Ideas & Debate

Regulating competition in logistics and freight

log

State-owned entities and private business should compete in a level playing field. FILE PHOTO | NMG

Increased competition can improve a country’s economic performance, open business opportunities to its citizens and reduce the cost of goods and services. But many laws and regulations restrict competition.

A firm’s ability to raise its prices is usually constrained by competitors and the possibility that its customers can switch to alternative sources of supply. When these constraints are weak, a firm is said to have market power and if the market power is great enough, to be in a position of dominance or monopoly (terminology tied to jurisdiction). While mere possession of monopoly power does not constitute violation of competition laws, the abuse of such power — particularly if it is used to weaken competition further by excluding rivals — calls for intervention from competition authorities.

Establishing a framework of competition law and liberalising sectors is important, but so is assessing the competitive effects of regulations and government intervention in other policy areas.

The Competition Authority of Kenya (CAK) is about to embark on a study on competition in the shipping, trucking and haulage sector. The Airfreight sector need not to be left out since the freight logistics landscape in the region is now characterised by multi-modal transportation.

Various logistics companies (both local and multinational) have diversified their businesses to encapsulate business units in the freight business: sea, air and road. Like any other sector in the economy, the transport and logistics sector is not exempt of anti-competitive practices.

Hard core cartels (when firms agree not to compete with one another) are bound to exist and these are the most serious violations of competition law.  They injure customers by raising prices and restricting market entry, thus making goods and services unnecessarily expensive. The categories of conduct most often defined as hard core cartels are price fixing, output restrictions, market allocation and bid rigging (the submission of collusive tenders).

It must be agreed also that some horizontal agreements between companies can fall short of a hard core cartel, and in certain cases may have beneficial effects.  For example, agreements between competitors related to research and development, production and marketing can result in reduced costs for companies, or improved products, the benefits of which are passed on to consumers.

The challenge for the CAK is how to assess these agreements, balancing the pro-competitive effects against any anti-competitive effects which may distort the market in the shipping, trucking and haulage sector. The development and growth of logistics clusters also brings together competitors that cooperate in salient aspects like green practices to reduce environmental impacts from the sector yet they still compete in their core businesses.

With the SGR now poised to move freight into the hinterland of the port of Mombasa, only Kenya Railways Corporation (KRC) will directly sell services to the market. No known concessions or franchises have been made public with regards to the future use of the foregoing infrastructure. In the UK, for example, there are at least 23 companies with franchised rail-passenger services and seven rail-freight operating companies operating trains.

How will the Competition Authority achieve competitive neutrality? At what stage will State-owned and private businesses compete on a level playing field? It is essential to use resources effectively within the economy and thus achieve growth and development. Therefore, the principle of competitive neutrality should feature in the proposed study, however, difficult. The Shippers Council of Eastern Africa must advocate for this very aggressively.

The study should aim at, inter alia, providing guidance to policy makers who want to make sure that the presence of the State-owned enterprises in the marketplace does not thwart private entrepreneurs, skew competition or lead to other inefficiencies. Understanding how to avoid unintended economic consequences that may follow from State ownership is particularly important for policy makers that face the challenge to balance the commercial objectives of State-owned enterprises with other important policy objectives.

Where individual organisations cannot compete directly with a mammoth entity, the natural direction to take is usually to merge. Larger economies of scale are the clincher for such deals. Most mergers are beneficial to competition, or at least do no harm to it, so the CAK should typically screen to identify exceptions. Mergers between competitors can result in large costs to consumers and to the economy.

The CAK should have the power and skills to investigate effectively and to remedy any potential problems they find- including blocking the merger. Mergers between companies that do not directly compete rarely raise competition concerns, but when they do, they require very sophisticated economic analysis to assess whether the effects are anti-competitive or efficiency-enhancing.

KRC should look into options of selling the freight capacity through Blocked Space Agreements (BSAs) via tendering to logistics service providers, and focus on their core competence. This will reduce friction between trucking and haulage companies and the corporation.

This could actually be more lucrative to KRC since competition between logistics companies for its rail-freight capacity could see it run with probable optimal capacity, yet still maintain insurance against any losses since BSAs would cover that liability. Concessions to use the SGR by private train operators, including franchises will and should be the direction to take in the nearest future.

The SGR should be ferrying a substantial amount to the port of Mombasa for export than imports, and policies should enhance the same.