The competition policy: Romania’s evolution in the area, towards EU integration

Silvia Anastasiu

The aim of competition policy is to create and maintain a system characterized by undistorted competition within an economic region. As competition stimulates productivity and encourages companies to promote technical progress, creating a competition environment as well as promoting a loyal and sound competition represented in the last century and still represent one of the major objectives of international authorities all over the world.

In my paper my goal is to evaluate Romania progress in the competition area and analyze if complying with the European Legislation as well as passing national competition laws, implies applying them. In the first place, for Romania to create an economy capable “to survive” the competition from European Union and to meet the requirements in order to be allowed to join the Union must represent one of the main concerns. It is especially hard for a country which before December 1989 even the term competition was inexistent, to be able to fulfill the European Union requirements regarding competition. It was a long and steep way, for Romania from “rediscovering” the term competition to meeting the requirements of the sixth chapter of negotiation in order to have a common policy with the European Union. However it is not clear how effective the implementation of this policy has been, therefore I present the “criteria”(anti-competitive practices) that “ guide” the competition policy and check if Romania fulfilled them in theory and especially in practice because as Neelie Kroes (2005) points out competition is the area facts are infinitely worth more than words.

I start by presenting the importance and scope of the existence of the competition policy and continue with Romania policy evaluation in the transition years and the steps undertaken in order to comply with European’s Union common policy in this area. I conclude with some relevant policy recommendation that if applied can improve the results obtained by the Romanian Competition Council in its fight against anti-competitive practices.

The scope of the existence and the importance of the competition policy is as IER (2003) notes the failure of markets. Maybe hard to admit for those of us of liberal “faith”, markets failure to function is the main argument for the competition policy. On one hand firms tend to increase their profits or their markets shares, using techniques that are detrimental to the consumers and on the other hand states are trying to support their own firms therefore disadvantaging other firms from the other countries members of the European Union. As Mario Monti (2004) notes it is straightforward to see that “the losers“ of this “unregulated game” are the consumers. This makes competition policy one of the weakest links in the chain of macroeconomic policies as the temptation of cheating is double and as it is known the power of a chain is given by the power of the weakest link. These are the reasons for which competition policy is such an important and delicate subject.

Regulation
The first stage in the evolution of an economic policy should be setting up a legislative framework. Regulation of competition is more delicate and important in a transition economy than in market economies. Nevertheless as Negrescu (2004) states, the rules and instruments of competition policy are hard to apply and they are costly. Competition policy is a very delicate problem as there is a very thin line between intervening in order to correct an anti-competitive behavior and punishing companies for using a better marketing strategies or technical progress. Nevertheless it is a mistake to think that the state should step out and stay out in order to assure the majority of private property and not concern about providing the legal and regulatory framework.

Looking at Romania, it can be said that unfortunately this was the case here. Romania’s policy makers figured out too late the importance of competition policy and what it means. For several years there was no regularization in this area and it took them a long time even to pass the law of competition. The law was finally passed in 1996, six years after the communist regime was replaced by a “democrat” regime and Romania was “a market economy”. The Competition Council was appointed the administrative authority in this area uncharged with maintaining a competitive environment as well monitoring and supervising the markets and the firms. Over the time Romania started adopting the European standards as regard to competition and increased the sanctions for those breaking the laws. During the negotiations for joining the European Union, the sixth chapter: “the competition policy” was among the last two chapters to be finalized, threatening for a while Romania’s integration. In June 2005 the European Commissar, Kroes, stated that the safeguarding clause might be applied to Romania for the sixth chapter if the Romanian authorities did not bring improvements especially in the state-aid area and in implementing the competition legislation. Finally this negotiation chapter was closed in December 2005.

