Law in transition 2004 - European Bank for Reconstruction and … · 2011. 2. 16. · Richard Bate, Kate Hardy, Angela Hill Anthony Martin, Jon Page Photographs Mike Ellis (pages

Law in transition 2004

Competition law and policyEnhancing enforcement and cooperation

General Counsel of the EBRDEmmanuel Maurice

Co-Editors-in-Chief Gerard Sanders, Michel Nussbaumer

Focus EditorLaura Campbell

Contributing EditorIrena Dajkovic

Production EditorAnna Sidorowicz

SupportRichard Bate, Kate Hardy, Angela Hill

Anthony Martin, Jon Page

PhotographsMike Ellis (pages 4 and 46)

Courthouse, WroclawAndrzej Luc (inside front cover and pages 18, 25, 34, 66, 71 and 77)

Courthouse, SarajevoHaris Memija (cover and

pages 54 and 60)

The European Bank for

Reconstruction and Development

(EBRD) is an international

institution whose members

comprise 60 countries, the

European Community and the

European Investment Bank.

The EBRD operates in the

countries of central and eastern

Europe and the Commonwealth

of Independent States committed

to multiparty democracy, pluralism

and market economies.

The EBRD’s countries of

operations are: Albania, Armenia,

Azerbaijan, Belarus, Bosnia and

Herzegovina, Bulgaria, Croatia,

Czech Republic, Estonia, FYR

Macedonia, Georgia, Hungary,

Kazakhstan, Kyrgyz Republic,

Latvia, Lithuania, Moldova, Poland,

Romania, Russian Federation,

Serbia and Montenegro,

Slovak Republic, Slovenia,

Tajikistan, Turkmenistan,

Ukraine and Uzbekistan.

The EBRD works through the

Legal Transition Programme, which

is administered by the Office of the

General Counsel, to improve the

legal environment of the countries

in which the EBRD operates.

The purpose of the Legal Transition

Programme is to foster interest

in, and help to define, legal reform

throughout the region. The EBRD

supports this goal by providing

or mobilising technical assistance

for specific legal assistance

projects which are requested

or supported by governments of

the region. Legal reform activities

Law in transition 2004

The EBRD Office of the GeneralCounsel gratefully acknowledges the

generous support of the Government ofTaipei China for funding the production

of this issue of Law in transition.

2ForewordRufus H. Yerxa, Deputy Director-General, World Trade Organization

4Enforcing secured transactionsin central and eastern Europe: an empirical studyFrédérique Dahan, Counsel, EBRDEliska Kutenicová, Consultant, EBRDJohn Simpson, Secured TransactionsProject Leader, EBRD

18Reform of security over movable property inLithuania: the second stageAndrius Smaliukas, PhD fellow at the law faculty of Vilnius University;visiting researcher at Queen’s College,University of Oxford

25Recent developments in Russian trademark and copyright legislation:an update from a practising lawyerMarina I. Drel, Head of Litigation and Enforcement, GowlingsInternational Inc. (Canada),Moscow Representative Office

32Focus on competition law and policy

Enhancing enforcement and cooperation

34The EBRD: promoting transition through competitionMaria Vagliasindi, Principal Economist, EBRD and Laura Campbell, Counsel, EBRD

46Transition to a competitivetelecommunications market:the application of competition rules in thetelecommunications sectorPaul Moffatt, Counsel, EBRD and Irena Dajkovic, Associate, EBRD

54Cooperation between thecompetition authorities in theEU: new challenges for centraland eastern European countriesPhilip Lowe, Director-General for Competition, European Commission, in cooperation with Patrick Lindberg andDorothe Dalheimer, Directorate-Generalfor Competition, European Commission

60The changing nature of competition: the Russian responseLessya Davydova, Head of Departmentfor International Relations andMethodology of Competition Policy, Ministry of the Russian Federation for Anti-Monopoly Policy and Supportfor Entrepreneurship

66Czech Republic: competitionrules in transitionJindriska Munková, Assistant-Chair for European Law,Charles University, Prague; Attorney at Law; Member of the LegislativeCouncil of the Government of the Czech Republic

71Enforcement of competition rules in Lithuania:the first decade Sarunas Keserauskas, Associate, and Arnoldas Klimas, Adviser, Law Firm Lideika, Petrauskas, Valiunas ir partneriai

77Competition law enforcement mechanismsJean Rossi, Attorney, Gide Loyrette Nouel

ˆ

ˆˆ

ˆˆ

www.ebrd.com/law

Contents

Contents 1

Foreword

Foreword 3

When the General Agreement on Tariffsand Trade (GATT) was established, thefounding members considered developinga set of rules addressing the anti-competitive practices of firms whichimpacted upon trade and development.Although this initiative was not pursued, in1996 the World Trade Organization (WTO)Ministerial Conference in Singaporeestablished a Working Group responsiblefor reviewing competition policy and trade. While diverse opinions exist amongWTO members about whether a set ofrules governing competition policy isrequired, the WTO has long recognisedthe close relationship between competitionpolicy, trade and development, andbetween competition policy and investment.

Following the reduction of governmentbarriers to trade and investment, therehave been increasing concerns that anti-competitive practices may thwart the gains made by liberalisation. There is also a growing realisation that mutually supportive trade andcompetition policies can contribute to sound economic development. In addition, effective competition policies help to ensure the benefits of liberalisation and market-basedreforms flow through to citizens.

The EBRD is committed to enhancingeconomic development through trade and investment. The Bank assists itscountries of operations, many of whichare on the threshold of becoming full EU member states, implement structuraland sectoral economic and legal reforms. This includes the promotion of a competitive private sector.

The transition of these countries fromcentrally planned to market economieswill depend significantly on their ability to ensure sound legal and regulatoryframeworks, which enhance competitivebehaviour in a market environment.

In the increasingly integrated globaleconomy, a key challenge for competitionauthorities is their ability to cooperatewith other regulators and to successfullyinvestigate and deter anti-competitivepractices, particularly practices havinginternational dimensions. The need for such cooperation, whether at thebilateral, regional and/or multilaterallevels, has been emphasised in the WTO Working Group.

This issue of Law in transition, with itsfocus on the enforcement of competitionlaw within the EBRD’s region, is a timelycontribution to the discussion oncompetition policies, but equally, andperhaps more importantly, the effectiveenforcement of these rules.

Competition law and policy cut across diverse sectors within nationaleconomies and can be applied in boththe domestic and international contexts.There is no single, universally-acceptedblueprint for regulation of anti-competitivebehaviour. Indeed, the WTO WorkingGroup has recognised that, althoughnational competition policies typicallyembody certain common principles, a “one-size-fits-all” approach is notappropriate in this field. Many WTOmembers, however, believe thattransparent and non-discriminatorydecision-making by national competitionauthorities is necessary to facilitateefficient trade and investment flows. In addition, cooperation amongst therelevant national authorities is essentialto effectively deter anti-competitivepractices which harm the welfare ofcitizens and undermine development.Ensuring well-resourced institutions arecapable of dealing with the complexitiesof competition matters, particularly cross-border transactions, will be vital to achieving these objectives.

In this context, this issue of Law intransition will be of interest to a wide variety of audiences, includingcompetition and trade policy practitioners and scholars.

Rufus H. Yerxa

Rufus H. Yerxa Deputy Director-General, World Trade Organization

Effective competition laws and policies can facilitate efficient trade and investment flows.

Enforcing secured transactionsin central and eastern Europe:

an empirical study

Enforcing secured transactions in central and eastern Europe: an empirical study 5

The purpose of secured transactions is to mitigate the risk of giving credit,thereby enhancing creditors’ confidencein recovering real value from mortgagedor charged assets. As a result, theavailability of credit should increase andthe terms (typically, the amount of theloan, the period for which it is grantedand the interest rate) on which it isavailable should improve.

Secured transactions was the first sector where the EBRD became involvedin legal reform in 1992. Since then, theBank has been working to improve theregimes for secured transactions in theregion where it invests via a combinationof policy advice and technical assistance.As an international financial institution,its mission is to promote and foster thetransition to a market economy in countriescommitted to political liberalisation, andit does so by lending primarily to theprivate sector in accordance with soundbanking principles. The EBRD has firsthand experience of the difficulties thatarise from an insufficient legal regime for secured transactions.

Understanding how legal frameworkswork in practice is a prerequisite for both policy dialogue on legal reform and for general credit risk assessment.Too often, pre-conceived views governthe behaviour of investors and othercreditors about whether the legal regimein a given country will support, or impede,their activities. In the field of law reform,inadequate attention is often paid towhat has been done in the past and how new proposed legal rules will (or willnot) function in their environment. In bothcases, the lack of proper information canlead to serious misjudgement.

Since 1999, the EBRD has published aRegional Survey on Secured TransactionsLaws. It is an assessment by the Bankdrawing on its accumulated knowledge ofsecured transactions law and practice inthe region. The regional survey aims to:

■ provide basic information aboutsecured transactions to help credit providers and their advisersassess the potential advantages of taking security;

■ highlight the strengths andweaknesses of the legal framework for collateral in each country; and

■ give a basis for objective comparisonand encourage mutual assistance in legal reform among transitioncountries.2

The regional survey sets out responsesto 34 questions covering key elements of the law and practice for using non-possessory security over movable assets.3

The grading system is a gradual progres-sion from a clear “yes” to a clear “no”.The design of the survey reflects the view that a sound secured transactionsregime should:

■ Enable the quick, cheap and simplecreation of a proprietary security rightwithout depriving the person giving thesecurity of the use of his assets.

■ Be available over all types of assets(including when generally described), tosecure all types of debts and betweenall types of persons and organisations.As far as possible the parties shouldbe able to adapt security to the needsof their particular transaction.

■ Provide an effective means ofpublicising the existence of securityrights, and clear rules governingcompeting rights of persons holdingsecurity and other persons claimingrights in the assets given as security.

Frédérique Dahan Counsel, EBRDEliska Kutenicová Consultant, EBRDJohn Simpson Secured Transactions Project Leader, EBRD1

ˆˆ

Since 1992, the EBRD has provided policy advice and technical assistance for legal reforms which foster secured transactions. This article charts the progress madein this sector and presents the various assessments conducted by the Bank, with afocus on the New Legal Indicator Survey first conducted in 2003.

■ Enable prompt realisation at marketvalue of the assets given as security,with the proceeds applied towardssatisfaction of the secured creditor’sclaim prior to other creditors.

■ Impose a low cost for taking,maintaining and enforcing security. 4

The EBRD Regional Survey provides an overview of progress in legal reformsand their implementation, measuredagainst best international practice. Yet itmay in some aspects be too general andnot provide sufficient detail, especiallywhen the particular aspect of the securedtransactions regime is complex andintertwined with other areas of the law.

It also “rewards” with better gradesthe countries which have adoptedmodern systems, as opposed to thosethat lack such systems – although theymay somehow have developed practicesfor taking security which, while beingcomplex and costly, still achieve practicalresults. This “rewarding” is no accidentsince the survey is primarily designed toaccompany the Bank’s legal reform efforts.

So far, the Bank has lacked the datanecessary to gauge the benefit that best international practices can bring to those countries that chose to adoptthem. The EBRD has therefore decidedto add to the Regional Survey a new type of assessment which seeks to findout how the law works in action, withoutregard to the underpinning principlesused in law reform. The EBRD sees these two aspects of the legal framework(so called laws in transition and laws inaction) as essential benchmarks both tomeasure the state of legal transition andto point to the strengths and weaknessesof individual countries.5

Methodology: from the RegionalSurvey to the case study

The need to concentrate on the “laws inaction” is obvious and the best methodto do this is via a case study. A casestudy has the advantage of concentratingon the facts as opposed to the rules,and of assuming a situation as close as possible to the context of normalcommercial practice. Using cases tosurvey legal systems is an approachwhich many organisations have recentlytaken, for instance the World Bank’s Lex Mundi project6 and also the Trentoproject on “The Common Core ofEuropean Private Law”.7

The drafting of the case is paramount for the quality of the responses: if thecase is too wide, the results will not be comparable across jurisdictions; if it is too narrow, it may not leave therespondent sufficient scope to describeparticularities of its legal system whichmay have dramatically affected theresults. Also, secured transactions is a relatively complex area of the lawand the application of the law greatlyvaries with the specifics of the case.Over-simplification of the matter couldlead to seriously misleading results.

In the context of secured transactions,the practical effects of the law appearmost clearly on the question ofenforcement of a security interest. The key issue for a creditor whose claimis not satisfied is how much and howfast he can recover through realisation of the charged assets, and how simplethe whole process will be. Therefore, the primary evaluation of the responsesneeds to concentrate on these threedimensions of enforcement. It ought also to take in a number of other factors,

which cannot be overlooked. Since the exercise’s objective is to gauge theeffectiveness of the process, all aspectsof the process must be taken into account.

In translating this conceptual backdropinto a practical methodology, the EBRDworked with two law firms in the region,Allen & Overy and Chadbourne & ParkeLLP. Where these firms did not have an office or an associate, the EBRDdirectly contacted local law firms.8

The respondents had to treat the caseas if it were a real case involving aclient, adding any practical advice theywould normally give to the client insimilar circumstances. The consistencyof the information was ensured by athorough review of the individual repliesand follow-up with the local counsel onany questions that arose.

The case put to respondents was the following:

“We are a bank registered in yourcountry. One of our customers, a localprivately-owned limited company inmanufacturing, has failed to repay aloan of €100,000. There was noinvalidity to the underlying loanagreement: the default is due to cashflow problems. The debtor thus has no valid defence for the non-paymentof the loan.

Our customer has given us security over €120,000 worth of:

(i) production equipment andmachinery used in its factory; and

(ii) inventory consisting of finished products.

We now ask you for advice on how wecan enforce our rights over the assetsgiven as security in order to recover our claim.”

The key issue for a creditor whose claim is not satisfied is how much and how fast he can recover through realisation of the charged assets, and how simplethe whole process will be.

6 Law in transition

Respondents were asked to assess the creditor’s ability to initiate an enforce-ment procedure and recover his loanfrom the charged assets (equipment onlyif inventory could not be used as collater-al), giving an indication of the amount ofany likely recovery and the time it wouldtake for enforcement. The case alsorequested the respondent to provideadditional information on variousaspects of enforcing a security right.These were as follows:

■ The status of the debtor: the extent to which the procedurewould vary should the debtor bedeclared insolvent;

■ The extent of charged assets:what will be included in the collateral and what will not(replacement assets, added assets, related rights, proceeds);

■ How different would the process be if the charged assets were immovable(for instance an office building or a factory) or receivables (such as the claims on customers for paymentfor goods sold);

■ The extent of secured debt:whether interest, costs, damages and any penalty will be included in the secured debt;

■ The level of external threat:competing claims to charged assets or proceeds (priority creditors such astax claims or employees, judgmentcreditors, other charges or liens, etc.);

■ The recovery procedure:simplicity, costs, speed, creditorability to influence the process, scope for debtor obstruction.

Some additional general questions also highlighted the existing institutionalcontext (courts, bailiffs, notaries,auctioneers, accountants, experts) andtheir integrity, and the existing practiceof enforcement in the country (in generaland also in terms of the number ofcases the respective law firms hadhandled in the past). 9

Enforcing the charge: amount, time and simplicity

As explained above, to allow cross-country comparisons, results were first presented on the basis of summaryindicators relating to the amount adebtor could be expected to recoverfrom the general case as described, the time needed to realise recovery and the simplicity of the legal process to be followed. These comparisons werethen refined and qualified by looking at how results might be affected if thecircumstances of the case changed(scope) and how the process ofenforcement is affected by taking intoaccount other interested parties, as wellas the quality and integrity of the courts.This was the only way the survey couldgive a fair and realistic picture of thesituation on the ground.

Chart 1 shows the initial assessment ofhow much a secured creditor can expectto recover (amount), how quickly (time)and how simply (simplicity). Each of thesecriteria is assessed on the basis of0 (worst) to 10 (best). The higher thebar, the more efficient and creditor-friendly the system is.

The amount indicator reflects the likelyreturn on the realisation of the assetsminus the enforcement costs (since thecosts will be recovered out of the saleprice and will therefore diminish whatthe secured creditor will recover from the collateral). The amount has beenadjusted on a scale of 0–10 where 10 equals the maximum possible return(€120,000, the assets’ market value).

The time indicator reflects the estimatedlength of the process necessary forsuccessful enforcement, from the startof the enforcement procedure to thecollection of the proceeds of sale. The time has been adjusted on a scaleof 0–10 where 0 equals the longestestimated time (24 months) and 10 theshortest (one month).

The simplicity indicator summarises arange of factors, including the number of procedural steps to be taken; thenumber of places to visit or persons tocontact; the availability of information;clarity of the law and regulations;uniformity of practice; the adoption ofnecessary implementing regulations; andthe ease of ascertaining the existence

0

5

10

15

20

25

30

Hung

ary

Latvi

aSl

ovak

Rep

ublic

Czec

h Re

publ

icLit

huan

iaEs

toni

aBu

lgaria

Croa

tiaSl

oven

iaFY

R M

aced

onia

Kaza

khst

anSe

rbia

and

Mon

tene

gro

Ukra

ine

Bela

rus

Kyrg

yz R

epub

licRo

man

iaAl

bani

aRu

ssia

Mol

dova

Pola

ndGe

orgia

Azer

baija

nUz

bekis

tan

Turk

men

istan

Bosn

ia a

nd H

erze

govin

aAr

men

ia

Chart 1 Enforcement of charged asset by countryTime, amount and simplicity scores

SimplicityTimeAmount

NotesRatings for each dimension range from 0 (worst) to 10 (best). No data for Tajikistan. Data for Serbia andMontenegro relate to the Republic of Serbia (excludingKosovo) only.

Source: EBRD New Legal Indicator Survey 2003.


of competing claims. Countries weregiven a 10 where the enforcementprocess was overall considered clear and with only a minor level of complexity;5 where there was a significant likelihoodof complexity or uncertainty which mightprejudice the enforcement process; and1 where there was a major level ofcomplexity or uncertainty which coulddeter creditors from starting enforcement.

The results give a surprisingly positiveoverall picture of enforcement in theEBRD countries of operations. Theresults indicate that it is possible torecover at least 80 per cent of themarket value of the assets taken assecurity in six months or less in ninecountries (Croatia, Czech Republic,Estonia, Hungary, Kazakhstan, Latvia,Lithuania, FYR Macedonia, and theSlovak Republic). A recovery of at least 60 per cent of the market value of the assets taken as security can beexpected in nine months or less in16 countries (the above plus Albania,Belarus, Bulgaria, Moldova, Romania,Serbia and Montenegro, and Slovenia).

The amount recovered and time factorsare not positively correlated in caseswhere the procedure presents somecomplexity but they are positivelycorrelated where the procedure is simple.In other words, countries that scorehighly on amount and time generally havea simple process. Moldova was the onlyone of the 16 top countries for amountand time where the process was judgedto be very complex or uncertain.

By contrast, in countries with significantcomplexity ratings like Bulgaria, a quickprocedure (8.3 on a scale of 10) ispaired with a mediocre return (5.3). The dichotomy is even more marked forSlovenia where the return is assessed at9.7 (excellent) but the time involved isdown to 2.5 (poor). The Kyrgyz Republic,Ukraine, and to some extent Russia also record reasonably high scores forthe amount recovered, but low scores on the time involved and the simplicity of the process.

The results are summarised in Chart 2which presents an unweighted average of the three dimensions of time, amountand simplicity, sorted by region.

Chart 2 presents a familiar picture of better performance in central andeastern Europe and the Baltic states(CEB) than in the remainder of the region.Six out of eight countries of CEB scored8 or more (out of 10) on the overallresults. In some of these countries,however, such as Hungary and theSlovak Republic, security enforcementrules have recently been changed andthe evaluation may to some extentreflect expectations of positive changesrather than accumulated experience.

Poland is the most noticeable exceptionof the CEB group: the system there does not provide a good recovery amountfor the secured creditor enforcing hissecurity over movable property (4.4 on a scale of 10), and the time required isworryingly long (1.6 on a scale of 10).

0

2

4

6

8

10

Arm

enia

Turk

men

istan

Uzbe

kista

nAz

erba

ijan

Geor

giaM

oldo

vaRu

ssia

Kyrg

yz R

epub

licBe

laru

sUk

rain

eKa

zakh

stan

Bosn

ia a

nd H

erze

govin

aAl

bani

aRo

man

ia

Serb

ia a

nd M

onte

negr

oFY

R M

aced

onia

Croa

tiaBu

lgaria

Pola

ndSl

oven

iaEs

toni

aLit

huan

iaCz

ech

Repu

blic

Slov

ak R

epub

licLa

tvia

Hung

ary

CIS SEE CEB

Chart 2 Enforcement of charged asset by regionAverage score received by each country on amount, time and simplicity indicators

Commonwealth of Independent StatesSouth-eastern EuropeCentral Europe and the Baltic states

NotesRatings range from 0 (worst) to 10 (best). No data forTajikistan. Data for Serbia and Montenegro relate to theRepublic of Serbia (excluding Kosovo) only.


8 Law in transition

The New Legal Indicator Survey 2003 results give a surprisingly positive overall pictureof enforcement in the EBRD’s countries of operations.

