reguletter cable tv operators in the provision of audio-visual services. in several countries the...

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

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With globalisation, the issue ofcompetition policy has acquired a

greater global dimension than ever before.When the corporations are more global innature and anti-competitive practices areglobal, legal/administrative enforcement ofcompetition principles only at the nationallevel cannot go too far. The competitionenforcement agencies of different countries ofthe world have responded to such a situationthrough the formation of the InternationalCompetition Network (ICN).

The ICN is intended to encourage thedissemination of competition experiences and“best practices”, promote the advocacy roleof competition agencies and seek to facilitateinternational co-operation. The ICN is notintended to exercise any rule-makingfunction. However, it can work as aninformal platform for promoting co-operationand exchange of information amongcompetition authorities.

The ICN has already adopted a commonset of guiding principles and practices formerger notification and review. Similarinitiatives are likely to be taken in other areasof competition enforcement. The ICN alsoplayed a catalytic role in the accord betweenthe US and the EU for simultaneous reviewof mergers, when officials from both sides ofthe Atlantic met at the sidelines of the FirstAnnual Conference of the ICN held atNaples, Italy, on September 28-29, 2002.However, what is missing is that such a co-operative effort does not include developingand other countries where the merging firmsoperate.

These set of principles and practices hasalso been criticised on the ground that itwould help merging companies to get theirdeals cleared in multiple jurisdictions bysmoothening the process. However, it hasignored the fact that a particular mergerwould have varied impact in different

Global Competition Challenges:Can ICN Help?

INSIDECompetition and Regulation inDistribution of TV Channels ... 2

Pressure forAnti-monopoly Law ............... 3

Physicians� Price Fixing .......... 5

Telefónica�s Abuse ofDominance ............................ 6

Topside Down in CSR .......... 10

Emerging InvestmentHotspots .............................. 12

Can Small EconomiesBenefit ... ............................. 15

Competition Scenario inBangladesh ......................... 16

Norwegian CompetitionLaw ..................................... 19

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No.1 November 2004

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jurisdictionsand, ideally, thedeal should becleared onlyafter looking atits impact in allsuchjurisdictionsincluding theweak ones.

Another area of concern in this regard hasbeen that the ICN has been active only in thearea of merger evaluation, while ignoringother areas of competition enforcement,especially international cartels, which aremost harmful, especially from theperspectives of developing countries.Fortunately, however, its 3rd annualconference at Seoul, the ICN has created anew working group to deal with cartels. AtSeoul, the ICN has also made a significantdeparture by agreeing to monitor theimplementation of the recommendedpractices in different jurisdictions.

Moreover, the ICN has often beencriticised for being dominated by a fewcountries, especially the developed ones,who have also been setting its agenda.However, this may not be fully justified, asthere is no structural problem with the ICNthat can allow a few countries to dominate. Ifa few countries are dominating it at present,it may purely be because most developingcountries have shown little interest in theaffairs of the ICN.

Nevertheless, the ICN has madesignificant progress within just three years ofits existence. Some of the upcomingcompetition authorities, particularly indeveloping countries like Brazil and SouthAfrica, have already benefited a lot from itthrough facilitation of technical assistance.The ICN, however, may do well by notputting excessive emphasis on the so called

2 REGULETTERNo.15, 2004

>>COVER STORY

Competition and Regulation in Distribution of TV Channels>>PERSPECTIVE

Cable Television was developed in thelate 1940s in the USA for communities

unable to receive TV signals because ofterrain, or distance from TV stations.

Since then, transmission of TV signalshas come a long way with the advancementin information and communicationtechnology (ICT). Now, several alternatedelivery platforms for transmitting TVsignals have emerged, such as Direct toHome Services (DTH) and InternetProtocol-based TV (IPTV). These alternatedistribution technologies are competingwith cable TV operators in the provisionof audio-visual services. In severalcountries the penetration rate of DTH ismuch higher than cable services andconsumers have choices betweencompeting technologies.

Carriage of popular channels bycompeting distribution networks isessential for competition in the market.As such, success of competition in thedistribution chain largely depends on thenon-discriminatory treatment of carriageof TV channels. Broadcasters may also facesimilar problems when distributionnetwork operators refuse to carry their TVchannels/programmes to subscribers’premises.

Sometimes broadcasters anddistribution network operators verticallyintegrate to discriminate againstcompetitors in the carriage or provision ofsignals. In certain circumstances Verticalintegration may be used to limitcompetition, which could take any of thefollowing forms:

• Vertical price squeeze, which happenswhen a vertically integrated broadcasterincreases the price of a TV channel forcompeting operators but maintains thesame price for operator affiliates;

• Exclusivity of content, whereby popularTV channels are denied to a competitorso as to promote broadcaster’s owndistribution network; and

• Denial of carriage by a verticallyintegrated cable system of TV channelof the rival company.

To what extent can regulation help toensure that there is fair competition and towhat extent can the market be expected toensure that the competition is notthwarted?

The concern is that broadcasters maynot provide content to rival platforms thereby adversely affecting competition in termsof price and quality of service. Moreover,the issue has to be seen primarily from theconsumer’s perspective. If all channels arenot available on one platform, then aconsumer may have to access more thanone platform to view his/her favouritechannels. If content, especially popularcontent, is exclusively available on oneplatform then there may not be effectivecompetition.

Moreover, vertically integrated cablecompanies are prohibited fromdiscriminating against competitors in thedistribution of satellite deliveredprogramming. Similarly, verticallyintegrated satellite delivered programmersmay not enter into exclusive contracts withcable operators unless the FederalCommunication Commission (FCC)determines that they are in the publicinterest. The FCC has drawn up the“Programme Access Rules” to check suchanti-competitive behaviour.

In Philippines, the NationalTelecommunications Commission (NTC)has prohibited exclusive agreementsbetween cable and satellite operators andchannels as a general rule.

As per the Broadcasting Law in Japan,a broadcaster shall not, unless under ajustifiable reason, refuse to provide its paidbroadcasting service to any person whowishes to receive its service.

In Canada, Canadian Radio-Televisionand Telecommunications Commission(CRTC) laid down certain principles for

the cable TV industry, such as:

• All specialty and pay services shouldbe supplied and distributed on fair andequitable terms.

• Unaffiliated companies should getterms and conditions that are noless favourable than those withaffiliates.In India, the Telecom Regulatory

Authority of India (TRAI) has recentlysubmitted its recommendations to theGovernment of India on broadcasting anddistribution of TV channels. TRAI hasrecommended that every broadcaster shallprovide signals of its TV channels on anon-discriminatory basis to all distributorsof TV channels and no exclusivity wouldbe permitted.

Generally, TV channels are providedto all carriers and platforms to increaseviewership for the purpose of earningmaximum subscription fee as well asadvertisement revenue. However,according to some, if all platforms carrythe same content it will reduce competitionand there will be no incentive to improvethe content. Accordingly, some degree ofexclusivity is required to differentiate oneplatform from another.

The experience in USA suggests thatthe regulation relating to non-discriminatory access can provide aneffective stimulus to competition andimprove the content. The FCC, afterreviewing the impact of its programmeaccess rules over a period of 10 years,found that exclusivity prohibition did notreduced the incentives to create new ordiverse programming.

In view of the above, it is necessarythat there are regulations in place to checkif content is denied in a manner thatstifles competition among competingdistribution networks. It is important thatall distribution platforms are promoted sothat they provide consumers with achoice.

“best practices”, as many developing countries need to beinnovative in their approaches, rather than following the “bestpractices”. The ICN should, therefore, try to promote sharingthe experiences of “good practices”, rather than “best practices”.

The ICN also needs to be proactive in getting more and moredeveloping countries into its fold. For example, many developingcountries’ competition authorities are not able to attend the ICNconferences due to financial constraints. The ICN should try itsbest to overcome this problem. Moreover, one would typicallyfind representations from several law firms representing theinterests of corporations in the conferences of the ICN.However, consumer organisations are conspicuous by theirabsence, as most of them are not able to attend due to resource

constraints. The ICN should try its best to address this problemas well so that its agenda does not get influenced by the interestsof business.

Undoubtedly, the ICN has great potential. By now, it is wellknown that there is an urgent need for a global competitionframework. However, there is no agreement as to what should beits contours and what would be the appropriate forum to host it.While the global community is debating on whether the WTO isthe right forum or the UNCTAD, the ICN might surpriseeverybody by providing the right platform. For this, the ICNneeds to earn the confidence of all the countries and theirstakeholders, which is not an impossible task.

3REGULETTERNo.15, 2004

MACRO ISSUES <<

Cos may Lose AssetsThe UK Competition Commission has

warned that the companies merging in thecountry could be forced to sell “crownjewels” assets, if they do not complete theagreed divestitures promptly. In caseswhere the competition regulator fears thata merged group may have too much marketpower, it can force it to sell off some assetsto alleviate competition concerns, as acondition of approving the deal.

The warning comes as the regulator setsout how it will handle divestiture remedies,under the recent Enterprise Act, which madeit independent from ministers and gave it theresponsibility for handling merger remedies.

Earlier, the Takeover Panel had publishedproposals for the biggest overhaul in 20 yearsto the Takeover Code, which governs themerger and acquisition activity in the UK.Although many of the amendments putforward by the Panel’s code committee reflectcodification of previous decisions and existingpractice, some of the changes would requiregreater disclosure of dealings during takeoverperiods. (FT, 18.06.04 & 21.06.04)

Stress on Anti-trust PolicyUrging the international community to

step up its efforts to co-operate in adoptingand implementing competition law, theKorean Fair Trade Commission Chairman,Kang Chul-kyu, said that consensus shouldbe built around the globe that competitionrules need to be established to enhanceconsumer welfare and economic efficiency.

He pointed out that, due to differencesin economic conditions and experience incompetition law enforcement, it is not aneasy task to co-ordinate the contents andenforcement of competition law. Also, theconflicts between nations are likely toincrease along with globalisation. He calledfor international support to the countriesthat are reluctant, or hesitant, to introduceand enforce competition law.

Kang also vowed to act as a bridgeconnecting advanced countries anddeveloping countries in competition policy.The Korean competition agency hasconducted education and trainingprogrammes for public officials working inthe competition field in other Asiancountries for several years.

(The Korea Herald, 22.04.04)

Stronger Competition LawA rare public tussle is brewing between

Japan’s regulatory watchdog, the Fair TradeCommission (FTC), and Keidanren, thenation’s most powerful business lobby. Theissue at stake is the Commission’s proposedoverhaul of the country’s anti-monopolylaw – the most radical in more than 25 years.

The FTC’s mandate is to toughenJapan’s competition policy, which,according to critics, has been lagging behindthe international standards for years. TheOrganisation for Economic Co-operationand Development (OECD) said that growthhas been hamstrung by anti-competitivebusiness conditions. Economists believe amore competitive market will spur recovery,by creating a more welcoming environmentfor new entrants and innovation.

The FTC is proposing to amend theanti-monopoly act by increasing the finesimposed on companies that break the lawby participating in collusive activities andbid-rigging. The Bill would also introducestiffer penalties for such offenders.

(FT, 13.05.04 & 24.05.04)

Ending MonopolyThe Sri Lankan Government’s move to

end the monopoly of the country’s soleflour miller, the Singaporean firm Prima,and divest it of pricing controls hasgladdened the citizens, but left investorsworried. The Government has invitedprivate sector bidders to enter the field. Thedecision to declare wheat flour an essentialitem came in the wake of demands by Prima,one of the country’s most pampered firms,to grant it compensation of $100bn forannual losses incurred by it for subsidingthe price of flour.

Prima said that it lost US$.035 a kgfrom January to March and US$.075 fromApril to May and would be forced toincrease the prices by US$.075, to avoidfurther losses. Following the threats, theGovernment declared that any increase inflour prices should be made only with theapproval of the Consumer ProtectionAuthority, the monitoring body for the priceand quality of consumer items.

The new decision contravenes an earlieragreement between the firm and theGovernment under which Prima could raiseprices when the average six-month cost ofwheat and freight, duties, taxes or otherlevies crossed US$20 a tonne. (ET, 04.06.04)

Legal FictionThe question of what constitutes an

‘acquisition of control’ has become a matterof controversy in South Africa. TheCompetition Tribunal has recently madecertain rulings relating to the question ofcontrol in both Ethos Private Equity FundTsebo Outsourcing Group (Pty) Ltd andCaxton v Naspers Ltd. In Ethos/Tsebo,Ethos exercised joint control over Tsebowith two other companies.

