Competition Policy and Competition Policy and Economic Regulation in Economic Regulation in

GeorgiaGeorgia

By Ketevan By Ketevan LapachiLapachi

22 May, 22 May, 20122012Georgian Development Research Institute

Content Content

Part I: Economic regulation - from deregulation to Part I: Economic regulation - from deregulation to regulatory quality (2-11)regulatory quality (2-11)

Part II. Competition Law and Policy (12-35)Part II. Competition Law and Policy (12-35) International rules and principles and Georgia’s International rules and principles and Georgia’s

International obligations in field of competition (12-13)International obligations in field of competition (12-13) EU and Georgia (14-19)EU and Georgia (14-19) Current situation: a) Competition Law in force and b) Current situation: a) Competition Law in force and b)

Draft Competition Law (20-33)Draft Competition Law (20-33) Future scenario: concept for reform (34)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 International rules and principles in competitionprinciples in competition

The internationally acknowledged principles of The internationally acknowledged principles of competition, amongst them the rules of state control over competition, amongst them the rules of state control over business restricting practice (WTO, EU, OECD, UNSTAD) business restricting practice (WTO, EU, OECD, UNSTAD) oblige states to: oblige states to:

Adopt Adopt Improve Improve And efficiently implement the respective legal acts. And efficiently implement the respective legal acts. Base their legislation on the principles of efficient Base their legislation on the principles of efficient

regulation and prevention of competition restricting regulation and prevention of competition restricting practices practices

Ensure the non-discriminatory attitude to every enterprise Ensure the non-discriminatory attitude to every enterprise Improve the enforcement measures Improve the enforcement measures

Georgia’s International Georgia’s International CommitmentsCommitments

Georgia is pressing towards the integration into the Georgia is pressing towards the integration into the institutions of the European Union, it is a member of institutions of the European Union, it is a member of the World Trade Organisation and also enjoys the the World Trade Organisation and also enjoys the status of a full member or observer of many bilateral, status of a full member or observer of many bilateral, regional or multilateral agreements and international regional or multilateral agreements and international organisations.organisations.

Consequently, Georgia has certain obligations in the Consequently, Georgia has certain obligations in the light of regulation of domestic legal framework for light of regulation of domestic legal framework for trade and competition with due consideration of trade and competition with due consideration of international principles and best practice and first of international principles and best practice and first of all rules and recommendations of the EU, WTO, all rules and recommendations of the EU, WTO, UNCTAD, OECD. UNCTAD, OECD.

EU and GeorgiaEU and Georgia

PCA (partnership and cooperation agreement with EC PCA (partnership and cooperation agreement with EC and its member countries) 1996, article 44and its member countries) 1996, article 44

Free Trade agreement (FTA) and Neighborhood PolicyFree Trade agreement (FTA) and Neighborhood Policy

EC Fact finding Mission (2009) and its recommendationsEC Fact finding Mission (2009) and its recommendations

DCFTA (Deep and Comprehensive Free Trade DCFTA (Deep and Comprehensive Free Trade Agreement)Agreement)

Copenhagen Criterions (1993) Copenhagen Criterions (1993)

PCA Agreement, Article 44PCA Agreement, Article 44

The Partnership and Cooperation Agreement between The Partnership and Cooperation Agreement between Georgia and the EU and its member countries (1996) outlines Georgia and the EU and its member countries (1996) outlines key directions (Article 44), which should be accorded key directions (Article 44), which should be accorded particular attention in the course of harmonisation of particular attention in the course of harmonisation of domestic competition law with that of the EU, amongst them: domestic competition law with that of the EU, amongst them:

““agreements and associations between undertakings and agreements and associations between undertakings and concerted practices which may have the effect of preventing, concerted practices which may have the effect of preventing, restricting or distorting competition, restricting or distorting competition,

abuse by undertakings of a dominant position in the market, abuse by undertakings of a dominant position in the market, state aids which have the effect of distorting competition, state aids which have the effect of distorting competition, state monopolies of a commercial character, state monopolies of a commercial character, public undertakings and undertakings with special or public undertakings and undertakings with special or

exclusive rights, exclusive rights, review and supervision of the application of competition laws review and supervision of the application of competition laws

and means of ensuring compliance with them.” and means of ensuring compliance with them.”

