El Salvador: Competition Superintendence

Ten years of the Competition Superintendence – past, present and future

Competition law enforcement in El Salvador started 10 years ago, so today is an ideal moment to assess the work of the Competition Superintendence, the authority in charge of its implementation since January 2006.

The discussion concerning the need to establish a Competition Law started in 1989 and its implementation was not an easy one. Several bills, were assessed before the current Competition Superintendence was finally approved in 2004. During its first years of operation, the Competition Superintendence worked with a very small budget and with a reduced staff.¹ Even though the Superintendence’s budget and staff have been strengthened lately; they are both still not enough when compared to the great workload that the institution faces. This need to reinforce the Superintendencia’s budget and staff was recently acknowledged by the IMF.²

In addition, at its very first stages the Competition Superintendence faced huge challenges to the implementation of antitrust law. El Salvador is one of the smallest countries in the world (21,000km³). Also, the country has a completely asymmetric general industry structure, with a high share of micro a small firms (less than US$1 million in annual revenues),⁴ which represent 85 per cent of total firms, but they only accrue 8 per cent of the country’s total generated wealth; in contrast, ‘big businesses’ represent only 3 per cent of total firms in the country, but they accrue around 77 per cent of national wealth. In 2014, the Salvadorian economy’s Herfindahl-Hirschman Index (HHI) was around 3,567 points. This means that the Competition Superintendence was facing oligopolistic markets with the presence of agents with considerable market power. Finally, there was the need to develop a competition culture in a country where many of the most important participants had not gained their current status exclusively on the grounds of their own merits.

El Salvador’s Competition Law addresses the main sources of potential markets distortions (behaviour of economic agents, distorting regulation framework, public procurements, mergers, among others), and the content of the law’s text followed what were considered the best international practices at the time it was drafted. This means that the law establishes three categories of anticompetitive conducts: agreements among competitors (hard-core cartels); anticompetitive practices among non-competitors; and the abuse of a dominant position. While hard-core cartels are analysed using the per se rule, other types of practices are assessed under the rule of reason. In addition, the legislature included in the article 46 of the Competition Law, which grants the Comeptition Superintendence the capability to identify new anticompetitive practices categories to be prohibited, even if these are not explicitly addressed in the Law’s third chapter, as long as these new types of behaviour threaten competition. Notwithstanding the above, the institution has not needed to use this power. Recently, in the context of a recent process of unconstitutionality, regarding some article of El Salvador’s Telecommunication Law, the Supreme Court stated that ‘… the article 46, point II, of the same law (competition law), contemplates the possibility of identifying new types of anticompetitive practices different from those indicated in the before stated articles, regarding the dynamism of economic markets and business relations that take place in them’.⁵

Meanwhile, the Competition Law’s first article establishes, as parameters for assessing market agent’s conducts, economic efficiency and consumer’s welfare. An analysis of the Law allows recognising that consumer welfare is regarded as the main tool to proxy economic efficiency. Both in the analysis of mergers and in anticompetitive practices among non-competitors the Law demands that the claimed efficiencies must generate a direct benefit for consumers. This means that this Law has a neo-classical theoretical grounding that focuses on static efficiency and consumer’s welfare and the tools to measure the damage from a specific anticompetitive practice.

In the field of merger analysis, the Competition Superintendence has the power to analyse ex ante mergers and acquisitions when these meet a particular set of conditions.⁶ One of these conditions is related to monetary thresholds: currently these are equivalent to US$148 million in assets and US$177 million in revenues. It has been considered that these thresholds are too high, given the size of El Salvador’s economy, and have only allowed the institution to analyse large-scale merger operations; however, thresholds were regarded as adequate, at the beginning of the Competition Superintendence’s operation in order to balance the administrative burden of a new agency such as the Competition Superintendence.

The law also granted the Competition Superintendence the proper tools for the detection of barriers to entry that may be present in the regulatory framework, public procurements; it also grants a wide range of means to promote, spread and defend competition, such as the development of market studies, among many other activities.⁷

During these first years, the institution has carried out a healthy oversight of markets promoting undistorted competition, strictly following the legal framework and proving its independence from political forces. The law entered into force under a right-wing government. Under the current left-wing government the authority imposed a fine of US$759,924 to Alba Petróleos for failing to report mergers. This firm is partly owned by ENEPASA, an association of municipalities governed by majors from the political party that controls the executive branch. Even so, the president re-elected the superintendent, Francisco Díaz, for a second term, setting a precedent in the region.

