ways government bodies can impact competition:
- market activities
- Legislation and regulation;
- Subsidies
- • Procurement
MARKET ACTIVITIES
many public sector businesses are providing services in competition with private sector businesses….Thus, competitive distortions can arise:
- due to differences in regulations;
- the cost of capital [public businesses are not required to earn a commercial rate of return or can borrow funds at rates lowe
- no requirement to pay taxes.
- in some countries they are exempted from anticomps.
- may receive gov subsidies. if they are used to cross-subsidise commercial activities, the public business will have an advantage
- get lax public procurement rules
- some public sector agencies have the power to collect data for public purposes….they have an advantage if they can use this data on terms more favourable than the private sector.
- if the public provider is less efficient than [actual or potential] private providers, but is nevertheless able to “crowd out” private providers, will result in a higher tax burden and allocative efficiency (AE)is reduced. Dynamic efficiency (DE) may also be lower if the government entity is less likely to innovate and entry is deterred. (usually the case)
- Distortions of this sort reduce the profitability of private participants in competition with the government entity. this is unfair, particularly if they regard part of any taxes they pay as subsidising their government competitor.
more stringent competition requirements should be placed on government businesses because they have greater incentives to exploit their map, and more opportunity to conceal anticomps…..In particular, an SOE [State Owned Enterprise] may set prices below marginal production costs, especially on products for which demand is price-elastic. An SOE also may understate its marginal cost of production and overinvest in capacity in order to relax a binding prohibition on pricing below cost. In addition, an SOE may have stronger incentives [than a private firm] to raise its rivals’ costs and to exclude rivals….. For example, SOEs often enjoy privileges and immunities .In addition, an SOE’s legal framework may impose upon it the duty to pursue objectives other than profit maximization. Furthermore, SOEs often benefit from statutory monopolies….Consequently, SOEs may not need to recoup the costs of anticompetitive activities by raising prices
conclusion:
we need both actvist ngos + cpcl + [cma = advocacy+ enforcement], to promote competitive neutrality [public/private], so that dominant, nonneutral public bodies can be sued/cma’d.
Eu:
competitive neutrality principles are embedded in the EC Treaty and are an integral part of the competition law. Article 86: government services/goods, or private entities on behalf of the government, are subject to the competition provisions of the EC Treaty unless this would undermine the provision of ‘services of general economic interest’. This is reinforced by the rules on State Aids that require member States to notify and seek approval from the Commission for subsidies (in any form) that would distort or threaten competition. To approve a subsidy the Commission must conclude that the member State has entrusted the service provider to provide a well defined service of general interest, and the aid is proportional to the objective and limited to the amount necessary to provide the service.
The Transparency Directive requires public companies to transparently and separately report commercial and non-commercial activities
Section 11 a. The Competition Council may issue orders for the termination or repayment of aid
granted from the public funds….. An order pursuant to subsection (1) may be issues, when the aid:
i) Directly or indirectly has as its objective or effect the distortion of competition, and
ii) Is not legitimate according to public regulation. (OECD 2001, P.100)
ec decision on a complaint by UPS, that Deutsche Post AG was cross-subsidising competitive parcel services from its letter service monopoly.
The Commission found that Deutsche Post AG had offered fidelity rebates and priced some services below cost. It concluded that these actions would have a significant effect on competition, and required Deutsche Post AG to separate its parcel business form other services, and was also fined EUR 24 million
UNITED KINGDOM
uk Framework for competitive neutrality relies on a combination of :
- -treasury guidelines for public bodies
- -(mostly ex post) application of cl (from which public bodies are not exempt).
- -cma to assess government laws and regulations that may inhibit competition/neutrality
Treasury guidance [to public firms, or tender priv firms]:
The UK government is keen to encourage public bodies to make better use of their assets, both physical and intangible, and, when appropriate, supports engaging in commercial services ….The key piece of guidance is on ‘Fees and Charges’, which outlines the rate of return for the public sector in commercial involvement in competitive (or potentially competitive) markets. The guidance states that the rate of return on capital (RORCA) should reflect an average return on capital reflective of:
• market pricing;
• the cost of capital faced by the private companies in that sector; and
• the level of risk associated with that sector.
• other issues that may impact on performance.
The Treasury has said that it would expect the real pre-tax return on capital to lie in the region of 5.5 per cent for low-risk activities to 15 per cent for high-risk ones.
However, this guidance does not apply to self-financing public corporations (as defined by the Treasury) or local authorities. Charging practices by local authorities are under the Local Authorities (Goods and Services) Act 1970 and the Local Government and Housing Act 1989.
The Treasury states that public bodies’ pricing strategies and cost recovery should be reviewed on an ongoing basis and at least annually. The NAO audits all government accounts and scrutinises the use of public money, while the Public Accounts Committee of the House of Commons can question a department’s financial performance. Rates of return are monitored via departmental annual accounts which outline the target rate and the actual rate received.
