THE RELATIONSHIP BETWEEN COMPETITION AUTHORITIES AND SECTOR REGULATORS, PARTICULARLY WITH RESPECT TO ABUSE OF DOMINANT POSITIONS THE CASE OF ZAMBIA

Transcription

1 THE RELATIONSHIP BETWEEN COMPETITION AUTHORITIES AND SECTOR REGULATORS, PARTICULARLY WITH RESPECT TO ABUSE OF DOMINANT POSITIONS THE CASE OF ZAMBIA Contribution by ZAMBIA Submitted to UNCTAD's Seventh Session of the Intergovernmental Group of Experts on Competition Law and Policy, Geneva, 30 October to 2 November 2006.

2 ZAMBIA COMPETITION COMMISSION The Relationship Between Competition Authorities and Sector Regulators, Particularly with Respect to Abuse of Dominant Positions. The Case of Zambia Communication submitted by Zambia 2

3 1.0 Introduction: A large and growing number of economies are undertaking major economic and political reforms aimed in the area of economic regulation to achieve better regulatory outcomes in the public interest. Competition agencies have a vital role in ensuring that the regulatory structures put in place are procompetitive and avoid competitive distortions. Competition * has become a driving force in today s global world. Countries are adopting trade and economic liberalisation policies, both due to the pressures of the global trade organisations and of their own volition, and moving towards a market economy. However, due to market distortions, the benefits of trade and economic liberalisation do not necessarily always accrue to the economy. Hence, countries around the world are also designing and implementing market regulatory instruments and one such economy-wide regulatory instrument is competition law and policy, which is no longer a rich country luxury, but has become an important public policy to provide safety nets. Economic reforms in various countries differ in some aspects but there are core or common areas in which reforms have evolved. John Martin 1 (2002), as quoted by the Korea Free Trade Commission (2002: 456), pointed out Although there are significant differences across countries and industries, major regulatory reforms have generally included the privatisation and corporatisation of former state owned enterprises, rethinking universal service obligations, liberalising restrictions on entry; prices and business practises; and taking measures to ensure consumers are properly informed and protected. One of the principle objectives behind such economic reforms has been to broaden the scope for private markets to allocate resources thereby improving economic efficiency. Competition agencies are vitally interested in and are affected by the reforms. Regulatory reform raises important questions about the scope of regulation needed in sectors being opened up to greater competition. Should such sectors be subject to anything more than the general competition laws enforced by the same agency responsible for protecting competition in other sectors of the economy? Or do they warrant special treatment? In practice, regulatory reform has rarely consisted simply regulations and leaving everything up to market forces operating within general framework competition law. In the greater number of institutions, policy makers have adopted the view that competition must be fostered by a new kind of regulation which may or may not be strictly transitory. Many new or existing sector-specific regulators are being mandated to promote competition and * Competition being defined as the process by which economic agents acting independently in a market limit each other s ability to control the conditions prevailing in that market. 1 At the time John Martin presented the paper on The relationship between competition authority and sector regulators in Seoul, Korea in 2002, he was a Commission at the Australian Competition and Consumer Commission, in Australia. 3

4 sometimes being charged with formulating and/or applying general or sectorspecific competition laws or rules. In a small number of countries, competition agencies have been assigned tasks that had previously been performed by government departments (acting as owners) or by sector-specific or general regulators. Whatever the current division of labour between agencies and regulators, there are few, if any, countries where that division can be regarded as finally settled, especially since the transition to greater competition is far from complete. 2.0 Sorting out regulatory tasks: Introducing competition into sectors previously dominated by state or heavily regulated by vertically integrated firms and protecting consumers from anti competitive pricing are difficult tasks, requiring a very broad range of expertise and experience. Before I delve into detail on the regulatory issues, which are the core purpose of this paper, it is necessary to clarify the concepts of competition policy and competition, as there is a tendency to use the terms interchangeably. Competition policy encompasses all government policies that affect competition. It includes such aspects as deregulation and privatisation, trade policy, industrial policy and regulation governing capital flows and foreign direct investment. Competition law comprises rules on anti-competitive practices of firms. These are normally classified in three categories: collusive behaviour among firms; abuse of a dominant market position; and mergers that create market dominance. The distinction, therefore, is that competition law is a subset of competition policy (Consumer Unity and Trust Society, 2003:4). Thus, competition policy is based on the idea that competition enhances economic efficiency and, therefore, avoiding the misallocation of resources. Composed of national rules, competition policy aims to prevent business from acting to the detriment of the common good by reducing or eliminating competition as such practices can reduce incentives for technical development and lead to the impairment of investment and of quality of goods and services. The effectiveness of competition law and policy in addressing anticompetitive conduct, including those, which have a negative impact on trade with other countries, crucially hinges on the actual degree of enforcement capabilities and the actual strength of enforcement by the Competition Authority. One vital outcome that needs to be achieved is that of competitive neutrality. To ensure that competitive market structures are established, it is necessary to put frameworks into place that will neutralise any benefits, cost savings, tax benefits, or access to scarce inputs, that former government business may have enjoyed over new entrants to the market. There are typically three regulatory tasks available that need attention in the transition from government ownership or heavy regulation to greater reliance on market forces: 4

