COMPETITION LAW AND INDEPENDENT CONSUMER AND COMPETITION COMMISSION IN PAPUA NEW GUINEA

COMPETITION LAW AND INDEPENDENT CONSUMER AND COMPETITION COMMISSION IN PAPUA NEW GUINEA FOR PRESENTATION /REPORT AT THE 4 TH APEC TRAINING COURSE ON COMPETITION POLICY, HOCHIMINH, VIETNAM, 3 5 AUGUST 2004 Presented by Andrew Wasina, LLB, Independent Consumer and Competition Commission First Floor, Garden City Complex Angau Drive, Boroko P.O. Box 6394 BOROKO Papua New Guinea Telephone: (675) 325 2144 Facsimile: (675) 325 3980 E-mail: awasina@iccc.gov.pg Andrew Wasina page 1

COMPETITION LAW IN PAPUA NEW GUINEA BACKGROUND The Parliament of Papua New Guinea passed the Independent Consumer and Competition Commission Act 2002 (ICCC Act) on the 26h February 2002 and became effective on the 16 th May 2002 except Part VI (Competitive Market Conduct) which became effective 12 months later on the 16 th May 2003. The ICCC Act established the Independent Consumer and Competition Commission (ICCC). Section 6 of the ICCC Act provides the primary objectives of the ICCC which is to enhance the welfare of the people of Papua New Guinea through: (a) (b) (c) the promotion competition, fair trading and the protection of consumer interest; and the promotion of economic efficiency in industry structure, investment and conduct; and the protection of the long term interest of the people of Papua New Guinea with regard to the price, quality and reliability of significant goods and services. The ICCC s primary objectives were then translated into three core functions in ensuring: Effective economic regulation of State Owned Enterprises, privatized enterprises and declared goods and services; and The Promotion and protection of competitive market and fair trading; and The protection of consumers interest. The Commission consists of three Commissioners, one full time Commissioner and two Associate part time Commissioners appointed for fixed period of 5 years. By March 2004 the ICCC was fully operational with over 40 staff. ICCC acknowledges that in the infant stage of its operation, it would rely on experts from other established competition agencies such as the Australian Competition and Consumer Commission, New Zealand Commerce Commission or others to assist build up the capacity to deal with complex technical and legal issues concerning its legislative functions. ICCC acknowledges the assistance of Mr. Paul Baxter, who is the non resident Associate Commissioner for ICCC. Mr. Baxter is the Chief Regulator of the Australian Capital Territory and Associate Andrew Wasina page 2

Commissioner with the Australian Competition and Consumer Commission. ICCC also acknowledges the assistance of Mr. Hank Spier, former CEO of ACCC and Mr. Merv Keehn, also former legal advisor to ACCC. Both Mr. Spier and Mr. Keehn have been engaged by ICCC for a period of 12 months to assist ICCC. This Paper will only focus on the promotion and protection of competitive market and fair trading function of the ICCC. COMPETITIVE MARKET AND FAIR TRADING The competition functions of the ICCC are provided under Part VI of the Independent Consumer and Competition Commission Act 2002. Part VI of the ICCC Act provides for Market Conduct Rules that are central to the ICCC Act and to the functions of the ICCC. These rules apply to commercial dealings by all individuals and businesses including Government owned and operated businesses. In particular, the Market Conduct Rules prohibit engaging in business conduct or behaviour that has, or is likely to have the effect of substantially lessening competition in a market as well as engaging in trade practices which prevent fair trading among market participants. ICCC is tasked to promote and protect competition in markets and fair trade to enable efficiencies in operations in commerce and industries so that they provide more and better quality goods and services at affordable prices to the consumers. EXCEPTIONS TO THE MARKET CONDUCT RULES Before looking at the prohibitions provided by the Market Conduct Rules it should be noted that the ICCC Act provides a number of provisions exempting against the application of the Market Conduct Rules. (a) Statutory Exceptions State Owned Enterprises Section 65 of the ICCC Act exempts certain State Owned Enterprises (SOEs) established by Acts of Parliament against the application of the Market Conduct Rules. In Papua New Guinea there are number of State Owned Enterprises established by Acts of the Parliament which have monopoly over the following service industries. Andrew Wasina page 3

