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Competition Policy in relation to the Central and Eastern European Countries Achievements and Challenges
by Karel Van Miert, Commissioner for Competition
Competition Policy Newsletter 1998 - number 2 - June
At the European Council meeting in Luxembourg of 12 and 13 December 1997 an historic decision was taken to launch the overall process of enlargement of the European Union to include the ten Central and East European applicant States and Cyprus. The enlargement process is seen as being comprehensive, inclusive and ongoing. Each of the ten Associated Countries of Central and Eastern Europe will proceed at its own rate, depending on its degree of preparedness.
At the European Council in Copenhagen in June 1993 it was decided that accession would take place as soon as a country is able to assume the obligations of membership by satisfying the economic and political conditions. Membership requires that the candidate country achieve stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities. The existence of a functioning market economy, as well as the capacity to cope with competitive pressure and market forces within the Union; and the ability to take on the obligations of membership, including adherence to the aims of political, economic and monetary union, constitute further requirements for membership.
Furthermore, the European Council in Madrid in December 1995 referred to the need, in the context of the pre-accession strategy, to create the conditions for the gradual, harmonious integration of the applicant countries through the development of the market economy, the adjustment of administrative structures and the creation of a stable economic and monetary environment.
The effective application and enforcement of EC Competition Policy within the enlargement process is crucial to the success of the European integration model. The completion of the Single Market programme cannot be dissociated from developments in the competition field. Without "the institution of a system ensuring that competition in the common market is not distorted" (Article 3g EC Treaty), the internal market would not be workable. Indeed, EC Competition Policy is one of the pillars of the economic constitution established by the EC Treaty, and is a fundamental part of the acquis communautaire.
The Europe Agreements therefore stipulate that a major precondition for the Associated Countries economic integration into the Community is the approximation of those countries existing and future legislation to that of the Community. Also, the Commissions White Paper on the preparation of the Associated Countries of Central and Eastern Europe for integration into the internal market of the Union noted that the introduction of competition policy in these countries and the effective enforcement thereof, must be considered as a precondition for the opening of the wider internal market, and ultimately of accession to the Union. Moreover, effective enforcement requires that the judicial system, the public administration and the relevant economic operators have a sufficient understanding of competition law and policy.
Most of the Central and Eastern European Countries (CEECs) have taken decisive steps in relation to or have started the process of approximation of legislation, institution building and enforcement on the basis of the obligations that are contained in the Europe Agreement.
The ongoing efforts to incorporate EC law (the "acquis communautaire") into the legal orders of the CEECs, in the form of national competition laws, and to ensure that these laws are actually applied, is of paramount importance. This will facilitate the harmonious operation of Community policies after accession.
Once the applicant States become Members of the European Union, the competition rules of the EC Treaty and the secondary legislation (for example block exemption regulations), will become directly applicable in the new member countries. The approximation of legislation in the pre-accession phase, therefore, gradually acquaints the CEECs with a Community system which ensures that competition in the common market is not distorted.
Moreover, the current exercise of approximation of the national laws of the CEECs to EC law, contributes to the creation of a European-wide network of competition authorities, which apply the same basic principles of competition law. This should allow the effective decentralised application of competition law in the future enlarged Community.
2. The introduction of a competition regime in the CEECs
Anti-trust policy has long been acknowledged to be an effective tool for regulating monopoly power, and for ensuring that markets function properly. That there are certain hard-core anti-competitive practices which the European Commission and other competition enforcement agen-cies should seek to halt, is internationally accepted. This is evidenced by work in progress within the WTO and OECD (1).
The introduction of a competition policy is one of the major challenges which the CEECs face in their transition to fully-fledged market economies. Other legal and institutional measures are equally important. They include the restoration of private ownership and property rights, the introduction of company law and rules on bankruptcy and liquidation of companies, and the adjustment of the judicial system and public administration.
Transition entails certain needs. Restructuring is taking place in the CEECs, to redress the imbalance between industry, services and agriculture. The concentration on basic outputs, rather than high-tech processes and on product differentiation, is an inheritance of central planning to be overcome. The existence of large "combinates", whose size was not determined by what the market will bear, is a common feature of centrally planned economies.