5 1. Competition protection controlling anti-competitive conduct and mergers; 2. Economic regulation- adopting measures to control monopoly pricing; and 3. Technical regulation- setting and monitoring standards so as to assure compatibility and to address privacy, safety, and environment protection concerns. The question that arises is how the regulatory functions can be split among the different regulators. An explanation of each of the above regulatory tasks is given below: 2.1 Technical Regulation: Technical regulation requires on going monitoring and application of sector specific expertise that generally has little direct relevance to competition questions. It is reasonable to assume that this function will generally be conferred on a set of sector-specific regulators. However, once such a regulator is in place in a particular sector, the question may arise as to which, if any, of the other three functions should be assigned to it. The answer depends on a complex mix of comparative advantage and synergy issues. It is also heavily influenced by a country s legal framework and regulatory history, hence the optimal solution could certainly vary from country to country and even across industries within the same country. In Zambia, industry specific bodies or more general government regulators administer technical regulation and some significant aspects of economic regulation. A good example is the Energy Regulation Board (ERB) and Communications Authority of Zambia (CAZ) that are charged with regulatory functions in the areas of energy and communication in Zambia, respectively. This recognises that the national competition authority should focus on restrictive business practices and not become embroiled in overly detailed or complex regulatory matters unless they have a clear connection with competition issues in, for example, network industries. Put in a nutshell, technical regulation involves the setting and enforcing product and process standards design to deal with safety, environmental and switching cost externalities and allocating publicly owned or controlled resources such as spectrum or rights of way. These are the real functions of the specific-sector regulators. 2.2 Competition Regulation general versus specific: General, as opposed to sector-specific, agencies avoid distorting competition through subjecting competitors to very different regulatory regimes and should provide greater legal certainty. Wherever there is a specific sector regulation, there is a need to define jurisdictional boundaries among regulators and this 5

6 can create legal expenses, delay and uncertainty. These problems are greatly alleviated where regulation is carried out either by a general competition agency or a multi-sector regulator. General regulation is also likely to involve some resource savings, as there are economies of scale and scope in regulation. Zambia has a national competition law that is consistently applied across all industries and is administered by a single independent regulator- the Zambia Competition Commission (ZCC). This general approach is seen to have advantages of: Promoting consistency, certainty and fairness in the universal application of competition law across sectors or across different industries; Enhancing the regulator s ability to take an economy-wide perspective; Reducing the risk of regulatory capture by industry; and Minimising duplication. Industry specific regulatory bodies may distort decisions in ways that are more favourable to the preservation of their own activities than to pro-competitive deregulation. However, there may be advantages in having industry-specific competition regulation in industries characterised by complex technology or having natural monopoly or other special elements. Firms in such industries being in monopoly positions or dominant positions, may engage in conducts that do not benefit the economy and the consumer, through misallocation of resources and conducts of restrictive business practices. The anti trust agency through their mandate cannot watch such behaviours to be perpetuated by such industries. In addition, it is argued that general regulation is more suitable in an era of convergence. The process of convergence is occurring in areas such as energy (between gas and electricity), communications (between telecommunications, information technology and the media), and financial services (between different providers of financial services, e.g. banks and insurance). An associated benefit of general regulation is that it permits one-stop shopping. For example in Australia, a new telephone entrant called Optus, wishing to provide paid television services found itself dealing with the telecommunications regulator, the competition regulator, the broadcasting regulator, the spectrum management allocator as well as the Departments of Communication and of Treasury. It should be noted that competition law and policy involves adopting, interpreting and enforcing framework rules designed to ensure that markets are and remain as efficiently self-regulating as possible. In particular, this involves preventing firms making anticompetitive agreements, abusing dominant positions and carry out anticompetitive mergers. 6

