REGULETTER - CUTS CCIER · However, Dolle did not mind buying ... Japanese officials said that ......

REGULETTERRThe proposed takeover of Arcelor

by Mittal Steel has attracted stiffresistance from a number of

European countries, making it the mostcontroversial bid of recent times. MittalSteel is the largest producer of steel in theworld, while Arcelor is second largest.Arcelor is of course the largest steel makerin both Europe and Latin America.

Post-takeover, the combined entitywill produce as much as three times theproduction of its nearest rival NipponSteel and almost as much as thecombined production of the next fourcompanies, and will control about 10percent of the global steel market. Such abig deal is bound to raise competitionconcerns, particularly when prices ofsteel are at record high levels.

However, those who are opposing thedeal have not raised the issue ofcompetition concerns, but other issueslike employment and corporategovernance. This is quite unfortunate,especially because some people havefound enough justification to oppose thedeal owing to the fact that L N Mittal, themajority shareholder in Mittal Steel, hailsfrom India. In fact, from the ongoingdebate and the media coverage on theissue, it is difficult to understand thatMittal Steel is not an Indian company,but based in the Netherlands. The fact is,Mittal Steel does not have any directbusiness presence in India, so far.

The involved governments haveevery right to raise the concerns ofprobable closure of plants in theircountries or of employment, if these arelikely to be affected by the deal.However, does this require that the dealbe blocked altogether because of suchconcerns? That there are better ways ofdealing with such issues, these Europeangovernments should, in all probability,

.../...

Volume 7, No. 1/2006

ALSO INSIDENeed More Might ................ 4

No Child�s Play .................... 6

Setting Standards ................ 9

Saying No ........................ 11

Watching Closely ............... 13

Air Cargo ShakenBy Cartel Probe .................. 17

Competition Law inPanama ............................. 18

INSERT: C-CIER Activities Report

A Quarterly Newsletter of the CUTS Centre for Competition, Investment & Economic Regulation

HIGHLIGHTS

Luna AbbadiExemption inPublic Interest� A Case from Jordan ........ 15

Richard MeadeIs Uniformity of InvestorProtection a Shot inthe Arm... or the Foot? ........ 16

Holding Mittal March in Europe:Competition Should be the Only Ground

learn from developing countries likeSouth Africa or Zimbabwe, or even fromleast developed countries like Zambia –for example, when the French Cementgiant Lafarge wanted to acquire Zambia’sChilanga Cement. In the context, theZambian Competition Commission,before allowing the acquisition, hadtaken an undertaking from Lafarge oncontinuation of production in thecountry as well as on level of operations.

Corporate governance is anotherissue that opponents to the deal haveattempted to highlight. But, as factsstand, Mittal Steel is a Rotterdam-basedcompany. Hence, one would wonder ifthe company was following the Dutchcorporate governance norms or Europeancorporate governance standards!

Arcelor chief executive Guy Dolle hasalso raised the issue of cultural differencesof the two companies, along with poorcorporate governance standards, in MittalSteel. However, Dolle did not mind buyingCandadian steel maker Dofasco in his bid toconsolidate his company’s global position,despite possible cultural difference andcriticisms from several quarters that the

2 REGULETTERNo.1, 2006

>>COVER STORY

There are certain uniquecharacteristics of the

pharmaceutical industry, which accountfor a distinctive competition scenario. Inthe pharmaceutical industry, marketconcentration exists to a substantialextent. If one looks at the pharmaceuticalsector as a whole, the individual marketshares of companies are small.

This is because pharmaceuticalproducts are not single homogenousgoods and there are several ‘relevantmarkets’ within the industry, alsotermed as the therapeutic segments.Statistical data in most countries revealthat there are high levels ofconcentration in several of thesesegments.

Another matter to consider in thiscontext is that in the wake of TRIPs,with the product patent regime beingimplemented in most countries,manufacturers can no longer producea rival’s patented drug even through a

different process, as was permitted inprocess patent regimes.

Therefore substitutability ofpatented drugs is often close to zero,leading to inevitable monopolisticpositions in the market. This may leadto competition concerns such as abuseof dominance.

In a normal product market, firmstry to boost sales and, consequently,profits, by reducing prices. This is notthe case in the pharmaceutical sector.The very essentiality of the productbeing sold, namely medicines,combined with the said marketconcentration and the lack of consumerindependence in the pharmaceuticalsector, is facilitative to distortion ofcompetition in the pharmaceuticalmarket.

Consumption patterns are notaffected by prices and hence firms donot have incentive to keep prices low.

Competition in the Pharmaceutical Industry>>PERSPECTIVE

price he was paying was too high. It is but natural for Dolleto oppose the deal, as his job will be at stake.

Even as deal opponents raised the bogey of corporategovernance, and concerns that the deal will not bringvalue to the shareholders of Arcelor, the markets thoughtotherwise. Arcelor shares rose from �22.21 (US$27.43) onJanuary 26, 2006, by almost 50 percent, indicating thatshareholders are convinced with Mittal’s logic. It may benoted that Mittal Steel’s rise over the last few years hasnot been through organic growth. Mittal Steel boughtsteel companies all over the world, many of them lossmaking and turned them to become profit making. Thisalso indicates that Mittal has been reasonably successfulin managing cultural differences.

Interestingly, many of the big consumers of steel,including many Arcelor customers have expressed concernsthat the deal might lessen competition in the market, whichis already tight due to heavy demands from China.

The European Commission (EC) is sure to review thedeal. However, even if the impact of the deal on competitionin the European market remains tolerable, there may bemany national markets beyond Europe where the deal islikely to raise serious competition concerns. Thus, if abroader view were to be taken, the logic for blocking thedeal would be stronger. There will, however, be seriouscompetition concerns in some product categories.

Hence, it is quite certain that even if the EC does notblock the deal, it will see divestments. Probably, Mittal isquite aware of this, and hence has already offered to sellDofasco – recently bought by Arcelor – to German steelmaker ThyssenKrupp, who was also interested in theCanadian steel company, but lost in the bid to Arcelor.

In this interweave of arguments, one pertinent point ofnote is that competition authorities often look into thepast behaviour of the involved companies while reviewinga merger or takeover. In this regard, Mittal Steel’s record isnot exactly clean. Accusations of price rigging (abuse ofdominance) as well as of collusive practices in SouthAfrica have been levelled against the company. Thoughthe final decision is yet to come, Mittal Steel is defendantto complaints by several buyers of steel and two goldmining companies, Harmony and Durban RoodepoortDeep, at the Competition Tribunal.

Interestingly, Mittal tabled reports that aimed to showthe company’s return on equity was below its weightedaverage cost of capital, alleging that this could not besustained indefinitely and could lead to bankruptcy. But,the complainants questioned, why, if the company was onthe verge of unprofitability had it a densely traded stockwith sustained investor interest? Moreover, they argued, ifthis was a true reflection of the situation, then Mittalshould have issued an announcement on the(Johannesburg) Stock Exchange News Service, because itwas going out of business!

All said and done, there can be significant competitionconcerns attached to the deal. However, the likes of Dollehave been so narrow-minded in their opposition that theyhave failed to highlight the competition concerns. Instead,Dolle has weakened his case by comparing Arcelor’s steelto ‘high-quality perfume’ over Mittal’s to ‘lower gradeeau de cologne’, which essentially means that they arenot competing with each other and hence, there is noreason to oppose the deal on the ground of competition!

Consumers of medicines are veryoften not the decision-makers when itcomes to deciding which medicine topurchase. They are for the most partguided by instructions from theirdoctors and pharmacists. Suchpractices result in patients being misledinto purchasing more expensivemedicines, or the prescribing ofirrational (or combinations of) drugs,which may lead to medicalcomplications, sometimes even causingdeath.

Within this distinct competitionscenario that leads to the prevalenceof special types of practices andabuses, a number of general anti-competitive practices pervade thepharmaceutical industry worldwide.

To contain the distortedcompetition in the pharmaceuticalindustry, effective regulation of thepharmaceutical industry, particularlydrug prices, is of vital importance.

3REGULETTERNo.1, 2006

MACRO ISSUES <<

Asking TaiwanThe Organisation of Economic Co-

operation and Development (OECD) ina peer review of Taiwan’s Fair TradeLaw has asked Taiwan to implement a‘forgiveness policy’ (also known asleniency policy).

This is in order to raise the level ofadministrative fines for collusivepractices and to eliminate regulationsfor price-setting practices by small andmedium-sized enterprises.

As such, the plan for a forgivenesspolicy had been incorporated inrevisions of related laws and thecompetition authority is consideringthe calculation of administrative fines.

(GAW, 10.02.06)

Descent to HellThe recent arrest of high-ranking

defence ministry officials, alleged tohave been orchestrating bid-rigging onprojects at two military facilities inJapan, has cast new light on dango, aninstitutionalised form of rigging thathas long distorted competition forpublic works contracts and virtuallyexcluded foreign players.

In such an arrangement, companiescollude to pre-arrange bids in order toensure that each is given an equal sliceof the pie. Japanese officials said thatdefence officials were believed to haveallowed the rigging to proceed in apractice known as amakudari(‘descent from heaven’).

This is where retired statebureaucrats are employed in private andpublic corporations, particularly thoseunder their ministry’s jurisdiction.

(FT, 01.02.06)

Italian InitiationItaly has come up with a new

charging scheme for mergers.Introduction of the new filing fees formergers will bring Italian merger reviewprocess in line with the US and Germansystems wherein the merging partieswill be asked for one percent of thevalue of their transaction, or US$60,465– whichever is lower.

It has been reported that the filingfees will be reassessed annually. Thenew charging scheme has alreadytaken effect. The least that anyonewould be required to pay is US$3,628.

However, observers note that whencompared with jurisdictions such asGermany and Spain, the initial feeappears high; also, the charging scaleappears less flexible than other regimes.

(GCR, 12.01.06)

Aligning the ActOn January 1, 2006, the new Cartel

Act came into force in Austria. Thecountry’s legislature was eager to bringAustrian cartel legislation as far aspossible into line with European Union(EU) cartel legislation.

Hence, the law implemented thelong established EU system of not onlypunishing members of a cartel with highfines, but also rewarding thosemembers of a cartel who ‘blow thewhistle’ before the authorities knowabout the cartel.

Accordingly, the new Cartel Actimposes fines of up to 10 percent ofthe total sales of the business yearpreceding the discovery of the cartel.

(ILO, 24.02.06)

The Sun on South Africa?South Africa’s strengthening

economy and improved currencystability, as well as the clutch of M&Adeals seen in 2005, should pave the wayfor more in 2006, according to bankersand business analysts.

The changing legislation and strictforeign exchange controls have untilnow deterred some foreign companies

from investing, analysts contend. Ofspecial concern has been the laws andguidelines on Black EconomicEmpowerment (BEE), which increasethe compliance burden of companies.

However, new government codesgoverning BEE were published lastyear, diminishing some of theuncertainty surrounding that process.Expected liberalisation of the country’sexchange controls could also ease thelot of foreign investors.

(FT, 10.01.06)

Completion, But NoChina plans to complete drafting of

a long awaited anti-monopoly law, buthas yet to settle the contentious issueof which arm of government will beresponsible for enforcement.