The transaction related to anacquisition by Ethos of an additionalshareholding in Tsebo. This increase wouldbe less than 5 percent, but would result inEthos’ total shareholding marginallyexceeding 50 percent. Ethos sought anadvisory opinion from the CompetitionCommission, which said the transactionwas notifiable. Ethos, thus, filed a mergernotification, albeit under protest, and thehearing before the Competition Tribunalchallenged the view that the transactionconstituted a merger.

The Tribunal ruled that the caseinvolved the existence of both joint and solecontrollers. Ethos was one of the jointcontrollers of Tsebo, but by increasing itsshareholding to more than 50 percent, italso simultaneously acquired sole control.The transaction was, therefore, notifiable.However, it was decided that such a mergerwould not lead to a substantial lessening ofcompetition and it was, thus,unconditionally approved.

(TLN, www.internationallawoffice.com, 10.06.04)

Pressure for Anti-monopoly LawPressure is growing in China for quicker progress on an anti-monopoly law that could

have big implications for leading multinationals such as Microsoft. In a report thatraises questions about the software group’s conduct in the Chinese market, the StateAdministration for Industry and Commerce has called for faster action on the law.

A recent report by China’s Fair Trade Bureau of the State Administration for Industryand Commerce suggests that any large foreign multinational group may be too big forChina. As a state-planned economy, China had little need for anti-monopoly legislation.“Big” was seen as “good”, because it helped the State to control the prices and markets inwhich companies operated.

As China edges closer towards a fully-functioning market economy, the need for anti-monopoly legislation has become clearer. But,some others argue that this legislation isunnecessary to govern domestic companies, asChinese companies are still small, comparedwith multinationals in developed marketeconomies. Moreover, China has issuedpiecemeal legislation aimed at reining in theinvestments of large foreign corporations. (FT, 26.05.04 & 16.06.04)

Business Standard


>> MACRO ISSUES

Domestic Steel Prices DownThailand’s Commerce Minister,

Watana Muangsook, said that his Ministryhas decided to temporarily lift anti-dumping tariffs imposed on hot-rolled steelimports from 14 countries for six months,to ease steel prices in the domestic market.

Watana said higher steel prices werealso prompted by higher demand becauseof a large number of housing andinfrastructure projects. It was found thatsome local companies were hoarding steelproducts to create a shortage in supplyand push the prices higher.

The Thai Government imposed anti-dumping tariffs against the 14 countries inMay 2003 for five years, to help protectthe domestic steel industry, which sufferedfrom excessive debt and collapse of thereal-estate sector, following the 1997-98Asian financial crisis.

( www.CACCI . org. june, 04)

OPEC Deal Eases Oil PricesOil prices eased below US$40 a barrel

as an OPEC (Organisation of PetroleumExporting Countries) deal to pump morecrude outweighed underlying fears ofpolitical instability in top producer SaudiArabia. US light crude fell 57 cents toUS$38.71 a barrel, following an 80 percentdrop when the OPEC agreed to a two-stageoutput increase of 2.5 million barrels a dayin July and August.

The US and other oil importers havelobbied the OPEC to pump more crude,to help reduce the threat of rising energycosts restraining economic growth. TheUS gasoline prices have surged to a recordaverage of US$2.064 a gallon, accordingto the Energy Department.

The effect on global markets ofincreased crude oil supply by the OPECmay be muted by the fact that the gain inoil prices is partly because the US refinersare struggling to replenish gasolineinventories, according to analysts.

(BL, 01.06.04 & ET, 04.06.04)

Foreign Cos RestrictedA recent US Supreme Court ruling

restricts foreign companies from using UScourts to settle antitrust disputes. Theruling reverses the decision of the US Courtof Appeals for the District of Columbiato allow several foreign vitamin buyers topursue price-fixing claims in US courtsagainst international drug companies,including F. Hoffman-La Roche Ltd.,BASF AG, and Aventis SA. The courtruled that US antitrust law governs theforeign effects of a company’s anti-competitive behaviour only if it could beshown that the foreign company’sbehaviour in the US contributed to theharm caused overseas.

(Dow Jones Newswires, 14.06.04)

EU Anti-trust ReformsWith the arrival of 10 new member

states to the European Commission(EU), the lawyers and officials involvedin the European anti-trust policy areseeing things a little differently. Thechanges in the law concerning agreementsbetween competitors are designed torespond to the demands of the new 25-member EU, as well as to the longer-standing problems.

Since 1962, the Commission has hadpower over bona fide agreements –Including ones for joint research and

development, distributorships, licencesand strategic alliances – and it alsoadjudicated on notifications. Mergersalso face a different set of hurdles inenlarged Europe. The EU’s hugelysuccessful merger regulat ion hasundergone a set of reforms that re-balance the allocation of cases betweenthe Commission and national agenciesand alter the equation for the approvalor vetoing of deals.

Observers recommand that the keyfor making the new system work isproper resourcing of the agencies andcourts. The Commission may be shakingoff its former caseload, but the nationalagencies that are to pick up the burdendo not seem to be adding any muscle.

(FT, 21.04.04 & 05.05.04)

Rules on ExemptionFollowing the, the new Portuguese

enforcement agency intends to creategreater legal certainty, by approving anew procedural regulation on individualexemption of agreements between anundertaking and the decisions ofassociations of undertakings.

Under the new regime, anyundertaking or associat ion ofundertakings can request theCompetition Authority to conduct aprior assessment in relat ion to anagreement or decision, with the aim ofobtaining a declaration, which confirmswhether the agreement or decision iscompatible with the relevant provisionsof the Competition Act.


Keen to resolve all theissues concerning

the Competition Act, 2002,for its smoothimplementation, theGovernment proposes totake up the task of‘competition advocacy’.This is aimed at generatingincreased awareness of therole of the CompetitionCommission of India (CCI)in the wake of the changingeconomic scenario.

The role of the Competition Commission set up under theAct, covers competition advocacy, prohibition of anti-competitiveagreements, prohibition of abuse of dominant position andregulation of combinations (mergers and acquisitions, etc., abovethe prescribed threshold limit).

The implementationof the law will be in threestages. In the first stage,the CompetitionCommission shouldinitially be endowed withan advisory or advocacyrole. In the second stage,the issues of anti-competitive agreementsand abuse of dominantposition will be taken.The issues concerning

mergers and amalgamation would be addressed at the last stage.In fact, this is in line with what the business lobby has been

asking for. For example, the Federation of Indian Chambers ofCommerce and Industry (FICCI) has been holding the view thatCompetition Law issues should be addressed in three stages asmentioned above. (BL, 28.06.04)

Advocacy Role of Competition Commission

Business Standard


MICRO ISSUES <<

Fur Industry Faces ProbeThe United States has launched a

criminal probe into possible price-fixing inthe global fur industry, slapping subpoenason dozens of auctioneers, brokers andretailers in the United States, Canada andelsewhere. The investigation, launched bythe US Justice Department’s anti-trustsquad, is focused on the thriving US$150mna year farmed mink business, according toindustry sources. Investigators are lookingat all transactions dating back at least fouryears, sources say.

US Justice Department spokesman,Charles Miller, said anti-trust regulators are“looking at the possibility of anti-competitive practices by domestic andinternational fur brokers in connection withfur auctions held in the United States andelsewhere”. After several years of depressedmarkets, the price of a mink pelt soared toa record high of about US$50. Herscovici,Executive President of the Montreal-basedFur Council of Canada, suggested that theinvestigation might well have been triggeredby disgruntled fur farmers when prices weremuch lower.

This is not the first time that the auctionbusiness has been the focus of price-fixingscrutiny. In 2001, the head of art auctionhouse, Sotheby’s, was handed a year-longjail sentence and fined tens of millions ofdollars for his part in colluding to set non-negotiable commission prices with rival,Christie’s, the other major player in the liveauction business.

(www.lists.envirolink.org/pipermail/ar-news,16.06.04)

Physicians� Price FixingDoctors in New Mexico, USA can’t

talk to each other about what they havebeen offered by health plans. Nor can anagent who is representing a number ofdoctors discuss with them what the othershave accepted from health plans. The dealsmust be strictly between the health plansand individual doctors.

The Federal Trade Commission (FTC),in a complaint filed earlier this year, accusedSouth-eastern New Mexico Physicians IPAInc. (SENM) of Roswell of negotiating onbehalf of all the doctors in its group. Thesepractices, which the FTC says began in thelate 1990s, resulted in inflated heath carecosts in the area and in health plans havingto pay up to 250 percent more for doctors’services than they might have otherwisepaid. SENM’s physician members hadagreed with each other and SENM that theywould not deal individually, or through anyother organisation, with any payer withwhom SENM was attempting to negotiate,or had signed a contract jointly on behalf ofthe group’s members. SENM’s membersoften refused payer offers made to themindividually, hindering payers’ efforts toestablish competitive physician networksin Roswell.

The complaint says that several healthcare providers might have had to pay morethan necessary for doctors’ services becauseof SENM’s actions. The complaint addedthat, due to SENM’s dominant marketposition, such coercive tactics had beenhighly successful.

(New Mexico Business Weekly, 25.06.04)

Cash Card Cartel UnveiledThe European Commission has

accused nine French banks of conspiring toincrease cash card charges. Groupement desCartes Bancaires (CB), which oversees theFrench banking payment system, wasaccused of facilitating the collusivebehaviour. The alleged anti-competitiveagreement is designed to prevent retailers,small domestic banks and foreign banksfrom entering the French market. “In theCommission’s view, the agreementprevents new entrants from offeringconsumers CB cards at a lower price andrestricts technical innovation by limitingthe issuance of CB cards with newfunctions”, the Commission said in astatement. (Reuters News, 08.07.04)

Alcoa Strengthens Global PositionAlcoa of the US, the world’s number one aluminium producer, is interested in buying two

plants from Russian Aluminium (RusAl), in a pioneering investment in the country’smetal sector. News received till end June suggests that the Russian Government has delayed itsdecision on the US$200mn Alcoa-RusAl deal, which is currently being investigated by theFederal Anti-Monopoly Service (FAS).

Alcoa also plans to build a US$1bn aluminium smelter in Trinidad that would produce250,000 tonnes of aluminium annually. The natural gas field of Trinidad and Tobago would beutilised to provide cheap electricity for the smelter. The plant, which is expected to startproducing the metal from 2007, would be 60 percent owned by Alcoa and 40 percent by theTrinidad Government.

The above cases testify to Alcoa’s efforts to maintain leadership in the aluminium industry,through overseas investments, ahead of its rival, Montreal-based, Alcan. In a statement releasedearlier, Alcoa Chairman, Alain Belda, said that he expected the company to have more internationalpresence in two to three year’s time. He added that the company was looking at projects in China,Brunei, Bahrain, Brazil and Canada also. (FT, 07.05.04 & 25.05.04)

Business Standard

Spanish Power Cos FinedThe restrictive practices court has

imposed fines upon the three largestelectricity producers of Spain. The firmswere found guilty of price-fixing andabuse of a dominant position. Eachcompany would be required to pay• 900, 000 on an average.

(Global Antitrust Weekly, Issue 293, NERA

Economic Consulting)

Rubber Producers FinedThe Japanese Fair Trade

Commission has imposed fines totalling¥230mn on twelve rubber producers forfixing the price of anti-seismic rubberproducts used in construction ofbridges.

(Jiji Press English News Service, 06.07.04)

Cost-fixing by SurgeonsFour eye surgeons have been found

guilty of alleged price-fixing. The NewZealand Commerce Commission foundthat in early 1999, the eye surgeons hadagreed on the fees they would chargefor the provision of services to MidCentral Health.

(Global Antitrust Weekly, Issue 293, NERAEconomic Consulting)

Modelling Cos� in troubleModelling companies inthe US have

been charged with conspiring to set thesame high fees for young women seekingwork. Millions of dollars are beingsought as damages through litigationinvolving New York modellingcompanies.

In defence, modelling companiesstate that the chances of collusionbetween modelling companies was verylimited on the ground of the ‘mutualhatred’ that prevails in the modellingindustry. They add that the industry isfairly transparent, and everyone knowseach other’s incomes. (FT, 03.06.04)


>> MICRO ISSUES

NAAMSA Refutes ChargesThe National Automobile Association

of South Africa (NAAMSA) has stronglyrejected claims made by the South AfricanCompetition Commission that theautomobile industry is anti-competitive inthe country. Members of NAAMSAinclude BMW, Daimler Chrysler, FordMotor Company, General Motors, Nissanand Volkswagen. The association also calledfor a quick conclusion to the investigationto remove uncertainties in the market.