This raises the question what specific role competition policy has to play in this process of transition from centrally planned economies to market economies.
Experience shows that while it is true that liberalisation of prices, trade and foreign direct investment are essential to create workable markets and competition among firms, they are not sufficient to ensure effective competition. Trade liberalisation has proved to be and, in certain cases, still is a difficult objective to be achieved. Moreover, foreign firms have focused their investments in the CEECs on few firms in certain sectors with considerable market power and governments have been willing to grant these foreign investors protection from competition. Furthermore, many markets are still local (such as distribution and retailing) and national markets are often segmented from world markets due to natural, economic or regulatory barriers to entry.
Other deficiencies may further inhibit the development of competition in the CEECs. For example, new firms may have limited access to the necessary credit facilities or to scarce resources, such as land and distribution networks, which often continue to be allocated in a distorted manner, so as to favour existing firms. It is clear that competition rules and enforcement are necessary in countering such barriers to entry.
The development of competition may also be hampered by all kinds of direct or indirect benefits or favours which existing monopolists receive from the State, such as grants, soft loans, state guarantees, tax reliefs, debt write-offs, the sale of public land below market price or preferential tariffs.
Another area of concern is privatisation. Privatisation agencies, supported by the government, the management and the workforce, may wish to sell off public monopolies as a whole to maintain their dominant positions after privatisation, in order to increase revenues. This obviously conflicts with the interest that consumers and new competitors may have in the breaking-up of monopolist firms to foster competition. Where the competition authority does not have the power to block privatisations which would merely result in the transfer of a public monopoly to the private sector, it should have sufficient powers to ensure that the monopolist firm does not abuse its dominance to earn monopoly profits.
There are further arguments for asserting that competition policy is crucial in the CEECs. Cartels in the CEECs may be more damaging, given the absence of a competitive fringe to affect its decisions at the margin. Market foreclosure may be more pronounced in transition economies, given the small number of firms on the market. The lack of vigorous competition and fragile macro-economic conditions in some CEECs may be further affected by unfettered monopoly power in the private sector, lack of control of state aid, and discriminatory treatment by state monopolies of a commercial character.
The experience of the Commissions last 40 years of enforcement of competition policy provides a useful model for competition policy in the CEECs. However, it is equally important to take into consideration the changing nature of market structures in the CEECs, as transition takes place. For example, the logic of competition policy in relation to high-tech industries and highly evolved distribution structures, clearly calls for a different analysis to that applicable to CEECs, which generally lack high-tech industries, or which have an under-developed distribution network. We should therefore take a pragmatic approach to approximation, ensuring that competition policy in the CEECs is fully compatible with that in the European Community, and at the same time taking into account the needs of transition economies.
We believe that the current institutional, substantive and procedural framework governing relationships between the EC and the CEECs is suited to achieving these goals.
3. The Legal Framework
The introduction of market economies in Central and Eastern Europe has led the Community to review its trading relations with the CEECs, and to conclude free trade agreements with them. The principal instrument is the Europe Agreement, which provides a new framework for trade and related matters between the European Communities and their Member States, on the one hand, and each CEEC, on the other hand, on a bilateral basis. Europe Agreements with nine of the ten CEECs (Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic) are in force. The Interim Agreement with Slovenia is in force, and the Europe Agreement with Slovenia is currently passing through the Community legislative process.
Restrictive Agreements, Abuses of a Dominant Position, and State Aids
The Europe Agreements contain the main substantive competition rules which apply where trade between the EC and a CEEC is affected. The competition rules found in the Interim Agreement with Slovenia are the same in substance as those found in the Europe Agreements. Consequently, the following are deemed to be incompatible with the proper functioning of the Agreement, in so far as they may affect trade between the Community and a CEEC:
(i) all agreements between undertakings, decisions by associations of undertakings and concerted practices between undertakings which have as their object or effect the prevention, restriction or distortion of competition;
(ii) an abuse by one or more undertakings of a dominant position in the territories of the Community of or a CEEC as a whole or in a substantial part thereof;
(iii) any public aid which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods.
