Georgian Development Research InstituteCompetition Policy in Georgia 1992-2012 By Ketevan Lapachi April 4, 2012
Content International rules and principles Georgia’s International obligations in field of competition Competition Policy Development in Georgia during 1992-2012 Reforms in 2010-2011 Problems and challenges old recommendations in new reality
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 existance 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.
II. Competition Law and Policy Development Stages of development 1992-1995 1996-2000 2001-2005 Since 2005 What about future?
The legal and institutional framework Beginning Resolution N323 of the Cabinet of Ministers of 17 March 1992 on Certain Measures Aiming at the Demonopolisation of the Economic Activities in the Republic of Georgia Resolution N870 of the Cabinet of Ministers Law of Georgia on the Principles of Entrepreneurial Activities In February 1992 the Administration for Antimonopoly Regulation, Consumer Protection and Promoting the Entrepreneurship was created within the Ministry of Economy of Georgia with 11-member staff.
Legal and Institutional Framework1992-1995 : September 16, 1992 – Decree of the State Council “on the Restriction of Monopolistic Activities and the Promotion of Competition” in the Republic of Georgia Ordinances of the President of Georgia N60 and N160 of 1995 “on the Protection of Consumers against Misleading Advertisement” In 1995 the Antimonopoly Administration of the Ministry of Economy of Georgia was delegated with the duty of controlling the advertisement activities, envisaged by the Ordinance of the President of Georgia N60 of 1995 on the Protection of Consumers against Misleading Advertisement, 10 established posts were added thereto and the Administration was transformed into the Main Administration for Antimonopoly Policy
Legal and Institutional Framework During 1995-2000 three laws were adopted 1995 -The Law “on the Protection of Consumer Rights “ 1996 - The Law of Georgia on Monopolistic Activities and Competition 1998 - The Law on Advertisement Up to 40 normative acts adopted on the basis thereof The amendments and additions made to the Code of Administrative Offences of Georgia, the Criminal Code of Georgia, the Law of Georgian on Normative acts, the Law of Georgia on the Procedure of Operation and Structure of the Executive Power and the other legal acts for the purpose of improvement of the performance of the Service By EBRD Georgian legislation was described as the best one in the transition economies
Legal and Institutional Framework In December 1996, in the course of reorganisation of the Ministry of Economy the Main Administration for Antimonopoly Policy was transformed into the Antimonopoly Service of the Ministry of Economy Commensurate with the Ordinance N137 of the President of Georgia of 14 March 1997 on Monopolistic Activities and Competition the subordinated to the Ministry of Economy State Antimonopoly Service was created on the basis of the Antimonopoly Service of the Ministry of Economy. The same Ordinance provided for the number of the members of the personnel (150 persons, amongst them 65 for central office and 85 – for regional offices) and the structure of the Service, which included 12 regional offices, the completion of which offices was finished in 1998.
Legal and Institutional Framework In 2000-2002 three reorganisations and many other justified or unjustified perturbations were undertaken Fluctuation of Personnel The Head of the Service was changed four times within a year. At the same time three of four heads of functional departments (units) and some other trained (in administrative establishments of Europe and US in EU and USA) and experienced employees left the AMS. Fragmentation of antimonopoly policy according to sectoral principle and gradual limitation of the powers of the Antimonopoly Service (see changes in statistics and customs laws, industry regulatory laws etc).
Legal and Institutional Framework In 2001 the Service (which earlier was a public law legal entity) was transformed into a subordinated entity, and its regional offices (the formation of which, except for Adjara was completed in 1998) into circuit ones with the reduction of their total amount Tbilisi Branch of the Antimonopoly Service was abolished At the expense of freed established posts the number of the personnel of the central office was increased from 65 to 110 members The regional services were again re-established with the new names – Bureaus
Independence Debates Despite the fact that during that period of the Antimonopoly Service met all the requirements set forth by the Law of Georgia on the Procedure of Operation and Structure of the Executive Power (was repealed in 2004) for an independent governmental entity, (See the law “The Concept and Types of Governmental Entities) and its independence was stressed by more than one international experts (including Dr. William Kovacic, former Chairman of the US Federal Trade Commission, Dr. Ben Slay – Chief Economist, UNDP) it deemed impossible to develop it into an independent authority and to improve its status.