Telecommunications Electricity Postal services Water and Sewerage Ports and Harbours services Motor Vehicles Third Party Insurance However, through Regulatory Contracts between ICCC and these monopoly service providers, ICCC has power over them by approving their tariffs and setting price path over periods of 5 years to ensure they meet their capital requirement to achieve cost efficient level of operation to recover their cost and at the same time provide the required minimum services standard for the price affordable to the consumer. In due course these SOEs will be either sold partially or wholly to private ownership. Domestic Oil Refinery In 1997 the Government of Papua New Guinea entered into a Project Agreement with EP InterOIl Limited, a company registered in Cayman Islands, British West Indies, to establish an oil refinery in Papua New Guinea. This Project Agreement has a number of provisions which has anticompetitive outcomes. However, the Project Agreement was exempted by the Independent Consumer and Competition Commission (Oil Refining Facility State Agreement Exemption) Regulation 2003 (No. 8 of 2003) from the application of the Market Conduct Rules. The InterOil Refinery has commenced operation in July 2004 and will produce diesel by the end of July and petrol and kerosene by the end of August 2004. The three main players in the petroleum industry in Papua New Guinea are Shell, British Petroleum (BP) and Mobil. The InterOil Refinery Project Agreement only binds the State and the InterOil. The Project Agreement, however, requires the State to ensure that Domestic Distributors purchase such Product first and foremost from the Domestic Refinery through a regulation to prohibit importation of petroleum products by anyone other than InterOil. So far there is no law enacted to enforce the provisions of the Project Agreement on the third party players in the petroleum industry in Papua New Guinea and third party domestic distributors are at liberty to import petroleum products into Papua New Guinea. If that happens the State is at the risk of being sued by InterOil for damages for Andrew Wasina page 4

breach of the Agreement by the State in not stopping the third party players from importing the petroleum products into the country. MARKET CONDUCT RULES The following Market Conduct Rules are designed to help identify anticompetitive market behaviour or conduct that is likely to lessen competition in the domestic market arena. Trade Practices Prohibited under the Market Conduct Rules Sections 50 to 63 deal with trade practices that will or would likely to substantially lessening competition in the market. They are as follows: Anti-Competitive Arrangements Contracts, arrangements or understandings which have the purpose or effect or likely effect of substantially lessening competition in a market are prohibited by the ICCC Act. This prohibition applies to the making of such contracts, arrangements or understandings and also to those who would give effect to such a contract, arrangement or understanding that has already been made or reached. Exclusionary Provisions Exclusionary provisions which are also known as primary boycotts are agreements between competitors that will prevent or limit their dealings with a particular person or class of persons, where the person who is the target of the boycott is a competitor of one or both of those who agree not to deal with him. These dealings are likely to lessen competition in the market and the ICCC Act prohibits such dealings. Anti-Competitive Covenants Covenants over land that have the purpose or effect or likely effect of substantially lessening competition in a market are prohibited by the Act. The prohibition extends to requiring someone to give a covenant, the giving of a covenant or seeking to enforce a covenant. Price Fixing An agreement between competitors to fix prices is an example of anti-competitive market behaviour. Accordingly, price fixing agreements between competitors is prohibited under the Act on the grounds that such action is deemed to have the purpose or effect or likely effect of substantially lessening competition. Price fixing agreements are defined broadly to include contracts, arrangements or understandings that have the purpose or effect or likely effect of fixing, controlling or maintaining the price for goods or services or any discount, allowance, rebate or credit. Andrew Wasina page 5

Taking Advantage of Market Power Where a person or a company has a substantial degree of power in a market, they are prohibited from taking advantage of that power for anti-competitive purposes including restricting the entry of a competitor into that market or another, preventing or deterring someone from engaging in competitive conduct, or seeking to eliminate a competitor. An example of someone taking advantage of their market power may be where a new competitor enters the market which is dominated by one large company, which immediately and drastically reduces its price for the product which its new competitor is selling, to a price below production cost, with the intention of forcing the new competitor out of the market, at which stage the dominant market player can again raise its price to a higher level. Resale Price Maintenance Resale price maintenance, the practice of a supplier requiring its retail customers not to sell its products below a certain price, is also prohibited. Retail price maintenance is prohibited. Resale price maintenance would also apply where a manufacturer threatens to refuse to supply a retailer who was discounting the manufacturer s products when other retailers were not. PROHIBITION OF BUSINESS ACQUISITIONS TO SUBSTANTIALLY LESSEN COMPETITION Section 69 prohibits business acquisitions or mergers that will or is likely or have a likely effect to lessen competition in the market. The acquisition of the assets or shares of a business that would have the effect or likely effect of substantially lessening competition in a market is also prohibited. While this prohibition relates to the structure of the market rather than to behaviour in that market, it is nevertheless prohibited by the Act. This is because mergers between competitors or the acquisition of one competitor by another that has the potential to substantially lessen competition can have just as serious anti-competitive consequences as can price fixing arrangements or arrangements that substantially lessen competition. Thus, those anti-competitive acquisitions are also prohibited. Section 69 (5) of the ICCC Act provides guides in considering whether a particular business acquisitions would have the effect or likely effect of substantially lessening competition in the market, the following guide on what are public benefits. (a) the actual and potential level of import competition in the market; Andrew Wasina page 6

