Competition Laws: Promoting Free Market

Under the US-Singapore Free Trade Agreement[ref]Under Chapter 12 of the US-Singapore Free Trade Agreement signed on 6 May 2003.[/ref], Singapore is obliged to enact competition laws by January 2005. It is widely expected that the proposed legislation will be published for public consultation sometime in early 2004.

NB: The draft bill was published on 12 April 2004. This article was written before the bill was published for public consultation.

The Rationale of Competition Laws

Competition laws are designed to promote competition in a free market. The concept behind these laws is that competition in any industry or business will result in more efficient use of resources and lowest possible prices for consumers.

Most countries around the world have laws and regulations concerning anti-competitive business practices. In the United States, such laws and regulations are generally referred to as “anti-trust laws”. Often the laws are extra-territorial in that they apply to conduct that occurs beyond their borders where such conduct affects competition within their borders.

Although Singapore has competition rules in specific industries (as an example in the telecommunications industry[ref]The Government advanced the introduction of full market competition in the telecommunications sector by 2 years from 1 April 2002 to 1 April 2000. The direct and indirect foreign equity limits for all public telecommunications services licenses were also be lifted in January 2000.[/ref]), there is no general competition law. We have to look at legislation in other countries (notably the United States[ref]The principal legislation are the Sherman Act, the Clayton Act and the Federal Trade Commission Act.[/ref] and the European Union[ref]Legislation is introduced under Article 81 of the European Community Treaty.[/ref]) to provide some guidance of what such legislation in Singapore could be like.

In order to be effective, competition assumes that the market is made up of suppliers who are independent of each other, each subject to the competitive pressure exerted by the others. In order to preserve the ability of suppliers to exert such pressure on the market, competition law sets out to prohibit agreements or practices which might reduce it.

Competition regulations usually focus on the following areas:-

  • The elimination of agreements which restrict competition and of abuses of a dominant position (e.g. price-fixing agreements between competitors).
  • The control of mergers between corporations (e.g. a merger between two large groups which results in their dominating the market).
  • The liberalisation of monopolistic economic sectors (e.g. telecommunications).
  • The monitoring of State aid[ref]The monitoring of state aid is unique to EU legislation. As the EU is made up of independent Member States, both competition policy and the creation of the European single market could be rendered ineffective were Member States free to support national companies as they saw fit.[/ref] (e.g. the prohibition of a State grant designed to keep a loss-making corporation in business even though it has no prospect of recovery).

Restrictive agreements and abuse of a dominant position

Some companies, because of their economic size or power, are able to unilaterally raise prices, reduce output and generally act independently of market forces. Competition laws seek to control such companies from abusing their dominant position to stifle competition.

It has to be said that the laws are not concerned with the economic size or power of companies but rather with the abuse by companies of their power to stifle competition.

Efficient businesses are run with a view to conquering markets. Holding a dominant position is not wrong in itself. It is the result of the business’s own effectiveness. But if the business exploits its power to stifle competition, this is an anti-competitive practice which is wrong.

The most familiar example is an agreement on prices, or a cartel, where companies fix price levels jointly as a result of which consumers are unable to take advantage of competition between suppliers to obtain competitive prices. Other types of anti-competitive agreements have the object or effect of fixing other conditions for the operation of markets: for example, they may allocate production quotas to certain companies or share markets between them. Examples of other practices that may be considered anti-competitive are market-sharing agreements, refusal to supply customers, tie-in sales, uncompetitive discount prices, predatory pricing, forcing distributors to stock the entire product range, bundling arrangements and even brand loyalty arrangements that reward distributors with higher commissions.

In the past, competition laws were used in the USA to break-up the monopolistic/cartel-like steel[ref]United States v. United States Steel Corporation, 251 U.S. 417 (1920)[/ref], railway[ref]Northern Pacific Railway Co. v. United States, 356 U.S. 1, 4 (1958)[/ref] and telecommunications[ref]United States v. AT&T, 524 F. Supp. 1336 (1981). The case lasted from 1974 to 1982, when AT&T agreed to a consent decree with the government leading to the 1984 break-up of the company. The government said AT&T had monopolised the market for local and long-distance telephone service, along with equipment.[/ref] industries.