Four main policy areas of the Four main policy areas of the EU Competition Law include:EU Competition Law include:

Cartels, or control of collusion and other anti-competitive Cartels, or control of collusion and other anti-competitive practices which has an effect on the EU (or, since 1994, the practices which has an effect on the EU (or, since 1994, the European Economic Area). This is covered under Article 101 European Economic Area). This is covered under Article 101 of TFEU (ex article 81 of the Treaty of the European of TFEU (ex article 81 of the Treaty of the European Community (TEC). Community (TEC).

Monopolies, or preventing the abuse of firms' dominant Monopolies, or preventing the abuse of firms' dominant market positions. This is governed by Article 102 of TFEU market positions. This is governed by Article 102 of TFEU (ex article 82 of TEC). This article also gives rise to the (ex article 82 of TEC). This article also gives rise to the Commission's authority under the next area, Commission's authority under the next area,

Mergers, control of proposed mergers, acquisitions and joint Mergers, control of proposed mergers, acquisitions and joint ventures involving companies which have a certain, defined ventures involving companies which have a certain, defined amount of turnover in the EU/EEA. This is governed by the amount of turnover in the EU/EEA. This is governed by the Council Regulation 139/2004 EC (the Merger Regulation). Council Regulation 139/2004 EC (the Merger Regulation).

State aid, control of direct and indirect aid given by State aid, control of direct and indirect aid given by Member States of the European Union to companies. Member States of the European Union to companies. Covered under Article 107 of TFEU (ex article 87 of TEC. Covered under Article 107 of TFEU (ex article 87 of TEC.

Competition authorities in the Competition authorities in the acceding countriesacceding countries

The enlargement of EU with the new members (as it was in May The enlargement of EU with the new members (as it was in May 2004) provides new challenges and opportunities for cooperation. In 2004) provides new challenges and opportunities for cooperation. In order to meet these challenges the accession process in the field of order to meet these challenges the accession process in the field of competition aims to prepare the acceding countries for an active role competition aims to prepare the acceding countries for an active role in competition enforcement.in competition enforcement.

Negotiations are based on the conclusion of the Copenhagen Negotiations are based on the conclusion of the Copenhagen European Council (June 1993), which defined criteria that candidate European Council (June 1993), which defined criteria that candidate countries have to meet before than can join the EU.countries have to meet before than can join the EU.

In the economic sphere these criteria require the existence of a In the economic sphere these criteria require the existence of a

functioning market economy as well as the capacity to cope with functioning market economy as well as the capacity to cope with competitive pressure and market forces within the EU. “this criterion competitive pressure and market forces within the EU. “this criterion of the accession negotiations into a principle whereby candidate of the accession negotiations into a principle whereby candidate countries are seen as ready to join the EU only if their companies countries are seen as ready to join the EU only if their companies and public authorities have became accustomed to a competition and public authorities have became accustomed to a competition discipline similar to that of the community well before the date of discipline similar to that of the community well before the date of accession accession

Copenhagen Criteria Copenhagen Criteria

three elements had to be in place in a candidate country three elements had to be in place in a candidate country before the competition negotiations were concluded:before the competition negotiations were concluded:

a) the necessary legislative framework;a) the necessary legislative framework; b) an adequate administrative capacity (in particular a well b) an adequate administrative capacity (in particular a well

functioning competition authority) and functioning competition authority) and c) a credible enforcement record of the competition c) a credible enforcement record of the competition

acquis. In case of new members these requirements were acquis. In case of new members these requirements were not only based on political context of negotiations but also not only based on political context of negotiations but also on the bilateral agreements that the EU had concluded on the bilateral agreements that the EU had concluded with each of the ten candidate countries from CE and EEC. with each of the ten candidate countries from CE and EEC. These agreements already provided a solid legal basis for These agreements already provided a solid legal basis for the accession preparation in the area of competition policy.the accession preparation in the area of competition policy.

