ROMANIAN COMPETITION COUNCIL Competition developments in key sectors Electricity sector Rail freight sector Telecommunications sector Competition in the food retail sector Insurance sector Banking sector 2012 2012 TABLE OF CONTENTS Foreword ......................................................................................................................2 1. Introduction .............................................................................................................3 1.1. Remarks on the evolution of the national economy ..................................................................... 3 1.2. Remarks on the role of competition policies in the recovery and development of the economy .......................................................................................................4 1.3. The relevant market within the context of a competition status analysis ....................... 5 2. Indices that substantiate the assessment of competition ....................... 6 2.1. Sectorial indices ............................................................................................................................................... 7 2.2. Market indices ................................................................................................................................................ 11 3. Competition in key sectors ...............................................................................13 3.1. Electricity sector .............................................................................................................................................13 3.2. Rail freight sector ..........................................................................................................................................21 3.3. Telecommunications sector .................................................................................................................. 28 3.3.1. Market of audio-visual program retransmission services ............................................. 28 3.3.2. The impact of frequencies auction in the telecommunications sector .................34 3.4. Competition in the food retail sector ............................................................................................... 42 3.4.1. Own Brands............................................................................................................................................. 54 3.5. Insurance sector ...........................................................................................................................................57 3.6. Banking sector ..............................................................................................................................................64 3.6.1 The Market for non-cash payments – a part of the banking system .........................75 www.competition.ro 1 Competition developments in key sectors Foreword This report belongs to a series of measures that Romanian Competition Council has initiated in order to monitor the way in which markets func- tion and to assess the competition climate in the key sectors of the national economy. This report proposes and assessment of the dynamics of several aspects that may influence competition levels in six economic sectors, which are particularly relevant to the national economy. At the same time, this report also vies to be a permanent work tool, based on which basis the Competi- tion Council will be able to represent both the actual status quo of competi- tion, as well as the impact of competition policies and other Government measures on the competition climate in a given economic sector. This year’s report employs indices for measuring the development of com- petition in the electric energy, railroad freight transport, insurance, and banking sectors. It also presents relevant aspects on the evolution of com- petition in the food retail sector and highlights legislative issues in this sec- tor. The report also sheds light on the involvement of the Competition Coun- cil in the ensemble of actions undertaken by the national telecommunica- tions regulator, within the context of the usage rights granting procedure for radio frequencies. Monitoring the economic sectors, which ensure production factors or vital services for the national economy as a whole, namely banks, energy, trans- portation, and insurance is one of the Competition Council’s priorities. On the other hand, sectors such as food retail or the re-broadcast of audiovisual programs are highly important for individual consumers, as they bear an el- evated degree of social relevance. Competition policies are horizontal public policies with their own dynamic, which is influenced by the evolution of economic theory. However, the ef- ficient implementation of competition policies is achieved at sector level, and there exist fields in which they need to be harmoniously reconciled with the specific policies of the regulating authorities. The endeavors in this report will also continue throughout the following years, both through a comparative assessment of the competition in some of the sectors that have already been assessed, as well as through the intro- duction of several new sectors, which have been deemed highly important for the national economy. President, Bogdan M. CHIRIŢOIU 2 www.competition.ro 2012 1. Introduction 1.1. Remarks on the evolution of the national economy After three years of profuse recession, the Romanian economy has undergone significant structural changes. Among the most important developments, the following are noteworthy: a change in the economic sectors’ share within the formation of the GDP (the most noticeable development is industry’s share increase – from 22.8 per cent in 2008, up to 26.5 per cent in 2011, respectively), inflation’s decrease to a historic minimum, against the back- drop of a decrease in domestic consumption, the significant devaluation of the national currency, the downturn in lending activities, and the shift in focus, from consumption and investment toward export. Chart 1. The structural evolution of Romania’s GDP 2008 v 2011 SOURCE: NSI Crossing a crisis period of such amplitude saw the elimination of several undertakings from the market, particu- larly small and medium undertakings. At the same time, major multinational corporations decided to curb their activity or to definitively withdraw from the Romanian economic system. The current report analyzes six economic sectors with a major impact on the national economy, from the per- spective of the evolution of the competition levels observed in these sectors. The analysis is based on a system of indices that generate an integrated outlook on the state of competition, while also allowing its evolution in time to be assessed, in the analyzed sectors. www.competition.ro 3 Competition developments in key sectors 1.2. Remarks on the role of competition policies in the recovery and development of the economy The notion according to which efficient competition contributes to economic development is a generally -ac knowledged principle, on which the large-scale espousal of competition policies is based. Moreover, this is prin- ciple is supported both by a vast corpus of empiric evidence, as well as by economic theory. Throughout history, the main arguments in support of competition policies have mainly focused on the added efficiency that compe- tition generates, both at the level of undertakings (eliminating x-inefficiency), as well as on the markets’ efficiency in functioning (maximizing the consumers’ welfare). At the same time, a dispute exists among competition policy experts, regarding the direction of the correlation between the strict enforcement of competition rules and the phenomenon of technological innovation inhibition. As several theoretic contributions have outlined, it can be argued that the relationship between the intensity of competition and increases in productivity bears the shape of an upside-down U, owing to the manifestation of two effects: a positive one – of allotting resources and a negative one – of the motivation behind profit. Specifically, levels of competition which start out low will benefit from an increase, which will lead to using resources more efficiently, yet without significantly diminishing the undertakings’ motivation. On the other hand, markets with sufficiently high levels of competition will only experience marginal gains in resource allotment efficiency, but with important consequences on the undertakings’ motivation to innovate. The fundamental implication of the above arguments is that each market has its own optimal competition level and competition policies need to take this level into consideration. Beyond the controversy regarding the impact of competition policies on technological innovation, an insuffi- ciently debated aspect is the existence of a link between competition and short-term economic growth. This link, should it exist, is neither direct, nor easy to measure. It can, however, be identified through an analysis of competi- tion in major economic sectors. Energy, transport, and capital represent fundamental inputs (production factors) for the other sectors, while the role that insurance plays in risk management is also extremely important. Table 1. Sectors of the economy of great importance to the competition authority Sectors Monitored for Their Impact on the Sectors Monitored for Their Impact on Economic Environment as a Whole Individual Consumers Energy Pharmaceutics Financial and banking