The Commission had suggested thatprice collusion and excessive pricing arecharacteristic of the South African carmarket. “Various statements made by theNAAMSA, as well as a pattern found tobe generally used in conducting motorvehicle sales by most manufacturers andimporters, create the impression that apractice of maintaining motor vehicle pricesat certain proportions or levels hasapparently been agreed upon”, theCommission said. In an earlier investigationToyota was fined Rand 12 mn for imposingon dealers a minimum resale price and theCommission also launched a widerinvestigation into suspicions that otherplayers were also guilty.

Consumers complain that SouthAfrican car importers have not passed onthe effects of a strong rand by the loweringprices. The industry, on the other hand,asserts that it was forced to keep the pricesstable to prevent the price of second-handcars from sliding.

(FT, 09.05.04 & Business Day South Africa,

02.07.04)

Monti to Face the MusicSony Music Entertainment (SME) and

Bartelsman Music Group (BMG) arepoised to enter a merger. The EuropeanCommission has voiced significantobjections to the deal. The outcome of thismerger is expected not only to affect thetwo companies but also the record industryas a whole. It could also have a profoundimpact on Europe’s anti-trust policy.

Mario Monti, European Union’sCompetition Commissioner, knows thatwhatever decision he takes, the Commissionis likely to be sued. The likely litigatorswould either be Europe’s independentrecord companies, which say they stand tobe elbowed out of the market by theincreased clout of the music majors, orSony and BMG themselves, who wouldtry to overturn a veto in the court and thenrevive the merger.

The Commission is facing a dilemmaon the wholesale prices – wondering if theywere uniform and transparent enough toallow the majors to carve up the market for

themselves. Sony and BMG’s rivals arefrustrated that the Commission has notmade more use of arguments on areas suchas shelf space, cross subsidies and apotential duopoly with Universal Music.Figures from the International Federationfor the Phonographic Industry show thatSony-BMG would account for 24.6 percentof the world market, bypassing UniversalMusic’s share of 23.5 percent. (FT, 17.06.04)

Review of GE-Honeywell VetoEU’s controversial veto of General

Electric’s $43bn bid for Honeywell in 2001is being reviewed by the European Courtof First Instance, the EU’s second-highestcourt. The case is one of the most importantfaced by the EC, although a final verdict onit is not due until 2005.

The Competition Commissioner’sdecision to block the GE-Honeywell mergereven led President George W Bush toexpress his concern.

GE has no intention of resurrecting itsmerger with Honeywell. But, it is keen toreverse the Commission’s decision, whichcould otherwise restrict the company’sability to acquire other groups in the aviationsector. (FT, 25.05.04 & 28.05.04)

Swedish Commission MisledTetra Laval of Sweden has been fined

•90,000 for supplying the Commissionmisleading information during aninvestigation into the company’sacquisition of Sidel of France. “TheCommission’s decision raises important

Telefónica�s Abuse of DominanceThe Spanish Court for the Defense

of Competition has imposed a•57mn fine on telecommunicationscompany, Telefónica, for abusing itsdominant position in the market forfixed telephony services in Spain. Thisis the highest fine ever imposed by theSpanish competition authorities on anindividual company. Telefónica wasinvestigated over a complaint filed in2000 by Astel, an associationrepresenting smallertelecommunications operators,claiming that Telefónica prevented users from accessing competing fixed telephonyservices.

The court found that Telefónica had run an unfair television advertising campaign,confusing users and denigrating competitors. Telefónica was accused of launching amassive mailing campaign aimed at convincing users that choosing fixed telephonyservices from Telefónica’s rivals would affect the quality of the phone calls and theprices of the ancillary services rendered by Telefónica.

In addition to the fine, Telefónica has been ordered to send letters to all recipientsof the mailing campaign, expressly indicating that choosing competing fixed telephonyservices implies neither a reduction in the quality of phone calls nor a price increase forancillary services provided by Telefónica. (TLN, www.internationallawoffice.com, 20.05.04)

issues of principle with regard to parties’obligations under EU merger control rules”,said Joergen Haglind, Senior Vice Presidentat Tetra Laval. The company has accusedthe Commission of failing to understandthe nature and potential of Tetra Fasttechnology, which is claimed to be at thecentre of the dispute. (Reuters News, 07.07.04)

CR Delta Violates LawCR Delta, a Dutch supplier of bull

semen, has been found guilty of abusingits dominant position in the Dutch market.The Netherlands Competition Authorityheld that CR Delta and its subsidiary,Holland Genetics, had tied down cattlefarmers through the application of rebateschemes for the purchase of bull semen.

CR Delta is the largest supplier of bullsemen to cattle farmers in the Netherlands.It has a stable market share of around 80percent in the market for both bull semenand test semen. The nearest rival bullsemen suppliers have market shares ofbelow 10 percent.

The Netherlands CompetitionAuthority rejected CR Delta’s claim thatit was meeting competition without anyintent to tie down its customers with rebatesystems. The Authority levied a fine of•2.6mn on CR Delta for abusing itsdominant position in the market. Inaddition, the authority ordered CR Deltato terminate the rebate schemes within twomonths and inform customers of thetermination.


Dow

n to Earth


RESTRUCTURING <<

Alstom UnhappyThe French government and the

European Commission ended the strife overFrance’s plans to bail out Alstom, thetroubled engineering group, by agreeing thatit would form alliances with other privatecompanies. The bail out will make theFrench state, Alstom’s leading shareholder,with up to 31.5 percent of its equity.

Mario Monti, Europe’s CompetitionCommissioner, said France had promisedto sell its stake in four years or within ayear of Alstom regaining an investment gradecredit rating. According to Nicolas Sarkozy,France’s Finance Minister, the bail-outwould “give at least four years to the bigcompany to restructure its finances,conquer market share and eventually agreeto industrial alliances.”

In return for European Commissionapproval of its bail-out, Alstom says it willdispose of businesses with revenuesapproximately worth •1.5bn (US$1.8bn),freeze transport acquisitions for four yearsand create a joint venture in its hydroelectricturbine division. The text agreed by the twosides states that the “partnerships will notinvolve businesses controlled by the Frenchstate, in law or in fact, individually orcollectively – unless by prior agreement withthe Commission”. (FT, 26.05.04 & 27.05.04)

Sony-BMG Set to TangoBMG (Bertelsmann Music Group)

and Sony Music are poised to merge withthe blessings of antirust regulators, creatinga clear number two to Universal in a four-house field, leaving rivals EMI and WarnerMusic at about half the size. Thus, therecord industry is soon to be fronted by aquartet. This has also led to freshspeculation among industry executives thatthey will renew talks to combine, fuellingthe back stage chatter about the emergenceof a trio.

Few years ago, sceptics doubted thatregulators would allow the music industryto shrink to five dominant players from

six, when Universal planned to merge withPolygram. Going to four from five wasconsidered out of question, when the Sony-BMG merger was announced. Now withSony-BMG merger approved, seeing thefield shrink to three is considered a steptoo far. Sony-BMG would hold 22.6percent of the market. It would trail onlyUniversal’s 23.5 percent share. EMI has13.4 percent and Warner 12.7.

European antitrust regulators, whoinitially had argued that there is tacitcollusion among record companies on someCD prices, were ready to approve themerger.Both Sony and BMG argue that theyneed the merger to cut costs withoutslashing talent at a time when the industryis reeling from piracy and unauthoriseddownloading. They added that many of theapparent price similarities were due to“averaging out” and a more detailedbreakdown would have revealed genuineprice disparities.

(BS, 09.06.04; FT, 15.06.04 & BL, 21.06.04)

Embratel Deal FinalisedAfter an increasingly bitter exchange of

accusations, MCI, formerly WorldCom ofthe US is finally set to sell Embratel, theBrazilian long-distance and internationaltelephone company, to Telmex of Mexico.A sale would help to determine the extentof competition in Brazil’s fast growingcommunications market and ultimately thesuccess or failure of the privatisationprocess that started in 1998.

MCI opted to sell to Telmex, whichhad offered US$400mn, instead ofaccepting an offer of US$550mn fromCalais, because of the risk that a purchaseby Calais would be blocked by Brazil’sregulators and the possibility of subsequentdamage to MCI’s image or even legal action.MCI’s apprehensions were well-foundedas Calais is presently under investigationby Brazilian anti-trust authorities forallegedly forming a cartel with Telefonica,Telemar and Brasil Telecom.

With Telmex in control, competition inthe Brazilian market is expected to bestrengthened. Although Embratel does nothave the ‘last mile’ network that couldenable it to compete directly for localresidential services, it does offer wirelessresidential services that resemble mobileservices. (FT, 29.04.04)

Telefonica’s Plan in Chile

Telefonica, the Spanish telecom groupraised its bet on wireless operations

in Latin America with a US$1bn agreedbid for Chile’s second-largest mobilephone operator - Telefonica Movil Chile(TMC). Analysts opine thatTelefonica’s plans to consolidate itsstakes in the growing wireless sectorcould be replicated elsewhere, especiallyin Brazil, which accounts for almost halfof Telefonica’s clients outside Spain. Itis expected that Telefonica might try tostrengthen Movil in Brazil, where thegroup owns stakes in five regionalwireless operators.

The acquisition will make Movil thedominant operator in Chile. The mergedcompany will hold a 49 percent share ofthe Chilean market, where thepenetration level is expected to growfrom the current 50 percent.

(FT, 20.05.04)

Takeover Battle in ChinaAnheuser-Busch, the world’s largest brewer is set to buy Harbin Brewery, a Chinese

company with a US$717mn bid following the withdrawal of rival SABMiller, the world’ssecond largest brewer. This ends the first take-over battle between foreign companies for a bigChinese firm. Anheuser-Busch, SABMiller and other global firms such as Heinken andInterbrew are pouring money into China despite a fragmented and fiercely competitive marketwhere a 640-ml bottle costs as little as 12 cents.

The reason for this behaviour is that global firms are counting on further consolidation andrising incomes to lift prices and profits. They also see a vast potential in a country where anaverage person drinks just 19 litres of beer per year, compared with 50 litres in Japan and 84litres in the US.

Analysts said that the fierce battle between the world’s two largest brewers and Harbin’shigh valuation could force other foreign investors to pay high prices to buy into Chinesebrewers. (FT, 03.06.04 & BL, 04.06.04)

The Financial Times

Telefonica MovilesMarket Position Rank

Argentina 1

Brazil 1

Chile 1

Colombia 2

Ecuador 2

Mexico 2

Panama 1

Peru 1

Uruguay 2

Venezuela 1

Source: Credit Lyonnais


>> RESTRUCTURING

Celtel Enters KenyaCeltel, the Netherlands-based

communications group that has operationsin 12 African countries acquired a majoritystake in Kencell, one of Kenya’s two leadingmobile phone companies.

During the past five years Celtel hasbuilt up operations in a dozen Africancountries, investing more than US$500mnin countries like Uganda, Sudan, Tanzaniaand the Democratic Republic of Congo. Thepresent deal represents one of the biggestforeign investments in Kenya, east Africa’sleading economy and the hub of regionaltransport and trade.

Celtel sees its investment drive as partof a pattern in which a few larger groupsfocused on Africa are asserting dominanceover the continental market as Europeancompetitors concentrate on their coreoperations. The company said that it wasseeking further expansion in West Africa.

(FT, 27.05.04)

Korean Air in Chinese SkyKorean Air has forged an alliance with

China Southern Airlines as part of its pushfor more access to the world’s fastest-growing aviation market. Under theagreement, Korean Air passengers will haveaccess to China Southern’s 12 weeklyflights between the two cities of Seoul(South Korea) and Shenyang (China), inaddition to Korean air’s 11 flights. Demandfor flights between the two countries is onthe rise on account of the growing trade andtourism activities between them.

Korean Air is also seeking to win a shareof intercontinental travel to China, byestablishing its Incheon base as a gatewayfor European and North Americantravellers.

However, Korean Air faces fiercecompetition in China from Asiana, itsdomestic rival. Although Korean Air is thebigger of the two airlines, Asiana has moreroutes to the mainland. Having a large fleetof cargo carriers, Korean air is well placedto benefit from the rapid growth in tradebetween China and the rest of the world.

(FT, 09.06.04)

Indian Out-sourcing BoomThe pace of expansion of the Indian

outsourcing industry is being consolidatedby entry of various foreign-owned callcentres.

