Peru: National Institute for the Defence of Free Competition and Protection of Intellectual Property
The year 2015 was particularly important for the defence of free competition in Peru. This year will be remembered for the Amendment to the Competition Act (which strengthened the powers of the agency to investigate cases of collusion), the beginning of sanctioning proceedings in key markets and the first steps for spreading of the leniency programme in the country.
These changes occurred in a context in which the agency decided to focus its activities differently. The priority is the pursuit of cartels, so congruently most of its resources are devoted to this purpose. A second level of priority is given to the type of markets or sectors investigated. There is a strong preference for markets with national scope, involving a large number of consumers, or key sectors such as fuel due to its impact on the price formation of a large number of goods and services of the basket of goods.
Reform to the Competition Act
Legislative Decree 1205 was published on 23 September 2015. This Legislative Decree approves a set of amendments and additions to the Peruvian Competition Act (the Act). Promoted by the National Institute for the Defence of Free Competition and the Protection of Intellectual Property (INDECOPI), the amendments to the Act have as their main objectives (i) improving the legal framework that allows INDECOPI to fight cartels, and (ii) strengthening the rules applicable to the activities of the Commission of Free Competition Defence (the Commission) to promote the free development of the competitive process markets (competition advocacy).
The main changes are as follows.
Repression of facilitators
After the modification, INDECOPI can apply sanctioning proceedings against not only companies that are part of a cartel but also against those whose participation in planning or execution is decisive. For example, sanctions can be imposed on the company that ensures the exchange of information and ensures that no company deviates from the agreement adopted by a price cartel. This provision is also applicable to public officials who, exceeding their powers, unjustifiably promote or facilitate cartels.
Access to personal email accounts and lifting of the secrecy of communications with judicial authorisation
As part of their inspection activities (dawn raids), the Technical Secretariat of the Commission (the Technical Secretariat) does not require judicial authorisation to access corporate email accounts, that is, those accounts that companies assign to their employees for work purposes. Instead, the access to personal email accounts required authorisation from a criminal judge.
According to the amendment, the judge in charge of these authorisations will be the competent judge to review the decisions of INDECOPI (administrative law judge), and the criminal judge will no longer do that. For reasons of specialty, the judge reviewing the decisions of INDECOPI is in a better position to understand the nature of collective interests that INDECOPI protects and can perform a proper balance with individual interests and the guarantees that correspond to every agent investigated.
It has also incorporated the possibility that INDECOPI may be legally authorised to apply other forms of lifting the secrecy of communications, such as, access to records of telephone calls, instant messaging systems or chats used from personal phones, among others.
The system of plea agreement has been reframed to turn it into a true system of early termination of the sanctioning proceedings. After the modification, this mechanism is no longer limited to less serious behaviour. However, the applicant must provide measures to ensure the restoration of the competitive process, in addition to the reversal of the negative effects of the unlawful conduct. To some extent, this mechanism resembles the plea agreements in other jurisdictions.
The scope of the programme, its requirements, stages and deadlines, as well as the powers of the organs of INDECOPI is better defined to adequately manage this benefits system. Regarding the latter, the amendment was aimed at enabling the responsible authority receiving requests (Technical Secretariat) to ensure the granting of benefits in exchange for the collaboration of applicants.
Fines for obstructing
In order to deter investigated companies from obstructing the research activities of the authority, the fines have increased for non-compliance with reporting requirements or obstruction for research (up to US$1.2 million).
When solving a case, the Commission is empowered to dictate measures that allow to repair any direct and immediate effect of an anticompetitive conduct sanctioned, that is, the overprice paid by consumers or customers as a result of such conduct, where possible to identify. Before the amendment, those affected had to wait for the culmination of the judicial process to demand compensation for damages.1 This may explain why compensation has not been granted to those affected so far.
This ability is also complemented by the attribution that the legislative amendment recognises to INDECOPI to sue on behalf of final consumers, full compensation of damages caused by a cartel.
In line with the recommendations made in 2015 by the OECD,2 the obligation of the Commission’s target state entities was introduced in order to give a reasoned response on the proposals for improving the regulatory framework identified by the Commission, within a period of 90 business days.
