GEO

TI Georgia recommendations for the Parliament on competition policy

22 January, 2013

Background

In 2005 all legislation regulating anti-competitive practices in Georgia was repealed. It was not until May 8, 2012 that the Parliament passed the Law on Free Trade and Competition (“the Competition Law”) and the President established the Competition and State Procurement Agency (‘the Agency”) in January, 2012. However, to date, no cases have as yet been investigated or initiated by this Agency. 

Legislation regulating anti-competitive practices is a mandatory step towards successful completion of the Deep and Comprehensive Free Trade Agreement (DCFTA) with the European Union (see Part I, s.2.2 & 2.3, TI Report).

Transparency International Georgia believes that there are fundamental flaws in the Competition Law and the establishment of the Agency that prohibit the effective regulation of anti-competitive practices in Georgia. In this blog, we present our key concerns on the law and our suggested amendments.  

Key Concerns and Required Amendments

TI Georgia believes that the following amendments to the Competition Law and the Agency’s powers should be addressed urgently by the Parliament in order to ensure healthy competition between companies in Georgia for the ultimate benefit of consumers and the economy:

1. Lack of independence and pro-government bias: the Competition Law places too much control in the hands of the government, for example:

a. The government defines which priority sectors will be regulated by the Competition Agency (see Art. 19, para.1, Competition Law);

b. The Competition Law stipulates that complaints from non-prioritized sectors can be ignored by the Agency (see Art. 19, para.2-3, Competition Law);

c. The government can determine exemptions (see Art. 9, para.3, Competition Law);

d. The head of the Agency does not have the power to issue secondary legislation (orders) relevant to regulating competition. It further reduces the Agency’s independence as well as creates a significant time delay in waiting for the legislature to approve each order. 

e. The Agency is not empowered to initiate an investigation unless a complaint has been lodged by a private party (see Art. 18, Competition Law);

These legislative sections should be amended to empower the head of the Agency to issue the necessary secondary legislation, permit the Agency to initiate an investigation without a complaint having been lodged and finally, to do so in any segment of the market, if that segment requires intervention.

2.  Conflicting functions: the Agency now has the following combined functions:  

a. implementing competition legislation (Competition function),

b. coordinating state procurement (Procurement function), and

c. monitoring state procurement (Competition function),

but these are three very distinct responsibilities. It is more appropriate and effective for these functions to be performed by two independent, separate authorities (see Part I, s.2.3, TI Report).

3.  Overlap of functions: the Competition Law should clearly state how the functions of the Agency and the two remaining independent sector regulators - the Georgian National Communications Commission and the Georgian National Energy & Water Supply Regulatory Commission - will be divided to ensure an effective separation between the three authorities (see art. 31 & 34 Competition Law, & Part I, s.1.3 and s.2.3, TI Report).

4.  Too great a threshold for de minimis: percentages quantifying de minimis agreements must be reduced from 25 to 10 per cent for horizontal agreements, from 40 to 15 per cent for vertical agreements and from 40 to 10 per cent for unclassifiable agreements, in line with the European Commission Notice on de minimis agreements (see Commission Notice (2001/C 368/07). By placing a number of significant agreements between economic agents outside of the regulation, the current thresholds do not conform with EU legislation (see Art.8, Competition law and Part I, s.2.3, TI Report).

5.  Eliminating competition: the list of exemptions in Art. 9 of the Competition Law is not qualified as per Art. 101(3)(b) of the Treaty on the Functioning of the European Union stating that exemptions must not create: “the possibility of eliminating competition in respect of a substantial part of the products in question.” This condition must be incorporated into the Competition Law in order to avoid the possibility of eliminating competition in a substantial part of the relevant market.

6.  Lack of deterrence: Fines are limited to 10% of the previous year’s profit, or if there was no profit, 2% of the previous year’s turnover (see Art.33, Competition Law). It is possible that a company, which declared less profits, will pay a smaller fine than a company, which did not declare any profits. If it is more profitable for a company to run the risk of a limited fine but continue pursuing anti-competitive practices, it makes economical sense for it to do so. TI Georgia believes that, in order to deter companies from engaging into anti-competitive practices, the criteria for charging fines should be specified in a way that the amount of a fine is calculated based only on the company’s turnover and that such a fine should be sufficiently high to act as a deterrent.

7.  Price creation: the Agency’s power is severely limited by being explicitly barred from analyzing price creation (see Art.1, para.5, Competition Law). Price creation (the components to price setting, cost conditions) is a crucial part of analyzing whether a company is engaged in anti-competitive practices.

8.  Leniency Program: this has proven to be a highly effective instrument to detect the facts of violation of competition rules by economic agents in the US and Europe. The Competition Law must implement and provide for such a tool (see Part I, s.2.3, TI Report).

9.  Prompt investigation of complaints: Art.25 of the Competition Law stipulates that the Agency must complete an investigation within 6 months. This article was amended to allow the Agency to grant itself a significant extension of a further 15 months, depending on the “importance and gravity” of the case. After a period of 21 months, any evidence gathered may be out of date and a decision could have an irrelevant impact on the market. We believe this provision is open to abuse and may hinder the timely conclusion of cases (see Part I, s.2.3, TI Report).

10. Transparency and accountability: the Agency is a public institution funded by taxpayers’ money. The Agency must give an account of its activities, in order for the parliament, the public and civil society to be able to monitor and scrutinize the quantity and quality of the Agency’s work. 

11. Requirement for further legislation in compliance with the Constitution: there is currently no law defining the amount of the service fee to be charged to complainants. This fee must be established by a law, it cannot be established by a by-law, as per Art.23, Para.8 of the current law, as this would be a violation of Art.94 of the Constitution (see Part I, s.2.3, TI Report).

12. Requirement for secondary legislation: it is vital that further secondary legislation be enacted (rule and procedure of investigation, methodology of investigation etc.) within the deadlines set by the Competition Law, in order for the Agency to effectively implement the Competition Law. 

Author: Natia Kutivadze and Eva Anderson