Chinese economic life continues tobe marred by companies’ abuse ofmarket dominance, price-fixing and useof mergers and acquisitions to createmonopolies.

Once the anti-monopoly law comesinto existence, it is hoped that it willhelp break down the administrativemonopolies that still exist in manyChinese industries, and will also helpcurb practices that throttlecompetition.

But, it has been felt that recentdrafts of the law do not include detailedrequirements for liberalisation ofsectors distorted by administrativemonopoly practices. (FT, 21.01.06)

On Way to Enhanced Co-operation

The Hungarian Competition Office and theUkrainian Competition authority have signed an

agreement, which will foster co-operation betweenthe two countries.

The agreement facilitates the flow of informationin cases of interest for the other country, andassistance to the other during the course ofinvestigation.

Likewise, the Competition Commission of Greeceand Cyprus have also signed a protocol of co-operation recently, which will deepen existing co-operation between the two bodies.

The document includes a commitment to briefeach other on new decisions to exchange information where businesses conductoperations involving both, and to run joint training programmes.

In an era of growing competition, agreements enhancing co-operationbetween countries have significant long-term macro economic implicationsaffecting future economic growth. (GAW, 01.02.06 & 21.03.06)

The Financial Express


>> MACRO ISSUES

Portugal Gears UpThe decentralisation initiated by EU

Regulation 1/2003, on theimplementation of the competition ruleslaid down in Articles 81 and 82 of theEC Treaty, is underway in Portugal, andthe last two years have revealed that agreater involvement of the nationalauthorities in the application ofEuropean competition law has led to asubstantial increase in efficiency.

The Portuguese CompetitionAuthority has shown itself to be veryactive in its co-operation with theEuropean Commission (EC) and othernational competition authorities sincethe entry into force of the regulation.

Nonetheless, implementation ofRegulation 1/2003 has also triggered adiscussion on amendments to theexisting national rules, in particularconcerning notifications for exemption,leniency programmes and investigationprocedures, even though the actalready takes into account the mainprinciples of the regulation.

(ILO, 20.01.06)

Argentine Price ControlsThe Argentine Ministry of

Economy have requested the NationalCommission for Competition to performcertain market investigations intoalleged cartel activity, in a bid to curbthe inflationary pressures prevailing inthe economy.

The industries under investigationare plastic and plastic containers, meatmarkets, public works, work-riskinsurance companies andsupermarkets. Members of theseindustries had been accused ofincreasing the prices of their productsas a result of agreements between them.

Recently, discussions between thegovernment and business leaders fromvarious sectors led to the renewal ofprice agreements in an effort to freezeprices on 200 products.

Analysts opine that reliance onprice controls to contain inflationaddresses only symptoms of inflationrather than causes, and that in the longrun will bear the opposite of theirintended effect. (ILO, 03.02.06)

Pledge AbandonedJapan’s Prime Minister, Junichiro

Koizumi, has dropped a pledge to

Private Action in EC?A keenly awaited policy paper on

private enforcement of antitrust ruleswas recently published by EC. The newEC green paper considers ways ofencouraging private legal actions fordamages as a result of restrictivebusiness practices or abuse of adominant position prohibited underArticles 81 and 82 of the EU Treaty.

The Commission believes that amore efficient system of privateenforcement would act as an additionaldeterrent to companies participating ina cartel or illegally abusing theirdominant market position. However,obtaining evidence of alleged antitrustinfringement is the ‘major obstacle” todamages action for private litigantssuch as companies.

Given the low value of individualclaims and the costs of litigation,consumers will not in practice be ableto bring claims. So the paper askswhether a form of ‘collective consumerredress’ similar to US class actionsshould be available. (FT, 20.01.06)

Poison PillsStung by Mittal Steel’s recent

takeover bid for Arcelor, countries areincreasingly using ‘poison pill’ tacticsto fend off hostile bids.

As such, the EU’s long and troubledcampaign against such takeoverdefences is heading for a furthersetback, with more and more memberstates deciding not to apply keyprovisions of the EU takeover directive.Accordingly, the EU has watered downits takeover directive.

Recently, France decided to givecompanies the right to use the poisonpill defences to rebuff hostile takeoverbids – even if they come fromcompanies unable to use similarstrategies as against the EU intentionto apply the same only if the bidderhas access to similar defencestrategies.

It is speculated that the long-termimplications of this could inhibit stockmarket activity and valuations andincrease the possibilities of underperforming management using thesame in a bid to protect themselvesfrom takeovers.

(BS, 22.02.06 & 03.03.06)

quadruple the country’s foreigndirect investment by 2011 to avoidbeing too closely associated with thepolit ically sensitive topic ofaggressive merger and acquisition(M&A) activity.

It is a setback for efforts by foreignbusiness groups, along with reform-minded Japanese politicians andbureaucrats, to promote foreigninvestment at a time when other Asiancountries such as China and India areattracting record FDI flows.

The decision illustrates thesensitivity in Japan towards hostilecorporate takeovers and highlightsthe way moves are being stalled toliberalise the environment for foreignM&A in the country. (FT, 02.02.06)

Need More Might

In a bid to help fight againstcartels, Turkey�s Competition

Board has demanded morepowers.

The board is of the view thatone of the key obstacles to cartelbusting is finding evidence. Powersunder the existing act are onlyenough to find obvious evidencein an inefficient way.

Accordingly, the board wouldlike intensive investigation powers,such as e-mail supervision, secretcamera use, house and bodysearches, and wiretap.

An information note of theboard underlined that informationconcerning cartelisation � whichis normally inclusive of criminalevidence � are well hidden and outof bounds, and criticised theexisting act as unable to uncoversuch evidence. (GCR, 19.01.06)

The Hindu Business Line


MICRO ISSUES <<

Under the law, Apple’s iTunes onlinemusic store will be forced to removesoftware barriers that prevent consumersfrom playing downloaded tracks on anyhandheld digital device other than thecompany’s own iPod player.

The legislation also imposes theconcept of ‘interoperability’ on Apple’srivals. This new law has beencondemned by parts of the IT industry.

It has been asserted that aweakened iTunes would reopen thedoor to pirate music sites.

On the flip side, the French cultureminister has said that this law allowed“the dawn of an equitable Internet” andoffered immense progress toconsumers. (BL, 23.03.06 & FT, 22.03.06)

Fined for Price FixingActing upon an informal complaint,

the Portuguese Competition Authorityhas fined the Portuguese Ship AgentsAssociation US$248,243 for using pricelists, in order to influence the prices ofagents’ services between 2001 and 2004.

The authority found proof that theAssociation had produced anddistributed price lists among itsmembers, in which the set prices werefollowed to the cent by many of theshipping agents.

Agents that were not members ofthe Association followed the price lead,which meant that the Association inpractice was running the market. Thelatter has stated it would challenge thesaid decision in court. (FT, 31.01.06)

A Stub in the AshtrayA complaint was filed against

Chiletabacos, a subsidiary of BritishAmerican Tobacco in 2002, allegingthat the company used a range ofunlawful practices to maintain its 97percent market share.

Consequently, the Chilean antitrustauthority gave its ruling on the mattervoiding Chiletabacos’s existingexclusivity agreements and preventingit from entering into new ones.

The ruling also preventedChiletabacos from hindering theexhibition or sale of the competitor’scigarettes in the future.

Of late, the Supreme Court of Chilehas upheld the said ruling and orderedChiletabacos to desist from theunlawful anti-competitive practices andpay a fine of US$560,000, the maximumallowed under Chilean Law.

(LatinlawyerOnline, 26.01.06 & GCR,

27.01.06)

Tackling Head-onThe EC in its efforts to stop national

governments from blocking cross-bordermergers has challenged Spain’s attemptto halt the takeover of Endesa, the powercompany, by rival Eon of Germany.

EC has asked the Spanishgovernment to respond to its concernsabout the official interventions in thetakeover battle, particularly the validityof the legislation that Madrid rushedthrough after Eon tabled its bid forEndesa. The new law gives Spain’s

national energy commission powers toveto or impose conditions on takeoversof domestic utilities.

In the event of an unconvincingresponse from Madrid to EC concerns,the Commission is likely to launch alegal challenge against the new Spanishenergy legislation.

(FT, 07.03.06 & 23.02.06)

Admitting to a WrongElpida, fifth largest maker of

dynamic random access memory(DRAM) chips – involved in theDRAM chips cartel – admitted its guiltand was subsequently fined US$84mnby the US Department of Justice (DOJ).

According to the charges, Elpidahad engaged in price-fixing and bidrigging. The plea sees Elpida pay areduced fine in return for helping withthe investigation of other allegedconspirators.

The company anyway had to pay asmaller fine than the other conspirators,because it sells fewer DRAM chips.

The DRAM cartel is one of thelargest cartels ever discovered. So far,the total amount of fines levied onconspirators involved in the cartel, isUS$730mn. (GCR, 23.02.06)

Contentious LawFrance’s lower house of parliament

has passed a controversial law that couldchallenge Apple Computer Inc’sdominance of the online digital musicmarket.

allow rivals to develop serversoftware that runs smoothly withWindows-driven computers andservers. The Commission hashowever indicated little interest.

Microsoft hopes to delay renewedCommission action by insisting theregulator respect its right to defenceand provide access to more of anyincriminating material collected.

In a new development, an antitrust complaint was filedin February 2006, by IBM, Oracle, Sun Microsystems,Nokia and several other technology groups, based on theirconcern about �a range of Microsoft business practicesthat threaten to deny enterprises and individual consumersreal choice among competing software products�.

The complaint will be scrutinised by the Commission, whichwill pursue the allegation, if it appears merited.

(FT, Feb-Mar 06 & ET, 14.02.06)

Microsoft � Much to Deal With

In 2004, the European Commission (EC) had decidedthat Microsoft had illegally used its dominant Windows

operating system to damage rivals in other softwareapplications.

EC not only levied a fine on the firm, butalso ordered it to provide its competitorscomplete and accurate technicaldocumentation, allowing them to developserver software that worked withMicrosoft Windows operating system aswell as Microsoft�s own server software.

Subsequently, EC alleged thatMicrosoft failed to comply with it�s rulingby not supplying its rivals with accuratetechnical documentation and threatened to impose finesof up to US$2.4mn a day. Microsoft denied the allegationsand contended that the EC ignored critical evidence.

Microsoft has offered to licence parts of the Windowssource code to other companies, claiming that this would

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>> MICRO ISSUES

Violating SeverelyAbuse of a dominant position is

considered a severe violation underLatvian Competition Law, and a finebetween 0.5 percent and 1.5 percent ofthe net turnover for the previousfinancial year may be imposed for suchviolations.

In accordance with the said law, theCompetition Council levied a fine onthe Latvian public telecommunicationnetwork operator SIA Lattelekom, thehistoric monopolist in thetelecommunication sector, for abusingits dominant position.

