‘Competition laws bring economic democracy'

Mr Frederic Jenny is an economist-turned Judge of the Supreme Court of France. A globally renowned scholar on competition laws, Mr Jenny started off as an economist interested in the functioning of the markets and competition. Later, he was convinced that the results of economic activities are dependent on the quality of the legal system. For example, he says, with a good contract law, speedy bankruptcy proceedings and well-protected property rights, a country can get much more investment and economic activity than it would otherwise. But this aspect is too often ignored by economists as they don't focus much on the legal system, he says. “So I became more interested in the interface between law and economics and that is how I became a judge,” says Mr Jenny, who is also the Chairman of the Committee on Competition Law and Policy, OECD, Paris.

Mr Jenny, who was recently in Delhi to attend a conference on regulation organised by the NGO CUTS, talked to Business Line on aspects of competition law and the merits of including competition clauses in the India-European Union Free Trade Agreement. Excerpts from the interview:

What is your experience with the implementation of competition laws?

Enforcing competition laws brings economic democracy, which goes together with political democracy. Competition law ensures there will not be barriers preventing people from moving into certain markets. It also makes sure there will be no exploitation of consumers by firms tempted to abuse their market power.

But if you don't have a liberalised international trade policy, or if you have corporatist regulations which prevent competition, then in many countries there may be very little competition even if you have good competition laws. So, policies on industry, trade, competition, investments, and state-owned enterprises are linked, and it is their combination that determines the real level of competition in a country.

How can competition authorities ensure that laws in their respective countries, especially developed ones, do not discriminate against foreign companies?

Both in the US and in the EU, competition laws apply equally to all firms irrespective of their nationality. The same is true in most countries. However, in some cases there may be other laws or regulations besides the competition law, sectoral laws, which create barriers to entry for foreign firms or even restrict competition between domestic players.

There are examples of such laws in the banking and financial sector, in various service sectors, in public procurements etc.

The competition authorities don't have the power to change other laws. But on finding that some laws are against the principle of competition, they can give an opinion to the Government, the press and the general public saying those laws are not consistent with the principles of fair and non-discriminatory competition.

Then the Government or Parliament should think whether such inconsistency is an oversight, or whether there are other ways to reach social and political goals without destroying competition. This advocacy function of competition authorities is very important and has led to numerous legal reforms in many countries opening up markets to international players and to more competition.

There are reports of the EU insisting on competition clauses in the India-EU Free Trade Agreements. Will this be disadvantageous for a developing country like India?

FTA negotiations will succeed only when each side feels it has gotten enough that is worth for it to enter into the agreement. FTAs eliminate or reduce governmental barriers to trade, for example, by lowering custom duties. But one has to ensure that strategic barriers created by firms do not replace governmental barriers. Otherwise the purpose of the FTA will be defeated.

India and the EU have competition laws. If EU firms manoeuvre to create barriers to the entry for Indian products or services, then the competition law will apply and Indian companies will be able to complain and gain effective access to the European markets.

It is understandable that the EU would also want to be sure that Indian firms will not create artificial barriers to entry on the Indian market and that competition prevails.

Is there a need to exclude the banking sector, which is sensitive due to its systemic issues, from competition laws?

In many countries, the banking sector is not excluded from competition laws. We don't want to eliminate competition in the sector because competition between banks is absolutely necessary to promote financial innovation and cheaper credit.

But we also acknowledge that the banking sector is one with systemic issues and that prudential regulation is necessary. So what we need is the proper combination of competition and regulation often achieved through cooperation between the sectoral regulator and the competition authority.

How can competition authorities assess and award damages?

There are very few countries where competition authorities directly award damages.

In some countries, competition authorities have to establish the existence of a violation, for example a cartel. Then those hurt by the cartel can go to a civil court, cite the competition authorities' finding, and seek damages. In other countries, victims of an anti-competitive violation directly go to civil courts.

To assess damages, one way is to compare a cartelised market with a similar market that is not cartelised in another country or in another region of the same country, or, with a different period before the cartel started or after the cartel finished.

This will show the difference between the price of the cartelised product or service and the price if there had been no cartel. This will establish the amount of overcharge due to the cartel which is the damage suffered by customers who bought the product.

There is another category of people who are hurt because they were not able to buy the product as its price was higher than what it should have been. Usually courts are reluctant to award damages to this category of plaintiffs because they find it difficult to establish with certainty that these plaintiffs would have bought the product if its price had been lower.

Is there a need to arrive at damages that will act as a deterrent for companies?

If it is very expensive to engage in an anti-competitive practice, a firm will think twice before doing it considering the risks involved. The costs for the firm include the administrative or civil or criminal fine. If in addition to the fine, the firm has to compensate the consumers for the overcharge due to the anti-competitive practice, this will make it even more expensive for the firm to engage in an anti-competitive practice and this will increase the deterrence.

How can competition law act on ‘duopolies', like in the case of Boeing and Airbus in the aviation industry, also backed by their respective Governments?

Airbus and Boeing probably compete fairly intensely on innovation and prices. So a duopoly does not necessarily mean that there is no competition. Also, there are other countries which are coming into the game such as India, China and Brazil.

But they also benefit from state aid. The market mechanism is distorted if you are able to outcompete your competitors because you have been aided by a Government rather than because you are more efficient than your competitors.

Both companies have taken each other to the WTO Dispute Settlement Body where it was found that both companies were Government-subsidised. Though the WTO discipline on state aids needs to be stronger, at least it exists and there is an enforcement mechanism.

Can a cooperation agreement between the competition authorities in the concerned countries help?

There are anti-competitive situations in a particular country because of actions of firms from other countries. In such cases, the competition authority in the ‘victim' country may not have the means to investigate in the parent country of the firm engaged in the anti-competitive practices.

But if there is a cooperation agreement between competition authorities in both the countries, the competition authority in the ‘victim' country can ask the other authority to gather proof against the firm so that the domestic law of the ‘victim' country can be used to punish such firms.

What about sectors where there is a Government monopoly, like Railways?

In sectors like railways there are at least two reasons for Government to intervene. First, having a developed communication network generates positive externalities.

Second, some forms of competition, particularly the provision of competing infrastructure such as railway lines could be wasteful.

But competition in the provision of railway services, for example competition in the operation of freight or passenger trains, can be quite useful to improve the quality of the service and lower its cost.

In Europe, public railway companies have been forced to allow private companies to run trains competitively with them on the railway line network. So there is competition in services.

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