A recent and prominent example is the anti-trust prosecution of Microsoft by the US Department of Justice and by the European Commission. The allegations against Microsoft are that, its bundling of Internet Explorer[ref]In June 2000, U.S. District Court Judge Thomas Penfield Jackson called for Microsoft to be broken into two companies and ordered its Internet Explorer browser unbundled from Windows. Jackson’s decision was over-ruled on appeal, and Microsoft kept Internet Explorer bundled in Windows.[/ref] or Windows Media Player[ref]The European Commission in March 2004 levied a fine of Euro 497.2 million on Microsoft and ordered the unbundling of Windows Media Player within 90 days. It also required that “complete and accurate” information be given to rival makers of computer servers within 120 days.[/ref] into the Windows Operating System and its attempts to contain and subvert Java technologies are an abuse of Microsoft’s operating system monopoly. Interestingly, Microsoft argued that having a uniform platform encourages developers to create innovative solutions, thus encouraging competition, not stifling it.

Another example is a 1999 ruling[ref]Commission Decision of 20 July 1999 relating to a proceeding under Article 82 of the EC Treaty and Article 54 of the EEA Agreement (Case IV/36.888 – 1998 Football World Cup)[/ref] by the European Commission that the committee organising the Football World Cup in France in 1998 has abused its dominant position in the sales of tickets for the final matches by favouring consumers who could provide an address in France, to the disadvantage of consumers resident in other countries.

Merger Control

When companies combine via a merger, an acquisition or the creation of a joint venture, this can have a pro-competition effect. Businesses usually become more efficient, competition intensifies and the final consumer will benefit from higher-quality goods at fairer prices.

However, mergers can also have an anti-competition effect. The merged entity could hold considerable market power, thus encouraging collusion with the other players in the market to control prices and prevent potential players from entering the market.

Therefore, in countries with competition laws, businesses that want to merge will have to seek prior approval from a competition authority. Such businesses have to show that their proposed merger will not adversely restrict competition. Economic data and analysis of the impact of such mergers are usually presented as evidence to support the merger. Often reservations by the competition authority can be addressed by the merged entity divesting parts of its businesses.

An example of a merger/take-over that was found to be anti-competitive was the proposed take-over of Manchester United Football Club by Rupert Murdoch’s BSkyB in 1998. The UK Monopolies And Mergers Commission[ref]The full report is found here: http://www.competition-commission.org.uk/rep_pub/reports/1999/426sky.htm[/ref] found that:-

  • BSkyB, as the only major provider of sports premium pay-TV channels, has market power in this area.
  • If the merger was permitted, BSkyB would gain influence over and information about the Premier League’s selling of rights to pay-TV channels that would not be available to its competitors.
  • The effect would be to reduce competition for Premier League TV-rights leading to less choice for the Premier League and less scope for innovation in the broadcasting of Premier League football.
  • Such a merger would adversely affect football as it would give BSkyB additional influence over Premier League decisions relating to the organisation of football, leading to some decisions which did not reflect the long-term interests of football.

Liberalisation

This is one area of competition policy that Singapore has already been pursuing vigorously.

In the past, governments often grant special rights, in particular monopoly rights, to public or private enterprises to perform “services of general economic interest”. Such rights have typically been granted in sectors such as telecommunications, postal delivery, rail/air transportation or electricity generation and distribution. These special rights generally correspond to responsibilities linked to the performance of a public service entrusted to the enterprise. However, such special rights must not go beyond what is necessary for the performance of that service. Otherwise, from the point of view of competition policies, they would create situations that restrict competition.

Monopolies entrusted to enterprises where they are not justified by a service of general economic interest lead in most cases to high prices, poorer quality service and backwardness in terms of innovation and investment.

Singapore has been looking at this sector by sector. The telecommunications, power generation, bus and mass rapid transportation have been liberalised. However there has been some rethinking by the government that for certain sectors (like the mass rapid transit[ref]A Report in The Straits Times on 29 October 2003 titled ‘Surprise Government U-turn on NEL’ quoted Transport Minister Yeo Cheow Tong as saying that ‘It makes good sense if there’s only one company running all the MRT systems.'[/ref]), public interest may not be served by liberalisation because of the small market size.

