Article

«Monopoly» Game in Ukrainian: Key Tasks and Challenges of the New Antimonopoly Committee

22nd of June 2015

Dmytro Pavlenko, Director of Deloitte Tax & Legal department in Ukraine

The Antimonopoly Committee of Ukraine (AMCU) has finally got itself a new leader. The Parliament appointed a lawyer Yuriy Terentyev as Head of the Antimonopoly Committee.

Shall we expect any significant changes in the sphere of competition? Business and expert communities express cautious optimism.

On the one hand, there is a feeling that an unbiased technocrat and reformer has come. On the other, there is an understanding that the introduction of changes requires a tough fight against chronic diseases of the Ukrainian economy and the AMCU itself – monopolies, excessive administrative resource of the Committee and lack of transparency in its operations.

The process of de-monopolization should be left to the politicians, at least for a time being. Especially since the senior officials and the new appointee himself actively express their ideas in this regard. As for the other challenges, we would like to believe that the decisive moment has come.

The market participants can either take the usual position of a passive observer and critic, or provide their own vision of the antimonopoly reform.

Certain actions are being currently taken: legislative proposals are being discussed and submitted by MPs to the Parliament. However, the quality of this work leaves much to be desired: the attempts to reform the AMCU lack systematic approach and are not supported by proper economic analysis.

For example, in 2008 MPs registered a draft law, which provided for a significant increase in the economic thresholds for control over concentrations. For many years, the draft law was being shelved, some MPs were trying to make amendments to it, and finally the draft law was withdrawn in 2014.

Another example is the draft law registered in 2015 which touches upon a very narrow issue –public disclosure of the ACMU’s resolutions.

Indeed, the Committee shall become transparent. However, should the reform start with the mandatory publication of resolutions, while it may begin with the limitation of the AMCU’s powers, which will relieve it from taking unnecessary decisions?

This draft law is useful, but it is not aimed at solving priority tasks. It is just a tiny puzzle piece in the overall picture. Partial reformation without a general action plan is at risk to remain incomplete or not implemented at all. And this is the way it happened: this draft law was also withdrawn.

On the overall, the MPs succeed in submitting and considering certain draft laws, but the main problems of the ACMU remain unsolved. 

Let’s think systematically: the strategy of competition development

To do a puzzle, you should first lay out all of the pieces on one table. All draft laws, initiatives of the expert community, industry regulators and the new leadership of the AMCU in the sphere of the competition development should be brought together and systemized. Populism should be discarded and priorities should be identified.

It is necessary to provide economic grounding, to align it with key commitments undertaken by the Parliamentary Coalition, the Government and the President, such as deregulation, decentralization, and creation of conditions for the development of small and medium-sized businesses. International obligations to the EU and IMF should not be forgotten as well.

As a result, the government and business can get a single document incorporating both the overall market and industry challenges.

There is a draft law on “National program on development of the competition in Ukraine for 2012-2024” lying on the ACMU’s web site for a long time. As usual, it is a meaningless declarative document that does not provide answers to the questions: what, when and by who should be done to achieve the goals.

The “Plan of Legislative Support of Reforms in Ukraine”, adopted by the Parliament on 4 June, is slightly more encouraging. It contains a list of actions, necessary to simplify the control over concentrations.

However, the proposed measures cannot be considered comprehensive. Thus, it is at risk of suffering the same fate as the above-mentioned draft laws.

The MPs, the AMCU and the expert community should join their forces. Based on economic analysis and international experience, they should develop a systematic strategy for the development of competition in Ukraine, with all the necessary draft legislation as an integral part.

The development of such a strategy is of paramount importance. Otherwise, the puzzle of the competition reform will not be completed.

New threshold indicators

Now it is a high time to consider the most discussed and long-standing problem: the size of thresholds for obtaining permission for concentration from the AMCU. Everyone agrees that they need to be increased. To do this, only one legislative amendment needs to be made, while the positive effects of it can be rapid and significant.

There is a lack of economic background in the expert environment, at least, a lack of interest in the works of Richard Posner in economic analysis of law. As a rule, the lawyers tend to express estimated suggestions, e.g. “the indicators are outdated”, “they should be higher”, and “they should be raised significantly”.

Deloitte experts developed a calculation methodology, on the basis of which several options were proposed. One of them formed the basis for amendments to the law “On Protection of Economic Competitiveness”. Below are its main points. 

To increase one needs to reduce

Any significant investment in the Ukrainian economy is considered a concentration and requires permission of the AMCU. This happens when the parties exceed three threshold indicators set for the "turnover" or "value of assets" criteria. 

  1. Cumulatively for all parties to the transaction worldwide – the equivalent of EUR 12 million (hereinafter, the “aggregate worldwide indicator”).
  2.  For at least two parties worldwide – the equivalent of EUR 1 million for each of the parties (“paired worldwide indicator”).
  3. Individually for at least one party in Ukraine – the equivalent of EUR 1 million (“individual country indicator").

Are all of these indicators necessary? No. The presence of the third indicator itself in the law does not attract foreign investment.

As a result, there are situations when applying to the AMCU is necessary even if it contradicts with common sense. For example, when the owner of asset exits the business by selling it to an investor who is entering the Ukrainian market. This cannot be considered a concentration; it simply means that the new entity takes place of the seller on the market.

Moreover, the “paired worldwide indicator”, as a rule, is absorbed by the “aggregate worldwide indicator”.

Transformation of the "paired indicator” from the worldwide to the national level will be economically viable. In fact, only transactions between several significant players already present in Ukraine, are the most likely to affect Ukrainian market.