The decision was appealed in courtbut was apparently withdrawn. In a bidto protect the interests of the societyin free, honest and equal competition,the Council imposed a fine amountingto LATS 10,000 or US$17, 658.82 – 0.35percent of SIA Lattelekom’s netturnover for 2003. (ILO, 27.01.06)

Cutting DeepThe long-running antitrust

investigation by EuropeanCommission (EC) into De Beers, thebiggest diamond producer, came to anend when it was agreed upon by thecompany to make the gems moreaffordable to consumers.

According to an agreement enteredinto by De Beers and Alrosa, thesecond largest diamond producer, theformer was to receive diamonds worthUS$800 a year for five years. The

agreement immediately raisedconcerns, as it would strengthen DeBeers’ already dominant position in themarket.

As per the new terms of theagreement, De Beers will, from 2009, nolonger buy rough diamonds fromAlrosa, which will result in more roughdiamonds being available in the openmarket, paving the way for genuinecompetition in the supply of roughdiamonds.

De Beers will also have todrastically reduce its purchases fromAlrosa in the three years before theban. An official of the Commission hassaid that it is expected that the price ofrough diamonds will fall as a result ofthis agreement, thus benefitingconsumers. (FT, 23.02.06)

Blocking the BidThe Australian Competition and

Consumer Commission (ACCC) hasblocked Toll holdings’ takeover bid fordomestic rival Patrick Corporation,thwarting a hostile move to create theworld’s fourth biggest transport andlogistics company, as the acquisitionwould likely substantially lessencompetition in several markets in thetransport sector.

Despite undertakings by Toll to sellseveral assets in the event of a takeover,the ACCC remained convinced thatallowing the takeover would bedetrimental to competition.

Toll Holdings is back in talks withthe ACCC to try to salvage its takeoverbid for Patrick Corporation. Analystshowever are of the opinion that thedefinitive nature of the rejection madeit highly unlikely that Toll could win onappeal. (FT, 19.01.06 & 21.01.06)

Drawing a Distinct LineThe phone company Digitel had

recently alleged that its rival companyMovistar had mimicked one of itsadvertising campaigns, illegallybenefiting from its image. It said thatthe similarity of the two phonepromotions would confuse customers.

Movistar denied the allegationscontending that the promotion wasdistinctive and original, forming part ofan expensive marketing campaigntargeting 13 countries and that therewould be no merit, therefore, in eitherconfusing its customers or trying toalign itself with a smaller competitor.The authority’s decision concurredwith Movistar’s defence.

The importance of this decision isits clear separation of intellectualproperty rights issues, which do notfall under the competition authority’sjurisdiction, from unfair competitionissues. (ILO, 03.02.06 & GCR, 24.01.06)

Aided LollipopsThe world’s largest maker of

lollipops, the Spanish company ChupaChups, is facing an in-depthinvestigation by the EC for allegedlyreceiving illegal government aid.

EC is scrutinising aid measuresgranted by the regional government ofCatalonia to help Chupa Chupsovercome a financial crisis caused bythe company’s overly ambitiousexpansion.

EC has indicated that it had doubtswhether the Catalan government’sfinancial agency, which granted theloan, had behaved in the same way thata private investor would have.

Should the Commission rule that theloan was equivalent to a governmentsubsidy, and that there was nojustification for granting it, the EC couldask for the loan to be repaid.

It could also ask the Catalangovernment to adjust the conditions ofthe loan in order to bring it into line withnormal market practice. (FT, 27.01.06)

The Center for Science in thePublic Interest (CSPI) has said that it

would sue both Kellogg Co. andViacom, Inc., which run theNickelodeon Cable Network, ifthe companies do notchange somem a r k e t i n gprac t i cesaimed atchildren.

If thedemands ofthe CSPI are notmet, a lawsuit wouldbe filed to stop the companiesfrom marketing junk foods in venueswhere 15 percent or more of theaudience is under age eight, and other

promotional campaigns aimed at thatage group.

The suit would contend that Kelloggand Nickelodeon are harming children,

since the majority of food productsmarketed to them is

high in sugarand fat.

CSPI hassaid that ofthe 168 adsfor food on

Nickelodeon,88 were for

foods with poornutritional quality. A recent

study has found that ads influence thefoods preferred by children, especiallythe very young. (ET, 20.01.06)

No Child�s Play

The Economic Tim

es


RESTRUCTURING <<

Toshiba TopsToshiba, the Japanese engineering

company, with a bid of almost US$5bn,won the battle for control ofWestinghouse, the US power plant armof British Nuclear Fuels (BNFL), seenas the most sought-after asset.

Despite Toshiba competing againstGeneral Electric (GE) and MitsubishiHeavy Industries of Japan, it was theone favoured, as BNFL perceived GEhaving a more aggressive corporateculture, which would not allow seniorWestinghouse management to run thebusiness on its own with minimalinterference from its new corporateparent.

The move signals the determinationof Toshiba, already a leading builder ofnuclear power plants, to make nuclearenergy one of its pillars along withcomputer chips and electronics.

By acquiring Westinghouse,Toshiba becomes the world’s No. 1nuclear power company, with a 28percent share in the global market. Withsoaring oil prices, experts say nuclearenergy is becoming a more attractiveoption in the U.S. and elsewhere, despiteits safety concerns. (FT, 23.01.06)

Google Going On AirThe historic acquisition of dMarc

with an offer price of US$1.24bn takesGoogle, the renowned search enginecompany, for the first time, into thebroadcast field. The deal showcasesGoogle’s intentions to extend the reachof its Internet-based advertisingnetwork.

dMarc runs an automated networkthrough which radio stations sell andschedule advertisements. WithGoogle’s Internet advertising network,the system now opens up the mediumto many smaller advertisers whom radiostations would not otherwise be ableto reach efficiently.

It is stipulated that this landmarkradio advertising deal could eventuallyreach ‘thousands’ of radio stationsaround the world that use dMarc’sstudio automation systems to managetheir inventory of advertising space.

Google further plans to plug itsAdWords Internet Advertising Networkwith dMarc Radio Advertising Networkraising the prospects of better reach toconsumers on both ends. (FT, 18.01.06)

Soon to be Home and Dry?Once Home Depot, the biggest do-

it-yourself (DIY) group, acquires theproposed large stake in Orient Home,one of China’s largest DIY chains, itwould mark the US group’s entry intothe US$50bn Chinese homeimprovement market.

It would also enable the US groupto compete with international rivalssuch as B&Q, owned by Kingfisher, theUK group, in China’s fast-growing DIYmarket. People close to the deal saythat the US group intends to acquire49 percent in Orient Home.

An official at Orient Group reportedthat Orient Home had held talks with anumber of international retailers, butHome Depot was the favourite. HomeDepot’s expansion in China would actas a fresh source of growth, as in theUS the home improvement market isnearing saturation. (FT, 13.02.06)

Grabbing the BestAlbertson’s takeover in January by

Supervalu, a discount food retailer andwholesaler, has led it to acquire over1,126 of Albertson’s best performingsupermarkets across the US. Thetransaction will triple the size of theretailer’s operations and create acompany with annual revenues ofabout US$44bn. The expandedSupervalu will have 2,656 storesnationwide.

Only Kroger Company will be larger,after this acquisition. The storesspecifically acquired by Supervalu

include Acme, Bristol, Jewel-Osco, andShaw’s Supermarkets banners.

Federal antitrust regulators recentlycleared the takeover with norequirements such as divestiture ofretail stores or other assets of thecompanies and no conditions orrestrictions were placed on thetransaction. The required pre-mergerwaiting period for the transaction hasalso expired. (FT, 24.01.06)

Set to Be Third LargestActavis, the Icelandic generic

medicines group, and its Croatian rivalPliva are all set to create the world’sthird-largest company in the genericsbusiness sector.

The deal would enable Actavis tocombine its pipeline of 200 generic drugsunder-development with an estimated100 more at Pilva and would provideimportant new markets for Actavis ineastern and central Europe, Italy,Germany, and Spain, where the marginsfor generic drugs are relatively high.

Analysts opine that the deal wouldmark the latest in an intensifyingconsolidation of the generics sector.However, they have also cautioned thatthe deal is likely to result in job lossesin Croatia and would add to Actavis’debt.

Actavis is already in the process ofexpanding from its traditional Icelandicbase into Europe, US, and India. Thedeal is seen as a great combination oftwo groups that are in many ways similarand would give Actavis a fantasticposition in Europe. (FT, 18.03.06)

Disney-Pixar Coupling

After months of negotiation, WaltDisney has agreed to acquire Pixar,

the animated film studio, in a US$7.4bndeal. The knot, which will be finalisedthis summer, is expected to reviveDisney�s animation department andposition the company better in anindustry primarily characterised bydigital technology.

In recent years, Disney�s artists havestruggled to make the transition fromhand-drawn cartoons to the computer-generated techniques, which Pixar made famous with the release of Toy Story.

Therefore for Disney, the acquisition is expected to restore it to its pre-eminent Hollywood animation studio status. The deal confirms a remarkablereversal of fortunes for both Disney and Pixar. (BS, 26.01.06)

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>> RESTRUCTURING

Spreading OutTokyo-based Softbank, which has

had success with its broadband serviceYahoo! BB in Japan has branched outinto the cell phone business with theacquisition of Vodafone’s strugglingJapan unit. The move is expected toboost Softbank’s foray into the cellphone business.

The purchase will allow Softbankto take over more than 15 millionJapanese users who have signed on tothe carrier (Vodafone), as well as itsmobile network, instead of building itfrom scratch.

The Japanese cell phone businesssector of late has been characterisedby stiff competition, especially from thetwo biggest mobile phone companies,NTT DoCoMo and KDDI.

Competition is to further intensifyin the fall, when consumers in Japanwill be allowed to switch carrierswithout changing phone numbers. Thedeal has resulted in Softbank’s stock tojump four percent in Tokyo. (ET, 18.03.06)

Milking Success?Sources report that Switzerland’s

Competition Commission has cleared amerger to near-monopoly. It was furtherreported that the Commission foundthat AZM, a dairy company, faced gravefinancial difficulties and its market exitwas probable.

The merger will enable Emmi,another dairy company, to absorbAZM, thereby providing it an unrivalledposition in the markets for milk, cream,yoghurt, and butter.

Switzerland maintains a closedcustoms frontier on agriculturalproducts. As a result, the Commissiondecided that no matter what theoutcome – collapse or merger – theamount of competition in the marketwould remain the same.

Swiss officials state that this casehas a protectionist effect, because it willallow Emmi to reach a critical size in orderto successfully enter the Europeanmarkets, once the agricultural sector isliberalised. (GCR, 29.03.06)

A Significant MergerThe proposed merger of AT&T and

BellSouth spells out the altered worldof telecommunications. The merger

would leave AT&T as the dominantforce with a big share of local phoneservice.

The new company would be thecountry’s largest phone company —with nearly half of all lines. It also wouldbe the largest cell-phone carrier and thelargest provider of broadband Internetservice.

The deal will enable AT&T to gainstrength in the battle of growingcompetition from cable TV and Internetcompanies. Together, AT&T, andBellSouth will have a national long-distance telephone and data network,residential customers in 22 states andbusiness customers comprising morethan half of Fortune 1000.

