Antitrust Law Center Forum

The young lawyers advocating the passage of anti-trust legislation held an anti-trust forum on 31 August 2011 at Pasay AB Function Room of the Makati Shangri-la at 11:00 a.m. The form was called “Bastardization of the Philippine Economy: A Primer on Anti-trust Legislation.”

The forum was organized by the Antitrust Law Center/Young Lawyers In Support of Antitrust Law (YLSAT).

The two main resource speakers were again Atty. Lorna Kapunan and Atty. Anthony Abad.

Atty. Lorna Kapunan spoke on manifestations of monopolies, unfair competition, restraint of trade and price manipulation in the Philippines. 

Atty. Abad discussed different anti-trust regulations and competition policies in various Asian countries.

Time for Anti-Trust?

“MAPping the Future” Column in INQUIRER – 1 August 2011

Time for Anti-Trust?
by Ronald U. Mendoza

Lee Kwan Yew once quipped that in the Philippines, 99 percent of the population waited for a phone line, while the remaining 1 percent waited for a dial tone. While this jab was directed at our telecoms sector, Lee could have just as easily poked at the rest of our monopolized and highly regulated industries then.

Sweeping market-oriented reforms in the mid-1990s were designed to change this. Deregulation and privatization would get the inefficient and costly government out of key sectors it had no business being in, and instead draw-in competitive, innovative and much more efficient private sector actors who would in turn compete for market share by providing better services at lower prices. Deregulation would enhance competition, in turn promoting the necessary investments to boost innovation and competitiveness. This would ultimately lead to increasing consumer welfare and taxpayers’ benefits, by lowering the number of loss-making and inefficient government owned and controlled corporations.

Are consumers (and taxpayers) really any better off today, well over a decade after this deregulation wave? Did competition and competitiveness really increase? Telecommunications, petroleum, and air travel are three industries that are particularly illustrative of the range of outcomes. There are some gains, but also evidence of emerging challenges to promote competition and safeguard consumer welfare.
 

Table 1. Summary of Selected Industry Information

Telecommunications Petroleum Airlines
Year of Deregulation 1995 1998 1995
Companies before Deregulation PLDT Shell, Petron and Caltex Philippine Airlines (PAL)
Companies after Deregulation PLDT (Smart; Talk N’Text-Piltel; Red Mobile-Cure and Sun-Digitel) and Globeb Shell, Petron, Caltex, SeaOil, Flying V, Total, Jetti, City Oil and UniOil PAL, Cebu Pacific, SEAir, Air Philippines, and ZestAir
Herfindahl-Hirschman Competition Indicatora (Higher values reflect more market concentration; Date or event in parentheses) Mobile Telephony: ·        10000 (1994) ·        4020 (prior to PLDT-Digitel merger)b ·        5800 (after PLDT-Digitel merger)c Landlines: ·        10000 (1994) ·        3253 (prior to PLDT-Digitel merger)b ·        4479 (after PLDT-Digitel merger)c 3427 (1996)d 2846 (2010)d Domestic: ·        10000 (1994) ·        3680 (2010) International: ·        2548 (2010)e

Notes:
a Herfindahl-Hirschman Index prior to and after deregulation, with year in parenthesis. The HHI it is the sum of the squared market shares of the each company in the industry. The index approximates the value zero when the industry has more firms with similar size. A higher value therefore signals potentially weaker competition and more concentration in the industry. For illustration, the US Department of Justice, Federal Trade Commission characterizes an HHI of 1500 and below as “unconcentrated”, 1500-2500 as “moderately concentrated” and 2500 and above as “highly concentrated”.
b Shares prior to PLDT-Digitel merger.
c Assuming PLDT-Digitel merger.
d Data from the Department of Energy.
e Data from the Center for Asia Pacific Aviation (2010); and based on passenger capacity, including international flights.

