Рубрика | Oilreview

WORKING TOGETHER

WORKING TOGETHER

Leading researcher at the National Institute for Strategic Studies

Рябцев-англ.Gennadii RIABTSEV

Director of special projects at Scientific and Technical Center «Psychea»

Doctor of Science in Public Administration, Professor

On the ways to improve the performance of Ukraine’s Anti-Monopoly Committee

«Where there is no competition, one sleeps better, but lives worse.»

– Unknown Author

A competition policy of any state is criticized more than any other form of the government’s public interference in private affairs. Outstanding economists of the day from Friedrich Hayek to Alan Greenspan call the world of antitrust regulation «naïve,» «unrealistic» and «irrational,» while Milton Friedman generally believes that competition legislation «brings far more harm than good» and it would be better if people get rid of it. But somehow, these statements don’t fall in line with the words of English bookbinder and trade unionist Thomas Joseph Dunning: «With adequate profit, capital is very bold… [For] 300% [of the profit] there is not a crime at which it will scruple, nor a risk it will not run, even to the chance of its owner being hanged.»

When Ukraine becomes a state with a developed market economy, domestic economists, like Alan Greenspan, will argue that the entire system of anti-monopoly legislation is a disorderly blend of economic irrationality and ignorance, a product of naïve and, undoubtedly, unrealistic economic theories. Then the Ukrainian president will definitely sign the «Act of Economic Freedom,» which will overturn the restrictions on the activities of private companies. But all this will be possible only if none of the participants in each of the markets in the country dictates the rules for the purchase and sale of goods and services, and prices are not set by the producer, but by Alfred Marshall with his demand and supply law.

The current competition law in Ukraine, the high quality of which is recognized in the EU and the United States, provides the Anti-Monopoly Committee of Ukraine (AMCU) with a wide range of powers aimed at improving the efficiency of the national economy. Unlike its counterparts in the post-Soviet space, our antitrust body is empowered to stop illegal actions not only by businesses, but also by executive authorities, and to assess regulatory acts in terms of their compliance with anti-monopoly legislation. Thus, the AMCU is a powerful tool for protecting economic competition, called in the National Security Strategy of Ukraine «a key condition for a new quality of economic growth.»

Despite this, there are numerous cases in the goods and services markets in Ukraine of:

– Establishment and maintenance of overpriced (monopoly) or undervalued (predatory) prices;

– Removal of goods from circulation and unjustified reduction of production of goods in demand;

– Creation of barriers to entering markets;

– Distribution of false, inaccurate or distorted information, capable of causing damage or harm; and

– Misleading consumers about the origin, properties, quality, and volumes of goods or services, incorrect comparison of manufactured and/or offered goods and services.

However, the state itself often unreasonably hinders the activities of business entities by:

– Deliberately limiting their rights to sell certain goods;

– Giving instructions on the priority supply of goods to a certain circle of buyers (in particular, the population or agricultural producers);

– Imposing restrictions on the consumers’ choice of producers (such as «Buy Ukrainian goods from Ukrainians»); and

– Unjustifiably narrowing access to participation in auctions and tenders, creating priority conditions for participation for individual market participants.

Such an intervention definitely does not contribute to the achievement of the declared objectives of competition policies.

Proving the facts of violations of the legislation on economic competition, the AMCU brings significant revenues to the budget. Last year alone, the economic effect achieved as a result of termination of violations by the Committee bodies (calculated according to the OECD methodology), exceeded UAH 1.5 billion.

However, since 2003, the state has received almost a tenth of the amount that it should have. This is partly due to the fact that the Committee’s decisions on high-profile cases are usually challenged in courts. This allows defendants pending trial to suspend both payoffs and enforcement of AMCU decisions on halting anticompetitive actions. Once seeing an opportunity to drag the investigation and/or postpone punishment, many businesses challenge any Committee’s demands (even requests for information), taking advantage of the fact that the Ukrainian courts consider appeals for years. At the same time, even a case the Committee wins does not guarantee the transfer of funds to the budget. While the Anti-Monopoly Committee appeals to the court to receive a written warrant, passes it to the State Bailiff Service and waits for its response, the fined company often has enough time to transfer all its assets to other legal entities, declaring bankruptcy. This could have been avoided if a defendant gave a court a pledge in the amount of a fine, and the AMCU orders were not suspended. It would also be great to oblige business entities to return prices of goods and services at the previous level immediately after the case is opened, as it is done in Germany.