Communitarian Legislation
The importance of regulating competition policy was recognized early and outlined in Articles 85-94 in the Treaty of Rome (1957). Even though competition policy is determined more and more by economical factors the constraints are juridical. As it is a common policy it must comply with some common laws, the basis of the competition policy is the European Treaty, mainly the articles 81-89. Although communitarian legislation in the field is very complex and comprehensive as Marin (2004) notes it is only applicable to the practices that negatively influence the commercial relations between the states member of the European Union. On the other hand those practices that affect only one state must be handled by its own national legislation. There are several practices defined as breaking the competition laws and therefore being anti-competitive.
Agreements
This section will present what are the agreements, what laws are applicable to them and the factors that facilitate them. Finally it shows two cases that illustrate how Romanian authorities are able to spot those who break the law and how they understand to apply the law.

An agreement is a practice, in which several firms agree to act in a common way and they are subject to the European Treaty , Article 81 –“forbidding all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States”; The agreement can be vertical (between the suppliers and the resellers) or horizontal (between firms situated at the same production level), the former as known to the wide public as cartels. As Negrescu (2003) notes the firms can agree on either fixing the prices (for either purchase or selling) or any other trading conditions. They can also “share the markets”, the “sources of supply” they can establish a minimum en-detail price, they can give bonuses for the quantity sold and so on. These are several “infringements” of the competition laws and are therefore punished. The firms found guilty generally pay a fine; the managers can receive penal punishment and so on.

In most cases the agreements are not straight forward for the authorities uncharged of supervising but there are several factors that facilitate the agreement. As Motta (2004) pointed out the main factors are: concentration (an agreement is more likely to appear when there are fewer firms on the market), so closer attention should be paid to the markets that have a structure resembling oligopoly; entry (as free entry is easier it is less likely for firms to reach an agreement); homogeneity of the product (if the products are more homogeneous it is easier to reach an agreement), elasticity of demand, evolution of demand and so on. Nevertheless one of the most powerful and effective instrument that the competition authorities can use in the fight against anti-competitive practices is the clemency policy. This program gives partial or total immunity to the firms that collaborate with the authorities, given that they were not the “initiators” of the anti-competitive behavior, nor that they persuaded others to join the agreement. The major advantage of this policy is that it helps the competition authorities to reduce the cost incurred from the investigation, due to the fact that firms need to supply the evidence themselves.

It is interesting to see how the Romanian authorities react when several markets are subject to these agreements. Maybe the best way to illustrate this problem is to present two cases. For a long time in Romania the cement market was “run” by a cartel between the three producers: LAFARGE ROMCIM S.A, HOLCIM S.A and CARPATCEMENT HOLDING S.A. These firms agree to fix the prices and taking advantage of their dominant position (together 98% of the market) they were able to triple the price, when the supply was twice as high as the demand. Moreover the export price that they charged for the same product continued to decrease. It is straight forward to see that they were financing the low export prices from selling at a higher price in Romania. These firms won both on the external markets as well as on the internal ones. Unfortunately the Competition Council did not spot this cartel on time and moreover it took them 4 years to finalize the investigation. The firms were finally found guilty and fined with 6% of their overall income for anti-competitive behavior.
Another case that is very similar to this one is a cartel between the cable television firms. In Bucharest there are two main providers of cable television: RCS, UPC ROMANIA Astral Telecom and Cablevision Romania (they bought all the other providers). However this is only theoretical, since in practice they divided the city between them. Depending of the city zone you inhabit only the services of one firm are available. So for the customer it is take it or leave it (take their price or no cable). Like the cement firms, these firms took advantage of their dominant position and bought out all the little firms and know share the market all most equally. It is unclear how the Competition Council was “blind” for so long to these practices, even though this issue has been address by different newspapers. Finally these companies were fined with approximately 7.5 million euros for forming a cartel; however the market still remains divided between these providers.

Abuse of Dominant Position
This section presents what exactly abuse of dominant position means, what forms it takes and what laws are applicable to them. Finally it illustrates what Romanians authorities understood by it.