According to India Advisory Partners,figures for the first quarter (valued atUS$229mn.) of mergers and acquisitions inIndia’s rapidly growing business processoutsourcing (BPO) sector in 2004 is alreadyclose to the total for 2003 (US$289mn.).Nasscom, the Indian industry’s trade group,estimates that revenues from BPO haverisen by more than 50 percent to US$3.6bnfor the year 2003-04. (FT, 12.04.04)

Sandoz Acquires SabexSandoz, the generics arm of

Switzerland’s Novartis pharmaceuticalsgroup took a further step forward in thegradual consolidation of its diversifiedoperation with the US$565mn acquisition

of Sabex Holdings, a privately heldCanadian group. Sandoz intends to expandits relatively small business in injectabledrugs through this acquisition, and gainentry into Canada, which is one of theworld’s largest market for generics.

Christian Seiwald, Sandoz chiefexecutive reiterated the company’s plansof capitalising from the Canadian marketthrough this deal. (FT, 08.06.04)

Reliance Bags TreviraReliance Industries of India has

announced the US$100 mn acquisition ofa European polyester giant Trevira, anerstwhile division of the German giantHoechst. This acquisition is set to makeReliance the largest polyester fibre andyarn player in the world.

The Trevira acquisition not only givesReliance an entry into Europe but also achance to capture the market in EasternEurope. The deal comes at a time whenthe rules of the game in the textile industryare set to be re-written after June 2005when the quotas disappear almost entirely,under the new WTO (World TradeOrganisation) regime.

According to Bernd Sassenrath, ChiefExecutive Officer of Trevira, thecombination of Reliance and Trevira wouldcreate a global leader in polyester fibresand significantly strengthen Trevira’scompetitive position. (BS & HT, 24.06.04 )

New Chinese Auto PolicyThe National Development and

Reform Commission launched a long-awaited new policy for China’s fast-growing auto industry. The policy isexpected to both loosen and tightenrestrictions on foreign investors in the autoindustry from different perspectives.

Foreign investors would be allowed tocontrol stakes of more than 50 percent inautomobile and motorcycle joint ventures(JVs) with Chinese partners “if their JVsare built in China’s export processingzones and shoot at overseas markets,” thenew policy states. It adds that big Chineseautomakers will be encouraged to team upwith foreign partners to merge bothdomestic and foreign vehicle producers to“expand business boundaries in line withthe auto industry’s globalisation”.

The policy also prods its carmakersto merge into fewer larger groups. China,where car production expanded to a record1.98 million units last year, is expecting tomake as many as 2.4 million cars this year.

(BL, 02.06.04 & www.chinadaily.com.cn/english, 03.06.04)

Aventis-Sanofi Stand ThirdThe Aventis SA Chairman, Igor Landau, said

that he expects a takeover offer by Frenchrival Sanofi-Synthelabo SA to result in thecreation of the world’s third largestpharmaceuticals company. According to Landau,Aventis is satisfied that the new Sanofi-Aventishas a solid future after it negotiated more thanEUR 7bn in additional cash, equal representationon the new company’s board of directors andstrategic committees. He added that the newcompany has more opportunities than risks, evenif it has to face some challenges.

A three-month takeover battle betweenSanofi and Aventis ended earlier, when Frenchpolitical pressure forced the two groups intonegotiations. The physical exchange of shares isexpected sometime towards the end of July.

The Sanofi-Aventis combination isanticipated to dominate the market in continentalEurope with a 10-11 percent share of drug sales.Aventis is the product of a merger of Germany’sHoechst and France’s Rhone-Poulenc’s LifeSciences Businesses. Last year it was the world’s sixth largest drugs maker in terms ofsales. ( FT, 06.05.04 & BL, 11.05.04)


CORPORATE ISSUES<<

Calpers against CitigroupCalpers, the largest US public pension

fund, has targeted Citigroup Inc’s SanfordWeill and Coca Cola’s Warren Buffet, inattempts to change the way major USbusinesses are run. Calpers would withholdvotes, a move that might affect re-electionof both Weill and Buffet as directors oftheir respective companies. Similar movescould be expected from the pension fundagainst directors of 10 other companies,including Sprint Corp., Wachovia Corp.and P G& E Corp.

Calpers, which advocates forcompletely independent boards ofdirectors, has become a leading force incorporate governance. Its actions came inthe wake of investor calls for reforms,following a wave of corporate scandals inthe US. “I hope the result of this is tobring attention to the real problem, thatUS law does not provide an adequatestructure for shareholder defence,”commented a governance expert onCalpers’ bold bid. (ET, 13.04.04)

Violations UncoveredThe Dutch securities regulator has

uncovered serious violations, includingincorrect or unclear information inprospectuses, slack controls that riskedinsider trading, erroneous informationregarding expenses and incorrect oroutdated procedures in the operation ofinvestment funds run by many leadingfinancial institutions in the Netherlands,following the most expensive probe everconducted of the US$118bn industry.

The investigation report, released bythe Netherlands Authority for FinancialMarkets, was intended to trigger a shake-up of lax regulation and compliance inthe industry and might lead to certain

funds being named and shamed andinvestors compensated. The findings areexpected to send a strong signal to otherEuropean regulators.

A commission headed by anindependent Chairman will be establishedto draft new guidelines for the industry. Inmany cases, institutions have indicatedwillingness to reform. (FT, 27.04.04)

Caught on the Wrong FootEliot Spitzer, New York’s ambitious

Attorney General, has opened aninvestigation into possible abuses in theinsurance broking industry.

After wringing a US$1.4bnsettlement out of Wall Street firms andjailing several mutual fund executives,Spitzer has now sent subpoenas to abouta dozen insurance brokerages, includingAon, Willis Holdings and Marsh &McLennan – to provide informationabout payments they receive regularlyfrom insurers in exchange for bringing inbusiness. Spitzer was quoted stating thatthe investigation was to check whetherbrokers that help companies buyinsurance had conflicts when acceptingpayments from insurance companies.The move followed a plea made by theWashington Legal Foundation, a non-profi t group, to investigate thesecompensation arrangements.

While the investigation was still inits early stages, it could turn out to bequite sweeping and seriously impactbrokers’ revenues. Brokers defendedthemselves, stating that they “have hadsuch arrangements with insurancecompanies for many years to compensatethe brokers for the service they provide”.

(FT, 24. 04. 04 & New York Daily News,24. 04. 04 at www.nydailynews.com)

CSR Key to Investment: UNEPIn a report released by the UNEP, a

group of 12 fund managers representing$1.6 trillion of assets under management,call on investors, government and businessleaders to embed environmental, social andgovernance best practices at the heart ofthe world’s markets.

The report was launched at the UnitedNations Global Compact Leaders Summitin New York, where hundreds of corporateleaders had joined ministers, heads ofinternational NGOs, labour organizationsand key UN agencies to examine theprogress made in advancing theenvironmental, labour and human rightsprinciples of the UN Global Compactinitiative.

Speaking on the occasion, UNEPExecutive Director Klaus Toepfer said,“This new report is a crucial recognitionfrom major financial institutions that theenvironmental and social components ofsustainable development, as well as theeconomic considerations, should sit at theheart of investment and capital marketconsiderations.” The report is based on11 sector reports prepared by analystsfor the UNEP Finance Initiative AssetManagement Working Group.

(www.csrwire.com, 25.06.04)

Recent trends suggest that‘investor activists’ are

gradually assuming significant rolesin influencing corporate governancein the developed world. This year,they have successfully ousted thechairman of Shell, halted a priceyacquisition at Vodafone and evenstripped Michael Eisner, DisneyCEO, of chairmanship in an ongoingfight for control.

This new genre of investors isessentially a cross between ‘value’investors (who buy shares in sound,but undervalued, companies) and ‘turnaround specialists’ (whobuy and fix broken firms). Investments are generally made in lagging,poorly managed public companies, using a corpus called the‘activist fund’. Subsequently, through tactics ranging from gentle

Investor Activism on a Highpersuasion to fiery proxy battles, theseinvestors push the companies intoimproving their corporate governance andsell at a profit when the market notices theimprovement.

Funds specialising in investor activismare estimated to manage nearly US$10bnof assets; with big names like RelationalInvestors (US), Active Value (UK) andSparx (Japan). Various public pensionfunds, including the US’s largest, Calpers,are becoming increasingly interested in suchfunds, for the reason that the latter providehigher possibilities of boosting returns.

Nevertheless, sceptics think that shrewd investment, not activismas such, has been the engine of activist funds’ performance. Especiallywhen ‘touting governance’ is high fashion at the moment, their strategymay not be much more than good public relation. (ET, 07.04.04)

Business Standard

Business Standard


>> CORPORATE ISSUES

KFTC Tough against ChaebolSouth Korea’s Fair Trade Commission

(KFTC) proposed change in the waychaebols, the country’s huge family-runbusiness groups, used affiliated insurancecompanies to leverage a disproportionatelevel of control over their sprawlingconglomerates.

KFTC, which had had those chaebolsin sight since the election of the reformistRoh Moo-hyun as President last year,wanted to reduce the voting rights thatinsurance units control in other groupcompanies from 30 percent to 15 percent.The plan was fiercely criticised by thechaebols, which feared that the restrictionswould limit investments and expose theircompanies to foreign takeovers. Minorityshareholders, who often complained of poorcorporate governance within the chaebols,however, welcomed the proposal.

If the Parliament approves the proposal,it will tackle one of the most common waysin which the powerful Korean familiesmaintain an iron grip over groupmanagement, such that they exercisedvoting rights equivalent to 35 percent, whileowning only an average of 8.7 percent ofthe shares in affiliates, as revealed by aKorean Development Institute report.

(FT, 07. 05. 04 & 28. 05. 04)

Insider Trading at VivendiAPPAC, an association of small

shareholders, just launched a civil legalaction, alleging insider trading at Vivendi

Universal, following the revelation that afamily trust belonging to its CEO, Jean-Rene Fourtou, took a massive undisclosedstake in a bond issue.

The purchases might not be illegal, ifFourtou could prove that he had not beenin possession of inside information at thetime of the US$23.6mn total investments,which greatly surprised investors by theirsize. The Fourtou family took 17 percentof the retail tranche, becoming one of itslargest investors. AMF, the French financialmarket authority, is currently probing thecase. The revelations and the lawsuit areembarrassing because Fourtou was broughtinto the media group in July 2002 to cleanup the company after corporate governancescandals under his predecessor Jean-MarieMessier emerged, also with the insidertrading charge.

Recent news suggested that APPAC isalso planning to sue Fourtou for agreeing toa US$50mn settlement with the USSecurities and Exchange Commissionwithout consulting shareholders.

(International Herald Tribune, 17. 05. 04 &FT, 18. 05. 04)

Grey Areas in AuditsLimited inspections by the US Public

Company Accounting Oversight Boarduncovered ‘significant’ problems in theaudits of America’s big four accountingfirms, Ernst & Young,PriceWaterhouseCoopers, KPMG andDeloitte & Touche.

William J. McDonough, Chairman of

the Board, warned auditors against shortcutsand bending-to-pressure-to-please-corporate-clients strategies that had fuelledthe accounting scandals of 2002. Based onthe results yielded by the 2003 limitedreviews, the Board, with subpoena powersand authority to discipline auditors, hasalready started a fully-fledged investigationof accounting firms’ audit books this year.

(ET, 25.06.04)

Issues of ConcernGovernance problems at Safeway and

Royal Dutch/Shell were among the ‘bigissues’ for US investors this year.Executive pay and splitting of the rolesof the Chairman and CEO would be theissues that receive maximum focus,according to Jamie Heard, Vice-Chairmanof Institutional Shareholder Services(ISS).

Activist shareholders would focus oncompanies with ‘peculiar’ governancestructures in their forthcoming meetings,said Heard. He added that the issue ofcombined roles had gathered ‘seriousmomentum’, after Michael Eisner, DisneyCEO, was forced to give up his position aschairman.

ISS comments coincided with theagenda of the International Forum for ActiveShareowners (IFAS), a powerful networkof 27 US and European institutionalinvestors managing US$1,500bn of assets,to focus its corporate governance crusadeon US companies with a CEO-Chairmancombined role. (FT, 05.04.04 & 12.04.04)

The world’s 100-largestcompanies (the Fortune

Global 100) had a poor record ofaccounting for their impact onsociety and the environment,said a report published byAccountAbility (aninternational institute forsocial and ethical accounting)and CSRnetwork (acorporate responsibilityconsultancy).

The publication of thereport coincided with agathering, billed by the UNas one of the largest of itskind, of CEOs, governmentofficials and civil society, to discuss global CSR.