If approved by shareholders andregulators, AT&T further plans to cutup to 10,000 jobs, mostly throughnormal turnover. Presently, thecombined company has 3,17,000employees, including Cingular WirelessLLC. (ET & FT, 07.03.06)

Offloading�Carrefour, the world’s second-

largest retailer, is in the process ofoffloading some of its South Koreanoutlets to Wal-Mart and Tesco, theworld’s first and fifth biggestsupermarket chains, respectively.

Speculation about a shake-up inSouth Korea’s retail industry hasdeepened, as stiff competition erodesmargins in the sector. Analysts believe

that the French group is committed toselling 31 stores in South Korea,because of their relative underperformance against domestic rivals.

It is expected that the proposed dealwould restructure the Korean retailmarket in a way that may produce longlasting impact and have landmarkimplications. (FT, 16.03.06)

Branching Out BigBASF, the world’s biggest chemical

company, is branching out into a widerrange of markets, buying theconstruction-chemical division ofGerman rival Degussa. The companyhas traditionally made plastics,solvents, and herbicides. The movereflects soaring business confidence inGermany.

Dusseldorf-based Degussa is theworld’s largest speciality chemicalscompany. The company’s five divisionsmake products such as toothpasteingredients, paper bleach, andsnowboard wax.

German politicians have endorsedthe deal and it fits in with a nationalpolicy to boost coal-mining companies.RAG, Germany’s biggest coal companyowns Degussa. The deal is being filedin the EU, the US, and Canada

Recently, BASF launched aUS$4.9bn offer for US catalyst-makerEngelhard. Its acquisition made BASFa world leader in catalysts.

(FT, 04.01.06 & GCR, 31.03.06)

King-size Connectivity

French telecom equipment company Alcatel andthe US equipment firm Lucent Technologies have

announced a merger agreement that will create aUS$33bn giant in global telecommunications.

The new company will have annual revenue ofUS$25bn. Although the deal requires regulatoryapproval in the US and Europe, the companieshave few overlaps. According to sources, Alcatelis to hold around 60 percent of the capital of thenew company, while Lucent will have 40 percent.

The deal will help generate significant growthin revenues and results, by exploiting marketopportunities in new generation network, services,and applications.

Both companies specialise in the landline phonetechnology, which is becoming increasinglyvulnerable to competition, due to increasing usageof both mobile phones and the Internet. (GCR & BL, 25.03.06)

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CORPORATE ISSUES <<

Keen to ImproveColombian president Alvaro Uribe

is keen to improve corporategovernance standards in the countryamid rising takeover and mergeractivities, and a marked increase inforeign investment. The country’sstock market index has risen six timessince Uribe was elected three yearsago.

Foreign direct investment has risen56 percent in the fist half of 2005, whileforeign holdings have undergone a fourfold increase in the last three years.

The government has embarked ona two-year plan to ‘merge’ the bankingand stock market regulators to form asingle body called theSuperintendencia Financiera – theagency to monitor Colombia’s 740financial entities. (FT, 17.01.06)

Unknowing AboutA recent survey undertaken by

bond issuers and investors in Europeand the US suggest the prevalence ofwidespread ignorance as to a code ofconduct for credit rating agencies thathas been in existence for over a yearnow.

The code has been developed bythe International Organisation ofSecurity Commissions, and has beenadopted by rating agencies as a meansto promote investor protection and tosafeguard integrity of the credit ratingprocess.

Two thirds of the investors andbond issuers who were surveyed weretotally unaware of such a credit ratingcode, and many did not have an opinionas to whether a credit rating agencyshould be regulated. (FT, 16.02.06)

Prepared or Not?Investors with some US$30tn in

assets have demanded from nearly2,000 of the world’s biggest companiesa disclosure of ways in which they areprepared to face the adverse impactsof climate change.

The investors, associated with theUK-based Carbon Disclosure Project(CDP), wanted the companies to shareinformation as to the risks thesecompanies were most likely to beexposed to from extreme weather events,the levels of carbon dioxide emission

imminent, and the strategies to cutemissions.

The objective of this exercise, asexplained by Paul Dickinson, co-ordinator of CDP, was for investors totake a well-informed decision on theprofitability of companies based upontheir energy consumption and (carbon)emission performance.

The general observation was thatinvestors were being increasinglylured to those companies that were lessenergy and carbon intensive.

While some of the big companieshave already initiated a proactive lineon climate change, experts apprehendthat unprepared companies, if they didnot heed, would be running the risk ofreputation damage. (BS, 02.02.06)

Good ScorecardA recent survey of 108 large

companies by AMF, the Frenchfinancial markets watchdog, hasconcluded that the country has madesignificant progress on corporategovernance over the last one year.

More than a third of the companiesaudited the work of their board; three-fourths of them had at least oneindependent regulator and most of thecompanies had made a markedimprovement in the quality of their(published) reports.

AMF’s report comes in at a timewhen a number of fresh faces areevident in some of the country’sleading companies, with outgoingchief executives often moving aheadto become chairperson in controversialsuccession plans.

Observers believe this is part of anevolving practice in the country forachieving greater differentiationbetween the roles of CEO and thechairperson. (FT, 19.01.06)

Of Corrupt ChaebolsA recent series of corruption

scandals involving Korea’sconglomerates or chaebols, areapplying pressure on local companiesto improve transparency in theircorporate structures and businessoperations.

Scandals involving HyundaiAutomotive and Samsung Groupclearly demonstrate what is wrong with

corporate governance in Koreanconglomerates. While Hyundai wascaught up in a money-for-favourincident, Samsung had allegedly beenproviding campaign funds topresidential candidates.

Both conglomerates used theirunlisted affiliates to transfer thecompany’s wealth to the foundingfamilies, thus strengthening the family-oriented structure, and created slushfunds for use in money politics.

Experts feel that there is a significantlink between corruption and cross-borderbusiness activities. And that regulatorsand auditors should show moredetermination in reducing such activities.

It is however evident that the poorcorporate governance of Korean bigbusinesses has not deteriorated to thepoint where foreign investors areturning backs entirely.

(The Korea Times, 30.03.06)

Setting Standards

Moving to calm the internaldebate on a key law

enforcement issue, the US Securitiesand Exchange Commission (SEC)has developed standards forslapping corporations with big fines.

There has been argumentbetween various quarters on themagnitude of fines being imposedin the country, with the sharp risethat the US has witnessed in recenttimes of the number of mega finesbeing imposed on companies,especially in the post-Enron era.

Releasing these standards, SECchairman, Christopher Cox, saidthat in the future, SEC would askitself key questions, prior toimposing fines, when deciding asto whether to fine a corporation,and if so, then how big should thatfine be. (BL, 06.01.06)

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>> CORPORATE ISSUES

Consenting to CompensateNewmont has agreed to pay

US$30mn over a period of 10 years tofund community development andscientific monitoring around the BuyantBay in Sulawesi, Indonesia.

The US-based largest goldproducer has been under fire over itsenvironmental practices in Sulawesi,where the company was alleged to havecaused severe environmental damagesfrom its Minhasa Raya gold mines.

This marks a victory for thecommunity that has been fighting itscase against the company havingsuffered from the adverse environmentaldamages from Newmont’s operations.

In return, the government woulddrop efforts to revive a US$135mn civilsuit that it filed against Newmont lastyear, and withdraw an appeal toIndonesia’s Supreme Court against alower court dismissal of the case lastyear. (FT, 16.02.06)

Binding CodesInternational companies have

responded favourably to calls forbinding human rights standards in thecorporate sector amid mountingevidence of voluntary guidelines beingunfair and bad for business.

Companies have starteddemanding a set of enforceable globalhuman rights standards.

Human Rights Watch – theinternational human rights watchdog

said that while launching its annualreport (2005) multinational executiveshad started to question, in private, theconventional wisdom that self-regulationand codes of conduct were sufficient.

The report recommends theOrganisation for Economic Co-operation and Development to make itscode of corporate social responsibilitybinding, and has called upon theUnited Nations to implement likewisewithout further delay.

(FT, 19.01.06)

Complaining AgainstThe Free Enterprise Fund, a non-

profit organisation, has launched thefirst legal challenge against Sarbanes-Oxley, a move that underscores thediscontent that has developed among

Appoint Women on Boards or Face Closure!

The 500 companies listed on Norway�s stockexchange face closure unless they install women

on their boards over the next two years.The Norwegian government has given a deadline

of two years for companies to ensure that womenhold 40 percent of the seats of each company listedin the Oslo bourse, or face closure. All newcompanies would need to comply with this rule, orelse would not be created. The government is alsoconsidering extending this norm to family-ownedbusinesses.

The Equality Minister of Norway, Karita Bekkemellem, was forced to take thisdraconian step in light of the fact that half of the companies in the stock marketdid not have any women on their board. An irony considering that more thanhalf of the country�s people who have business education are women. (BL, 10.01.06)

some business leaders against thecorporate governance legislation.

A complaint lodged by the Fundclaims that the Public CompanyAccounting Oversight Board createdunder the provisions of the Sarbanes-Oxley Act was unconstitutional.

Many of the biggest businesslobbyists in Washington havecomplained about the high pricecorporate America has been forced topay to comply with the Act, somethingthat is particularly difficult for small andmedium firms that have to make a hugeeffort to revamp their internalcompliance systems. (FT, 09.02.06)

Cutting BordersInvestors have welcomed a

proposal by the European Commissionthat will make it easier for shareholdersin the European Union (EU) to exercisetheir rights in companies outside theirhome country.

A draft law, presented recently,seeks to break down the barriers beingcurrently faced by cross-borderinvestors, by allowing them to vote bypost, through proxy, and even by e-mail. Experts observe this to be onepositive step ahead towards creating asingle capital market in the region.

EU internal market Commissioner,Charlie McCreevy, asserted thatinvestors needed to get relevantinformation on time and vote withoutunnecessary obstacles, wherever theywere in the US, or elsewhere, in orderto make sure that the management wasacting in their best interests.

(FT, 10.01.06)

SNIPPETS

To Define ExcellenceA new international consortium ofglobal businesses, lead by IBM andnine other world-class companies, isbeing created to define excellence incorporate citizenship and helpcompanies manage relatedchallenges, identify trade-offs, andbalance countervailing pressures.Known as the Global LeadershipNetwork, its objective is to improvecitizenship performance anddemonstrate the important role thecorporate sector can play inimproving economic, social, andenvironmental conditions in theworld. (CSR Wire, 27.02.06)

�After Sarbanes-Oxley�The Committee for Economic

Development (CED) has released,�Private Enterprise, Public Trust: TheState of Corporate America AfterSarbanes-Oxley�, a policy statementthat examines the state of corporategovernance in the US and offerspractical recommendations forrestoring public trust in business.

CED recommends additionalpractical and effective changes � infinancial statements, executivecompensation, selection of corporateboards, and other matters � thosethat do not require new governmentmandates. (CSR Wire, 28.03.06)

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Up for SaleBulgaria’s National Assembly has

approved the privatisation strategy forthe country’s flag carrier Bulgaria Airin an attempt to help raise thecompany’s competitiveness ahead ofBulgaria’s EU entry, scheduled forJanuary 1, 2007.