7 2.3 Economic and Competition Regulation: Both competition authorities and regulators usually share a common goal of economic efficiency. However, a number of issues arise when considering whether, and to what extent, economic and competition regulation should be performed by a single or multiple agencies. Sector- specific regulators are often charged with diffusing the effects of market power, whereas competition agencies basically focus on reducing such power. This tends to produce quite different views on the extent to which market power can be managed for the public good; Sector-specific regulators typically impose and monitor various behavioural conditions whereas competition agencies are more likely to seek structural remedies; Sector specific regulators generally apply an ex ante prescriptive approach while competition offices, except in the important area of merger review, generally apply an ex post enforcement approach; Sector-specific regulators typically intervene more frequently and require a continual flow of information from regulated entities, while competition offices rely more on complaints and gather information only when necessary in connection with possible infringements of the law; and Sector-specific regulators are typically assigned a considerably broader range of goals than competition agencies are asked to pursue, so they may become more adept at trading off conflicting goals. Whenever the principal task is arguably to manage the evolution to evergreater competition, general competition agencies should enjoy certain advantages over sector-specific regulators. In particularly, competition agencies should be more: Attuned to pursuing static and dynamic economic efficiency which are the principal reasons for introducing competition; Committed to competition truly producing significant benefits, and motivated to demonstrate this in as many sectors as possible; Familiar with what constitutes a competitive market and what threatens it; Likely to rely on structural remedies which would generally prove to be a better instrument for developing competition than dependence on a set of behavioural prescriptions; Willing to wind back both access and economic regulations as and when competition becomes sufficiently strong; and 7

8 Able through advocacy to pursued the private sector, i.e. prospective investors that the government is committed to making the transition to a less regulated environment. On the other hand, there are arguments in favour of industry-specific regulation including: Industry-specific regulators may have better technical economic knowledge and expertise; It is generally easier to combine industry specific economic regulation with detailed technical regulation in one organisation which is likely to lead to more enlightened economic decision- making. There are some dangers in relying solely upon a general regulator, i.e. something to be said for ensuring a degree of diversity in regulation and in not putting all eggs in one basket ; and There may also be a better prospect for adequate funding of an industry-specific than a general regulator. Separation of regulatory duties between competition, technical and economic regulators does entail the risk that competition regulators will not always have the same level of technical knowledge that can be achieved by an integrated industry regulator. Mechanisms are needed to facilitate coordination between regulators. It is worthy noting that economic regulation involves directly controlling or specifying: production technologies (other than those linked with setting common technical product standards); eligible providers (granting and policing licenses); terms of sale (i.e. output prices and terms of access); and standard marketing practices (e.g. advertising and opening hours). It is difficult to carry this debate too far. Whichever solutions are chosen, there are ways of overcoming its limitation. Zambia has tended, however, on balance, to have both general and industry specific regulation. In summary, it can be said that while competition authorities have their core function focussed on competition matters in the whole economy, regulators have been tasked to do the following: To protect user interests and promote development of public service providers; To determine the tariff calculation methods and approve the tariffs; To issue licences, supervise compliance with the requirements for included in the licences, such as requirements for quality of service, environmental protection, technical specifications, technical standards, etc; 8

9 To provide for preliminary extra-judicial examination of disputes; and To perform such other functions as set out in special laws of the sector. 3.0 A background to Zambia s Regulatory Framework: At this stage, allow me to give a background to Zambia s regulatory framework. Saasa 2 (1999) as cited by UNCTAD (1999: 25) indicated, In the context of economic liberalisation that benefited from support of the IMF and the World Bank, the Zambian government recognised that an active competition policy remains a key guarantor to economic efficiency and consumer welfare and contributes to greater availability to the consumer of a broad range of products and services at lower prices. An open competitive environment has also been recognised to foster innovation and efficiency, thereby contributing to overall competitiveness of producers. By promoting optimal allocation of resources, competition policy is seen to contribute to economic growth and development and supports other objectives of macro economic policies. In Zambia, since 1991, the Government of Zambia has been pursuing liberal economic policies. The important aspects of this policy framework have been the implementation of a rapid and far-reaching Structural Adjustment Program (SAP). This strategy, supported by the World Bank and the International Monetary Fund, was a major shift from the previous economic policies, which were guided by strict government control on economic management (CUTS, 2003:5). At the heart of the new order of economic management has been, inter alia, trade liberalisation, removal of exchange controls, public service reform, introduction of cost-sharing (arrangement where both government and citizens share the responsibilities of meeting the costs) with respect to the service sectors- education, health, water, electricity, etc. Since the economy was previously dominated by state owned enterprises, the government enacted laws that culminated in the establishment of a number of regulatory institutions. The creation of various statutory regulatory frameworks was aimed at ensuring that the gains from liberalisation, commercialisation, privatisation, and the new investment were not lost to the new private monopoly/ dominated players in the newly liberalised economy. Thus, the statutory bodies that include Energy Regulations Board (ERB), National Water and Sanitation Council (NWASCO), Communications Authority (CA), Zambia Bureau of Standards (ZABS), etc charged with regulatory functions were established. Thus, a number of policy fundamentals ought to be appreciated. Liberalisation entails that the period of government control has to end, something that the 2 An the time Oliver S. Saasa presented the paper, Impact of legal reforms to enhance productive capacity and competitiveness in LDCs: competition policy inn Zambia at the workshop organised by UNCTAD in Zambia in 1999, was a Professor of International Economic Relations at the University of Zambia. 9