Telecommunications

The telecommunications industry was deregulated in the early 1990s, but PLDT remained a dominant player due to its control over most landlines. This was further reinforced in 1998, when First Pacific (owner of Smart) bought control of PLDT (also owner of Piltel), and these companies accounted for a combined share of 68 percent of the cellular telephone subscribers and 43 percent of the installed lines. Competition between PLDT-Smart and Globe kept pricing steady for text messaging, so in real terms (i.e. accounting for inflation), the price of text messaging declined over time, even as it was kept at PhP1 per text message. In 2003, Sun Cellular of Digital Telecommunications Philippines Inc. (Digitel) entered the mobile telecommunications market offering product innovations like “unli” (unlimited) calls and text messaging. While initially challenged by the industry incumbents through the National Telecommunications Commission (NTC), the NTC upheld Sun Cellular’s entry and it eventually provoked similar product innovations among the incumbents.

Intense competition among these companies generated a wider array of product options for consumers, with ever more competitive pricing schemes fitting different consumer preferences. Well over 80 percent of the population now has access to mobile telephony—a far cry from the times when it took over a decade to get a landline from PLDT.

However, the recent acquisition of Digitel by PLDT raises questions about the state of market concentration in the industry, and in turn, what this might mean for continued product innovation, competitiveness and consumer welfare. A virtual duopoly will emerge from this deal, with PLDT and its affiliates accounting for about 70 percent of the mobile phone market, and Globe serving the remaining 30 percent. Despite deregulation, barriers to enter the industry, including separate franchise requirements for each telecommunications sector and limits to foreign participation (40 percent cap), prevent further enhanced competition.

Petroleum

Deregulated in 1998, the downstream oil industry was initially comprised of three players: Caltex Philippines (now the marketing and distributing company under Chevron), Pilpinas Shell, and Petron (then jointly owned by the state-owned Philippine National Oil Company and Saudi Aramco). Today there are several more gasoline suppliers, including the original three plus SeaOil, Flying V, Total, Jetti, City Oil and UniOil.

Unleaded gasoline was about PhP12 per liter while diesel gasoline was about PhP8 per liter during the deregulation—these recently reached peaks of about PhP60 and PhP45, respectively. Are these dramatic price increases due to deregulation? Recent analysis by the UAP and SGV suggests that, in fact, local pump prices have not gone up as fast as international indicators for crude oil and its refined products. Further, the stock prices of oil companies such as Petron and Shell do not appear to show any marked improvements during the period of study from 2005-2008, when prices at the pump were on an upward trend.

Our own empirical analysis at AIM also shows that much of the change in gas prices at the pump since the deregulation was accounted for by international price movements. In fact, after correcting for the influence of international prices and a measure of industry competition, gas prices on the margin before and after deregulation are not statistically different. This suggests that while deregulation is not to blame for the dramatic rise in gas prices, it did not seem to change industry pricing either. Indeed, even as they are now also competing in retail, food and shopping options, the three main industry players still dominate—their combined market share still stands at about 77 percent.

Airlines

The civil aviation industry in the Philippines was dominated by PAL until the government finally opened this sector in 1995. Following the entry of new airlines like Cebu Pacific, Air Philippines and Asian Spirit (now ZestAir), PAL’s market share was cut in half, declining from 96 percent in 1995 to about 49 percent in 1999. PAL nevertheless remains a dominant player in the market with about 50 percent market share in recent years, but Cebu Pacific has captured significant ground, accounting for about 30 percent market share.

Deregulation brought about a surge in domestic air travel in the country, thanks to more flights and more competitive pricing. The Manila-Iloilo route alone experienced an 83 percent increase in the number of travelers just two years after deregulation. Passengers from Manila to Davao and from Manila to Cebu also shot up by 45 percent and 34 percent, respectively, during this period.

