Competition Policy and Economic Regulation in Georgia By Ketevan Lapachi 22 May, 2012 Georgian Development Research Institute
ContentPart I: Economic regulation - from deregulation to regulatory quality (2-11)Part II. Competition Law and Policy (12-35) International rules and principles and Georgia’s International obligations in field of competition (12-13) EU and Georgia (14-19) Current situation: a) Competition Law in force and b) Draft Competition Law (20-33) Future scenario: concept for reform (34)
Regulatory Policies and Institutions Objectives and typologies of economic regulation Rules and institutions Independent industry and competition regulators (allocation of responsibilities, independence and accountability) Relationship between utility and competition regulators
Evolution of the Concept of Regulatory Reform International tendencies (1997-2005) From deregulation to regulatory quality management Main elements and mechanisms of quality of regulation Regulatory tools: administrative simplifications, RIA, Transparency and communication, alternatives to regulation, compliance and enforcement, administrative justice and accountability
Four dangerous regulatory “myth” (Jacobs) We live in an age of deregulation Regulation is bad for businesses, so the less regulation, the better Countries reform regulations because of globalization forces them to reform Regulation is a means for governments to control business behavior
Myths’ Corrections- some considerations For a decade, Regulation has increased faster than any other form of government activity Every indicator shows that regulatory state is growing , not shrinking Market liberalization requires more regulation as markets expand Private enterprises produce wealth within well regulated competitive markets, within a framework of social welfare Changes is ownership is not enough Pure and inadequate regulatory structures permit abuses and corruption, undermine investor and consumer confidence and destroy rather than create economic value
Why regulatory framework is still major constraint on growth in most transition countries The reason is not that country regulate, but that they regulate badly The problem is a mix over-regulation, under regulation, and the wrong kind of regulation combined with ineffective institutions to design, apply, and adjudicate regulations Deregulation is insufficient principle for market reform Regulatory quality is the guiding principle We need smart government not small government Institutional reforms must strengthen both markets and states
Characteristics needed for quality regulatory systems Consistency with competition principles Security (legal security, predictable enforcement) Transparency Legitimacy (protect public interests) Efficiency Expertise Reducing regulatory risk is a key. Transparency and regulatory impact analysis are considered as tools for reducing regulatory risks.
Governments reform regulations because it is in their domestic interests In general reforms are driven by purely domestic needs Domestic benefits: boosts consumer benefits, improves competitiveness, fosters innovation, increases job creation, etc. Among the major results (according to international practice) are: price reduction after reforms, GDP growth, etc
Principles of Reform minimize the need of regulation by getting industry structure right thoroughly access the design of the regulator in light of the evolution of the industry/sector/economy adapt to changes establish close working relations with competition authorities to preserve consistency in the economy wide competition policy integrity of economic system, etc
Is the Georgian Regulatory Model efficient? Independence debate conflict of interests coordination with competition policy aims of regulation, expected benefits and real situation cost- benefit issue major problems and infringements of consumers’ rights in infrastructure sectors needs for policy reforms etc The role of competition policy in reform
International rules and principles in competition The internationally acknowledged principles of competition, amongst them the rules of state control over business restricting practice (WTO, EU, OECD, UNSTAD) oblige states to: Adopt Improve And efficiently implement the respective legal acts. Base their legislation on the principles of efficient regulation and prevention of competition restricting practices Ensure the non-discriminatory attitude to every enterprise Improve the enforcement measures
Georgia’s International Commitments Georgia is pressing towards the integration into the institutions of the European Union, it is a member of the World Trade Organisation and also enjoys the status of a full member or observer of many bilateral, regional or multilateral agreements and international organisations. Consequently, Georgia has certain obligations in the light of regulation of domestic legal framework for trade and competition with due consideration of international principles and best practice and first of all rules and recommendations of the EU, WTO, UNCTAD, OECD.
EU and Georgia PCA (partnership and cooperation agreement with EC and its member countries) 1996, article 44 Free Trade agreement (FTA) and Neighborhood Policy EC Fact finding Mission (2009) and its recommendations DCFTA (Deep and Comprehensive Free Trade Agreement) Copenhagen Criterions (1993)
PCA Agreement, Article 44 The Partnership and Cooperation Agreement between Georgia and the EU and its member countries (1996) outlines key directions (Article 44), which should be accorded particular attention in the course of harmonisation of domestic competition law with that of the EU, amongst them: “agreements and associations between undertakings and concerted practices which may have the effect of preventing, restricting or distorting competition, abuse by undertakings of a dominant position in the market, state aids which have the effect of distorting competition, state monopolies of a commercial character, public undertakings and undertakings with special or exclusive rights, review and supervision of the application of competition laws and means of ensuring compliance with them.”
