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1 Ten Years of Competition in Romania Hard Core Cartel Enforcement in Romania: Achievements and Challenges Frederic Jenny Chairman OECD Competition Committee Bucarest, 26 April 2007
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Ten Years of Competition in Romania
Hard Core Cartel Enforcement in Romania: Achievements and
Challenges
Frederic JennyChairman OECD Competition Committee
Bucarest, 26 April 2007
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Issues to be addressed
1) What are hard core cartels and why they should be a priority of antitrust enforcement;
2) Lessons from developing and transition economies
3) Lessons from the past in Romania in the fight against hard core cartels
4) Challenges ahead for the Romanian Competition authority
5) Conclusion: what do we learn from international and domestic experience ?
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The EBRD: Promoting transition through competition
The analysis of the data provided strong evidence of how, for most transition countries, implementing and maintainingan efficient competition policy has fallen short of international norms across several dimensions and further work is needed.
Enforcement of competition laws, particularly with respect to prosecutions of hard core cartels, requires improvement in allcountries surveyed. Although clearly, the accession countries have benefited from increasing experience with the implementationof EU compatible competition laws.
Among SEE countries, the two European Union (EU) accession countries, Bulgaria and Romania, are substantially outperformingthe others, which reflects the important role that the EU has played in fostering more effective enforcement of competition lawand policy.
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Definition of hard core cartels: the UN Set and the OECD examples
Ex 1) UN Set : « a) Agreements fixing prices, including as to exports and imports
b) Collusive tendering,c) market or customer allocation arrangements,d) allocation by quota as to sales and production,e) collective action to enforce arrangements, e.g. by
concerted refusals to deal,f) Concerted refusal of supplies to potential importers,g) Collective denial of access to an arrangement, or association,
Ex 2) OECD Recommendation: « A « hard core cartel » is an anticompetitive agreement, anticompetitive concerted practice, or anticompetitive arrangement by competitors to fix prices, make rigged bids (collusive tenders), establish output restrictions or quotas or share or divide markets by allocating consumers , suppliers, territories or lines of commerce »
Frederic Jenny
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What are the effects of hard core cartelsExploitative Artificially increase the price / quality
ratio of goods and services thus forcing consumers to pay monopoly rentor forego consumption
Diminish the competitiveness of the economy ( directly by raising the price of inputs in the production process and indirectly bymisallocating resources)
Exclusionary Prevent non cartel members fromenjoying the benefits of freedom of trade
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Four reasons why hard core cartels shouldbe an important target of antitrust
enforcement1) Unlike vertical anticompetitive practices they do not have contradictoryeffects on competition ( ex: exclusive distribution contracts)
2) Unike most potential abuses of dominance their anticompetitive effect doesnot depend on the particular circumstances in which they are implemented( ex: low prices)
3) Unlike both vertical anticompetitive practices and abuses of dominance, hard core cartels very rarely improve efficiency
3) Unlike both vertical anticompetitive practices and abuses of dominance, hard core cartels are always deliberate attempts to eliminatecompetition
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What do we learn from international experience?
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Sectors affected by hard core cartels reducing consumer welfare in developing
and transition economiesLocal agriculture and local fishing (producers, wholesalers)Local telephonyConstruction and construction materials ( cement , bricks,wood, steel rods etc….)
ElectricityWaterRoad, sea, rail transportation ( taxis, buses, ferries, shippingcompanies)Local retail tradeReal estate
Professions ( lawyers, pharmacists, doctors etc…)
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Sectors affected by hard core cartels reducing the competiveness of developing and
transition economies
Fertilizers and chemical products: input for agriculture
Oil : input for agriculture and manufacturing
Construction and construction materials : input for manufacturing
Transportation : input for all production activities
Telecommunications input for all production activities
Banking, Insurance and financial services: input for all production activitiesWholesale trade
Steel, heavy electrical equipment, aluminium etc…….
At the domestic level
At the international level
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Cartels which reduces consumer surplus: Examples from Romania
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The Colgate Palmolive Case“The relevant market was the market of chemical products for domestic care, products for oral use and self care products.
Following the investigation, the following were established: Infringement of the provisions of article 5 alin (1) let a) of the Competition Law, by:- indirect fixing of the minimum sale price, on the basis of vertical agreements between the CPR supplier and the other undertakings, among which the plaintiff, Prestige Trading SRL;- horizontal agreements among Colgate products distributors, representing cartels of indirect fixing of the minimum sale price; The undertakings parties to this agreement were sanctioned with fine for contravention, the total fines amounting to RON 15 million”.
