How Does the New Competition Ordinance Impact Your Construction Business?

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2 How Does the New Competition Ordinance Impact Your Construction Business? Presentation to the Hong Kong Institute of Surveyors Malcolm Chin & Miranda Noble 23 July 2013 Copyright Minter Ellison

3 Overview Part 1: Understanding the basics why comply? Part 2: Knowing the boundaries complying with prohibitions on anticompetitive conduct Part 3: Enforcement

4 Part 1: Understanding the basics why comply?

5 Why do we need competition laws? To promote competition & fair trading Why is competition so important? Promotes efficiency Leads to lowest prices, highest quality, most innovation Benefits consumers (including you) Why do we have competition law training? Avoid breaches therefore avoid fines Detect possible issues & enable business to act quickly Mitigatory effect on penalty Best practice

6 The Competition Ordinance (Cap 619) Hong Kong s first cross sector competition law Regulates anti-competitive agreements and conduct Will come into effect over 2013 and 2014 First phase occurring now creation of HKCC (April 2013) and Competition Tribunal (Aug 2013) Next phase - HKCC preparation & consultation on guidelines (2014), then implementation Not retrospective Applies outside Hong Kong Before CO comes into effect After CO comes into effect X

7 Importance of compliance Fines / penalties (per breach) of: Up to 10% of annual local turnover (i.e. total gross revenues obtained in Hong Kong) For each year of conduct, up to a maximum of 3 years Applies for any involvement: Attempting a breach Aiding, abetting, procuring, inducing a breach Being knowingly concerned in or party to a breach

8 Importance of compliance Disqualification orders banned from company management for up to 5 years Prohibition on indemnification of penalties / costs Individuals must personally pay Follow on action by third parties for damages Injunctions, declarations Management time Costs of investigation & proceedings Reputational effects / negative publicity / share price impact

9 Part 2: Knowing the boundaries complying with prohibitions on anti competitive conduct

10 The Competition Rules

11 The First Conduct Rule Prohibits agreements with object or effect of preventing, restricting or distorting competition in Hong Kong What is an agreement? Does not need to be in writing Communication + mutual behavioural expectations Mere discussions can raise risks Formal meetings (eg trade associations) Informal settings (eg parties, dinners, pubs, airport lounges) Diagram from Malaysian Competition Commission

12 2 categories of conduct

13 Price fixing Agreements to fix, maintain, increase or control price Price include discounts, allowances, rebates, credits, other concessions & advantages, and other components of price Do not need to agree exact price - covers agreements to: Fix / add / remove components of price (incl. discounts & surcharges) Limit / guide price movements or maintain margins Stop discounting / price wars Cover price Risks in exchanging price information and price signalling Can determine prices/discounts by reference to competitors, but conduct must be unilateral

14 Price fixing real life examples Construction (UK) 103 firms fined (total million) Cover pricing on 199 tenders Compensation payments to unsuccessful bidders in some cases Prestressing steel (EU) 17 producers fined (total 269 million) Fixed prices, set quotas, allocated customers & exchanged sensitive info Lasted 18 years, over 550 meetings Road bitumen (EU) Both suppliers & purchasers fined (total 266 million) Fixed price of bitumen & agreed uniform rebates for purchasers for over 8 years

15 Market sharing / allocation Agreements which allocate sales, territories, customers or markets i.e. agreements as to what goods / services you will supply where you will supply which customers you will supply to which suppliers you will buy from Includes arrangements to go soft, not to poach or not to compete Diagram from Malaysian Competition Commission

16 Market sharing real life examples Premix concrete # 1 (China) Association assigned members specific market shares / specific areas to supply Association monitored compliance Members had to file sales contracts with association Premix concrete # 2 (Aus) 3 suppliers (& executives) fined (total A$20 million) More than 50 meetings & telephone calls Agreed to maintain market shares (by not competing for business of certain customers) and not to compete on major projects Also agreed to price fix

17 Output restrictions Agreements to fix, maintain, control, prevent, limit or eliminate production or supply of goods or services For example Setting production / sales quota arrangements Agreeing not to add production capacity Agreeing to restrict access to market Decisions to reduce output or in relation to future investment must be made independently