The Europe Agreement makes it clear that these rules, and the prohibited conduct, are to be interpreted in accordance with the criteria arising from the application of Articles 85, 86 and 92 of the EC Treaty. Furthermore, the decision practice of the Commission and the case-law of the Court of Justice will be relevant. The principles contained in the block exemption regulations in force in the EC, and a de minimus principle below which the agreement will not fall foul of the competition rules relating to restrictive agreements, also apply.
A number of specific rules apply to the general rules set out above. One specific rule concerns the regime for regional aid. The Europe Agreements state that, during the first five years after the entry into force of the Europe Agreement, any public aid granted by a CEEC shall be assessed taking into account the fact that that CEEC shall be regarded as an area identical to those areas of the Community described in Article 92(3)(a) EC Treaty (i.e. areas where the standard of living is abnormally low or where there is serious under-employment). In practical terms, any aid which is aimed at the economic development of a CEEC is not prohibited by the Europe Agreement if it is granted in conformity with the Community rules on regional aid under Article 92(3)(a) EC Treaty.
The five year period for this exceptional state aid regime has expired for certain CEECs. These CEECs have requested that the Association Council decides on the extension of this regime by a further period of five years.
Another special regime applies to restructuring aid as regards ECSC steel products. According to Protocol 2 to the Europe Agreements, during the first five years after the entry into force of the Agreement, and by derogation to the existing EC rules on state aid to the steel sector, the CEECs may exceptionally grant public aid for restructuring purposes under certain conditions. There should first be a restructuring programme linked to a global rationalisation and reduction of capacity. This programme should lead to the viability of the benefiting firms under normal market conditions at the end of the restructuring period. Finally, the amount and intensity of such aid must be strictly limited to what is absolutely necessary in order to restore such viability and must progressively be reduced.
This five year period for coal and steel products has also expired for certain CEECs, which have requested that this period be extended by a further five years. The Association Council has to decide on such an extension. The establishment of a restructuring plan for the steel industries of these individual CEECs, including details on the adjustment of capacities to market demand, the privatisation framework and aid matters, are essential in this context.
The Implementing Rules
According to the Europe Agreements, the Association Council had to adopt the necessary rules for the implementation of the competition rules outlined above within three years of the entry into force of the Agreements.
The Association Council has already adopted rules for the application of the competition rules applicable to undertakings (i.e. restrictive agreements and abuses of a dominant position) for Bulgaria, the Czech Republic, Hungary, Poland and the Slovak Republic. Identical rules in relation to the other CEECs are currently passing through the legislative process.
According to these Implementing Rules, cases are dealt with by the European Commission on the EC side, and by the national competition authorities of each CEEC on the side of each CEEC. The competences of the European Commission and the competition authorities of each CEEC to deal with these cases are based on the existing rules of the respective legislation of the EC and each CEEC. Both authorities settle the cases in accordance with their own substantive rules.
The Implementing Rules for undertakings also contain procedures for co-operation between the Commission and the competition authorities of each CEEC, procedures for notification of cases to the other Party, the exchange of information, and consultation.
Also in the field of state aid, draft Implementing Rules have been prepared and agreed upon in principle between the European Commission and the authorities of the CEECs. The process for the final adoption of the Implementing Rules by the Association Council is underway.
The draft Implementing rules follow a two pillar system of state aid control. On the EC side, the Commission controls the compatibility of state aid granted by the EU Member States, with the Europe Agreement, on the basis of the existing EC rules on state aid. On the side of each CEEC, the national monitoring authority is to monitor and review existing and new public aid granted by the same CEEC, on the basis of the same substantive rules. The draft Implementing Rules for state aid provide for procedures for consultation and problem solving, rules on transparency (i.e. each CEEC is to draw up and thereafter update an inventory of its aid programmes and individual aid awards, established on the same basis as in the Community) and rules on mutual exchange of information.
The Community or a CEEC may take appropriate measures after consultation within the Association Council, where either of them considers that a particular practice is incompatible with the competition rules of the Europe Agreement, and is not adequately dealt with under the implementing rules, or in the absence of such rules, and if such practice causes or threatens to cause serious prejudice to the interest of the other Party or material injury to its domestic industry. In the field of state aid, such measures must be adopted in accordance with the procedures and under the conditions laid down by the GATT.