(b) (c) (d) (e) (f) (g) INDEPENDENT CONSUMER & COMPETITION COMMISSION the nature and effect of barriers to entry to the market; the number of buyers and sellers in the market; the degree of countervailing power in the market; the likelihood that the acquisition would result in the acquirer being able to significantly and substantially increase prices or profit margins; the extent to which substitutes are available, or likely to become available, in the market; the dynamic characteristics of the market, including growth, innovation and product differentiation; (h) the likelihood that the acquisition would result in the removal of from the market of a sustainable, vigorous and effective competitor; (i) the nature and extent of vertical integration in the market. PENALTIES FOR BREACH OF ICCC ACT The ICCC Act provides a number of penalties for breach of the Competitive Market Conduct Rules: (a) (b) (c) (d) Pecuniary penalties not exceeding: (i) in the case of an individual PGK500,000; and (ii) in the case of a body corporate PGK10,000,000. Court may order divestiture of assets; Private legal actions for damage; and ICCC may obtain injunction against actions on breach. ICCC MAY GRANT AUTHORIZATIONS FOR ANTI-COMPETITIVE ARRANGEMENTS OR BUSINESS ACQUISITIONS OR MERGERS Authorisation for anti-competitive arrangements The ICCC may grant authorisation for anti-competitive arrangements including price fixing, exclusionary provisions, and resale price maintenance, if the public benefits outweigh the competitive detriments. However, it should be noted that authorisation is not available for misusing market power. Clearance of business mergers or acquisitions Section 81 provides the process for granting clearance of business acquisitions where such acquisitions would not lead to lessening of competition in the market. Other jurisdictions such as Australia do not have clearance provisions. There is a time limit for 20 days for ICCC to consider the application for clearance, otherwise past 20 days the application will be deemed to be granted. Authorizations of business mergers or acquisitions Andrew Wasina page 7

Section 82 provides provision for ICCC to grant authorizations of business mergers or acquisitions that would be anti-competitive on public benefit grounds. There is a time limit of 72 days for the ICCC to consider merger authorisation applications. HIGHLIGHTS ON CASES ON IMPLEMENTATION OF THE COMPETITION LAW IN PAPUA NEW GUINEA In Papua New Guinea the Competitive Market Conduct Rules came into operation on the 16 th May 2003. This report covers the period from May 2003 to July 2004, a period of 14 months. Anti Competitive Arrangements, Agreements or Understanding On the commencement of the Market Conduct Rules in May 2003, ICCC had expected a big number of applications for authorizations especially on the anti-competitive arrangements. That did not happen. This does not mean that there are no anti competitive arrangements, agreements or understanding in existence. There are many but businesses have not come forward seeking exemption from the application of the Market Conduct Rules. Below are three interesting cases that should be highlighted. o o First, the State Owned PNG Power Limited, which has monopoly over the electricity industry entered into an Easipay Electricity Vending Agreement giving Steamship Trading Company Limited, a multi business giant, an exclusive right to retail electricity through EASIPAY. PNG Power sought the ruling of ICCC on the Agreement and was advised that the Agreement was in breach of the Market Conduct Rules. Other Retailers stores should also be allowed to retail electricity through Easipay facility. The second case relates to the InterOil Refinery Project Agreement referred to earlier, which provided four provisions that could potentially lead to a substantially lessening of competition in the market for refined petroleum products: (a) Clause 13.2 restricts the State from granting exclusive rights to another person to operate a refinery. This Clause does not stop the State from licensing other refinery on a non-exclusive basis. (b) Clause 18 requires the State to use its best efforts to persuade producers of crude oil in Papua New Guinea to allow InterOil the opportunity to purchase the domestically produced crude oil. This Clause limits the ability of domestic Andrew Wasina page 8

