Papua New Guinea: Independent Consumer and Competition Commission
The proposed amendment to pre-merger notification regime
The Independent Consumer and Competition Commission (ICCC) is proposing amendment to its current pre-merger notification regime. Under the current Independent Consumer and Competition Commission Act 2002 (the ICCC Act), companies are under no legal obligation to notify the ICCC by applying for a clearance or an authorisation for an impending merger or acquisition. Sections 81 and 82 of the ICCC Act are the relevant provisions relating to this voluntary regime.
The relevant tests for clearance and authorisation applications are competition and public benefit tests, respectively. Briefly, clearance is given if the proposed acquisition would not have, or would not be likely to have, the effect of substantially lessening competition (SLC); and authorisation is granted if the proposed acquisition, although it would have the effect of SLC, would result in greater benefit to the public.
In the small economy of Papua New Guinea (PNG), the ICCC has noted over the years a number of challenges that occur under the voluntary regime. On many occasions the ICCC would discover that a potentially anticompetitive business merger or acquisition has already been completed without parties having sought clearance or authorisation from the ICCC.
Some major challenges faced by the ICCC under the voluntary pre-merger notification regime are as follows:
- there are increasing cases of lack of voluntary compliance from businesses to notify the ICCC;
- with key goods and service industries being highly concentrated, there have been increasing cases of ‘creeping’ acquisitions; such acquisitions increase concentration level of already concentrated markets and increase the structural barriers to entry;
- the difficulty of enforcement in the PNG judicial system: there may be an uncertainty of timing of the outcome, which may defeat the purpose of enforcement action;
- more resources are used when the ICCC investigates consummated mergers or acquisitions, especially when it comes to taking court enforcement actions; and
- the ICCC lacks both human and monetary capacity to take effective enforcement action, as not all technical officers (both lawyers and economists) are experts in competition.
Given the ‘size’ of the economy and the structure of various industries, the ICCC would like to have a mandatory regime to effectively control potentially anticompetitive mergers and acquisitions.
Case study: application for business acquisition in aviation fuel declined
The ICCC recently declined granting authorisation for a proposed business acquisition in relation to the supply of aviation fuel and refuelling services.
In aviation refuelling services, there are currently three players servicing the aviation operators in PNG. They are: Pacific Energy Aviation Limited (PEAL), Puma Energy PNG Limited (Puma) and PNG Ground Services Limited (PNGGS). While PEAL operates both Joint User Hydrant Installation (JUHI) facility and tanker trucks, Puma and PNGGS do aviation refuelling using tanker trucks only.
Puma applied for authorisation to acquire all the assets of PNGGS. The application was received on 14 April 2015 but was not registered until 6 May 2015, and the review of the application started thereon.
Puma is the wholly owned subsidiary of Puma Energy (Singapore) Private Limited, which has a presence in various countries, including Australia, South Africa and Singapore. It operates midstream and downstream oil businesses. Puma owns the only oil refinery in PNG and has exclusive rights granted by the government of PNG to supply to domestic distributors.
In the area of aviation fuel (which includes other fuel products), Puma is the exclusive importer and supplier to the domestic market. The government of PNG granted this exclusivity1 to InterOil Corporation2 in 2007 for 30 years, and this is expected to expire in 2027.
Puma provides aviation refuelling services in nine major domestic airports, with the total national volume of 20 per cent. Unlike PEAL and PNGGS, Puma does not have presence at Jacksons International Airport,3 the international gateway of the country.
PNGGS is the wholly owned subsidiary of Airlines of Papua New Guinea Limited. In comparison with other players, PNGGS is a small player, with about 9 per cent share of the total volume of aviation fuel supplied nationally, and conducts refuelling operations in four different airports in PNG. PNGGS’s refuelling operations are generally limited to the fleet of aircraft operated by its parent company, and to other aviation operators on an ad hoc basis.
PEAL is only based in Port Moresby, but supplies the commanding volume of about 71 per cent of aviation fuel to operators in PNG. PEAL supplies greater volume because Jacksons airport in Port Moresby is the national hub for aviation.
In its application, Puma claimed that the proposed acquisition will result in the following public benefits:
- increased competition at Jacksons airport as currently PEAL is the leading player in Jacksons’ market;
- as a result of the above, there is potential for lower airfares for the travelling public;
- increased efficiency gains in airports concerned; and
- potential employment benefits to nationals.
The ICCC considered the above claims were not properly justified. The ICCC was of the view that the demand for fuel is derived from the demand for travel, and the level of aircraft use at Jacksons is largely stable rather than growing.
It was noted that PNGGS serves its own aircraft, and in two other airports, an ‘arm’s length’ customer. There was no indication that PNGGS is not a vigorous and effective competitor and that if opportunities arise, it would not compete for new business if it continues operations.
The ICCC further considered that substitution of one supplier for another in a relatively stable market, where the latter is the vertically integrated monopoly wholesale supplier, is unlikely to result in price reductions and lower airfares because:
- there is no incentive, other than predation, for the new supplier to cut fuel prices significantly; and
- airlines, unless subject to intense competition, have no incentive to pass on reductions in fuel prices.
Furthermore, efficiency gains usually imply labour reductions, so in the ICCC’s view, increased employment, as Puma claimed, was unlikely to result.
In consultation with public and interested stakeholders, the ICCC assessed Puma’s application and considered that:
- the market is already highly concentrated and concentration levels will further increase with the acquisition;
- concerns on vertical integration and the exclusive right to import fuel are greater among industry participants;
- although there is potential for new entrants, the nature of the business is highly technical and specialised; in any case, the market is too small and not attractive to potential new entrants;
- the number of potential competitors would be reduced on a national basis if the proposed acquisition proceeded;
- import competition is extremely limited, with limited scope for increasing; and
- since Puma is vertically integrated and has presence in other airports, it was considered that if Puma enters Jacksons, it would give Puma opportunity to:
- leverage its market position in the wholesale market to ‘squeeze’ retail competitors or ‘discipline’ new potential retail entrants in the downstream retail market;
- ‘package’ aviation fuel supply to entice customer contracts; and
- increase prices and profit margins.
The ICCC therefore considered that the proposed acquisition would have the effect of substantially lessening competition. The ICCC also considered that there are more public detriments than benefits likely to result from the proposed acquisition. The ICCC, therefore, declined to grant authorisation.
- The government granted this exclusivity to encourage InterOil Corporation, former operator of the only fuel refinery in PNG, to invest in the refinery.
- All downstream businesses of InterOil Corporation, from the refinery to refuelling, were acquired by Puma in June 2014.
- Jacksons International Airport, located in Port Moresby, is the hub of aviation operators. Jacksons is estimated to supply 80 per cent of total aviation fuel distributed by airports in PNG to aviation operators.