The relevant provisions of the Europe Agreements and the Implementing rules are intended to ensure that, already in the pre-accession phase, state aid control is effective, whilst taking into account the specific needs of transition economies. The Implementing Rules for state aid provide for the Commission and the state aid monitoring authority of each CEEC to work out, in addition to the types of aid allowed in the Community, a Special Guidance on the compatibility of aid designed to combat the specific problems of each CEEC as it completes transition to a market economy.
However, the Special Guidance should not serve as a general escape clause as regards the granting of state aid to ailing industries. The Special Guidance should only address problems inherited from the past business-economic irrationalities imposed by the centrally planned economies, i.e. transition problems, and will not cover aid measures aimed at development. The development problem is covered by the existing rules on state aid. In particular, the Article 92(3)(a) EC Treaty regime referred to above leaves ample room for granting aid for new investments and expansions, for allowing temporary operating aid and for increasing the level of aid for various horizontal objectives, such as environmental protection, R&D, SMEs etc.
Mergers are not directly referred to in the Europe Agreements. Neither are there any substantive rules on mergers in the Implementing Rules for undertakings. However, the competition authorities of a CEEC are entitled to express their views in the course of the procedure under the EC Merger Regulation, where the merger will have a significant impact on the economy of the CEEC concerned. The Commission will give due consideration to that view.
Public undertakings and State monopolies
Under the Europe Agreements, the Association Council must ensure that as from the third year following the entry into force of each Agreement, the rules applicable to public undertakings and undertakings to which special or exclusive rights have been granted, the principles of Article 90 EC Treaty are respected.
Under the Europe Agreements, State monopolies of a commercial character are treated in a similar way to the way they are treated under Article 37 EC Treaty. Consequently, State monopolies of a commercial character are to be progressively adjusted so as to ensure that by a specified date, no discrimination regarding the conditions under which goods are procured and marketed exists between nationals of the Member States and of a CEEC.
The Europe Agreements also provide that a major precondition for the CEECs economic integration into the Community is the approximation of that countrys existing and future national legislation to that of the Community. According to the Europe Agreements, the CEECs must use their best endeavours to ensure that future legislation is compatible with Community legislation. This covers anti-trust, merger control, State monopolies and public undertakings, and state aid.
Approximation of legislation in the context Europe Agreements does not mean that the CEECs should adopt all the details of the acquis communautaire in the field of competition verbatim. However, the key elements of EC Competition law, as set out in the White Paper must be taken over and implemented in the CEECs. Each country may decide that particular forms of laws or guidelines are the most suitable in its individual situation, and which legal structure provides the most suitable vehicle for its monitoring and enforcement authorities.
It is, however, important to stress that the exercise is not confined to the sole adoption of laws and regulations, or the establishment of the appropriate institutional structures. There must be a continued effort to ensure the enforcement of competition policy and to make competition policy widely known and accepted by all economic agents involved, i.e. by governments, companies and by the workforce.
Essentially, the White Paper follows the logic that the appropriate administrative and judicial machinery is required, for there to be effective application and enforcement of the principles found in European Community law. This is particularly important when it comes to competition and state aid policy. Competition authorities in the CEECs must be endowed with a sufficient degree of independence, and sufficient investigatory and enforcement powers.
4. Achievements and Challenges
The establishment of competition offices has taken place relatively quickly and without too much controversy in the CEECs. Most of the CEECs have also adopted basic competition laws taking over the core elements of Articles 85 and 86 of the EC Treaty and merger control, as well as the necessary enforcement powers, and they are in the process of completing and refining the existing legislative framework. This is a great achievement.
However, the establishment of a competition authority and a competition law is only the first step towards an effective competition policy. A much more difficult task to fulfil is the effective enforcement of the law and application of the law by all economic operators. This requires, first of all that the competition authority has sufficient qualified staff. Secondly, the competition authority needs to be independent from political interference. The political will must also exist to grant the competition authorities of the CEECs real powers to enforce the law. Competition authorities should not only have far-reaching powers on paper, but also the ability to enforce decisions against enterprises, including public undertakings or bodies.