The reason for this seems to be the over-burdening of the courts which are, in practice, the only available method for pursuing enforcement. Although the1998 Law on Registered Pledge andPledge Registry provided for a possibleout-of-court procedure, the necessaryimplementing regulations were neveradopted. In their absence, the creditorhas no practical choice but to petitionthe courts. The sale will then take placeat public auction and the return is likelyto be well below market price.

Slovenia also has a low scoring on time,which is reflected in the overall scoring.In addition the enforcement regime isrecent too, so here again, only furtherexperience will confirm the efficiency orotherwise of the system.

Close examination of the country reportsreveals that there is not a single mode of enforcement common to all thesecountries, which could serve as a model for less successful jurisdictions.In Hungary, Latvia, Lithuania and theSlovak Republic, where the creditor and debtor have so agreed, the law gives the creditor or his agent the rightupon debtor default to take the collateralinto his possession. Thereafter, he can organise a sale of the collateral,normally a direct private sale or byselected bidding, subject to the legalduty to realise as good a sale as possiblein the then current market circumstances.

In the Czech Republic, such an option isnot available. The sale would typically beled by a private executor appointed bythe creditor without further influence ofthe creditor, and the appointment itselfcould be contested by other creditors. InEstonia, although creditor-led enforcementis possible, it is not recommended dueto the complexity of statutory provisionsand the lack of reliable practice.

In south-eastern Europe, six out of sevenstates fare relatively well with scoresbetween 6 and 8 (average of 6.88 out of10). The clear exception to this is Bosniaand Herzegovina, where a creditor’sprospects for enforcing a security rightare slight. The only way to contract anon-possessory charge over movableproperty is to use the Law on Enforcementby which a court-ordered seizure of theassets constitutes a charge, pending itsenforcement upon the debtor’s default.The procedure is ill-designed for

commercial transactions. Furthermore,public auctions, which are the onlymethod to realise the collateral, areoften unsuccessful leaving the creditorunable either to collect any proceeds orto take title of the assets. A new Law onEnforcement and a complete overhaul ofthe secured transactions legal frameworkis currently being prepared and shouldimprove the system.

In the countries of the Commonwealth of Independent States (CIS)10 the resultsare mixed, with an average score of 4.84out of 10. At one extreme is Kazakhstan,which has a well-implemented system for secured transactions over movableproperty. The creditor’s position onenforcement of a charge is made strongerby registration since the debtor then hasfewer grounds for challenging the validityof the charge. Upon default, creditorscan choose the extrajudicial procedure of enforcement, by which their authorisedrepresentative conducts a public auction.This procedure is generally slightly fasterthan court-led enforcement, but evencourt-led enforcement is not reported to be unduly long.

Ukraine, the Kyrgyz Republic and Russia,by contrast, are all characterised by atime-consuming process, which makesenforcement more difficult for thesecured creditor.

In Moldova, the return that a creditor can expect on enforcement and the timeinvolved are quite reasonable. However,the whole process lacks simplicity andcertainty. For example, the newly createdregistration system for charges lacks a centralised pledge numbering system.

Public notaries, who have beenappointed to operate the registry, use their own numbering system whenmaking entries into the registry, whichmeans that several entries could havethe same number, leading to confusion.

At the bottom of the scale are Armenia,Uzbekistan and Turkmenistan, where theposition of the secured creditor is unclearin terms of time and amount. Uncertaintyis also shown for Armenia and Uzbekistanin the complexity of the process.


Countries that score highly on amount recovered and time factors generally have a simple charge enforcement process.

Scope and process ofenforcement

As noted earlier, results based only onthe predicted return, timing and simplicityin a single situation cannot tell the wholestory. The efficiency of the enforcementprocess may be influenced by many otherfactors, or “qualifiers”, that add nuanceto the “raw” results on amount, time andsimplicity. Twelve qualifiers were takeninto account here.

Six of these qualifiers account fordifficulties which can be encountered inthe process of enforcement, especiallyby involved parties or institutions beingable to affect this process (see boxbelow). While some of these process-related factors may be reflected in theraw scoring (for example, a highlikelihood of debtor obstruction wouldhave influenced the assessment of thelength of the enforcement process), it isuseful to assess them separately to gaina better understanding of the practicalsituation in a given country.

The remaining six qualifiers relate to thescope of enforcement (see box below).Such factors include insolvencyprocedures and ranking of creditorsunder insolvency. The relevance ofinsolvency is self-evident. A creditor’sassessment of his security will change if, on examination, it appears that the

relatively good enforcement that might be expected would be radically curtailedshould the debtor be declared insolvent.Limitations on the kinds of assets thatcan be pledged, and variations in thelegal procedures relating to differentclasses of assets, similarly providenecessary qualification to theassessment presented above.

The following graphs present for eachcountry scores on, respectively, theprocess factors (in blue) and the scopefactors (in purple). These are rated on a scale of 1 to 3, with 1 indicating no significant problems or limitations, 2 relatively minor problems or limitations,and 3 major problems or limitations. The fuller the ‘web’ of the graph, themore serious the problems are in each of the factors’ categories.

For some countries, there is a relativelyclose correlation between the raw scoreson amount, time and simplicity and thescores on scope and process presentedin their respective graphs. Lithuania and Latvia, for instance, which bothreceived high scores on time, amount andsimplicity, reveal no particular underlyingproblems which could contradict or qualifythe raw results. Notably, enlargement ofthe scope of the case would not havehad any significant effect on the overallpositive assessment. In a similar vein,Azerbaijan and Georgia received a 2 or 3

Process factorsDebtor obstruction: The possibility for the debtorto prevent, slow down or otherwise obstruct theenforcement proceedings to the detriment of thechargeholder. Legitimate exercise of right of defenceor appeal is not included.

Preferential creditors: The impact of claims ofother creditors (other than prior-ranking securedclaims) on the satisfaction of the secured creditor’s claim.

Creditor control: The ability of the creditor tocontrol or influence the conduct of the enforcementprocedure.

Institutions: The reliability of the courts and other institutions necessary to support theenforcement process.

Practical experience: The general level of practicalexperience with the enforcement process in thecountry in question.

Corruption: The impact of corruption within the court system on the enforcement process.*

Scope factors Insolvency procedure: The impact of the debtor’sinsolvency on the enforcement process.

Insolvency ranking: The priority of the securedcreditor’s claim upon insolvency of the debtor.

Receivables: An assessment of the simplicity andcertainty of the enforcement process for a chargeover receivables.

Immovables: An assessment of the simplicity andcertainty of the enforcement process for a chargeover immovables.

Inventory: An assessment of the simplicity andcertainty of the enforcement process for a chargeover inventory.

Scope of collateral: The possibility to enforceagainst replacement and subsequently acquiredassets included in the general description of the collateral.

* Although the assessment was based on the replies from respondents, reference was also made to the joint EBRD-World Bank Business Environment and EnterprisePerformance Survey (BEEPS) and, where applicable, the TransparencyInternational Corruption Perceptions Index. For Turkmenistan, which was not covered by these surveys, no assessment was givenfor corruption or institutions.

10 Law in transition

Debtorobstruction

Preferential creditors

Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Process and scope Qualifying factors in the charge enforcement process

AlbaniaDebtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Azerbaijan

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Bulgaria

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Estonia

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Hungary

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Armenia

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Belarus

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Croatia

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

FYR Macedonia

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Kazakhstan

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Bosnia and Herzegovina

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Czech Republic

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Georgia

(continued on page 13)


Process factors (see box on page 10)

Scope factors (see box on page 10)

1 = no significant problems or limitations 2 = relatively minor problems or limitations 3 = major problems or limitations.

The fuller the ‘web’ of the graph, the more serious the problems are in each of the factors’ categories.

NotesNo data available for Tajikistan. Data for Serbia and Montenegro relate to the Republic of Serbia (excluding Kosovo) only. No assessment was carried out on corruption and institutions in Turkmenistan.



scoring on almost all scope and processfactors, which matches their low ratingson the raw scores above. Major effortswould be needed to achieve realimprovement in these countries.

However, the importance of examiningthe scope of the law comes out clearly for countries like Hungary, the Czech Republic and the SlovakRepublic, where severe limitations exist on recovering charged assets from a debtor in insolvency.

In both the Czech Republic and theSlovak Republic, the chargeholder onlyretains priority for 70 per cent of thesecured debt – for the remaining amount,he ranks as an unsecured creditor. InHungary, for charges which were takenmore than one year before the start ofthe procedure, 50 per cent of the claimwill rank ahead of all creditors, while theremaining 50 per cent will rank behindthe cost of the liquidation (including, but not limited to, the outstandingsalaries, tax and social securitypayments, associated costs and fees of the liquidation).

Moreover in the Czech Republic, takingsecurity over inventory is not possible,nor does the law allow for a flexibledescription of the collateral, by whichparties could agree to add or replace the assets. Such restrictions in effectpreclude the use of many modernfinancing techniques which involvegranting security over groups or pools of assets. In Estonia, the law on secured transactions also has restrictedapplication: it is only possible to take a non-possessory security over certaintypes of assets, or over the whole of an enterprise.

These qualifications echo some of thelimitations of the law itself. What thisindicates is that for these advancedreform countries, the principal need is toextend the scope of secured transactionslaw to cover a broader class of assetsand to deal with the case of insolvency.The case study does not suggest anymajor problems with implementing and using the law in practice in these countries.

A closer look reveals further interestingqualifications in process or scope relatedfactors. In Bulgaria, FYR Macedonia andKazakhstan, for example, the weaknessof the courts, and in particular the problemof corruption in the courts, is regardedas a serious limitation. In the KyrgyzRepublic and Moldova, similarly, goodand comprehensive laws on securedtransactions are being undermined by adeficient institutional framework. In Poland,where raw results show that enforcementis slow and gives a poor return, the graphdemonstrates that the scope factors areactually excellent (five out of six receiveda 1 score). If Poland improved its institu-tional framework for the enforcement ofpledges, this would have a major positiveimpact on secured lending.

Finally, for a few countries, the findingsderived from the qualifiers appear ratherinconsistent with the overall picturepresented by the raw results. The picturefor Romania, for example, is puzzling: theraw scoring does not show a particularlygood expectation for secured creditors,yet the graph does not pin-point anyparticular process-related factors. It wouldseem to be more a question of a broadrange of issues where some problemsstill persist. The same is true for Russia,where only one process-related factor is found to be very problematic (namelydebtor obstruction) but where scopefactors are also less encouraging.

Process and scope Qualifying factors in the charge enforcement process (continued)

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Latvia

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Moldova

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Russia

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Slovenia

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Uzbekistan

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Lithuania

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Poland

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Serbia and Montenegro

Debtorobstruction


Creditor control

Practicalexperience

Corruption*

Institutions*

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

*no assessment

Turkmenistan

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Romania

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Slovak Republic

Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Ukraine

Process factors (see box on page 10)

Scope factors (see box on page 10)

1 = no significant problems or limitations 2 = relatively minor problems or limitations 3 = major problems or limitations.

The fuller the ‘web’ of the graph, the more serious the problems are in each of the factors’ categories.

NotesNo data available for Tajikistan. Data for Serbia and Montenegro relate to the Republic of Serbia (excluding Kosovo) only. No assessment was carried out on corruption and institutions in Turkmenistan.


Debtorobstruction


Creditor control

Practicalexperience

Corruption

Institutions

Insolvencyprocedure

Insolvencyranking

Receivables

Immovables

Inventory

Scope of collateral

3

2

1

0

Kyrgyz Republic


The Regional Survey andcomparison between results

This case study on enforcement wastriggered by the EBRD’s endeavours to assess its countries of operations’laws in action, as opposed to theirreform efforts. How do these resultscompare with the assessment providedby the EBRD’s Regional Survey, which is designed to assess progress against benchmarks?

The 2003 edition of the Regional Surveyshows that countries can roughly bedivided into five groups.

Advanced reform countries

An advanced reform country is one where there has been major reform of the law and also of the institutionalframework to enable the efficient use of collateral for securing credit. For example, Hungary and Lithuaniaintroduced major reforms in 1997.However, secured creditors in Hungarystill suffer from a weak position oninsolvency, while in Lithuania formalrequirements for defining collateral

restrict the scope for some financingtechniques. The Slovak Republic hascarried out the most far-reaching reformin the region to date which becameeffective on 1 January 2003. Initialindications are that this is beingimplemented successfully although, asin Hungary, the position on insolvency isless satisfactory. Nonetheless all threecountries have a modern and efficientregime for secured transactions.

Major reform countries

Major reform countries are those that have carried out a major overhaul of their laws but have shortcomings orsignificant limitations either in the lawsthemselves, or in their implementation.In the Czech Republic, for instance, the legal framework limits the type of collateral available. In Poland, the time required for registration and the complexity of the processdiscourages the use of security.

In the Kyrgyz Republic and Moldova, the establishment of a reliable registrystill remains a problem. A notification or registration system is a necessarypart of any effective regime for securityover movables. It serves to publicise the security and to alert others that thecreditor has a prior right in the collateral.

Minor reform countries

These countries have carried out somereform but remain far from having anadequate legal framework for securedtransactions. Russia, for example, madea promising start with a new law as earlyas 1992, which provided a model forother CIS countries. However, the failureto implement the law as it was intendedmeans that taking security in Russia isstill problematic. The lack of any form of registration or notification system hasbeen one of the main reasons for theineffectiveness of the 1992 pledge law.Estonia only allows security over certaintypes of assets and over the whole of an enterprise. FYR Macedonia has beenmaking considerable efforts to reform its law but the rules for the creation ofsecurity remain incompatible with therequirements of a modern market forsecured credit. Slovenia only allows the taking of security in a very limitedway, although it has recently introducednew provisions on collateral.11

Croatia offers only a rudimentary system of non-possessory charges over movable property.


The case study has highlighted some practical features which the Survey had only partlyrevealed. In some countries where the secured transactions law has been reformed,enforcement remains a serious problem.

Levels of reform in secured transactions

Advanced reform countries Hungary, Lithuania, Slovak Republic

Major reform countries Albania, Bulgaria, Czech Republic, Kazakhstan, Kyrgyz Republic, Latvia, Moldova, Poland, Romania, Ukraine

Minor reform countries Armenia, Belarus, Croatia, Estonia, FYR Macedonia, Russia, Slovenia

Deficient reform countries Azerbaijan, Georgia, Tajikistan, Turkmenistan, Uzbekistan

Unreformed countries Bosnia and Herzegovina, Serbia and Montenegro

Source: EBRD Regional Survey of Secured Transactions, 2003.

Deficient reform countries

Five countries fall in this group, all from the Caucasus or Central Asia. In all of them, the legal framework for secured transactions is seriouslylacking, according to responses to the Survey. Azerbaijan made a seriousattempt at reform in 1998, but thestatus of that reform became confusedwith the introduction in 2001 of the newCivil Code. This is a problem found in a

number of countries, including Tajikistan,where Civil Codes which contain generalprovisions on security rights on propertyare not always well coordinated withspecific secured transactions law.

Unreformed countries

Only two countries out of 27 fall into theunreformed group. Both of them arecurrently undertaking reform. Serbiapassed a new law in May 2003, which, ifproperly implemented when it enters intoforce, could propel it into one of the mostadvanced countries in the region. Bosniaand Herzegovina is a special case. In2000 and 2002, each of the entities ofthe state (the Federation of Bosnia andHerzegovina and the Republica Srpska)adopted a separate Law on RegisteredPledges on Movables and Shares but it is not clear whether these laws haveentered into force.12 In broad terms, the results of the Regional Survey and ofthe case study coincide. The advancedreform countries and major reformcountries broadly score among the top countries in the case study results.This suggests that most countries with a sound legal framework for securedtransactions have efficient enforcementmechanisms in place, which effectivelyprovide the necessary level of confidenceto secured creditors. There are exceptions,

however, and a full understanding of why this divergence occurs will requirefurther research. Nevertheless, a fewobservations can be made at this stage.The case study has highlighted somepractical features which the Survey hadonly partly revealed. In some countrieswhere the secured transactions law has been reformed (thus achieving a relatively good evaluation in theRegional Survey), enforcement remains a serious problem. This is true of

Albania, Kyrgyz Republic, Moldova,Poland, and Romania, which were allmajor reform countries according to the Regional Survey categories.

Evidence in the Regional Survey of institutional weaknesses comesthrough more clearly in the case study,where greater focus was put oninstitutional efficiency (for example, the ability of the court system to support the enforcement process).

Albania is a case in point. The securedtransactions regime was comprehensivelyreformed in 1999 with the adoption ofthe Law on Securing Charges, whichentered into force in 2001. The lawprovides for an enforcement system bywhich the charged assets can be solddirectly by the secured creditor (after the sequestration of the collateral by the bailiffs office and its restitution tothe creditor). The secured creditor needsto present to a court an immediatelyenforceable instrument (which is thesecuring charge agreement dulyregistered with the Registry of SecuringCharges), on the basis of which thecourt will issue an enforcement order.

Upon presentation of the enforcementorder, the bailiffs office can actimmediately without prior notice to the debtor, and can proceed with thesequestration of the collateral. Thecollateral is then handed to the creditorfor sale. Problems associated with this procedure are the costs – bailiffswill charge a fee of 7 per cent of the secured claim – and the time.Despite a seemingly simple procedure,enforcement will usually take between

six and twelve months, and this seemsto be due to the inability of the courts to handle cases swiftly.

The combination of the Survey and thecase study evidence suggests that thebenefits of legal reform can be reapedfully only if the institutional changesrequired to enable effective enforcementare undertaken. Too often, legal reformis not followed through with adequatestructural improvements.

Conversely, in other countries wherethere are limitations or inadequacies in the secured transactions law, therenonetheless exists a basis for effectiveenforcement. This is true for the CzechRepublic, Croatia and Estonia, and, at the extreme, Serbia (Croatia andEstonia were assessed as minor reformcountries according to the RegionalSurvey results, and Serbia is still inneed of reform). In the Czech Republic,enforcement of a charge can be donethrough a licensed executor who sellsthe charged assets in a public auctionpursuant to a detailed procedurecontained in the Civil Procedure Code.The system seems to be efficient, andpractitioners seem to be relativelycomfortable with it.


The combination of the Survey and case study evidence suggests that the benefits of legal reform can be reaped fully only if the institutional changes enabling effectiveenforcement are undertaken.


Similarly, in Croatia, enforcement can be conducted by public notaries. Theprocess has been taken out of the courtsand this seems to give a relatively goodreturn in a fairly quick period of time.

Although the legal regime for securedtransactions in these countries remainsimperfect, the market has nonethelessfound a relatively successful way ofrealising value out of charged assets.Practical adaptation to a deficient legalframework has its limits, however: it isunlikely that such systems would provesufficiently flexible for many modernfinancing techniques. This represents a lost opportunity for creditors andborrowers. There is a potential for greateruse of secured credit if the rules arewidened, for example to facilitate takingsecurity in a commercially efficientmanner over a broader range of assets, including inventory.

Conclusion

Some conclusions emerge from theassessment work carried out by the EBRD on secured transactions and thisempirical study.

■ There has been much activitythroughout the region in the reform ofsecured transactions law, and changescontinue. The case study confirmsthat, in general, improvements to thelaw yield practical results, but theextent of the results varies. Failure to follow the reform with practical andinstitutional implementation can bevery disappointing for the country, andalso the assistance providers, whohave invested resources in the reform.There is still immense scope forsecured transactions law reform in the EBRD countries of operations.

■ There is no fool-proof recipe:enforcement modes vary widely across the region. The success orfailure of the procedure depends onmany interrelated factors. There is nomodel that reformers could adopt forguaranteed improvements. Theprocess of enforcement, and theinstitutions that are developed tosupport it, must be carefully assessedin the local context. The countries thatpresent the best results are thosewhich have exploited their existingstrengths and have avoided creatinginstitutions and practices which aredifficult to adapt to their own market.

■ The case study, although limited inscope, revealed an interesting trend.When the three main factors (amount,time and simplicity) show poor results,the other factors (process and scope)are generally problematic. Focusing onenforcement demonstrates the needfor legal reform to address broaderfactors and to introduce a regime thatfits with the existing institutionalframework. If the ground is not wellprepared, the benefits of reform aimedspecifically at secured transactions arelikely to be correspondingly fewer.

■ EU accession countries show the best ratings, which seems to confirmthat a more advanced market economygoes in tandem with a more effectivelegal framework. Some majorexceptions can be noted: in the casestudy, Slovenia and Poland did notscore as well as their advancedtransition country peers. This wasillustrated by the poor functioning of institutions involved in securedtransactions, especially the courtsystem which is shown to be over-burdened and slow in dealing with such cases. In addition, in theRegional Survey, Estonia is shown as having an inadequate legalframework for secured transactions.

■ On average, CIS countries fare worsethan the advanced transition countriesin central eastern Europe and south-eastern Europe. However, there are a few countries where serious reformefforts have been made with somesuccess, namely Kazakhstan, KyrgyzRepublic, Moldova, and Ukraine. There is a need to embrace whole-heartedly the momentum for changeand then to follow through witheffective implementation. As in otherareas of legal reform, countries thatare unable to pursue a swift anddetermined reform agenda for securedtransactions are at risk of findingthemselves increasingly isolated.