10 Zambian government has accepted in principle and, to a large measure, in practice. It is increasingly being recognised worldwide that monopolistic public providers of infrastructure, social services, let alone business ventures, are unlikely to succeed in their responsibilities. This means that carefully designed strategy of private sector entry should be encouraged as it enhances the growth of markets. As already pointed out, the central focus of Zambia s policy of liberalisation since 1991 has been the switch from the system of central planning or control of the economy to the use of market forces as the means of resource allocation. It was anticipated that the free play of supply and demand would, in the long run, determine market prices throughout the economy, allowing productive resources to be allocated in an efficient manner. The country s Structural Adjustment Programme (SAP) has been adopted to include marketoriented reforms, particularly in the area of price deregulation, including the reduction or elimination of subsidies; administrative allocation of key product inputs; privatisation of public enterprises; and the liberalisation of trade and investment regimes. The main assumption behind the liberalisation policy in Zambia is that, by providing enterprises with more freedom and stronger incentives, this would stimulate entrepreneurial activity, business efficiency, productive investment and economic growth. It was also expected to enhance consumer welfare through improved quality and quantity of goods and services at prices determined by the market rather than administrative decision, as was the case before. Against this background and mindful of the need to legislate against monopoly formation, the Government passed the Competition and Fair Trading Act in Until the enactment of this piece of legislation, there has been no formal enforcement of competition rules and policy by any institution in Zambia. Consequently, the creation of the Zambia Competition Commission is the first attempt by the government to enforce the competition rules in various ways and it is hoped that it will eventually lead to their uniform interpretation and application, in view of the different attitudes towards competition rules by the business community. Suffice to state that Zambia has a general competition law, the Competition and Fair Trading Act (The Act), Cap 417 of the Laws of Zambia that applies across all industries and is administered by a single competition authority, the Zambia Competition Commission (ZCC). The ZCC is an independent statutory body responsible for administering and enforcing the competition law in Zambia. The Competition and Fair Trading Act is the primary mechanism for dealing with anti competitive and unfair market practices, including misuse of market power, secondary boycotts and anti-competitive mergers. Until 1991, Zambia has been in a similar position to many other developing countries in the region. About 80% of the industrial, transport and energy companies were in the public sector and their policies were strictly controlled by government, often with social objectives in mind. The liberalisation process, which the country embarked on, led to the rapid enactment of new 10

11 laws and amendments of existing laws, especially in the field of business and commercial related laws. This was inn certain circumstances accompanied by the establishment of new institutions to implement the newly enacted laws. The objective of the Zambia Competition Commission is primarily to establish conditions of free and fair and effective competition in the economy, to ensure that the anticompetitive practices do not create barriers to trade or other forms of protectionism. The competition rule set down minimum standards and allow enterprises to penetrate markets and establish themselves thereby facilitating inter-market trade. Competition agencies have important expertise in identifying and helping to eradicate market power that, if left unchecked, would greatly reduce the benefits of regulatory reform. This is especially necessary because firms which are used to operating as monopolies or being co-ordinated by regulators may find it normal and highly attractive to continue in their pre-regulatory reform modes of doing business. In addition to opposing that tendency, competition agencies are in a good position to contribute to reform process itself. Their input is particularly valuable on matters of industry structure (i.e. the need to horizontally or vertically split dominant incumbent firms), and on issues involving stranded costs or the implementation of universal service obligations. They are also able to assist in eradicating deceptive marketing practices which directly harm consumers and tend to distort the competitive process in markets being liberalised. It is noteworthy to realise that in this present age of economic management, governments and economic operators as well as the general public agree that competition law and policy has a big role to play in creating conditions of economic governance both for domestic and global market places. In various conferences, i.e. local, regional and international, developing countries have generally agreed on the importance of basing economic reform on sound competition principles. There seems to be consensus amongst economists in serving in various global trade institutions and governments that competition law and policy is the best instrument available in order to ensure that the benefits arising from privatisation, deregulation and commercialisation remain a source of welfare for the citizens and the firms in all economies that have adopted market oriented economic reforms. Thus, the enactment of the competition law is not merely an important element in regulatory reform but rather, a matter of economic self-defence. 4.0 Abuse of dominant position: The abuse of dominance provision of the competition act is a key element of the framework for control of anti-competitive conduct by firms with market power. The provisions apply to a broad spectrum of conduct that has, as its main objective, the effect of substantially lessening or preventing competition in a relevant market. The law, requires dominant firms not to be permitted to use their advantage to block challenges from existing or potential competitors. The abuse of 11