Another major problem has in the past been the lack of expertise and knowledge of competition law among the staff of the competition offices. Intensive training of staff is therefore essential and the Commission has done and still does much in the way of training and technical assistance. The Commission has organised joint training programmes for officials of the competition offices of the CEECs, and it has started with similar training sessions for judges. This should further the general awareness among all economic operators about competition policy and the activities of the competition authority, so as to create a true competition culture.
In this context, another important aspect of training is the Annual Conference of the competition authorities of the CEECs, responsible for anti-trust and state aid control, and the Competition Directorate-General of the European Commission. This Conference, which, this year, took place in Bratislava on 25-26 May, is extremely useful for exchanging views and experience on approximation of legislation and the enforcement of competition rules with and amongst the CEECs.
The main challenge for the competition authorities of the CEECs today is to appropriately allocate their resources in enforcing competition law, in order to focus on the kinds of conduct or transactions by firms which most seriously obstruct the proper working of the markets. Due to high barriers to entry and the few number of firms in the market place, collusion between firms or market foreclosure is both more likely to take place and more damaging in the CEECs. Priority should therefore be given to such cases which restrict entry to or expansion of markets. The collusive habits of central planning make breaking up cartels a priority. Finally, liberalisation is a necessary compliment to enforcement of competition policy, as anti-trust policy cannot be successful in ensuring that markets work properly on its own.
With respect to liberalisation, it should be recognised that in most CEECs, the competition authorities have played an important competition advocacy role in ensuring that new legislation complies with the principles underlying the competition rules, in particular as regards the regulated sectors, such as energy, telecommu-nications and transport.
However, leaving this aside, it would seem that the competition authorities have devoted substantial resources to complaints from firms or consumers in relation to abuses of dominance by the other party to an agreement due to onerous contract terms (typically, complaints in relation to extensive prices and discriminatory behaviour), rather than on hard-core restrictions of competition, particularly cartels.
While the submission of complaints against exploitative behaviour of dominant firms shows a certain level of awareness of the existence of competition law, this type of case should not take priority over cases such as cartels, monopolistic acquisitions, exclusionary practices by dominant firms, or other cases which may have an impact on the competitive structure of the market. Obviously, the competition problems to be solved in such cases are not the easiest to deal with, and they require a certain amount of experience. For cartel cases, the necessary investigative powers to collect evidence, including the power to perform dawn raids, should be in place and should be used.
Finally, it is equally important for competition offices to impose sufficiently deterrent fines where serious restrictions of competition are at stake.
In addition to the above discussion on the anti-trust pillar of the competition rules, certain points need to be made in relation to the state aid pillar of the competition rules in order to consider where progress has been made and where work still needs to be done.
The control of state aid is just as important as anti-trust policy in ensuring that a level-playing field on the market is created and maintained. However, from the outset, the introduction of state aid control in the CEECs has proven much more controversial and politically sensitive than anti-trust policy, the reason being that state aid control goes to the heart of the role of the State, namely how governments use public expenditure to support their industry.
Although the state aid rules in the Europe Agreements and the draft Implementing Rules concerning state aid provide ample possibilities to develop an aid policy consistent with the particular problems of a transition economy, there has been a general fear in the CEECs that the introduction of state aid control would lead to the closing down of companies at a rapid pace, resulting in enormous socio-economic problems which would be politically unacceptable and expensive. This is even more the case where state aid is closely linked to the process of transition.
For example, state aid is often granted in connection with privatisation. State aid may also be involved in the financing of the restructuring necessary to make companies commercially viable. State aid may take the form of state guarantees, low interest loans, debt write-offs or other kinds of operating aid, simply to keep companies alive. Finally, state aid is often granted through tax reliefs, tax arrears, social security contribution reliefs and other measures which find their origin partly in too lax a fiscal policy. This partly results from a habit of granting favours to favourite state-owned companies.
Nevertheless, it is not possible to imagine an internal market where one Party is controlling the granting of state aid to its industry, whereas the other does not do the same. There are also obvious public finance reasons for keeping state aids under strict control.