In addition, the Competition Superintendence has taken a leading position in the region. It has twice received accolades at the World Bank’s Competition Advocacy Contest. First, the Competition Superintendence received an honorary mention for the development of the project to include competition in the legal framework, which intended to help developing a pro-competition regulation framework in the country. The Competition Superintendence received a second accolade when it won the first place of the Advocacy Contest thanks to the development of world’s first web-based application related to the inquiries of antitrust cases. The Competition Superintendence remains the only authority in Central America that has enjoined a merger (the acquisition of Digicel by Claro in the telecommunications market), and has given a strong push to the design of a regional competition law through its work in the RECAC⁸ (the Central American network of competition authorities). El Salvador has acted as the executive unit for its adoption, which must be completed by 2020 and is one of the commitments acquired by the countries of the region in order to sign an association agreement between the European Union and Central America. It is estimated that this instrument will be very helpful given the fact that a great share of the region’s economic agents have presence in more than one country and that Central America, as a region, is currently lacking an instrument that would allow countries to enforce competition laws outside their own borders.

In the law enforcement area, it has conducted investigations in markets that have spill-over effects in the economy such as the energy industry, the wheat flour market (carrying out dawn raids), the distribution of sugar (imposing a fine on Dizucar, the dominant wholesale distributor that is owned by the local sugar mills), the telecommunications industry, insurance companies, among others.

The institution acknowledged the role that public sector intervention plays and allocated substantial resources to identify restrictions to competition arising from regulations. For that purpose, the authority pointed toward the need of improving regulations to promote more openness to trade regarding products of social importance such as rice and sugar. The Competition Superintendence has also pushed for reforms to the law that creates a legal cartel in the production of sugar.

Another important promoted policy change has been the amendment of the system under which radio-electric spectrum concessions are granted in the telecommunications industry. The recommendations are aimed at promoting competition in the allocation of this input (competition for the market) in a context of upcoming expiration dates to current grants in the broadcasting market and the still uncertain process of digital technology adoption in the country.⁹ Recently, the authority issued a statement regarding a decision by the Supreme Court’s Constitutional Bench¹⁰ on the alleged unconstitutionality of certain provisions of the Telecommunications Law. The Court acknowledged the importance of taking into account the institution’s position in congressional hearings on the matter.¹¹ On 5 May 2016, the Congress approved the amendments to the Telecomunications Law. In these amendments, many points stated by the Competition Superintendence were taken into account, mainly those regarding a consultation mechanism which allows it to anticipate any competition concerns that may arise from assignation of the radio-electrical spectrum in coordination with the regulator of the sector.

The Competition Superintendence has taken a stand on a total of 14 cases of anticompetitive behaviour, analysed 17 merger transactions, carried out 23 market studies, issued 128 opinions, signed 36 MoUs, and implemented a wide-ranging programme of diffusion and promotion of the country’s competition law. The authority has imposed US$15.1 million in fines (93 per cent of which corresponds to anticompetitive behaviour decisions). The institution has also worked promoting recommendations through active participation in the National System of Consumer Protection. In other words, it is quantitatively and qualitatively clear that the authority has sought to cover all sources of restrictions to competition.

Nonetheless, the main topic to reflect upon is the ability to have real impact on efficiency and consumer welfare (objectives that the authority has to pursue by law), which are to be understood as indirect means to achieve higher living standards for society as a whole.

At the moment, this is hindered by the lack of support from the legislative, executive and judiciary branches evidenced by two facts: first, the Supreme Court’s Administrative Bench’s judicial backlog regarding the review of the Competition Superintendence’s decisions on anticompetitive behaviour. From the total of fines imposed by the authority (US$15.1 million) more than 90 per cent have been challenged by the punished firms, with 27 ongoing proceedings before the Administrative Court and one before the Constitutional Court. Currently, there are US$9.1 million of overdue payments in fines. For its part, the Administrative Court has temporarily enjoined the payment of some of them and other precautionary measures, some of which have been certified to the National Prosecutor.¹²

Second, the authority has found scant support from other government institutions in the implementation of policy recommendations and inter-institutional dialogues have been rare at best.

The first element hinders the ability to correct the anticompetitive behaviour being punished and reduces the deterrent effect of the fines; while the lack of support from other government entities reduces the likelihood that competition policy can spur economic and social growth.

However, as of today, most of the rulings of the Chamber for Contentious Administrative Proceedings have approved the legality of the Superintendencia’s acting: from a total of 17 rulings, 14 have been in favour, two of them have been dropped, and just one of them has been ruled against the Institution. Regarding this last procedure, the Constitutional Chamber has accepted the application of a constitutional complaint brought by the Superintendencia’s Board of Directors.

One of the most momentous rulings so far, has been the one granted on 5 May 2016, by the Chamber for Contentious Administrative Proceedings, which confirms and establishes important precedents in the application of antitrust law in El Salvador. On the one hand, it approves the per se rule as a way of analysing hard-core cartels (defined in LC, article 25), classifying these sorts of practices as an ‘abstract danger’, saying that it is not necessary for a tangible harm to have been committed for these to be punished (in more developed jurisdictions, this may not be a relevant issue, however, for El Salvador, this represents a great advance). On the other hand, this same ruling approves the use of indirect proof to demonstrate anticompetitive practices. This will have a huge positive impact on the Competition Superintendence’s capacity to attack cartels, since now more economic tools will be used to demonstrate the absence of economic rationality in anticompetitive practices.