The purpose of the survey was to identify companies “thathave really integrated responsible business practices into theirprocesses as a prime facet of accountability”, said Mark Line,the CSRnetwork Director.

The report revealed that these 100-companies scored an

average of about 24 out of100, on a range of measureincluding strategy,governance and stakeholderinvolvement. Only 5companies out of the lotscored more than 50 on the100-point scale. The low-point score highlighted “howmuch more has to be donebefore an approach toaccountability, aligned tolong-term value creation andsustainable development, canmove on”, said the report.

European companiesscored 31, Asian companies

25 and North American companies 16 on average. A major findingwas that US companies featured heavily amongst those scoring lessthan 10. Inspite of the focus of the US companies on philanthropyand community involvement, a low accountability score by themre-emphasised the general weak link of the above two aspects withcore business standards. (FT, 23.06.04)

Topside Down in CSR

The Economic Times


INVESTMENT & PRIVATISATION <<

Raising Foreign StakeVietnam is considering lifting a 30-

percent limit on foreign ownership ofstocks, after a quadrupling of foreigninvestment in the stock market over thelast year pushed their stakes close to thelimit for half the bourse. Under the limit,the collective foreign ownership in aVietnamese stock cannot be more than 30percent.

On a similar note, pressure is growingfor the state-owned Electricity of Vietnamto end its monopoly by opening the doorto investment in power production anddistribution systems.

Under a government plan, enterprisesfrom different economic sectors will beinvited to join different forms of investmentduring the next decade.

(www. vietnamnews.vnagency.com)

Accelerating PrivatisationPoland plans to speed up its stalled

privatisation programme to counter itsgrowing budget deficit, but, depending onthe financial situation, intends to keep“strategic industries” in public ownership.

Poland’s 2004 budget foreseesUS$2.3bn in privatisation proceeds, morethan double over the previous year’s total.Privatisation attained a high point in 2000,under the previous centre-rightGovernment, but has fallen under the rulingex-communist Democratic Left Alliance.The ruling party has shied away fromprivatising state-owned companies, but hasbeen forced to change by the desperate needfor funds.

As per the privatisation plans, mostcompanies to be privatised are small. TheGovernment intends to get rid of minoritystakes, while planning to maintain acontrolling share in most of the largercompanies. (FT, 27.03.04)

New FDI Boom ExpectedMore than four out of five international

location experts from around the worldbelieve that FDI is about to take off again,following three years of continuous declinein global FDI. In 2003, FDI flows stagnatedat some US$653bn, less than half the recordUS$1400bn made in 2000.

In a survey conducted by the UNCTADand Corporate Location Magazine in theUK, three-quarters of corporate locationof experts predict a better investmentclimate over the next two years and over 80percent were optimistic for 2006-07.

Earlier, the UCTAD predicted that FDIwill rebound this year in the wake of strongerglobal economic growth, higher companyprofitability, improved investor confidenceand a pick-up in cross-border mergers and

acquisitions. The Asia-Pacific region is seenas having the brightest FDI prospects inthe short and medium terms. For LatinAmerica, the experts are more optimistic inthe short term, while for Africa, they takethe opposite view. Top magnets for FDIare expected to be the booming economiesof China and India, as well as the US, theworld’s biggest FDI recipient in 2003.(FT, 16.04.04 & UNCTAD Press Release, 13.04.04)

Privatisation Plans DisruptedTurkey’s efforts to boost its haphazard

privatisation record and meet toughbudgetary targets for the year 2004 wentinto disarray after a court blocked theflagship US$1.3bn sale of an oil-refininggroup.

In early January this year, theGovernment had agreed to sell a 66- percentstake in Tupras refining group to aconsortium, including a Russian oilcompany and a Turkish conglomerate. Thedeal was seen as a fresh start for thecountry’s privatisation plans after years ofmissed opportunities. But, the transactionwas controversial from the start. Criticsargued that Privatisation Administration,which oversees the sale of state assets, hadaccepted too low a price and that the saleprocess lacked transparency.

The Administrative Court upheld acomplaint by a union representingpetroleum workers that the sale did not meettechnical requirements. Earlier this year, theGovernment had promised a fresh start on

attracting outside investment. But, legaluncertainties remain a substantial barrierthat has to be overcome first. (FT, 27.05.04)

Privatisation in ChinaA host of western institutions are

seeking to gain a foothold in China, aheadof the liberalising reforms the country mustintroduce before 2006 under itscommitments to the WTO.

The US equity fund, NewbridgeCapital, is set to become the first foreigninvestor to buy a controlling stake inShenzhen Bank, a state-run Chinese bank.The investment will give Newbridge an 18-percent stake in the Bank. Under Chineselaw, the ceiling for foreign investors is 20percent. HSBC is also pushing to expandits presence in China, where it is planningto acquire 20 percent of the Bank ofCommunications. If completed, theUS$1.0bn acquisition of shares in China’sfifth-largest bank would be the biggest dealby a foreign institution.

On the privatisation front, theliberalisation of Chinese businesses thatwere once the preserve of the state receiveda further boost when one of the country’slargest private companies said it had securedexclusive agreements with 10 Chinese citiesto distribute natural gas. While China haspartially privatised its big oil companiesand many of its power generators, thedistribution of gas, till this announcement,had remained in state hands.

(FT, 28.05.04 & BL, 03.06.04)

Contrary to prevailing perceptions, the ten countries joining the European Union (EU)have not been diverting massive FDI (foreign direct investment) flows away from the

15 older members of the Union, as per the United Nations Conference on Trade andDevelopment’s (UNCTAD’s) findings.

The report has found that, since the mid-1990s, the FDI inflows of the “accession-10”have accounted for a fraction of those of the EU-15 – a mere 3.5 percent in 2003, downfrom a high of 10.6 percent in 1995. The low numbers suggest a large untapped FDI

potential in the accession countries.One of the main reasons why FDI has not yet increased

so fast in the accession group may be related to the natureof FDI, especially the sunk costs of existing projects.

The low level of FDI might also be due to a lack ofvigorous home-country measures in the 15 oldermember states and at the level of the Union.

Current low levels of FDI in the new EUnotwithstanding, the UNCTAD believes there is

a reason for hope in the medium andlonger term. It is expected that, despite

the lack of policy support, investors willsubstantially increase their presence in

accession countries because it makes goodbusiness sense.Firms from outside the EU, in particular, are likely

to locate increasingly their efficiency and EU-market-seeking new FDI in the accessioncountries. For them, the considerations of sunk costs and home-country pressure might beless relevant. (UNCTAD Press Release, 30.04.04)

Lack of FDI Diversion

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>> INVESTMENT & PRIVATISATION

Taiwan to Ease RulesTaiwan will relax restrictions on

domestic companies’ investments in China,in an effort to boost its financial markets,according to the island’s chief economicplanner. The plan could result in radicalchanges in the current rules that allowcompanies to invest in China only a smallportion of funds raised in Taiwan’s markets.

The rules were a part of Taipei’sattempts to reduce economic dependenceon the mainland, which claims sovereigntyover the self-ruled island. But, the policyfailed to stop corporate investment inChina, while simultaneously deprivingTaiwan’s stock market of a hugeopportunity to grow. It is alleged that firmsestablish dummy companies elsewhere andtransfer money through other channels, justto circumvent Taiwan’s regulations.

Under the plans, the administrationwould no longer dictate when a companycould issue shares and bonds in Taipei orwhere it could use the funds raised.

(FT, 09.06.04)

Deregulation in JapanThe focus of deregulation in Japan is

shifting from the unwinding of economicrules and regulations into changing the basicsocial contract that has prevailed throughoutmost of the post-War-period world. Thederegulation process has evolved throughcorporate and financial sector reform intoprivatisation of state-operated postalservices and highway corporations and isnow moving into breaking the statemonopoly on health, wealth and education.

Deregulation began in earnest in theearly 1980s, with the partial privatisationof Japan National Railways and NipponTelegraph & Telephone. Since then, it hasspread through a wide swathe of Japaneseeconomic life, affecting everything from air-fares to the use of cell phones and from

corporate restructuring to the financial BigBang. Under Koizumi, Japan’s reformistPrime Minister, the direction ofderegulation and privatisation has changed.Privatisation of the state-owned postalservices became his first priority, along withthat of national highway and housingcorporations.

Attention is turning now to the openingof basic public services to increasedcompetition. Deregulation panels haveargued that private enterprises would notonly widen the range of choice in areas suchas medical, welfare and education servicesbut also reduce costs. It is difficult to knowwhether such arguments will appeal to theJapanese public over those of social equity.

(BL, 05.06.04)

TIFA with USThe United States has signed Trade and

Investment Framework Agreements(TIFAs) separately with five Central Asiancountries and Mongolia.

The TIFA creates a US-MongoliaCouncil on Trade and Investment thatconsiders a wide range of issues, includingintellectual property, labour, environmentalissues and enhancing the participation ofsmall and medium-sized enterprises in tradeand investment.

The United States has TIFAs with anumber of countries in order to enhancetrade ties and co-ordinate regionally andmultilaterally, through regular senior-leveldiscussions on trade and economic issues.Regular, ongoing dialogues establishedthrough TIFAs with other countries andregions have been very successful and haveled to concrete and positive results.

(USTR Press Release, 01.06.04)

Facing Court RulingsForeign investors are facing a barrage

of troubled rulings from Indonesia’s courts.

In one instance, UK-based Prudentialhas appealed to Indonesia’s SupremeCourt to lift a bankruptcy ruling againstits profitable local subsidiary.

In another instance, British agri-investor, Rowe Evans, was planning toappeal against a Sumatran court’s rulingoverturning its US$3.5mn purchase of an80-percent stake in a palm oil plantation.

The rulings against Prudential andRowe Evans are just two examples of amounting trend in Indonesia, coincidingwith a protracted election season that hasleft the current Government in a largelypowerless caretaker role. (FT, 19.05.04)

Woori PrivatisationThe South Korean Government has

revived plans to sell a 22-percent stake,valued at US$1.2bn, in the Woori FinancialGroup, accelerating the privatisation of thelast big South Korean bank still under statecontrol. Woori is South Korea’s third-largest financial services group.

The sale of a 22-percent stake wouldbe an increase from the 15 percent theGovernment originally planned to auction.The stake is likely to be sold in smalltranches to institutional investors, ratherthan a single strategic bidder seekingcontrol.

The disposal would advance Seoul’sefforts to retrieve US$140bn of publicfunds used to bail out banks during thefinancial crisis.

The Government has sold controllingstakes in Korea First Bank, Seoul Bank,Chohung Bank and Korea Exchange Banksince the financial crisis. Woori isscheduled for complete privatisation byearly 2005. (FT, 04.05.04)

Privatisation Deal BlockedThe US$800mn acquisition of South

Korea’s Hanbo Steel by two affiliates ofHyundai Motor has been thrown intodoubt after a failed bidder launched a legalaction to block the deal.

AK Capital, a South Koreaninvestment company, claimed aprovisional deal it struck in 2003 to buyHanbo had been unfairly cancelled. Thecompany has complained that Hanbo andits receiver had sabotaged the deal. AK ispursuing its complaint through theInternational Chamber of Commerce(ICC), a Paris-based organisation thatmakes legally binding rulings oncommercial disputes.

AK was the only bidder for Hanbowhen it signed an MOU in 2003. Hanboclaims that its deal with AK collapsed inNovember 2003 because the buyer failedto secure funding. (FT, 30.06.04)

Eastern Europe and India have emerged as theleading recipients of inward investment by

global retailers in the year 2003, according to an industrysurvey of 30 emerging markets.

According to the AT Kearney report, risingconsumer-spending power was driving rising retailinvestment – particularly in Russia, India and China.Most activity was taking place in food and generalmerchandise, as companies, including Wal-Mart, continuetheir international expansion.

In related news, India has emerged a star performeras a favoured offshore destination, according to a 2004Offshore Location Attractiveness Index prepared by ATKearney. While India topped the list of countries due toits strong mix of low costs and significant depth in humanresources, China and Malaysia got the second and thirdslots. (FT, 04.05.04 & 22.07.04)

Emerging Investment HotspotsMost Attractive Emerging

Markets for RetailersCountry 2004 2003

Rank Rank

Russia 1 1

India 2 5

China 3 3

Slovenia 4 14

Croatia 5 N/A

Latvia 6 19

Vietnam 7 9

Turkey 8 6

Slovakia 9 2

Thailand 10 18

Source: AT Kearney


SECTORAL REGULATION <<

UTILITIES

Efforts to Open up TelecomThe Bangladesh Telecommunications

Regulatory Commission (BTRC) havingalready awarded nine licenses tocompanies to run private fixed linenetworks, as a part of its efforts to openup the telecommunications sector is nowset to accept bids for two mobile operatorlicenses in August.