It must be clear that only the abuse of a dominant position is punished not the merely existence of a dominant position. Simply an abuse of dominant position can be defined as a firm behavior through which a firm influences the structure of a market reducing its degree of competition. This anti-competitive practice is subject to the European Treaty, Article 82- “forbidding any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it”; This takes several forms, especially based on how firms decide “to play” with prices. Excessive prices (the prices that are situated above the level that would exist in a competitive market), are one form but as Negrescu(2003) points out it is very hard to identify them ,that is why the European Commission found only one case on this subject. Another form is dumping prices. A dominant firm can practice on short term prices that are below the production costs in order to eliminate the competition. Discriminatory prices, imposing the resale prices are just others forms of the abuse of a dominant position.

What the Romanians understood by this have nothing to do with competition. Excessive prices is one of Romania’s favorite subjects and people saw this law a way to continue to control prices, mainly that it would be possible to penalize price rises. This feature was common to many transition economies due to the low income of the consumers.

State aid
This section presents the problem of state aid, which of them are considered acceptable and which distort competition, also showing how Romania was able to fulfill these requirements.

Unlike the other practices that look at firms, this one refers to an anti-competitive behavior of a national state. As Monti (2003) pointed out, in certain cases state aid just prolongs some activities that are no longer fulfilling the requirements of economic efficiency therefore artificially maintaining them. State aids are subject to Articles 87-89 of the European Treaty- forbidding any “aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods”;

Nevertheless there are several types of state aid that are considered compatible with the European legislation in the competition field and are known as horizontal aid. Mainly as stated in the European Treaty these are: aids used for promoting the “economic development of areas where the standard of living is abnormally low or where there is serious underemployment”, aid for natural disasters and aid for promoting “culture and heritage conservation”.

Even though Romania started this “competition game” rather late great, credit must be given to the Competition Council for the efforts and the progress accomplished especially in the anti-trust area. Unfortunately as Neelie Kroes (2004) pointed out in her speech, at the European Institute –Bucharest, in the state aid field there are not enough checks. Still Romania was able to close the negotiations for Chapter 6 “Competition Policy” in December 2004. Romania was able to create the legislative framework and the administrative capacities, nevertheless the results are doubtful.

I would like to conclude with some policy recommendations. First of all Competition Council should pay closer attention to the markets that have a structure resembling oligopoly. As Motta (2004) pointed out the probability that firms reach an agreement is much higher when the number of firms is lower. Only a closer supervision of the Competition Council, which should act as a “watch dog” will determine the firms not to reach an agreement.

Secondly it would be a good idea to check if certain firms were sanctioned before for anti-competitive behavior and to be familiar with the conditions on the respective markets and the actions of the firms, in order to be able to identify if they are repeating their behavior (the cement firms were sanctioned before for anti-competitive behavior). A special attention should be played to the geographic markets and how they are divided.

Third state aid should not be left out of the equation. It is important that the Competition Council approves all the state aid, as the state maybe tempted to grant aid to certain companies that are bankrupt in order to avoid social movements although there companies are not longer productive and need to be shut down.

And last but not least, the time until an investigation is concluded should be shorter in order to be more effective (the longer the anti-competitive practice lasts, the longer the consumers have to suffer) and the fines much higher.

After all these measures are applied the Competition Council will became more powerful and “feared” by the firms that are thinking about taking part in anti-competitive practices. It is my opinion that only then it will be a good idea to put more weight on the clemency policy, in order to lower the costs induced by the investigations. Using this policy now maybe ineffective as firms know that the probability of being caught is low and the fine they have to pay is lower than profits they gained from the anti-competitive practice.


References

Kroes Neelie, “Concurenta in Uniunea Europeana-cazul Romaniei”, Speech at European Institute of Romania, 2005
Marin D& C Socol, Economie Europeana-O prezentare sinoptica, Editura Economica, 2004
Monti Mario, Politica de concurenta in Europa, www.ier.ro
Motta Massimo, Competition: Theory and Practice, Cambridge University Press, 2004
Negrescu Dragos, Politica de protectie a concurentei, www.cerope.ro, 2004
Phare Project RO 0006.18.02, Competition Policy, European Institute of Romania, 2004
European Commission, Articles of the EC Treaty - http://europa.eu.int.html
European Institute of Romania- www.ier.ro
Romanian Competition Council , multiple decisions - www.competition.ro