The strategy drafted last month,provides for putting up for sale 99.99percent of Bulgaria Air by the state.The shares will be offered to a strategicor a financial investor. The state,however, will keep a ‘golden share’ inthe company in order to protectnational interests, which will permit thestate to have the right to block keydecisions of the new owner.

Walking along the same footprints,it was reported that Saudi Arabia’sSupreme Economic Council approveda plan to privatise Saudi ArabianAirlines. The carrier had alreadycompleted two of its three-stepprivatisation plan in anticipation ofgetting the go-ahead.

(www.sofiaecho.com, 03.04.06 &www.ameinfo.com, 22.03.06)

Giving the Nod, �Sadly�The Australian lower house gave

the go-ahead signal to the privatisationof the historic Snowy Mountainshydro-electric scheme, ‘with heavyhearts’.

The Snowy hydro scheme is thelargest supplier of renewable energyin Australia, producing about fourpercent of the nation’s electricity eachyear.

The government accepted Labouramendments designed to ensure thatthe new owners maintainenvironmental river flows and reportback to Parliament within five years onall the consequences of privatisation.

(The Age, 30.03.06)

Partly PrivatisingThe Maldivian government plans

to partly privatise the state-ownedfishing industry wherein thegovernment intends to sell off 49percent of its investment in the sectorto foreign bidders.

As per officials, fishermen areforced to dump hundreds of tonnes ofprime tuna into the sea every month,because the heavily regulated fishing

industry is incapable of matchingdemand with supply.

Opposition sources however allegethat the reason for privatisation hasmore to do with the new-foundgovernment commitment to free marketreform rather than helping out thecronies. (HT, 20.03.06)

Going AheadAustria has announced that it

would give the green light to theprivatisation of its postal service, inspite of political concerns about heavyunion resistance.

Austrian finance minister, anenergetic proponent of privatisation,has argued that the move would givethe post office greater financialflexibility to expand in central andeastern Europe.

Along the same lines, the AustrianChamber of Commerce has called forthe cancellation of the legalrequirement for the government toretain 51 percent of the shares ofelectricity utilities facilitating industryconsolidation and capital investment.

(FT, 12.01.06 & GER, Feb 06)

Expanding AbroadKhazanah, the Malaysian state-

owned investment agency thatcontrols Malaysia’s power, auto, airlineand telecommunication companies andwhose holdings account for a third ofKuala Lumpur’s stock marketcapitalisation, plans to sell part of itsstakes in some of Malaysia’s largestcompanies.

This transformation could helpmodernise Malaysia’s corporate cultureand give the country a tool to diversifybeyond its borders, giving the economya potential new engine of growth.

It is understood that Khazanah hadasked investment banks to advise it oncutting its stakes in some statecontrolled groups and to presentproposals for selling shares orconvertible bonds for some of itsholdings. (FT, 25.01.06)

Staking for Jordan TelecomA Palestinian-led consortium of

Arab investors is bidding againstFrance Telecom for a stake in JordanTelecom, which is being privatised bythe Jordanian government.

However, Jordan is close toreaching an agreement with FranceTelecom, which already has a 40 percentstake in the company but wants to buyanother 11 percent to give it a majorityholding. The price offered was notdisclosed.

If France Telecom reaches a deal tobuy another 11 percent in JordanTelecom, Jordan plans to sell the restof the stake in two ‘tranches’ – a privateplacement targeting Arab Gulf fundsand a retail offering on the Amman orDubai stock exchanges. (FT, 22.02.06)

INVESTMENT & DISINVESTMENT <<

Saying No

Regardless of the fact thatprivatisation is in full swing in

different parts of the world, there area few countries desisting the same.

In the context, the Frenchgovernment has ruled out theprivatisation of Electricité de Fsrance(EdF), the electricity supplier.According to officials, France doesrespect European Union (EU)directives on competition in theelectricity and gas markets, but atthe same time feels that rules do notrequire privatisation of groups likeEdF and Gaz de France (GdF).

Likewise, Australia�s Governmentvery recently ruled out theprivatisation of its forestry operationsand rejected the idea of selling offhuge areas of forests.

In line with the same, SaoPaulo�s state government in Brazilpostponed the privatisation of itspower transmission company, theCompanhia de Transmissao deEnergia Eletrica Paulista (CTEEP).

(FT, 06.03.06 & GER, Feb 06)

The Economic Tim

es


Package DealKeeping in view the challenges

faced by Bangladesh in the post multi-fibre arrangements era and in anattempt to attract foreign investments,the government has decided toprivatise state-owned textile mills in thebackward linkage industries.

Bangladesh has privatised anumber of jute mills, closed down manyothers and is planning more stake salesto end state losses and subsidies.

Likewise, the privatisation ofseaports is also on the cards to bringabout dynamism in trade and portactivity.

Dissatisfied over the performancein port activity, the government feelsthat privatisation could help overcomethe problems faced in the developmentof ports.

(www.jang.com.pk, 26.03.06 & The

Daily Star, 02.04.06)

Sprucing UpThe Kenyan government has

started the process of cleaning upTelkom Kenya’s balance sheet inpreparation for its privatisation. TheInternational Finance Corporation hasbeen selected as the transactionadvisor.

The government has started theprocess of planning an initial publicoffering (IPO) for Telkom, which itexpects to complete within 18 months.

It hopes to sell 34 percent of Telkomto the public via the Nairobi StockExchange, with a further 26 percent tobe sold to a strategic investor.

Telkom is currently in the processof a 12,000 staff layoff plan, which willresult in around 12,000 redundancies.

(www.telegeography.com, 30.03.06)

Upholding DecisionPrivatisations in Turkey have been

plagued by legal problems. Of late, theCouncil of States, Turkey’s highestadministrative court, issued a rulingcalling for the sale of a 51 percentcontrolling interest in state owned oilrefiner Tupras to be halted.

It was a transaction believed to beone of the highlights of a US$16bnprivatisation programme by Turkey’sgovernment last year, which broughtin more foreign investments in one yearthan in the previous decade. The courtstated that the Tupras tender processbreached privatisation laws.

Despite of legal entanglements withthe privatisation process, theParliamentary Planning and BudgetCommission further passed a draftamendment to the Electricity MarketLaw, which paves the way forprivatisation of electricity distribution.

(FT, 03.02.06 & GER, Feb 06)

Attracting InvestmentsIn the wake of a 0.5 percent fall in

Foreign Direct Investment (FDI)inflows last year, China has eased rulesgoverning foreign investment,authorising provincial and localgovernments to approve new overseasinvestments, including retail business.

As of March 2006, foreign investedcompanies will not have to go to theMinistry of Commerce for the approvalprocedure.

Hong Kong, the prime source offoreign investment for China has seena consequent sharp rise in investmentby foreign companies that have setshop in the territory, reflecting the pullof the fast-growing Chinese economyand Hong Kong’s attractiveness,especially to small and medium

enterprises that are looking for a safermeans of entry to the mainland.

(FT, 12.01.06 & 06.02.06)

Nigeria on Way�Soon after coming to power, the

federal government of Nigeriasignalled its intentions to divest itselfof its equity holdings in a number ofstate-owned enterprises through theenactment of the Public EnterprisesPrivatisation and CommercialisationAct 1999.

Against the backdrop of the same,after an initial unsuccessful attempt toprivatise the state-owned telephoneoperator in 2001, Orascom emergedvictorious in the battle to acquireNigerian Telecommunications Plc(NITEL), with a bid of US$256.53mn.

In line with the government’sobjectives of privatising corporations,the Federal Government is further onits way to privatise the Nigerian MiningCorporation (NMC) and the NigerianCoal Corporation (NCC).

Accordingly, NCC would be splitinto a 10-coal property to be sold offindividually. The government is said tohave agreed to divest itself of itsownership interests and focus on theadministrator-regulator while theprivate sector would be owner-operator.

(ILO, 02.02.06 &www.thetidenews.com, 09.03.06)

Receiving Bids�The privatisation process,

launched by Cameroon, for the state-owned Cameroon Telecommunications(CAMTEL) as part of an InternationalMonetary Fund (IMF)-backedeconomic reform programme that aimsto provide debt relief, was reported tohave received six preliminary bids fromEurope, the Middle East, Africa andAsia to buy 51 percent stake it is sellingin CAMTEL.

Earlier, it was reported that FranceTelecom submitted a bid to pre-qualifyfor the tender in which formal bids willbe sought.

CAMTEL was created in 1998 andall shares are held by the state ofCameroon. The government wants tosell the stake either to a single telecomoperator or a consortium led by one.

(www.forbes.com, 20.03.06)

>> INVESTMENT & DISINVESTMENT

Residents of AddisAbaba, the

Ethiopian capital, heardtheir first independentradio broadcast afterauthorities issued licensesto the East Africannation�s first two privatelyowned radio stations.

The two stations � Zami PublicConnections and Tinsae Fine Arts �

will broadcast to AddisAbaba on FM.

They were selectedfrom a pool of 12applicants in February.The licenses wereissued on the basis ofthe stations� financialstatus and programmecontent.

(www.alertnet.org, 03.04.06)

Tuning In

arts.monash.edu.au


Fully ConsentingThe Yaun – Taiwan’s legislative

body has approved the NationalCommunications Commission (NCC),which will act as an independentregulator for the converged broadcastingand telecommunications industries.

Meanwhile, the TelecommunicationAct is also under the process of beingupdated to boost competition inTaiwan. The industry is generallypositive about a move towards a ‘light-touch’ regulatory regime.

The proposed revision aims topromote competition by lowering thebarriers for market entry and exit;strengthening the interconnectionregime; prohibiting anti-competitivebehaviour by dominant operators;moving towards self-declaration fortechnical compliance; recognisingoperators’ rights of way; allowing accessto essential facilities; and enforcingconsumer protection principles forsubscribers. (ILO, 01.02.06 & 03.02.06)

Energy EntangleA litany of complaints from

European Commission (EC) stated thatthe European Union (EU) energy sectorwas characterised by oligopoly,discrimination, lack of transparency,cross-border competition, real marketdistortion and possible violation ofcompetition rules.

In response, Brussels is issuingwarnings of investigations across thewhole energy sector and is threateninganti-trust action against potentialabusers of competition rules. TheCommission is also giving a freshjudicial push to force all governmentsto implement in practice the gas andelectricity liberalisation laws they haveaccepted in theory.

It is also a signal to governmentsto stop encouraging the formation ofnational energy champions in mergercases outside the Brussels jurisdictionand to curb high-energy prices, despiteintense efforts to liberalise theelectricity and gas markets and deteranti-competitive practices.

(FT, 17.02.06 & 20.02.06)

Challenging DuopolyThe Economic Development and

Labour Bureau of Hong Kong has

proposed changes to regulationsgoverning the power industry,challenging the duopoly which hascontrolled the territory’s electricitysupply for nearly a century.

Changes include a reduction in themaximum permitted rate of return forHong Kong Electric and CLP Power,which sets a ceiling on tariffs, and acommitment to explore liberalisation ofthe market through third-party accessto HEC and CLP power grids.