The number of mobile users in thecountry is expected to reach a figure in therange of 6-8 million by the year 2006.

(www.inteleconresearch.com, 14.06.04)

Policy Reviewed in GhanaIn a move to improve Ghana’s

telecommunication infrastructure, theGovernment is reviewing the country’stelecommunication policy. This is beingdone to ensure that a clear regulatoryframework is defined for the sector, and tohelp evolve regulatory guidelines. TheMinistry of Communications hasembarked on this activity in the wake ofthe liberalisation of the sector.

(www.regulateonline.org, 18.05.04)

Ending State MonopolyThe Monopoly of state-owned

Telkom Kenya in the fixed-line operatingsector is set to come to an end, with a newentrant expected to enter the market soon.The pressure of international donors andbusinesses on the Government seems tohave worked.

This is a relief for consumers who havebeen waiting for long periods to getconnected for years.


New Long Distance RulesFederal Telecommunications

Commission (Cofetel), Mexico’sTelecommunication Regulator, issued newlong-distance regulations to enhance theability of smaller operators to competewith former monopoly, Telefons de Mexico(Telmex). A Cofetel spokespersonreiterated that the regulations aim to openthe long distance market to competition.


Thai Interconnection SystemThe Thai government intends to

introduce interconnection charges, in caseit is unable to constitute a new independentregulatory body.

Efforts to deregulate the country’stelecom industry have been marred bypolitical interferences, since state-ownedoperators control the industry. Expertsbelieve that interconnection system would

replace the prevalent access charge schemeand create a level playing field forcompetition in the Thai telecom market.


Connectivity in West AfricaExperts feel that lack of appropriate

policy, and legal and regulatory frameworkare the major impediments to evolvingcross-border connectivity in West Africa.

It is being suggested that the EconomicCommunity of West African States(ECOWAS) should encourage theestablishment of a regional forum forregulators, policy makers and telecomoperators to foster integrationcooperation.


Justified Service CostTelfonica is the only telecom company

in Spain offering universal service onaccount of its dominant position andfollowing the provision of the GeneralCommunications Law.

The cost incurred by Telefonica forprovision of universal service has been heldby the Telecommunications MarketCommission as justified, since it did notimply a competitive disadvantage for theoperator.

(www.internationallawoffice.com, 19.05.04)

Control on Fixed WirelessFixed wireless technology has been

used in Indonesia for a couple of yearsnow. Recently, a fixed wireless systembased on the CDMA technology wasintroduced by private companies in someparts of the country.

In order to address emerging concerns,the government introduced regulationsgoverning fixed wireless services. Thisregulation confirms that local fixed-linenetwork operators could only operate localfixed wireless networks. The regulation alsorestricted the mobility of these local fixedwireless networks within a limited area.

(www.internationallawoffice.com, 09.06.04)

Watchdog Reduces TariffAn investigation by ‘Ofcom’, Britain’s

media-to-telecom watchdog, into BTgroup’s new tariff plans has prompted thecompany to cut fixed-line access fees. Thetariff plan had been reported to force BT’srivals to charge customers more for linerental, and therefore was considered as anti-competitive by many. (ET, 30.0404)

Move to Usher CompetitionIn order to increase competition in the

telecom sector in the country, the FrenchGovernment is set to introduce new ‘virtualoperators’. A virtual operator is definedas one who does not own a network butbuys capacity from others.

Observers anticipate that the numberof mobile operators in France woulddouble, as a result of this step. (FT, 14.06.04)

Unhappy US OperatorsA recent US government ruling

permitting local phone companies to chargehigher rates for access to the their networkhas setback long distance operators. USlong distance telephone carriers warned thatthey might be forced to raise consumer pricesor withdraw from local phone services as aresult of this decision. (FT, 11.06.04)

Privatisation Sparks FuroreThe Electricity Generating

Authority of Thailand (EGAT)has dominated the Thaipower industry, restrictingoperations of competing firms -using political muscle. The ThaiGovernment’s recent plans totranslate the utility into a listedpublic company had resulted inprotests by the company’s powerfullabour union, resulting in theresignation of the CompanyDirectors en masse. Consequently,Thaksin Shinawatra, the Thai Prime Minister, was forced to review his privatisationplans, which experts argued would affect consumers and favour a handful of privateinvestors.

Environmentalists fear that transferring EGAT’s hydropower plants into a semi-private profit-driven company could lead to conflicts over the scarce water resources.

Prompted by such concerns, industrialists, consumer groups, academicians and analystsare urging the Government to precede its privatisation plans by judicious reforms, throughestaablishment of an independent, technically competent power sector regulator.

(FT, 02.04.04 & Asian Labour News at www.asianlabour.org)

Business Standard


>>SECTORAL REGULATION

Energy Plans CriticisedA study recently commissioned by

Portugal’s Competition Authority revealsthat the Portuguese Government’s plans torestructure the country’s energy sector failto address ‘severe distortions’ in theelectricity market that inhibit competition.

According to the plans, gasimportation, distribution and supply areto be de-merged into a new company. Theplan also involves realigning gastransmission activities to a differentcompany.

The new plans launched in thebackdrop of the government’s decision tophase out long-term power purchaseagreements is believed to deter the entry ofnew firms. (FT, 19.04.04)

The Chinese policy makers’ disregard for the role of prices in balancing the supply and

demand has been changing dramatically in the presentreform era. Instead of a fixed-price regime, productsare increasingly based on market prices. This hashad a salutary impact on the economy, enhancingefficiency and stimulating demand.

However, authorities have been reluctant torely on prices to balance supply demand for publicutilities like water.

But times are changing, both the Ministry ofConstruction and the Beijing municipality have

issued rules for rationalising water tariffs. Analysts believe that tariff increases must be accompanied by investment in efficient

technologies, structural reorientation in the authorities and the establishment of appropriatemarket institutions. ( FT, 23.06.04)

Rail Sector Law DerailedThe entry into force of the Rail Sector Law

in Spain has been postponed until December31, 2004. The law on implementation woulddramatically reorganise the legal regimegoverning state-managed rail services.

The law set under the EU RailwayInfrastructure Directives, required separatingthe management of rail infrastructure anddevelopment of transport services.

A month before the law was set to takeeffect (from May 18, 2004), there was a changein the ruling political party in Spain. As hadbeen anticipated, the new political regime ofthe country accentuated revisions in the Lawwhich has resulted in this.


Favour for Generic DrugsA European Court of Justice’s recent

ruling should make it easier for generic drugmanufacturers to bring competing versionsof block-buster drugs to European markets.The court made its ruling in the context of acase brought by the Swiss drug maker,Novartis, against a generic drug approvalgranted by the UK’s Medicines ControlAgency (MCA).

Experts believe that the decision wouldhave much wider implications. The decisionimplies that the generic versions of reviseddrug formulations could now be in themarket up to 10 years sooner than theymight otherwise have been.(BS, 30.04.04)

Composite Regulator for FCsAn inter-regulatory working group of

the Reserve Bank of India (RBI), Securitiesand Exchanges Board of India (SEBI) andthe Insurance Regulatory and DevelopmentAuthority (IRDA) has proposed toidentify ‘financial conglomerates’ (FCs) andput them all under the eye of a specialcomposite regulatory agency.

The FCs would be required to reportto a principle regulator and a pension fundregulator. The idea is to capture the intra-group transfers and exposures (ITEs)within each FC and its large exposure tooutside counter-parties. It is being plannedto set up a formal mechanism for inter-regulatory exchange of information also.

(BL, 14.06.04)

Foreign Currency BorrowingThe State Administration for Foreign

Exchange (SAFE), China’s foreign debtregulator, is considering limiting foreigncurrency borrowing. Foreign bank

executives claim that the measure onintroduction would adversely impact theirbusiness in the mainland.

Zou Lin, Director of SAFE, assured thatthe step was taken to stem a rapid increasein China’s foreign debt, and was not directedat foreign banks. He added that the movewas consistent with the World TradeOrganisation (WTO) principle of ‘nationaltreatment’ (NT) and that foreign investedbanks and domestic banks would be treatedequally on the issue of overseas borrowing.

(FT, 19.06.04 & World Business atwww.en.icxo.com, 16.06.04)

CESR and SEC ConvergeThe Committee of European Securities

Regulators (CESR) and the US Securitiesand Exchange Commission (SEC) haveagreed to work together, a move that isanticipated to the plug lacunae inregulations.

An indicative list of issues to bediscussed between the two includes market

structure, mutual fund regulation,international financial reporting standards,credit rating agencies and financial analysts.

(FT, 05.06.04)

Powers to Irish WatchdogIreland’s new financial regulator, the

Irish Financial Services RegulatoryAuthority (IFSRA), is to be given powersto fine and name errant institutions underdraft legislation, which is now going throughthe Dail, the Irish Parliament.

The recent alleged sharp practice atAllied Irish Banks (AIB) - fromovercharging on foreign currencytransactions – have hurt the Republic’sbiggest bank, and raise questions about theeffectiveness of regulation. The creationof IFSRA was a populist response to thepublic outrage at the scandals that surfacedduring the elaborate Cayman Islands taxscam.

(FT, 04.06.09 & www.caymannetnews.com,07.06.04)

China Cuts Drug PriceChina took the most aggressive

measure to bring down health costs byordering price cut of antibiotics up to56 percent. The price cut could affectdomestic companies more than foreigncompanies, since the price cut orderedby the government is more in case ofgeneric drugs, as compared to foreigndrugs, which are usually patented.

The National Development andReform Commission of China informedthat the price cuts were in response topublic complaints about the high costof medicines. (FT, 02.06.04)

Business Standard

Tariff to Regulate Water

A S S O R T E D

FINANCIAL SERVICES


SPECIAL ARTICLE<<

To a Caribbean person, it is quitealarming that the term, “small

economy” is being so loosely used as toinclude Canada, Australia, Israel,Singapore, and Switzerland, among others.These are large and developed economies,compared to the Caribbean and somePacific territories, which are not just smallin size of population, geographic landspace, and market, but whose economieshave been forged by its history ofcolonialism to be very different from thosethat are claiming the title.

A small open economy can be describedas one in which there are limited human,financial and natural resources with smallsize of market limiting the number ofbusiness actors, scale of production anddevelopment options, and in whichretention of capital is restricted byinsertion into the global economy at a lowlevel in the global product value chain,leading to severe economic vulnerability.Because these economies produce forexports and are dependent on imports forconsumption needs, including basic needs,the majority of business activities in thelocal economy are commercial: importing,wholesaling and retailing.

It is precisely because these economiesare so open and import dependent thatthey are very susceptible to the activitiesof international cartels. What littlemanufacturing there is depends on importof intermediate and capital goods forassembly production. While no statisticsare currently available, one can surmise thatthe Vitamin Cartel would have extracted asignificant amount of excess profits fromthese economies, as would have thegraphite electrodes cartel. Jamaica forexample, was named amongst the countriestargeted by the Heavy Electrical EquipmentCartel. It is, therefore, very important thatsmall economies are protected frominternational cartel activities.

The small economies of CaribbeanCommunity (CARICOM) are highlydependent on foreign direct investment togenerate growth. As such, the major exportsectors, such as the extractive industriesand tourism, are dominated by foreigninvestors. In some economies, such asTrinidad and Tobago, foreign investors havepermeated diverse sectors and activities,

both in producing goods and providingservices. The annual income and power ofmost of these foreign companies far exceedsthat of the governments, especially in thesmaller territories. This power asymmetryincapacitates governments in their abilityto discipline the transnational corporations(TNCs) resident in their countries.

Both in dealing with international cartelsand with resident transnational corporations,Caribbean countries need assistance from themore developed economies, especially thehome countries of the TNCs, and there is nodoubt that a multilateral framework that canprovide assistance in dealing with these crossborder issues is not just helpful, but neededby these small economies. The proposedMultilateral Framework on Competition(MFC) in the WTO has generated a lot ofcontroversy, however. It proposed thatmembers prohibit hard core cartels, apply

Trade Associations were found to befixing prices. In Trinidad and Tobago, theBaker’s Association openly fixed the priceof bread, rice importers met and increasedthe price, and announced this in thenewspapers, and shipping agents, as agroup, increased handling charges. Becausethere is no competition law, businessagents are not aware of the anti-competitive nature of their actions, andare therefore very transparent in theirconduct. Predatory behaviour on the partof one poultry producer caused prices toplummet, resulting in the exit of twoproducers (of a total of seven), andthereafter initiated a rapid increase inprices. In Belize, there was a hostile take-over of five bus companies plying thecountrywide route by the sixth companyin that trade, resulting in total monopoly.The monopolist then almost doubled thefare, causing riots in the streets of Belize.

