Exemption from the Competition Law – Has the Government Made Its Case?

Exemption from the Competition Law – Has the Government made its case? By Stephen Crosswell Senior Consultant, Competition, Telecommunications & Media Herbert Smith Hong Kong For the Asia Competition Forum held on 9 December 2008 Introduction Questions as to how to structure a general competition law in Hong Kong (including whether the Government and statutory bodies should get a wholesale exemption) need to be assessed, I believe, taking into account the unique structure of Hong Kong's constitution and economy. I therefore start my presentation today with a statement that will be a timely reminder for those from Hong Kong and perhaps a useful introduction for those visiting from other jurisdictions. Hong Kong is a capitalist society. It is probably the most capitalist society in the world. But this is not an accident of history: it is a matter of long standing government policy and, since the enactment of Hong Kong's Basic Law, it is a constitutional right guaranteed to the people of Hong Kong. Article 5 provides that: "The socialist system and policies shall not be practised in the Hong Kong Special Administrative Region, and the previous capitalist system and way of life shall remain unchanged for 50 years." There is no room for ambiguity in this and it is not a matter of degrees. Just as other constitutional rights are not protected piecemeal, any significant level of socialist policy in the government and administration of Hong Kong is, I would suggest, unlawful. It is also necessary that the capitalist nature of Hong Kong be reflected in, and inform, Government policy making. Essentially, this requires that Hong Kong protect private property rights while giving market forces the widest possible reign. Consistent with this, the Government of Hong Kong has adopted a 'small government, big business' policy, at the centre of which is a focus on free trade, low taxation and minimal government. Also consistent with this is the light handed sector-specific approach that has been taken to competition policy in Hong Kong to date. The light handed approach to competition policy has meant that there has not, historically, been a great deal of consideration of the interaction of Hong Kong's policy of minimal government and competition law. Having said this, an example of how this policy interacts with competition law is found in the liberalization of the domestic and external telecommunications franchises that 1 commenced in the mid to late 1990s and the history of competition law enforcement in the sector to date. Telecommunications is one of the few sectors in Hong Kong subject to competition law at present. When the franchises were first removed and the industry opened to competition, ex ante regulatory intervention was exercised on various fronts, on the basis that new entrants had to deal with an incumbent in a dominant position. Market failure was presumed in this situation and regulatory facilitation of competition (i.e. liberalization) was pursued by the regulator. However, the telecommunications regulator has since concluded that the market is fully liberalized, ex ante regulation is being removed and under the prevailing ex post competition law the regulator has expressly stated that there should only be intervention (i) "in the clear circumstances that market forces have failed, or are likely to fail"1 and (ii) "it is demonstrable that regulation can do better".2 It will immediately be seen that this two-pronged test, while being consistent with Hong Kong's market led policy, sets a high threshold for intervention under an ex post competition regime. Even when it can be shown that there has been anticompetitive conduct, it is often difficult to convincingly make the case that regulatory intervention "can do better". I believe that it is fair to say, as a matter of general principle, that the threshold for intervention under competition laws in Europe (including the EU and its member States), the United States and other jurisdictions with established competition laws, such as Japan, Canada, Australia and New Zealand is not, and has not historically been, so high. Although all vary in their degrees of interventionism, they do not, as a matter of policy, apply such a strict two-stage threshold for intervention. Whether such an approach to competition law in other jurisdictions can be justified by broader policy considerations that their governments seek to pursue is not a matter I will dwell on. It is not a relevant question in Hong Kong, given Hong Kong's unique constitutional framework. I will confine myself to observing that it is not surprising in the face of Hong Kong's market driven policy that, with limited exceptions, Hong Kong has chosen not to promote regulatory intervention in the market, and this has, I would submit, been one of the great contributors to Hong Kong's current position and prosperity. General competition law in Hong Kong With that introduction, it should be clear that the challenge for Hong Kong, if it is to introduce a general competition law, is to develop a law and enforcement policy that is consistent with its unique constitution: in other words, a competition law and policy consistent with capitalism. The Government appears to be seeking to avoid a detailed and potentially inflexible competition law, insofar as it has proposed general prohibitions against: (i) agreements or concerted conduct; and (ii) abuse of market power; 1 Telecommunications Authority "Deregulation for Fixed-Mobile Convergence – Second Consultation Paper" dated 14 July 2006, para S5. 2 Telecommunications Authority "Deregulation for Fixed Mobile Convergence – Statement" dated 27 April 2007, para 17. 2 where such agreements or conduct have the purpose or effect of significantly lessening competition in a market. This approach lends itself to clear and straight-forward drafting while enshrining (with the possible exception of merger regulations) principles of competition law commonly seen in other jurisdictions. This fundamental distinction between multi-firm and single firm conduct sits at the heart of much competition law and antitrust analysis around the world and is a flexible and useful tool in competition analysis. IF properly administered, this principle based approach to drafting (which avoids an overly prescriptive and inflexible application of the law) should serve Hong Kong's policy goal of a competition law that gives pre-eminence to market forces. However, whether the law will meet this policy goal turns to a large degree on whether due regard will be given to the higher threshold for intervention under competition law that must necessarily apply in Hong Kong. Some issues particular to Hong Kong The degree to which Hong Kong adheres to the "small government, big business" principle is relevant to whether wholesale exemption from any new competition law can be justified by the Government. The reason for this should be easy to see. If the Hong Kong Government does not engage in many areas of activity that are, as a matter of policy, engaged in by governments that put less emphasis on market forces, then it is much easier as a practical matter, to consider exemptions on a case by case basis. The feasibility of the exercise makes the argument compelling that a rule of reason approach to exemptions be adopted, particularly in view of the limited scope the Hong Kong Government has for raising legitimate policy grounds for exemptions. As I will endeavour to demonstrate, the case for a wholesale exemption may be even harder for the Government to make in Hong Kong because, although the Government has fairly minimal bureaucracy, it does engage in areas of activity that should be the preserve of the private sector and, importantly, has considerable influence and control over the supply of land, conditions of land development and the commercial/residential building markets. Small government, big business One may or may not go so far as to accept Rothbard's argument that the only form of monopoly is that which arises from a grant of privilege from the State restricting sale or production.3 In fact, it is a highly controversial question in economics whether private monopoly can develop in an open capitalist market and be sustained for a period of time sufficient to cause market failure.4 However, there is virtually no debate in mainstream economics about the inefficiency of government monopolies – those created by coercive State power - and the distortions in the competitive process that they can cause. This critique extends not only to Government-owned business/industries but also to franchises, exclusive licences and other instruments used by Government, without good reason, to restrict entry into a particular field of economic activity. 3 Murray N. Rothbard, Man, Economy, and State, Volume II (D. Van Nostrand Company, Inc., 1962), pp. 561–66. See also Journal of Economic Literature, September-October, 1974, p 593. 4 For example, there is an enormous amount of literature around what has been loosely referred to as Schumpeter's theory of "creative destruction", which considers innovation to be the engine of capitalism that is both driven by and tempers pursuit of monopoly. 3 It is this philosophy, premised on a belief that private entrepreneurs are better positioned to make decisions about allocation and deployment of capital than politicians and bureaucrats, that sits behind Hong Kong's 'small government' policy. Hong Kong has successfully applied this policy to keep regulation to a minimum in some areas. Examples include the low tax rate in Hong Kong and the simple tax structure, minimal duties, one of the most open borders in the world for trade in goods5 and significantly lower expenditure on social services as a percentage of GDP than most other industrialised economies.6 Hong Kong obviously does provide various public services and, where the case justifies it, exemptions from competition law should be considered.

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