Main elements of Main elements of competition policy reformscompetition policy reforms

The foregoing puts forward the necessity of The foregoing puts forward the necessity of improvement of competition policy in Georgia improvement of competition policy in Georgia and respectively, the care for the provision of and respectively, the care for the provision of such elements, as: such elements, as:

The existence of clear and predictable rules of The existence of clear and predictable rules of competition; competition;

Efficient state supervision over their Efficient state supervision over their observance; observance;

Reliable and transparent enforcement practiceReliable and transparent enforcement practice

Arguments for competition Arguments for competition policypolicy

The best international practice treats competition as The best international practice treats competition as an important factor of economic growth and public an important factor of economic growth and public welfare. welfare.

Strengthening of the competition policy is regarded Strengthening of the competition policy is regarded as a crucial direction of reforms in every country.as a crucial direction of reforms in every country.

The foregoing is proved both by the activities of The foregoing is proved both by the activities of

international organisations in this respect and the international organisations in this respect and the competition regimes of more than 120 foreign competition regimes of more than 120 foreign countries and the steps made towards their countries and the steps made towards their competition policycompetition policy

Opposite opinionOpposite opinion

there are some different opinions as well, that: there are some different opinions as well, that: The regulation of competition is an excessive and The regulation of competition is an excessive and

purposeless bureaucratic burden; that it is not purposeless bureaucratic burden; that it is not necessary these days; necessary these days;

The legislation is meaningless without efficient The legislation is meaningless without efficient enforcement and it will be better to revoke it; enforcement and it will be better to revoke it;

The regulation is an obstructing factor to the The regulation is an obstructing factor to the entry to any market, innovations and the growth entry to any market, innovations and the growth of local companies;of local companies;

etc.etc.

Current SituationCurrent Situation

Commensurate with the agreement made with Commensurate with the agreement made with the European Union and its member states the European Union and its member states Georgia has committed itself to the Georgia has committed itself to the approximation and harmonisation of its approximation and harmonisation of its legislation with that of the EUlegislation with that of the EU

Despite foregoing, Georgia’s law (of 2005) and Despite foregoing, Georgia’s law (of 2005) and policy in competition and consumer protection: policy in competition and consumer protection:

Does not take account of competition and Does not take account of competition and consumer protection related problems in consumer protection related problems in Georgia and the mechanisms of their solution Georgia and the mechanisms of their solution within the competition legislation. within the competition legislation.

Features of the law of 2005Features of the law of 2005

Unlike similar laws of the other countries (e.g. the laws of Unlike similar laws of the other countries (e.g. the laws of the WTO, OECD and EU member countries, as well as the WTO, OECD and EU member countries, as well as other countries), the Law on Free Trade and Competition other countries), the Law on Free Trade and Competition of 2005 does not apply to such manifestations of business of 2005 does not apply to such manifestations of business restricting practices, as anticompetitive agreements restricting practices, as anticompetitive agreements monopolistic activity, concentration of market power monopolistic activity, concentration of market power (mergers and acquisitions).(mergers and acquisitions).

The existing Law (2005) is unable to ensure the state The existing Law (2005) is unable to ensure the state

control in the following directions: concerted practices control in the following directions: concerted practices which aim or have the effect of restricting competition, which aim or have the effect of restricting competition, abuse of a dominant position in the market, abuse of a dominant position in the market, concentration concentration of market power. of market power.

Features of the Law of 2005Features of the Law of 2005

the current competition law regulates only the current competition law regulates only the anticompetitive actions of the the anticompetitive actions of the governmental authorities with respect to governmental authorities with respect to state aid, prohibits the discrimination of state aid, prohibits the discrimination of economic agents in the course of issuance of economic agents in the course of issuance of state aids.state aids.

however, the Law is so inconsistent in this however, the Law is so inconsistent in this respect as well, that it excludes the efficient respect as well, that it excludes the efficient practical implementation of these provisions. practical implementation of these provisions.

