The Chinese University of Hong Kong

THE CHINESE UNIVERSITY OF HONG KONG

EMBA Program

MBA 6061

Seminar on Business and Management Issues

19th April 2008

Competition Law and Competition Policy in Hong Kong

- The Way Forward

Prepared by :

Name Student Number

Keith Chan 06323560

William Ho 06324550

Yulanda Lee 06325390

Jack Luk 06325700

Andy Wong 06906930

Contents:

I.  Executive Summary P.3 - 6

II.  Background P.7 - 11

III.  Management Problem and Queries P.12 - 17

IV.  Justifiable Findings and Action Implication P.18 - 23

V.  Conclusion P.24

VI.  References P.25

20

I.  Executive Summary

Background

1. In November 1996, Consumer Council recommended the Government should have competition policy as the key to Hong Kong (HK)’s future success. The Government’s response was to set up Competition Policy Advisory Group (COMPAG) in May 1998 to handle anti-competitive behavior against government only and then established the Competition Policy Review Committee (CPRC) in June 2005 to review the effectiveness of Hong Kong’s competition policy and to consult the public about the need to introduce in Hong Kong cross-sector law on fair competition. The clear signal from the public consultation was a high level of support for Competition Law in HK. Details are discussed in section II.

The Way Forward

2.  In February 2007, the Consumer Council provided its discussion document submission to the Government which strongly supported the enactment of a cross-sector competition law. In December 2007, the Secretary for Commerce and Economic Development, Frederick Ma presented at the Third Asian Competition Law and Policy Conference that the Government set the target of introducing the Competition Bill into the Legislative Council in the 2008-09 legislation session. Before introducing the Bill, the Government will issue for public comment a paper that will set out in plain language the proposed detailed provisions of the law.

Major Concerns of Stakeholders and Unsolved Issues

3. The policy objective of enacting new Competition Law will not target specific sectors nor will intervenue market structures but to develop a transparent regime to allow all the citizens in HK to take civil action against anti-competitive conducts i.e. seven types of these conducts were suggested by CPRC.

4. The competition law is well-intention and is widely adopted by many foreign countries. Thus, various stakeholders should have little to fear from Competition Law. However, such provisions have been discussed by the public since 1996 and have not yet been enacted. Section III aims at identifying and discussing about stakeholders’ concerns and unresolved management problems, for example, Concerns of SMEs, Merger and acquisition, Investigative power of Competition Authority, Composition of Tribunal.

Strategies and Recommendation

5. Recently, we have interviewed with two key participants involving the introduction of Competition Law who provided good insights to our project group about how to introduce the Competition Law successfully. Per discussion with the Principal Assistant Secretary for Commerce and Economic Development, Mr. McKinley, he considered competition law is really a good thing but the general public is difficult to grasp the concept of better consumer benefit after the enactment of the law. To convince the consumer’s support, the Government should pursue strategies of relating the law to the public’s excellent experience of lower price and better quality of goods and services after the enactment of Telecommunication Ordinance in HK. To convince large corporation to support the bill, Liberal Party and commercial sector will likely to accept it if the Competition Law incorporate the minimum investigative power of proposed Competition Commission, the minimum fine, civil proceeding by Tribunal and exclude the merger provision. To convince SME, the government should hold seminar and talk to major trade association to convey a clear message to SME, who do not have market power, are seldom targeted by competition regulator. Per discussion with the Consumer Council member, Mr. Larry Kwok, he emphasized how well to promote the Competition Law is the key to success of introducing the law. To gain support from the general public, the Government should focus on emphasizing 3 major consumer benefits: lower prices, better quality and more choices. To gain support from the commercial sector, the law should be promoted for creating level-playing field for all business in HK and focus on attacking 7 anti-competitive conducts only.

6. Based on research findings, our Project recommends the 知 – 明 – 喜 – 行 – 慣 approach combine with the application of Flywheel concept, derived from the famous business book “Good to Great”, to promote the introduction of Competition Law in HK as detailed in section IV.

