Georgian Government’s New Legislative Initiative– Universal Competition Agency Without Sector Regulator?
The importance of free competition has been demonstrated by a number of policy and academic studies. It is also well known that competition policy (or anti-trust policy, as it is more often called in the US) helps enhance the country’s competitiveness on the global market and promote economic welfare. In particular, free competition leads to a better choice of products and services at lower prices to the benefit of society as a whole and can additionally promote innovation and greater productivity.
Last week the Georgian Government presented to parliament a draft law ‘On Free Trade and Competition’. This document, as well as the “Comprehensive Strategy in Competition Policy” has been prepared with the purpose of meeting recommendations and requirements of DCFTA (the multilateral negotiations regarding the free trade agreement between Georgia and the European Union). An analysis of the draft law reveals some positive changes. However, parts of the draft suggest that the government will not be able to either regulate the competitive environment in line with the European standards or to fully implement a comprehensive reform in the field of competition.
The provisions of the proposed draft law are mainly consistent with EU competition law and merger regulations. In particular, the draft law:
- Does not prohibit the monopoly (dominant) position of a company or interdependent companies in the market; prohibition only applies to the abuse of this dominant position;
- Defines a company with a dominant position as a company (or interdependent companies operating in the same market) that accounts (account) for at least 40 percent of the turnover in the market;
- Defines the cases, when a company or interdependent companies abuse a dominant position and there is evidence of collusion between companies, which purposefully and unfairly restricts competition (for instance, when a company uses predatory pricing on the market);
- Introduces the concept of concentration regulation (merger control, direct or indirect acquisition of control of companies);
- The state is prohibited from offering aid that could limit or restrict competition, etc.
Despite the progressive aspects of the proposed draft law, it still suffers some regrettable drawbacks. Specifically:
- Unlike the Comprehensive Strategy in Competition Policy, adopted by the government, which only provides for the creation of a Competition Agency, the draft law proposes to create “Competition and State Procurement Agency”. Consequently, the new agency will be responsible for enforcing the competition law as well as implementing state procurement. This means that the new agency is supposed to assume the functions of and replace the existing State Procurement Agency. It is worth noting in this regard that the two roles are distinct in nature and combining them is not beneficial either in terms of effective implementation of competition policy or effective supervision of state procurement.
- The draft states that, in cases where the matters covered by the Free Trade and Competition Law are regulated differently by another law, the other law is to be considered superior. (Article 1.5). We believe the draft law must be clear and accurate regarding the interaction with other legal acts in order not to jeopardize the core of competition law.
- The draft law grants the authority of ex-ante regulation, monitoring of operators and enforcement of the law in the electronic communications sector to the sector’s independent regulator (Article 31.8). However, it is also noteworthy that, according to the transitional provisions (Article 35.1), creation of a sole agency responsible for the enforcement of the competition law is still planned (as envisaged by the Comprehensive Strategy in Competition Policy). Starting from January 1, 2016, regulatory functions (such as control over restrictive agreements and concerted practices, etc.) will be shifted to the ”Competition and State Procurement Agency”. This will effectively limit the authority of the independent sector regulatory body, will create problems in terms of the sector’s regulation and is likely to result in the abolition of the regulatory body.
The abovementioned change is of very significant for effective regulation of the competitive environment of Georgia. It is important to remember that there is an essential difference between competition policy and regulation. Specifically, while the powers of the competition authority are limited to checking the lawfulness of the firms’ activities, sector regulators have more extensive powers, such as controlling the decisions of companies on tariffs, investments and product choices. Competition authorities check the legality of a certain business practice and intervene ex-post, i.e. only after the action has already been taken by a firm on the market. Meanwhile, sector regulatory bodies (e.g. communications, energy and water supply regulatory bodies) act before the action is taken (ex-ante) and can therefore authorize a certain business practice or deny authorization. As a result, their regulation of the sector is a long-term and continuous process, whereas the competition authority’s interventions tend to be ad hoc. Furthermore, competition policy applies to sectors where structural conditions are compatible with normal functioning of competition (so-called liberal sectors). Regulation, on the other hand, applies to special sectors, whose structure is such that one would not expect competitive forces to operate without problems (so-called non-liberal sectors). In particular, regulation would usually concern markets where fixed costs are high and therefore only one firm (so-called natural monopoly) or a small number of firms (so-called oligopolistic market) can operate profitably. Examples might be telecommunications (local loops), electricity (its transmission phase), railways (the network) etc. For this reason, regulatory bodies usually take actions to pursue the objective of economic welfare.
”Transparency International Georgia” believes that the concentration of power in the hands of a single agency (the Competition and State Procurement Agency) can produce a potential threat that competition-related issues will not be supervised effectively. Only through an effective division of powers between the agency and independent regulatory bodies can the country develop a competitive environment that reflects on international best practices and is compliant with EU requirements. Important changes in the structure of the public bodies (such as the transfer from the independent regulatory body model to the quasi-regulatory body model or the one without any regulatory body) definitely represents an attempt to change the country’s existing model of economic management. Strong evidence must be presented in order to justify such a radical change in the country’s institutional framework.