A market economy has a serious drawback – it is unprotected from collusion due to its transparency. Because of this, both consumers and the state lose a lot of money. Not surprisingly, in most developed countries there is a severe punishment for violating the competition law. For example, in the U.S., dozens of top managers are annually sentenced to three to eight years in prison for signing cartel agreements and/or following them. Meanwhile, officials in Ukraine do not bear any responsibility for preventing the AMCU from conducting investigations. The maximum penalty for avoiding the fulfillment of Committee decisions and refusing to provide the required information (or providing incomplete or inaccurate information) is UAH 119 (seven non-taxable minimum incomes, according to Article 166-4 of the Code of Ukraine on Administrative Offenses). At the same time, the prospect of even a minor personal punishment and publicity may be sufficient to keep an official from violating the rules. Criminal liability for an individual comes only if they were forced to take part in concerted actions by force or by causing material damage (or the threat of such damage). In practice, top managers violate the law deliberately, as they can obtain a much greater personal benefit from committing unlawful actions as compared to the negative consequences that may arise after fines have been imposed on their business entities. In addition, as Ukrainian and global experience shows, agreements on price fixing, sharing of a market or production volumes are made during informal meetings and not documented. Methods and means of investigation, which the AMCU is not entitled to employ, are necessary to stop such violations.

In addition, the country’s competition authority has numerous functions that similar European structures do not have. The AMCU reputation as one of the most effective bodies has played a bad joke, imposing additional obligations on it, in particular in the field of public procurements (without any substantial staff expansion or increased budget). The indirect burden on the Committee has also grown, as other Ukrainian state agencies and individual citizens also make use of that rather effective antitrust legislation by turning to the court bypassing the AMCU.

There is a constant demand coming from higher offices that the AMCU ensure lower prices for infrastructure products (petrol, gas, electricity, and food), although their regulation is not among its functions. Moreover, prices for the vast majority of goods and services in Ukraine are free-floating and no state body has a right to establish their fixed or interval values (Article 190 of the Commercial Code of Ukraine). The Anti-Monopoly Committee is entitled to intervene in market pricing processes only in case they detect abuse of monopoly or concerted actions of economic entities (participants in a single market, a seller and an intermediary, wholesale and retail salesmen), aimed at establishing or maintaining prices that cannot be set if there is significant competition.

One of the consequences of these management problems is their «fragmentation.» Significant in this respect is a much higher (than in the EU member states) number of cases investigated by the AMCU. At the same time, several of its territorial units might not only open identical cases against the same entities simultaneously, but also assess their actions differently. At the same time, AMCU ignored the general tendencies of development of the main commodity markets both at the regional and national levels.

Unfortunately, sometimes this «blindness» of the antitrust authority is man-made and has signs of regulatory capture, that is, a situation where the authority, which may in one way or another affect the activities of business entities, gets «adjusted» to fit their interests. As a result, such a body:

– Begins to adhere to commercial and other private interests prevailing in the markets, contributing to a higher profit of certain economic entities;

– Neglects interests of consumers and the public as a whole;

– Contributes to the creation of cartels, restricts competition;

– Protects individual market participants from competitors, in particular by selective application of sanctions or carrying out audits;

– Creates or increases barriers to entering regulated markets, including by complicating procedure to obtain permits or carrying out unmotivated investigations against individual economic entities.

One of the factors contributing to this situation is a huge gap between salaries of top managers of business entities dominant in markets and AMCU staff (the latter are the lowest among other executive bodies).

As an example of the Anti-Monopoly Committee turning a blind eye to the apparent violations of antitrust law, one can recall the facts of simultaneous, equal prices raises and without obvious reasons for all types of petroleum products on April 11, April 22, April 27, and May 17, 2016 at 1,625 petrol stations belonging to 18 companies, which are not formally tied by control relations. Although everything indicated that these actions corresponded to the definition of «conscious parallel behavior,» the AMCU chose not to react at all.

During the economic and political crises of 2008-2011 and 2014-2016, the level of competition in domestic markets for goods and services has decreased. Main features of this period were:

– Government interference in all market processes associated with gaining profit;

– Reduction of domestic production;

– Significant rise in prices for goods and services, primarily in infrastructure;

– Level of product quality ensured only by the companies’ marketing policies;

– Low profitability of businesses, especially small and medium-sized;

– Aggressive marketing policies of businesses and wars for consumers;

– Aggravation of unfair competition, in particular through price and quality;

– Significant volatility of markets and inability of public authorities to monitor and predict changes;

– Inefficiency of the rules of the game known to businesses; and

– Readiness of businesses to make quick and intuitively unpredictable decisions.

