Tag Archives: Competition Law in El Salvador

Why We Need Antitrust Law to Work: Some Thoughts on South Africa and El Salvador

By Francisco Beneke*

South Africans appear to be enraged by the prospect of having had to pay a higher price for cancer drugs. The Competition Commission of South Africa is currently undertaking three separate investigations on excessive pricing by three drug manufacturers: Aspen, Pfizer, and Roche. In El Salvador, the final word from the Supreme Court is finally out on the proceedings regarding a cartel of two wheat flour producers who conspired to raise the price of this product. In these two countries, which have a relatively high poverty rate (as defined by local authorities), antitrust cases that involve access to health and nutrition have an extra component that makes them special. Indeed, cases like this have the potential of generating social unrest. Why? The image of a cancer patient who cannot afford a needed drug or a malnourished child evokes a feeling that other cases do not.

Before going any further, one distinction between the situations in the two countries has to be made. In South Africa, we are talking about three ongoing investigations where guilt has not been yet established, while in El Salvador, the case that concerns us has already been decided. The two flour producers were found guilty and rightfully so. The case is the only instance where the Salvadoran authority has conducted a dawn raid, in which it found conclusive evidence of the agreement to allocate market shares. The point of this article is not to advance a judgment in the case of the South African investigations but to point out why a correct competition law enforcement policy is crucial in developing countries. Cartels and abusive dominant firms can be extra harmful in the sense that poor consumers do not simply forgo a part of their welfare but the harm extends to their daily struggle to survive.

I have picked these two examples as the basis of this post because they are recent developments. However, we can find similar situations in other countries in the past. When the farmacies cartel was uncovered in Chile, the population was so enraged by having had to pay more for their medicines that protests erupted and all of this served as a catalyst for reforms that strengthened the Chilean competition authorities.

Developing countries have a particular need for a working competition policy. They do not only have to ensure markets that promote productivity growth but also protect consumers in vulnerable situations. As a consequence, it is important to ensure that the deterrence effects are maximized in markets strategic to this purpose. I say this because it is a common problem in developing countries that competition authorities are underfunded and understaffed. As a result, their investigation and case-resolution capabilities are limited, which decreases the expectation of companies of being caught and punished for competition law infringements. In such a situation, the authority can nevertheless create such an expectation in important industries––for example, health and food products––by focusing its scarce resources on this industries. The deterrence effect of antitrust will not work in the whole economy but at least in an essential part.

The case of El Salvador also shows an important area where the advocacy efforts of the authority should be directed: judicial efficiency. The wheat flour cartel case spent almost nine years under judicial review after the date of the Competition Superintendence’s decision. Such prolonged court battles significantly hamper the deterrence effects of the competition law since the final payment of the fine and, perhaps more importantly, the enforceability of the injunction is postponed. Therefore, the companies can significantly discount the potential losses of an adverse judgment (though they have to pay substantial litigation costs, which nevertheless shows the value they place on delaying the final judgment). In addition, the lengthy proceedings tie up important personnel of the antitrust authority, which affects its enforcement activities.

Competition policy in developing countries faces more difficulties than in developed economies. But more is at stake. It is important that the policies achieve maturity and gain sufficient importance in the eyes of the public so that their funding can become a priority and the authorities can have a better chance of achieving their purpose.

*Co-editor, Developing World Antitrust

 

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Ten Years of the Competition Superintendence – Past, Present, and Future

By Marlene Tobar*

Competition law enforcement in El Salvador started ten years ago, an ideal moment to assess the work of the Competition Superintendence, the authority in charge of its implementation since January 2006.

In these first years, the institution has carried out a healthy oversight of markets promoting undistorted competition, strictly following the legal framework and proving its independence from political forces[1]. In addition, the authority has taken a leading position in the region. It has been awarded twice at the World Bank’s Competition Advocacy Contest, it is the only authority in Central America that has enjoined a merger (the acquisition of Digicel by Claro in the telecommunications market), and it has given a strong push to the design of a regional competition law through its work in the RECAC[2] (the Central American network of competition authorities).

In the law enforcement area, it conducted investigations in markets that have spillover effects in the economy such as the energy industry, the wheat flour market (carrying out dawn-raids), the distribution of sugar (imposing a fine on Dizucar, the dominant wholesale distributor that is owned by the local sugar mills), and the telecommunications industry, among others.

