Briefing Note for Provisional Legislative Council Panel on Trade and Industry

GOVERNMENT RESPONSE TO THE CONSUMER COUNCIL'S REPORT ON COMPETITION POLICY

INTRODUCTION

1. This note briefs Members on the Government Response to the Consumer Council's report on competition policy. A copy of the Response is attached.

BACKGROUND

Sectoral Competition Studies

2. In the 1992 Policy Address, it was announced that Government would develop a comprehensive competition policy for Hong Kong. Between 1993 and 1996, we commissioned and the Consumer Council completed six sectoral studies - on the banking, supermarkets, gas supply, broadcasting, telecommunications and private residential property markets. We have taken on board many of the Council's recommendations, key among which include -

1. abolishing the interest rate cap on time deposits for seven days or more;
2. setting up an Energy Advisory Committee to advise Government on energy policy and related matters, and commissioning a study on the feasibility of introducing a common carrier system for gas supply; and
3. reducing the rate of royalty charges on advertising revenue to the two local broadcasting companies.

Report on Overall Competition Policy

3. In November 1996, the Consumer Council issued the final report which contained an overall assessment of Hong Kong's competition situation. The Council briefed Members on this report on 14 January 1997.

4. The Consumer Council considers Government's existing sector-specific competition policy inconsistent, unfair and lacks transparency. While accepting that Hong Kong is subject to international competition, the Council contends that we lack competition in the domestic sectors. This issue is especially critical since Hong Kong is now a service-oriented economy. Service sectors, according to the Council, are often insulated from international competition and hence prone to anti-competitive practices. It urges Government to -

1. adopt a comprehensive competition policy for Hong Kong;
2. enact a competition law to restrict horizontal¹ and vertical² collusive agreements and abuse of dominant position³ ; and
3. establish a Competition Authority and an Appeal Body to enforce the law.

5. Furthermore, the Council opines that enacting a competition law will allow Hong Kong to participate more prominently in international trade discussions especially when international organizations such as the World Trade Organization (WTO) and Asia-Pacific Economic Cooperation (APEC) are devoting a lot of attention to competition.

Existing Competition Policy

6. We are committed to promoting free trade and competition and fully subscribe to the economic philosophy of minimum government intervention in market forces. Our objective is to create market conditions which will enhance the competitive process and economic efficiency in Hong Kong. The ultimate test of whether competition exists is whether the market is accessible and contestable.

7. We do not impose artificial barriers to market entry. We appreciate the importance of deregulation in facilitating the competitive process. To discourage unfair, deceptive and misleading trade practices and safeguard competition, we have enacted a package of specific legislation⁴ . Depending on the needs of specific sectors, we have also established various regulatory regimes to safeguard competition such as in the broadcasting, telecommunications and public transport sectors.

8. Our existing competition policy is in line with our free trade and open market approach and has a pragmatic and sector-specific flavour. This policy has served Hong Kong well. In the last three years, the US Heritage Foundation named Hong Kong the freest economy in the world. The World Economic Forum, the Fraser Institute of Canada and the International Institute for Management Development all assigned very high rankings (top three) to Hong Kong's international competitiveness and economic freedom.

Government's Considerations

9. In the light of the Consumer Council's report, we have critically reviewed our existing policy. Our thinking in respect of each of the three key recommendations is set out below.

(a) Competition Policy

10. The Consumer Council recommends adopting a comprehensive competition policy. Specifically, it proposes that the Government should promote understanding of the policy's aims throughout the economy, ensure new government policies give due regard to implications on competition and review existing control mechanisms to confirm their necessity.

11. We accept the Council's proposals. We agree that our existing competition policy can be more proactive, transparent and comprehensive to ensure that both the public and private sectors can comply with it. We suggest that Government should take a lead in ensuring that the government machinery is itself conducive to competition. To this end, we will -

1. issue a clear policy statement on the objectives of promoting competition. We will require all government bureaux and departments to comply with these and encourage organizations under their purview to observe these. This ensures consistency and transparency;
2. request all bureaux to give due regard to the competition angle by specifying the implications on competition in all policy submissions. We will also request policy bureaux to critically review existing regulations and policies to minimize barriers to market accessibility and contestability and to refrain from specified restrictive practices; and
3. request all bureaux and departments to submit new initiatives for promoting competition in their fields. This reflects Government's commitment to take the lead in promoting competition.