In contrast to the anti-trust pillar, progress has been slow in the CEECs with respect to the control of state aid. A lot of work remains to be done. The most important objective today is to create transparency in the granting of state aid. Without transparency it is not possible to examine whether existing aid in the CEECs is compatible with the Europe Agreements. Moreover, the rules on co-operation between the EC Commission and the CEEC authorities in the field of state aid, as laid down in the draft Implementing rules on State aid, cannot be operational if transparency is not established.
Therefore, as a matter of urgency, the CEECs need to take the necessary steps to establish an aid inventory of all existing aid. This inventory must encompass existing state aid granted by all aid granting authorities, not only aid granted through the State budget. This means, in particular, that aid granted by local or regional authorities, aid granted through privatisation funds, environment funds or other funds or bodies controlled by the state must be included in the inventory. Moreover, the aid inventories must cover both direct and indirect aid measures, and it must be updated on a continuous basis as new measures are introduced and existing aid measures are modified or abolished.
In parallel, it will be necessary progressively to review the identified existing aid measures and to modify or abolish those measures which are not compatible with the Europe Agreement.
A second priority is the setting-up of a state aid monitoring authority and a system ensuring that monitoring is carried out in an effective manner. Most of the CEECs have now established such a national monitoring authority. Some of them have appointed a unit within the Ministry of Finance (Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Slovak Republic) or within the Ministry of Economy (Poland) as the monitoring authority, while others have given this responsibility to the Competition Office (Lithuania, Romania).
Currently, these monitoring authorities do not yet receive, on a systematic basis, information on all new aid granted in their country so as to enable them to give an opinion on the compatibility of the proposed aid with the Europe Agreement prior to it being granted. There can be many reasons for this. For example, the lack of a clear legal framework identifying the powers and responsibilities of the monitoring authority, the lack of sufficient and qualified staff in the monitoring authority, the lack of the necessary practical tools and procedures to implement the monitoring or a combination of these and other deficiencies may explain why these problems exist.
It is clear that the establishment of a credible state aid control cannot be achieved overnight. However, in order to fulfil the economic criteria for accession to the European Union, and to maintain confidence in current and future trade relations between the Community and the CEECs, it is important that concrete measures are taken to ensure a progressive adjustment of the system of state aid within a reasonable period of time.
On substance, the existing EC rules on state aid, the Europe Agreements and the draft Implementing rules on State aid (including the envisaged Special Guidance designed to combat the specific problems of CEECs as they complete transition to a market economy) should provide a satisfactory framework for tackling any particular transition problems while maintaining a level playing field. At the same time, it is clear that certain aid measures cannot be accepted even in transition economies, such as export aid, or can only be accepted under very strict and transparent conditions, such as operating aid and aid to sensitive sectors.
The deficiencies which are outlined above should not be seen as lessening the progress of the competition authorities in the CEECs over a time-span of only 5 to 6 years. Achievements in the field of anti-trust policy in particular have been remarkable, and the competition authorities of the CEECs deserve enormous credit for their pioneering efforts.
On the other hand, a lot of work still needs to be done, especially in the field of state aid control. It is necessary to ensure that all operators are working under the same rules, and thus not enjoying any unfair advantages over competitors operating in the same market, as well as to create a climate of confidence comparable to that which exists between EU Member States.
Enlargement is an historic process and has major consequences for the future application and enforcement of EC Competition Policy. In an enlarged EU, the Commission will be empowered to apply EC Competition law to all the new members. This creates enormous challenges for anti-trust enforcement.
The screening process has already been launched, whereby the implementation of the acquis communautaire is being examined and discussed with the CEECs on a multilateral and bilateral basis. Enlargement negotiations themselves will not be easy. However, we believe that an effective working relationship between the Commission and the competition authorities of the CEECs will help smooth this process.
(1) The framework of the WTO Working Group on trade and competition is currently being used to study issues relating to the interaction between trade and competition, including anti-competitive practices. The OECD Committee on Competition Law and Policy agreed on the Draft OECD Recommendation on hard-core cartels during its meeting in Paris of 20.02.1998.
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