UK Competition Act 1998:
mirrors Articles 81 and 82 of the EC Treaty. The CA98 concerns the conduct of all undertakings, including PBs that undertake commercial activities.
The OFT has in fact investigated a number of public sector bodies under the CA 98, although so far no infringements of the Act have been found:
• Companies House: cma investigated complaints that Companies House was engaging in predatory pricing or anti-competitively squeezing margins, but found no evidence
• Environment Agency,: complainants argued that the Agency attempted a margin squeeze, and engaged in predation and anti-competitive discrimination. However, cma found no evidence.
• Ordnance Survey : private sector competitors complaining that Ordnance
Survey price discriminates, cross subsidises and that its products directly competes with those of its downstream licensees.
- The OFT has also investigated complaints v n&w regarding public sector bodies abusing their purchasing power, by offering unfairly low prices and terms when purchasing nursing care services. The OFT dismissed the complaint on the basis that N&W was not in fact the body responsible for setting the prices in question. It also said that ‘paying low purchase prices is only likely to amount to an adp in exceptional circumstances’.
ANTICOMPS OTHER THAN MARKET ACTIVITY [MARKET STUDIES]
the Enterprise Act 2002 allows CMA to conduct market studies if it suspects that features of the market – including government regulations – are limiting effective competition.
-market studies to det whether government regulations may limit competition:
For instance, in January 2003, the OFT published a report recommending that the ‘control of entry’ regulations for community pharmacies should be abolished, to improve consumer choice and increase competition. The OFT also concluded that regulatory restrictions on the supply of dentistry services limit consumer choice, competition, business freedom and the potential to develop and deliver better services.
-regulatory impact assessment (RIA), which assesses also competition.
-Government procurement : in particular markets, procurement is likely to lead to competition problems.
– Subsidies : extends to the examination of cross-subsidies within government bodies. Effective cost and revenue allocation between the public and gov bodies, limits the gov’s unfair advantage in competing with private sector
EU
Article 86 of the EC Treaty is the main tool for ec to implement competitive neutrality policies. EC held: cl apply only to economic activities that affect trade between Member States. ….three principles:
• neutrality with regard to the public or private ownership of companies;
• Member States’ freedom to define services of general interest, subject to control for manifest error; and
• proportionality requiring that restrictions of competition and limitations of the freedoms of the single market do not exceed what is necessary to guarantee effective fulfilment of the mission.”
EC:
In its Aeroports de Paris, adp, decision, ec found that Aeroports de Paris
a public undertaking which manages the Paris airports, had infringed Article 82 of the EC
Treaty, by using its dominant position (as manager of these airports) to impose discriminatory
commercial fees in the Paris airports of Orly and Roissy-Charles de Gaulle on suppliers of certain ground-handling services. The discrimination resulted from the structure of the commercial fees charged by ADP to the suppliers for providing ground handling services. The commercial fees were composed of a fixed part, which related to the property occupied by the supplier, and a variable part corresponding to turnover of the supplier at the airport.
ec ordered ADP to stop its infringement of Article 82 of the EC Treaty
Article 87
Another important too for ec to achieve neutrality. Article 87 of the Treaty is to prevent trade between Member States, being affected by advantages granted by public authorities to undertakings, irrespective of whether they are publicly or privately owned, which in various forms, distort or threaten to distort competition
For a measure to constitute state aid under Article 87, the state must grant an economic advantage, above a certain minimum threshold,28 to an undertaking. Exempting an
undertaking from having to pay certain charges, may also constitute state aid. Examples include: tax concessions, the application of excessively low energy prices, preferential interest rates on loans, cross subsidisation, state guarantees and other indirect advantages such
as the sale or lease of assets at non-market prices.
A Member State intending to implement new state aid, or alter existing state aid, must notify its intention, and full details of the aid to be granted, to the Commission….ow, unlawful.
• In Banco de Credito Industrial, (ECJ) found that a measure through which a Member State granted a tax exemption to a public undertaking [ a Spanish limited company in which the State had a holding], constituted state aid… however, was considered existing
state aid, and is lawful, as long as not found it to be incompatible with the common market.
• In Syndicat français de l’Express international (SFEI) v La Poste33 the ECJ stated that the
provision of logistical and commercial assistance by a public undertaking to its private subsidiaries, may be state aid . The test is whether the remuneration is less than under normal market conditions.
state aid is present where capital is contributed by a public authority to an undertaking (whether public or private) in circumstances that would not have been acceptable to a private investor under normal market economy conditions.
example : where a normal return on the capital investment cannot be expected within a reasonable time.
A second example is the ‘Market Economy Investor Principle’ (MEIP): ec: “To ensure the principle of neutrality, the aid must be the difference between the terms on which the funds were made available by the State to the public enterprise, and the terms which a private investor would find acceptable in providing funds to a comparable private undertaking, under normal market economy conditions
The Transparency Directive
In order to apply cp and ensure neutrality, ec must ascertain what advantages these undertakings receive. For this purpose, the Commission issued the
Transparency Directive.