CARICOM countries have very highconcentrations in markets because of theneed for minimum efficient scale, but alsobecause the appropriation of resources bythe colonial elite and the unequaldistribution of wealth has remained afeature of the economies, as the wealthhas remained in the hands of thedescendants of the plantocracy throughinheritance. The abuse of dominance inmarkets is prevalent in these countries,and in fact, is more problematic than cartelactivities, since small size leads to suchtransparency that once the law is in placeand there is public education, it would bevery difficult to hide a cartel. In the touristindustry, which is the most importantsector for these economies (exceptTrinidad and Tobago), concentration andabuse of power exist both at the local andinternational levels. International touroperators extract the highest profits andcreate barriers for smaller competitors.

Given the types of competitionproblems faced by small economies, theseeconomies need both domesticcompetition laws and an MFC. However,unless the MFC offers meaningful andoperational means to deal with internationalcartels and resident TNCs, these are oflittle use to small economies.

*University of the West Indies,Trinidad & Tobago

Can Small Economies Benefit from a MultilateralFramework on Competition?

– Taimoon Stewart*

the core principles of MFN, NT, andTransparency and in due process, agree tovoluntary co-operation, and submit to peerreview.

A question debated in the WTO waswhether small open economies neededcompetition law, so long as there was anopen competition policy. Hong Kong,China and Singapore, in particular, arguedagainst the need for domestic competitionlaw. Research in CARICOM countries,however, provides empirical evidence ofanti-competitive conduct, particularly inthe non-tradable sectors, such as import,wholesale and retail businesses, and in theprovision of services in the domesticmarket, such as transport. So, even very smalleconomies, such as those in CARICOM,do have non-tradable sectors that aresusceptible to anti-competitive conduct.

Both in dealing withinternational cartels and with

resident transnational corporations,Caribbean countries need assistancefrom the more developed economies,

and there is no doubt that amultilateral framework that can

provide assistance in dealing withthese cross border issues is not justhelpful, but needed by these small

economies.


>> SPECIAL ARTICLE

Competition Regime inBangladesh

Competition regimes are often relatedto the development strategy of the country.At the time of independence in 1971,Bangladesh inherited a policy of very rigidimport substitution industrialisationstrategy, which continued to be pursuedin the 1970s. The typical instruments ofthis inward-looking developmentparadigm, such as widespread quantitativerestrictions on imports, high import tariffs,foreign exchange rationing and overvaluedexchange rate became characteristics ofBangladesh’s trade and industrial policyenvironment. These policies were aimedat creating a domestic industrial base inthe domestic economy by protecting localfirms from foreign competition.Consumers’ interests were neglected as itwas believed that “infant industries” willeventually grow up to become moreefficient than their foreign counterparts,and in the long-run dynamic efficiencygains will outweigh the initial welfare loss.

Although the choice of import-substitution was dominated bymacroeconomic concerns about the balanceof payments and fiscal balance, even aftera decade of highly protected trade regimeboth the internal and external balancesituation of the country continued toworsen. Moreover, the import-substitutionstrategy generated a distorted incentivestructure resulting in an “anti-export” biasundermining the potentials for exportgrowth. It was against the backdrop ofserious macroeconomic imbalances of theearly 1980s, and the stagnating exportperformance that the policy of reforms forstabilisation and structural adjustment wasundertaken.

Therefore, since the mid-1980sBangladesh has been implementing tradepolicy reforms with inevitableconsequences for the domesticcompetition regime. Quantitative

Competition Scenario in Bangladesh–Atiur Rahman*

restrictions on imports were drasticallyreduced from about 40 per cent of all importlines in 1987-88 to a mere 2 percent of allimport lines in the1990s, tariffs wereslashed from as high as 350 per cent in1992 to as low as 40 per cent in 1999, andexchange rate restrictions were liberalisedgreatly with frequent adjustment in the

therefore, I point out a number of issuesthat might deserve serious attention infuture research.

Lack of Legal ProvisionThere is no effective legal provision

designed to protect the interest of theconsumers in Bangladesh. Besides, thereis no legal entity to oversee the tradingpractices of business firms. These tasksare complicated. On the one hand, it needsto be ensured that consumers are notcheated, and on the other hand special careshould be taken so that private firms andbusiness do not feel that regulatory powersare excessive.

Therefore, in this era ofcommercialisation, protecting consumers’interest will require much more thanenacting laws. How the rules of the gameare implemented – is the most importantissue at stake.

Lack of EffectiveConsumers� Associations

Like any other country, the politicaleconomy of protection is also importantin establishing a suitable competitionregime in Bangladesh. Through theirchambers, business organisations, andthrough their connections with bureaucratsand politicians, it is the producers (orfirms) who promote their business interest.This results in pressuring the governmentfor more protection either in the form ofincreased tariffs or subsidies or restrictingcompetition. In contrast, the consumersare not organised at all and due to the lackof an effective association they cannot playany role in promoting their own interest.The existing Consumers Association ofBangladesh (CAB), has not beenparticularly effective in raising theconcerns of the consumers. As a result,policy makers most often see stronglobbying in favour of demands forprotection, but they hardly encounter

Like any other country, thepolitical economy of protection is alsoimportant in establishing a suitablecompetition regime in Bangladesh.

nominal rates. Previously, domestic firmswere also protected by imposingdiscriminatory sales taxes on imports inaddition to the tariffs. With tradeliberalisation the import discriminatorymultiple rate sales tax has been replacedby a uniform value-added tax (VAT), whichis imposed on both imports anddomestically produced goods.

The trade liberalisation measures alongwith the rationalisation of the tariffstructure have resulted in the reduction ofmean nominal protection for all tradablesin the domestic economy from 89 per centin 1989 to about 28 per cent in 1999.Similarly, the import weighted mean levelof nominal protection for manufactures hasdeclined by about 27 percentage points.Currently, Bangladesh’s nominal importprotection level ranks among the lowest inSouth Asia (World Bank, 1999).Bangladesh has also taken measures inprivatising some of the publicly ownedlarge enterprises and has offered generousincentives to attract foreign investment.

It goes without saying that the abovemeasures have greatly reduced theprotection enjoyed by domestic firms inthe tradable sector of the economy. In fact,competition policy is an area of economicsthat has received the least attention inBangladesh. In the following article,

IntroductionBy competition or antitrust policy economists usually mean intervention by public authorities for ensuring competition in the markets.

The basic objectives of competition policies are designed to promote competition by preventing agreements between firms that lead to anti-competitive behaviour either through explicit cartels or through tacit collusion. Such policies also deal with monopoly power in any marketand the process of business concentration such as mergers and acquisitions.

The most important purpose of competition policy is (1) to protect the consumers’ interest by ensuring that they have greaterchoice in terms of price, quality and service and (2) to maintain a competitive environment so that an efficient allocation of resourcesin the domestic economy can take place, which promotes economic growth.


SPECIAL ARTICLE <<

popular public demands for not grantingthose protective measures. Therefore, aneffective competition regime shouldconcentrate on developing consumers’associations so that debates anddiscussions can take place betweenopposing views.

Presence of State-ownedInefficient Industries

A number of large state-ownedenterprises have contributed to anti-competitive behaviour in certain industries.Many of them are incurring huge lossesthus creating a lot of pressure on thegovernment budget. Textiles, jute and sugarare examples of such industries inBangladesh.

Among the services, banking is a sectorthat also suffers from this problem, whichhas important implications for thecompetitive environment within the sector.In Bangladesh, nationalised commercialbanks (NCBs) are burdened with bad loansand loan defaults. When private bankswere allowed to operate, it was hoped thatthey would charge lower rate of intereston lending as they did not have to startwith bad loans. But it was found that theshare of the market for private banks waslimited, and their access to thegovernment’s development fund restricted.Moreover, NCBs operated in suchactivities where private banking is absent(such as agriculture and rural developmentprojects). This also reduced thecompetition between the public andprivate sector.

Natural MonopoliesNatural monopolies are the sectors

where the government has an importantrole to play. But in Bangladesh, sectorssuch as railways, telephones, and otherpublic utility services have generated suchanti-competitive structures that not onlyinhibit modernisation of these services butalso hinder private investment into thesesectors. While in recent times the privatesector has entered into the business ofcellular phones, competition has beenrestricted to a few firms only. This allowsthe state owned BTTB (or BangladeshTelegraph and Telephone Board) tocontinue inefficiently. Only very recentlya regulatory commission has been set upfor the telephone sector. Whuch, it is stillin its infancy.

Within the natural monopolies, public-private sector collaboration can helpimprove the standard of services. This can

result in increased competition as privatesector firms will be involved and,consequently, consumers will benefit fromimproved products and services at low cost.

Regulatory FrameworkA number of regulatory frameworks

also act as hindrance to the promotion ofan efficient and competitive marketmechanism in Bangladesh.

First of all, transparency and fairnesslie at the heart of the competition policyand the rule of the law concerning themmust be implemented relatively quickly.An autonomous and independent, effectiveand efficient judicial system is one of themost essential elements for ensuring afavourable business climate forcompetition. Currently, the country’s legalsystem is burdened with more than half a

business transaction costs and widespreadrent-seeking opportunities. This does notallow the participation of efficient firmsin the business and therefore societycannot experience a gain in efficiency.Moreover, when things are done in a non-transparent way, they are susceptible tochange with change in the political regime.Discontinuation of policy is regarded tobe the worst factor in private sectordevelopment as it hampers efficiency.

Concluding ObservationsDespite significant reforms in the

domestic economy, Bangladesh stillpossesses a rather weak competitionregime. This obstructs the efficiency gainsin the domestic economy. Moreover, aweak competition regime implies that theinterest of the consumers is totallyoverlooked. Setting up of an effectiveregime in this regard will remain achallenging task for Bangladesh, whichwould require, amongst others: legal andregulatory reforms, implementation of ruleof law, development of civil society groupsprotecting the consumers’ interests, and,above all, further deregulation andliberalisation of the domestic economy.

However, there is also a danger ofexcessive competition, which may haveadverse socio-economic implications.There is, therefore, a need for an openpublic debate on these issues andcontinuous monitoring of the impact ofcompetition on the weaker sections of theeconomy (particularly on SMEs).Simultaneously, there is the need for arealistic assessment of the extent to whichMNCs are following the disciplines ofcompetition law.

Indeed, participatory governanceshould also be at the heart of any move toregulate competition. In fact, thegovernment should undertake measures tosignificantly improve corporate (both localand multinational) governance, increasecorporate transparency, prevent fraud andensure corporate social responsibility. TheWorld Bank and International MonetryFund (IMF) policies should strengthenrather than undermine the ability of theBangladesh government to undertakemeasures to regulate investment andcorporate governance so that a morehealthy competition regime develops inBangladesh.

*Unnayan Shamunnay, Bangladesh,

The author is grateful to Dr. A. Razzaque,Department of Economics, Dhaka University for hisresearch support and co-operation.

Despite significant reforms in thedomestic economy, Bangladesh still

possesses a rather weak competitionregime.

million cases. Such a slow and inefficientjudicial system increases the costs oflitigation.

Secondly, despite liberalisation andderegulation of substantial magnitudes, thegovernment does not allow further entryinto certain industries known as reserved,regulated or over-saturated. Currently,edible oil, electric fans, corrugated ironsheets, etc. are considered to be sectorsthat are over-saturated. This is against thespirit of a competitive environment as thegovernment does not know whetherpotential entrants could be even moreproductive and technologicallysophisticated. If policies of the governmentrestrict the entry of more efficient firms,the dynamic efficiency of the economy willbe compromised. And, certainly,consumers will not benefit from reducedprices or better quality products or both.Besides, in the name of “over-saturated”sectors, the government might beproviding protection to the inefficientfirms, which would result in loss ofconsumers’ welfare.

Thirdly, there are other sectors (e.g.,telecommunication, power generation andair transport), which are gradually beingopened up and some participation of theprivate sector is taking place. However, ithas been alleged that this is being done in anon-transparent and unpredictable policyenvironment, resulting in increased


>> NEWS & VIEWS

The European Commission (EC) at lastis reviewing the European Council

Regulation 4056/86. This process couldsee the end of the anti-trust immunity forliner shipping which could, in turn, markthe end of the century-old conferencesystem.