Free Trade Agency during Free Trade Agency during 2005-20122005-2012

Since 2005, Georgian antimonopoly authority exists only Since 2005, Georgian antimonopoly authority exists only nominally (till 2010 as a subordinate entity of the Ministry of nominally (till 2010 as a subordinate entity of the Ministry of Economic Development with its personnel consisting of only Economic Development with its personnel consisting of only 5-6 persons and than as an independent competition agency 5-6 persons and than as an independent competition agency (was established in February of 2010).(was established in February of 2010).

Due to deteriorated institutional capabilities this authority Due to deteriorated institutional capabilities this authority was practically inactive. was practically inactive.

The signs of monopolization of the markets are already The signs of monopolization of the markets are already apparent (examples of unfair competition, limited choice, apparent (examples of unfair competition, limited choice, monopolistic prices, etc.), what in long run will have a monopolistic prices, etc.), what in long run will have a negative impact on: the investment image of the country; on negative impact on: the investment image of the country; on the outcomes of economic development and the outcomes of economic development and

on the process of joining the European Union (in particular, on the process of joining the European Union (in particular, will considerably protract the process). will considerably protract the process).

Policy FragmentationPolicy Fragmentation

No legislative or administrative initiatives to improve No legislative or administrative initiatives to improve competition policy have been implemented for the competition policy have been implemented for the past 10 years and moreover after the Rose past 10 years and moreover after the Rose Revolution, except for the addition of rather strict Revolution, except for the addition of rather strict provisions to the law of industry regulation aiming at provisions to the law of industry regulation aiming at the restriction of the rights of the Competition the restriction of the rights of the Competition Agency and fragmentation of the competition policy Agency and fragmentation of the competition policy according to industry principle.according to industry principle.

There are no efficient coordination mechanisms for There are no efficient coordination mechanisms for

ensuring the cooperation between and joint activities ensuring the cooperation between and joint activities of industry regulators and the Competition Agency. of industry regulators and the Competition Agency.

Institutional reforms in 2010-Institutional reforms in 2010-20112011

February 26, 2010 by the decree of the President of February 26, 2010 by the decree of the President of Georgia an independent legal entity of public law Free Georgia an independent legal entity of public law Free trade and Competition Agency was set uptrade and Competition Agency was set up

From 2012 a legal entity of public law Competition and From 2012 a legal entity of public law Competition and State Procurement agency started functioning State Procurement agency started functioning (according to decree of Georgian Government (according to decree of Georgian Government December 27, 2011). Prime ministerDecember 27, 2011). Prime minister

In accordance with the competition strategy draft law In accordance with the competition strategy draft law on competition was elaborated and submitted to the on competition was elaborated and submitted to the parliament for consideration in September, 2011. parliament for consideration in September, 2011. Discussions in 2011 and second hearing in February Discussions in 2011 and second hearing in February 29, of 2012.29, of 2012.

Draft Competition Law (under Draft Competition Law (under consideration) consideration)

The draft law is still under considerationThe draft law is still under consideration

Discussions organized by the civic organizations Discussions organized by the civic organizations (October 3, 2011, September 25, 2011, April 4, 2011 (October 3, 2011, September 25, 2011, April 4, 2011 etc)etc)

Critical comments are provided by the NGO’s (TI Critical comments are provided by the NGO’s (TI Georgia, GILA, GDRI and many independent experts). Georgia, GILA, GDRI and many independent experts).