The institution acknowledged the role that public sector intervention plays and allocated substantial resources to identify restrictions to competition arising from regulations. For that purpose, the authority pointed toward the need of improving regulations to promote more openness to trade regarding products of social importance such as rice and sugar. The Competition Superintendence has also pushed for reforms to the law that creates a legal cartel in the production of sugar. Another important policy change promoted has been the amendment of the system under which radio-electric spectrum concessions are granted in the telecommunications industry. The recommendations are aimed at promoting competition in the allocation of this input (competition for the market) in a context of upcoming expiration dates to current grants in the broadcasting market and the still uncertain process of digital technology adoption in the country.[3] Recently, the authority issued a statement regarding a decision by the Supreme Court’s Constitutional Bench[4] on the alleged unconstitutionality of certain provisions of the Telecommunications Law. The Court stated that the national congress should not close the door on any advisory intervention of the Competition Superintendence during the hearings on the issue.[5]

The Competition Superintendence has decided a total of 14 cases of anticompetitive behavior, analyzed 16 merger transactions, carried out 23 market studies, issued 128 opinions, signed 36 MoU’s, and implemented a wide-ranging program of diffusion and promotion of the country’s competition law. The authority has imposed $15.1 million USD in fines (93% of which correspond to anticompetitive behavior decisions). In other words, it is quantitatively and qualitatively clear that the authority has sought to cover all sources of restrictions to competition.

Nonetheless, the main topic to reflect upon is the ability of having a real impact on efficiency and consumer welfare (objectives that the authority has to pursue by law), which are to be understood as indirect means to achieve higher living standards for society.

At the moment, such ability is hindered by the lack of support from the legislative, executive, and judiciary branches evidenced by (at least) two facts: first, the Supreme Court’s Administrative Bench’s judicial backlog regarding the review of the Competition Superintendence’s decisions on anticompetitive behavior. From the total of fines imposed by the authority ($15.1 million USD), more than 90% have been challenged by the punished firms, with 27 ongoing proceedings before the Administrative Court and 1 before the Constitutional Court. Currently, there are $9.1 million USD of overdue payments in fines. On its part, the Administrative Court has temporarily enjoined some of the payments and other precautionary measures, a part of which have been certified to the National Prosecutor[6].

Second, the authority has found scant support from other government institutions in the implementation of policy recommendations and inter-institutional dialogues have been rare at best (or non-existent in many cases). The first element hinders the ability to correct the punished anticompetitive behavior and hampers the deterrent effect of the fines; and the lack of support from other government entities reduces the likelihood that competition policy can spur economic and social growth.

All that said, it is important to look at the future and set the direction of competition policy in El Salvador. In his speech in the event commemorating the tenth year anniversary of the institution, the superintendent stated that he would seek for the institution to have a greater impact in key variables of the economy (development, poverty, and inequality) with the purpose of contributing to its “democratization”.

In order to do that, in addition to tackling the problems mentioned above, the authority will have to aim its competition enforcement activities toward solving the real problems faced by the country. As a consequence, there are more than a few considerations to be made. Some of the main issues to be analyzed are if the current legal framework is adjusted to the nation’s objectives; if the use of neoclassic economic theory is an adequate basis for the analysis of competitive restrictions (as the international community advises as best practices); determining the objectives that competition policy has to pursue in order to effectively contribute to the country’s development; to define the term of economic efficiency that will be pursued, among others. This analysis will have to be made taking into consideration El Salvador’s particular traits and variables that determine the dynamics of competition in its national markets.[7]

*The author is the head of the department in El Salvador’s competition authority that is in charge of the merger review proceedings, market studies, and opinions regarding law proposals and rules of tendering in public procurement.

[1] The law entered into force under a right-wing government. Under the current left-wing government the authority imposed a fine in the amount of $759,924 USD to Alba Petróleos for failing to report mergers. This firm is partly owned by ENEPASA, an association of municipalities governed by majors from the political party that controls the executive branch. Even so, the president re-elected the superintendent, Francisco Díaz, for a second term, setting a precedent in the region.

[2] Composed of the competition authorities from Costa Rica, El Salvador, Honduras, Nicaragua, Panama, and the Dominican Republic. Representatives of the Guatemalan government attend the meetings in an observer capacity since Guatemala has no competition law to this date.