More attractive pricing clearly played a role in successfully contesting market share from PAL. There is also evidence that PAL restricted output—and this was quickly undone by the entry of more players. A recent empirical study suggests that average airfares are about 10 percent lower after liberalization, and that up to 90 percent of domestic airline passengers benefited from lower fares.

The industry is not without challenges, however. Competition did improve for the most profitable routes, but the less profitable routes (or so-called missionary routes) could be left behind. PAL used to serve these routes through a cross-subsidy between the more profitable and less profitable destinations. However, with the break-up of its monopoly, and the apparent focus of the new entrants on the more profitable routes, up to 11 markets formerly served by PAL have lost airline service.

Airport infrastructure is also still inadequate. In addition, even as new domestic firms have shown their competitiveness relative to the once monopoly incumbent, there are some concerns that these same firms may be hard-pressed to compete at the international level, notably once the country opens up to ASEAN competitors as part of the country’s “open skies” policy. Industry experts already forecast the Philippines could be a key battleground for low cost carriers in the region, including AirAsia (Malaysia) and Tiger Airways (Singapore) once Philippine skies have been opened up.

Promoting Competition and Competitiveness

The preceding examples provide some evidence of consumer gains from deregulation. However, they also flag critical issues, including the possible need to maintain healthy competition levels, and also competitiveness, across Philippine industries. Indeed the indicator of competition used widely by international regulators—the Herfindahl-Hirschman index (HHI) —suggests that the potential for abuse of market power is still present in all three industries examined here (see table 1). Since the HHI for these industries are well above 2500, according to the guidelines of the US Department of Justice and the Federal Trade Commission, they would all be described as “highly concentrated.”

Some market consolidation has also already begun to take place. Indeed, if we were to draw from guidelines on competition policy presently applied in the United States or in the EU, the PLDT-Digitel merger would automatically raise a red flag and trigger closer scrutiny by regulatory authorities, as the worsening of industry concentration indicators could indicate a rise in market power and possibly open the door to anti-competitive behavior.

In addition, pricing behavior and product/service strategies remain largely unexamined. Further market liberalization will also introduce challenges to some industries. Regulatory authorities will need to catch up with these developments, utilizing international good practices, including more robust analytical frameworks and technical analyses to strengthen regulatory oversight over these evolving industries.

Deregulation does not mean that the government should be absent—only that its role be re-focused. Markets can also malfunction, and industries could end up consolidating in ways that undermine competition, innovation and ultimately also competitiveness. It is up to regulatory authorities to facilitate healthy competition and improved competitiveness, in order to safeguard consumer welfare. That in turn requires professional and technically equipped regulatory institutions with true independence and real capacity to exercise their mandate. Given the growing importance of anti-trust issues both nationally and internationally, more effective and coherent competition law and policy will be necessary.

(The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines.  The author is Associate Professor of Economics at the Asian Institute of Management, and Executive Director of the AIM Policy Center. Prior to joining AIM, he was a senior economist with the United Nations in New York. Feedback at map@globelines.com.ph.  For previous articles, please click

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ADB supports SMEs

"Asian Development Bank backs support for MSMEs in Phl"

by Ted Torres

Published 21 July 2011, The Philippine Star

(Original article available online here).

"MANILA, Philippines - The Asian Development Bank (ADB) said the Philippine government should redirect its support to the micro-, small and medium enterprises (MSMEs) instead of continuing to favor large corporations.

In a report, the ADB also said the Aquino government should continue to pursue the Public-Private Partnership (PPP) program, especially in the infrastructure sector.

The ADB report highlighted that one of the constraints for growth is the “disconnect” between large companies and the MSMEs.

“One constraint is the bias for large companies (mostly in the export industry) and domestic SMEs, many of which do not prosper due to lack of capital, unreliable supply chains, and weak demand for their output,” it said.

The report urges the government to help MSMEs by lowering the cost of doing business. This can be done by improving infrastructure; streamlining and removing excess administrative procedures; and creating a fair competitive environment through anti-trust laws and good business practices.