International obligations and 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 European Union. Despite 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.
International obligations and current situation Is not compatible with the commitments undertaken by virtue of international agreements of the country and internationally acknowledged rules and principles of state control over the business restricting practices. Such a situation impedes the development of competition on consumer market, promotes anticompetitive practices of forces, which are already established on the market, amongst them of the abuse of dominant position and has a negative impact both on the status of the consumers (particularly within limited competition) and the investment image of the country and public welfare.
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 of Georgia regulates only the anticompetitive actions of the governmental authorities with respect to state aid, amongst them, 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 existed only nominally as a subordinate entity of the Ministry of Economic Development with its personnel consisting of only 5 persons and than as an Though in 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.
Major Enforcement Problems Before the revocation of the Law of 1996 on “Monopolistic Activities and Competition”: Legislative gaps and first of all, the deficiency of the secondary legislation; Political situation, which not always provided for the Antimonopoly service (now the Agency) to implement the intensive enforcement measures; Lack of the information about the market (what was further intensified by the amendments made to the Law on Statistics, the current situation in statistics field, unreliability of the information and lesser transparency of pricing and regulation process in the field of natural monopolies irrespective of the statutory requirements); Weak institutional position of former Service – status, funding, lack of qualified personnel; Inconsistency of state policy, inconsistent and non-complex nature of economic reforms; Low level of coordination; Absence of political will.
Major Enforcement ProblemsAfter the effectuation of the Law (of 2005) on Free Trade and Competition: The general competition law does not extend to the monitoring of monopolistic practices and anticompetitive agreements any more; The restrictions, envisaged by industry regulatory acts and the Law of Georgia on Independent Regulatory Authorities related to the intervention of the Competition Agency in the respective fields in the solution of competition related problems; Inefficient mechanisms of state and public protection of consumers; Non-readiness of judges to solve the consumer protection and competition related problems; Low level of public activity.
Changes in 2010-2011 Recommendations by EC fact finding missions (March, 2009) regarding Georgia’s preparedness for the DCFTA negotiations Four policy priorities including competition were established by the above mentioned mission Comprehensive strategy on competition policy was adopted on December 3, 2010 decree 1551 ( www.gov.ge)
Capacity Building July 29, 2009 - GEPLAC training December 10,2009 - GEPLAC training in institutional arrangements on competition January, 2010 Donor coordination roundtable was organized by state minister’s office for Euro Atlantic integration issues. As a result the project with SIDA, Estonian Competition Agency and Estonian Embassy was launched February- March, 2010 World Bank video conferences: Sharing experience in EU legislation and the process of negotiations with EU February, 2010 Chief advisor of the Prima Minister of Georgia participated in in the OECD Global Forum on Competition February, 2010 experience sharing working visit in the German Competition Authority financed by GTZ
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)
Comments on the draft law Major problem areas in the draft law: Scope of application (Articles 1, paragraph 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% “. It means that the great majority of anticompetitive agreements would be in exemptions. Similar exemptions (“de-minimis” rules) are usual for competition laws. But in Georgian case this article establishes too high thresholds unusual for competition laws and contradicts the international standards where the same banchmarks are established on the level of 5-15 %.
Prioritization of tasks 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..
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..
Relations affected by the new law Analysing the draft law I doubt that it (if is adopted without serious improvements) will positively impact on the competition environment in domestic markets. The critical provisions of the draft law need to be carefully revised, otherwise they might frustrate the aim of the law. As to the international relations to be affected – Adopting this draft law (in its current condition) maybe would serve as one of the necessary preconditions for starting negotiation with EU, but it is expected that the law will be criticized by European experts, when negotiation on competition chapter starts.