[3] Currently, the Congress is evaluating the best way to implement the amendments ordered by the Constitutional Court regarding the design of an alternate mechanism for the auctions of radio-electric spectrum.

[4] Decision of the Constitutional Court on the accumulated unconstitutionality proceedings with references 65-2012 and 36-2014. In El Salvador, the Supreme Court of Justice is divided into separate sub-courts according to a subject-matter criterion.

[5] Clarification issued by the Constitutional Court on December 16, 2015, regarding its decision on the accumulated unconstitutionality proceedings with references 65-2012 and 36-2014.

[6] One such example is the order enjoining the anticompetitive behavior for which DIZUCAR (the wholesale distributor owned by El Salvador’s sugar mills) was punished.

[7] Gal, M., et al. (ed.) (2015). The Economic Characteristics of Developing Jurisdictions, Their Implications for Competition Law”. Edward Elgar, Northampton, United States.

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Telecommunications Industry, Market Failures, and Government Intervention in El Salvador

By Carmen Ortiz*

In October of 2015, an incumbent in the Salvadoran telecommunications industry, Telefonica, affirmed that the country is the most underdeveloped in terms of telecommunications in Latin America[i]. The government responded with an effusive denial[ii]. It supports the current framework of allocation of Radio Electric Spectrum (RES) by auctions that reward the highest price. The controversy brings up considerations from a public law and competition policy perspectives regarding the impact that the sector regulation, Ley de Telecomunicaciones (LT), has on the conditions of competition in the market for broadband services.

The regulation’s objectives are the promotion of access to telecommunications for all sectors of the population, the protection of the rights of the users, operators, and service providers, the development of a competitive telecommunications market and the rational and efficient use of RES. RES[iii] is a scarce public resource fundamental for essential sectors such as telecommunications and for services such as mobile and wireless broadband. The reason for the regulation of RES is its scarcity and the fact that competing uses of the same frequencies result in chaos[iv]. Barriers to entry through the hoarding of RES are a type of business strategy[v].

The controversy points out market failures in terms of missing markets for the provision of full national coverage of broadband services. Three operators, Telefonica, Claro, and Tigo, offer 3G and/or 4G only in restricted areas close to the main cities. Digicel does not offer 3G, nevertheless, is the only one with national coverage for 4G services. The fact that the frequencies assigned for mobile telecommunications have all been licensed to incumbents[vi] and that no entry has occurred in the last 10 years indicate that the lack of RES is a barrier to entry.

SIGET, the regulator responsible for the management of RES, orders public auctions upon requests of licenses for its use. Licenses have a 20-year term and are adjudicated to the highest bidder. From a public policy and competition policy point of view, the legal framework is fundamentally flawed: it bans an evaluation for the appropriateness of issuing licenses of RES according to its rational and efficient use.

“Effective policy must recognize competition issues in the downstream market for wireless services”[vii]. Superintendencia de Competencia, the national competition authority, performed a substantial analysis on the topic and issued recommendations to SIGET on how to promote and protect competition through the management of RES[viii], for example, by performing auctions exclusively for entrants. Unfortunately, its recommendations are not binding for the regulator.

An analysis from a public law perspective can identify if the regulation favors certain players at the detriment of others and if competition and consumer welfare are neglected. The question to be answered is how the LT protects or neglects the interests of the players involved.

Starting with incumbents, who in majority have colluded in the past[ix], they would prefer to maintain the status quo and close the market than to confront pressures of an entrant. The price for closing the market can be paid through an auction, even if overbidding is necessary. The LT permits this strategy and facilitates foreclosure. On the contrary, potential entrants are negatively affected. They might not posses at once the economic resources necessary to win an auction against motivated incumbents and to invest on sunk costs to enter the market. Being implicitly excluded from a positive outcome in the auction and from the downstream market means they are losers. Moreover, the LT gives them incentives to abstain from participating in auctions.