Four main policy areas of the EU Competition Law include: Cartels, or control of collusion and other anti-competitive practices which has an effect on the EU (or, since 1994, the European Economic Area). This is covered under Article 101 of TFEU (ex article 81 of the Treaty of the European Community (TEC). Monopolies, or preventing the abuse of firms dominant market positions. This is governed by Article 102 of TFEU (ex article 82 of TEC). This article also gives rise to the Commissions authority under the next area, Mergers, control of proposed mergers, acquisitions and joint ventures involving companies which have a certain, defined amount of turnover in the EU/EEA. This is governed by the Council Regulation 139/2004 EC (the Merger Regulation). State aid, control of direct and indirect aid given by Member States of the European Union to companies. Covered under Article 107 of TFEU (ex article 87 of TEC.
Competition authorities in the acceding countries The enlargement of EU with the new members (as it was in May 2004) provides new challenges and opportunities for cooperation. In order to meet these challenges the accession process in the field of competition aims to prepare the acceding countries for an active role in competition enforcement. Negotiations are based on the conclusion of the Copenhagen European Council (June 1993), which defined criteria that candidate countries have to meet before than can join the EU. In the economic sphere these criteria require the existence of a functioning market economy as well as the capacity to cope with competitive pressure and market forces within the EU. “this criterion of the accession negotiations into a principle whereby candidate countries are seen as ready to join the EU only if their companies and public authorities have became accustomed to a competition discipline similar to that of the community well before the date of accession
Copenhagen Criteria three elements had to be in place in a candidate country before the competition negotiations were concluded: a) the necessary legislative framework; b) an adequate administrative capacity (in particular a well functioning competition authority) and c) a credible enforcement record of the competition acquis. In case of new members these requirements were not only based on political context of negotiations but also on the bilateral agreements that the EU had concluded with each of the ten candidate countries from CE and EEC. These agreements already provided a solid legal basis for the accession preparation in the area of competition policy.
Main elements of competition policy reforms The foregoing puts forward the necessity of improvement of competition policy in Georgia and respectively, the care for the provision of such elements, as: The existence of clear and predictable rules of competition; Efficient state supervision over their observance; Reliable and transparent enforcement practice
Arguments for competition policy The best international practice treats competition as an important factor of economic growth and public welfare. Strengthening of the competition policy is regarded as a crucial direction of reforms in every country. The foregoing is proved both by the activities of international organisations in this respect and the competition regimes of more than 120 foreign countries and the steps made towards their competition policy
Opposite opinionthere are some different opinions as well, that: The regulation of competition is an excessive and purposeless bureaucratic burden; that it is not necessary these days; The legislation is meaningless without efficient enforcement and it will be better to revoke it; The regulation is an obstructing factor to the entry to any market, innovations and the growth of local companies; etc.
Current Situation Commensurate with the agreement made with the European Union and its member states Georgia has committed itself to the approximation and harmonisation of its legislation with that of the EUDespite foregoing, Georgia’s law (of 2005) and policy in competition and consumer protection: Does not take account of competition and consumer protection related problems in Georgia and the mechanisms of their solution within the competition legislation.
Features of the law of 2005 Unlike similar laws of the other countries (e.g. the laws of the WTO, OECD and EU member countries, as well as other countries), the Law on Free Trade and Competition of 2005 does not apply to such manifestations of business restricting practices, as anticompetitive agreements monopolistic activity, concentration of market power (mergers and acquisitions). The existing Law (2005) is unable to ensure the state control in the following directions: concerted practices which aim or have the effect of restricting competition, abuse of a dominant position in the market, concentration of market power.
Features of the Law of 2005 the current competition law regulates only the anticompetitive actions of the governmental authorities with respect to state aid, prohibits the discrimination of economic agents in the course of issuance of state aids. however, the Law is so inconsistent in this respect as well, that it excludes the efficient practical implementation of these provisions.