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Why cement is important to the welfareof Romanians and to their economic
development ?
2) Cement is an essential component in the development ofinfrastructures (roads, bridges, ports, tourist hotels, nuclearpower plants etc…)
1) Cement accounts for about 60% of the cost of low-cost homes.
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The Cement cartel
In March, 2001 the Romanian competition authority started an investigation in the significant and simultaneous increase of cement’s prices by the local cement producers SC Lafarge RomcimSA (part of Lafarge French Group), SC Holcim Romania SA (part of Swiss Group Holcim) and SC Carpatcement Holding SA (part of German Group Heidelberg Cement.
Together they own 9 cement plants (three plants each), uniformlyspread throughout the country.
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The Romanian Cement CartelThe investigation established that:• the three producers infringed the provisions of art. 5(1)(a) and art. 6(a) from Romanian Competition Law (equivalent of art. 81 and 82from EC Treaty), by participating in a price fixing cartel between 2000 and 2004 and by abusing their collective dominant position,imposing resale prices.
• Lafarge also infringed the provisions of art. 6 (f) of law, regarding the “selling on the export market below production costs, recovering the losses by imposing increased prices to domestic consumers.’’
• Holcim infringed the provisions of the Romanian Competition Law by failing to observe the conditions that Competition Council imposed in a conditional decision in 2000, when the Council authorised the acquisition by Holcim of a new cement plant (increasing the number of cement plants owned by Holcim) from 2 to 3
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The cement cartel1. For the infringement of Article 5(1)(a) of the Romanian Competition Law:
Lafarge Romcim was fined 6.5% of the turnover achieved in 2004 amounting to approx. EURO 10,424,955;
Holcim Romania was fined 5.5% of the turnover achieved in 2004 amounting to approx. EURO 8,015,385;
Carpatcement Holding was fined 6.0% of the turnover achieved in 2004amounting to approx. EURO 8,655,787.
2. Corrective steps:- the annulment of the “Cement” Committee within the Cement Professional
Association CIROM in order to stop the possibility of concluding collusive agreements;- the monthly submission by each producers, for a period of 2 years, of the
cement prices for the prior month, mentioning: the assortment and the net ex-work price.
1) DAF/COMP/GF/WD(2006)30
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Holcim Corporate SustainableDevelopment Report 2003 !!!!
« We believe in and support faircompetition as a core value in how we do business worldwide. To underline this commitment, in 2003 we released a policy statement and guidelines for fair competitionthroughout the Group, requiringHolcim employees to respect and comply with laws aimed atprotecting fair competition whereverwe do business. Training programs, audits, and compliance processes in regard to this policy are ongoing ».
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A Romanian cartel which deniedeconomic opportunities for potential
entrants:
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The Romanian Pharmacists Trade Association Case (Dec 2000)
Between 1997 and 2000 the members of Pharmacists Association,which plays a role in the authorization of new pharmacies, have put barriers to entry on the on the drug distribution market (USD 400 million/year).
The agreement among the members of the PharmacistsAssociation was aimed at sharing the market among existing pharmacies since the entry on the market of new undertakings could diminish the profit of the existing pharmacies. Indeed the price of drug is still regulated in Romania, the mark-up can not be over a limit. “It is obvious that by this anti-competitive practice the members of the Association management board have intended to eliminate the potential competitors in order to obtain advantages
which were not in consumers interests”.
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A cartel which reduced the competitiveness of Romania
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The cartel membership
. The largest contingents are from the UK ( with General Electric and 16 other firms), Italy ( with Marelli, ANSALDO etc..), France ( with Alsthom, CGE, Merlin Gerin, etc…), Germany ( with AEG, Siemens etc…), Switzerland ( withBrown Boveri etc..),Sweden ( with ASEA etc..)In 1947 the US Federal Trade Commission charges the U.S. participants with violating the Sherman Act by illegallyconspiring to restrain internatiional trade. The US firmswere enjoined from further participating in the cartel.
After having failed to eliminate the Japanese manufacturersthrough predatory pricing, the cartel members convincedHitachi, Mitsubishi, Fuji Electric to join the cartel in the mid seventies. They become associate members.
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The IEA agreements
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The cartel practices
Notification system: members must notify the cartel secretary if theyreceive an enquiry or intend to submit a tender. The secretary advisesall members who have notified that enquiry. Consultations betweenthe firms submitting a bid will follow.
