Competition Laws; a toolkit to achieve robust non-oil growth in GCC
What is the ultimate objective of that body of rules generally known as “competition” or “antitrust” laws? This question has been debated for well over 100 years and doesn’t yet have a definitive answer. Addressing it is not merely a matter of academic speculation: the “purpose” of competition laws – their perceived “role” in the governance of an economy – deeply affects their interpretation and day-to-day application by the regulators and the courts.
Wide or narrow purpose?
Should competition laws focus on pursuing purely economic goals in the form of macro-economic efficiency and consumer protection? Or should they be a tool, among several others, for the pursuit of a wider range of policy objectives such as, for example, higher levels of employment, the protection of the environment, or a nation’s industrial policy? Within the GCC, this broad question arguably takes the following shape: should competition laws be a tool to foster key industrial policy priority of most GCC countries in the current historical context, namely the development of their non-oil sectors?
Depending on geographies and historical periods, the question of what objectives competition laws should pursue has been answered in a variety of ways. On one extreme, economists belonging to the so-called Chicago School advocate restrained intervention by the state in the natural interaction of economic forces, on the basis that these are mostly self-regulating. According to this approach, competition laws should intervene to correct only extreme imbalances, which market forces would be unable to rectify of their own accord.
On the other extreme, a comparative analysis shows that the competition laws of several countries explicitly affirm, as their objective, the pursuit of the wider macro-economic priorities of the day. For example, South Africa’s competition law includes among its objectives the increase of “the ownership stakes of historically disadvantaged persons”; China’s competition law has the purpose, inter alia, of “promoting the healthy development of the socialist market economy”.
By contrast, in the US, the 1890 Sherman Act does not expressly set out a specific objective and, as a result, the approach to enforcement in that country varied widely among past administrations. Also in the EU, Articles 101, 102 and 106 of the Treaty on the Functioning of the European Union do not expressly articulate any particular policy objective – although this legislative agnosticism did not prevent EU politicians from attempting at various times to pressure authorities into espousing varying political agendas.
A tale of two GCC competition laws
Saudi Arabia’s 2004 competition law expressly states its aim in Art. 1: “to protect and promote fair competition and combat monopolistic practices that affect lawful competition”. This is the traditional “core” purpose of competition laws, with no scope allowed for add-on policy objectives. The purposes of the UAE’s 2012 competition law are codified as follows (Art. 2): “the protection and enhancement of competition and the combat of monopoly practices through […] providing a stimulating environment for businesses in order to enhance efficiency, competitiveness, and the interests of consumers […]”.
While this language is only marginally broader than Saudi Arabia’s law, the UAE law is also tasked with contributing to the “sustainable development in the State”. Arguably, in the current economic context, “sustainable development” may be interpreted as a push toward diversification in the factors that contribute to GDP, through the increase of non-oil revenues.
Such an interpretation of the UAE competition law’s objectives would be justified also in light of the recommendations made with increasing frequency by global bodies, including notably the IMF. For example, in an October 2016 paper, eloquently entitled “More Bang for the Buck in the GCC: Structural Reform Priorities to Power Growth in a Low Oil Price Environment”, the IMF notes that the enforcement of competition laws plays an important role in creating an economic environment capable of fostering non-oil growth in the GCC.
Objectives vs reality
The stated objectives of GCC competition laws should be read also in light of their actual scope of application, which is relatively narrow if compared to US and EU competition laws.
The UAE competition law carves out from its purview a significant fraction of the economy. To begin with, government entities and companies where the government owns a majority of the shares are exempted from the application of the law. It is well known that such companies play a considerable role in the UAE economy (and indeed, embarking on a privatization program is one of the IMF’s key recommendations).
Secondly, several economically important industries are entirely excluded. Among these: the financial sector, telecommunications, oil and gas, pharmaceuticals, electricity and water, and transportation. Lastly, the law does not apply to small and medium enterprises. These are defined as businesses employing less than 200/250 employees or having revenues not exceeding AED200/250 million (depending on the sector they operate in). A materiality threshold set at this level effectively carves out from the law’s remit the vast majority of businesses.
In Saudi Arabia, the incidence of carve-outs is lower. For example, companies are exempted only if wholly owned (rather than majority-owned) by the government. The practical relevance of this distinction has been demonstrated in 2015, when Saudi Telecom Co. (a publicly listed but government-controlled entity) was fined SAR10 million for abusing its dominant market position.
Enforcement of the competition law in Saudi Arabia began in earnest in 2014, following the adoption of a set of key implementing regulations, and has constantly increased over time.
The Saudi Council of Competition Protection handled approximately 95 investigations and complaints since its creation, of which 29 were in 2016. In terms of merger control, the Council reviewed a total of 63 applications, of which 26 were in 2016. It imposed a total of SAR357 million in fines, including in relation to cartels, abuses of dominant position, and prohibited vertical agreements. Also, the number of dawn raids is increasing rapidly (there have been 38 such raids in 2015). Companies in Saudi Arabia are taking note and adjusting their behavior to the new reality, with clear benefits for consumers and the economy in general.
In the UAE, competition law enforcement has been gradually building up following the adoption of certain key implementing regulations during the second half of 2016. It is still early days, however, to properly assess the impact of competition law enforcement on the wider economy and no statistical data is yet available. That being said, it is to be expected that UAE businesses will soon take note of the increasing incidence of enforcement actions and will re-calibrate their practices as needed.
Altering a macro-economic context
History has taught that, if left alone to determine their own behavior, market participants are likely to combine or collude in a way that benefits them but leaves society as a whole worse off. Conscious of this, in its recommendations the IMF constantly identifies the establishment and effective enforcement of competition laws as a fundamental element of economic growth. History has also shown that the introduction of such laws quickly brings about tangible benefits to consumers.
The effective and reliable enforcement of competition rules acts as a catalyst to entrepreneurship and innovation, while also acting as a major driver towards price efficiency. In this sense, competition laws (if consistently and reliably enforced) do indeed gradually but fundamentally alter the structure of economies and improve the aggregate well-being of those countries that adopt them.
It is important to stress that all these benefits derive simply by the pursuit of the “narrow” purposes of competition laws, namely protecting consumers and driving firms to be economically efficient by exposing them to competition. Wider political aims, such as the decrease of unemployment, or wealth re-distribution, are best left to those other institutions of the State that are better suited at identifying and addressing political needs.
As a matter of fact, empirical evidence in the US and the EU has shown that competition authorities achieve best results if they only focus on “narrow” mandates. Narrow mandates allow authorities to act solely on the basis of rational economic analysis and models.
This in turn leads them to act neutrally and predictably, which in turn fosters the reliability and credibility of the legal system as a whole. These considerations have gradually led both US and EU competition authorities, during the past 10-15 years, to interpret and apply competition rules only in light of their “narrow” objectives (a policy shift dubbed in the EU as the “more economic” approach).
What lessons can GCC governments derive from the American and European experiences? We submit that GCC competition authorities should not directly attempt to resolve economic imbalances, nor deliberately endeavor to alter the GDP mix by adopting an activist and interventionist stance. They will best serve the economies they oversee – and, incidentally, foster the development of the non-oil sector – by allowing enforcement actions to be driven exclusively by rigorous and objective economic criteria.