18 Output Restrictions real life examples Concrete reinforcing bars (EU) 8 companies fined (total 83 million) Limited output & sales Also fixed elements of price Players in market reduced from 40 to 12 over cartel s lifetime Salmon cull (Australia) Agreed to limit supplies of salmon to address problem of oversupply causing prices to fall Industry association facilitated agreement Cull stopped by regulator

19 Bid rigging (collusive tendering) Agreements regarding terms on which parties will (or will not) bid / tender, eg who should withhold a tender ('bid suppression') who should withdraw a tender ( bid withdrawal ) who should submit / not submit a bid on a rotating basis / taking turns to win jobs ('bid rotation') the payment of 'unsuccessful' or 'loser' fees to 'share' the available contracts between them to cover price / quote to otherwise submit a tender on terms agreed between competitors or which reduces competitive tension in tender process Often also involves price fixing

20 Bid Rigging real life examples Coastline survey (Korea) Cover pricing on bids to provide coastline survey and database construction services Steel gates (Hong Kong) Cover pricing on tenders for Housing Authority projects Building projects (Aus) Cover pricing on 4 government building projects (fined A$1.3 million) Offshore works / engineering & harbour works / highway (Japan) Many bid rigging construction cartels all involved designating a successful bidder & cover pricing so that bidder would win (all fined more than JYP1 billion)

21 Trade Associations Membership not illegal But decisions (rules, recommendations, agreements among members) and discussions about pricing, supply, bidding, costs, customers can be a breach Eg Recommended fee schedules / price guidelines issued by association Does not legitimise unlawful behaviour Exercise caution - provides forum for easy discussion between competitors Leave if / when inappropriate topics raised

22 Trade Associations real life examples Construction industry association (Aus) Bid rigging on government construction project (fined A$1.75 million) Involved payment of unsuccessful tenderer fee to losers Roof tile industry (Aus) Used association to fix rates paid to roof tile contractors Also agreed to only engage services of contractors who were members Medical Association (Sing.) Warned by regulator that issue of fee guidelines (which recommended fee ranges for doctors services) would be a breach

23 Exclusive dealing (vertical arrangements)

24 Second Conduct Rule Substantial market power Ability to give less /charge more without competitive constraint Abuse that power Engage in conduct with purpose or effect of preventing, restricting or distorting competition in Hong Kong Example of high risk behaviour: Predatory pricing Limiting production, markets or technical development Exclusive dealing (incl tying/bundling) Refusal to supply to competitors Price / service quality discrimination Loyalty / target pricing, discounting or rebates

25 Abuse of market power real life examples Concrete masonry (Aus) Predatory pricing (below manufacturing cost) to drive out new entrant and deter others Court found did not have substantial degree of market power Steel products (Aus) Refusal to supply steel Y bar (used for fence posts) to potential competing manufacturer of fence posts at competitive price

26 Exclusions / exemptions Exempt from First Conduct Rule Second Conduct Rule Agreements enhancing economic efficiency Block exemptions (*will probably cover most vertical agreements) SMEs (*limited exemption) Most statutory bodies in Hong Kong Compliance with a legal requirement Provision of services of general economic interest Exceptional & compelling public policy grounds To avoid conflict with international obligations If combined annual turnover < HKD 200m Not if 'serious anti competitive conduct If annual turnover < HKD 40m

27 Part 3: Enforcement

28 The Hong Kong Competition Commission (HKCC) HKCC administers & enforces Competition Ordinance Role includes promoting understanding of competition & compliance Competition regulators are typically well-resourced, diligent and successful in their investigations & legal proceedings The Competition Tribunal New judicial body Proceedings under Competition Ordinance must be brought in Tribunal Power to impose penalties & wide range of other orders

29 Investigatory powers Statutory power to compel: production of information & documents person to answers questions Statutory search & seizure powers (under warrant) Dawn raids Offence not to comply with powers or to provide false or misleading material Exposure to fines / imprisonment Costs of compliance with powers can be significant

30 HKCC enforcement options

31 What s next? HKCC: Guidelines & block exemptions Draft to be issued in 2014 for public consultation Implementation of Competition Ordinance Educating the public Decisions to clarify interpretation / scope of exemptions and exclusions Building up body of case law / enforcement action Businesses Take appropriate compliance measures: conduct audit of possible risk areas, take action to address risk areas, implement effective compliance program, prepare tailored compliance manuals, conduct compliance training for staff

32 If in doubt, always ask your compliance manager