HEC and CLP’s refusal to open theirgrids to outsiders has been blamed forthe complete absence of competitionin the market resulting in the existingduopoly situation and an absoluteabsence of government actions onunreasonably high tariffs beingcharged to customers.

Upon acceptance of proposals, anindependent committee will be set upto examine the feasibility of grantingthird party access for a fee to the gridsand of importing surplus electricityfrom China, thereby putting an end tothe anti-competitive dominantposition. (FT, 03.01.06)

Thrown into the SeaThe European Parliament have

rejected a draft legislation to liberaliseport services and thereby halting theEC’s drive to free up markets forcompetition.

Since 2003, the EU TransportCommission has attempted to push

through port services reform, in thehope of increasing inflows of fundingto upgrade Europe’s ageing andsaturated port infrastructures.

The draft legislation on portsproposes opening cargo handling tocompetition, ending monopolies for theloading and unloading of goods. Unionsfear the measures will cost jobs, depresswages and erode safety at 400 Europeanports. They say the plan would allowship crews to handle cargo.

A sector that has been largelysheltered from reforms, the port industryis in desperate need of modernisation.

However, liberal market reformershave faced strong opposition fromMEPs defending job security and thecurrent practices in ports, which areoften state owned. (FT, 19..01.06)

Halted, As of NowIt has been reported that China has

halted its plan, temporarily, to introducecompetitive pricing for electric powerin the northeastern region.

China had selected thenortheastern region as a trial area forelectricity reform, allowing powerplants to sell electricity to the nation’sgrid system at market rates.

According to a State ElectricityRegulatory Commission (SERC) official,owing to different cost burdens betweenold and new generators, power plantscould not compete on an equal footing.

(GER, Feb 06)

SECTORAL REGULATION <<

Watching Closely

In the wake of the speculated and long awaited government papers on therelaxation of Australia�s restrictive media ownership laws, the Australian

Competition and Consumer Commission (ACCC) has said that it would pursueantitrust action against companies if mediamergers reduced competition or if content was�tied up in an exclusive fashion�.

The government paper highlights lawsproviding greater freedom to invest within theindustry, putting an end to cross-mediarestrictions, which forced media companies tochoose between newspaper or television, andregulations reducing content hoarding. Furtherforeign media companies can own more than15 percent of a free-to-air television station.

The changes are predicted to spark a waveof merger and acquisition interests in the sector from overseas and domesticcompanies. The ACCC has stated that it will use its power to block mergersif media mergers tried to act differently. (FT, 06.02.06)

The Economic Tim

es


Seoul to Slash RegulationsAs part of the Korean government’s

plans to strengthen its financial sectorand become a financial hub, a numberof financial sector regulations wereslashed. It has been reported that theCapital Market Consolidated Act willreplace six laws governing financialservices and enable companies tocombine equities and derivativestrading with asset management andinvestment banking.

Plans for insurance sectorderegulation are also expected.According to officials, the twin pillarsof the act are opening to competitionwith the purpose of giving firms a freehand in the development and marketingof products.

The law will enable the financialinstitutions to conduct many kinds offinancial services including investmentbanking, wealth-management, principalinvestment securities service and trustservices. It will further ease regulationson the scope of underlying assets forinvestment funds. The bill is to furtherenhance market transparency rules.

(FT, 21.02.06)

Altered FunctionThe Spanish government has

approved a ‘Royal Decree’ with reformsto the settlement of the wholesaleelectricity market and which modifiesthe so called ‘14th Function’ of theSpanish energy regulator, ComisiónNacional de Energía.

The decree provides for aframework wherein mergers oracquisitions in the energy sector have

certificate authorisations, conform tothe new anti-manipulation authoritygranted in the Energy Policy Act.

(GER, Feb 06)

Tightened RegulationThe National Telecommunications

Commission of Thailand has come upwith draft regulations aimed atpreventing foreign investors fromcontrolling the Kingdom’stelecommunication industry.

The new rules come in response totakeovers of the country’s leadingmobile telecommunication operatorsDTAC and Advanced Info Service byforeign-controlled investor groups.

The draft regulations prohibit‘foreign dominance’ of telecomconcerns, including not only directownership of more than 49 percent of acompany, but also the use of nomineesto shield foreign ownership, disparatevoting rights between foreign and localowners resulting in foreign ownershaving effective control.

Further, the draft regulationsidentify acts, such as the ability toformulate policy, hire and fire and signcontracts, as indicators that foreigndominance has occurred.

(www.manager.co.th, 24.03.06)

Competition de MexicoIn a bid to allow companies to

compete with Telmex, the privatisedtelephone monopoly, Mexico’s topcompetition official urged thegovernment of Vicente Fox to pushahead with reforms to the country’stelecommunication market.

According to observers, thedominant industries and corporategroups in Mexican telecommunicationmarket do not like competition, and thataffects Mexico’s economic performance.

Introducing greater competitioninto the country’s telecom sector wascentral to making Mexico morecompetitive and is ‘once-in-a-lifetimeopportunity’.

Implementation of reforms is likelyto completely change the picture ofMexican telecom market wherein Telmexwould no longer enjoy the dominantposition it has held and a virtualstranglehold on Mexican telecommarket. (FT, 15.03.06)

to first receive the regulator’s approval.This is to ensure that the deal neitherthreatens the viability of the regulatedactivities nor public interests.

The Royal Decree furtherestablishes that until regulations areimplemented for the distributioncompanies, to acquire energy in theforward market, the overlappingamounts will be netted out andassimilated to a physical bilateralcontract at a price defined by thegovernment. (GER, Feb 06)

Package of New RulesThe Federal Energy Regulatory

Commission (FERC) of the US hascommissioned landmark new rules onthe certification of an Electric ReliabilityOrganisation (ERO) and the proceduresfor the establishment, approval andenforcement of mandatory electricreliability standards.

The new regulations elucidate theprocess for certifying a singleindependent ERO to propose andenforce a new national regime ofmandatory reliability standards asmandated in the Energy Policy Act 2005.

FERC further issued an orderrepealing two and codifying four of themarket behaviour rules that had beenincorporated previously in the tariffsof market-based rate sellers. As peranother order, parallel changes weremade to the regulations governingnatural gas sales.

These rules will ensure thatwholesale power market-based ratetariffs and authorisations as well aspipeline sales and gas blanket

>> SECTORAL REGULATION

Philippine ERC Order Invalidated

The Supreme Court of Philippines has nullified an order by the Energy Regulatory Commission (ERC), which approved an increase in Manila

Electric Company�s generationcharge from US$0.061/kWh toUS$0.064/kWh.

The court said that the ERC orderwas nullified for �having been issuedwith grave abuse of discretion�.

The court further added that theorder was made without givingconsumers any opportunity to file

their comments, a violation of the Electric Power Industry Reform Act of 2001.The court�s ruling comes as an action on a petition filed by a consumer

advocacy group against the ERC ruling. (GER, Feb 06)

Business Standard


Introduction

I t has often been argued that some anti-competitivepractices should be tolerated in developing countries, due

to ‘development’ or public interest considerations. Such ademand came from the specialised tourism transport sectorin Jordan. However, the competition authority did not findenough justification in favour of such a claim.

The ContextArticle 7(B) of Jordan’s Competition Law No.33 for the year2004 stipulates that practices and arrangements exemptedby the Minister from the application of Articles 5 and 6 by areasoned decision on the basis of a recommendation of theDirector shall not be considered anti-competitive, if theylead to positive results, with a common benefit that cannotbe achieved without this exemption, including theimprovement of the competitive ability of enterprises, orproduction or distribution systems, or providing certainbenefits to the consumer.

Article 5 of the Competition Law relates to practices,alliances and agreements, explicit or implicit, which prejudice,contravene, limit, or prevent competition.

Relevant FactsJETT, a public share-holding company, has dominated themarket for almost thirty years, with a licence to undertaketourism transport services in all parts of the Kingdom, since1966. Due to the boom in the tourism movement, especiallyfollowing the peace process, and the subsequent increasein tourists, the Jordanian Company for Investments andTourism Transport (Alpha) was established on November11, 1994. A third company called Petra also entered the marketon June 14, 1995.

The three companies Alpha, Petra, and JETT applied tothe Tourism Ministry to licence a company regarded asconsortium of the three, but the same was denied.Subsequently, the three signed an Agreement on June 29,1997 by which a joint operations room was formed toadminister, operate, and organise unified bookings/reservations among the three, later called the UnifiedReservations Office.

The Exemption RequestOn December 19, 2002, the Unified Reservations Office madean exemption request to the Competition Directorate (CD),at the Ministry of Industry and Trade (MoIT), of theconsortium of companies from implementing provisions (5,7(B)) of the Competition Provisional Law No (49) for theyear 2002, on the following bases:• A lack of organisation in specialised tourism transport

services in light of governmental specified pricing thatwould lead to a retreat in the level of services provided

Exemption in Public Interest � A Case from Jordan– Luna Abbadi*

due to high costs compared with wages, an issue thatwould result in: shortage in foreign currencies; collapseof public shared companies; loss of job opportunitiesfor Jordanians.

• Specialised tourism transport prices are set by theMinister of Tourism & Antiquities according to Article(12) of the Code number (7) for1995, issued according tothe Tourism Law.

• Ban of illegitimate speculations and evading the negativeoutcomes on the tourism sector in general, and thespecialised tourism transport sector in particular.

• Specialised tourism transport prices are set by theMinistry of Tourism & Antiquities according to Article(12) of Code number (7) for 1995, issued according to theTourism Law.

The Competition Directorate�s AnalysisBy studying the request for the exemption of the above-mentioned companies, the CD at the MoIT considered thisConsortium as an anti-competitive practice, which violatedArticle 5 of the Competition Law. Therefore, although theCD accepted the exemption request in form, it howeverrejected it in content because of the following reasons:• The consortium’s failure to attain positive results of

public interest that may not be fulfilled without grantingthe exemption.

• The basic goal behind forming a consortium and signingthe agreement was to control the market, especially marketshares and prices.

• The consortium is a form of monopoly by an elite minoritythat led to obstructing market mechanisms (supply/demand forces), an issue that resulted in clear disruptionsin market structures.

• The claim that in the absence of an office to regulate therole of the related companies would lead to their collapseis not valid, because competition sovereignty in the caseof dissolving the consortium would motivate specialisedtourism transport companies to improve the level ofprovided services.

ConclusionIt has not yet been proved in the study that the consortiumachieved public benefits that could not be fulfilled withoutits presence. On the contrary, the benefits achieved werelimited to the companies in the anti-competitive agreement,including: regulating queue; maintaining high price levelsfor the specialised tourism transport sector; and evading apotential price rivalry in case there is no consortium.

Further, the CD recommended to the authorities to reviewand amend the specialised tourism transport code, to allowcompetition forces play a bigger role in this sector.

SPECIAL ARTICLE <<

* Luna Abbadi is Director at The Competition Directorate in the Ministry of Industry and Trade at Amman, Jordan.1 The Jordanian Company for Unified Reservations was established in early 2002.


>> SPECIAL ARTICLE

One Rule Rules, OK?Arguments for the imposition of uniform securitiesregulations across trading platforms include the importanceof limiting investor confusion, the desirability of minimisingrisks of cross-market contagion, and the need to avoid‘regulatory arbitrage’, whereby regulated issuers reducecompliance costs by migrating to less regulated tradingplatforms.

