Peru: Overview

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Peruvian Competition Regime

The legal framework governing competition in Peru is formed by two different regimes: first a general one, applicable to all sectors and businesses carried out in the market, which is in charge of establishing and sanctioning practices considered to be anti-competitive; and second, a special regime exclusively applicable to the electric power sector, which previously controls operations that qualify as concentrations.

Regulations governing free competition

The Peruvian constitutional framework for free competition policies is developed in the economic chapter of the 1993 Political Constitution, whereby the state acknowledges a set of guarantees, duties and rights for private parties to be observed during the conduct of their economic relationships. This section also establishes parameters to channel the state's role in the market, which is highly relevant in the outline of free competition policies. Thus, Article 61 of the Constitutions provides:

The state promotes and oversees free competition. It fights any practice that may restrain it as well as the abuse of dominant or monopolistic positions. No law or concerted action may authorise or establish monopolies.

Moreover, policies implemented in Peru during the course of the last 15 to 20 years have sought to, and continue seeking to, generate an economy that encourages free investment, where private initiative is promoted. For this reason, within the framework of the Constitution, free competition must be understood together with policies that promote private investment and equal treatment to national and foreign investors.

In this context, the 1993 Constitution recognises the role of the state as a free competition promotion agent, thus ensuring that private parties, through private initiative, will be able to openly conduct and carry on their businesses.

In the legal arena, the regulations governing free competition in force until 25 June 2008 were contained in the Legislative Decree No. 701 against Monopolistic Practices, Controls, and Restraints on Free Competition. This Legislative Decree was in force for over 15 years and was mainly aimed at seeking protection mechanisms and, particularly, promoting free competition.

However, as time went by, this body of law evidenced a number of flaws and gaps that gave way to the need of a comprehensive reform. Thus, Legislative Decree No. 701 was repealed on 26 June 2008, when Legislative Decree No. 1034, Law on the Repression of Anti-competitive Conducts ('LRCA'), went into effect.

Like any form of economic regulation, free competition rules seek to modify the behaviour of economic agents in order to produce certain desired objectives. In this particular case of free competition regulations, the aim is mainly to achieve the greatest efficiency in the actions of economic agents in the market. Thus, the main aim of the LRCA is to prohibit and sanction anti-competitive practices, not only to promote market efficiency but also to drive the country's economic competitiveness and improve the well-being of consumers.

In this way, the LRCA prohibits and sanctions three types of anti-competitive practices, namely abuse of dominant position and horizontal and vertical collusive practices.

According to the LRCA, its subjective scope of application is individuals or legal entities, entities governed by public or private law, whether state-owned or not, and profit or non-profit organisations, supplying or demanding goods or services in the market, or whose partners, affiliates, associates or members perform such activity. Moreover, it applies to whoever is in charge or directing, managing or representing the entity, provided they have participated in planning, conducting or performing the administrative offence.

Finally, the LRCA applies to all practices that produce or may produce anti-competitive effects in all or part of the national territory, even if such practice originated abroad.

Competition agency

The authority in charge of enforcing the general legal framework governing free competition is the National Institute for the Defence of Competition and the Protection of Intellectual Property (INDECOPI), which through its Commission on Free Competition, investigates and sanctions anti-competitive behaviour in the markets, with technical and functional autonomy.

Its powers include:

• requiring books, files, documents, correspondence and magnetic records to be exhibited, immobilised, withdrawn and copied, and generally requesting information on the company;

• summoning and interrogating company officers;

• conducting inspections, with or without prior notice;

• imposing fines of up to 12 per cent of sales or gross revenues earned by the company, or its economic group;

• imposing fines of up to 360,000 neuvos soles to legal representatives or management members; and

• issuing corrective measures (such as doing or refraining from doing something) making it mandatory to enter into a contract or allowing access to a given service or activity.

In the case of the telecommunications industry, the rules governing free competition are enforced by OSIPTEL, the agency that regulates telecommunications.