■ The assessments of securedtransactions carried out by the EBRDhave already provided a wealth ofinformation. This is intended to provide a useful tool for the continuingreform efforts both of individualcountries and of external assistanceproviders. Although it cannot be provedby hard statistics, the EBRD believesthat the regular publication ofinformation on the state of securedtransactions laws in its 27 countries of operations, together with anassessment of those laws in practice, is itself a significant spur towardscontinuing improvement.

Notes1 Thanks to EBRD colleagues Michel Nussbaumer,

Martin Raiser and Alan Rousso for their helpfulcomments on an earlier draft. All mistakes oromissions remain the authors’ sole responsibility.

2 See www.ebrd.com/st.

3 The survey also includes possessory security butthis is not covered in the context of this article.

4 The objectives of a sound secured transactionsregime are expressed in the EBRD Core Principlesfor a secured transactions law, which compriseten principles.

5 The full strategy and context are further explained in the EBRD Transition Report 2003, where thefindings of this study were first published. Thegovernments of the United Kingdom, Japan and the United States provided support for the EBRDRegional Survey on Secured Transactions and theNew Legal Indicator Survey (NLIS) and theiranalysis. This funding is gratefully acknowledged.

6 The Lex Mundi project, which forms part of a larger World Bank project on “Doing Business” in various jurisdictions throughout the world.See Simeon Djankov, Rafael La Porta, FlorencioLopez De Silanes, and Andrei Shleifer, “Courts: The Lex Mundi Project” (March 2002), at http://rru.worldbank.org/DoingBusiness/Downloads/ContractEnforcement/lexpaper.pdf.

7 See http://www.jus.unitn.it/dsg/commoncore/home.html.

8 The EBRD is indebted to all the law firms involved,which participated on a pro bono basis. Initiallyanswers were obtained to a set of 15 questionsrelating to the facts of the case. Subsequently, answers were clarified and elaborated throughfollow-up exchanges. In addition, Allen & Overy and Chadbourne & Parke LLP both reviewed andcoordinated the work with their own offices andassociates to ensure the quality and timeliness ofthe responses. The participating firms were: Allen &Overy (Albania, Croatia, Czech Republic, Hungary,Poland, Russia, Slovak Republic); Grant ThorntonAmyot LLC (Armenia); BM Law Firm in cooperationwith Chadbourne & Parke LLP (Azerbaijan);Borovtsov & Salei in cooperation with Chadbourne& Parke LLP (Belarus); Advokat Maric Branko(Bosnia and Herzegovina); Spasov & Bratanov incooperation with Allen & Overy (Bulgaria); Luiga &Mugu (Estonia); Mgaloblishvili, Kipiani, Dzidziguri(MKD) Law Firm (Georgia); Zanger Law Firm incooperation with Chadbourne & Parke LLP(Kazakhstan); Dignitas Law Firm in cooperation withChadbourne & Parke (Kyrgyz Republic); SorainenLaw Offices (Latvia); Lideika, Petrauskas, Valiunas& Partners (Lithuania); Law Office Polenak (FYRMacedonia); Turcan & Turcan (Moldova); NestorNestor Diculescu Kingston Petersen in cooperationwith Allen & Overy (Romania); Chadbourne & ParkeLLP (Russia, Uzbekistan)); Karanovic & Nikolic(Serbia and Montenegro); Colja, Rojs & partnerji(Slovenia); Medet Company Ltd (Turkmenistan);Grischenko & Partners in cooperation withChadbourne & Parke LLP (Ukraine). It was notpossible to secure the support of a law firm inTajikistan, so the survey does not provide any datafor that country.

9 The assessments of the respondents have beentaken into consideration at their face value. In mostcountries the lawyers consulted gave clear answersto the case questions, based on their own practiceof enforcement. When respondents could notprovide any basis for a realistic estimate, thelowest score (1) was given on the basis that suchuncertainty is bound to reflect negatively on the creditor’s expectations. The results shouldbe interpreted with some caution. They reflect theviews of a small number of lawyers. The EBRDwelcomes comments in order to improve the datathat are being evaluated and reported. It is onlypossible here to present a summary of the resultswhich will be published in more detail on the EBRD Web site (see www.ebrd.com/law) togetherwith the full text of the case and the methodology used for analysing responses.

10 The CIS includes all countries of the former SovietUnion except the Baltic states.

11 This has not yet been covered in the 2003 survey.It may be that this new law will move Slovenia tothe major reform countries group.

12 There is an ongoing reform project in Bosnia andHerzegovina led by USAID.

AuthorsFrédérique DahanCounsel, EBRDTel: +44 20 7338 6050Fax: +44 20 7338 6150E-mail: [email protected]

Eliska KutenicováConsultant, EBRD

John SimpsonSecured Transactions Project Leader, EBRDE-mail: [email protected]

European Bank for Reconstruction and DevelopmentOne Exchange SquareLondon EC2A 2JNUnited Kingdom

ˆˆ

17

Reform of security over movable property in Lithuania:

the second stage

Lithuania, like all of the countries of central and eastern Europe, hasrecently undertaken considerable efforts to reform its laws on securityover movable property. Reform wasurgently needed, since Lithuaniainherited soviet Russia’s model of security law after Lithuania becameindependent in 1990.

This system was unsuitable for theneeds of a market economy. The entirelegislation on security interests wascontained in several short articles of the Civil Code.1 The Code was silent onthe possibility of using ownership forsecurity purposes and the only securityinterests that it expressly provided forwere the close equivalents to Romanpignus and hypotheca, yet classified asius in personam. 2 Thus, prior to reform,Lithuania’s secured transactions lawwas outdated and unsophisticated.

Nevertheless, the soviet model was anideal starting point for the comprehensivereform of security law. First, it was nothostile towards the non-possessory

security interests. The Civil Code allowedfor the creation of a non-possessorycharge. This meant a security interestcould be created without the debtorbeing dispossessed of the propertycharged, even though it was not requiredto record such a charge in a publicregistry. 3 No specific limitations wereimposed on the scope of such collateral.

Arguably, the principle of publicity was neglected, as the drafters of thesoviet Civil Code did not intend securityto be widely used in practice and so the problem of “false wealth”,4 whichis created by the undisclosed non-possessory security interests, was notdeemed important.5

Second, prior to the reform, Lithuaniadid not have a working system of law on taking security. This meant therewere no parties who could influence the lawmaking process that wereinterested in keeping the status quo. As a consequence, the process ofreform was not impeded either by the desire of practitioners to save a

system – which, though not ideal, still in their eyes functioned well enough – or by the negative influence of manytraditional legal concepts. These are the two factors that undermine reform of law on taking security in numerouseconomically advanced jurisdictions ofthe western world. 6

The first stage of reform

Reform of law on taking security inLithuania took place in two stages. The first stage formally culminated in theenactment of the law on charges overmovable property7 (lit. Kilnojamojo turto

˘■ikeitimo

˘■istatymas) and the creation

of the central Hypothecary Register (lit. Hipotekos registras) that startedfunctioning on 1 April 1998. Thesechanges were inspired by the EBRD’sModel Law on Secured Transactions.8

Lithuania benefited from the Norwegianexperience in designing both theregistration system of non-possessorycharges and the office of theHypothecary Register. 9

This article considers Lithuania’s endeavours to create a modern system of securedtransactions law, concentrating on the second stage of reform that was finalised on1 January 2003. Particular emphasis is placed on the functioning of the registrationmechanism for security interests.

Reform of security over movable property in Lithuania: the second stage 19

Andrius SmaliukasPhD fellow at the law faculty of Vilnius University; visiting researcher at Queen’s College, University of Oxford

The reform introduced a single concept of a non-possessory charge over movable property, which wasdefined as a registered right in rem,created to secure the performance of an obligation.10 However, the first stage of reform was also influenced by thedoctrine of functionalism.11 Article 19 of the law on charges over movableproperty treated as security not onlycharges stricto sensu but also conditionalsales and financial leases as thesetransactions were seen as assuming thesame economical function like charges,i.e. guaranteeing repayment of theunderlying obligation.

The newly created system correspondedto the fundamental concepts of modernlaw on taking security as enshrined inthe EBRD’s Core Principles for a securedtransactions law.12 The law enabled:

■ quick creation of security rightswithout depriving the person giving a security of the use of his assets;

■ security over all types of movableassets, both present and future;

■ the possibility of securing all types ofdebts, including future debts, betweenall types of persons;

■ the creation of an all encompassingregistration system as an effectivemeans of publicising the existence of non-possessory charges;

■ the ability to keep the costs of taking,maintaining and enforcing security low;

■ enforcement procedures which enabled the secured creditor to satisfypromptly his claims out of the value of the collateral;

■ security rights which continued to be effective and enforceable after the bankruptcy or insolvency of thesecurity provider;

■ a clear set of priority rules;

■ substantial powers for the parties tocontract out of its provisions, whenseeking to adapt the security to theneeds of the particular transaction.

International experts evaluated this stage of Lithuanian reform as a particularly successful one. In theEBRD’s Regional Survey of SecuredTransactions Laws, Lithuania joined a small group of “advanced reform”countries, defined as those that hadperformed a conceptually sound reformof their respective legislation, followed by coherent practical implementation of the recent legal enactments.13

Need for a second stage of the legislative reform

However, after the new system was inoperation for a few years, a number ofproblems were revealed.14 For example,the procedure for creating a charge hadbeen formalised too much and theexecution of secured creditors’ rightswas inefficient. Most of these problemswere caused by certain inadequacies inthe new legislation.15 This led to thesecond stage of the reform.

In addition, at the turn of the millenniumLithuania was finalising wholesale workon the codification of its private law, bothsubstantive and procedural. It sought toprepare two contemporary codes – theCivil Code and the Code of Civil Procedurethat would lay down the new foundationsof the Lithuanian private law. These codeswould be harmonised with the relevantparts of EU acquis communautaire, andwould reflect the unifying endeavours ofthe leading international organisations,such as the UNIDROIT, UNCITRAL or the

Hague Conference on Private InternationalLaw. They would also respond to themost recent developments in otherjurisdictions in the codification andreform of private law.16

The drafters of the Civil Code decided toinclude in it the fundamental provisionsof commercial law. It was clear that thenew Code should regulate all substantiveaspects of the law on taking security,while the registration of security interestsand enforcement of secured creditors’rights should be dealt with by the Codeof Civil Procedure. Systematic changes in the regulation of secured transactionstherefore seemed inevitable.

As there were already certain problems with the functioning of thenewly reformed law on taking security,the adjustment of the legal frameworkresulted not in a mere restatement ofthe existing law in the new codes, but its comprehensive revision.

The new Civil Code entered into force on1 July 2001, replacing the old Civil Codeand repealing all provisions of the law oncharges over movable property, exceptthe procedural rules. The second stageof the secured transactions law reform,however, was only finalised on 1 January2003 when the Code of Civil Procedurebecame effective. 17


International experts evaluated the first stage of Lithuanian secured transactions lawreform as particularly successful.

This stage of the reform finally shapedthe concept of Lithuanian securedtransactions law. Lithuania confirmedthat it would not opt for a fully fledgedfunctionalistic approach, which impliesre-characterisation of transactions basedon their function. Rather it maintained its formalistic reform, founded on theexperience of the civil law revision inQuebec.18 Secured transactions remainedclassified according to their form ratherthan substance but, unless they arepossessory, they must generally berecorded in a single public registry. As aresult, the Lithuanian Civil Code coverednot only the charges stricto sensu, butalso the so-called quasi security interests.

The concept of a charge overmovable property

Charges stricto sensu, both possessoryand non-possessory, are regulated byBook 4 of the new Civil Code, which isdevoted to the rights in rem. 19 The chargeis defined as a right in rem belonging tothe creditor and encumbering theownership of the security provider, be it a debtor or a third party, created tosecure the performance of an obligation.The charge is therefore an absolute rightthat can be enforced against everyone,entitling its holder to rights of pursuitand preference. Moreover, the fact that the charge is held to be a real, not a personal right, determines itsenforceability in the debtor’s insolvency.The Civil Code upholds the accessorynature of the charge, expressly statingthat the charge is extinguished when the secured obligation ceases to exist. Apartfrom consensual charges the code alsocovers charges imposed by law, andcharges over immovables (called ahypothec and regulated in a separatesection of Book 4 of the Civil Code). 20

Some large-scale tangible movables are by law presumed to be immovableproperty and, therefore, subject to theregime of hypothecs. These are seagoingvessels21 and civil aircrafts.

The charge itself is a single security right that can cover all types of movableassets, both present and future.Moreover, it can secure all sorts ofdebts, including future debts, between all types of persons. The Civil Codeprovisions are drafted in such a way that it would be perfectly possible to create avalid “universal charge”22 encompassingfluctuating pools of assets, and even thewhole of the enterprise.

Yet the Civil Code also retains a specialcharge over stock in trade: encumberingonly goods and raw materials owned by an enterprise. Similar to the way a universal business charge wouldfunction, the collateral can be describedin broad terms instead of in specie andthe debtor is entitled to dispose of theproperty free of charge in the ordinarycourse of his business. The rationale forthe need to have such a special regimeis questionable. Apparently, it wasincluded in the new Civil Code for practicalreasons, as the charge of stock in trade– a charge of goods and raw materials –in spite of its limited scope has beenwidely used since it was introduced bythe first stage of reform.

Regulation of quasi securityinterests

The new Lithuanian Civil Code extendedthe registration requirements to a numberof quasi security interests. It was decidedto cover only ownership-based structuresthat vest in the creditor the rights in remof an owner. Since the quasi securityinterests were not re-characterised ascharges, they are regulated separately in Book 6 of the Civil Code, which isdevoted to the different aspects of thelaw of obligations.

The transactions that can createregistrable quasi security interests are:sale with the right of redemption,23

leasing, and instalment sale withreservation of title.24 Sale with the right of redemption, if used as quasi security,bears some features of a charge, sincethe creditor can only satisfy his claimpursuant to the fundamental principles of law on taking security.

This means that the Civil Code does notallow the creditor to retain unconditionallythe ownership in the collateral on thedefault of the debtor, as the creditor isrequired to account for any surplus if thevalue of the property exceeds the amountof the debt. The same is true with thefiduciary assignments of receivables andfactoring, 25 although this quasi securitydevice should not be publicly registered.

Functions of the HypothecaryRegister

All non-possessory charges over movable property and above-mentionedquasi security interests are registeredwith a single institution – the HypothecaryRegister, which is operated by the state.Apart from registering security overmovables, the Hypothecary Register also records hypothecs over immovables,grants execution orders to securedcreditors and provides official or unofficialinformation on the data stored to allinterested persons.26

All security interests have to be registeredin this single registry, but only there.Double registration in registers wheretitle of the property is registered orcompany registers are not requiredbecause the Hypothecary Register itself transfers the relevant data to these registers. 27

The Hypothecary Register consists of the Central Hypothecary Office andHypothecary divisions that are part of the general competence courts of first instance (lit. apylink

.es teismas).

The Central Hypothecary Office isprimarily responsible for the maintenanceof a central database that stores allregistration data and also providesinformation on these data to the public.Instant registration of charges overmovable property is conducted byHypothecary judges, who sit in one of the 15 territorial Hypothecary divisions.28


Differences in registration ofnon-possessory charges andquasi security interests

Although charges and quasi securityinterests are registered by the sameinstitution, the systems of their registrationhave some important differences.

First, to register charges over movableproperty, the actual documents evidencingthe transaction between the parties mustbe filed to the Hypothecary Register –that is, the formal charge deed that must have already been certified by the public notary. As a consequence, the application for registration can onlybe presented in hardcopy form.

In contrast, in order to register quasisecurity interests it is sufficient to givethe Hypothecary Register a notice.29

The content of such notice is quiteextensive. It must include the data that identifies the parties and indicatesthe debtor’s consent to file a quasisecurity interest, the description of theproperty subject to the security, and adescription of the contracts that createthe creditor’s rights. 30

Second, the major effect of the filing of a non-possessory charge is its creation,while registration of quasi securityinterests merely perfects creditor’s rights by making them enforceableagainst the world at large and by settingtheir priority. The priority status ofcharges is determined not by the time oftheir actual registration, but the momenta charge deed is presented before theHypothecary Register, provided theregistration application is successful.

Finally, unlike the registration of quasisecurity interests, the role that theHypothecary judge performs in the filingof charges is not a simply managerialone, ensuring only a compliance withformalities. For the filing of non-possessory charges, the judge mustensure that an entire transaction iscontracted in accordance with therelevant legal provisions.31

Registration of security interests:practical evaluation

Theoretically a notice-registration system,which merely perfects security interestsand puts the searcher “on notice” thatthe secured party might claim a securityinterest in the collateral, is more modernthan document-filing based mechanisms,where the input of data can not practicallybe conducted online. Nevertheless, theprimary question applied to a registrationsystem should be whether it adequatelyserves the needs of the parties whenentering into financing transactions.32

In this regard the Lithuanian registrationsystem has so far been functioning fairlysoundly for the business community.Despite the fact that the registrationcannot be done instantly and thatprospective registration is impossible,the whole process is at least quite quick.A term of five working days is usuallysufficient to carry out the entire process,from the notarisation of a charge deedtill its actual registration by theHypothecary judge.

Registration fees, which cover both thestamp duty for the registration in theHypothecary Register and the notarisationcosts, are also relatively low, since theycannot exceed LTL 700 (approximately€200). The notice filing of quasi securityinterests is significantly less expensive,with a registration fee of only LTL 20.

The registration system is centralised,fully computerised and easily accessibleat modest cost using the internet. All interested persons can search andreceive the registered data, including theparticulars of a charge, electronically.Finally, registration gives constructivenotice both of the creation of the chargeand on its particulars.

Major shortcomings of thereform of law on taking security

Nevertheless, the legal provisions thatregulate registration of charges do havesome shortcomings.

First, the registration process isunreasonably burdensome, as there are too many formalities to comply with. Most importantly, the mandatoryrequirement to certify the charge deed bythe public notary can hardly be justified,because the Hypothecary judgesubsequently conducts a similar legalscreening of all its terms and conditions.

The argument that a notary is betterplaced to check the presence of adebtor’s genuine consent for creation of a charge cannot be upheld. The judgehas wide procedural powers, which could be applied to solve the matter if in exceptional cases there is concernthat the attempted registration might befraudulent or speculative. The eliminationof the need to notarise the charge deedwould make the existing document-filingsystem half as expensive and lesssubject to delay.

Second, the effect of the registration,which is deemed a condition sine qua nonfor a charge to exist even between theparties, is too restrictive. While theconcept was inspired by the equivalentprovisions of the Civil Code of Quebec, it is inconsistent with the purpose and effects of the publication of quasisecurity interests. This might raisecomplex problems of characterisationsince it is the form of a transactionwhich could be determinant on its validityas between the parties. The existingregistration system would become more flexible and consistent if theregistration was merely a condition for the enforceability of a charge, but not its creation.


Finally, as the legally binding instructionof the Ministry of Justice that sets the requirements for the drafting of the charge deeds is extremelyunsophisticated, and the Civil Code issilent on the matter, practical problemsarise over whether it is possible toidentify the collateral using a genericdescription. The recent decree of theLithuanian Ministry of Justice thatregulates the procedure of registration of quasi security interests has a similardeficiency. This is essential for theproper functioning of universal charges,yet the instruction, apart from chargeover stock in trade, only provides for thepossibility of charging separate items –not universality of assets described ingeneral terms. Such regulation must beamended for it is incompatible with theoverall philosophy of the security law, as enshrined in the new Civil Code. The prevailing view in contemporary legal doctrine is that a universal securityinterest should be recognised as it is an important feature of modern law ontaking security. 33 The problem could besolved by the creative jurisprudence ofthe Lithuanian Supreme Court, as theLithuanian legal system upholds thedoctrine of stare decisis, meaning that a judicial precedent becomes a legallybinding source of law.34

Conclusion

Lithuania has pursued thorough reform of its secured transactions law. After two successive legal reform efforts, thisjurisdiction has created a comprehensiveframework of relevant legislation, basedon the major principles of modernsecurity law.

Eventually it was decided not to adopt a fully fledged functional concept of security. Therefore, the system ofsecured transactions law consists ofcharges stricto sensu and quasi securityinterests. A charge stricto sensu isdefined as a uniform concept: apossessory or non-possessory rightin rem that secures the performance ofan obligation by vesting in the creditorpriority to satisfy his claim out of thevalue of the collateral.

All non-possessory charges must beregistered in the single HypothecaryRegister. The major “functionalequivalents” of security, such asconditional sales, financial leases andfiduciary transfers of ownership, whilehaving retained their traditional formallegal identity, must with a few exceptionsbe registered with the HypothecaryRegister. A non-possessory charge isvoid unless registered; whereas thefailure to file quasi security interests onlyprevents them being enforced againstthird parties but does not underminetheir validity as between the parties.