The ‘investor confusion’ argument is paradoxical, in thatcontemporary securities regulation emphasises the importanceof continuous and widespread information disclosures. If thesedisclosures are important, it is because investors of allcapacities are presumably competent to understand theirtrading implications. Yet, these same investors are unable todistinguish trading providers that are subject to investor-protection regulation from trading providers that are not.

Cross-market contagion is in principle a valid concern, withthe possibility of disturbances spreading from less regulatedmarkets to those that are more regulated, and perhaps beingcaused by a relative lack of regulation in the first place. But,the risk of such contagion is also easily overstated. Marketcrashes are rare events, and co-market crashes are rarer still.Analysis of major cross-market events reveals they are almostalways precipitated by major macroeconomic shocks, notepisodes of individual company failures.

Theoretical research, consistent with the experience ofrecent major episodes such as the Asian financial crisis of1997-1998, predicts that shocks emanating from lessregulated markets tend to be transmitted via more regulatedmarkets to other less regulated ones.3 Might this suggestthat more developed markets should become less regulated,if reducing financial contagion is the aim?

But what of regulatory arbitrage – the possibility thatissuers will evade high compliance costs in regulatedmarkets by migrating to less regulated ones, leaving ill-equipped investors at the mercy of the rapacious?

Issuers opting for less regulated and/or less liquid andtransparent markets bear a cost of this choice in the form of

Is Uniformity of Investor Protection a Shot in the Arm � or the Foot?– Richard Meade*

a higher cost of capital. In addition, if all issuers were to optfor less regulated trading venues when significant portionsof investors preferred higher levels of investor-protectionregulation, an unmet clientele of investors would result,leaving ‘money on the ground’ for those issuers willing tomeet that clientele’s preferences.

Regulating to Hold Back the Waves?This raises an important issue when considering whether ornot to extend investor-protection regulation across all of theworld’s securities trading facilities. Will this result in allexisting trades becoming subject to such protections, or willthose issuers and investors preferring less regulatorycompliance cost and protection simply take their businesselsewhere?

Quite clearly at least, some trades will revert to the naturalhome of trading in most countries’ businesses – the relativelyunregulated over-the-counter markets. Across the world, onlysmall subsets of businesses have listed securities traded on anorganised exchange, with the vast majority trading securitiesby less formal means. If the objective of securities regulation isto reduce the proportion of trading in such non-transparentways, and to improve liquidity and price discovery in securitiestrading, then imposing uniform investor protection on allorganised trading platforms is likely to be retrograde.

When there is only ‘one show in town’ (with a resultinglack of competition for trades), the case for investor-protection regulation is stronger. When trading venues facecompetition from home and abroad, the case for uniforminvestor protection is weak. Indeed, it risks denying lessrisk-averse investors the centralised trading opportunitiesthey would otherwise enjoy. Risk-averse investors are likelyto be left trading the ‘safer’ securities that they were alreadytrading without uniform investor protections, thus creatinglosers without winners.

Finally, even if the case for uniform investor protection isconsidered sound, care must be applied in defining the ‘norm’to which uniformity inclines.

* Richard Meade is research principal at New Zealand’s Institute for the Study of Competition and Regulation (ISCR), and principal ofCognitus Advisory Services Limited.

1 R G Rajan and L Zingales. 2003. ‘The Great Reversals: The Politics of Financial Development in the Twentieth Century’ Journal ofFinancial Economics 69 pp5-50.

2 See, for example, E Kelley and T Woidtke ‘Investor Protection and Real Investment by US Multinationals’ Journal of Financial andQuantitative Analysis (forthcoming); and R G Gelos and S Wei. 2005. ‘Transparency and International Portfolio Holdings’ Journal ofFinance 60 pp2987-3020.

3 Kodres L E and M Pritsker. 2002. ‘A Rational Expectations Model of Financial Contagion’ Journal of Finance LVII(2) April pp769-799.

A growing body of international evidence suggests that thriving capital markets should include protections forminority investors against expropriation by dominant investors. But does this imply that all capital markets should

adopt the same protections? And, supposing they did, would that improve the lot of investors? These questions naturallyarouse the interest of regulators keen to distance the world’s capital markets from their historical ‘wild west’ reputation.

Yet, the importance of investor protection is easily overstated. Capital markets thrived around the world longbefore the advent of securities regulation. Insider trading laws, for example, are a relatively recent innovation, withthe US first to introduce them in 1934. France was second in 1967; but most developed countries followed suit onlyin 1989. By many measures, capital markets were actually more developed in 1913 than they were in 1980, with thisreversing only recently.1 And many studies highlight the fact that foreign-investor security holdings areproportionately higher in countries with relatively weak investor protections2.


Air Cargo Shaken By Cartel Probe

IntroductionOn February 14, 2006, European Union (EU) antitrustinvestigators raided the offices of British Airways Plc,Deutsche Lufthansa AG, Air France-KLM Group and severalcompetitors against the backdrop of a probe with the USJustice Department of Price Fixing in the air cargo market.There were simultaneous raids in the US, Asia and Europe.

Consequently, private antitrust lawsuits on behalf ofairfreight customers, both individuals and businesses, havebeen filed – alleging a global conspiracy to fix prices for fuel,security and insurance surcharges in international air cargoshipping. One of them being filed by Sisimizi, based in Dar-Es-Salaam, Tanzania, which said it had used KLM Cargo toship woodcarvings to New York.

Sisimizi is seeking unspecified damages from thedefendants, which include Air France-KLM, Asiana Airlines,Cathay Pacific Airways, Singapore Airlines, Korean Air,Scandinavian Airline, and Chile’s LAN Airlines.

Allegations RaisedIt is alleged that the major cargo carriers have illegally fixedsurcharges under the pretext of rising fuel costs beginningin 2000; additional security costs as a result of the September11, 2001 terrorist attacks; and lastly rises in war-risk insurancepremiums as a result of the Iraq war in 2003.

It has been further alleged that airfreight carriers raisedtheir surcharges in consent with one another through thesecret exchange of information and public announcements,and that the surcharges have continued despite changes ineconomic and political conditions that were the purported,original justifications for the surcharges.

Worldwide PanoramaCargo operators exchange data on a limited basis using theInternational Air Transport Association’s tariff conferencesystem, in which 95 cargo airlines participate. The EC isconcerned about some of this data exchange – which involvesface-to-face meetings between airline representatives. It fearsthat this could lead to a possible cartel activity.

Many air cargo companies introduced fuel surchargesto cope with the rising price of jet fuel. In most cases, airlinespublish surcharge indices on their web sites to make theprocess transparent to customers.

According to the EC, the raids were triggered by concernsthat the companies may have violated rules on cartels andrestricted business practices. It further emphasised that theraids did not necessarily mean that the airlines were guiltyof anti-competitive behaviour.

The air cargo cartel probe and the pursuant raidsgenerated widespread concern across the globe and have

touched base with people hailing from all corners of theworld. For many airlines, the probe comes in at a tricky timewhen they battle high fuel costs and lower-pricedcompetitors.

According to Kent Ewing, a teacher and writer at HongKong International School, cargo airlines across the globeare waiting anxiously for the other shoe to drop in the price-fixing scandal whose widening global net has cast a pallover the US$50 bn air-cargo business. He points out that theprobe comes at a time when Asian airlines are licking theirchops over the burgeoning air cargo business in China. WithChinese airlines still primarily focused on the passenger sideof aviation, foreign carriers are positioning themselves totake advantage of the booming sector.

Ewing opines that whatever be the ultimate findings ofthe multi-pronged investigation launched, the stakes arehigh. Guilty verdicts would almost certainly put a damper onthe growth of the air-cargo market. EU can impose a fine forcartel activity of up to 10 percent of annual sales. In the US,such activity is a criminal offence that can result in lengthyjail terms. So when the other shoe drops, it might drop hard.

Placed in the said context, the Freight TransportAssociation (FTA) welcomes the joint EU-US cartel probeon airlines and very much hope that the investigation will beable to give the industry a clean bill of health.

Shippers are expected to operate in an environment ofkeen commercial competition regarding both cost and service,but the same does not apply to air cargo industry and thatevents in the recent past have created doubts in confidence.The shippers are keenly looking forward to the conclusionof this probe.

Along those lines, comes the view of Julius Maldutis,President of consulting firm Aviation Dynamics, whobelieves that this is going to be a very big issue because allthe airlines increased the price of their cargo businessconcurrently.

ConclusionSo far the inquiry by anti-trust authorities is focusing onlyon cargo and not on passenger traffic, where also surchargeshave been imposed since oil prices began to rise in the late2001 and since the September 11, 2006, attacks.

In the wake of the recent developments and events in theair cargo industry it is being increasingly felt that someprocedures must be followed to monitor work today in air cargo.

The air cargo industry has to answer allegations raisedand assure its customers worldwide, as the story begins tounfold further.

Information in this article has been collected fromwww.lieffcabraser.com, www.fta.org.uk, www.airwise.com, &

www.asiatimesonline.com.

NEWS & VIEWS <<

In the wake of the worldwide cartel probe, European, US, and South Korean antitrust officials jointly raided theoffices of several air cargo companies recently. The investigation was believed to focus on the way in which theindustry imposes surcharges for items such as fuel and security, a process that lack transparency. The EuropeanCommission (EC) said it had reasons to believe that the companies concerned violated European rules thatprohibit price-fixing agreements and other cartel abuses. (BS, 16.02.06)


Setting the StageStructural economic reforms that commenced in the 1990swere key factors to lasting Panamanian growth anddevelopment. The change in approach in Panama’s economicpolicy since the 90s has translated into an increasinglymarket-driven economic development.

In early 1992, the Endara Government concludednegotiations with international financial institutions to clearPanama’s arrears with these institutions and to restore accessto new financing. These negotiations included thePanamanian agreement to implement various structuralreforms, such as trade liberalisation, tax and social securityreforms, privatisation, poverty reduction, and increasedpublic investment.

The government launched an economic reformsprogramme in 1994 to liberalise trade, attract foreign investment,privatise state-owned enterprises, stimulate fiscal reform, andencourage job creation. These reforms have taken root and arehaving a positive impact on the economy.

The economic reforms implemented in Panama duringthe 90s also paved way for formation of a free marketeconomy, the principal objective of which was the generationof the fundamentals and mechanisms required for theefficient development of the markets, through a wide andcompetitive regulatory framework.

Working it OutThe concept of competition policy came into effect in the90s, and therefore this phenomenon is not new to the country.Indeed, the section of the Panamanian Constitution on thedomestic economy takes into account competition as one ofits subjects. The section bans all those combinations,contracts or actions from commerce and industry intendedto restrict or prevent competition and having monopolisticpractices, which adversely affect the public.

From the Panamanian point of view, competition meansrivalry in the market place, regulated by a set of policies andlaws. Since its inception, the competition policy in Panamahas had three goals:

Competition Law in Panama

• Consumer welfare;• Economic efficiency; and• Check on concentration of economic power.

