Protecting the public interest through competition
In 2016 the Competition Council of Latvia (CC) adopted several important decisions, examined complicated merger transactions and continued to implement diverse competition culture activities. The CC also has prepared soil for processes of internal changes within the authority in order to be able to ensure even higher professional performance of the authority in the future.
New practices in examination of competition issues
In 2016, the CC took a step further and assessed new anticompetitive practices and applied new methods, in cases of abuse of dominance and in merger transaction.
In September 2016, the CC discovered the transgression, by dishonest use of a dominant position, of the Knauf Group of enterprises. It is the first matter in the CC's practice where a transgression was discovered in the application of competition limiting loyalty discount to a dominant enterprise. Between 2009 and 2014 the Knauf Group applied loyalty discounts to its consumers (building material retailers), thus creating positions equivalent to exclusivity for the Knauf Group's providers of plaster boards.
For abusing their market power by creating and implementing anti-competitive loyalty rebates system a fine was imposed on both involved companies (SIA Knauf/Latvia and Norgips/Poland) totalling €1.3 million. The CC, for the first time, analysed whether loyalty rebate systems designed and implemented by a dominant undertaking constituted a competition law infringement.
Meanwhile, regarding new practices in merger examination, a decision in January 2017 has to be mentioned. The highly concentrated food retail market of Latvia is mostly divided between two large chains. One of them planned to open a store in a multi-functional shopping centre in Riga; these premises were previously rented by another, much smaller chain. While examining the merger and overlapping geographic areas, the CC used an isochrone comparison and loyalty cards data analysis for the first time. The CC extended its decision-making process for two weeks beyond the four-month deadline into January 2017 to allow the retailer to submit remedies; as they did not do so, the CC blocked the merger.
Bid-rigging schemes - still the most frequently detected infringement
Analysing decisions on prohibited agreements made by the CC within the past five years, most of them (70%) have been bid-rigging schemes in public procurements. It has been calculated that such prohibited agreements have affected public procurements to at least €134 million in total, mostly affecting procurements in the construction sector.
In 2016 the CC adopted five decisions on the most severe infringement of competition law - prohibited agreements. On three instances the authority detected bid-rigging in public procurements, and in total 12 companies were imposed fines amounting to of €294,833.45. Two cartel agreements were implemented in 34 construction procurement procedures, whereas another one was implemented in four different procurements of medical devices. In two cases the CC decided to close investigation of a case, because the amount of gathered evidence was insufficient to detect any infringements.
In parallel to the adoption of significant decisions on infringements the CC has also worked actively on prevention of infringements. Thus the CC expressed warnings to 21 persons in six cases of smaller scale alleged prohibited agreements, whereas in five cases the CC settled company disputes through negotiations.
In addition to investigation activities, the CC also has promoted the competition culture by targeting entrepreneurs, procurement organisers, students, associations and judges. It has allowed the CC to become more recognisable - in 2016 the CC received almost 300 applications: twice as many as in 2015, which confirms the increasing role of competition protection.
Nevertheless, there are still many challenges to overcome.
Increasingly alarming competition problems
In 2016 the CC carried out a public opinion study, surveying companies, associations, legal offices and local governments. The respondents indicated competition distortions caused by public administrative bodies - the state and local governments - and bid-rigging as two of the most widespread competition problems in Latvia. The second have been common for Latvia for several years now, while the first - becoming more and more alarming.
Competition harm caused by the state and local governments
By receiving applications from market participants and others involved in the market, the CC has observed this problem on regular basis. There are several forms of such competition distortions; the most common are advantages granted to companies owned by public administrative bodies. This can do serious harm to private companies and their opportunities to operate successfully in future.
Regulatory enactments that create needlessly unequal competition conditions or discrimination, and give unjustified advantages to companies, are one of the other ways in which public administrative bodies distort competition and make an environment unfavourable for investment.
In 2016, the CC discovered 28 cases of potential competition risks caused by the regulatory framework. In nine cases these risks were successfully avoided through competition advocacy.
One of the potential competition risks caused by the regulatory framework in 2016 was an intention to entrust the task of dog-chipping to inspectors from the Food and Veterinary Service. This allowed the state to participate in the market, where the private sector is able to freely ensure the provision of this service. After the objections of the CC, these planned amendments were not adopted.
In order to reduce the competition distortion risk caused by public administrative bodies, from 1 January 2016 public administrative bodies are obliged to consult with the CC in two instances: when there is a plan to establish one's own capital enterprise, or when reconsidering participation in a capital enterprise. Over the past year, the CC assessed seven potential distortions.
Unfortunately, the regulatory framework in Latvia prevents the CC from fighting such distortions effectively. The authority can only issue recommendatory, rather than binding, opinions.
Tightened rules on competition law
On 15 June 2016, amendments to the Competition Law finally after four years of discussion and coordination entered into the force. This can be considered as a marking point into the Latvian competition law as it significantly modernised the application of competition law in Latvia.
These amendments extended not only the opportunities and the rights of entrepreneurs, but also the enforcement powers of the CC. Namely, the number of cases where infringer may apply for exemption from penalties (a fine and a year-long ban from participating in public procurements) has now been increased. Such opportunities will be offered to market participants that, for example, are the first to provide the CC with evidence of the implementation of another cartel agreement. The amendments widened opportunities for market participants to explain their opinion to the CC, and to receive compensation for the damages caused by competition distortions, etc.