The Lithuanian experience of securedtransactions law reform demonstratesthat to create and implement a coherent modern legislative framework is extremely difficult. This is the caseeven in a jurisdiction where reform is not hindered by the desire to retainthe status quo, and where prior to thereform the theoretical attitude towardsnon-possessory security was highlyliberal. Two stages of reform havedeveloped a working system that can still be significantly improved. The majorefforts of the future reform should nowbe concentrated on promoting the use ofuniversal charges, and on simplifying theformalities related to the drafting andregistration of charge deeds.



Notes1 Compare O. S. Ioffe, Soviet Civil Law, pp.198-201

(Dordrecht, 1988).

2 Compare H. Oda, Russian Commercial Law, p.174(Kluwer, 2002); A. Dovgert, “Das ukrainische Rechtder Mobiliarsicherheiten”, in U. Drobnig, M. Roth &A. Trunk, eds., Mobiliarsicherheiten in Osteuropa,p.229 (Berliner Wissenschafts Verlag, 2002).

3 This was not only different from the absolutemajority of the civil law jurisdictions, but also fromother former socialist states of central and easternEurope, which had not been part of the USSR.

4 In French called “solvabilité apparente”; in German – “Anschein der Bonität”.

5 Compare H. Oda, “Law and Practice of RealSecurity Rights in Russia”, Jahrbuch für Ostrecht,Vol.42, p.305 (2001).

6 See F. Dahan, “Secured Transactions Law inWestern Advanced Economies: Exposing Myths”,BJIBFL, Vol.16, p.66 (2001).

7 The title of this act is sometimes translated intoEnglish using the umbrella term “pledge” instead of“charge”.

8 For information about the EBRD Model Law and itsimpact on security law reform in the region seeJ. Simpson and J. Menze, “Ten years of securedtransactions law reform”, Law in transition,pp.20-26, Autumn 2000.

9 On the functioning of the Norwegian Brønnøysund Register Centre seehttp://www.brreg.no/english.

10 See G. Bartkus and D. Petrauskaite, “Lithuania’s law on pledge over movable property”,Law in transition, pp.50-53, Autumn 2000;D. Petrauskait, “Secured transactions in Lithuania”,in U. Drobnig, M. Roth & A. Trunk, eds.,Mobiliarsicherheiten in Osteuropa, pp.87-93(Berliner Wissenschafts Verlag, 2002).

11 For an excellent analysis of the doctrines offormalism and functionalism see M. G. Bridge,R. A. Macdonald, R. L. Simmonds & C. Walsh,“Formalism, functionalism, and understanding thelaw of secured transactions”, McGill Law Journal,Vol. 44, pp.567-664 (1999).

12 See the EBRD’s Web site athttp://www.ebrd.com/st.

13 See D. Fairgrieve and M. Andenas, “Securingprogress in collateral law reform: the EBRD’sRegional Survey of secured transaction laws”, Law in transition, pp. 28-36, Autumn 2000.

14 On the importance of effective monitoring ofimplementation of a newly created security law seeJ. Simpson and J. Menze, “Ten years of SecuredTransaction reform”, Law in transition, pp.20-26,Autumn 2000.

15 Similar to many other jurisdictions of the region that have also reformed the secured transactionslaws, major problems existed at the level ofdetailed drafting. However, Lithuania didn’t have any serious problems with the practicalimplementation of the new legislation. CompareF. Dahan and G. McCormack, “InternationalInfluences and the Polish Law on SecuredTransactions: Harmonization, Unification or What?”, Uniform Law Review, p.735, (2002-03).

16 On the reform of Lithuanian private law seeV. Mikel.enas, “Unification and Harmonization ofLaw at the Turn of the Millennium: the LithuanianExperience”, Uniform Law Review, pp.243-262(2000-02); V. Mizaras and V. Nekrosius, “Das neueZivil – und Zivilprozessrecht in Litauen”, Zeitschriftfür Europäisches Privatrecht, pp.466-488 (2002).

17 See V. Nekrosius, “Vorschriften über dieVerpfändung von Mobilien sowie über das Prinzipder Prozeßkonzentration”, in U. Drobnig, M. Roth & A. Trunk, eds., Mobiliarsicherheiten in Osteuropa,p.99 (Berliner Wissenschafts Verlag, 2002).

18 See P. Ciotola, “La réforme des sûretés sous le Code Civil du Québec”, in La réforme du CodeCivil, Vol. III, pp.303-443 (Presses de l’UniversitéLaval, 1993).

19 Articles 4.198-4.228 of the Civil Code.

20 Articles 4.170-4.197 of the Civil Code.

21 Hypothecs over the seagoing vessels also fall underthe sui generis regime of the law on the mercantileshipping, enacted on 24 September 1996.

22 See P. R. Wood, Comparative Law of Security andGuaranties, pp.10-11 (Sweet & Maxwell, 1995).

23 Articles 6.417-6.418 of the new Civil Code.

24 Articles 6.567-6.574 of the Civil Code governleasing or finance lease, whereas instalment saleswith the reservation of title or conditional sales areregulated by Articles 6.411-6.416 of the Code.

25 Articles 6.101-6.110 and 6.903-6.912 of the new Civil Code.

26 The detailed scope of the Hypothecary Register’sfunctions, as well as other relevant information, is published in English at its official Web sitehttp://www.lhr.lt/LimoE/e_main.htm.

27 Except charges of certain types of industrialproperty, such as patents, that must also berecorded in the State Patent Bureau.

28 See Articles 542-553 of the new Code of CivilProcedure.

29 On the differences between notice-registration anddocument-registration see R.C.C.Cuming,“Considerations in the design of an internationalregistry for interests in mobile equipment”, UniformLaw Review, p.281 (1999-2002).

30 On this problem see R.C.C.Cuming, “The Internationalization of Secured Financing Law: the Spreading Influence of the Concepts UCC,Article 9 and its Progeny”, in R. Cranston, ed.,Making Commercial Law. Essays in Honour of Roy Goode, p.501 (Clarendon Press, 1997).

31 See dictum of the decision of the LithuanianSupreme Court delivered on 30 May 2000 inRe A B Dumbla (Case No. 3K-3-643/2001).

32 Ch. W. Mooney, Jr., “Relationship between theprospective UNIDROIT International Registry,Revised Uniform Commercial Code Article 9 andnational civil aviation registries”, Uniform LawReview, pp.337-339 (1999-2002).

33 See R. Goode, “The protection of interests inmovables in transnational commercial law”, Uniform Law Review, pp.458-459 (1998-2/3).

34 This stems from Article 23 of the Lithuanian Law on Courts. See V. Mikel.enas, “Unification andHarmonization of Law at the Turn of the Millennium:the Lithuanian Experience”, Uniform Law Review,p.245 (2000-02).

AuthorAndrius SmaliukasE-mail: [email protected]

Faculty of LawUniversity of VilniusSauletekaio 9VilniusLithuania

ˆ

ˆ

Recent developments in Russian trademark and

copyright legislation:an update from a practising lawyer

“Never ask what the laws are, butalways ask how good the judges are.”

Nikolai Karamzin, Russian historian and writer (1766-1826)

Russia, with its huge market andpopulation, continues to attractcounterfeit products. These include food, beverages, pharmaceuticals,software, automobile spare parts, toys,detergents, clothing: the list is endless.Street vendors and market traders offer counterfeit CDs and DVDs.Sometimes, even centrally locatedexpensive boutiques sell counterfeitclothing and accessories.

Controlling counterfeit products remains a key issue for the state, which incurssubstantial losses through unpaid taxes. For the rights holders, counterfeitproducts result in lost profits, dilution of their trademarks, infringement of theircopyright, and damage to their businessreputation. Consumers limited by lowincome and attracted by the low prices of pirated software or CDs, or counterfeitgoods illegally marked by knowntrademarks, suffer every day from thepoor quality of such counterfeit products.

For the Russian state there are two keyissues: ensuring compliance with theAgreement on Trade-related Aspects ofIntellectual Property Rights (the “TRIPSAgreement”), 2 and ensuring the safety ofits citizens and taxpayers.

The important question is whether therecent developments in Russian trademarkand copyright legislation and TRIPScompliance are merely window dressing,or whether they constitute real reform. It will be some time before Russiansociety and the international legalcommunity will be able to answer this.

At present, these developments are part of a determined drive to gain entry to the World Trade Organization (WTO).With this aim, Russia has takensignificant steps towards bringing itsintellectual property legislation intocompliance with the TRIPS Agreement.While these legislative changes aregenerally improvements on the existinglaw, any real benefits to the Russianlegal system, economy and society as

a whole will depend on how the law isinterpreted and applied by the courts andthe law enforcement agencies. Practicewill determine whether the recentimprovements to Russian trademark andcopyright law will result in actual reform.

Trademark legislation

The basis for Russian trademarklegislation was set down in 1992, when the Russian Law on Trademarks,Service Marks and Appellations of Origin(the “Trademark Law”) was adopted. The Trademark Law, among other things,outlined the legal regime of trademarks,their registration criteria, and theprocedure of registration with theRussian Trademark and Patent Office(PTO). It also defined the scope of the trademark owner’s rights and the regime of “trademark use”, andestablished liability for trademarkinfringement. Nonetheless, the numberof infringements remained substantialand the rights of trademark owners werenot sufficiently secured and protected.


Russian intellectual property legislation has been considerably revised in recent years.Revisions to the substantive laws, such as those relating to trademark, patent and copyright,have been accompanied by revisions of administrative, customs and arbitration procedures. These changes show that Russia has made an important legislative effort to enhance the protection of intellectual property rights.

Marina I. DrelHead of Litigation and EnforcementGowlings International Inc. (Canada), Moscow Representative Office1

In December 2002, amendmentsto the Russian Trademark Law came into force. The amendments provide newopportunities for trademark owners toprotect their rights against violations.

The purpose of these amendments is to increase the level of trademarkprotection; to establish clear rules forexamining trademark applications; and to strengthen trademark enforcementmeasures, bringing the trademarklegislation in line with internationalstandards, including those of the TRIPS Agreement. These amendmentsare briefly outlined below.

Cybersquatting

Cybersquatting has been an issue inRussia for years. 3 Under the amendedTrademark Law,4 trademark owners haverecourse when cybersquatters use theirtrademarks or confusingly similardesignations either on the internet or as a part of their domain names.5 Priorto this amendment, the courts did nothave a clear basis in the substantive law to support the rights of trademarkowners against cybersquatters. Pursuantto the recent amendment, the rights of the trademark owner prevail.

The Trademark Law, however, restrictsthe protection of trademarks againstunauthorised use in domain names to those goods or services which areprotected by trademark registration. The most recent court practice supportsthis interpretation. Accordingly, it may

be difficult to obtain relief in cases where a domain name is used for thenon-commercial promotion of goods or services different from those coveredby the trademark registration, or wherethe domain name has been held by theowner without any use.

Extensive use

Another novelty is registration of markswhich lack inherent distinctiveness buthave acquired distinctiveness due totheir extensive use.6 This provisionallows parties to register many marksdeserving trademark protection whichwould otherwise have been refusedprotection on formal grounds.7

Well-known marks

The Trademark Law now defines the legal regime for the protection ofwell-known marks, together with theprocedure for recognising a trademark as well-known. 8 Briefly, the well-knownstatus provides trademark owners with a greater chance of prohibiting the use of either their trademark or a confusinglysimilar designation. In some instances,trademark owners may prohibit the useof confusingly similar designations whichwere in place even before the trademarkwas declared well-known.9

Trademark owner consent

The consent of the owner of the earlierregistered, or earlier applied, trademarkwill now be sufficient to permitregistration of a new trademark which is confusingly similar, and which wouldotherwise be refused protection. Theamended provision reflects previous PTOpractice and facilitates the procedure ofsecuring trademark rights by the owner. 10

Firm names

The amendments to the Trademark Lawestablish that any previously existing firm names11 prevent the registration of confusingly similar trademarks related to similar goods or services.12

This provision should have stopped such trademark abuse. However, there is no single firm names database.Furthermore, commercial entities inRussia are not obliged to define theparticular type of their commercialactivity in corporate documents.Therefore it will still be a problem todefine whether a firm name is actuallybeing used with regard to particulargoods or services.

It is likely that the number of disputes,such as trademarks versus firm names, will increase. The interpretation andimplementation of these provisions bythe arbitration courts may clarify andfurther develop the legal status of thesetwo key objects of intellectual property.

Recent developments in Russian trademark and copyright legislation 27

In December 2002, amendments to the Russian Trademark Law came into force, providing new opportunities for trademark owners to protect their rights.

Non-use

Trademark owners should be aware of a change in the trademark non-useperiod. Under the amended TrademarkLaw, this becomes three years, insteadof five years. Non-use during any threeconsecutive years within the period of

trademark registration will be deemedgrounds for trademark cancellationprovided that the trademark has notbeen used by the date a non-usecancellation petition is filed. It is nowexpressly stated in the Trademark Lawthat the burden of proof is on thetrademark owner. This amendment mayincrease the number of trademarkscancellations and respective disputesdue to non-use.13

Additional grounds for cancellation

In line with international standards, theamended law has added new grounds fortrademark cancellation. A trademark maybe cancelled in the event of its unlawfulregistration in Russia by an agent orrepresentative of a person or entity whoowns the same trademark in one of themember states of the Paris Conventionon Protection of Industrial Property. 14

Exhaustion of trademark rights

The amended Trademark Law limits the “exhaustion of rights” doctrine togoods introduced into circulation by the trademark owner in the territory ofRussia. 15 Therefore, so-called “parallel”or “grey” importing of goods, which have

been legitimately manufactured by orwith the consent of a trademark ownerabroad, but imported into Russia withoutsuch consent, may now be considered asa violation of exclusive trademark rights.These changes may provide additionalopportunities to prevent the importing of“grey” goods into Russia.

PTO changes

The Appellate Chamber and the SupremePatent Chamber of the PTO have beenreplaced by a single Chamber on PatentDisputes. This structural change, whichhas eliminated an additional unnecessaryadministrative body, should facilitate andspeed up the resolution of thosetrademark registration disputes which are within the competence of the PTO.

Liability

Substantial changes have beenintroduced in the handling of trademarkinfringement and enforcement. Theamended Trademark Law provides for the destruction of counterfeit goods,labels or packaging as a civil remedy.16

Counterfeit goods may be also transferredto the trademark owner or to the state,pursuant to the court’s decision.Previously, the Law only provided for theremoval of the counterfeit trademarkfrom the goods or packaging.

A trademark owner may also claimstatutory compensation, which does notdepend on the actual damages incurred.The amount of statutory compensationshould be defined by the courts,depending on the particular circumstancesof each case, and may range fromUS$ 3,000 up to US$ 150,000.17

Procedures

Last year the Administrative Code, the Criminal Code and the Customs Code18 were amended. While the newAdministrative Code contains moresevere sanctions for trademarkinfringements, the Criminal Code hasstrengthened the position of rightsholders by providing clearer grounds for criminal prosecution, but has notincreased criminal liability. This reflectsthe general approach taken by Russianlegislators, which is to liberalise andimprove criminal law by providing cleardefinitions of the elements of crimes andsanctions for violations, rather than bystrengthening the repressive component.

The amended Administrative Codeimplemented administrative liability for unauthorised use of a third party’strademark, service mark, appellation of origin or confusingly similardesignations.19 Relevant sanctions include a fine and the confiscation ofinfringing goods.20 Administrative liabilityfor trademark infringement is new toRussian legislation.


Substantial changes have been introduced in the handling of trademark infringementand enforcement.

Recent amendments to the CriminalCode provide that, among other things,illegal use constitutes a criminal offencewhen committed by an organised group.21

Applicable criminal sanctions include afine, detention for four to six months, orimprisonment for up to five years.Previously under the Criminal Code, theunlawful use of a trademark, service mark,appellation of origin or confusingly similardesignations was considered a criminaloffence when it was carried out repeatedly,or when it caused substantial damage.

The new Customs Code came into forceon 1 January 2004. Under the CustomsCode, a trademark owner may register itstrademarks with the customs authoritiesin the register of the objects ofintellectual property, in order to assistcustoms officials in identifying andintercepting shipments of unauthorisedproducts bearing the trademarks. As partof a legislative act, such as the CustomsCode, this procedure appears to offer aneffective weapon in the fight against theinflux of counterfeit products into Russia.The customs authorities have the right todetain unauthorised shipments and toinitiate administrative action against theimporter. Such action may result in a fineand the confiscation of the goods.

Copyright infringementslegislation

Over the past few years, legislation onliability for copyright infringements hasbeen substantially reviewed. The changeswere introduced due to the continuousefforts of various associations of rightsowners. The Russian government hasalso supported these efforts.

The Russian Law on Copyright andNeighbouring Rights of 1993 (the“Copyright Law”) applies to the creation

and use of works of science, literature orarts which are copyright objects. TheCopyright Law provides that a copyrightviolation may lead to civil, administrativeand criminal liability.

Civil remedies are provided by theCopyright Law. Special provisions onadministrative and criminal liability forcopyright violations are contained in theAdministrative and Criminal Codes.

Administrative sanctions

The Administrative Code provides forsubstantial changes in administrativeliability for copyright infringements. The amended Administrative Codeextends the list of activities considered as copyright infringements.Any copyright infringement is now considered an administrative violation.22

As a result, a public performance or use on the internet may be viewed asillegal. Moreover, the Administrative Code also grants protection toperformers, broadcasting and cableorganisations from the unauthorised use of their rights. 23

Administrative sanctions include fines of between US$ 45 and US$ 1,200 –depending on the offence – with theobligatory confiscation of infringingmaterials and products, as well asconfiscation of the equipment used to manufacture the products andmaterials.

Finally, the Administrative Code, for the first time, provides that, along withindividuals, a legal entity may be subjectto administrative sanctions. Thesanctions for legal entities are harsherthan those for individuals. 24

Criminal liability

The recent amendments to the Criminal Code on the liability for copyright infringements came into forcein April 2003. The amendments furtherdevelop previously existing provisions of the criminal law and extend the list of activities recognised as a copyright infringement.

The previous wording of the CriminalCode provided for criminal liability for copyright infringement only when itresulted in substantial damage. However,the law did not specify how to determinewhether the damage was substantial.The practical implementation of theCriminal Code due to the substantialdamage condition was extremely limited.The amended wording specifies theamount of substantial damage andprovides for criminal liability when theprice of works or copyright used by theinfringer exceeds an amount equivalentto US$ 1,450.25 Penalties include a fineof up to US$ 5,800, compulsory labour,or imprisonment for up to two years. If the price of works or copyright exceedsthe equivalent of US$ 8,500, the infringer

Recent developments in Russian trademark and copyright legislation 29

The recent amendments to the Criminal Code have extended the list of activitiesrecognised as a copyright infringement.


may be sentenced to imprisonment forup to five years with payment of a fine of up to US$ 17,000.

The amended Criminal Code also allowsthe criminal prosecution of those whopurchase, store or transport piratedcopies of works for sale. Previously, such actions were not regarded as aninfringement of copyright and so were not punishable under the Criminal Code.

There is also a new provision that allowslaw enforcement agencies to investigatecriminal cases against copyright infringerson their own initiative, without a formalcomplaint from the rights owners. Thismay also strengthen the position of therights holders against pirates.

While there are positive aspects to theamended Criminal Code, there are stillsome ambiguities which may negativelyaffect copyright protection. Calculating the cost of material subject to copyrightthat has been used illegally remains amajor source of uncertainty. The questionis whether this calculation should be based on the market price of the piratedcopies, which is always low, or on theprice of the licensed copies. In Russiathe difference is substantial, given theprice gap between counterfeits and thelicensed products. 26 In our opinion, the calculation of damages should bebased on the price of licensed products.Any other approach could be interpretedas a recognition of the legality of pirated products.

Civil court procedure

The Arbitration Code27 became effective on 1 September 2002. It contains newprovisions on preliminary injunctions,which may significantly affect litigation in the intellectual property rights area.

Under the new Arbitration Code, thearbitration court 28 has the right to obtaincivil ex parte measures to secure thematerial interests of the claimant or the evidence for further legal action. A claimant may file a motion which thecourt should consider within one day.The preliminary injunction order must beenforced immediately by the court bailiffservice. In a new development, under thenew Code, the court may rule before theactual claim is filed. 29

Under the Arbitration Code, the court cannot refuse and must grant apreliminary injunction when the claimantposts a deposit with the court. The courtdetermines the amount of the depositwhich cannot be less than 50 per cent of the claim.

These ex parte measures are likely to facilitate protection of intellectualproperty rights in the arbitration courts.There are hopes that these measuresmay be used by the rights owners to stopthe pirated copies or to use the assetsof the infringer to secure damages.

Conclusion

Russian society and law enforcementagencies are becoming increasinglyfamiliar with intellectual property issues.Copyright and trademark disputes arewidely discussed and commented on in the press. The awareness of, andrespect of, intellectual property rights is gradually becoming part of the legalculture. This, in turn, may ensure thatrights owners will enjoy a higher level ofprotection and enforcement of their rights.Intellectual property disputes will beresolved by qualified forums of judges.

Intellectual property legislation, and the enforcement of intellectual propertyrights, becomes effective when the law enforcement agencies and courts are prepared to actively implement itsprovisions. It is now a legal principle thatany activity which constitutes trademarkor copyright infringement is detrimentalto society and its citizens.

