FIFTH UNITED NATIONS CONFERENCE TO REVIEW ALL ASPECTS OF THE SET OF MULTILATERALLY AGREED EQUITABLE PRINCIPLES AND RULES FOR THE CONTROL OF RESTRICTIVE BUSINESS PRACTICES Antalya, Turkey, 14 18 November 2005 COMMENTS ON VOLUNTARY PEER REVIEW OF COMPETITION LAW AND POLICY IN JAMAICA 1 Submission by JAMAICA AYT.05-059
Fifth UN Conference On Restrictive Business Practices COMMENTS ON VOLUNTARY PEER REVIEW OF COMPETITION LAW AND POLICY IN JAMAICA 1 1. INTRODUCTION The UNCTAD Secretariat report on the voluntary peer review of competition law and policy in Jamaica 2 that was prepared by a team led by Mr Philippe Brusick, Head of the Competition and Consumer Policies Branch, UNCTAD, and coordinated by Mr Hassan Qaqaya, Chief of Capacity Building and Advisory Services of the Competition and Consumer Policies Branch, UNCTAD, should be complemented for its comprehensiveness and thoroughness in analysing the main pressing issues of the theory and practice of Jamaica s competition law and policy. It is noted from the report that the primary twin goals of competition legislation in Jamaica are to increase economic efficiency and consumer welfare, just like in many other countries. Also like most other developing countries, the major development that triggered the formal adoption of competition law and policy in Jamaica was the country s adoption of structural adjustment programme and market-oriented policy reforms (trade liberalisation, removal of price controls, deregulation, privatisation and/or commercialisation of public enterprises, etc.), with the realisation that the benefits of structural adjustment might be eroded, or even cancelled out, anticompetitive practices of business enterprises in the absence of competition regulation. It is also noted that Jamaica s competition law covers most common areas such as; (i) application of the law; (ii) treatment of anti-competitive practices; and (iii) institutional arrangements. It also has provisions that extensively deal with consumer welfare and protection, which is a strong aspect of the law that is missing in the competition legislation of some developing countries, notably Zimbabwe. However as stated in the report, Jamaica s competition law has some serious shortcomings that are hindering its effective implementation. The following are comments on some of the likely shortcomings of Jamaica s Fair Competition Act. 2. LIKELY SHORTCOMINGS OF THE LAW 2.1. Scope of Application The Fair Competition Act of Jamaica is reportedly meant to be a general law of general application that also binds the State. This is what it should be. Therefore, the observation made by the Peer Review team that the definition of the word goods in the Act is too restrictive since it effectively exempts the entire financial services sector from the application of the law is fully supported. It is also noted that the Minister of Commerce, Science and Technology of Jamaica has statutory powers of exempting certain businesses and activities from the application of the law, and that these powers have been used to exempt entire business sectors and not just specific activities of the sectors. Such powers are also too wide and can seriously restrict and constrain the application of competition law and implementation of competition policy in economies of 1 2 Comments by Mr Alexander J Kububa, Director of the Competition & Tariff Commission of Zimbabwe Document UNCTAD/DITC/CLP/2005/5 2
developing countries that are relatively small and in which all economic sectors should be subject to competition regulation. The basic principle that competition law should be a general law of general application is also seriously compromised by having blanket exemptions. 2.2. Anti-Competitive Practices It is noted that the Fair Competition Act deals with horizontal agreements that restrict competition (price fixing agreements, market-sharing agreements, etc.), and that these are either per se prohibited or considered using the rule of reason approach based on public protection grounds. It also deals with vertical restraints, using both the per se prohibition and rule of reason approaches. It further addresses abuse of dominant positions, or monopolisation, that cover both exclusionary and exploitative abuses. The Peer Review team however made a striking observation that the Fair Competition Act does not contain any provisions dealing with mergers and acquisitions regardless of the fact that it is generally accepted that there are three essential elements of competition law: merger provisions, conspiracy (anti-competitive agreements) provisions and abuse of dominance provisions. This observation is shared with concern. The need for merger control provisions in competition legislation has been confirmed both empirically and practically. It has generally been agreed that most mergers pose little or no serious threat to competition, and may actually be pro-competitive. Such benevolent mergers have a number of economic advantages such as resultant economies of scales, reduction in the cost of production and sale, and gains of horizontal integration. The advantages could lead to lower prices to the consumer. Other mergers however seriously harm competition by increasing the probability of exercise of market power. In this regard, concerns about vertical restraints and abuse of dominance come to the fore. Mergers can also sometimes produce market structures that are anti-competitive in the sense of making it easier for a group of firms to cartelise a market, or enabling the merged entity to act more like a monopolist. There is therefore need for competition authorities to identify and prevent those mergers that are harmful to competition. All the three main types of mergers (horizontal mergers, vertical mergers and conglomerate mergers) may be harmful to competition in one way or another. Horizontal mergers present the greatest danger to competition by the mere fact that they reduce the number of competing firms in a product market. Such mergers most directly lead to market concentration, which could in turn create dominant or monopoly positions that reduce or eliminate competition. Some analysts have gone as far as viewing horizontal mergers as attempts at legitimising collusive and cartel-like behaviour between competing firms. Since vertical mergers combine firms at different stages in the production and distribution process, they may also have harmful effects on competition if they give rise to risk of markets becoming foreclosed to third parties. Conglomerate mergers present the least danger to competition since in the case of pure conglomerates there is no functional link whatever between the merged firms. Such mergers can however be potentially anti-competitive if they are considered in the context of additional financial strength (or deep pockets ) they give to the parties involved, which the parties can use against actual or potential competitors in their combined markets through cross-subsidisation. Since all mergers may have some competition concerns regardless of whether they are horizontal, vertical or conglomerate, there is need for provisions in competition law to control and regulate such business transactions. Regardless of the apparent benefits of merger control provisions however, it is a fact that a number of competition legislations, like that of Jamaica, do not have such provisions. Richard 3