The CC's capabilities were also significantly strengthened by its being allowed to prioritise its operations, and concentrate its resources specifically on the investigation and elimination of the most severe infringements. In alleged competition infringements of smaller scale and severity, the CC issues warnings or implements a negotiation process without a formal case investigation.
Slight but important changes were introduced in the context of dawn raids. For instance, if during the inspection, CC representatives obtain information that evidence of the alleged infringement can be found in the possession of other persons, the CC - in accordance with established procedures for urgent situations - is entitled to apply to the court. Within two hours, the cout issues a permit to carry out the dawn raid.
By amendments, merger control was improved as well. Previously, mergers had to be notified if one of two criteria were met: at least €35.5 million turnover, or a 40% market share. Now, the reporting requirements for merger transactions have been changed by excluding the market share criterion and reducing the turnover to €30 million. In addition, the turnover of at least two merger participants has to constitute at least €1.5 million.
Furthermore, a state fee for the assessment of mergers was introduced. This way, the merger participants, who are direct beneficiaries of the merger transaction, are able to partially cover the expenses that arise in relation to the merger notification examination process and further supervision of potential conditions imposed by the CC.
Restoration of credibility - a possibility for bid-rigging participants to mend their ways and participate in procurements
The companies in which the CC has detected an infringement of participation in a bid-rigging agreement, and which are not exempted from the fine (or where the fine is not reduced within the remit of the leniency programme) are prohibited from participating in public procurements for one year. However, from 2016 such companies are entitled to implement specific measures to prove: their conformity for the restoration of their credibility; and their ability to avoid committing the same or similar infringements in the future.
In 2016, the CC issued a positive opinion to eight companies. For five of these the CC's decision was final, after termination of court proceedings on involvement in a prohibited agreement among 26 energy constructors, which was detected by the CC in 2013.
In order to receive a positive opinion from the CC, a company shall implement specific measures including payment of the imposed fine, or provide sufficient guarantees that it will be paid if the CC has agreed for payment of the fine in instalments. A company shall also cooperate with the CC during and after an investigation of infringement; develop a corporate competition law compliance programme; and train its employees to prevent repetition of the same or similar infringements in the future.
Long-term litigation with AS Latvijas Gāze on the dishonest use of its dominant position has ended
Among the most significant court decisions in 2016 is that of the Supreme Court concerning the natural gas supplier AS Latvijas Gāze. A lengthy litigation with the company has now been settled, with it having paid €2.2 million into the state budget last year for the abuse of its dominant position.
In 2013, during the case investigation, the CC received more than 500 complaints from consumers and enterprises that AS Latvijas Gāze refused to conclude new contracts for supplying natural gas before having covered other consumers' debt commitment. At that time, AS Latvijas Gāze was the only gas supplier in Latvia.
Promotion of fair competition environment through fair retail practices
On 1 January, 2016, the Unfair Retail Practice Prohibition Law entered into force. The CC is the authority responsible for supervision of the law. The law is designed to prevent retailers from using their market power to apply exploitative requirements to suppliers.
As 2016 was the first year of implementation of the law, the CC largely took on the role of consultant. It consulted more than 400 retailers and suppliers by giving 93 telephone counselling sessions, 29 on-site consultations and 67 answers to applications, and it participated in five seminars explaining the new norms of the law.
Overall, considering the results of the new law, the CC sees a positive impact having been made to several aspects of cooperation of retailers and suppliers. For instance, retailers do not force a return of goods if suppliers oppose it. This has contributed to responsibility among retailers and prudent planning for the sale of goods. Furthermore, the law has promoted adjustment of contract terms: completely unjustified terms on compensation for the opening of a new store, or provision of the lowest price for a particular retailer, have been excluded from contracts.
Nevertheless, there still are some aspects to be implemented in accordance with fair trade practice. Among these are disproportionate sanctions imposed by retailers on contract violations and other undue payments. To fulfil successful implementation of the law, in 2017 the CC will revise its drafted guidelines, and will shift the role from consulting to active enforcing if any unfair practices are detected.
Sharing of competition culture
In addition to competition supervision and advocacy, the sharing of competition culture is another important task to be carried out by the CC. In order to prevent the infringements of the competition law, the CC actively educates various target groups. In the previous year, the CC organised and participated in almost 20 activities where different target groups were informed about the CC's operations; how companies can avoid the implementation of prohibited agreements through mutual cooperation; and how to recognise alleged bid-rigging in public procurements.
At the same time, it has also become essential for national competition authorities to share their experiences. Such cooperation not only improves the application of competition rules at the national level, but also addresses competition-related issues at an international level and enables equal opportunities for market participants to operate freely and fairly in the region.
In 2016 the CC welcomed representatives from the Moldavian, Ukrainian and Croatian competition authorities. During these visits the CC introduced foreign delegates with experience of Latvian competition law, its application and the most common infringements. Thus the CC has shared its working methods on how to protect the interests of entrepreneurs and consumers more efficiently, and how to better promote equal opportunities for market participants.
Future commitments for free and fair competition
With the main competition issues and events of previous years thus summarised, the policy priorities of the CC are clear. The two most significant are: ensuring equal competition conditions, both to the private sector and to the state and local governments; and ensuring continued activity in the combating of prohibited agreements in public procurement.
Thus, the CC will continue working to promote a culture of competition. This will include educating both entrepreneurs on how not to conclude prohibited agreements during a cooperation, and organisers of procurements on how to detect alleged prohibited agreements of tenderers.