In early 1994, the government started preparing studiesto enable the principle set forth in the Constitution to takethe form of a draft law regulating free competition andallowing new market policies to be adopted. This was donewith the main objective to promote economic efficiency andconsumer welfare. While drafting this bill, laws of countrieswith a high degree of experience in competition field wereconsulted, such as United States, Mexico, and Peru etc.,which resulted in a modern, up-to-date law.

The draft law covered substantive concepts for regulatinga free-market economy and demanded the creation of anautonomous authority with decision-making and enforcementpower and endowed with the legal means to carry out its duties.Furthermore, the draft law also endowed the judicial branchwith a new, specialised structure to handle competition cases.

Enacting a LawPanama thus enacted, for the first time, its antitrust legislationin 1996 by means of Law No. 29 “whereby rules in defenceof competition as well as other measures were passed” onFebruary 1, 1996. This laid down the framework for thepromotion and defence of competition in the Republic ofPanama. Accordingly, the objective of the Law lay inprotecting and ensuring free economic competition,eliminating other constraints on the efficient functioning ofthe markets for goods and services, and safeguarding thegreater interests of consumers. The passage of such a lawconstituted a groundbreaking step in overcoming theobstacles to a free-market economy.

The Law has well designed provisions that seek to ensurefree competition and avoid distortions that may affect the freeoperation in the markets of goods and services in the country.

Law 29, 1996, applies to all economic agents, with nodistinction made between individuals, legal entities, privateenterprises, state, municipal, industrial institutions, merchants,professionals, and for-profit or not-for profit entities.

>> ABOUT A COMPETITION LAW

Situated between Costa Rica to the north and Columbia to the south, Panama, a small country, connects Central and South America and is bordered by the Caribbean Sea andthe Pacific Ocean.

At the outset of 1990, Panama’s economy was in shambles given years of mismanagement, two years of USeconomic sanctions, and the lingering effects of increased debt servicing requirements. The recovery started after the1990s when the country experienced Gross Domestic Product (GDP) growth of at least 3.4 percent in real terms inthe year 1990 and of 9.3 percent in 1991, and when inflation remained very low. Government policies aimed atencouraging foreign investment for export industries and at improving market efficiencies through the eliminationof tariffs, price controls, and quotas were proposed.

Because of its key geographic location, Panama’s economy is based upon services, especially banking, commerce,and tourism. The most important sectors that have encouraged growth in the country are the Panama Canal and thecountry’s shipping and port activities. Service sector accounts for 83 percent of the Panamanian GDP, generates 75percent of its exports, and employs 65 percent of the country’s workforce. The industrial and manufacturing sectorsaccount for 10 percent of the economy, while agriculture represents around seven percent

The country’s chief exports include banana, sugar, shrimp, and coffee, while the chief manufacturing industriesinclude petroleum products, construction materials, and clothing. Despite these resources, Panama still faces alegacy of economic crises and soaring unemployment.


ABOUT A COMPETITION LAW <<

To maintain the spirit of competiveness, Law 29, 1996,created:• The Free Competition and Consumer Affairs

Commission (CLICAC) – CLICAC was created as adecentralised government agency with its own legalstatus and independent in its internal management.Hence, it was given autonomy in its decision-makingand the ability to appoint its own staff; and whose mainresponsibilities include fostering free competition in thedomestic market. It primarily carries out administrativefunctions and as the main objectives ensure compliancewith the constitutional and legal provisions, whichsafeguard competition, and also the investigation andpenalising of illegal acts.

What the Law DoesOn the advocacy part, CLICAC has conducted investigationsand studies aimed at preserving safety regulations governinggoods and services received by consumers, while assistingvarious Commissions of the Legislative Assembly in framingand debating important pieces of draft legislations.

Law 29, 1996, also empowers CLICAC to issue opinions onlaws, regulations, administrative acts and draft laws, to conductstudies, so as to detect distortions affecting consumers, andto encourage the elimination of such practices either byproviding society with information or by recommendinglegislative/administrative measures to rectify them.

The Antitrust Law, which also includes consumerprotection and litigation provisions, among others, has beenregulated by means of Executive Decree No.31 of September3, 1998.

The law contemplates the constitutional provisions onmonopolies, free competition and consumer protectioncontained in Title X of the Political Constitution andcomprises of four groups of provisions:• Provisions focused on the prevention of monopolistic

practices;• Consumer protection provisions;• Provisions to prevent unfair competition; and• Procedural provisions and specialised entities.

Therefore, the law prohibits:• Absolute monopolistic practices, which are agreements

that are deemed illegal per se, regardless of their negativeeconomic effects; and

• Relative monopolistic practices, which are those thatrestrain or damage free competition and which involvesan economic agent with substantial power in the relevantmarket.

Consumers� InterestConsumers’ interest is enshrined in the whole system of thePanamanian competition policy and consumer protectionprovisions are geared towards the protection of consumersof goods and services. Hence, the law regulates in detailcertain implicit warranties of any goods sold or servicesrendered to consumers.

As such, Panama’s competition law and authority areboth working with the main aim to protect the rights andinterest of consumers.

Consumers are protected by the CLICAC, which hasinstituted fines for practices ranging from selling expiredproducts to price gouging.

One of the CLICAC’s main activities in this area was itsregistration of three consumer organisations, two of whichare receiving funds (applicable under Law 29) for the purposeof conducting publicity campaigns.

In addition, various activities promoting consumerawareness are carried out through fairs, one-day trainingcourses, and information booths etc.

Besides, Panama also maintains an open regulatoryenvironment for services. The Service Regulatory Entity(ERSP) of 1996, and now the National Authority for PublicServices (Decree Law N° 10 of February 20, 2006) is anindependent agency responsible for the regulation,supervision, and oversight of public water (potable) supplyand sanitation, telecommunications, and electricity services.

Future ScenarioThe keystone in the Panamanian competition policyimplementation system is based upon universally provenprinciples of free competition, deregulation of the economyand an opening of fair trade which are without doubt, proventools to promote economic efficiency, generation ofemployment, reduction in cost of living.

Previously some sectors such as telecommunications,public transportation, energy, water and sanitation etc., werenot under the jurisdiction of the Law 29, 1996. However, achange was brought about recently to CLICAC’s structureand functions, as well as to major provisions of Law 29 (DecreeLaw N° 9 of February 20, 2006) that now includes these sectorsunder the jurisdiction of Law 29 and the Authority for theProtection of Consumer and Defence of the Competition (formerCLICAC).

As in many other countries, it has been recommendedfor CLICAC to have an understanding with other regulatorybodies. Otherwise, this reticence tends to be one of thebiggest drawbacks in the Panamanian competition regime.

Yet, after so many years of existence, CLICAC still facescertain institutional challenges in discharging its functionsefficiently such as Independence in Administration andManagement; Funds for Performance; Administrative orJurisdictional Justice; Recruitment and Training of Personneland so on.

The following have been recommended to overcome theproblems faced by the competition authority:• Obtaining more budget for functioning;• Recruiting personnel with professional expertise;• Conducting training programmes for officials;• Providing CLICAC with adequate legal instruments to

undertake tests and procedures for processing ofinvestigations;

• Well planned dissemination strategy; and• Transparency with regard to the interpretation and

compliance of the Competition Law.In the end, these efforts will certainly increase the efficiency

and credibility of the competition agency in fulfilling itsactivities in the area ofcompetition policy in theRepublic of Panama.

Extracted from “Competition Regimesin the World – A Civil Society Report”

What Readers Suggest

The news/stories in this Newsletter are compressed from several newspapers. The sources given are to beused as a reference for further information and do not indicate the literal transcript of a particular news/story.

GAW: Global Antitrust Weekly

GCR: Global Competition Review

GER: Global Energy Regulation

HT: Hindusthan Times

ILO: International Law Office

D-217, Bhaskar Marg, Bani Park, Jaipur 302 016, IndiaPh: +91.141.228 2821, Fax: +91.141.228 2485

Email: [email protected], Website: www.cuts-international.org

Subcription: $30/Rs.150 p.a.

SO

URCES

Pu

blis

he

d b

y BL: The Hindu Business Line

BS: Business Standard

ET: The Economic Times

FE: The Financial Express

FT: Financial Times

It is an excellent newsletter, and I especiallyenjoy the academic/specialised articles �what I do miss is perhaps still more cross-cutting regulatory � focused articles not onlynarrowly focused on competition � as manysectors are often regulated under more thanone/different regulatory authorities (includingeconomic regulation that often overlaps withcompetition related issues) but cross cuttingacross other regulatory areas as well.

Les KugelKugel Legal Consulting

South Africa

I congratulate all of you for the great successat your achievements. I give 9 out of 10regarding the content, number of pagesdevoted to each section, number of specialarticles and use as an information base.However, 7 for the readability of it. Perhapswe can increase attraction by inserting morecolours and pictures.

Dr. Kemal ErolChairman

Turkish Competition Association,Istanbul Branch, Turkey

We want to hear from you…We put a lot of time and effort into takingout this newsletter and it would mean alot to us if we could know how far thiseffort is paying off in terms of utility toreaders. Please take a few seconds off tograde the newsletter on the followingparameters on a scale of one to ten (tenbeing the best). Try to be honest and pleasesuggest ways for improvement.� Content� Number of pages devoted to short news

stories� Number of special articles� Use as an information base� Readability (colour, illustrations &

layout)Please e-mail your comments andsuggestions to [email protected]. Eagerlywaiting to hear from you!

Competition Regimes in the World� A Civil Society Report

This report is a compilation of shortessays that maps national competition

regimes from around the world from a civilsociety perspective and covers nearly 120countries. Most countries covered in thebook have competition legislation in place,while there are others without one, whilesome others are in the process of adoptinga competition regime. The publicationalso carries a brief description of regulatoryregimes and consumer protectionframeworks in each country. The book wasearlier released in one of the side eventsof the UN Conference on Trade and Development, held on November14-18, 2005, in Antalya, Turkey in the presence of more than 50international delegates. The �final� revised and refined version of thereport will be available for readers in May 2006. The final version ofthis book has a foreword by UNCTAD Secretary General, SupachaiPanitchpakdi and an introductory chapter co-authored by SecretaryGeneral of CUTS International, Pradeep S Mehta and renownedcompetition scholar Simon J Evenett.

For getting your copy refer to http://www.competitionregimes.comYou can also send an e-mail enquiry to [email protected]

Order Your

Copy Now!

Publications

Policy Watch

The latest issue of Policy Watch (Jan� Mar 2006) discusses, in its cover

story, cross-cutting issues ininfrastructure regulation. It furtherhighlights issues and concerns that needaddressing before a framework forindependent regulation in infrastructureservices in the country is developed.

Special article by noted Indian commentator,S L Rao, examines issues that need to be resolved whenintroducing competition in Indian infrastructure services. Anotherspecial focuses on the purpose, scope and the myriad experiences ininitiating private participation in the country�s water sector.

The Good Practices section makes an effort to look into variousprojects undertaken with a view to provide sustainable digital accessto the rural communities and to help farmers to market their producein a more competent and informed manner.

CUTS Centre for Competition, Investment & Economic Regula tion

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