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Following is a speech by the Under Secretary for Commerce and Economic Development, Mr Gregory So, at the 4th Annual Asian Competition Forum Conference at Hong Kong Polytechnic University this morning (December 9):
Good morning, ladies and gentlemen,
First of all thank you for inviting me to speak to you this morning. I understand that you have already had a very full programme on the first day of this conference, and that today discussion will focus closer to home on progress with the regulation of competition in Hong Kong and Mainland China.
In this context, I hope in the next few minutes to be able to give you some further insights into the progress that we are making with the introduction of a competition law in Hong Kong, a process that is not without challenges.
Brief background ¡V the competition policy review
As many of you are aware, it is only in the last two to three years that Hong Kong has taken the decision to introduce a framework for regulating competition. Before that, our stance was that given Hong Kong¡¦s naturally open and competitive business environment, there appeared to be no strong need for legislation against anti-competitive conduct. If complaints of such conduct did arise, it was felt that these could be handled by the relevant government authorities, in co-operation with the Competition Policy Advisory Group (or ¡§COMPAG¡¨), which is chaired by the Financial Secretary.
In 2005, COMPAG decided that it was an appropriate time to review the existing competition policy, to ensure that it was consistent with best practice. Accordingly, it set up the Competition Policy Review Committee, which studied how COMPAG had dealt with complaints of anti-competitive conduct, as well as the practice of competition regulatory authorities in selected jurisdictions overseas.
The review committee noted that although COMPAG looked into a steady number of complaints every year, in the majority of cases it had not been able to conclude whether or not anti-competitive conduct had taken place. Further, even if such conduct were established, there were no powers available to COMPAG to compel that such conduct cease ¡V nor could COMPAG impose any sanctions in respect of such conduct.
In the eyes of the members of the review committee, if Hong Kong¡¦s competition policy was to keep pace with best practice elsewhere in the world, it would be necessary to introduce suitable legislation to allow for the full investigation and where appropriate, sanctioning of anti-competitive conduct, recognising that such conduct would have a negative effect on economic efficiency and on consumer welfare.
Accordingly, in June 2006 the committee published its recommendation that a suitable competition law for Hong Kong be introduced, and that such a law should be enforced by an independent Competition Commission. The committee further recommended that before a new competition law be drawn up, the Government should consult the public on the key issues, including the basic questions of ¡V
* Whether Hong Kong needed a competition law;
* If so, how should such a law be enforced; and
* What should be the main features of such a law?
Further developments ¡V the public response
In November 2006, we published a discussion document entitled: ¡§Promoting Competition ¡V Maintaining Our Economic Drive¡¨, in which we explained some of the principles behind competition regulation, set out examples of actual cases of anti-competitive conduct drawn from other administrations, and asked 20 ¡§key questions¡¨ relating to whether, and if so, how we should legislate to regulate competition in Hong Kong.
The public response was a resounding ¡§yes¡¨ to the introduction of a competition law, to be enforced by an independent regulator. However, some concerns were expressed by the business sector that such a law should be drafted carefully, so as not to cause uncertainty or unduly raise the costs of legitimate business operations in Hong Kong.
Noting these concerns, in May of this year we issued a consultation document that outlined 50 proposals relating to the detailed provisions of the proposed competition law, for further public consideration. In response, we received more than 170 written submissions, many of which were impressively detailed and well-informed. While the general sentiment was still very much in favour of introducing a law to regulate competition, a number of specific issues surfaced that will require us to consider carefully the detailed format of the law.
In the time remaining, I would like to describe some of these issues and our initial response to how we might address these when drafting the Competition Bill.
Key issues of concern
(1) Role of the Competition Commission
One of the single most important elements for the success of any regulatory regime is a credible and effective framework for enforcement. In designing the framework for enforcing the competition law, we have borne in mind two key considerations ¡V
First, the regulator must have teeth, so that it can effectively investigate suspected cases of anti-competitive conduct. Allied to this, there must be effective penalties available to deter parties from engaging in anti-competitive conduct.
Second, the overall framework must be fair and transparent, with appropriate safeguards in place, including full rights of appeal.
As those of you who have had the chance to read our proposals will know, the original concept presented in the consultation document was to establish a ¡§European-type¡¨ Competition Commission with powers to investigate, adjudicate on and hand down penalties in respect of cases of anti-competitive conduct. Safeguards would apply in respect of the investigation mechanism and the adjudication process, and appeals would be available to a Competition Tribunal, and from there on up through the court system to the Court of Final Appeal.