Notes1 The author would like to extend a special thanks to

her office colleagues and friends Dmitry Semenov,Pavel Arievich and Mike Malloy for their kindsupport and inspiration in the preparation of this article.

2 Annex 1C of the Marrakesh Agreement Establishingthe World Trade Organization, signed in Marrakesh,Morocco, on 15 April 1994.

3 Cybersquatting refers to a situation in which domainnames are registered in the name of parties whichdo not have any legal right to associate products,services, their organisation, or themselves with apreviously established trademark or firm name.

4 Article 4(2).

5 Domain names are internet designations used toidentify Web sites available on the internet.

6 Article 6(1).

7 For example, BMW or TDK.

8 Previously, these issues were regulated by PTOregulations.

9 Article 19.

10 Article 7(1).

11 Under Russian law, a firm name is the officiallyregistered name of a legal entity as it appears inthe register of legal entities.

12 Article 7(3).

13 Article 22.

14 Article 28(1).

15 Article 23.

16 Article 46(2).

17 Article 46(4). The amount of compensation andfines referred to are calculated on the basis of theminimum rouble wage as provided by the laws.

18 The Russian Federation Administrative Code, The Russian Federation Criminal Code, The Russian Federation Customs Code.

19 Article 14(10).

20 For individuals the fine may be up to US$60; forcompany officers up to US$120; for companies up to US$1,200.

21 Article 180.

22 Article 7(12). Russian administrative procedure operates inparallel to criminal and civil law and provides anadditional means of remedies for the state for lawviolations. Administrative sanctions are generallyless severe than criminal penalties, but they areapplied to both individuals and legal entities, whilecriminal penalties apply only to individuals.

23 Previously, only unauthorised use of copies ofworks or phonograms was considered as aninfringement which could result in liability.

24 Article 7(12).

25 Article 146.

26 For example, a licensed CD would cost aboutUS$ 25, whereas the same counterfeit one wouldbe sold for about US$ 4.

27 The Arbitration Procedural Code of the RussianFederation.

28 Russian arbitration courts are permanentlyfunctioning courts similar to commercial courts. The majority of intellectual property disputes aretried by the arbitration courts. Recently, a specialdivision of those judges who specialise in this areaand who have developed expertise was formed inthe Moscow City Arbitration Court. Their area ofpractice includes trademark and trade namedisputes, domain name disputes, patent andcopyright disputes.

29 Article 99.

AuthorMarina I. DrelTel: +7 501 787 20 70Fax: +7 501 787 20 71E-mail: [email protected]

Head of Litigation and Enforcement Gowlings International Inc. (Canada) Moscow Representative OfficePrechistensky Per 14, bldg.1, 4th floor Moscow 119034 Russia

31

With competition and the regulation of anti-competitive behaviour affecting all sectors of the economy and law, a review of competition law and policycould take many forms.

Virtually all EBRD countries of operationshave adopted some form of competitionlaw, which addresses broad policy areas,such as antitrust, market liberalisation,mergers and state aid. Assuming the law incorporates agreed basic principles,its enforcement (or lack thereof) deter-mines whether it is effective. This issueof Law in transition focuses on theenforcement of competition laws in tran-sition economies during the past decadeand the identification of future challenges.

Of particular interest are the institutionaland legal frameworks within which thelaws are implemented. The nature andstructure of competition authorities,appeal mechanisms and availableenforcement measures or sanctions are reviewed. One theme that clearlyemerges from various articles is that the nature of competition is changingand greater cooperation amongstcompetition authorities will be required in the future. This is due not only to theimminent accession of ten new MemberStates to the European Union, but alsoto the effect of globalisation and economic integration.

The first article, written by MariaVagliasindi and Laura Campbell of theEBRD, examines the different ways inwhich the EBRD promotes competitionand monitors the application ofcompetition law and policy within itscountries of operations. In promoting thedevelopment of private sector capacityand activity, the EBRD seeks to ensurethat each project it finances will havepositive and sustainable transitionimpact. By engaging in policy dialoguewith the governments of the region, theEBRD seeks to encourage sectoral andstructural reforms which will acceleratetransition. By monitoring the perceptionsof the legal and regulatory environmentsin its countries of operations, the EBRDidentifies achievements and weaknesses.

The second article, by Paul Moffatt andIrena Dajkovic of the EBRD explores howthe traditional “natural monopolies”,such as power, telecommunications and transport enterprises, fit into thecompetition landscape, particularly once such sectors are liberalised.Focusing on the telecommunicationssector, the article discusses the criticalissues which arise during the transitionfrom a monopoly regime, to a regulatedenvironment first, and then to acompetitive market place. The authorsconclude that in the early stages ofmarket liberalisation, it may be moreadvantageous to have a sector-specificregulator. However, as the market

matures and competition develops, itmay be possible to move regulation to an economy-wide competition authority.Where the jurisdiction of the sector-specific regulator overlaps with thejurisdiction of the general competitionauthority, countries will need to be aware of the possible pitfalls in notaddressing such overlaps through the relevant legislation.

Cooperation amongst competitionauthorities is the focus of the next article by Philip Lowe, Director-General forCompetition at the European Commission.The article reviews the steps taken bythe Commission regarding Regulation1/2003, to be applied from 1 May 2004,when ten new Member States accede tothe European Union (EU). One importantstep has been the establishment of theEuropean Competition Network. This hasbeen developed with the full involvementof the accession countries. The applicationof Regulation 1/2003 will present newchallenges to the transition countriesacceding to the European Union. Thesecountries will be obliged to enforce theircompetition rules in the context of a much larger market. They will berequired to cooperate and coordinatewith the competition authorities of theEU Member States, including adoptingappropriate administrative mechanisms.


Focus on competition law and policy:

enhancing enforcement and cooperation

The next article is from Lessya Davydova,Head of International Relations andMethodology of Competition Policy at theRussian Ministry for Anti-Monopoly Policyand Support for Entrepreneurship (MAP).It discusses how the changing nature ofcompetition, Russia’s increasingintegration into the global economy and growing foreign direct investment in Russia have all contributed to thecountry reviewing and revising itscompetition law to respond to these new challenges. Despite significantachievements in its short history, someof the more immediate issues whichneed to be addressed by MAP includeenhancing its investigatory powers tomore effectively regulate cartels and anti-competitive practices and improvinglegislation relating to abuse of dominantpositions. The author concludes thatmore cooperation amongst competitionauthorities in different countries isessential in light of globalisation.

The next two articles examine thecompetition laws within two of the EUaccession countries: the Czech Republicand Lithuania. Professor Munková ofCharles University, Prague, traces thehistory of competition law and thecompetition authority during the past 50 years of Czech history. The competition authority has gone from a quasi-independent body, to

a ministry of the government, and then to an independent authority today. While much progress has been made in anticipation of joining the EuropeanUnion in 2004, challenges still remain.These include further harmonisation oflaws and regulations with EU standards,adoption of mechanisms enabling thecompetition authority to address matterswith the European Community dimensionand enhancing the investigative powersof the competition authority.

Sarunas Keserauskas and ArnoldasKlimas, of the law firm Lideika, Petrauskas,Valiunas ir partneriai in Lithuania, haveprovided an assessment of the firstten years of competition law enforcementin Lithuania, including an analysis of theinstitutional framework. The lead up toaccession in 2004 has had a positiveeffect on the enforcement of competitionlaw in the country. However, more workneeds to be done. To better addressissues related to joining an enlargedmarket, amendments are being made to the Lithuanian competition law,including both substantive andprocedural changes.

The final article in the focus sectionexamines the competition authorities,appeal mechanisms and availablesanctions within five transition countries.Jean Rossi, of the law firm Gide LoyretteNouel (GLN), Warsaw office, togetherwith the assistance of the GLN offices inthe Czech Republic, Hungary, Romaniaand Russia, provides a practitioner’sview of how the systems are working todate. As noted in the Keserauskas andKlimas article, preparations for accessionto the European Union have positivelyinfluenced the enforcement of competitionlaw in these countries. The competitionauthority in Russia, which is a fullyfledged ministry within the government,stands out in contrast to the othercountries’ competition authorities, whichhave varying degrees of independence. One issue identified by the author whichemerges in all countries is the need fortraining at the appellate level.

ˆ

Focus on competition law and policy

Enhancing enforcement and cooperation 33

The EBRD:promoting transition through competition

The European Bank for Reconstructionand Development (EBRD) wasestablished to assist transition countriesin central and eastern Europe and theCommonwealth of Independent States(CIS) further the implementation ofmultiparty democracy, strengthendemocratic institutions, the rule of law and respect for human rights andimplement reforms to evolve towardsmarket-oriented economies. One of the ways in which the EBRD assists the transition countries is to promoteprivate, entrepreneurial and competitiveactivity. Stimulating competition within astable economy committed to democracyand political openness will accelerate acountry’s transition and promote economicprogress. In pursuing its mandate, theEBRD monitors the effectiveness of thelegal and regulatory environments in itscountries of operations, includingcompetition law and policy, and onlyfinances projects which have thepotential for transition impact. Thisarticle examines the different monitoring,evaluation and financing techniques theEBRD employs to assist the transitioncountries through enhanced competition.

Background

After the fall of the Berlin Wall in 1989,the countries of central and easternEurope and the CIS faced dauntingchallenges to reconstruct, rehabilitateand reorient their economies. The EBRDwas founded to assist in tackling thesechallenges. Established by internationaltreaty, the Agreement Establishing theEBRD dated 29 May 1990, the EBRDbelongs to a group of financierscommonly referred to as internationalfinancial institutions (IFIs). Other IFIsinclude the Bretton Woods institutions,the International Bank for Reconstructionand Development (or the World Bank) and the International Monetary Fund, and other regional development bankssuch as the Asian Development Bank and the Inter-American DevelopmentBank. There are many similaritiesamongst the various IFIs, but alsoimportant differences.

Like the Bretton Woods institutions, the EBRD was established following a turbulent period in the world and at the end of a war. The World Bank was established in 1945 following

World War II to, among other things,assist with the reconstruction anddevelopment of territories affected by thewar. The EBRD was established in 1990following the end of the Cold War.

Like the Bretton Woods institutions, theEBRD promotes economic growth,facilitates trade and promotes privateforeign investment. The World Bank was established to generally “assist inbringing about a smooth transition from a war time to a peace time economy”.1

The EBRD’s purpose is also to assist inbringing about transition: but transition ofa different nature. At the end of the ColdWar, the EBRD’s countries of operations2

were predominately centrally-planned,command economies. The EBRD has, in contrast to the World Bank and otherIFIs, an express mandate to promote“transition towards open market-orientedeconomies and to promote private andentrepreneurial initiative in the centraland eastern European countries . . .” . 3

The EBRD’s countries of operations mustalso be “. . . committed to and applyingthe principles of multiparty democracy,pluralism and market economics.”4

Maria Vagliasindi Principal Economist, EBRD andLaura Campbell Counsel, EBRD

Competition, supported by effective laws and agencies, enhances transition to marketeconomies. This article briefly examines the importance of competition and looks at theresults of the EBRD Legal Indicator Survey, in particular the enforcement of competitionlaw and policy within the Bank’s countries of operations. The article concludes with areview of how the EBRD helps improve competition legal and regulatory frameworks within its region.


The EBRD: promoting transition through competition 35

This political element of the mandate is unique to the EBRD amongst the IFIs.While other IFIs are expressly requirednot to be influenced by political consider-ations, the EBRD must assess politicalenvironments. The founders of the Bankbelieved that economic and politicalprogress advance or regress together.

One of the key elements in promotingtransition to open market-orientedeconomies is improvement of competi-tive environments and behaviour, both domestically and internationally. The functions of the Bank as set out inArticle 2 specifically identify “demonopo-lisation, decentralisation and privatisation”

as targets in the transition process.Some of the measures used to achievethe targets include:

■ to promote, through private and other interested investors, theestablishment, improvement andexpansion of productive, competitiveand private sector activity; and

■ to foster productive investment . . . to support private and entrepreneurialinitiatives, thereby assisting in making a competitive environment and raising productivity. 5

This article will:

(i) briefly discuss how competition intransition countries, supported by thedevelopment of strong competitionagencies, can assist in advancingtransition;

(ii) examine the results of recent EBRDsurveys of the perceptions of legalpractitioners concerning theapplication and enforcement ofcompetition law and policy withinEBRD countries of operations; and

(iii) consider how the EBRD assists its countries of operations to promote competitive environmentsand behaviour.

Competition law and policy: why it is important for transition6

As noted earlier, the EBRD’s mandate isto assist transition countries committedto political openness move from centrallyplanned to market economies. The roleof competition reforms, including owner-ship reforms, in helping EBRD countriesmove towards market economies hasbeen revisited over time. Reflecting

Coasian views, according to which owner-ship transfer should be enough to achieveefficiency and boost economic growth,economists and policy makers early on encouraged speedy privatisation for all countries. 7

However, transition economies’ experiencedemonstrated that, in order to be effective,privatisation needs to be complementedby reforms stimulating the developmentof institutions, such as competitionauthorities, as well as prudent rules andregulations. The so called “big-bang”theory has been replaced by a moregradual approach, re-examining the roleof ownership and competition forces.

From a theoretical perspective, competition has desirable static anddynamic effects. It increases allocativeand distributional efficiency; it providesthe incentive to innovate; and it enhancesmarket selection, for example by stimu-lating the survival of more efficient firms.Competition can also foster efficiency by improving managerial incentives.There is extensive literature that viewscompetition in product markets as a powerful force for solving the agencyproblem, which results from the separationbetween owners and managers.8

Competition in this context is seen as a discipline device, since incentiveschemes provide sharper incentives in the presence of competitors.9

In particular, a well developed competitivemarket allows adoption of “yardstickcompetition”; that is, to make compensa-tion dependent on the comparison of the performance of an enterprise withthe performance of its competitors.Competition also raises the probability of bankruptcy and job losses. This

generates strong incentives for managers and workers to improve productivity and higher labour turnover to avoid bankruptcy and job losses.10

In the context of transition economies the overall effect of increased competitionis generally viewed as positive.Competition – as a signal of hardeningbudget constraints and the need forrestructuring – is generally considered as positive, since it generates informationabout investment opportunities and thequality of the manager. 11

Nevertheless, the impact of competitionon innovation is less straightforward. Thetraditional Schumpeterian view considersmarket power as a prerequisite forinnovation, to reward entrepreneurs fromundertaking the high risks connected toinnovative activities. However, the mostrecent economic theory shows that theimpact of competition on innovation andgrowth may well be positive, dependingcritically on the assumption of thebehaviour of firms.12


EBRD research shows that there are strong links between the implementation of competitionlaw and policy and more intense economy-wide competition.

Considering that competition is generally perceived as a positive force in promoting economic growth and willenhance transition to market economies,how is the implementation of competitionlaw and policy perceived in the EBRD’scountries of operations?

Competition law and policy intransition countries

As part of the EBRD’s Legal Indicator Survey (see Box 1 on page 38),practitioners in the transition countrieswere asked to give their perceptions ofthe effectiveness of competition law andpolicy within their jurisdiction.

Designing the competition policy component

In designing the survey questions relatingto the competition policy component, the approach developed by Dutz andVagliasindi, summarised in Vagliasindi(2001)13 was adopted. This approach isbased on general criteria that are tailoredfor transition economies. Three dimensionsor aspects of competition law and policyimplementation were surveyed:

■ anti-competitive acts and relatedenforcement activities;

■ competition advocacy activities; and

■ institutional effectiveness and relatedinstitutional activities.

With this broader perspective, the analysisgoes significantly beyond the traditionalemphasis on antitrust activities.

The enforcement dimension adopted fortransition economies is generally similarto that in established market economies.It focuses on the enforcement of compe-tition laws related to anti-competitiveacts, abuse of dominant position, hardcore cartels, other prohibited horizontalor vertical agreements, mergers, and the effectiveness of fines. An important additional dimension related to theenforcement of laws in respect of anti-competitive acts by government bodies –which are prohibited explicitly in almostall transition economies, a sharp depar-ture from practice elsewhere in theworld. These provisions are intended to help prevent attempts by state-ownedentities from introducing barriers to competition through their conduct, especially at local levels.

The advocacy dimension comprisesseveral subcategories. These include:

(i) the ability, through public comments,to change rules concerning a broadrange of economic policies affectingcompetition, specifically theregulation of infrastructure sectorsand privatisation policies; and

(ii) the assessment of education and constituency-building effortsspecifically directed at consumers and small businesses.

The benefits from the incorporation ofcompetition principles in the legislativeand regulatory activities of governmentcan be substantial. This is especially thecase in transition countries that haverecently privatised some of the networkinfrastructure industries, where adequateregulatory expertise is scarce, and whereawareness of basic competition policyprovisions is very low.

The institutional dimension is based on assessments of the degree ofpolitical independence of the competitionauthorities, the transparency of theauthority, and the effectiveness of theappeals process. The assessment ofindependence is based on the frequencyof decisions either that the authoritieshave failed to take or that have beenoverturned for political reasons. Theassessment of transparency is based onthe extent to which decisions and annualreports are publicly available and asreflected by the awareness of the generalpublic of competition law provisions. Theassessment of the appeal process isbased on the extent to which appealsare judged on their merits, such aseconomic content, rather than exclusivelyon procedural matters or due process.

Survey results

The results of the survey on competitionpolicy are discussed on the followingpages. Chart 1 reports the trend of



0%

20%

40%

60%

80%

100%

CEB

Pola

nd

Czec

h Re

publ

ic

Latvi

a

Slov

ak R

epub

lic

Hung

ary

Lithu

ania

Slov

enia

Esto

nia

Croa

tiaSEE

Bulga

ria

Rom

ania

Alba

nia

Bosn

ia a

nd H

erze

govin

a

FYR

Mac

edon

iaSe

rbia

and

Mon

tene

gro

CIS

Uzbe

kista

n

Ukra

ine

Russ

ia

Kaza

khst

anM

oldo

va

Azer

baija

nGe

orgia

Arm

enia

Tajik

istan

CEB SEE CISAlways

Never

Chart 1Effectiveness of competition law enforcement How often are anti-competitive practices of enterprises investigated and prosecuted?

19992002

CEB Central Europe and the Baltic statesSEE South-eastern EuropeCIS Commonwealth of Independent States

NotesRatings range from 0 to 100 per cent reflecting thepercentage of times that anti-competitive practices ofenterprises are routinely investigated and prosecuted. Data for Serbia and Montenegro were not available for 1999.Data for Armenia, Bosnia and Herzegovina, and Tajikistan were equal to zero in 1999.

Source: EBRD Legal Indicator Survey (1999 – 2002).

the perception of effectiveness ofenforcement from 1999 to 2002.14

One of the most significant findings is that countries belonging to centralEurope and the Baltic states (CEB) have improved their average regionalrating from 50 per cent to 61 per cent,whereas some competition authorities in south-eastern Europe (SEE) and theCommonwealth of Independent States(CIS) have been perceived as lesseffective in investigating and prosecutinganti-competitive practices over time.15

Among CEB countries, not surprisinglythe Visegrad countries (Czech Republic,Hungary, Poland and Slovak Republic)are the top performers in this dimension,undoubtedly due to their early experiencein this field.

Among SEE countries, the two EuropeanUnion (EU) accession countries, Bulgariaand Romania, are substantially outper-forming the others, which reflects theimportant role that the EU has played in fostering more effective enforcementof competition law and policy.

Among CIS countries, it is striking tonote the strong cross-country variations,with ratings ranging from values close to 60 per cent for Russia, Ukraine andUzbekistan to very low levels of enforce-

ment, well below 30 per cent for others.Armenia and Tajikistan have values of22 per cent and 13 per cent, respectivelyin 2002, up from the lowest possiblelevel (0) in 1999.

Chart 2 disaggregates the data byenforcement subcategory, distinguishingcases related to abuse of dominantposition (AOD), hard core cartels(Cartels), other prohibited horizontal orvertical agreements (Agreements) andmergers, concentrations and acquisitions(Mergers). Here, one of the mostsignificant findings is that enforcementrelating to hard core cartels displays thelowest effectiveness ranking for SEE andCIS countries and the second lowest inCEB countries (after other prohibitedhorizontal and vertical agreements).

An interesting feature of one of the prosecuted cases of hard core cartels is that the agreement was discoveredduring a routine site visit to the offices of a Lithuanian enterprise, whose managerprovided a copy of the written agreementand a statement admitting the agreement.This underlines the general lack of aware-ness of competition law provisions in theregion and highlights the problems thatagencies will face over time if businessesbecome less cooperative.16

Chart 3 presents evidence on theeffectiveness of advocacy activities from2000 to 2002.17 One of the most strikingfindings is that this important dimensionof competition policy has been perceivedas rather ineffective across the majorityof countries in the region. Another ratherworrying trend for CEB is the reduction in the average rating, mainly driven bythe very sharp decline in the perceptionof effectiveness of competition advocacyactivities in Latvia and Lithuania. Theother regions, however, particularly theCIS, are characterised by more effectivecompetition advocacy activities overtime, even though on average the ratingsare very low (around 30 per cent).