12 dominant provision is particularly important in the context of a deregulated and privatised business environment and can be instrumental in assisting the transition from regulation to deregulation. Moreover, it helps to ensure that dominant firms do not preclude the competition discipline promised by the removal of trade barriers and increased foreign competition. UNCTAD (1999:93) emphasised that it is important to note that the emphasis of the law is upon the activity of any enterprise rather than its status. Consequently, the holding of a dominant position is not prohibited, but the abuse of the dominant position. This provision of the Competition Act does not imply that a company in a dominant position cannot protect its commercial interests and take advantage of its market share. It is entitled, like any other party, to take reasonable steps, as it deems appropriate, to protect the said interest. The purpose of that action, however, should not be intended to protect or to strengthen its dominant position. For example, if a dominant company innovates its products in order to effectively compete with new entrants or established competitors, it should do so without resorting to anti-competitive behaviour, such as tying, predatory pricing, or refusing to supply. The Competition Act has adequate provisions to deal with such practices and this is aimed at ensuring the attainment of levelling the playing field for all the market players in the relevant markets in the economy. 5.0 Addressing regulatory uncertainty: With the division of labour between various regulators, there is potential for some degree of overlap of functions between the ZCC, which administers competition regulation across all sectors of the economy, and those technical and economic regulators that operate within specific industries. For this reason, a number of steps need to be taken to minimise uncertainty regarding the jurisdiction of particular regulators and avoid confusion for consumers and the business community. For example, the ZCC has periodic information exchanges with a variety of economic and technical regulations through regular liaison consultations and exchange of publications and other relevant information. The ZCC also has a significant public and business education role. This helps to bridge the knowledge gap that can arise when competition economic and technical regulators are separate bodies. 6.0 Way Forward: Finally, I may ask, what is the way forward for the Zambia Competition Law and Policy? Zambia like other countries in the region still is facing teething problems in the administration, enforcement and implementation of competition law and policy. The same problems are applicable in different degrees to all the countries in the region. Although the enactment of the competition law was designed to remove the impediments in the market and create a level playing field for big, medium and small scale business organisations, the effectiveness of the law is however reduced by several 12

13 factors and one of them is weak capacity coordination with regulatory bodies to enhance and entrench competition culture in the economy. There is need, therefore, to establish a working relationship with enterprises, business people and trade associations. This should be aimed at understanding of similar issues and concepts faced by difficult regulators, minimise regulatory overlap for large users operating across jurisdictions, provide a means of exchanging information and enhance the prospects for consistency in the application of regulatory functions. It should be appreciated that unjustifiable economic regulation and underestimation of competition and market focus can raise misgiving in respect to the reform of regulatory institutions and hinder successful functioning of the system. 7.0 Conclusion: Every supervisory authority has its own legislation to apply. If an industry specific regulation introduces specific competition rules, it is an industry specific law and its application is in the jurisdiction of the regulator. However, it should be ensured that the sector specific laws do not become inconsistent with general competition policy and do not contradict the competition law. Hence, the contradictory interpretation possibilities of the two types of laws should be brought to minimum for the optimal results to be achieved. In view of the above, close cooperation between regulator and competition authority is needed, it will improve the effectiveness of regulatory and competition legislation, because the overall aim of regulator and competition commission is the same- to promote development and competition in the industries to the benefit of consumers, and the clear division of tasks between regulator and competition authority would significantly simply and improve efficiency of cooperative measures. 13

14 References: CONSUMER UNITY AND TRUST SOCIETY, (2003). Globalisation, Competition Policy and International Trade Negotiations. CUTS: Monographs on Investment and Competition Policy. CONSUMER UNITY AND TRUST SOCIETY, (2003). Investment Policy in Zambia- An Agenda for Action. CUTS: Africa Resource Centre. KOREA FAIR TRADE COMMISSION, (2002). Competition Brings Prosperity. Paper presented by John Martin to the Seoul Forum on Competition Policy 2002 on 6 to 8 th November, 2002, Korea. Co-hosted by the KFTC, OECD and UNCTAD. UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT, (1999). Competition Policy, Trade and Development in the Common Market for Eastern and Southern Africa: UNCTAD Series on Issues in Competition Law and Policy. 14