“The inability of MSMEs to provide efficient and cost-effective support to large firms on the one hand, and the lack of demand from large firms for such support from MSMEs, on the other hand, present a vicious cycle that debilitates the sector,” the report said, adding that the vertical integration of MSMEs into large enterprises has been less successful in the Philippines than in countries like Germany and Japan.

The report also said the Philippines critically needed better infrastructure as well as technical expertise to help move the economy.

Socioeconomic Planning Secretary Cayetano Paderanga, a former professor at the University of the Philippines’ School of Economics and author of the report, said the PPP program in the Philippines have typically been shunned by business because of unclear policy and regulatory frameworks, a cumbersome government approval process, and a lack of bankable projects. Other impediments, such as controversial judicial decisions, have also constrained PPP growth.

To encourage partnerships, the government should improve transparency in PPP project selection, provide better accounting of revenues and expenditures, and have a higher-profile anti-corruption drive, he added.

“The success of reforms in both rules and administrative processes and infrastructure support is expected to result in higher foreign direct investments and an increase in fixed capital,” the report added.

Meanwhile, ADB country director for the Philippines Neeraj Jain said it makes concrete proposals to realize the potential contribution of the private sector to inclusive economic growth in the Philippines.

“We are gratified that these proposals have contributed to the policy directions embedded in the Philippine Development Plan for 2011-2016,” Jin said."

Anti-trust crusaders hail EO45

"Anti-trust crusaders hail Aquino order"

Published 12 July 2011 in Malaya

(Original article available online here).

"The Young Lawyers in Support of Antitrust Law, together with a number of Filipino distributors and lawyer-anti-trust crusader Lorna P. Kapunan, hailed the signing by President Aquino of Executive Order No. 45 which gives full jurisdiction to the Department of Justice (DOJ) over matters related to competition and fair trade practices.

"President Aquino assured Filipinos that the matter of monopolies and corporate bullying tactics was one of the first issues that he would look into. By signing this executive order, he has shown that he is taking active steps to back up that promise," Kapunan said.

EO 45 creates the Office for Competition (OC) whose mandate is to investigate and prosecute all anti-trust violations. 

The OC is also tasked to "enforce competition policies and laws to protect consumers" and "supervise competition in the markets by ensuring that prohibitions and requirements of competition laws are adhered to." 

The OC must likewise "monitor and implement measures to promote transparency and accountability in markets" and "prepare, publish and disseminate studies and reports on competition to inform and guide the industry and consumers."

Kapunan said with EO 45, "Filipino entrepreneurs beleaguered by unfair business practices of giant conglomerates will now know exactly where they should seek help." 

"Now that it is clear which agency has jurisdiction, I am certain that more Filipino distributors will take action against exploitation by multinationals," she said. 

A number of pending legislative bills are in collaboration with EO 45, most of which are intended to improve current laws on monopolistic behavior, predatory pricing, and the restraint of trade. 

There is Senate Bill No. 1 ("The Competition Act of 2010") authored by Senate President Juan Ponce Enrile, and Senate Bill No. 123 ("The Fair Trade Act of 2010") authored by Sen. Sergio Osmeña. 

There are 12 anti-trust bills in the House of Representatives, among them House Bill No. 4835 ("The Philippine Fair Competition Act of 2011") authored by Rep. Rufus Rodriguez."

Lawyer's take on the new competition authority

"Why a new competition authority out of the blue?"

by Francis Ed Lim

Published 07 July 2011, Philippine Daily Inquirer

(Original article available online here)

"Last June 19, President Aquino signed Executive Order No. 45 designating the Department of Justice as the Competition Authority for the Philippines.

The EO creates the Office for Competition (OC) under the Office of the Secretary of Justice and tasks it to exercise vast powers and responsibilities relating to antitrust matters. It was issued pursuant to the President’s “power and control over executive departments, bureaus and offices,” as well as his “continuing authority under existing laws to reorganize such executive departments, bureaus and agencies.”

