[SCMP Column] Cartel Conundrum

December 19, 2015

For the better part of 15 years, Hong Kong has debated whether or how we should join the rest of the world’s major economies by adopting a Competition Law. Now at last after what has seemed like a lifetime, we have one. But instead of being pleased, I’m anxious.
It is of course not politically correct to question the virtue of a Competition Law. Monopolies, price fixing, cartels and the like are all bad things. But if I remember correctly, there were always clauses in various Hong Kong ordinances that enabled the government to tackle these transgressions. The “schemes of control” created to prevent abuse in areas of natural monopoly – like electricity, or ports – seemed to work well, despite being politically unfashionable. And small city economies like Hong Kong or Singapore have always raised problems for Competition Policy wonks.
My anxieties were aroused from the outset of the debate, because the original decision to explore a Competition Law was above all else due to fierce pressure from the IMF and the World Bank to “fall into line”. Singapore did so a decade ago with a marvelously cynical piece of legislation that carved out from Competition Authority oversight all of the Government-linked organizations – which of course accounted for the great majority of the economy. To its credit, the Hong Kong government has not been as cynical. Instead – as usual – it has procrastinated.
To remind myself of why I am so anxious, I had to go back to articles I wrote back in the middle of 2008. Talk about memory lane! But a wide range of still-unresolved issues have flooded back. The proposal to take a cross-sector approach – and to draw in the existing regulator of competition in telecoms and broadcasting – was sensible. So too was the commitment to making the Commission independent, with powers to demand investigation.
But the call for minimal exemptions was ignored: lots of government-linked organizations and statutory bodies have won exemption for not very good reasons. I still puzzle over why such bodies should be exempted. If the Electrical & Mechanical Services Department or Architectural Services Department competes against private sector companies to provide services, then why should they be above the law? If with the help of significant Government support and a demonstrable market dominance the Trade Development Council is able to “outcompete” suppliers of exhibition services, then why should it not be subject to competition law just like a private sector contractor? If the MTR were found to be abusing the market dominance intrinsic to its rail monopoly – say, in colluding on tenders for services at MTR stations – then why should it too be above the law? No-one is saying that any of these Government agencies or organizations has done anything wrong, but that is beside the point. If there are good reasons for keeping the Government’s agencies above the law, then the Government has never made a convincing case.
It has always seemed to me that the “money” bits of the new Commission are the most troubling. Is HK$60-80 million for the annual running costs of the Commission, and HK$100 million for litigation costs, really sufficient? Surely this is naivety running riot. US, European, British and Australian competition policy authorities have budgets that run into billions of Hong Kong dollars. The cost to the US government of pursuing Microsoft a decade ago cost upward of US$5 billion over years of courtroom arm-wrestling and plea bargaining. Faced with controversies over slipshod investigation at the same time, the UK regulator decided in 2008 to trim its caseload from an average of 25 investigations a year to 10 a year. Just how many cases will our Competition Commission be able to investigate with an annual budget up to HK$80 million a year, and so tiny a litigation budget?
Some elements of the new law must be welcomed: the decision to prioritise collusive activity and abuse of market power will provide salutary focus. But there are other elements that are less welcome. It was originally suggested that mergers that do not lift a company’s market share above 20 per cent would win “safe harbour”, and that alarums over dangers of market dominance would only be set off when market share rose above 50%. But this has been abandoned, and that is a pity. Competing companies lost a valuable “rule of thumb” when considering a merger. And the new regulator has lost the chance to rid itself of a lot of the business that consumes the time, energy and money of counterparts in Europe.
Perhaps the single most important conundrum for me is something the government has always stayed silent on: in a small city market like Hong Kong, how will you define the relevant market? No-one will ever be able to prove abuse of market power if in the first place you can’t define the market in which abuse has allegedly occurred. In a large country like the US or China, defining the market may be easy. But in Hong Kong, this is not so. For example, is Hactl or Cathay Pacific, which handle the huge majority of Hong Kong’s air cargo, capable of abusing local market power if their true competitors are in Singapore, Shenzhen and Guangzhou? Can Hong Kong’s port operators truly be tried for abuse of market power if their competitors are ports in Shenzhen and dispersed across the length of Asia. And could Hutchison Telephone or PCCW be credibly scrutinized for market dominant behaviour when Mainland mobile operators already hover over the local market with customer bases 100 times larger than our local “behemoths” could ever dream of? The work of our competition regulator is likely to be fascinatingly complicated by the increasing “fungibility” of the Hong Kong and Mainland markets.
Difficulties in defining the relevant market could create a paper tiger, with paper teeth. I am still not sure we have created a new body that many taxpayers would have preferred not to afford.

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