Our view was that this system would allow for efficient and timely enforcement of the law, with a minimum of procedural hurdles, yet would provide a transparent process that would allow parties aggrieved at the Commission¡¦s decisions to seek appropriate redress. Furthermore, a similar system appears to work well in Europe and the United Kingdom.
In the six months or so since we formulated this proposal, two things have combined to cause us to re-think ¡V
First, a significant number of the submissions that we received in response to the consultation document expressed concern that the proposed model was not in line with the general common-law approach in Hong Kong, whereby there is a clear separation between the enforcement authority and the exercise of judicial power.
Second, over the course of this year there have been a number of appeal court judgments that cast doubt on the constitutionality of allowing a regulator such as the proposed Competition Commission to impose anything other than strictly limited types of civil remedy. Many of you will be familiar with the judgment in the Koon Wing Yee case, where the Court of Final Appeal made it clear that any significant financial penalty should be seen as criminal in nature, and therefore could not be included as part of a set of civil regulatory remedies.
In the light of these developments we are now reviewing the relative powers that might be granted to the proposed commission and the Competition Tribunal respectively. We are also considering further whether the courts should play a role in adjudicating on cases where severe financial penalties are sought, in order to ensure that the proposed competition law framework is in line with the recent appeal court judgments.
Without wishing to give too much away at this stage, I can pretty much assure you that recent developments mean that we will need to modify the original proposal set out in the consultation paper. At the same time, we will aim to design an enforcement mechanism that is as efficient and ¡§user-friendly¡¨ as possible within the overall framework of our legal system.
(2) Mergers and acquisitions
The public consultation drew considerable comment on the proposed enforcement framework. However there was markedly less comment on another issue on which we spent considerable time on during the drafting of the consultation document. This was the issue of how far - if at all - we should seek to regulate merger activity under the new law.
I fully realise that in almost every competition regime in the world, regulation of mergers and acquisitions is seen as an essential element of the law. Here in Hong Kong it appears that the picture is not so clear.
To back-track a little: when the Competition Policy Review Committee issued its report in June 2006, it made an unequivocal recommendation that the proposed competition law should not address the question of merger regulation. The committee took the view that the law should focus on cases of anti-competitive conduct, be they in the form of agreements or abuse of dominance, and that it should not deal with issues of market structure.
The committee also felt that as there was, in any case, very little local merger activity of any significance, this was not a problem affecting competition in Hong Kong, and therefore should not be a priority when designing the future competition regulatory regime.
Clearly the views of the review committee struck a sympathetic chord in the eyes of many stakeholders, as following our initial consultation exercise in November 2006, we received a very mixed response to the question of whether the competition law should include merger controls. Accordingly, in the detailed proposals paper we issued in May this year, rather than set out a clear direction, we offered a choice of options, which were, in simple terms ¡V
One: to include merger control in the law.
Two: to draft merger provisions but not to have them take effect until after a review of the impact of the law as a whole.
Three: not to include merger control in the law ¡V but to review the position further down the road once we had a chance to observe the effect of the new law.
Once again, the feedback on this issue was mixed. A slight majority of the respondents who commented on this issue were in favour of merger regulation from the outset. Most of those in favour argued to the effect that without merger provisions, other types of anti-competitive conduct could more easily occur.
Yet there were a number of respondents who picked up the views of the review committee, and argued that there was no real need for merger control in Hong Kong, and that introducing such provisions would have a negative impact on Hong Kong¡¦s business environment.
Frankly speaking, this is a tough one. We can see the validity of arguments on both sides, and yet without a law in place, it is simply not possible to gauge the impact of including or not including merger provisions in the law from the outset. This is an issue we will work on further in the context of preparing the Competition Bill, and one way or another we will have to present a clearly stated position to the Legislative Council when introducing the Bill.
(3) Exemptions
I am sure that Mark will not let me leave this morning if I do not address one further issue that has drawn considerable comment over the past few months, and that is the issue of exemptions.
During the public consultation, the single issue that drew the most unanimous comment was the proposal that the competition law should not apply to the Government or to statutory bodies. And I have to admit that many respondents who commented on this subject were skeptical with regard to the merits of this proposal.
It is widely recognised that it is quite legitimate, whether on economic grounds or on the grounds of wider public interest to exempt some activities from the ambit of competition law. There are express provisions in the competition laws of Australia, New Zealand, Singapore and the United Kingdom, to name just a few examples, which allow for exemptions from the application of the law in certain circumstances.