Anti-competitive conducts

As we have stated above, the LRCA prohibits three types of practices: conducts that constitute abuse of dominant position and horizontal and vertical collusive practices.

With regard to the nature of such prohibitions, some of them qualify as absolute prohibitions and others as relative prohibitions. According to Article 8 of the LRCA, the former refers to a behaviour that is forbidden per se and thus the competition agency will only have to prove the existence of the practice in order to determine the offence. On the contrary, in the case of relative prohibitions, in order to verify the existence of the offense, the existence of the practice must be proved and, additionally, that it has or may have negative effects for competition and the well-being of consumers.

Abuse of dominant position

According to the LRCA, an economic agent enjoys a dominant position in a relevant market when it has the possibility of substantially restraining, affecting or distorting the supply-or-demand conditions in such market, without its competitors, suppliers or customers being able to counteract it.

A dominant position in a market generally occurs as a result of factors such as:

• a significant participation in the relevant market;

• the characteristics of the supply and demand of goods or services;

• the technological development or services involved;

• the competitors' access to financing and supply sources, as well as to distribution networks;

• the existence access barriers of a legal, economic or strategic type; and

• the existence of suppliers, customers or competitors and their powers of negotiation.

Holding a dominant position, with or without affecting real or potential competitors, does not constitute illegal conduct. Monopolies or dominant position are not rejected per se, but rather the abusive use thereof.

In line with the foregoing, Article 10 of the LRCA provides that an abuse of dominant position is verified when an economic agent that holds a dominant position in the relevant market uses this position to unduly restrain competition, obtaining benefits and harming other competitors, which would not have been possible had it not held such position.

The main conducts considered to be abusive by the LRCA are:

• unjustified refusal to enter into a contract;

• discrimination among competitors (does not include generally accepted discounts or practices);

• tie-in clauses;

• the unjustified hindrance of access to or permanence in an intermediation association or organisation;

• the establishment of exclusive distribution or sales agreements, no-competition or similar clauses, without justification;

• the abusive and reiterated use of judicial or administrative proceedings, the effect of which is to restrict competition;

• the incitement of third parties not to provide or accept goods or services; and

• in general, all those conducts that prevent or hinder the access or permanence or current or potential competitors in the market due to reasons other than greater economic efficiency.

Such practices are sanctioned even when the dominant position arises from a legal rule or instrument, contract or administrative regulation.

Finally, it is important to point out that all conducts entailing abuse of dominant position constitute relative prohibitions.

Horizontal collusive practices

Horizontal collusive practices imply the joint action of several competitors as if they were one. The reason for this is that sometimes companies find that cooperating with other competitors is more beneficial than the competition itself, since they reduce their volume of production, raise their prices and increase the benefit of each of their members.

According to the LRCA, such practices may consist of concerted agreements, decisions, recommendations or practices among competitors with the aim or effect of restraining, preventing or forging competition. The lay is not limited to those agreements that are legally enforceable, but also includes cooperation activities, decisions or recommendations made through business partnerships and even understandings.

Certain practices are governed by absolute prohibition (per se illegal) and others by relative prohibition.

Horizontal collusive practices that constitute relative prohibitions are:

• direct or indirect concerted pricing or establishment of other business or service conditions;

• concerted limitation or control of production, sales, technical development or investments;

• concerted distribution of clients, suppliers or geographical areas;

• concerted action to fix the quality of products when they do not conform to technical standards and negatively affect the consumer;

• concerted application of discriminating practices among competitors;

• unjustified concerted tie-in clauses;

• concerted and unjustified refusal to enter into contracts;

• concerted and unjustified hindrance of access or permanence of a competitor in a market, association or intermediation organisation;

• concerted or coordinated offers, positions or proposals, or refraining from them in public or private biddings processes or tenders or other forms of public contracting or procurement contemplated in the current legislation, as well as in public auctions; and

• other practices with an equivalent effect aimed at obtaining benefits for reasons other than a greater economic efficiency.