Chart 4 disaggregates the data by competition advocacy activity in the keypolicy areas: pre-privatisation comments (including break-up of assets/restructuring);infrastructure related interventions(including comments to existing and newlaws); and non-infrastructure relatedinterventions (including entry licences,taxes, and bankruptcy). The data showhow, for most CEB countries, the leasteffective area of intervention is related topre-privatisation comments and opinions.

Most privatisations in CEB, particularly inPoland, were approved with no changesat all, suggesting that advocacy in thisarea should be focused exclusively onthose privatisations and restructuringsthat are likely to have maximum impacton the economy. This inference coincideswith data reported separately by eachCEB competition authority identifyingwhat they consider to be the mostimportant competition advocacy. A largenumber of countries reported that inter-ventions on draft government rules in theareas of telecommunications, transportand energy have been the most importantconsidered by the agency. Perhaps notsurprisingly, there is a very low rating ofcompetition advocacy efforts in all areasacross all regions. This no doubt reflectsthe fact that advocacy efforts are difficultand require additional resources. Mostcountries have scope for substantiallygreater impact in this area.


Box 1The Legal Indicator Survey (LIS) methodology

Since 1997 the EBRD has conducted the Legal Indicator Survey (LIS). The LIS is a snapshot in time of the perceptions of law practitioners in the EBRD’s countries of operations on theextensiveness, efficiency and functioning of the legal systems in their respective countries. The LIS asks for the views generally prevailing within the legal profession at the time of thesurvey. The survey questions examine the adequacy of the laws and their enforcement in thecourts or otherwise. The LIS from 1999-2002 inclusive included questions related toCompetition Policy. The other areas covered by the survey include: pledge law/securedtransaction law; company law/corporate governance; bankruptcy law; general questionsregarding effectiveness of commercial laws; financial institutions; capital markets; andconcession law. The results of the survey are published annually in the legal annex of theEBRD’s Transition Report. Reference to the survey results can also be found online at theEBRD’s Web site: www.ebrd.com/law.

Starting in 2003, the Bank adopted a new format for the survey, the New Legal Indicator Survey,whereby extensiveness ratings were substituted with sector assessments prepared by EBRDstaff and expert consultants. See the article by F. Dahan, E. Kutenicová and J. Simpson,“Enforcing secured transactions in central and eastern Europe: an empirical study” in this issueof Law in transition, and see also the EBRD’s Transition Report 2003, Annex 2.2.

ˆ



0%

20%

40%

60%

80%

100%

CEB

Slov

ak R

epub

lic

Hung

ary

Croa

tia

Pola

nd

Czec

h Re

publ

icEs

toni

a

Lithu

ania

Slov

enia

Latvi

a

SEE

Alba

nia

Rom

ania

Bulga

ria

Bosn

ia a

nd H

erze

govin

a

FYR

Mac

edon

iaSe

rbia

and

Mon

tene

gro

CIS

Uzbe

kista

n

Ukra

ine

Azer

baija

n

Kaza

khst

an

Arm

enia

Russ

ia

Geor

gia

Tajik

istan

CEB SEE CISAlways

Never

Chart 3 General effectiveness of competition authority’s advocacy How often have the competition authority’s advocacy comments on laws and regulationsbeen accepted in the relevant legislation?

20002002

NotesRatings range from 0 to 100 per cent reflecting thepercentage of times that the competition agency hasadvocacy comments on laws and regulations accepted. Datafor Serbia and Montenegro, and Bosnia and Herzegovina in2000 and Tajikistan in 2000 and 2002 were equal to zero.


0

50

100

150

200

250

300

CEB

Slov

enia

Slov

ak R

epub

lic

Croa

tia

Hung

ary

Latvi

a

Polan

d

Czec

h Re

publ

ic

Lithu

ania

Esto

nia SEE

Bulga

ria

Rom

ania

FYR

Mac

edon

ia

Alba

nia

Serb

ia an

d M

onte

negro

Bosn

ia an

d He

rzego

vina

CIS

Mold

ova

Ukra

ine

Arm

enia

Russ

ia

Kaza

khsta

n

Uzbe

kista

n

Geor

gia

Azer

baija

n

Tajik

istan

CEB SEE CIS

Chart 2 Competition law enforcement by category How often are abuse of dominant position, hard core cartels, anti-competitive agreements and mergers investigated and prosecuted?

Abuse of dominant positionCartelsAgreementsMergers

NotesRatings range from 0 to 100 per cent per category reflectingthe percentage of times that the anti-competitive practices ofenterprises related to abuse of dominant position (AOD),hard core cartels (Cartels), other prohibited horizontal orvertical agreements (Agreements), and mergers,concentrations and acquisitions (Mergers) are routinelyinvestigated and prosecuted. Data for Belarus and the Kyrgyz Republic were not available.


High level ofenforcement

Low level ofenforcement

0

40

80

120

160

CEB

Slov

enia

Slov

ak R

epub

lic

Croa

tia

Hung

ary

Latvi

a

Pola

nd

Czec

h Re

publ

ic

Lithu

ania

Esto

nia

SEE

Bulga

ria

Rom

ania

FYR

Mac

edon

ia

Alba

nia

Serb

ia a

nd M

onte

negr

o

Bosn

ia a

nd H

erze

govin

a

CIS

Mol

dova

Ukra

ine

Arm

enia

Russ

ia

Kaza

khst

an

Uzbe

kista

n

Geor

gia

Azer

baija

n

Tajik

istan

CIS SEE CEB

Non-infrastructureInfrastructurePrivatisation

NotesRatings range from 0 to 100 per cent per category reflecting the percentage of times that the competitionagency provides competition advocacy comments on pre-privatisations (including break-up of assets/restructuring);infrastructure (including existing and new laws) and non-infrastructure (including entry licences, taxes andbankruptcy). Data for Belarus and the Kyrgyz Republic were not available. Data for Bosnia and Herzegovina andTajikistan were equal to zero.


Chart 4 Effectiveness of competition authority’s advocacy by areaHow often have the competition authority’s advocacy comments concerning (i) privatisations, (ii) infrastructure and (iii) non-infrastructure been accepted in the relevant legislation?

High level ofeffectiveness

Low level ofeffectiveness

Chart 5 provides a measure of “de facto”or informal independence as perceivedby a number of legal practitioners andexperts in each country. 18 While manycompetition agencies have formal inde-pendence from the rest of government,equally or more important is the develop-ment of de facto independence. The ability to reach decisions solely on meritand through unbiased application of thelaw is essential and over time govern-ment, business and the public at largeshould develop an appreciation for astrong and impartial competition policy.

While competition agencies in Hungaryand Croatia both report to parliamentrather than government, the perceptionof political independence is significantlyhigher in the former than the latter.Similarly, while the structure of thecompetition agencies in Lithuania andLatvia are similar (both are composed of five commissioners appointed by the government or cabinet of ministersand serve for relatively long terms), de facto independence is substantiallyhigher in the former.

Relevance of appeals (the frequency that decisions on appeal are based oneconomic content rather than exclusivelyon due process) depends on the trainingand ability of judges as well as othersafeguards.19 As shown in Chart 6the only countries that rank at or above50 per cent on the effectiveness ofappeals in 2002 are the Visegradcountries (Czech Republic, Hungary,Poland and Slovak Republic) and Latviaamong the CEB countries, Bosnia andHerzegovina, Bulgaria and Albania among SEE countries and Ukraine among the CIS.

Chart 7 reports evidence of transparencyas reflected by the awareness of thegeneral public. 20 It is interesting tocompare Hungary and Poland. WhileHungary requires the publication ofannual reports and all decisions, andmakes substantial information availableon the internet, Polish competition lawrequires neither. Nevertheless, inpractice, Poland also publishes annualreports and decisions. Both countriesalso rank highly in terms of overall publicawareness, together with the SlovakRepublic. In the case of these countries,higher general public awareness mayalso be due to one or more high profileinterventions that have receivedsubstantial press attention.

Perhaps the most noteworthy finding fromthese data is that across all countriesthere is low average awareness ofcompetition law provisions by the public,ranging from the maximum of 39 percent in CEB countries to 33 per cent and 27 per cent in SEE countries and the CIS respectively.

EBRD research in the area of competitionlaw and policy using these indicatorsshows that there are strong links betweenthe implementation of competition lawand policy and more intense economy-wide competition. At the country level, an important finding is that competitionlaws and policy and recent changes inimplementation are significantly andpositively correlated with the intensity of competition. This result is robust to the introduction of other policy-levelcontrols and alternative specifications of the basic model.

Other interesting results at themicro level include a significant positive relationship between theintensity of competition, lower barriers to entry and exit, and higher perceivedelasticity of demand.21

Implementing the EBRDmandate to promotecompetition

Bearing in mind the strong correlationbetween enforcement of competition lawand policy and the intensity of competitivepressures, the EBRD strongly encouragesits countries of operations to adoptsound legal and regulatory systems.Given the EBRD’s role as more than afinancier, but also a development partner,there is an opportunity for the Bank toengage its countries of operations inpolicy dialogue.

Specifically the EBRD’s charter providesthat the Bank shall “assist the recipientmember countries to implement structuraland sectoral economic reforms”.22

In addition to policy dialogue, assisting in the privatisation of state-ownedmonopolies and oligarchies has beenone of the primary measures used by the EBRD to achieve such structural and sectoral reforms.

Unlike other IFIs, such as the World Bankand the Asian Development Bank, whichare able to provide structural adjustmentor programme loans23 to promotestructural and sectoral reform, the EBRDis restricted by the Agreement Establishingthe EBRD from undertaking similarmacroeconomic structural adjustmentprogrammes. Article 13 (ii) provides thatthe “operations of the Bank shall providefor the financing of specific projects,whether individual or in the context ofspecific investment programmes, and for technical assistance…”.

The EBRD’s portfolio is predominantly a private sector portfolio. In fact,pursuant to Article 11.3 (i) of theAgreement Establishing the EBRD, notmore than 40 per cent of the EBRD’stotal committed loans, guarantees andequity investments shall be provided tothe state sector. Therefore, with morethan 60 per cent private sector financing,alternatives to macroeconomic policydialogue to promote structural andsectoral economic reforms need to beconsidered. Accordingly, the EBRD’s rolein promoting competitive behaviour and




CEB SEE CIS

0%

20%

40%

60%

80%

100%

CEB

Hung

ary

Lithu

ania

Croa

tia

Slov

enia

Slov

ak R

epub

lic

Esto

nia

Polan

d

Czec

h Re

publ

ic

Latvi

a

SEE

Serb

ia an

d M

onte

negro

Rom

ania

Bulga

ria

FYR

Mac

edon

ia

Bosn

ia an

d He

rzego

vina

Alba

nia CIS

Uzbe

kista

n

Azer

baija

nGe

orgia

Arm

enia

Kaza

khsta

n

Russ

ia

Mold

ova

Ukra

ine

Tajik

istan

0%

20%

40%

60%

80%

100%

CEB

Slov

ak R

epub

lic

Hung

ary

Pola

nd

Czec

h Re

publ

ic

Latvi

a

Esto

nia

Slov

enia

Lithu

ania

Croa

tiaSEE

Bosn

ia a

nd H

erze

govin

aBu

lgaria

Alba

nia

Rom

ania

Serb

ia a

nd M

onte

negr

o

FYR

Mac

edon

ia CIS

Ukra

ine

Kaza

khst

an

Russ

ia

Mol

dova

Azer

baija

n

Uzbe

kista

n

Geor

gia

Arm

enia

Tajik

istan

CEB SEE CIS

Veryindependent

Notindependent

Veryeffective

Noteffective

Chart 5 Competition authority’s independence How independent is the competition authority perceived to be?

0%

20%

40%

60%

80%

100%

CEB

Hung

ary

Slov

ak R

epub

lic

Pola

nd

Slov

enia

Czec

h Re

publ

ic

Lithu

ania

Latvi

a

Esto

nia

Croa

tiaSEE

Alba

nia

Rom

ania

Bulga

ria

FYR

Mac

edon

ia

Bosn

ia a

nd H

erze

govin

a

Serb

ia a

nd M

onte

negr

oCI

S

Russ

ia

Ukra

ine

Arm

enia

Geor

giaKa

zakh

stan

Azer

baija

n

Mol

dova

Uzbe

kista

n

Tajik

istan

CEB SEE CIS

Chart 6 Effectiveness of appeals in competition lawAre appeal mechanisms perceived to be effective in terms of enhancingcompetition and fairness?

Chart 7 Transparency in competition policy Is the public aware of competition laws and regulations?

Fullyaware

Notaware

19992002

NotesRatings range from 0 to 100 per cent reflecting thepercentage of times that the political independence of the competition authority has been upheld and notcompromised. This is based on decisions taken, includingthose that could have been but were not overturned forpolitical reasons. Data were not available for Armenia,Bosnia and Herzegovina, Serbia and Montenegro andTajikistan in 1999 and Uzbekistan in 1999 and 2002.


19992002

NotesRatings range from 0 to 100 per cent reflecting thepercentage of times that the appeal process is perceived as effective, ensuring that appropriate competition-enhancing decisions are made, in terms of relevance ofadjudication and perceived fairness. Data were not availablefor Armenia, Bosnia and Herzegovina and Serbia andMontenegro in 1999 and Tajikistan in 1999 and 2002.


19992002

NotesRatings range from 0 to 100 per cent reflecting thepercentage of times that the general public is aware of competition law provisions. Data were not available for Armenia and Serbia and Montenegro in 1999 andTajikistan in 1999 and 2002.


environments also takes a grassrootsapproach – financing specific projectsand relying significantly on the demon-stration effect to show others the path to transition at an enterprise level.

In considering which projects to finance,there are several factors the EBRD willconsider before approving financing.Each EBRD-financed project (whetherstate or private sector) has to demonstratethe potential for transition impact, financing of the proposed project mustmeet sound banking principles and theBank’s financing must provide additional-ity. The monitoring of transition impactand other tools the EBRD uses to promote competition through its operationsand in its countries of operation are discussed below.

Transition impact

In measuring transition impact, the EBRDconsiders the potential effects the projectmay have on the host country enabling it to move from a command economy to an economy driven by well-functioningmarkets.24 The assessment of transitionimpact is based on a specific checklist.This identifies seven potential types of impact within three broad criteriawhich relate to the structure and extentof markets; the institutions and policiesthat support markets; and the promotionof market-based behaviour skills and innovation.

Competition both in the project sectorand in other sectors represents animportant source of transition impact.There are two important ways in whichmarkets can be extended and theirfunctioning improved by projects:

(i) through interaction of the projectentity with suppliers and clients; and

(ii) through project contributions to theintegration of economic activities intothe national or international economy,in particular by lowering the cost oftransactions. To have a structuraleffect, these contributions shouldenhance competitive market interac-tions on a sustained basis. This wouldgenerally be achieved either throughthe formation of strong institutions orthrough interactions that have astrong demonstration effect.

Finally, the way the transition challengesare addressed depends crucially onproject selection and design. The balancebetween achievable transition objectives,market reform implementation, and theability of a project’s financing instrumentto influence the behaviour of the partywho controls such implementation, willdetermine the practicality, relevance andeffectiveness of transition-relatedcovenants in a project.

State sector conditionalities

As noted above, the EBRD does not make policy-based or structuraladjustment loans per se. One wayhowever, that the EBRD does seek topromote structural or sectoral reforms is through the conditionalities imposedas loan covenants in the projects that it finances. Many of these structural orsectoral reform covenants are found inthe state sector loans providing financialassistance for the commercialisation orprivatisation of state-owned enterprises.

In such cases, the EBRD may require the state to give an undertaking toestablish an independent regulator, tocommercialise the operations of state-owned industries to eliminate subsidiesand/or to open up the relevant industryor sector to competition. Many of thesecovenants relate to tariff adjustments to ensure prices reflect the market rateof the service provided.


In 2001, the EBRD provided a €100 millionloan to the public enterprise ElektroprivredaSrbije, which is responsible for 95 per cent ofthe total power generation in Serbia andMontenegro. The loan was to finance emergencyrehabilitation and upgrades to thermal andhydrogeneration plants, and to rehabilitate andupgrade the transmission system.

The Republic of Serbia undertook to prepareand adopt a sector reform strategy; to prepareand implement a sector action plan; and toprepare and submit to the National Assembly a new electricity law to reform the electricitysector in the Republic of Serbia, includingestablishing a regulatory agency. The strategyand plan were to be prepared in consultationwith the borrower and the EBRD in a phasedapproach. In addition, the Republic of Serbiawas to put into effect, or cause the borrower to put into effect, tariff reforms.

As of 2003, there have been delays with the submission of the draft electricity law. This is due to the dissolution of parliament. It is unclear when there will be a vote on thenew law. The tariff adjustments are ahead ofschedule and some of the restructuringexpected of the borrower has started with some labour restructuring.

Emergency Power Sector Reconstruction Serbia and Montenegro

Of over 125 sovereign operationsreviewed, at least 20 of those operationsincluded specific structural or sectoralreform covenants. In addition to specificcovenants, many operations contain general covenants requiring the borrowerand/or the government to provide the EBRD with information concerningstructural or sectoral reforms. Some projects also include negative covenantsrequiring the government to refrain frominterference in the day-to-day operationsof state-owned entities. Box 2 gives asample of the types of conditionalitiesfound in EBRD loans.

Conditionalities are generally sector orindustry specific and attempt to promotecompetitive behaviours and environmentsby establishing level playing fields –reducing the level of monopolistic or anti-competitive activities of state-ownedentities – and preparing state-ownedenterprises for the opening up ofmarkets and industries to competition.Two specific examples of EBRD projectswith such conditionalities are set out onpages 42 and 44.

Private sector conditionalities –best practice

While general sectoral reforms cannot be specifically undertaken in private sector operations, the EBRD also encour-ages enhancement of the competitiveenvironments in its countries of operationsby ensuring compliance with best practicesin companies in which it invests. Thisparticularly covers the areas of good orporate governance, transparency andthe maintenance of financial accountsconsistent with internationally acceptableaccounting standards. When taking anequity position in a company, the Bankwill normally reserve the right, often exercised, to nominate an individual tothe company’s board of directors. EBRDnominee directors monitor a company’sbehaviour and encourage it to complywith best corporate practices.

Box 2Examples of conditionalities (by sector) in EBRD financed projects

Telecommunications ■ Increase the level of tariffs for domestic and internationaltelecommunications traffic by at least 100 per cent and200 per cent respectively in real terms, within a timetableacceptable to the Bank.

■ Manage telecommunications activities and other activities asseparate commercial operations.

■ Ensure no form of financial support, including budgetary transfers or subsidies, is provided.

■ Ensure all transactions between separate operations are in the ordinary course of business, on commercial terms and on an arm’s-length basis.

Energy/power ■ Increase average industrial and residential electricity tariffs to noless than 3 cents per kilowatt hour.

■ Annually review and adjust such tariffs so that the rates for thesale of electricity are set and maintained at levels agreed.

■ Ensure that departments, services, local councils, agencies andstate-owned enterprises pay the electricity agency all charges forelectric energy provided and cause such entities to includeappropriate budgetary appropriations for electric energy charges.

■ Submit a sector restructuring plan approved by the relevantministry and the parliament, as may be required by law, torestructure the energy sector and for commercialisation of theborrower (including transformation into a joint stock company).

■ Adopt, maintain and implement regulations which provide for theindependent setting and adjusting of prices for electricity servicesto users of electricity in its territory.

Civil aviation ■ Ensure the national airline maintains, to the satisfaction of theBank, the status of an autonomous and commercial oriented entityand an independent management for day-to-day business.

Water supply ■ Prepare a national policy and regulatory framework for the waterand sewage sector.

■ Set tariffs for water use charges at levels that will enable the entity to meet its financial obligations and adjust such tariffs in accordance with inflation.

Banking ■ Promptly commence preparation of a review of the accounting and banking regulations applicable to commercial banks inrespect of the treatment of the reserves for purposes of calculationsof (i) capital adequacy ratios and (ii) minimum capital requirements.This should be done with a view to creating a legal and regulatoryenvironment which is conducive to competitive operation incommercial banks, based on international accounting principlesand international banking practice.



Technical assistance

Another tool which the EBRD has availableis the financing and/or administration of technical assistance projects. Suchprojects can help governments developadequate regulatory frameworks, preparesectoral restructuring programmes or provide assistance to state-owned entitiesfacing new challenges when commercial-ising operations. Technical assistance is often provided in conjunction withstate sector loans and will help ensurethat the conditionalities agreed to are implemented.

The Bank also carries out many legaltechnical assistance projects whichdirectly or indirectly promote competitiveenvironments. Establishing certainty oflegal regimes, in such areas as securedtransactions, will assist in bringing in private sector and foreign investors leading to a more competitive environ-ment. Other legal areas in which the Bankconcentrates include establishing corporategovernance codes and adopting telecom-munications regulatory regimes.

Conclusion

The analysis of the LIS data providedstrong evidence of how, for most transitioncountries, implementing and maintainingan efficient competition policy has fallenshort of international norms across severaldimensions and further work is needed.Enforcement of competition laws, particu-larly with respect to prosecutions of hardcore cartels, requires improvement in allcountries surveyed. Although clearly, theaccession countries have benefited fromincreasing experience with the implemen-tation of EU compatible competition laws.Harking back to the earlier mention ofpolitical openness, there is a generallack of competition advocacy from localparticipants in developing governmentregulations and a limited awareness ofcompetition law. These weaknesses willneed to be addressed if there is to beeconomic and political progress.