The strategy of increasing dawn raids on the suspicion of collusion supported by the use of IT forensic tools3 for the collection and processing of evidence and the commitment to enhancing the leniency programme has enabled the authority to initiate sanctioning proceedings in relevant sectors with convincing evidence of collusion, for example:
- Toilet paper and other products of tissue paper (paper towels, napkins, handkerchiefs and facial tissues), for alleged price-fixing agreement and other marketing conditions during 2005 to 2014 by the two main companies in the sector. The manufacturers of tissue paper products had grown significantly in recent years. The production of toilet paper, paper towels and napkins in 2014 has increased by 36.71 per cent, compared to 2013. It should be noted that this is the first case where an applicant makes public its request for the leniency programme, waiving their right to the confidentiality of their collaboration recognised by the Peruvian Competition Act.
- Liquefied petroleum gas (LPG), for an alleged nationwide agreement to fix the price in its bulk and packaged presentations. The agreement would have been developed between 2005 and 2011 with the participation of the four major companies, representing 63 per cent of sales nationwide. LPG is used for transport and by industries and households, representing energy source of the 80 per cent of households.
- International shipping of containerised cargo, for an alleged agreement of the major shipping lines in the world to fix rates for international shipping of containerised cargo to or from Peru. During the period under investigation, container shipping accounted for about half of the total cargo transported by sea.
On the other hand, in March this year the Commission fined 34 companies that provided the haemodialysis service for the patients of EsSalud (an institution that is part of the Peruvian National Health System) after verifying that companies colluded to manipulate prices of five selection processes convened by the EsSalud between 2010 and 2012.
In order to understand the way this cartel operate, it must be noted that the Peruvian legislation on public contracting state the obligation of the public entities to request quotations to companies interest in providing the haemodialysis service, with the purpose to set the referential value for the public tender. The referential value is a key factor in the Peruvian public tenders because it set the maximum price to be offered by companies.
The strategy of the companies was to coordinate the amount of their quotations in order to increase the referential value, so they can receive higher payments for the haemodialysis service. Since EsSalud noticed a suspicious conduct of the undertakings because of the much higher quotations than those usually charged for the service, the institution decided to set the reference value on the basis of historical values or past public tenders. In response, the investigated companies – which are almost all companies in the sector – jointly decided not to show in the public tenders (processes were declared void) and demand EsSalud to convene the selection processes with referential values based on their quotations.
The Commission was emphatic in stating that all behaviour jointly developed by competing agents that seeks to influence in the process of determining the price of goods or services offered on the market, such as consensus values of quotations required by a state entity, is a price fixing that must be sanctioned. Therefore it imposed a total fine of approximately US$2 million. This decision has been appealed to the Tribunal of INDECOPI.
We must also mention strengthening the policy of prosecuting cartels by the Technical Secretariat through the prosecution of individuals involved in collusion. Thus, in the case of the haemodialysis companies, two individuals were sanctioned with fines totalling about US$27,000 for their participation in the planning and execution of the sanctioned conduct. In the toilet paper and GLP cases mentioned above, the Technical Secretariat has charged 24 executives or managers of companies for their alleged involvement in the development of the investigated conduct. The Technical Secretariat will continue this policy to discourage individuals from carrying out this type of illegal conduct within their organisations.
Promoting competitive markets through the improvement of regulatory framework is one of the lines of work of the Commission. In this regard, there have been recommendations in the past two years in (i) the market for public notaries, (ii) the service road test to obtain a driver’s licence in Lima and Callao given by a private company (iii) the tender system of routes for mass passenger transport (known as ‘corridors’) and (iv) private health insurance.
These recommendations have already shown favourable results for competition. For example, in the case of corridors, the Commission identified that the rules established in the public tender unjustifiably privileged participation of companies operating on the routes as the selection criteria to be used was the ‘overlapping routes’ and also facilitated the exchange of information among bidders with the consequent risk of collusion. Therefore, the Commission recommended eliminating such rules in future similar processes.
In May 2016, the Metropolitan Municipality of Lima said it would eliminate for future public tenders of corridors any advantage resulting from the overlapping of routes. He also noted that it would maintain the secrecy and confidentiality of information on the content of the proposal of the bidders, considering the current regulations.