Conclusion

7. Our project group supports the enactment of the competition law in HK in the near future. Based on the research and findings further discussed in following sections, our project group is looking forward to suggest solutions to the stakeholders to solve important issues and to adopt appropriate approach and strategies to introduce the Competition Law.

II.  Background

8. The competition policy was started to discuss in Consumer Council 1996, but not agreed by the Government at that time. In 1997, COMPAG was formed and set out the Competition policy in May 1998. Moreover, CPRC was appointed by COMPAG in June 2005 to review the effectiveness of HK competition policy and to report to COMPAG on its findings of “reviewing COMPAG composition, functions and modus operandi, including its mechanism and practice in dealing with competition related issues and complaints: and to the Government competition policy and the implementation thereof.”

9. COMPAG stated that the objective for the policy is “To enhance economic efficiency and free flow of trade, thereby also benefiting consumer welfare. The Government is committed to competition as a means to achieving the said objective, and not as an end in itself. ” ~ Report on the Review of HK Competition Policy in June 2006.

10. It is important to take account of the HK’s own situation when considering to establish a new competition law. HK is well-known on its free and open economy, with few restraints to trade in goods and services and foreign direct investment. However, our domestic market is relatively small. Some sectors characterized by significant economy of scale are dominated by a few big companies, with or without a large number of smaller companies at the periphery. In recent years, there can be seen an indication of higher expectations from consumers as they become increasingly aware of their rights. Nonetheless, some international organizations have expressed concern that there are little regulations of anti-competitive practices in HK. Therefore, HK needs to introduce a law to implement competition policy effectively by providing a legal basis for investigation and sanctioning of anti-competitive conduct. Secondly, it would strengthen our institutional framework for regulating competition, thereby promoting market discipline in HK; Thirdly, it also promotes a level playing-field for business in HK and lastly, it helps to avoid to have any adverse effect on the relative competitiveness, especially in sectors with higher entry barriers.

11.  The CPRC has reviewed international experience (Singapore, UK, USA, Canada, Australia and EU) in the formulation and application of Competition Law, and also studied the local sector specific competition regulatory regimes for telecommunications and broadcasting industries.

12.  From the report, CPRC recommends on the 1) New Legislation – General; 2) New Legislation – Broad Provisions; C) Regulatory Framework; D) Implementation and E) COMPAG. – the key summary as below :

a)  should not seek artificially to introduce competition, but should aim to deter and sanction specific types of anti-competitive conduct;

b)  should not seek to intervene in market or benefit particular sectors by targeting natural monopolies or mergers and acquisitions;

c)  should be apply to all areas of the economy, cross-sector in nature, rather than singling out certain sectors of the economy;

d)  should allow for exemptions to be made where so merited on public policy or economic grounds.

e)  seven specific types of conducts set out to be covered in the policy:

R  Price-fixing

R  Bid-rigging

R  Market allocation

R  Sales and production quotas

R  Joint boycotts

R  Unfair or discriminatory standards

R  Abuse of a dominant market position (such as predatory pricing)

f)  There should not be lengthy and detailed descriptions of specific types of conduct in the new law, so as to allow the regulator appropriate flexibility and to avoid the need for frequent legislative amendments. However, certainty and clarity are very important to all stakeholders, so a set of appropriate guidelines should be drawn up and that would include : detailed descriptions and examples of the types of anti-competitive conduct and an indication as to how intent and effect in relation to market distortion might be assessed and also references of existing local laws / related overseas legislations.

g)  To set up the legislation, the Government have to establish an effective regulatory framework as follows:

R  Have a relevant authority that has investigative power that would allow for a full and fair investigation of possible cases of anti-competitive conduct.

R  A law provides for sanctions that would have a clear deterrent effect, and that should be appropriate checks and balances, including an appeals channel, to guard against abuse of regulatory power.