In our public consultation document we put forward a number of proposals that would allow for exemptions to be granted in similar circumstances as those adopted by other jurisdictions.
For example, where agreements that may on the face of it be anti-competitive, yet can promote efficiency gains within the overall economy, there are clearly grounds for exempting such agreements from potential sanction under the law. In the United Kingdom, for example, the responsible Minister of State may order that a category of agreement is exempt from the provisions on anti-competitive agreements provided that such agreements contribute to ¡V
* Improving production or distribution, or
* Promoting technical or economic progress.
Similarly, both Singapore and the United Kingdom have codified in their respective competition laws the practice established in the European Union, whereby specified prohibitions on anti-competitive conduct do not apply to undertakings entrusted with the operation of services of general economic interest.
When preparing for the Hong Kong law, we recognised that in effect, even without an explicit exemption, almost all services provided by the Government would be exempted ¡§automatically¡¨ by virtue of the fact that they are not undertakings engaged in economic activity. Nonetheless, we felt that in order to provide a high degree of certainty to these organisations, the simplest course of action would be to make such an exemption explicit. Even with such an exemption in place, any government agency that engaged in anti-competitive conduct would be subject to investigation under the existing competition policy.
Of course, the volume of public feedback on this subject has given us further food for thought. We recognise that there are circumstances in which statutory bodies may be engaged in economic activity, sometimes in direct competition with the private sector. We are therefore engaged in a thorough survey of the activities of the various bodies that are commercially active, and we will review the scope of the exemption once we have a better idea of the likely impact of the law on their operations, particularly where these involve essential services that are provided to the general public.
Other issues
The three issues I have just described will present particular challenges as we move ahead with the design of the competition law. However, there were many other views expressed during the course of the public consultation, which questioned the proposals that we had put forward in areas such as ¡V
* The exact framing of the prohibitions against anti-competitive agreements, and in particular the need for clarity to help give certainty to the business sector,
* Whether it is better to use an ¡§abuse of dominance¡¨ or ¡§abuse of substantial market power¡¨ standard,
* The extent to which we should allow for private civil actions, including representative actions, and
* How far we should merge the existing competition regulation in the broadcasting and telecommunications sectors with the new law.
By the same token, there was broad agreement to many of the other proposals, in areas such as the composition of the regulatory authorities, the circumstances in which enforcement powers should be used, levels of penalty, the safeguarding of confidential information, leniency programmes, and even some of the proposals regarding the exemptions mechanism.
As I said earlier, many of the submissions that we received were detailed and well thought out and have genuinely helped us better to understand the potential ramifications of the various proposals and options that we have developed over the past two years. I derive comfort from the fact that we have such expertise in Hong Kong, and that for the most part we have received helpful and constructive advice.
Going Forward
At last year¡¦s ACF conference, my former boss, Fred Ma spoke about taking forward the competition law and while describing the broad policy direction he made the very prescient remark that: ¡§the devil is in the detail.¡¨ I can assure you that the devil is still there, and will take some dislodging!
Nonetheless, one year on we are older and wiser, and have had the benefit of a rigorous and increasingly well-informed public debate on how we should frame a competition law for Hong Kong. We have plenty of thinking still to do, albeit less time in which to do it, given that the Chief Executive has set us the demanding target of having a Bill ready to go to the Legislative Council before July next year.
In the coming months we will continue to talk to stakeholders as we prepare the detailed provisions of the Competition Bill, and we will look for ways to ensure that we have a law that is effective in regulating competition and that provides clarity to the business sector. We remain firmly committed to the introduction of this legislation, and I welcome further views and advice on how we can craft a law that will allow us to implement in full our competition policy, with the aim of enhancing economic efficiency and thereby also creating benefit for consumers.
In closing, I would like once again to thank Mark Williams and the ACF for inviting me to speak to you this morning. I would also like to congratulate Mark and his team not only on the continued success of this annual conference but also on the establishment of the Asian Competition Law and Economics Centre, which I understand will formally open tomorrow. This is a very significant step in the development of local expertise in competition law, and although I will unfortunately not be able to attend tomorrow¡¦s opening, I wish you every success with this project.
Finally, I wish you all a fruitful second day of the conference, and I particularly hope that our overseas visitors will enjoy the rest of your stay in Hong Kong.
Thank you.
Ends/Tuesday, December 9, 2008
Issued at HKT 10:57
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