The EO comes in the wake of several bills now pending in Congress to revamp our present laws on monopolies and combinations in restraint of trade. There are several bills in the Senate, among which are Senate Bill No. 1, authored by Senate President Juan Ponce Enrile, otherwise known as the Competition Act of 2010, and Senate Bill No. 123, otherwise known as the Fair Trade Act of 2010, authored by Sen. Sergio Osmeña.

There are also 12 antitrust bills in the House of Representatives, among which is House Bill No. 4835, otherwise known as the Philippine Fair Competition Act of 2011, authored by Rep. Rufus Rodriguez.

Senate Bill No. 1 is basically the same as the antitrust bill passed by the Senate in the last Congress. The House versions of the bill are now in their advanced stage. The committees on trade and industry and on economic affairs are now preparing a substitute bill to the 12 antitrust bills filed in the House of Representatives.

My two cents’ worth

Under the present setup, the delineation of powers and responsibilities on antitrust matters is clear. The DoJ takes care of criminal prosecution while the different implementing agencies take care of regulation.

EO 45 appears to radically change this setup. It creates the OC as the super body for antitrust matters. Thus, aside from giving the OC the power to investigate and prosecute violations of our antitrust laws, EO 45 empowers it to “[e]nforce competition policies and laws to protect consumers” and “supervise competition in the markets by ensuring that prohibitions and requirements of competition laws are adhered to.” It also mandates the OC to “[m]onitor and implement measures to promote transparency and accountability in markets” and “[p]repare, publish and disseminate studies and reports on competition to inform and guide the industry and consumers.” Consistently, the EO empowers the OC to “call on other government agencies and/or entities for submission of reports and provision for assistance,” thereby apparently relegating the other agencies to assisting the OC in the performance of its task under the executive order.

The creation of this superbody by an executive order, however, gives rise to more questions than answers. For example, there are matters relating to monopolies and combinations in restraint of trade that are currently under the regulatory jurisdiction of other government agencies. Things that readily come to mind are sale of assets (which include shares of stock) of corporations, corporate mergers and voting trust agreements, all of which must comply with our laws against monopolies and combinations in restraint of trade. These matters are governed by the Corporation Code, which is being implemented and enforced by the SEC. Another example is the Downstream Oil Deregulation Act (RA 8479), which mandates the Department of Trade and Industry and Department of Energy to prevent cartelization, monopolies, combinations in restraint of trade. A live example is the reported P74.1-billion acquisition by PLDT of 51.55-percent shareholding in Digitel, which the NTC is reviewing in the exercise of its powers under the law.

Since EO 45 is silent as to the operating relationship between the OC and government agencies with antitrust powers, the question then is: Should these government agencies now stop exercising their antitrust powers in light of the creation of the OC as the superbody for antitrust matters? Alternatively, should the OC now supervise the various implementing agencies in the way they discharge their antitrust powers and responsibilities? If so, is this just another bureaucratic hurdle that will further complicate doing business in the Philippines? In this regard, “supervising” competition could lead to legal challenges from the private sector.

For another, in the United States, there is no single authority for antitrust matters. The prosecution for antitrust violations is left to the DoJ while the regulatory side is left to the Federal Trade Commission. This model is followed by other countries such as the United Kingdom and other Asean countries.

In other words, the enforcement authority for the antitrust law is a policy matter to be determined by Congress in the exercise of its legislative powers under the Constitution. In fact, a cursory examination of the pending bills in Congress indicates different policy approaches to the matter. On the one hand, Senate Bill No. 1 designates the DoJ as the main implementing agency for the new competition law. On the other hand, Senate Bill No. 123 proposes to create a Fair Trade Commission. The same approach is being proposed by the House of Representatives, which proposes to create the Philippine Fair Competition Commission (PFCC).

