Comments and Suggestions Regarding Georgian Government’s Legislative Initiative: Draft Law “On Free Trade and Competition” - საერთაშორისო გამჭვირვალობა - საქართველო

Comments and Suggestions Regarding Georgian Government’s Legislative Initiative: Draft Law “On Free Trade and Competition”

15 November, 2011

Below are Transparency International Georgia’s comments and suggestions regarding the Georgian Government’s new legislative proposal: the draft law “On Free Trade and Competition”:

  • The presented draft law calls for the establishment of the Competition and State Procurement Agency. It is noteworthy that, according to the Comprehensive Strategy for Competition Policy, a Competition Agency was to be created and its responsibilities were to include, among other things, monitoring of the state procurement process. According to the draft law, the Competition and State Procurement Agency will be responsible for the enforcement of competition laws, as well as the law “On State Procurement”. Accordingly, the legislative proposal provides for the replacement of the current State Procurement Agency with the Competition and State Procurement Agency and the new agency will both participate in the state procurement process and monitor it. It is noteworthy that roles such as supervising the enforcement of competition legislation, organizing the state procurement process and monitoring it are essentially different from one another. For this reason, merging these roles in a single agency will promote neither efficient enforcement of competition policy, nor efficient supervision of state procurement.

Another point needs to be emphasized. As it is widely known, the European Union has a two-tier legislation in the field of competition: the EU-level regulations and the legislation of the member states. If, in the case of some European countries (Sweden, Czech Republic, Denmark), merging the competition and state procurement agencies at the country level alone can be regarded as an acceptable decision, this kind of a setup (where the competition and the procurement agencies are merged) cannot be considered the best possible solution for Georgia.

We would also like to emphasize that the presented draft law was not submitted to parliament along with any amendments to the draft law “On State Procurement “. This is a violation of the law “on Normative Acts” of Georgia (Article 17) and the Rules of Procedure of the Parliament of Georgia (Article 147).

  • The draft states that, in cases where the matters covered by the law “On Free Trade and Competition” are regulated differently by another law in specific circumstances, the latter is to be considered superior. (Article 1.5). We believe the draft law must be clear and accurate regarding the interaction of the law with other legal acts in order not to jeopardize implementation of the core principles of the competition law.
  • Article 8 concerns agreements of minor importance, which are not considered as restricting competition (de minimis principle employed in the draft) and therefore are not subject to the regulation envisaged by the draft. Specifically, according to the draft, agreements are considered to be de minimis and therefore accepted if the combined market share of the parties does not exceed 25% of the relevant market for horizontal agreements and 40% of the relevant market for vertical agreements. These definitions do not conform to the EU Regulations. Under European Union competition law some agreements between economic agents infringing Article 101(1) of the TFEU are considered to be de minimis and therefore accepted if they satisfy the criteria as follows: 1) in case of horizontal agreement the parties’ market share is 10% or less, and 2) in case of vertical agreement - it is 15% or less. Furthermore, where it is difficult to identify an agreement as a horizontal or vertical agreement, the combined share of the parties to the agreement should not exceed 10% of the relevant market.
  • Article 9 of the draft law identifies specific types of agreements that limit competition but may still be exempted from the general regulation outlined in the draft law. In particular, the exemption applies to agreements that promote improvement of the production or distribution of goods, or promote technical or economic progress and regional development. It is noteworthy that, the EU regulations that establish these exemptions (TFEU Article 101) set an additional condition: the exemptions must not create the possibility of eliminating competition with respect to a substantial part of the products in question. This important condition is not identified in the presented draft law.
  • Article 23 of the draft law allows the agency to charge a service fee paid by the parties that file complaints. The amount of the fee is to be determined through a Georgian Government decree. This provision contradicts Article 94 of the Constitution whereby the rules for the introduction of taxes and fees and their structure can only be defined through a law. In this regard, there is a decision of the Constitutional Court of Georgia N 2/1/187-188, dated January 10, 2003 whereby a fee established through a by-law was declared unconstitutional.
  • The draft law grants the authority of ex-ante regulation, monitoring of operators and enforcement of the law in the electronic communications sector to the Georgian National Communications Commission (Article 31.8). At the same time, according to the transitional provisions of the draft law (Article 35.1), starting from January 1, 2016, regulatory functions in the field of electronic communications (such as control over restrictive agreements and concerted practices, etc.) will be shifted to the Competition and State Procurement Agency.

In order to ensure effective regulation of competition in Georgia, the abovementioned provision needs to be rendered more specific. The powers of the competition agency and the regulatory body must be separated and the primary powers of the independent regulatory body must not be restricted (for example, one of such powers is the right of the regulatory body to impose specific obligations on a company that possesses dominant market power in order to ensure competition, and to control whether these obligations are fulfilled).

Based on international experience, we believe that the development of the country’s competitive environment in accordance with the EU Regulations is only possible through an efficient division of powers between the competition agency and the independent regulatory bodies working in different business sectors.

It is important to remember that there is an essential difference between competition policy and regulation. In particular, while the powers of the competition authority are limited to checking the lawfulness of the firms’ activities, sector regulators have more extensive powers, such as controlling the decisions of companies regarding tariffs and investment choices. Competition authorities check the legality of a certain business practice and intervene ex-post, i.e. only after the action has already been taken by a firm operating in the market. Meanwhile, sector regulators (e.g. communications, energy and water supply regulatory bodies) act before the action is taken (ex-ante) and can therefore authorize a certain business practice or deny authorization. As a result, their regulation of the sector is a long-term and continuous process, whereas the competition authority’s interventions tend to be ad hoc. Furthermore, competition policy applies to sectors where structural conditions are compatible with normal functioning of competition (so-called liberal sectors). Regulation, on the other hand, applies to special sectors, whose structure is such that one would not expect competitive forces to operate without problems (so-called non-liberal sectors). In particular, regulation would usually concern markets where fixed costs are high and therefore only one firm (so-called natural monopoly) or a small number of firms (so-called oligopolistic market) can operate profitably. Examples might be telecommunications (local loops), electricity (its transmission phase), railways (the network) etc. For this reason, regulatory bodies usually take actions to pursue the objective of economic welfare.