On the other hand, horizontal agreements between brands that are not supplementary or accessory to other legal agreements constitute absolute prohibitions (per se illegal). These agreements consist of:

• fixing prices or other business or service conditions;

• restricting production or sales, particularly through quotas;

• distribution of customers, suppliers or geographical areas; or

• establishing positions or abstentions in public or private biddings processes or tenders or other forms of public contracting or procurement contemplated in the current legislation, as well as in public auctions

Vertical collusive practices

According to Article 2 of the LRCA, these are collusive practices among economic agents operating at different levels of the production, distribution or marketing chain, aimed at restricting, preventing or forging free competition. These types of practices require at least one of the parties to have a dominant position in the relevant market prior to engaging therein.

Illegal vertical practices may consist of alleged abuse of dominant position and horizontal collusive practices.

Finally, all vertical collusive practices constitute relative prohibitions, whereby the competition agency must demonstrate in all cases that the practice has or may have a negative impact on the competition.

Proving collusive practices

Due to the fact that these cases are difficult to prove, the competition agency may resort to signs and presumptions in order to verify whether a similar behaviour exists among competitors, which similarity is not naturally explained by the competitive operation of the market, such as simultaneous price fluctuations, similar quality of the product offered, etc.

In this sense, the competition agency must make a careful and restrictive analysis of the alleged uncompetitive practice. For example, it must make sure that the similarity in behaviour is not the result of a mere suspicion, but that it has been absolutely proved, that there is no rational alternative explanation for the concerted practice which is capable of justifying such identical behaviour, etc.

<>Sanction for anti-competitive practices and corrective measures

Anti-competitive practices may be sanctioned by INDECOPI through the imposition of fines, which, depending on the seriousness, may reach up to 12 per cent of the gross sales or revenues earned by infringing companies.

On the other hand, INDECOPI is empowered to order corrective actions aimed at re-establishing the competitive process and are additional to the sanction that may be imposed for infringing the provisions contained in the LRCA. These may be:

• cessation or performance of activities;

• obligation to enter into contracts;

• non-enforcement of anti-competitive clauses or provisions of legal instruments; and

• the access to an intermediation association or organisation.

Release from liability

The LRCA establishes two mechanisms aimed at releasing offenders from a possible sanction. They are the commitment to cease the practice and the benefit granted for cooperating with INDECOPI in detecting anti-competitive practices.

The commitment to cease the practice consists of the offer made by the investigated party to cease the investigate actions or the modification of its conduct. It is INDECOPI's option whether or not to accept the offer made, one of the elements to be evaluated being the fact that the conduct has not affected or will not affect the well-being of consumers.

On the other hand, the LRCA has established the possibility that those parties providing proof, on a definite basis, of the existence of an illegal practice may request INDECOPI to exempt them from sanction.

Once the commitment of exemption from sanction has been signed by INDECOPI and the beneficiary, the administrative or judicial authority will be precluded from pursuing or bringing any type of administrative or judicial action on the same grounds against the beneficiary. However, such agreement releases from civil liability for the damages that the beneficiary may have caused as a result of its anti-competitive behaviour.

Merger control

In Peru, merger control has only been contemplated for the electric power sector. Therefore, the general rule is that any mergers or concentrations made among companies not engaged in the power sector may be carried out without the need of prior control by the competition authority. In such cases, the Peruvian free competition legal system is limited to making an ex post analysis of the conducts of those agents resulting in concentration, which analysis is made by applying the legal regime governing free competition described above.

Peru is one of the few countries that have not implemented mechanisms for the control of mergers and concentrations that apply generally to every type of economic activity. This was due to the fact, among other reasons, that when former Legislative Decree No. 701 was issued in 1991, it was considered that merger control was not convenient, since a certain degree of concentration was unavoidable in a small economy such as the Peruvian economy. Moreover, it was considered that imposing restrictions on the size of companies could make them less competitive in international markets.