Scrutiny of State Aid

Although legislation against state aid is unique to the EU, the pro-competition rationale is of general applicability.

By giving certain companies or products favoured treatment to the detriment of other companies or products, state aid seriously disrupts normal competitive forces. Neither the beneficiaries of state aid nor their competitors prosper in the long term. Very often, all public subsidies achieve is to delay inevitable restructuring operations. Ultimately the entire market will suffer from state aid, and the general competitiveness of the economy is reduced.

One industry that has been the subject of constant scrutiny is the airlines industry in the EU. Subsidies and rescue packages for national carriers of member states in the EU have been the subject of many competition rulings. One of the harder-to-understand rulings is that of Ryanair’s use of Belgium’s Charleroi airport.

The European Commission ruled that certain forms of aid granted to Ryanair at Charleroi cannot be authorised. In particular:-

  • the discounts on airport charges which go beyond the discounts already provided for in the Belgian legislation;
  • the reduced ground handling fees, which are not offset by possible surpluses from other, purely commercial activities like parking, shops rental, etc; and
  • one-time only incentives paid when new routes were launched, where no account was taken of the actual costs of launching such routes.

Many small regional airports are critical of the ruling saying that it does not consider market realities and the huge commercial success of the partnerships between low fares airlines and these under-utilised airports[ref]A statement made by the President of the European Low Fares Airlines Association, Wolfgang Kurth, on 1 February 2004 just before the EC ruling.[/ref].

What is the impact of competition law on businesses in Singapore?

Companies will have to ensure that their businesses practices are within the permitted boundaries of competitive conduct. From a commercial point of view, doing so will retain the trust and loyalty of its shareholders and customers. From a legal point of view, failure to do so could render affected arrangements with its business partners unenforceable.

In addition, any contravention of competition laws will usually result in heavy fines imposed on the guilty company. Often civil remedies are also available to consumers and other parties adversely affected by the anti-competitive conduct. This has resulted in large damage awards in many jurisdictions. In some countries (like the United Kingdom), breaches of competition law can also result in jail terms and qualification from directorships.

Therefore Singapore companies, in particular those that hold a dominant market position, should institute an effective competition law compliance check or audit.

Government-linked corporations and other large local corporations are often considered dominant and are therefore subject to heightened scrutiny. Therefore, a comprehensive competition compliance programme is important. Such a programme involves an audit of its business practices to determine if any of them are anti-competitive, a review of existing contracts for anti-competitive terms, a risk assessment to determine the impact on the company arising from non-compliance and employee education.

Small and medium sized enterprises (SMEs) are least likely to be adversely affected by competition laws. Often they benefit from such regulations. SMEs should be aware of what is considered permissible and non-permissible business conduct under the competition laws, as it can be an effective tool to use against any anti-competitive behaviour of their dominant rivals.

Multi-national corporations operating in Singapore are also not expected to be significantly affected as they are likely to be already complying with competition rules in their home countries. In fact, most MNCs are likely to have in place a written global competition compliance policy to ensure that the competition rules of the countries in which they operate are met.

Any undertaking by Singapore corporations (whether big or small) to familiarise themselves with competition laws and policies will not only ensure that they comply with the laws in Singapore but can also be beneficial to them, especially when such corporations go overseas to do business in developed countries. Familiarity with competition requirements will give them a competitive advantage over companies that have no experience doing business in such an environment.

Conclusion

The introduction of new competition laws in Singapore provides an opportunity for the ‘creative Singaporean’ to ‘rise to the challenge’. To the Singapore draftsmen, the challenge is to come up with new ideas of how to promote competition without being overly ‘heavy-handed’. To Singapore businesses (and also to Singapore lawyers), the challenge is to devise business arrangements that will make commercial sense, allow businesses to make money and still not be anti-competition.

The call has already been made by the government to private enterprise to cultivate imagination, creativity and innovativeness.

Recently, a similar call has also been made by Defence Minister, Rear Admiral Teo Chee Hean, to the civil service[ref]A report of the Straits Times on 31 March 2004 titled “Civil servants get wake-up call” reported that Defence Minister speaking at the annual administrative service dinner, stated that public servants must understand how markets work and consider the needs of entrepreneurs and companies and that government policies should be analysed from these points of view.[/ref].

Are we up to the challenge?