The SC is obstructed from protecting and promoting competition to achieve economic efficiency and consumer welfare because its opinions and recommendations on the efficient management of RES are not binding for SIGET. SC could even be demotivated to continue spending resources in performing analysis and recommendations on a topic that has a dead end with the regulator. The SIGET is unable to achieve its own objectives because the LT inhibits it from evaluating the efficiency and rationality in allocating RES. New market failures cannot be prevented or corrected. The central government, receiving millions of dollars to be paid in the auctions, supports emphatically the higher bidder-winner design and fails to acknowledge the new market failures faced in the industry. Favored with additional income, it has no intentions to reform the legal framework. Finally, consumers, the most important of all, are deprived from wider choices and from the benefits of vigorous competition, innovation, lower prices, and ample access to broadband benefits in wider geographical areas. Hence, consumers are losers.

From a competition law and public law perspective, an efficient management of RES and a national broadband planning for the long term should be a priority in developing countries. The state is responsible for these and its responsibility cannot be circumvented by the economic gains resulting from a higher bidder-winner auction design. Auctions for licenses of RES are a way of efficient allocation and encouragement of investment. For this, the regulator should make efforts to remove the legal obstacles that obstruct its responsibilities. Then, evaluate the existence of market failures, the conditions of competition in the market (with the support of the competition authority), the legitimate needs of RES of the incumbents and the asymmetries between incumbents and entrants. The ideal outcome of an auction and its design should be based on a case-specific analysis. The design of auctions of RES must have as objectives attracting entrants, preventing collusion and promoting competition both in the auctions and in the downstream markets[x]. Regulations that inflexibly favor the higher bidder-winner may hinder competition, obstruct economic efficiency, economic growth and neglect consumer welfare. Such design does not guarantee that the winner could give the most efficient use of RES. Aiming for the highest price does not imply success in public policy nor economic efficiency in benefit of consumer’s welfare.

*LLM in International Competition Law and Policy, University of Glasgow, School of Law, Scotland, United Kingdom. Candidate for the LLM in Law and Economics, University of Utrecht, Netherlands. Head of the Mergers Control Unit in Superintendencia de Competencia, El Salvador, from January 2012 to August 2015.

References

[i] See recent declarations on local newspapers, available at: http://www.laprensagrafica.com/2015/10/15/el-salvador-el-pais-mas-atrasado-en-telecomunicaciones-de-latinoamerica

[ii] See, Government of El Salvador’s official webpage, available at:

http://www.presidencia.gob.sv/el-salvador-en-primeros-lugares-de-latinoamerica-en-crecimiento-de-acceso-a-telefonia-roberto-lorenzana/

[iii] Radio waves or hertzian waves: Electromagnetic waves of frequencies arbitrarily lower than 3 000 GHz, propagated in space without artificial guide. See the Radio Regulations Articles, International Telecommunication Union (ITU) Library & Archives, Edition of 2012, pg. 7, available at: http://www.itu.int/dms_pub/itu-s/oth/02/02/S02020000244501PDFE.PDF

[iv] Ozanich G.W., Hsu, C., Park, (2004). H. 3-G wireless auctions as an economic barrier to entry: the western European Experience, Telematics and Informatics 21, pg. 227. Available at: https://www.researchgate.net/profile/Han_Park/publication/223696166_3-G_wireless_auctions_as_an_economic_barrier_to_entry_the_western_european_experience/links/00463536b910a89e98000000.pdf

[v] Porter, M., (1984). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press, NY., pg. 13-14.

[vi] According to the Cuadro Nacional de Atribucion de Frequencias (Table of national assignation of frequencies), see at: http://www.siget.gob.sv/attachments/2213_CNAF%202004%20y%20modificaciones%20al%202014.pdf

[vii] See, Cramton, P., Kwerel, E., Rosston, G., Skrzypacz, A. (2011). “Using Spectrum Auctions to Enhance Competition in Wireless Services”, The Journal of Law and Economics, Vol. 54, pg. 168, available at: https://web.stanford.edu/~skrz/spectrum-auctions-and-competition.pdf

[viii] See the opinion issued by the Competition Authority of El Salvador, 11/10, 2013, pg. 11, available at: http://www.sc.gob.sv/uploads/SC-043-S-LP-R-2013_111013_1340.pdf and the decisions SC-016-S/C/R/2011 and SC-013-S/C/R-2012

[ix] See Superintendencia de Competencia decision on collusion: SC-017-O/PS/R-2010/RES:19-12-2011

[x] Klemperer, P. (2001).”How (Not) to Run Auctions: the European 3G Telecom Auctions”, November 2001, available at: http://dx.doi.org/10.2139/ssrn.297907, pg. 3

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