Although the market continues being relatively small, the Peruvian economy has grown considerably in the last few years, which, coupled with the international trend of implementing regulations aimed at controlling mergers, allows us to see that this type of legislation could be implemented within the not too distant future as part of the Peruvian general framework. In fact, INDECOPI has presented certain initiatives to include merger control in the general system governing free competition.

Now then, we believe that establishing ex ante control of mergers and other concentrations faces a number of difficulties in Peru that other legal systems have been able to overcome with an effort. This has been due to the complex analysis to be made by the agency, which mainly consists of predicting the anti-competitive effects a merger can produce. In the case of developing countries such as Peru, added to this difficulty is the lack of resources and institutional weakness, which makes the implementation of this mechanism even more challenging.

Merger control in the electric power sector:

Following a path similar to that of other countries, in Peru the power market liberalisation process in the 1990s involved a structural reform of measures aimed at disintegrating power generation, transmission and distribution activities.

This reform was supported on the basis that, although vertical integration represents a number of efficiencies (reduced transaction costs, scale economies, etc), it may facilitate anti-competitive practices that allow owners of essential facilities to extend their market power, which may give rise to abuse of dominant position and the creation of barriers to access the market.

The underlying principle of the legal framework that was promoted was that power generation, main transmission system and distribution should be provided separately. This principle is currently contained in article 122 of the Electricity Concession Law, approved by Decree Law No. 25844.

In application of this article, every type of vertical integration in the electric power sector, whether direct or indirect, is prohibited. The sole exception is that the concentration does not imply a decrease, damage or restriction of competition and free concurrence.

On the other hand, the Antimonopoly and Antioligopoly Law for the Electricity Sector No. 26876 (LAASE), in force since 19 November 1996, provides in Article 1 thereof that vertical or horizontal concentrations that may arise in electric power generation and/or transmission and/or distribution will be subject to a procedure of prior authorisation to be issued by the Commission on Free Competition of INDECOPI, in order to avoid concentration practices resulting in a decrease, damage or prevention of competition and free presence in the energy market.

To this end, article 2 of the LAASE provides that concentration is understood to be the performance of the following actions: merger; incorporation of a company in common; the direct or indirect acquisition of control over other companies through the purchase of shares, a participating interest, or through any other contract or legal form that confers direct or indirect control in a company, including entering into joint venture agreements, unincorporated partnerships, or any other similar business cooperation agreements. Also included is the acquisition of productive assets of any company that performs activities in the sector; or any other act, contract or legal form including legacies, by virtue of which societies, associations, shares, corporate parties, trusts or assets in general are concentrated, performed between competitors, suppliers, clients, shareholders or any other economic agents.

It is important to clarify that, included within the scope of the LAASE, are those concentration acts that in spite of being performed in a foreign country, directly or indirectly involve companies engaged in electric power generation, transmission and/or distribution activities within the national territory.

Concentration acts that require prior authorisation from INDECOPI are those acts that directly or indirectly involve companies engaged in electric power generation and/or transmission and/or distribution activities that hold, before or after the act that gave rise to the authorisation application, either jointly or separately, a percentage equal to or greater than 15 per cent of the market in horizontal concentration acts, and a percentage equal to or greater than 5 per cent of any of the markets involved in the case of vertical concentration acts.

Without prejudice to the provisions contained in the referred rules (Article 122 of the Electricity Concession Law and the LAASE) the reform for the disintegration of electric power generation, transmission and distribution activities was never fully implemented. At present, the state still maintains a significant share in the generation and distribution markets. Moreover, since the LAASE was approved, various cases of concentration, both vertical and horizontal, have occurred, which have been authorised by INDECOPI without establishing any type of structural limitation or restriction.

Without prejudice to the imposition of applicable sanctions, the failure to obtain prior authorisation from INDECOPI empowers this entity to bring the necessary legal actions for the purpose of invalidating the concentration performed, such as: ordering the sale of productive assets, the sale of shares, declaring the nullity of the act, among others.

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