Some critical comments by Ketevan Lapachi are Some critical comments by Ketevan Lapachi are provided. Full version of comments and suggestions provided. Full version of comments and suggestions is available (at www.gdri.ge) 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)Exemptions (articles 9,12) Prioritization of tasks by the Georgian Prioritization of tasks by the Georgian

Government (Article 19) Government (Article 19) etcetc

Scope of ApplicationScope of Application

Special attention should be paid to the scope of application of the Special attention should be paid to the scope of application of the law and exemptions from forbidden anticompetitive agreements law and exemptions from forbidden anticompetitive agreements and prioritization of tasks by government. Namely:and prioritization of tasks by government. Namely:

According to the draft the scope of application is very limited According to the draft the scope of application is very limited (Article1, paragraph 4). Free Economic Zones, small markets (Article1, paragraph 4). Free Economic Zones, small markets (with share less then 0, 25% in GDP), goods and services for (with share less then 0, 25% in GDP), goods and services for defense and public safety, etc. are in exemptions. In addition, defense and public safety, etc. are in exemptions. In addition, paragraph 5, of the same article stipulates that all other laws paragraph 5, of the same article stipulates that all other laws prevail and transitional provisions (article 35) exclude prevail and transitional provisions (article 35) exclude infrastructure industries from law application.infrastructure industries from law application.

According to best practice, the general competition laws apply to According to best practice, the general competition laws apply to all sectors and products. To this end the law contradicts to all all sectors and products. To this end the law contradicts to all recommendations and Georgia’s Comprehensive Strategy in recommendations and Georgia’s Comprehensive Strategy in Competition Policy as well. Competition Policy as well.

ExemptionsExemptions

  Some individual and group exemptions are established by Some individual and group exemptions are established by the draft law, and in addition, the government is enabled the draft law, and in addition, the government is enabled to establish additional exemptions and priorities. (Articles: to establish additional exemptions and priorities. (Articles: 9, para2 and 3, article 12 Para. 2/b,f, g, h, etc.)9, para2 and 3, article 12 Para. 2/b,f, g, h, etc.)

In accordance with international practice special In accordance with international practice special agreements are exempted according to so called de-agreements are exempted according to so called de-minimis rules. But this rule does not apply to the cartel minimis rules. But this rule does not apply to the cartel agreements. In addition, in spite of the same practice the agreements. In addition, in spite of the same practice the benchmarks to be established are to high and need to be benchmarks to be established are to high and need to be revisedrevised

““De minimis” RulesDe minimis” Rules

According to draft law (Article 8) prohibition to the agreements shall According to draft law (Article 8) prohibition to the agreements shall not apply not apply

““a) in case of horizontal agreements if aggregate market share of a) in case of horizontal agreements if aggregate market share of parties does not exceed 25 %; b) in case of vertical agreements if 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 share on the relevant market of each party does not exceed 40 % for each party; c) in case if agreement contains both characteristics – each party; c) in case if agreement contains both characteristics – aggregate share of parties does not exceed 40% “.aggregate share of parties does not exceed 40% “.

Similar exemptions (“de-minimis” rules) are usual for competition Similar exemptions (“de-minimis” rules) are usual for competition laws, but thresholds stipulated by the draft law are to high and laws, but thresholds stipulated by the draft law are to high and contradict to the international standards (for example in the EU and contradict to the international standards (for example in the EU and its member countries similar benchmarks are established at the level its member countries similar benchmarks are established at the level of 5-15 %. of 5-15 %.

In addition, de minimis rules never apply to the cartel agreements In addition, de minimis rules never apply to the cartel agreements   

Article 19 and competition Article 19 and competition agency independenceagency independence

Article 19 – prioritization of tasks by the Georgian Article 19 – prioritization of tasks by the Georgian Government is absolutely different (it should be done by Government is absolutely different (it should be done by the agency but not government) than traditional the agency but not government) than traditional prioritization of tasks by competition authorities. prioritization of tasks by competition authorities.

Does it mean that agency should respond only to Does it mean that agency should respond only to government massages? According to widespread opinion, government massages? According to widespread opinion, to understand the implications of a law, some standard to understand the implications of a law, some standard policy analysis questions should be asked: who are the policy analysis questions should be asked: who are the affected parties; what are the market effects; what are the affected parties; what are the market effects; what are the administrative costs; how will Georgia’s international administrative costs; how will Georgia’s international relations be affected, etc.. 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.

Thank you for your attention

For comments: klapachi@ibsu.edu.ge klapachi@yahoo.com