Enforcement Practice (1999) In 1999 by the State Antimonopoly Service was considered more than 800 cases of violation of antimonopoly legislation, is revealed hundreds of facts of violation of the law ,,On the Monopolistic Activity and Competition”, important part of which were prohibited voluntary, according to directions of the State Antimonopoly Service. more than 400 cases were passed to courts public advocacy
structure of infringements of the ,,On Monopolistic Activity and Competition” violation of the article 10 of the law by the government bodies - especially in fields of telecommunication service, transportation, on the markets of petroleum products and baking products -40% violation of the article 13 (on the prohibition of monopolistic activity) – 30% violation of the article 9 (unfair competition) -22 % violation of another articles - 8%
Violations of the Consumer Rights During 1999 especially often was violated the rights of consumers in the sphere of trade and services (violation ,,Rules of trade and services” – 52 % of violation) especially in spheres of public utility services (violation of contract terms – 25 %) violation of the rights on information -13% etc 10%
violations of the law ,,On Advertising” The numerous facts of violation of the appropriate laws ,,On Advertising” was revealed in the sphere of telecommunications, mass media and in field of exterior advertising. Since April 7, 1998 The Antimonopoly Service sent hundreds of instructions to advertising agencies, TV companies including (the Georgian TV and Radio Corporation), mass media, producers and distributors of goods in order to eradicate the cases of infringement by common efforts, e.g. in connection with tobacco and spirits. 110 economic agents were penalized.
The structure of violation of law ,,On Advertising” (1998-1999) Infringement of the article 5 (General and specific requirement for advertising)- 60 % spirits and tobacco advertisement 13% Specifics of outside advertising 8,5 % Characteristics of specific goods advertising – 5% Social Advertisement – 3.5% etc -10%
International Cooperation State Antimonopoly Service of Georgia had collaborated with the international organizations such as the World Bank, USAID, UNDP, TACIS, UNCTAD, OECD, foreign competition agencies (Russia, Ukraine, Azerbaijan, Belarus and with the republics of the Middle Asia) as well of Romania, Belgium etc. , research and educational centers, e.g. Luven La New University (Belgium) etc. With the financial and technical support provided by above mentioned organizations, Antimonopoly Service of Georgia was equipped by the required technical base, the employees of the service take part in the workshops on topics of antimonopoly regulation, competition policy and consumers’ protection held as well in Tbilisi as abroad (Moscow, St-Petersburg, Vienna, Istanbul, Washington etc).
Some important cases (1998-1999) Cases of unfair competition on the markets of Georgian mineral waters, such as ,,Borjomi”, and Georgian wines especially on the markets of the Russia, Moldova and another CIS countries Notwithstanding joint measures carried together with Antimonopoly Bodies of Russia, Ukraine, Uzbekistan, Belarus and another countries falsification and illegal use of Georgian trade marks ,,Borgomi”, and Georgian wines (Xvanckara”, ,,Mucuzani” , etc) were among the very difficult problems for the State Antimonopoly Service of Georgia.
Some important cases and violators Abuse of dominant position by the energy providers (AES, Tbilgazi, Imereti Gazi, TbilwatterChnnel , Sakteleradiocentri etc Anticompetitive actions by the Customs Department (mesxeti case), “Sakaeronavigatia” , Ministry of Agriculture (Wino moldova case)etc Competition restrictions by the entities involved in telecommunication market, Restriction of competition in field of insurance by the UGB, by local governments etc. Ministry of Agriculture ministry of Education Ministry of Communication Railway transport department, customs department, Tbilisi municipality, “Samtrest”, etc
Statistics of violation revealed by the regional branches (as to August of 1999) Tbilisi -92 Shida Kartli– 68 Kvemo kartli-172 Kakheti –92 Guria - 47 Imereti– 80 Samtsxe Javaxeti - 37 Mtcheta Mtianeti - 36 Samegrelo Semo Svaneti – 64 Abxazeti - 0
Possible Future Scenarios new challenges and problems old recommendations in new realities modern competition law and institution capacity building enforcement regime etc Question: why competition policy is so unwelcome in Georgia?