12. To complement Government's efforts, we will -

1. request the Consumer Council to continue to monitor and review trade practices in sectors that appear to be prone to unfair trading activities which affect consumers. We will encourage the Council to continue its good work, consult the relevant bureaux and departments, and submit recommendations to Government for consideration; and
2. request the Consumer Council to assist trade associations to establish codes of conduct for various businesses to promote competition in Hong Kong. This is in line with the Council's statutory obligations.

13. We will establish a Competition Policy Advisory Group (COMPAG), chaired by the Financial Secretary, to oversee the government initiatives and consider policy issues that may arise from the Consumer Council's further studies. Besides the Consumer Council, we will invite other relevant experts to participate in the deliberations on a need basis. This high level coordination provides a focused forum to review competition policy matters. We plan to activate COMPAG as soon as possible.

(b) Competition Law

14. The Consumer Council strongly recommends enacting a competition law and considers legal enforcement the only means to deal with anti-competitive practices in a consistent and transparent manner.

15. We do not support enacting a competition law at this stage. An all-embracing competition law will not be able to take into account the specific requirements of individual sectors. It will be an overkill and will create considerable uncertainty amongst businessmen. Many firms entering into apparently collusive agreements may have done so for the purpose of attaining economies of scale or scope, or strengthening the quality of service, which are different forms of allocative efficiency. It would not be proper to rule these out indiscriminately. We have to analyse these acts more thoroughly in their particular context to ascertain whether they really restrict market accessibility or contestability.

16. In line with our free trade and minimum intervention approach, we prefer a less intrusive but more in-depth alternative to promoting competition. This involves promulgating self-regulatory codes of conduct to monitor the practices of different sectors; and considering sector-specific legislative changes, if necessary, to deal with anti-competitive problems. We are not averse to legislative changes, but we do not believe the extent of horizontal and vertical restraints or abuse of market dominance is so pervasive as to merit general outlawing.

17. Our alternative also has an additional merit of not having to be encumbered with a bureaucratic set-up in the form of a Competition Authority and Appeal Body. Given the uncertainties even over what exactly we want to outlaw, it is difficult to anticipate and justify a bureaucracy right from the start. An anti-trust regime is often associated with the proliferation of protracted court cases. Judging from experience overseas, the extent of anti-trust legislation and related set-ups does not seem to be directly proportionate to the competitiveness of the economy. It is salutary that neither Singapore nor Hong Kong has a general competition law, and yet both are widely regarded as the most competitive economies in the world. This demonstrates that legislation is not the only or best instrument to facilitating competition. In the case of Hong Kong and Singapore, free market forces have been the tested and proven instrument.

18. We have examined the extent to which the absence of a competition law could, as the Consumer Council has argued, compromise Hong Kong's international standing in world fora like the WTO and APEC. While some pressure exists for Hong Kong and a few other economies to introduce some form of competition law, we are not particularly concerned as our market is more open to goods and services from other economies than any other in the world. Free market forces have worked well for Hong Kong. We should be very careful not to upset the business environment that has served us well.

19. A clear majority of the public who have responded on the subject express reservation on the proposed law and do not believe the present situation in Hong Kong warrants a legislative approach. They urge Government to conduct more studies and think twice before deciding on it.

(c) Competition Authority and Appeal Body

20. The Council recommends establishing an independent Competition Authority and an Appeal Body. As explained, we prefer to promote a better understanding of and better compliance with our competition policy within our existing framework. We consider a separate body unwarranted because many sectors have already developed their own regulatory regimes that have investigative powers and can impose binding codes on their members. It would not be necessary to duplicate enforcement resources in these cases. Again, the public has expressed major reservation on the proposed Competition Authority and Appeal Body, arguing that the set-up will have duplicating or sometimes ambiguous roles vis-?vis other existing regulatory bodies and government bureaux and that it lacks the technical expertise to cater for the requirements of individual sectors. There is also debate on whether conferring advisory, investigative and judicial powers upon one Authority is appropriate.