Currently, commodity markets in Ukraine are rapidly expanding, although the global economy, on the contrary, is seeing a rapid development of the area of small, family businesses. Given these circumstances, fundamental decisions are required to change the structure of businesses, unbundling of companies operating in the regional and local markets for the processing of raw materials, transportation, storage and sale of products. Economic and administrative barriers should be eliminated or reduced to the entry of new independent players into these markets, while the development of competition there is hampered by the lack of modern capacities and logistics infrastructure, inaccessibility of bank lending, confusion, confusion, cumbersome nature and fragmentation of land and environmental legislation. It is important to guarantee non-discriminatory conditions for access to services of natural monopolies (rail and pipeline transport, electric, gas and heat networks), transshipment (whose market is almost monopolized), and storage services for products in regional and local markets, as well as direct sales from manufacturing enterprises. It is worthwhile to change the taxation system so that it not only performs a fiscal function, but also contributes to the competition development. It is necessary to increase the responsibility of authorities before market participants and of traders – before the state. Indeed, underpayment of taxes can also be regarded as a violation of antitrust laws because such companies due to such actions gain significant competitive advantages.

There is one more problem. It’s a closed-up nature and opacity of business entities, primarily those who did not unbundle extraction and processing, production and sales. The intermediary links remain half-criminal, although their operations play a decisive role in any product supplies. Traders know their intermediaries well and are well aware of how much they make. It is their money that goes to party coffers, on bribes and kickbacks – all those things that are being condemned but never ceased to exist.

One of the mechanisms for creating a real market in its western sense is the development of organized trade, including on the exchange. Then it will move to a transparent pricing system based on market quotations, formed and implemented on both organized trading platforms (electronic ones in particular), and based on direct contracts, without any instructions or rushing on the part of the state (but retaining obligatory supervision). It is worth creating internal price indicators (instead of traditionally, and thoughtlessly, copying the external ones) reflecting the real balance of demand and supply, as well as expectations for its future changes.

In order to prevent systemic violations of the antitrust law in the future, the government should not resort to crackdowns but set up clear, open, accessible, transparent, and competitive markets, reorienting the efforts of the Anti-Monopoly Committee toward:

– Econometric, not merely legal, substantiation of its actions;

– Effective use of quality information and analytical support;

– Synchronizing horizontal and vertical interaction of the AMCU’s units; and

– Formation of common methodological approaches to the assessment of actions of economic entities.

To this end, it is necessary to update market models the AMCU uses by:

– Determining main groups of economic entities – market participants – and control relations between them;

– Clarifying product boundaries of markets, in particular, taking into account consumer features of goods sold on them;

– Clarifying geographical boundaries of markets, taking into account the impact of both demand and offer;

– Defining mechanisms of interconnection between adjacent markets;

– Developing a pricing model in line with modern conditions; and

– Creating an algorithm for collecting, storing and using information on the functioning of markets and the AMCU units’ operations on them;

– Applying more actively the methods of economic and econometric analysis in revealing violations of antitrust legislation.

At the same time, politicians should ensure the political, financial and functional independence of the Anti-Monopoly Committee by:

– Guaranteeing transparency of appointments to posts, preventing facts of moving to managerial positions in regulatory bodies representatives of economic entities or persons who are in labor or other contractual relations with public-political associations;

– Prohibiting any form of interference with the AMCU operations and any pressure by state authorities and local governments, their officials, business entities and their associations, political parties, public associations, trade unions, associations of citizens and their bodies, and introducing personal liability for such attempts;

– Excluding for a certain period the establishment by former AMCU chiefs of contractual relations with business entities and/or their appointment to managerial positions in them;

– Establishing a clear procedure for discussing draft decisions, including with industry associations;

– Ruling out coordination of the AMCU’s draft decisions with other bodies of state power;

– Providing for periodic audits of the AMCU by acclaimed independent companies, with external payment for their services.

. . .

Read the complete version of the article in the magazine TerminaL.

Tel.:(+38 044) 263-68-39, email: terminal.psychea@gmail.com

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