R  The education and publicity programs were put in place so as to raise public awareness of the importance of fair competition to the proper functioning of market forces. e.g. SME may concern how the law can protect them but not accused by the larger corporation and going to have a higher business cost.

h)  The CPRC recommends a two-tier Competition Commission, consisting of a governing board and a full-time executive office, as the regulatory authority responsible for enforcing the new law.

i)  The CPRC recommends to establishing a Competition Tribunal to adjudicate on cases and to hand down sanctions as an option to the Government to consider it seriously.

j)  The CPRC recommends COMPAG to strengthen both in terms of membership and remit, to allow the Group to take a more direct and robust approach to handling complaints and assessing competition in specific sectors if there is not establish a Commission.

13. To implement the law smoothly, there is a need to engage the public in a through and inclusive process of consultation. Moreover, engaging stakeholders in a transparent and participatory consultation process should help Government to develop a clear picture of the most viable parameters for an efficient and effective regulatory regime. Secondly, the Government should carefully plan the administrative and resource requirements for the establishment of an appropriate body to oversee the implementation of the competition regime. Last but not least, the regime should able to coexist with the related legislation with a clear delineation of roles and minimal overlap of resources.

14. Thereafter, Legislative Council drafted a public discussion document named “Promoting Competition Maintaining our Economic Drive”, which issued on 6 November 2006 to launch a 3-month period of public consultation.

III. Management Problems and Issues

Results of the Public Consultation

15.  The objective of the consultation was to seek the public views as to whether or not they support a new competition law in Hong Kong. A total of 114 written submissions, 60 pro forma submissions and a 1200-signature petition were received from the general public by the end of the consultation period.

16.  The results of the public consultation indicated that majority of the respondents supported some form of legislation in order to enhance the regulatory framework for the implementation of competition policy. However, there were also some respondents who did not show a clear preference or did not support any new competition law. The major concerns of the respondents are discussed in the following paragraphs.

Cross-sector vs. Sector-specific

17.  For those respondents who supported the new competition law, there were in favour of a cross-sector rather than sector-specific competition law. This is because anti-competitive conducts could occur in any sectors and for the sake of fairness, it should be applied to all of them. In addition, it is difficult to identify which sector should be regulated and which one should not, and if the competition law only applies to some sectors, it might attract unnecessary allegation of discrimination in the future.

18.  Despite of the foregoing, some respondents argued that since each sector is unique, cross-section competition law would lack the flexibility to deal with sector-specific issues or practices. Besides, they are of the view that the existing system is working well and anti-competitive conducts are not apparent in many industries. Introduction of a new competition law would only increase their operating costs.

Concerns of SMEs

19.  For those respondents who did not support to have any new Competition Law, there were mainly SMEs. This outcome is a surprise to the Government as from the experience of other countries, SMEs are usually very supportive to the competition law since the law is protecting them from the anti-competitive conducts or practices of larger corporations in many occasions.

20.  The response from the SMEs indicated that they are worried that large corporations will take advantage of the Competition Law to sue them for anti-competitive conducts. Since SMEs would not be able to afford huge legal costs to defend themselves from these potential allegations, large corporations could easily eliminate SMEs without having to compete with them in the market place.

21.  Per our interview with Mr. McKinley, we understand that anti-competitive conducts are not exclusive to large corporation only. As the HK market is relatively small compares to other countries and many industries are highly concentrated, the way that some of the SMEs conduct their businesses might fall into the definition of anti-competitive practices of the new Competition Law. Therefore, the concerns of the SMEs mentioned in paragraph 20 above are legitimate. In order to address the concerns of the SMEs, Mr. McKinley commented that a dedicated tribunal is proposed to be set up to handle allegations in respect of anti-competitive conducts. The tribunal will be given power to issue orders to “cease and desist” from anti-competitive conduct (i.e. dismiss any unjustified claims immediately). Therefore, this will provide some protection to SMEs from incurring huge amount of legal costs as compared with going through a normal court proceeding. However, he has concern that the proposal of going through a dedicate tribunal rather than the existing court system will be challenged by LegCo members and will potentially be an obstacle to the legislation of the Competition Law.