On the other hand, in the market for notary services, it was included the recommendation to expand the number of notaries by province, in order to consider in the determination of the number of notarial positions offered in the public tenders the criteria of economic traffic, not only the population density of the province. This is because there are areas with a small number of citizens, but with intense commercial traffic and thus with a high demand for notary services.
To measure the impact on competition in this market, it should be noted that the Department of Economic Studies of INDECOPI estimated that the entry of an additional notary in the area of influence can cause a reduction in the price of legalisation of signatures service up to 7.9 per cent, while the price of vehicle transfers service can be reduced up to 1.7 per cent.4
With the issuance of Legislative Decree 1232 on 26 September 2015, the government incorporated the economic traffic as one of the criteria for determining the number of notaries, supporting the reform on the basis of the recommendations made by the Commission.
However, it should be noted that there are still unjustified barriers to competition identified by the Commission, such as those that allow notaries themselves exert a dominant influence on the competition and the selection of new notaries (competitors), or prohibiting advertising in notary services.
Finally, INDECOPI has decided as part of its policy of transparency to make public the responses to its recommendations through its official website. This will enable the society to know the reasons why the state decides to maintain regulation or practice identified by INDECOPI as an unjustified restriction on free competition. This citizen control can promote the implementation of pro-competitive reforms in the analysed markets.
The sanctioning proceedings initiated in recent years have put competition issues into the spotlight again. The media have refocused on news about the harmful effects of cartels and begun to comment on the introduction of a leniency programme for those who collaborate with the authorities in detecting cartels. This diffusion of information is important to ensure, in addition to legal sanctions, the ‘moral’ sanction of the society for those companies that get into cartels.
However, the achievements mentioned above are not enough. Reproaches not only must come from consumer to business but it must also occur between peers. There is a long way that must cross INDECOPI to accomplish that task. The business class should get far from those entrepreneurs who do not believe in the market and alter the basic ground rules of free competition, through acts that besides being illegal, are incompatible with ethics in business. The approach to the business community to generate that understanding will contribute to deterrence cartels and thus should be part of the future agenda. In the same direction, it is essential to initiate a coordinated work with business schools to spread the knowledge of the rules of free competition. Competition is a value that cannot be ignored or neglected in the formation of future business leaders.
For those who persist in defying the rules of free competition, the authority faces the challenge of making use of new powers or tools that reform the law of free competition offers. In the short term, it is expected that judicial authorisation will first be obtained to lift the secrecy of communications to certain investigated agents due to the existence of evidence of their involvement in collusion. On the other hand, at the time of writing, the agency approved the plea agreement where one of the investigated pledged to take economic measures in exchange for an early termination of the administrative proceedings.
Legislative reform has also developed guidelines to give greater clarity to new figures or institutions. The adoption of regulations or guidelines that generate certainty in the agents involved on the rules regarding to free competition will be a constant task for INDECOPI in the coming years. This year the Leniency Program Guidelines will be issued, whose project was submitted in May this year for public consultation. National and international experts have contributed to this process through valuable comments and suggestions. On the other hand, this year, a Guideline of Public Procurement and Free Competition will be approved. The guideline aims to incorporate the principles of competition into the design of public contracts and prevent them from engaging in anticompetitive behaviour.
In 2017, it is expected to approve a Methodological Guide to determine sanctions for price-fixing infringements, which will bring to a close the work undertaken by the Department of Economic Studies in this area in recent years.
Finally, in the rest of this year and the next cases of collusion are expected to be concluded that initiated in important markets such as pharmaceutical products, LPG vehicles in cities in the north of the country, GLP nationally by sales bulk and packaged presentations, toilet paper, transport of containerised cargo between Asian and Peruvian ports, and international road transport of passengers between the border cities of Peru and Chile.
- INDECOPI decisions can be challenged in the courts.
- OECD, Competition and market studies in Latin America (2015).
- In 2013 dawn raids were made to 27 companies; in 2014, 49; and in 2015, 114.
- Department of Economic Studies of the INDECOPI, ‘Relationship between the number of rivals and the price: The case of the Notary Public Services’ (2014).