More importantly: Why is there a new Competition Authority all of a sudden? Why not just wait for the new antitrust law, a priority bill that President Aquino promised in his first State of the Nation Address? Is the Aquino administration sensing an uphill battle in the enactment of a new antitrust law? Is this a genuine effort to level the playing field pending the passage of a new antitrust legislation? Is this a word of warning to our big business groups that are trying to outdo one another in acquiring businesses? Will the new authority exercise regulation on the antitrust issues raised on PLDT’s acquisition of Digitel?

Your guess is as good as mine!"

Office of Competition rules nearly ready

"Office of Competition rules nearly ready"

Published in BusinessWorld Online, 04 July 2011

Hit the stands on 05 July 2011

(Original article available online here)

"THE JUSTICE DEPARTMENT expects to soon begin tackling competition issues with guidelines implementing the Palace-ordered mandate likely out next week, a Cabinet official yesterday said.

Justice Secretary Leila M. de Lima said the rules that will govern the planned Office for Competition under her department are still being finalized.

“We are still discussing the guidelines. We hope to release it by next week,” Ms. de Lima said.

Among the issues the competition office will study is Philippine Long Distance Telephone Co.’s (PLDT) planned purchase of rival Digital Telecommunications Philippines, Inc. (Digitel).

“[T]here are [alleged] anti-trust issues in the deal,” Ms. de Lima said.

Executive Order 45, signed by President Benigno S.C. Aquino III on June 9, designated the Justice department as the country’s Competition Authority. It was tasked to investigate violations of competition laws and prosecute violators; “supervise competition in markets” by enforcing such laws; as well as prepare, publish and disseminate studies and reports on competition to inform and guide industry and consumers. It will target monopolies, cartels and other “combinations in restraint of trade”.

The order also formed an Office for Competition under the Justice secretary’s office to carry out the Competition Authority’s functions.

Ms. de Lima said the guidelines, which are being deliberated by an internal panel composed of herself, Justice undersecretaries and assistant secretaries, among others, will adhere to the provisions of Mr. Aquino’s directive.

“We also had to keep in mind that for this year, the budget [for the competition office] will come from the DoJ (Department of Justice) budget and it will only be next year that a full allocation will be made for the office,” she added.

Ms. de Lima has said that the competition office , likely to be staffed by current state lawyers, would also engage the services of technical consultants and advisers from the private sector."

Previous related BusinessWorld post here.

DOJ formulating guidelines for competition office

"DOJ to formulate guidelines on competition authority"

Published in Positive News Media, 23 June 2011

(Original article available online here)

"MANILA, June 23 (PNA) – Department of Justice (DOJ) Secretary Leila De Lima will meet all the officials of the Department of Justice (DOJ) to formulate guidelines in investigating all cases involving violations of competition laws and prosecute violators to prevent, restrain and punish monopolization, cartels and combinations in restraint of trade. 

“We need to come up with guidelines on competition authority, the unit that will handle anti-trust cases because of Executive Order 45,” De Lima said.

Under E.O. 45, the DOJ is empowered to act as “Competition Authority” that would “investigate all cases involving violations of competition laws and prosecute violators to prevent, restrain and punish monopolization, cartels and combinations in restraint of trade.”

The DOJ is also mandated under E.O. 45 to “enforce competition policies and laws to protect consumers from abusive, fraudulent, or harmful corrupt business practices and monitor and implement measures to promote transparency and accountability in markets.”

Likewise, the DOJ is also tasked to “supervise competition in markets by ensuring that prohibitions and requirements of competition laws are adhered to, and, to this end, call on other government agencies and/or entities for submission of reports and provision for assistance.”

The DOJ under E.O. 45 carries the responsibility to “prepare, publish and disseminate studies and reports on competition to inform and guide the industry and consumers; and promote international cooperation and strengthen Philippine trade relations with other countries, economies, and institutions in trade agreements.” (PNA)"