On December 4, 2003, theCompetition Directorate General of the ECheld a public hearing on the Review of theCouncil Regulation 4056/86, laying downdetailed rules for the application of Articles81 and 82 of the EC Treaty to maritimetransport and providing for a blockexemption for liner conferences. Thehearing was the second ( and oral stage) ofa fact-finding exercise, which began withthe publication of the Commission’sconsultation paper in March 2003.

The European Shippers’ Council(ESC), the Brussels-based organisationrepresenting the interests of the Europeanindustry as users of freight transportservices, represented the shippers’interests during this hearing.

Where the Problem Lies?Liner shipping conferences, according

to the ESC, are irrelevant to shippers. Intoday’s marketplace, liner conferences donot provide freight rate stability.

Furthermore, shipping cartels have hada numbers of deleterious effects. They havefostered mistrust between customers andproviders and reduced incentives toimprove operational efficiency andperformance.

The ESC fears that the existingRegulation is helping maintain a cartelagreement that is being rejected elsewhere.Following court rulings and legislativechanges under US competition law,customers are able to negotiate individualservice contracts confidentially.

What the Shippers Argue?There are a number of ‘myths’ that

need to be dispelled, some of which areexplained below.

Conferences do not fulfil conditionsfor exemptions from normal competitionrules:

To ensure that supply meets demand,shipping lines today only need to co-operate with regard to the supply ofvessels. Confidential ISCs (individualservice contracts) apply to 80 to 90 percent

Liner Shipping: Ancient Myths and Modern Realities–Nicolette van der Jagt

of the cargo carried by containerised linershipping lines. The Commission’sevaluation of the major liner conferences’behaviour in decisions such as the TACA(Trans-Atlantic Conference Agreement)indicate that ISCs have replaced the linerconference, in commercial reality.

It follows that liner conferences neitherproduce any economic benefits of value tocustomers nor can be said to beindispensable. Liner conference price-fixing, therefore, only helps to maximisethe profits of the shipping lines, byenabling them to charge prices abovecompetitive levels.

Antitrust immunity requires regulators inall member states: Liner conference lines often claim that thetreatment of line conference cartels shouldbe the same in the EU as it is in other partsof the world, such as the US. There is afundamental flaw in this approach. In theUS, the liner shipping industry is regulatedby the Federal Maritime Commission andexcluded from the application of US anti-trust law, which is enforced by theDepartment of Justice. In Europe, on thecontrary, there is no alternative regulation,regulatory authority or agreement for theindustry.Liner shipping cartels do not benefitcustomers:

The very idea that price cartels are inthe public interest, or benefit the customer,or the consumer, is open to widespreadderision by shippers and the widerbusiness community.

It is not to the economic benefits ofshippers to know how much theirtransport costs will be when thesetransport prices are not negotiated in anormal commercial way on a one-to-onebasis. It is obvious that shippers will losebusiness because they cannot compete inexport markets in the light of high tarifffor transporting their products dictated byliner conferences.

Artificially fixed transport pricesmean hindrances rather than economicbenefits to shippers’ competitiveness.It is clear that shippers wish to beallowed to enjoy normal market forcesfrom the evidence that 90 percent of thecargo carried today on transatlanticroutes is carried under ISCs which were

prohibited until 1997 in the name of‘price stabilisation’.

Recent experience has shown linerconferences to be wanting in respect ofaccurate forecasting of the level and thelocation of demand, which has resulted incapacity shortfalls on some routes andexcesses on others, affecting the serviceperformance and price.

Liner conferences do not provide stability:Liner shipping conferences do not

provide freight rate stability or economicefficiency. In the shippers’ experience, itis matching supply with demand that leadsto a certain stability of services, not price-fixing.

Price fixing leads to worse value for money: Price fixing, even if in the most

unlikely of events, were to work, givesconference lines a bargaining poweradvantage in negotiating prices with theshippers. This bargaining power would,and indeed does, inevitably result in higherprices and prices that give less value formoney.

What of the Future?Carriers and their customers should be

able to conclude confidential servicecontracts in modern business arrangementsapt for a modern industry. Shippersshould always have the option of freelynegotiating rates, surcharges and otherterms of carriage on an individual andconfidential basis with the carrier(s) oftheir choice, without the interference ofany regulatory body or otheradministrative bureaucracy, such as aconference.

Any co-operative arrangementsamong shipping lines must be of a technicalnature in order to enhance efficiency andreflect global trading patterns. The ESCviews consortia and alliances as the mostacceptable and preferable form of co-operation between ship owners (providedthey meet the kind of provisions set out inthe EC Consortia Regulation 823/2000/EC).

Abridged FromConsumer Policy Review, Mar/Apr

2004,Vol 14. No 2


ABOUT A COMPETITION LAW<<

Competition Laws and InstitutionsNorway has a long history of competition law. It is one of the

first countries in the region to have a competition legislation, whichdates back to World War I. In 1917, the Price Regulation Act wasintroduced to tackle the problem of high prices.

The Norwegian Competition Act, come into being in 1993 &Some minor amendments were introduced in 2000. The objectiveof this Act was to achieve efficient utilisation of resources andstimulate necessary conditions for workable competition. The Actprohibited, amongst others, the following:

• Collaboration with regard to tenders;

• Resale price maintenance of goods and services;

• Price fixing;

• Market-sharing agreements; and

• Price labelling.

Under this Act, the enforcing body, the Norwegian CompetitionAuthority (NCA), established on January 1, 1994, could:

• Prohibit practices that involve dominance, refusals to deal,restriction of consumers’ choice, etc.;

• Intervene against acquisition of enterprises if it feels theacquisition will restrict competition;

• Grant exemptions to certain parties, anticipating leads toincreased competition or efficiency; and

• Submit proposals that are aimed at strengthening competition.

There are three general exceptions from prohibitions of theAct. These are:

• Co-operation between companies of same concern or combine;

• Restrictions agreed in licence agreements involving patents anddesigns; and

• Agricultural, forestry and fishery industries.On March 5, 2004, the Parliament (Stortinget) passed the newcompetition law, the Norwegian Competition Act, 2004. This law,which is modelled on the EU/EEA competition rules, came intoforce on May 1, 2004. The new Act is far stricter and containsmore comprehensive prohibitions. In case of any dispute betweenthe NCA and the EEA law, the latter prevails.

Some of the notable changes are:

• Abuse of dominance prohibited per se;

• Principle of leniency introduced to encourage cartel-busting;

• Notification of M&As to the NCA:

• Abuse of dominance will no longer attract criminal penalties.

• Tighter deadlines: NCA must now notify a party of anypossible intervention within 25 business days, 100 businessdays.The NCA has over hundred employees. The Ministry of

Labour and Governmental Administration provides the frameworkfor the NCA’s activities. It is the appellate body of the NCA’sdecision. The responsibilities of the NCA under the new Act include:

• Enforcement of Article 53 (European Free Trade AssociationSurveillance Authority to grant both individual and blockexemptions) and Article 54 (Prohibition of Abuse ofDominance) of the EEA agreement; and

• Provision of guidance to undertakings with respect to theinterpretation, scope and application of the Act.

Other Regulatory LawsApart from the Norwegian Competition Act 2004, Norway

also has the Marketing Control Act of 1972, which was latermodified and came into force in March 2001. Some of the featuresof the Act are as follows:

• Prohibition of incorrect or otherwise misleading representationthat may influence demand or supply of goods, services orother performances;

• Prohibit advertisements that are in conflict with the inherentequality of the sexes and those that portray men or womenoffensively or derogatorily;

• Restriction on the use of certain methods of communicatingwith the consumer, like e-mail, text messaging or facsimilewithout prior consent; and

• Prohibition of free riding, i.e., use of copies of distinguishingmarks, advertising material, etc., of another product that maybe considered as unfair exploitation and result in confusion.

Fines and infringements can be awarded to an offender under theAct.

This Act has two enforcing bodies – the Consumer Ombudsmenand the Market Council. The Market Council (MC) functions likea court of law with regard to disputes between parties andconsumers’ grievances in the market. It consists of nine members,appointed by the King, for a term of four years. No appeal can befiled against the MC’s decision.

The Consumer Ombudsman (CO) is an independentadministrative body that:

• Aims to prevent market abuses prohibited under the MarketingControl Act;

• Considers cases upon complaints from consumers and traders;

• Looks into cases brought forward by foreign authorities andorganisations (listed by the EU Commission); and

• Seeks to influence traders to adhere to the regulatoryframework.

An appeal against the decision of the CO may be lodged withthe MC.

The Norwegian Competition Authority enforces anotherlegislation called the Price Control Act, which, inter alia, containsmeasures on general price control measures. The Authority is alsothe appellate body for cases arising under the Rent RestrictionsAct as well.

Future ScenarioThe year 2004 has been quite eventful for competition in Norway.Not only was a new legislation, which aligned NorwegianCompetition Law with the EEA law, introduced, but the Parliamentalso decided to relocate the NCA from Oslo to Bergen.

The relocation is to be completed by January 1, 2007.

The activity in Bergen commenced in the spring of 2004. Anew department, called the Market Monitoring Department, hasbeen established. It is to look into the allocation of resources withinthe health sector and suggest competition policy remedies toimprove the sector.

The Norwegian Competition LawThe Norwegian economy displays a carefully crafted balance between free market activity and government intervention. Theeconomy is the third-largest exporter of oil, which, along with natural gas, accounts for 35 percent of its total exports. In 2000,the Government privatised the fully state-owned oil company, Statoil, by selling one-third of its shares. This, along with a vastarray of legislations, has further boosted healthy competition in the Norwegian markets.

From Our Readers

Publications

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.

FE: Financial ExpressBS: Business StandardTLN: The Legal NewsletterUSTR: United States Trade

Representative

Ireceived your Reguletter and found it excellent and a valuableupdate on world antitrust and regulatory events. Many thanks

for sending it.

David G. AndersonAllen & Overy LLP

Brussels, Belgium.

I am indeed grateful to CUTS for its capacity building supportto my organisation through its various publications that I have

CUTS Centre for Competition, Investment & Economic RegulationD-217, Bhaskar Marg, Bani Park, Jaipur 302 016, India

Ph: +91.141.228 2821, Fax: +91.141.228 2485Email: [email protected], Website: www.cuts-international.org

SO

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y ET: The Economic TimesFT: Financial TimesBL: The Hindu Business LineHT: Hindustan Times

Book

Essays on the InternationalTrading SystemAn Unfinished Journey

The essays are a compilation of the range of CUTS’ activities in the area of trade anddevelopment. The first part deals with trade, environment and development-related issues.The second part is devoted to trade, investment and competition.

This collection of essays presents a passionate analysis of the effectiveness of theinternational economic system and how economics affect the everyday life of the people indeveloping countries. The book offers practical suggestions on how to benefit fromglobalisation, without undermining it. Perhaps these writings will challenge both the tradecommunity and ‘anti-globalisers’. Advocates and opponents, negotiators and students,

people from the North and the South alike will benefit from this reading.

By Pradeep S. Mehta (Secretary General CUTS International)Published by Cameron May, London, May 2004.Website: www.lexmercatoria. org

Newsletter

EconomiquityThis is a quarterly newsletter published by the CUTS Centre for International Trade,Economics and Environment (CUTS-CITEE). It covers news and views on the internationaltrade issues, economic and developmental issues, trade & environment, intellectual propertyrights, etc.

This particular issue (April-September, 04) throws light on the UNCTAD XI held atSao Paulo, Brazil, with the cover article focusing on developed countries’ increasing apathytowards it. This issue also includes a four-pager insert on WTO negotiations. It may berecalled, a major breakthrough achieved in July, at Geneva, brought the bewildered DohaRound of trade negotiations back on track.

been receiving freely for many years now. Indeed, CUTSsupports to CAMON over the last three years of collaborationare too numerous to be quantified financially. On behalf of myorganisation and over 100 million consumers of Nigeria, I say aBIG THANK YOU to CUTS.

Babatunde Abiodun AdedejiCoordinator-General

Consumer Affairs Movement of Nigeria (CAMON)Ogun State, Nigeria.

ESSAYSONTHE

INTERNATIONAL

TRADINGSYSTEM

ANUNFINISHED

JOURNEY

byPradeep S. Mehta

reguletter cable tv operators in the provision of audio-visual services. in several countries the...

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