adequate coverage for the trade.
(h) Meaningful consultation with Shippers on rate changes, service pat. terns and all matters of mutual concern, at the request of either party.
Attached is a simple illustration of the method of pooling which embraces the principles enunciated.
TABLE 2.-ADJUSTMENT OF ENTITLEMENTS RESULTING FROM DELIBERATE UNDERCARRIAGE BY LINE E
TABLE 3.-ADJUSTMENT OF ACTUAL EARNINGS TO AMENDED ENTITLEMENTS AND APPLICATION OF CARRYING
ALLOWANCE (50 PERCENT) TO COMPENSATE OVERCARRIERS FOR HANDLING EXPENSES
Mr. RUSSELL. I think this illustrates that in the tightest and most effective type of closed conference with a pooled trade and effective loyalty agreements with shippers, malpractices are entirely eliminated, as there is no economic or commercial sense for the shipowner parties involved to malpractice. And it is possible only under that system to rationalize sailings and match the services and rates to the commercial requirements of the trade.
Over many years, in many countries, it has been amply demonstrated that any problems that the closed conferences produce between shipowners, or between shipowners and shippers, can be solved by consultation, with governments only on the sidelines.
The foreign trade of the United States, which one must constantly reiterate is also the foreign trade of other nations, would-we are quite certain--move more freely and more economically under that system. It lies in your hands to direct a move away from the shibboleth of an outdated philosophy toward a more widely accepted doctrine.
Any suggestion that it is a privilege for foreign nations to participate in the U.S. trades, and that the whole world must conform to your rules and regulations misses the mark in an economically interdependent world. What would follow if every trading partner of the United States adopted a similar view in relation to what it claimed to be its foreign trade, and what impact would that have on U.S. shipping operations and relationships?
Looking at the U.S. trades, we have found that recent interpretation of U.S. statutes apparently prohibit meaningful consultation -in European eyes—with representative shipper bodies at either