crude oil producers to supply foreign oil refineries at the expense of domestic refineries. (c) Clause 19.1 requires the State to ensure that all domestic petroleum retailers purchase refined petroleum products first and foremost from the domestic refiner, provided that they are made available at Import Parity Price (Singapore price). This Clause is anti-competitive where domestic distributors are able to import petroleum products at lower price than the InterOil import parity price (Singapore price). (d) Clause 19.2 provides that the State shall not allow domestic retailers to sell petroleum products below the Import Parity Price. This is clear price fixing imposed on the retailers by the Project Agreement. As stated earlier the Project Agreement was made before the ICCC Act came into being but State had made a subsequent Regulation exempting the Agreement from the application of the Competitive Market Conduct Rules. o The third example is currently a matter before ICCC for its consideration under the exclusive rule. ICCC received a letter from Mobil, one of the three key players in the petroleum industry advising of the proposed Exclusive Supply Agreement being discussed with InterOil and seeking preliminary view of the ICCC. Mobil is proposing an Exclusive Supply Agreement between BP and InterOil where BP will acquire products from InterOil refinery. There are three factors that will guide ICCC in this matter if the proposed exclusive agreement is to be executed. First, as a matter of principle, ICCC as a State agency will enforce any State policy or agreement that binds the State and in this case ICCC would assist in the enforcement of the Refinery Agreement that exist between the State and InterOil which is already exempt from the application of the Market Conduct Rules. Secondly, ICCC is aware that the State has not enacted any law to enforce the anti-competitive provisions of the Refinery Agreement against Mobil or any other domestic distributors of petroleum products. The proposed Exclusive Agreement may not be necessary as it goes to enforce the Project Agreement anyway. Thirdly, even if there is not law enacted to enforce the provisions of the Project Agreement, it would be unfair to penalize the third parties while State and InterOil, also key players in the petroleum industry are exempt from the application of the Market Conduct Rules. This matter is still pending formal decision of the ICCC. Andrew Wasina page 9

Anti-competitive business acquisitions/mergers ICCC has dealt with the following merge/business takeovers: Oil Search took over Chevron Niugini Joint Venture operation of Kutubu Oil. Oil Search, a partner in the Joint Venture was assuming the only operation in the crude oil extraction operation in Papua New Guinea and the takeover would not lessening in competition in the crude oil market in Papua New Guinea. Laga Industries takeover of Tanubada Diary Products, another local manufacturer of ice cream. ICCC granted authorization to allow local market ice cream product which are lower in quality and price to maintain its position against the premium priced imported ice cream products. Ice cream has been listed as declared goods for the purpose of monitoring prices. ICCC also authorized InterOil Limited (the new Refining company) to takeover BP (20% market share), one of the 4 distributors (Shell 43%, Mobil 33% and NOC 4%) of petroleum products in Papua New Guinea on the ground that there were still 3 other main competitors and there would be no lessening of competition. A number pending business acquisition matters before the ICCC. On the 22 nd July 2004, ICCC received application from InterOil seeking clearance for acquisition of shares in Shell, giving InterOil all of Shell s distribution assets but Shell would retain the distribution business by a 10 year leasing back contract to the use of the assets for their business. Shell has the option to terminate the lease back contract after giving 6 months notice. The 6 months notice is a concern to ICCC because it means Shell will dump the distribution asset to InterOil giving it 63% share of the market- causing a monopoly for InterOil. ICCC gave a preliminary view for the Shell to undertake not to sell the distribution business to another competitor but to NOC (4% market share) or to a new entrant to the market. Boroko Motors, a motor vehicle retailer has applied for clearance for the acquisition of Highway Automotive from Steamships. It would seem that this acquisition may have been completed prior to application being made and it may be that ICCC may not give a retrospective clearance. ICCC would have to give a careful consideration as the breach has occurred and may attract penalty under the ICCC Act. Andrew Wasina page 10

INVESTIGATION PROCEDURES The Competitive Market Conduct Rules in Papua New Guinea is only 14 months old and the Investigation Procedures is still being developed. The progress on this will be reported in the next year s report by ICCC. ABUSE OF DOMINANT POSITION (MONOPOLIZATION) ICCC feels that there is lot of companies in Papua New Guinea abusing their dominant positions but at this early stage, ICCC is still feeling its way around trying to come to have a grip on the competition law and again without the Investigation Procedures in place ICCC is unable to make some headway into this area in the implementation of the competition law. CONCLUDING REMARKS Papua New Guinea is a small market by world comparison. The bulk of the population of 85% is based in rural setting and the balance of 15% is in the urban centres. Except for agriculture and mining operations, market players are mainly concentrated in urban areas. Initially, some Chambers of Commerce and Industries objected to the introduction of the Market Conduct Rules in Papua New Guinea saying the market was too small. ICCC responded to saying many of the key market players in Papua New Guinea are subsidiaries of companies from Australia, New Zealand, United States, Asia and Europe where competition laws was in operation and are already applying the competition laws. In the next 12 months ICCC will closely monitor the following areas: operation of the new oil refinery in Papua New Guinea and its potential monopolistic effect on petroleum products in the market; the operations of the State Owned Enterprises which have monopoly on utility industries; the general anti-competitive conducts that so far appear to be nonexistent; Mergers and acquisitions. Thank you Andrew Wasina Andrew Wasina page 11