Whish (2001) observed that in 1999 of the more than 80 countries that had competition laws, at least 50 of those laws had merger control provisions 3. There is a belief in some countries, particularly those with smaller markets and economies, that merger control is not necessary because such control impedes the restructuring of firms trying to obtain a critical mass necessary to compete in world markets, and that having a national champion even abusing a monopoly position on the domestic market allows it to be competitive in foreign markets 4. That belief has however largely been disproved. It has been found that monopolies might enjoy their monopoly rents domestically at the expense of domestic consumers and economic development without necessarily becoming more competitive abroad. A study on Merger Control: Concentration and Export Performance 5 also did not find a direct causal link between mergers and export competitiveness. Empirical evidence gathered found that firm size confers very small productivity advantages, if any, and therefore as export performance depends on productivity, the link between merger policy and export competitiveness is more apparent than real. It was found in contrast that the costs of domestic concentration and political influence arising from mergers are tangible. It has also been found in other studies that it is difficult for a business to become more competitive in the global market when domestic competition is weak. There is also the possibility that by not having a merger control system, a country might deprive itself of the legal powers to challenge foreign mergers which might have adverse effects on its territory and thus undermine both the national and global competitiveness of its export-oriented national champions. Mergers of transnational companies with distribution subsidiaries in smaller economies often cause drastic changes to market structures in those economies with devastating anti-competitive effects on the relevant markets. The recommendation of the Peer Review team that the Government of Jamaica should initiate a consultation process on merger review and thereafter enact merger control law is therefore fully supported. 2.3. Institutional Arrangements It is noted that the Fair Trading Commission of Jamaica is the main body responsible for the administration and enforcement of the Fair Competition Act, and that the Commission is composed of a minimum of three and a maximum of five Commissioners appointed by the Minister of Commerce, Science and Technology. The staff of the Commission is headed by an Executive Director, who is also an ex-officio member of the Board of Commissioners. Given the above arrangement, it is no wonder that the lack of separation of the Fair Trading Commission s adjudicative functions from its investigative functions has presented problems in the administration of Jamaica s competition law. As reported by the Review Team, this fundamental issue has led to the successful contest before the Court of Appeal of the constitutional validity of the Commission, thereby rendering it practically inoperative. In Zimbabwe, the country s competition legislation, the Competition Act, 1996 (No.7 of 1996), had similar loopholes in that it also does not provide for a clear separation of the investigative and 3 Richard Whish, Competition Law (Fourth Edition), Butterworths, London, 2001: p. 724. 4 Model Law on Competition UNCTAD Series on Issues in Competition Law and Policy, United Nations, Geneva, 2000: pp. 27-30. 5 Undertaken by World Trade Institute and reported at UNCTAD s Fourth Session of the Intergovernmental Group of Experts on Competition Law and Policy held in Geneva, Switzerland, during the period 3 5 July 2002. 4
adjudicative functions of the Commission. While the term Commission is referred to in the Act as a body corporate capable of suing and being sued in its corporate name, it is also provided that the Commission consists of appointed members (Commissioners, who are appointed on part-time basis). The Act gives the Commission (represented by the appointed Commissioners) all the competition functions, including the functions of investigating and making determinations on competition cases. Unlike the Jamaican arrangement however, the Director of the Commission, who heads the administrative and investigative staff of the Commission, is not an ex officio member of the Commission. The Director s statutory functions are to administer the Commission s affairs, funds and property and to perform any other functions that may be conferred or imposed upon him by or under this Act or that the Commission may delegate or assign to him. Even though the apparent lack of clear separation of the Commission s investigative and adjudicative functions has never been legally challenged in Zimbabwe, the Commission itself identified the problem right from the outset. The Commission therefore delegated its investigative functions to the Director and his staff. The Act was also amended to provide for the undertaking of preliminary investigations into competition cases by the Directorate s investigation officers. Further amendments to the Act are being worked out to clearly bring out the separation of the Commission s investigative and adjudicative functions. It is being proposed that the Act should specifically make provision for two distinct operating arms of the Commission: (i) a Directorate with basic investigative functions; and (ii) a Board of Commissioners with purely adjudicative functions. It is noted that the Zimbabwean system does not provide an ideal mechanism for the effective separation of the investigative and adjudicative functions of the Commission but it is working and provides some form of functional separation through its system of Chinese walls. The ideal mechanism is like the South African system, which provides for the establishment of separate competition institutions, one responsible for investigations and the other for adjudications, but this can be very costly for developing countries. 3. CONCLUSION In my view, the above three major shortcomings in Jamaica s competition regime, viz: (i) wide and numerous exemptions in the application of the law; (ii) absence of merger control provisions; and (iii) lack of clear separation of the investigative and adjudicative functions of the competition authority, have the effect of seriously hampering the effective application and implementation of competition law and policy in the country. The Peer Review team noted that of the 348 cases completed by the Fair Trading Commission in 1999-2000, 145 cases were related to misleading advertising (i.e., direct consumer protection) and 147 were related to breaches not covered by the Fair Competition Act. Therefore, only about 15% the cases completed during that period were directly related to purely anti-competitive practices. The reasons must be connected to the three major shortcomings in the law commented above. The overcome of these shortcomings, together with others identified by the Peer Review team, should go a long way in improving the implementation of competition law and policy in Jamaica. Competition & Tariff Commission Harare. Zimbabwe 8 th November 2005 5