Thus, it makes sense to abolish the “individual country indicator”, and to narrow the “paired worldwide indicator” down to the “paired country indicator”. The new system of indicators will be as follows:  

  1. Cumulatively for all parties to the transaction on a worldwide level or the “aggregate worldwide indicator”.  
  2. For at least two parties in Ukraine or the “paired national indicator”. 

This approach will correspond to the EU Merger Regulation (№139/2004) and majority of the national European practices. 

Threshold of reformatory courage

The main difference between the thresholds in Ukraine and developed countries is in their size. Deloitte experts collected and compared these data for most European countries.

Threshold indicators across some European countries and Ukraine

Country Worldwide turnover, EUR, mln
Country turnover*, EUR, mln Worldwide turnover, % of GDP** Country turnover, % of GDP**
Italy  472
47 0,0307 0,0031
Poland 1 000 50 0,2231 0,0112
Netherlands 113 30 0,0179 0,0047
Austria 300 30 0,0975 0,0098
Slovakia  46 14 0,0632 0,0192
Spain 
240 60 0,0228 0,0057
France 150 50 0,0073 0,0024
Germany 500 25 0,0184 0,0009
Hungary 
50  1,6 0,0445  0,0015
Czech Republic 
55 55  0,0324 0,0324
Ukraine  12 0,0112 0,0009

 

* Unofficial data of “Deloitte & Touche USC” based on the information obtained from public sources and foreign offices of Deloitte.

** IMF data on GDP for 2014. Source: imf.org/external/data.htm

Conclusions: The indicators established in Ukraine in 2001 are extremely low and do not correspond to the challenges of the current market environment. They are several or even ten times lower than indicators of the nearest western neighbours of Ukraine.

Existing restrictions rather protect the Ukrainian market from attracting foreign investments. However, they have never been an obstacle to the formation of oligarchic monopolies.

The AMCU has never had any objections: the low thresholds result in greater AMCU’s powers. As for business, it poses not only the risks of corruption, but also makes business transactions more costly and time-consuming. New high indicators shall eliminate the inconveniences faced by investors.

What should these indicators be like? A simple comparison of absolute figures is not enough since sovereign economies of the European countries sometimes differ greatly in size and structure. Therefore, Deloitte experts analyzed the percentage ratio of the countries’ indicators to the national GDP (see the Table above).

An extrapolation of the obtained results at the level of GDP of Ukraine gives an understanding of how the Ukrainian thresholds may look in comparison to the ones of the Western European countries. To obtain an averaged result, the experts created a basket of six economies, comprising three developed countries – Italy, France, Germany, and three neighboring countries – Poland, Hungary and Czech Republic.

Then they calculated the average percentage ratio of the indicators to the national GDP and applied this "averaged" ratio to the GDP of Ukraine. Experts named the obtained threshold option as “averaged”.

Poland has the highest thresholds in Europe: the worldwide indicator is set at EUR 1 billion, domestic indicator – at EUR 50 million. Polish colleagues told that this threshold was set in the 1990s as part of other measures aimed at maximizing market liberalization and attracting investors.

By applying Polish ratios, the experts received "maximum" indicators for Ukraine.

New threshold indicator options for Ukraine

New threshold indicator options for Ukraine Aggregate worldwide indicator, EUR, mln Paired national indicator, EUR, mln
Draft law No. 0875, withdrawn 50 4
Averaged threshold based on indicators of Italy, France, Germany, Poland, Hungary and Czech Republic 64 9
Maximum threshold based on indicators of Poland 240 12

 

Indeed, to assess the de-regulation effect of the proposed changes in full, it would be valuable to extrapolate them to indicators of all the applicants, who have obtained permissions from the AMCU over the recent years. However, the attempts to obtain this information on these applicants from the AMCU failed.

At the end of 2014 there was a letter received in reply to one of the MP’s request stating that the Committee has no generalized information available on the number of permits received in terms of the assets and turnover.

It was also mentioned that the provision of such information would require performance of individual analysis for each of 1,417 cases considered during Q1 2013 – Q3 2014.

Is not surprising that with such an enormous and unreasonable workload the AMCU did not have time for the qualitative analysis of its work. Has the time come for it?

The experts discussed both the average and maximum threshold options with the representatives of business. The majority voted for the “maximum” indicators. It does make sense since the business wants immediate and drastic deregulation.

The most supported option with maximum thresholds formed the basis for the draft law on increase of thresholds. This draft law was prepared by the experts and submitted for review of the MPs and the AMCU.

The brief summary of the commentary received is as follows: the government is not ready to carry out swift and decisive reforms as it was in Poland 20 years ago. Regrettably, there is no political will to "promote" such a draft law.

The experts have revised the draft based on the “average” threshold option. It is hoped that it will appear in the Parliament. However, even such an increase of indicators may be regarded by the MPs as excessive and may fail to be supported.

The company has received comments stating that the proposed approach does not account for devaluation of Ukrainian Hryvnia against Euro and the GDP decline, thus creating conditions for further monopolization. In response, I would like to note on the following:

It is time for real reform, instead of its imitation by issuing resolutions that will have no serious impact on the economy;
It should be kept in mind that the law contains an independent provision for control over the concentration when the parties to the transaction exceed the share of the relevant or adjacent market by 35%.
This criterion should remain unchanged or at least it should not increase. This criterion itself, and not the low thresholds, would become a tool to combat monopolies. However, to succeed the Committee has to provide a clear and transparent methodology for the determination of markets and calculation of its shares.

At the meeting of the National Council of Reforms Yuriy Terentyev stated that the monopolization in the energy sector reached 46.5%, and 33.3% for the transport and communication markets. The new Head of the AMCU has a lot of work to do in these areas.

Dmytro Pavlenko, Legal Director at Deloitte, Attorney-at-law, PhD in Law

Epravda.com.ua

472
47 0,0307 0,0031
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