Free Trade Agency during 2005-2012 Since 2005, Georgian antimonopoly authority exists only nominally (till 2010 as a subordinate entity of the Ministry of Economic Development with its personnel consisting of only 5-6 persons and than as an independent competition agency (was established in February of 2010). Due to deteriorated institutional capabilities this authority was practically inactive. The signs of monopolization of the markets are already apparent (examples of unfair competition, limited choice, monopolistic prices, etc.), what in long run will have a negative impact on: the investment image of the country; on the outcomes of economic development and on the process of joining the European Union (in particular, will considerably protract the process).
Policy Fragmentation No legislative or administrative initiatives to improve competition policy have been implemented for the past 10 years and moreover after the Rose Revolution, except for the addition of rather strict provisions to the law of industry regulation aiming at the restriction of the rights of the Competition Agency and fragmentation of the competition policy according to industry principle. There are no efficient coordination mechanisms for ensuring the cooperation between and joint activities of industry regulators and the Competition Agency.
Institutional reforms in 2010-2011 February 26, 2010 by the decree of the President of Georgia an independent legal entity of public law Free trade and Competition Agency was set up From 2012 a legal entity of public law Competition and State Procurement agency started functioning (according to decree of Georgian Government December 27, 2011). Prime minister In accordance with the competition strategy draft law on competition was elaborated and submitted to the parliament for consideration in September, 2011. Discussions in 2011 and second hearing in February 29, of 2012.
Draft Competition Law (under consideration) The draft law is still under consideration Discussions organized by the civic organizations (October 3, 2011, September 25, 2011, April 4, 2011 etc) Critical comments are provided by the NGO’s (TI Georgia, GILA, GDRI and many independent experts). Some critical comments by Ketevan Lapachi are provided. Full version of comments and suggestions is available (at www.gdri.ge)
Advantages and major problem areas of the draft law on competition General advantage is the structure of the draft law – it contains all critical elements Major problems areas are: Scope of application (Articles 1, paragraphs 4, 5) Agreements of minor importance (article 8) Exemptions (articles 9,12) Prioritization of tasks by the Georgian Government (Article 19) etc
Scope of Application Special attention should be paid to the scope of application of the law and exemptions from forbidden anticompetitive agreements and prioritization of tasks by government. Namely: According to the draft the scope of application is very limited (Article1, paragraph 4). Free Economic Zones, small markets (with share less then 0, 25% in GDP), goods and services for defense and public safety, etc. are in exemptions. In addition, paragraph 5, of the same article stipulates that all other laws prevail and transitional provisions (article 35) exclude infrastructure industries from law application. According to best practice, the general competition laws apply to all sectors and products. To this end the law contradicts to all recommendations and Georgia’s Comprehensive Strategy in Competition Policy as well.
Exemptions Some individual and group exemptions are established by the draft law, and in addition, the government is enabled to establish additional exemptions and priorities. (Articles: 9, para2 and 3, article 12 Para. 2/b,f, g, h, etc.) In accordance with international practice special agreements are exempted according to so called de-minimis rules. But this rule does not apply to the cartel agreements. In addition, in spite of the same practice the benchmarks to be established are to high and need to be revised
“De minimis” Rules According to draft law (Article 8) prohibition to the agreements shall not apply “a) in case of horizontal agreements if aggregate market share of parties does not exceed 25 %; b) in case of vertical agreements if share on the relevant market of each party does not exceed 40 % for each party; c) in case if agreement contains both characteristics – aggregate share of parties does not exceed 40% “. Similar exemptions (“de-minimis” rules) are usual for competition laws, but thresholds stipulated by the draft law are to high and contradict to the international standards (for example in the EU and its member countries similar benchmarks are established at the level of 5-15 %. In addition, de minimis rules never apply to the cartel agreements
Article 19 and competition agency independence Article 19 – prioritization of tasks by the Georgian Government is absolutely different (it should be done by the agency but not government) than traditional prioritization of tasks by competition authorities. Does it mean that agency should respond only to government massages? According to widespread opinion, to understand the implications of a law, some standard policy analysis questions should be asked: who are the affected parties; what are the market effects; what are the administrative costs; how will Georgia’s international relations be affected, etc..
Possible Future Scenarios challenges and problems old recommendations in new realities modern competition law and institution is needed clear competition rules and predictable enforcement mechanisms need to be established designing efficient competition authority: main elements enforcement regime etc.
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