Price fixing: ex. agreement for steam turbines and generators: « anyparty…shall…quote not lower than the price determined from and in accordance with the Price and Heat Consumption Manual multiplied by the factor stated in Appendix 1 hereto »
Market allocation : the parties agree on a market shares allocation,on an initial sequencing of orders and a procedure for the subsequentperiod « upon notification of an enquiry from one or more members,the Secretary assesses the value of the project according to the PriceAppendix. Orders are then allocated to the member whose totalAllocation Value was lowest prior to the tender. »
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Developing and transition countries are victims of price discrimination
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The Scope of the Heavy ElectricalEquipment International Cartel
Published records concerning transactions recorded by the « transformers » section of the cartel suggest that the following countries were victims of bid rigging by the cartel members:
Australia, New Zealand, India, Pakistan, South Africa, Zambia, Nigeria, Ivory Coast, Hong Kong, Malaysia, Jamaica, Ireland, Cyprus, Brazil, Paraguay, Chile,Columbia, Venezuela, Panama,Chinese Taipei, China, Korea, Iran, Kuwait, Iraq, Spain, Denmark,Greece, Romania, Yougoslavia, Turkey, Philippines, Indonesia,Saudi Arabia, Syria, Lebanon, Morocco
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Bid rigging in Romania
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Tacit Agreement in auction market for the privatisation of Obcina Radauti
The privatisation method of Obcina Radauti, a state owned company Obcinaactive in the field of marketing of industrial products and food products chosen by the Romanian Authority for State Assets Recovery (RASAR, called, at the time, The State Ownership Fund) was an ascending auction for the sale of the shares it owned in Obcina.
The bidders in the auction were company X[1], company Y and the Employees Association Obcina Radauti (hereinafter called EAO). Y won the auction, by offering the highest price, and signed the privatisation contract.The privatisation contract was annulled as Y did not pay the price for the shares within the period provided for in the contract.
Therefore, a second ascending auction was organised. The participants in this second auction were company A and company B. The two companies participated in the auction as independent bidders.
Due to the fact that none of the bidders offered the opening price, the second auction turned into a descending one, as provided by the relevant regulation. The auction was won by company B, at its first offer. During the auction, company A did not bid at all.
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Tacit Agreement in auction market for the privatisation of Obcina Radauti
The Romanian Competition Council found that:-both B and its’ sole shareholder were significant shareholders of A and
there were family links between the executive management of company A and the sole shareholder of B;
-A and B had a long history of active cooperation in their commercial activities, both on a formal, as well as on an informal basis.
-B’s sole shareholder was also the sole shareholder of company Y that won the first auction and did not accomplish the contractual clauses of the privatisation.
-Since B could not come up with the letter of bank guarantee for 800.000 euro (bid bond guarantee), required to participate in the auction, company A provided real estate company assets as security collaterals for the bank’s letter issued in favour of company B specifically for the second auction.
-Company A took on a passive role and did not bid altogether, facilitating for company B to win the auction at a much lower price than the start-up price.The Competition Council found that company A and B had infringed article 5(1) f) of the Romanian Competition Law. The second auction, including the privatisation contract were also annulled. The decision has been upheld by both the Bucharest Appeal Court and by the Romanian High Court of Justice.
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Bid Rigging in the procurement of laser equipment for the Ministry of Home Affairs
The evidences was the following:• For all 5 auctions organized by the Minister, in the same year, only one firm won –Wilhelm;• The Minister asked for offers from Wilhelm, Temco and a National Institute of Research, receiving offers only from Wilhelm and other 2 companies, Ducatex and Master which had not been asked for an offer and did not have any connection with the medical field not with laser equipments;
• The offers of the two companies, Ducatex and Master, were realised on the Wilhelm’s type and even sent from the Wilhelm’s fax;
• The offer of Master was signed by an associate of Wilhelm;
• The representatives of Ducatex and Master sustained the fact that they sent the offers for promotion purpose but they could not prove the connection with the medical field both prior to the auction and afterwards;
Global Forum on Competition ROUNDTABLE ON PROSECUTING CARTELS WITHOUT DIRECT EVIDENCE OF AGREEMENT Contribution from RomaniaIn 15-Dec-2005
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Competition and corruption in Romania public procurement markets
« The procurement of goods and services by the state requiresspecial care to avoid corruption.
In Romania, 47 percent of firms that had participated in state tenders in the previous 12 months reported that an important reason not to participate in tenders was that participants hadto make unofficial payments.
Sixty-seven percent said that unfair competition was an important reason not to participate in tenders ».