As a development partner, the EBRD will continue:

(i) to rigorously assess the transitionimpact of each project it proposes to finance, including its effect onenhancing competition;

(ii) to monitor the implementation ofprojects to help ensure the desiredeffects are achieved; and

(ii) where possible, to engage itscountries of operations in policydialogue to enhance the overallcompetition and legal frameworkwithin the country and assist thetransition countries to develop well-functioning, open and competitiveeconomies.


In 2001, the EBRD provided a US$ 13 millionloan to joint stock company Tajiktelekom, the state-owned national telecommunicationsoperator. The loan was to improve access to,and the quality of, basic telecommunicationsservices through the procurement of digitalswitching and transmission equipment. TheRepublic of Tajikistan provided a guarantee to support the loan and agreed to undertake a regulatory development programme.

In this project, the regulatory reforms and tariffadjustments were described as part of theproject to be implemented. The sectorrestructuring programme was designed tocreate a modern legal and regulatory frameworkfor the telecommunications sector. This wouldinclude developing a coherent policy for thesector; drafting and implementing a newtelecommunications law; developing andimplementing transparent licensing andinterconnection policies; and tariff reform. The sector reform work was to be undertakenwith the help of technical cooperation funding.

As of 2003, the new telecommunications lawwas in place, having been approved inApril 2002; tariff increases had beenimplemented; a medium-term tariff plan hadbeen prepared; a regulatory agency had beenestablished (albeit not a fully independentone); and the second phase of a technicalassistance programme to develop secondarylegislation was under way.

Tajikistan Telecommunications

Notes1 International Bank for Reconstruction and

Development, Articles of Agreement, Preamble (v).

2 An EBRD country of operation, or recipient country,is a country in which the Bank operates to provideor co-finance loans or guarantees to, or equityinvestments in, private sector enterprises or state-owned enterprises operating competitively ortransitioning to private ownership. Sovereign andsub-sovereign investments and technical assistanceare also provided for the reconstruction anddevelopment of infrastructure necessary for privatesector development. This generally refers to centraland eastern European countries plus theCommonwealth of Independent States.

3 Agreement Establishing the EBRD, Article 1.

4 Ibid.

5 Ibid., Article 2.

6 The following two sections draw on an earlier article by M. Vagliasindi. Cf. M Vagliasindi,“Competition Policy across transition economies”,Revue d’Economie Financière, pp. 215-250 (2001 Special Issue).

7 Cf. R. Coase, “The Nature of the Firm”, Economica I, 4, pp. 386-405, (1937).

8 In agency theory, one person (the principal) wants to induce another person (the agent) to do something that the agent does not want to do. The agent (e.g. the manager) has hiddeninformation or actions, because it is difficult or expensive for the principal (e.g. the owner) to monitor the agent. On the economic theory of agency, see J. Mirrlees, “The optimal structure of incentives and authority within an organization”,Bell Journal of Economics, 7, pp. 105-131 (1976),and B. Holmstrom, “Moral hazard and observability”,Bell Journal of Economics, 10, pp. 4-29 (1979).

9 See, among others, B. Holmstrom, “Moral hazard in teams”, Bell Journal of Economics,13, pp. 324-341 (1982); D. Mookherjee, “Optimalincentive schemes with many agents”, Review ofEconomic Studies, LI (3), pp. 433-446 (1984) andM. Meyer, and J. Vickers “Performancecomparisons and dynamic incentives”, Journal ofPolitical Economy, CV (3), pp. 547-81 (1997).

10 See, among others, K. Schmidt, “Managerialincentives and product market competition”, Reviewof Economic Studies, 64, pp. 191-213 (1997).

11 However, there is a line of literature – starting from O. Blanchard, and M. Kremer“Disorganization”, Quarterly Journal of Economics,112 (4), pp. 454-465 (1997) – according to whichcompetition may worsen firm performance duringthe disorganisation phase.

12 When firms maximise profit and agency problemsare small, the standard Schumpeterian effect drives the results, so that increased competitionreduces the incentives to invest in R&D. In thepresence of serious agency problems, to attractoutside investors enterprises tend to over-invest in R&D. Cf. P.M. Aghion, Dewatripont and P. Rey“Agency costs, firm behaviour and the nature ofcompetition”, Review of Economic Studies, 66 (4),pp. 825-52 (1997).

13 Cf. M. Vagliasindi, “Competition Policy acrosstransition economies”, Revue d’EconomieFinancière, pp. 215-250 (2001 Special Issue).

14 The enforcement dimension is measured by theresponse to the question: “What percentage oftimes are alleged/suspected anti-competitivepractices of enterprises routinely investigated andprosecuted?”.

15 CEB countries include Croatia, Czech Republic,Estonia, Hungary, Latvia, Lithuania, Poland, SlovakRepublic and Slovenia. SEE countries includeAlbania, Bosnia and Herzegovina, Bulgaria,FYR Macedonia, Romania and Serbia andMontenegro. CIS countries include Armenia,Azerbaijan, Belarus, Georgia, Kazakhstan, KyrgyzRepublic, Moldova, Russia, Tajikistan,Turkmenistan, Ukraine and Uzbekistan.

16 See J. Clark, “Competition Policy in the Baltics”,OECD Journal of Competition Law and Policy,Vol. I, pp. 149-168 (1999).

17 The competition advocacy dimension is measuredby the response to the question: “What percentageof times is the competition agency successfullyproviding competition advocacy comments on lawand regulation?”.

18 Informal independence is measured by theresponse to the question: “What percentage oftimes has the political independence of thecompetition authorities been upheld and notcompromised, based on decisions taken, includingthose that could have been but were overturned forpolitical reasons?”.

19 The “relevance of appeal” dimension refers to thepercentage of times that the appeals process isperceived as an effective instrument to ensure thatappropriate competition-enhancing decisions aremade, in terms of relevance of adjudication andperceived fairness.

20 The “transparency” dimension refers to thepercentage of times that the general public is awareof competition law provisions.

21 See M. Vagliasindi, “Competition across transitioneconomies: an enterprise level analysis of the mainpolicy and structural determinants”, EBRD WorkingPaper, No. 68 (2001). Found at www.ebrd.com/pubs/econ/workingp/68.pdf.

22 Agreement Establishing the EBRD, Article 2.1.

23 A structural or sector adjustment or programmeloan is distinct from a project loan. Among otherthings, the loan amount is determined based on the economic and financial cost of the reforms to be carried out under the loan. In contrast, for anEBRD project loan the loan amount is determinedby the financing needs of the specific project and is not necessarily related to the cost of the reforms which are sought by way of theconditionalities imposed.

24 Transition impact does not cover direct income and resource effects of a project, and coversenvironmental impact only indirectly, to the extentthat it is a consequence of the broadening anddeepening of markets.

AuthorsMaria Vagliasindi Principal Economist, EBRDTel: +44 20 7338 7213Fax: +44 20 7338 6111E-mail: [email protected]

Laura Campbell Counsel, EBRDTel: +44 20 7338 7928Fax: +44 20 7338 6150E-mail: [email protected]


45

Transition to a competitivetelecommunications market:

the application of competition rulesin the telecommunications sector

1

Historically, regulation of thetelecommunications industry was based on the understanding that theprovision of telecommunications servicewas a natural monopoly. 3 Market andtechnological developments in recentyears have since made it clear that thisis no longer necessarily the case andcompetition is now possible withinvirtually all of the relevant telecommuni-cations markets, even down to the “local loop”. 4

In countries where telecommunicationshas been liberalised, including themajority of the EBRD’s countries ofoperations, the challenge is now tofoster competition and advance it to a sustainable position where specialsector-specific regulatory intervention5 –which has characterised the market todate – is no longer required. The goal is more competition and less regulation,ultimately to the extent that competitionshould replace regulation as the bestmeans of determining network andservice offerings and price.

The recently revised European Union (EU)telecommunications regulation framework6

reflects this movement away from sector-specific provisions toward the generalcompetition framework. A criticallyimportant policy issue for the market is the timing and administration ofevolution from a monopoly regime first toa sector-specific regulated environment,and then to a competitive market placewith full application of the generalcompetition framework within the sector.

Given that the two authorities ofsignificance within the telecommunicationssector – the competition authority andthe telecommunications regulator – bothhave somewhat of a different focus andpursue differing objectives, as competitiontakes hold in the market the interfacebetween the two has the potential to be a veritable minefield of jurisdictionaloverlap during this crucial transitoryperiod. Consequently, a mechanismwhich would avoid conflicting exercise of jurisdiction and permit consistentapplication of competition law and sector-specific regulations in thetelecommunications area is necessary.

As the EU prepares to move eastwardsand modern, international practices takehold within the accession countries,7 itwould appear an opportune time to reflectupon this issue, explore what this meansfor the EBRD countries of operations8

and the options available to deal with thisoverlap. This article will seek to examinethese issues, with specific reference tothe telecommunications sector. 9

Background

With a decision to liberalise the telecom-munications sector in a given countrycritical issues for consideration are:

(i) how will competition in the market be introduced and sustained?

(ii) who will be responsible for the introduction and maintenance of such competition?

More particularly, the questions whicharise in this respect are:

■ whether responsibility for the sectorshould be administered via a cross-sectoral body, such as an economy-wide competition authority, or via an industry specific regulator; and


Transition to a competitive telecommunications market 47

As an industry or market matures and develops, regulation may move from a sector-specific regulator to an economy-wide competition authority. However, where these two bodies operate concurrently, a mechanism for avoiding conflicts of jurisdiction and consistent application of law is necessary. This article examines key issues which governments must consider in the context of a particular liberalised industry: the telecommunications industry.

Paul Moffatt Counsel, EBRD and Irena Dajkovic Associate, EBRD 2

■ whether general competition law will suffice to introduce competitioninto the telecommunications market or is there a necessity for sector-specific rules.

In this respect, complications arise as certain specific instances of anti-competitive behaviour addressed bysector-specific legislation, such as arefusal to interconnect, 10 are at thesame time used as an example of an

abuse of a dominant position, one of the crucial components of the generalcompetition law. Allied to this, thequestion arises as to which rules shouldbe applied by which body and what is theprocedure for overlap in the jurisdictionof the rules applicable to the sector.

Before examining such overlappingjurisdiction, it is important to explore the nature of the framework within which competition is introduced to thetelecommunications market and thecharacteristics of the authorities taskedwith the application and implementationof such a framework.

General competition law versus sector-specific laws 11

When it comes to the liberalisation of network industries,12 particularlytelecommunications, these industriescan be seen as possessing certainunique characteristics that require theapplication of special measures beforemeaningful competition can take hold.

One particular instance of these uniquecharacteristics, within the telecommuni-cations sector, is the nature of therelationship between the incumbentoperator13 (whose market share will bediminished by liberalisation) and newentrant operators14 (who will seek toacquire market share previously held by

the incumbent operator). For liberalisationand competition to work there must be a workable and cooperative relationshipbetween the two.

Incumbent operators in the telecommuni-cations industry have very little or noincentive to cooperate or facilitate theemergence of competition. In fact, somewill often engage in anti-competitivebehaviour to prevent diminution of theirmarket share. Anti-competitive behaviour

in the telecommunications market cantake several different forms, includingrefusal by an incumbent operator tomake available or construct adequatecapacity for competitive provision ofservice (i.e. interconnection) or anti-competitive cross-subsidisation.

Interconnection

One of the areas of the incumbentoperator/new entrant relationship which is critical for the development of a competitive market in telecom-munications is “interconnection”.15

Interconnection is the lifeblood of acompetitive telecommunications marketand can be one of the primary areas of anti-competitive practices by anincumbent operator aimed at preventinga new entrant seizing market share at their expense.

EU case law16 shows, in broad terms, that where an organisation holds adominant position in the market, withrespect to a particular product, andrefuses to supply that product, wheresuch refusal prevents the emergence of a new product or service or impedescompetition with respect to existingproduct market, this refusal to supplycan constitute an abuse of a dominantposition. This particular type of abuse ofa dominant position, which has found asource of inspiration in American case

law,17 is usually referred to as a refusal to provide access to an essential facility.18

Refusal to provide this access is likely to drive new entrants out of the marketsince either there is no alternativesolution to the services they seek or, if it exists, it is disproportionatelyexpensive. If such dictum is applied tothe telecommunications market, refusalby an operator possessing a dominantposition to provide a new entrant access

to its network (i.e. interconnectioncapacity), where such refusal wouldprevent the provision of a new service to the market or restrict competition inthe market for such services, this couldamount to an abuse of a dominantposition and thereby breach generalcompetition law.

Cross-subsidisation

Another instance of anti-competitivebehaviour in the telecommunicationsmarket that would also contravene generalcompetition law is anti-competitive cross-subsidisation. EU competition lawprohibits19 dominant firms from usingrevenues to cross-subsidise the price ofa service it provides in another market.In the telecommunications sector, suchbehaviour will arise where an operator,dominant in a particular part of themarket, raises or maintains a specificpricing above cost and uses excessrevenue generated in that market tosubsidise lower costs in other liberalisedmarkets. Without the ability to cross-subsidise its services, new entrants maybe disadvantaged in terms of matchingprices offered by the dominant operator.


Network industries can be seen as possessing certain unique characteristics that requirethe application of special measures before meaningful competition can take hold.

Sufficiency of general competition law in thetelecommunications sector

Many of the issues arising within thetelecommunications sector appear to beclassic anti-competitive practices whichshould be sufficiently addressed under ageneral competition framework. However,when some of the unique characteristicsof the telecommunications market areclosely examined the need for sector-specific laws becomes apparent. 20

Having the protection of competition as its main objective, general competitionlaws may not ensure the emergence of

a competitive market in the telecommuni-cations sector and more appropriatecompetition provisions within the sector-specific law could deal with the issue more efficiently. Moreover,before initiating a procedure with respectto anti-competitive practice under ageneral competition law, an aggrievedparty will generally be required toaccumulate evidence proving theexistence of a dominant positionin the particular marketplace and facts

constituting an abuse of that position.

Translating this to a case of a refusal tosupply network access by an incumbentoperator, an aggrieved party will have to establish:

■ access to the particular facility inquestion was indeed essential;

■ there was sufficient network capacity available to provide theaccess requested;

■ there was no objective justification for this refusal; 21

■ this refusal has prevented theemergence of a new service or product market.

Similarly, unfair cross-subsidisation can usually only be established after a thorough examination of the incumbentoperator’s books. This is generallypossible if the books have been keptconsistent with a set methodologypermitting the allocation of revenues and expenses to appropriate andverifiable categories and the aggrievedparty has sufficient access to thesebooks. It is highly unlikely that anincumbent operator will adopt such acomplex and burdensome methodologyon its own initiative.

Consequently, in the absence ofaccounting separation obligationsimposed upon a regulated company by a sector-specific framework, acompetition authority operating on the basis of commonly understoodpowers would be arguably unlikely to find sufficient evidence of unfair cross-subsidisation.

Necessity for sector-specific laws

While the general competition frameworkprovides fundamental protections againstanti-competitive behaviour in the telecom-munications sector, these protectionswill only be meaningful if supplementedby sector-specific provisions establishingrules designed to facilitate the emergenceof competition dealing with the specificissues highlighted.

In the EU, such sector-specific laws havebeen set out in the original Open NetworkProvision Directives,22 adopted more thana decade ago and recently consolidatedand revised 23 to take account of develop-ments within the telecommunicationsmarket. This sector-specific law goesfurther than general competition law,extending obligations traditionally imposedonly on dominant undertakings to alloperators with significant market power. 24

It also establishes a specific mechanismfor assessing whether an operator will or will not be subject to the requirementsof the sector-specific legislation.

In this way, the rules can be seen asmore workable, efficient and are more in tune with the realities of the marketfor competitive telecommunicationsservices. Additionally, these sector-

specific laws can require operators to grant access to their networksirrespective of whether or not they aredominant. This would not be possibleunder general competition laws.

The sector-specific law also appliesrequirements with respect to the specificmethodology applicable to allocation ofcost and revenue. Again, general compe-tition law does not extend this far. Manyof these provisions have been replicatedin the telecommunications legislation ofnumerous countries around the world,including the majority of the EBRD’scountries of operations. The EBRD Legal Transition Programme assists theauthorities in EBRD countries of operationsto elaborate and implement telecommuni-cations sector principles based upon orreflective of the EU telecommunicationsregulatory framework.25



For liberalisation and competition to work there must be a workable andcooperative relationship between the incumbent operator and the new market entrants.

Competition authority or sector-specific regulator?

When a decision has been made regardingthe nature of the legal framework andhow it will support the introduction andmaintenance of competition in the tele-communications sector, a related question arises. Will the responsibility for the implementation of that frameworkbe entrusted to an economy-wide competition authority or a sector-specifictelecommunications regulatory authority?

Worldwide, various options have beenpursued with respect to whether a generalcompetition authority or sector-specificregulator should be responsible for over-seeing the liberalisation of the telecom-munications marketplace. These optionsrange from having both a general compe-tition authority and a sector-specific regulator 26 to a competition authoritywithout any sector-specific regulator. 27

The general tendency in Europe, in particular since the advent of de-monopolisation and liberalisationwithin the utility sectors, has been the establishment of a sector-specificregulator, in addition to an extantcompetition authority. In this context,there has been considerable debateabout the nature and scope of regulationrequired and the relationship betweensector-specific laws and the greatercompetition framework and between the respective authorities.

Competition authority and sector-specific regulator compared

The basic frameworks underpinning both an economy-wide competitionauthority and a sector-specific regulatorcan be compared in a number of ways. A competition authority’s responsibilitystretches throughout the economy,focusing on the preservation ofcompetition. According to generalcompetition law a competition authorityby and large performs its duties on aretrospective basis, addressing activitythat has already taken place which hadas its object or effect the distortion ofthe market.

A competition authority is generallydriven by specific complaints or generalinvestigation aimed at remedying atransgression after the fact. In this way a competition authority acts in a pre-dominantly ex post fashion. In contrast, a sector-specific regulatory authority isindustry specific, pursuing multiple policyobjectives. These objectives range fromthe introduction and development of acompetitive market, through to pursuingcertain social policy objectives, such asuniversal access.28 The sector-specificauthority will generally use its discretionto exercise sector-specific regulatoryfunctions, where particular marketsbecome sufficiently competitive. This canbe done through a combination of ex anteand ex post measures.

In essence, the role of telecommunica-tions regulation is affirmative in nature,dictating precise acceptable behaviourrequired for sector participation througha mix of retrospective and prospectiveactivity. Certain functions of the regulatoryauthority, such as tariffing limits, termsand conditions for interconnection andquality of service have a prospectivequality, while at the same time these regulators are also empowered to

respond to individual complaints or launch investigations where thereappears to have been a contravention of the regulatory framework.

Given the particular characteristics of the telecommunications sector andthe differing objectives pursued by aneconomy-wide competition authority, a sector-specific regulatory authoritywould appear to be the most appropriateauthority for administration of a sector-specific framework, at least until a certaindegree of competition has taken hold.

For example, a sector-specific regulatorwould be in a better position than atraditional competition authority to rendertechnical expertise necessary for theadministration of interconnection or the detection of cross-subsidisation. In addition, a sector-specific body would be more appropriately suited to pursuingcertain sector-specific policy objectives,that may not best serve the principles of a fully competitive market place (e.g. universal service objectives).

Overlap in the application of competition and sector-specific laws

As indicated earlier, overlap in theapplication of competition and sector-specific laws occurs when specificinstances of anti-competitive behaviouraddressed by sector-specific legislation,such as a refusal to interconnect, arealso used as an example of an abuse ofa dominant position, a crucial componentof general competition law.

The EU regulatory framework, and those based thereupon, envisage steadily increasing competition within the telecommunications market and com-mensurately less need for sector-specificregulation. To facilitate enforcement andharmonisation of competition rules in the

With increasing incidence of concurrent powers for both telecommunications regulatorsand economy-wide competition authorities, the scope for overlap and inconsistentapplication of competition measures by both authorities remains significant.


telecommunications sector, for example,a number of guidelines and notices havebeen adopted over the years.29

Continuing this trend, the new EU regula-tory package manifests an approach morein line with the principles of general com-petition law.30 While national legislationin certain EU markets, such as the UnitedKingdom, reflecting that manifestationincreasingly provides for competence ofthe telecommunications regulator to applycompetition law in the telecommunica-tions sector, 31 debate remains as towhich is the competent authority.

The main approaches to this issue range from no mechanism at all, 32 tomandatory cooperation,33 to resolutionby a third authority, 34 to agreementbetween authorities.35 If this issueremains unresolved within EU countries,there is certainly potential for similaroverlap to become an issue in the non-accession telecommunications marketsof the EBRD’s countries of operations asthese countries move to liberalise theirtelecommunications marketplaces.

Consequently, in the absence of specificlegislative guidance in this respect (particularly in the non-accession telecom-munications markets) it is essential thata clear and unambiguous framework isdeveloped. This framework should setout the competencies of each authorityand provide a workable mechanism forthe resolution of dispute as to the com-petencies. Without these measures, thescope for inter-agency power battles andpotential for regulatory duplication, incon-sistent intervention or “double jeopardy”increases greatly.