Recently, there has been a closer approach with other government institutions, in order to effectively apply the recommendations given by the Competition Superintendence. For example, an inter-institutional discussion table has been opened in order to address the recommendations made by this institution regarding the insurance industry. Another example is the recent signing of a letter of understanding between the Salvadorian Social Insurance Institute and the Competition Superintendence. This project, which will be implemented during 2016, attempts to attack one of the main problems that developing countries face – bid rigging. It will use historical data as a mean to detect patterns that may constitute an alert sign, from a competition perspective. In order to widen the scope of this project, more public institutions are intended to be included in the future.

That being said it is important to look at the future and define the direction of competition policy in El Salvador. As a main aspect, all the accrued experiences during these past 10 years have allowed for the identification of a number of law amendments needed to improve the capacity of the Competition Superintendence. These reforms look to strengthen the institution, to increase the efficiency of its procedures and to grant the institution with a wider scope of action for competition defence. Among the main proposed amendments are those related with mergers: the reduction of monetary thresholds¹³ and the capacity to charge fees regarding administrative costs.¹⁴It also has been proposed that the election of the members of the Board of Directors should be carried out in a staggered fashion as a means to preserve historically accrued knowledge about past cases. Improvements to the current leniency programme have also been considered, allowing total exemption from fines to those who actively to pursue any sort of agreement. Additionally, it is proposed to state explicitly in the law the power of the institution to evaluate the impact of the actions taken by the institution.

At the end of these past 10 years, the Competition Superintendence has started to think about the way in which it may help to contribute to the improvement of key variables and indicators of the national economy.

In his speech at the event commemorating the 10-year anniversary of the institution, the Superintendent stated that he will seek for the institution to have a greater impact in key variables of the economy (development, poverty and inequality) with the purpose of contributing to its ‘democratisation’.

In order to do that, in addition to tackling the problems mentioned above, that is to say seeking a greater coordination between the legislative, the judicial and the executive branch of the government, the authority will have to aim its competition enforcement activities towards solving the real problems faced by the country. Some of the main issues to be analysed are whether the current legal framework is adjusted to the nation’s objectives; whether the use of neoclassic economic theory is an adequate basis for the analysis of competitive restrictions (as the international community advises as best practices); determining the objectives that competition policy has to pursue in order to effectively contribute to the country’s development; and to define the term of economic efficiency that will be pursued, among others. This analysis will have to be made taking into consideration El Salvador’s particular traits and variables that determine the dynamics of competition in its national markets.¹⁵ Regarding this point, many authors, mainly academics, have begun to think about the idea that developing countries should have a flexible framework so that they can take into account their own particular characteristics.

It is clear that the country needs to build a real competition policy, in such a way that every member of society heads towards that direction: public institutions, private sector and consumers as a whole.

Notes

1. US$1.37 million and a total of 24 employees.
2. FMI: El Salvador: Staff Concluding Statement of the 2016 Article IV Mission. 6 May 2015.
3. Among many other elements, that may be discussed in further articles.
4. Unconstitutionality Ruling, reference 65-2012/36-2014 (29 July 2015).
5. The economic agents must be independent from one another prior to the merger, the merger must produce a change in control that will result in a loss of independence among the agents, the merger must exceed either the assets threshold of 50,000 minimum annual urban wages (US$147.96 million in 2016) or the turnover threshold of 60,000 minimum annual urban wages (US$177.552 million in 2016).
6. The Law was reformed in 2007 and new powers were included, among them the power to obtain search warrants.
7. This is composed of the competition authorities from Costa Rica, El Salvador, Honduras, Nicaragua, Panama and the Dominican Republic. Representatives of the Guatemalan government attend the meetings in an observer capacity since Guatemala has no competition law to date.
8. Currently, the Congress is evaluating the best way to implement the amendments ordered by the Constitutional Court regarding the design of an alternative mechanism for the auctions of radio-electric spectrum.
9. Decision of the Constitutional Court on the accumulated unconstitutionality proceedings with references 65-2012 and 36-2014. In El Salvador, the Supreme Court of Justice is divided into separate sub-courts according to a subject matter criterion.
10. Clarification issued by the Constitutional Court on 16 December 2015, regarding its decision on the accumulated unconstitutionality proceedings with references 65-2012 and 36-2014.
11. One such example is the order enjoining the anticompetitive behaviour for which DIZUCAR (the wholesale distributor owned by El Salvador’s sugar mills) was punished.
12. The proposed thresholds are: an assets threshold of over 30,000 annual minimum urban wages and a turnover threshold of over 37,000 annual minimum urban wages.
13. The proposed fees are: a fixed fee of US$250 for the admissibility analysis of the request to merge and a maximum of US$32,058 for the thorough analysis of the proposed merger.
14. Gal, M., et al. (ed.) (2015). The Economic Characteristics of Developing Jurisdictions, Their Implications for Competition Law, Edward Elgar, Northampton, United States.