Diagnostic Surveys of Corruption in Romania Analysis prepared by the World Bank at the request of the Government of Romania 2001
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Corruption and collusion in timber auctionsin Romania ?
DETECTING COLLUSION IN TIMBER AUCTIONS:AN APPLICATION TO ROMANIAJEAN-DANIEL SAPHORES, JEFFREY R. VINCENT, AND VALY MAROCHKOWITH IOAN ABRUDAN, LAURA BOURIAUD, AND CLIFFORD ZINNES,World Bank Policy Research Working Paper 4105, December 2006
« Allegations of corruption coming mainly from loggingcompanie fall into two categories, bribery and fraud.
Companies claim that NFA officers have sometimesdemanded bribes in return for approving one or more of the numerous requirements that firms must satisfy » .
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Fighting hard core cartels: challenges
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Increased attention to cartel enforcement
In 2005, 14 decisions were made on restrictions of competition
out of which 4 decisions represented as well sanctioning
decisions in cartel cases having as an object the concerted
fixing of prices/tariffs.
Annual report to OECD 2005
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Increase in the level of fines
In 2005, the Romanian Competition Council focused its activity on a more deterrent sanctioning policy, prosecuting cartels and otherrestrictive business practices, the total volume of fines applied amounting up to EUR 44,194,989.05. Comparing with the total amount of fines applied by the Competition Council in the previous year, that is an increase of 18 times.
Also, the Competition Council started to actively advertise itsleniency policy so to detect cartels and other restrictive agreements.
The higher overall amount of fines can partly be attributed to the fact that more hardcore cartels were discovered than in previousyears.
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Romanian leniency programsIn 2004, through the Order no. 93/2004, the conditions and application criteria of a leniency policy pursuant to the provisions of article 56(2) of the Competition Law, with subsequent amendments and completions, have been put into practice.
In order to promote the leniency policy, the Competition Council has initiated a large campaign: “Promoting of the leniency policy within the business environment”. The campaign presents in an attractive way (guidelines, leaflets) details concerning the procedure to be followed by the undertakings, which, although having had resorted to anticompetitive agreements, are willing to come forward to theCompetition Council and to disclose evidence on the respective practice, obtaining in exchange leniency as regards the amountof fine.
OECD Global Forum on Competition ROUNDTABLE ON PROSECUTING CARTELS WITHOUT DIRECT EVIDENCE OF AGREEMENT, Contribution from Romania
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Cartel Enforcement in RomaniaStatistics on cartel enforcement in Romania from 1999 to present
Year 1999 2000 2001 2002 2003 2004 2005 2006Number of cases 5 3 2 4 2 1 3 1
Industries where cartels have been discovered• Cement • Telecommunications • Shipping • Insurance • Real Estate • Meal tickets • Mineral Water • Tobacco• Pharmaceuticals
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The Romanian leniency program in perspective
-Leniency programs can be effective only if the financial risk incurred by the cartel members is high.
-Leniency program are effective only if cartel members fear that the probability of their cartel being investigated or revealed by one of its members .
- Romania increased the level of its fines for hard core cartels in 2005 after havingintroduced its leniency program in 2004.
-The level of fines still seems to be insufficient to give an important incentive for cartel members to seek leniencyEx the Romanian cement cartel: the cartel lasted four years, the price of cement dropped 6% after the cartel was sanctioned by the Romanian competition council (thus the monopolistic profit margin seems to have been around 6%) but the fine for the cartel members was about 5 or 6% ( one year extra profit).
In short: « leniency is a complement programs complement rather than a substitute for other means of detecting and sanctioning cartels »
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Conclusion1) Compliance programs cannot be trusted ( remember Holcim)
2) Fines for hard core cartels high enough to have a deterrent effect will lead cartelmembers to seek leniency (remember the cement cartel)
3) In some sectors, hard core cartel activity is frequent ( cement was a goodexample but consider the list of sectors prone to hard core cartels derived frominternational experience).
4) Consumers know a lot about suspicious simultaneous price increases and smallcompetitors know a lot about exclusionary pratices. They can be complementarysources of information to cartel members seeking leniency if they are given an incentive (remember economics of deterrence).
5) Focus on public procurements design and implementation and establish a linkwith the national Regulatory Authority for Public Procurement ( cf bid riggingCases and the IEA case)
6) Corruption and anticompetitive practices are often complementary in public procurement. Hence a M.O.U. for exchange of information with the anticorruptionbody can be useful to promote both better governance and more competitivemarkets ( example of Indonesia).