21. We believe the package of initiatives as set out in paragraphs 11 to 13 above suffices to demonstrate Government's commitment towards promoting competition and enhancing Hong Kong's economic efficiency.

INTERNATIONAL PERSPECTIVE

22. There is no overwhelming international pressure or clear international recognition for the need to introduce a competition law in every economy. Hong Kong is one of the six economies⁵ among the 18 APEC members which do not have a general competition law. There is no APEC consensus that a general competition law is essential to a competition policy.

23. In the WTO context, although there are provisions scattered in various Agreements obliging members to ensure that certain anti-competitive business practices do not occur, they do not specify the means to do so. Indeed, discussions on competition have only started rather recently and focus is more on the interrelationship between trade and competition policies. It is unlikely that any form of harmonised international competition rules will emerge in the near future.

FINANCIAL AND STAFFING IMPLICATIONS

24. The proposals above will have no significant financial and staffing implications on bureaux and departments concerned. The Secretary for Trade and Industry will absorb any additional workload arising from the establishment of the COMPAG within her global allocation as far as possible.

ECONOMIC IMPLICATIONS

25. Pursuing legislative measures or affirmative actions on those business practices for which harmful anti-competitive behaviour may not be conclusively established while there may be efficiency reasons on other scores, could constitute undue Government interference on private business activities.

26. The general trend nowadays is for government to reduce interference. Deregulation, coupled with maintaining openness, accessibility and contestability, is regarded as a proper way of enhancing the free play of market forces. This should be the main plank of our competition policy.

27. Continuing to adopt a more flexible sector-specific rather than a more rigid all-embracing approach, underpinned by appropriate initiatives and codes of conduct for upholding competition, represents the preferable move in line with such a policy in Hong Kong's circumstances.

PUBLIC CONSULTATION

28. The former Legislative Council had urged Government to formulate a fair trade policy and to introduce legislation to establish a fair trading commission in three motion debates in February 1993, May 1996 and January 1997. We have taken Members?views into consideration when formulating our steps forward as set out in paragraphs 11 to 13.

29. Between December 1996 and March 1997, we consulted over 110 organizations, including chambers of commerce, trade and professional associations, and tertiary institutes on the Consumer Council's report and received 88 responses. The majority of the feedback supports maintaining and sharpening Hong Kong's competitive edge within the existing framework and urges Government to review more carefully the need for and scope of the proposed competition law.

PUBLICITY

30. We will organise a press briefing and issue a press release after the briefing for the Panel.

Trade and Industry Bureau
3 November 1997

1 -- Horizontal agreements are agreements among competitors, typicallynfor the purpose of raising or fixing prices (so-called "price-fixing"); compressing bid prices ("bid-rigging"); allocating specific customers or sales territories to particular firms and not competing over the territory or customers of other firms ("market sharing"); or not dealing with firms that supply other firms in their market ("collective boycotts).
2 -- Vertical agreements are agreements among suppliers and distributors or retailers, typically for the purpose of setting a minimum price at which the product may be sold to customers (so-called "resale price maintenance"); requiring a retailer or distributor not to sell products competing with the supplier's products ("exclusive dealing"); or requiring purchasers of one product to purchase other products from the same supplier ("tie-in sales").
3 -- Abuse of market dominance would typically come in the form of price-cutting for the sake of driving out competitors ("predatory pricing") or selling to some customers on different terms ("discriminatory behaviour").
4 -- Relevant legislation includes the Sale of Goods Ordinance, Trade Descriptions Ordinance, Supply of Goods (Implied Terms) Ordinance, Control of Exemption Clauses Ordinance and Unconscionable Contracts Ordinance.
5 -- The other five economies that do not have a general competition law are Singapore, Indonesia, Malaysia, Brunei and papua New Guinea.