Whether such a framework is containedin specific legislation or agreementsbetween authorities is a policy choice for individual nations. While the prefer-ence is to have as binding a mechanismas possible, there must be sufficient flexibility to react to the rapidly changingmarket environment within the sector.

Conclusion

As competition becomes more pervasivein telecommunications markets, anincreasing reliance on competition law,rather than sector-specific measures, isexpected. The updated EU telecommuni-cations regulatory framework reflects thisexpectation, as do national laws adoptedto transpose the EU measures.

However with the increasing incidence ofconcurrent powers for both telecommuni-cations regulators and economy-widecompetition authorities within thetelecommunications sector, the scope for overlap and inconsistent applicationof competition laws and relevant sector-specific measures by both authoritiesremains significant during the transitionto a competitive marketplace. While this matter is being dealt with in varyingdegrees within the advanced telecommu-nications markets, the matter representsa relatively significant issue for the lesserdeveloped markets. In particular the non-accession EBRD countries of operationsas they move to reform both theirtelecommunications and competitionframeworks will likely be affected.

To avoid such conflict, there should be a clear and unambiguous statementof the competencies of both the telecom-munications authority and the competitionauthority. The statement should coverthe application of competition rules tothe telecommunications sector. Goingforward, technical cooperation assistanceprovided by the EBRD, through its Legal Transition Programme, will enablethe Bank to stay abreast of theseissues, the surrounding debate and the mechanisms adopted to addressoverlapping jurisdictions.

Notes1 For the purpose of this article, competition rules

should be understood to include any provisionprovided either by classical competition law orsector-specific regulation, relevant to the corecompetition law principles.

2 The authors wish to acknowledge the helpful comments of Olivier de Juvigny and Pierre-Xavier Boubée of the law firm RambaudMartel, Paris, France.

3 The Organisation for Economic Co-operation and Development (OECD) understands a “natural monopoly” to exist in a particular marketif a single firm can serve that market at lowercost than any combination of two or more firms.Natural monopoly arises out of the properties ofproductive technology, often in association withmarket demand, and not from the activities ofgovernments or rivals. Generally speaking, naturalmonopolies are characterised by steeply declininglong-run average and marginal-cost curves such that there is room for only one firm to fullyexploit available economies of scale and supplythe market (OECD Glossary of IndustrialOrganisation Economics and Competition Law –http://www.oecd.org/dataoecd/8/61/2376087.pdf). For further reference on thenatural monopoly concept see: W.W. Sharkey,The Theory of Natural Monopoly, CambridgeUniversity Press, Cambridge, UK (1982);M. Waterson, “Recent Developments in theTheory of Natural Monopoly”, Journal of EconomicSurvey, Vol. 1, No.1 1987.

4 The “local loop”, also known as the “last mile”, is the physical copper line circuit in the localaccess network connecting the customer’spremises to the operator’s local switch,concentrator or equivalent facility (Article 2 of Regulation (2887/2000/EC) on UnbundledAccess to the Local Loop).

5 “Sector-specific regulatory intervention” refers tothe legislative and regulatory framework applying to a specific sector such as telecommunications,electricity, etc. aimed at the introduction andmaintenance of competition in that marketplace.

6 While the revised EU framework uses the term“electronic communications” (referring to theconverged marketplace of telecommunications,broadcasting and internet), for the purpose ofconsistency throughout this article, the term“telecommunications” will be used.

7 Eight of the ten countries anticipated to accede to the European Union in 2004 are EBRD countries of operations. These countriesare the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic and Slovenia.

8 The current EBRD countries of operations areAlbania, Armenia, Azerbaijan, Belarus, Bosnia andHerzegovina, Bulgaria, Croatia, Czech Republic,Estonia, FYR Macedonia, Georgia, Hungary,Kazakhstan, Kyrgyz Republic, Latvia, Lithuania,Moldova, Poland, Romania, Russia, Serbia andMontenegro, Slovak Republic, Slovenia,Tajikistan, Turkmenistan, Ukraine and Uzbekistan.

9 While certain of the issues highlighted in this article are being addressed within the recentlyadopted EU communications regulatoryframework, as not all of the EBRD countries ofoperations are directly concerned with the EUtelecommunications framework, the aim of thisarticle is to explore the issues herein on thewider basis of their application to those countries.

10 See definition of “interconnection” at footnote 15.

(continued on page 52)




Notes (continued)

11 It is important to note that this debate is being carried on within the context, and against the backdrop, of an ever evolving competitivestructure and market dynamic. Thus while it maycurrently be appropriate to discuss an adequatescope of competition rules in the telecoms areaand their enforcement by either competition orregulatory authority – or both, the ever changingnature of the industry structure could at some stage make such delineation redundant.

12 An industry in which, inter alia, competitors need to have physical, electronic or contractual links with one another in order to compete effectively.Examples of such industries would includetransport, electricity, gas and telecommunications.

13 “Incumbent operator” generally refers to the established telecommunications networkoperator(s) in a given country. Normally this entityoperates all or most of the public telecommunica-tions network infrastructure in a country. In manycountries, this was the Post Telephone andTelegraph (PTT) administration of the national government. In some countries it was, or now is, a private sector operator. In both cases, incumbentpublic telecommunications operators generally operated as monopolies (see infoDev/McCarthyTétrault Telecommunications Regulation Handbook,appendix C, page 7 – http://www.infodev.org/projects/314regulationhandbook/appendix.pdf).

14 A “new entrant operator” refers to a newtelecommunications service provider, including a new public telecommunications operator (seeinfoDev/McCarthy Tétrault TelecommunicationsRegulation Handbook, appendix C, page 10 –http://www.infodev.org/projects/314regulationhandbook/appendix.pdf).

15 Interconnection means the physical and logicallinking of public electronic communications networksused by the same or a different undertaking toallow the users of one undertaking to communicatewith users of the same or another undertaking, orto access services provided by another undertaking.Services may be provided by the parties involved or other parties who have access to the network.(Article 2, Directive 97/51/EC of the EuropeanParliament and of the Council of 6 October 1997).In most basic terms, interconnection is the linkingof different networks so customers of each networkmay communicate with one another. The purpose of an interconnection regime is to benefit users by encouraging competition and innovations in the telecommunications market.

16 Radio Telefis Eireann (RTE) and IndependentTelevision Publications Ltd. (ITP) v Commission of the European Communities; Decision of the European Court of Justice, Joined Cases C-241/91 P and C-242/91 P, 6 April 1995: the “Magill” decision.

17 Decision of the American Supreme Court “United States v Terminal Railroad Association” (224 US 383), in 1912.

18 The theory of essential facilities has beenprogressively introduced into EU law mainly throughthe EU Commission’s decisions and mostly underthe name of essential infrastructure. For furtherreference see: M. Furse, “The essential facilitydoctrine in community law”, European CompetitionLaw Review, pp. 469-473 (1995/8); D. Glasl,“Essential facility doctrine in EC anti-trust law: a contribution to a current debate” EuropeanCompetition Law Review, p. 469-473 (1994).

19 Case C-62/86 AKZO Chemie BV v Commission of the European Communities (1991) ECR I-3359.

20 The 1998 EC “Access” Notice (Notice on the application of competition rules to access agreements in the telecommunicationssector OJC 265.22.8.1998) recognised thatcommunity competition laws were not sufficient to remedy all the various problems in thetelecommunications sector.

21 Refusal is likely to be objectively justified if accessto the network at a particular point or time wouldnot have been technically feasible (where thefacilities or equipment of the requesting party were not of a technically compatible standard).

22 For further information on the Open NetworkProvision Directives refer to Directive 90/387/EECof 28 June 1990 on the establishment of theinternal market for telecommunications servicesthrough the implementation of open networkprovision and relevant provisions flowing therefrom.

23 The revised 2002 EU communications regulationframework aims to reduce regulation as competitionbecomes effective in specific markets. The adoptionof the new directives is expected to stimulate morecompetition as it will create a clear and consistentregulatory framework across the EU for all operators.

24 These are organisations which provide electroniccommunications networks or service and areconsidered by the communications regulatoryauthority as having “significant market power”. An undertaking shall be deemed to have significant market power if, either individually orjointly with others, it enjoys a position equivalent to dominance. That is to say it has a position of economic strength affording it the power tobehave to an appreciable extent independently ofcompetitors, customers and ultimately consumers(Article 14 (2) Directive 2002/21/EC of 7 March2002 on a common regulatory framework forelectronic communications networks and services(Framework Directive) – L 108/33).

25 For further details see http://www.ebrd.com/country/sector/law/telecoms/main. For a brief overview of EBRD telecommunications policysee box (right). The EBRD Legal TransitionProgramme has provided, or is currently providing,technical assistance within the telecommunicationssector of the following countries: Albania, Armenia,Belarus, Bosnia and Herzegovina, Estonia, Georgia,Kazakhstan, Kyrgyz Republic, Lithuania, Poland,Russia, Serbia and Montenegro, Tajikistan, Ukraineand Uzbekistan.

26 The model for an independent sector-specificregulatory authority for the telecommunicationssector is in place within the EU and many countriesthroughout the world. According to the InternationalTelecommunications Union there are now currentlyin excess of 110 such regulators through the world.See http://www.itu.int/publications/docs/trends2002.

27 See, for example, the mechanism in place in New Zealand. For further detailed discussion on thisissue see Roundtable on the “Relationship betweenRegulations and Competition Authorities” held bythe Committee on Competition Law and Policy inJune 1998, Organisation for Economic Co-operationand Development, DAFFE/CLP (99) 8, p. 211.

28 Universal access/service generally refers to aminimum set of services of specified quality whichare available to all users independent of theirgeographical location and, in the light of specificnational conditions, at an affordable price (Article 2of Directive 97/33/EC of 30 June 1997 oninterconnection in telecommunications with regardto ensuring universal service and interoperability).

29 See, for example, guidelines on the application ofthe EU competition rules to the telecommunicationssector (OJC 233, 6.9.1991); and Access Notice(1998) (see footnote 19 above).

30 For example, the definition of significant marketpower has been changed to bring it more in line withthe concept of “dominance” in EU competition law.

31 In the United Kingdom, the 1998 Competition Act confers almost all of the functions of thecompetition authority under the Competition Act inso far as those functions relating to “commercialactivities connected with telecommunications”. The recent update of UK legislation in this area (the Telecommunications Act 2003) confirms andextends the communications regulator’s powers in this regard. Under sections 369-371 of the 2003 UK Communications Act, the communicationsregulator will have power to investigate and enforce competition law across the whole field of communications using the extensive powers set out in the competition law, concurrently with the competition authority.

32 Such would appear to be the case in Austria wherethe telecommunications authority possesses acertain degree of authority with respect to theapplication of competition rules in the sector. There currently exists no special mechanism toavoid conflicting exercise of jurisdiction, nor isthere any specific mechanism to ensure the

consistent application of competition rules andsector-specific legislation.

33 Hungary is an example of such mandatoryconsultation insofar as it requires cooperationbetween the telecommunications regulator and the competition authority on matters affecting competition in the market.

34 It is understood that in Poland, both thetelecommunications regulator and the competitionauthority have competence with respect to mattersof competition in the telecommunications sector.Where there is an overlap of jurisdiction betweenthe two authorities, the President of the Council ofMinisters is empowered to decide the appropriateauthority to exercise jurisdiction in a given instance.

35 Canada is a good example of a workableagreement. In 1999, the Competition Bureau andthe CRTC signed a Memorandum of Understandingwhich describes the authority of the CRTC under theTelecommunications and Broadcasting Acts and theauthority of the Bureau regarding the telecommuni-cations and broadcasting sectors. The interfacedocument deals with a range of competitive issuesincluding access, merger review, competitivesafeguards and various marketing practices.

AuthorsPaul MoffattCounsel, EBRDTel: +44 20 7338 7453Fax: +44 20 7338 6150E-mail: [email protected]

Irena DajkovicAssociate, EBRDTel: +44 20 7338 7020Fax: +44 20 7338 6150E-mail: [email protected]


The EBRD telecommunications policy

In accordance with its established policy and practice, the Bank provides technical cooperationassistance to its countries of operations which have expressed genuine interest in reforming theirtelecommunications policy. EBRD technical cooperation projects will only be launched if no otherlaw reform facilitator is providing adequate assistance and the project is directly related to aspecific Bank investment, potential investment or investment strategy in general. In providingtechnical cooperation assistance, the Bank promotes:

a) the gradual liberalisation of all telecommunications services The Bank believes that both the telecommunications sector and the overall economy of a country will benefit greatly from the rapid emergence of competition in all telecommunications markets;

b) the establishment of an independent regulator with no structural or functional links with theincumbent telecommunications operator The Bank considers that the effective separation of the regulatory authority from the ownerof the incumbent operator is vital for the creation of a level playing field for new entrants.The EBRD, therefore, supports efforts to create an independent regulator with the powersand the means to sanction any anti-competitive behaviour of the incumbent operator andthe emergence of competition in the sector;

c) the progressive rebalancing of tariffs The Bank considers that the structure of the tariff policy of many dominant operators in theregion constitutes a serious impediment for both liberalisation and privatisation. Tariffs forlocal telecommunications services are often substantially below cost and need, therefore,to be subsidised by income generated through the provision of international and long-distance services. This has the following repercussions:

■ Unbalanced tariffs create an obvious opportunity for “cream-skimming” in the event ofcompetition, thus constituting a deterrent to liberalisation.

■ Unbalanced tariffs offer little incentive to provide local telecommunications services, in particular to remote or sparsely populated areas. Hence, the demand fortelecommunications lines exceeds that available and the Universal Service obligationof the incumbent operator remains unfulfilled.

In order to compensate the likely adverse social effects of rapid tariff rebalancing, the Banksupports all efforts to develop universal service and/or universal access mechanisms.These will permit less privileged customers to benefit from a direct subsidy but will notdisrupt the development of the market by creating competitive advantages ordisadvantages; and

d) the elaboration of a set of rules designed to facilitate the emergence of competition The main objective of these rules will be to enable new entrants to obtain access into thedominant operator’s network on fair, objective and transparent terms. The Bank takes theview that effective competition can only emerge if regulatory constraints preclude predatoryuse of market dominance by the incumbent operator and unfair practices versus its newcompetitors.

The policy advocated by the Bank is consistent with the WTO agreement on basic telecommunicationsservices and with the telecommunications policy and legislation of the European Union. In the caseof EU accession countries, the Bank encourages and supports the efforts of those countries toachieve full compliance with the European Union’s acquis communautaire.

53

Cooperationbetween the competition

authorities in the EU: new challenges for central and

eastern European countries

Cooperation between the competitionauthorities in the European Union (EU)will take an important step forward on1 May 2004 with the application of Regulation 1/2003.1 The new regulationwill help enforce the EuropeanCommunity (EC) competition rules laiddown in Articles 81 and 82 of the TreatyEstablishing the European Community,as in force from 1 February 2003 (theEC Treaty). The date the Regulationcomes into force coincides with theaccession of ten new Member States(the acceding countries) to the EuropeanUnion. At present, the Commission andthe competition authorities of theMember States are busy setting up theEuropean Competition Network (ECN),the new framework for cooperation, andthe acceding countries are fully involved in this process.

Regulation 1/2003 replaces Regulation17 of 1962,2 bringing about majorchanges in the way the fundamentalcompetition rules of the EC Treaty areenforced, for the benefit of consumersand the European economy as a whole.In particular, it provides for a moredecentralised enforcement of Articles 81and 82 EC. Consequently, it also callsfor increased cooperation between theEuropean Commission and the competi-tion authorities in the Member States.

In order to ensure efficient cooperation,the Commission, the current MemberStates and the acceding countries havebeen working closely together over thelast year to establish concrete workingrules for the new ECN.

Direct application ofArticle 81(3) (EC)

The central feature of Regulation 1/2003is the direct application of Article 81(3) EC.Pursuant to Article 81(3) EC, anagreement that restricts competitionwithin the meaning of Article 81(1) ECcan nonetheless be found legal if it

involves benefits that outweigh the negative impact on competition. Under Regulation 17, the application of Article 81(3) EC was reserved to the Commission. Undertakings werecalled upon to notify their restrictiveagreements to the Commission in orderto obtain an exemption decision from it.

Under the new regulation, agreementsthat fulfil the conditions of Article 81(3) ECare legally valid and enforceable withoutthe intervention of an administrative deci-sion. 3 Undertakings will be able to invokethe exception rule of Article 81(3) EC asa defence in proceedings before theCommission, Member States’ courts andMember States’ competition authorities.

More effective enforcement at Member State level

The principal objective of the newRegulation is to bring about moreeffective enforcement of Articles 81 and82 EC. As one major means to achievethis aim, the new Regulation opens theway for more decentralised enforcementof Articles 81 and 82 EC by Member

Philip Lowe Director-General for Competition in cooperation with Patrick Lindberg and Dorothe Dalheimer,Directorate-General for Competition, European Commission

Regulation 1/2003, enforcing Articles 81 and 82 of the Treaty Establishing theEuropean Community, will require increased cooperation and coordination amongstthe EU Member States. In the lead up to the application of this new Regulation, theEuropean Union is taking important steps to ensure its smooth implementation.These steps include the establishment of the European Competition Network, aframework which has been developed in consultation with the accession countries.


Cooperation between the competition authorities in the EU 55

States’ courts and competitionauthorities. These enforcers will, from 1 May 2004, be able to apply theEC competition rules in their entirety.They will also be obliged to apply theEC competition rules to all cases that fall within their scope of application.4

To be ready to take on this increasedresponsibility, Member States areobliged to set up competition authoritiesand equip them with the necessary powers. 5 Regulation 1/2003 alsoapplies fully to the competition authori-ties of the future Member States.

The European CompetitionNetwork (ECN)

The new Regulation not only opens theway for a much greater involvement ofMember States’ competition authoritiesin the enforcement of Articles 81 and82 EC, it also introduces enhancedmeans for these authorities to cooperatewith each other and with the Commission.Indeed, an agreement or practice fallsinto the scope of application of Articles 81and 82 EC where it is capable of affectingtrade between Member States.6 All casesthat come under the EC competition ruleswill therefore have an impact that reachesbeyond the territory of a single MemberState. Cooperation between enforcersand coherent application of the rules arethus essential.

Accordingly, Regulation 1/2003introduces a range of new elements to ensure the effective and coherentapplication of the EC competition rulesby Member States’ competitionauthorities. The new powers andobligations are part of the enhancedculture of close cooperation7 betweencompetition enforcers in the EU and willbe further developed in the EuropeanCompetition Network (ECN).

The ECN is designed to function atdifferent levels. It encompasses meetingsat the level of Director-General as well as working groups that focus on theproblems of certain sectors. Cooperation

in the network ranges from the statutoryinformation requirements set out inRegulation 1/2003 to informal contacts.

The ECN is a crucial element of the newenforcement system. With the need toapply the new Regulation from 1 May2004, the Commission and the competi-tion authorities of the Member Statesand acceding countries have been workingtogether over the recent months to set thenetwork up. This has been a very positiveexperience. In particular, the team spiritshown by the competition authorities is avery encouraging sign for the functioningof the new enforcement system.

During these preparatory works, theMember States’ competition authoritieshave cooperated closely with theCommission to prepare the Notice onCooperation within the Network ofCompetition Authorities (the “Notice”).8

This sets out the main network mecha-nisms, providing guidance for undertak-ings subject to the competition rules.

Work sharing in the network

One very important subject dealt with in the Notice concerns the principlesgoverning the work sharing between themembers of the network. Regulation1/2003 establishes a system of parallelcompetence in which both the Commissionand Member States’ competitionauthorities are competent to applyArticles 81 and 82 EC to cases capableof affecting trade between Member States.This approach was taken to ensureefficient work sharing for all cases,including complex ones, withoutburdening the system with a rigid division of competencies.

However, certain principles can beidentified that will guide the authorities inthe sharing of casework. These principlesare set out in the Notice.9

Pursuant to the Notice, cases will bedealt with by:

■ A single Member State’s competitionauthority, possibly with the assistanceof competition authorities of otherMember StatesA single Member State’s authority will, in general, be well placed to deal with agreements or practices that substantially affect competitionmainly within its territory. Furthermore,the single action of a Member State’scompetition authority might also beappropriate where its action issufficient to bring the entireinfringement to an end.


Regulation 1/2003 establishes a system of parallel competence in which both theCommission and Member States’ competition authorities are competent to apply Articles 81 and 82 of the Treaty Establishing the European Community to cases capable of affecting trade between Member States.

■ Several Member States’ competitionauthorities acting in parallel Parallel action by two or three MemberStates’ competition authorities maybe appropriate where an agreement orpractice has substantial effects oncompetition mainly in their respectiveterritories, and when the action of onlyone authority would not be sufficientto bring the entire infringement to anend or to sanction it adequately.

■ The Commission The Commission is well placed to deal with cases where Communityinterest requires the adoption of aCommunity decision to developCommunity competition policy. It isalso well placed to ensure effectiveenforcement where serious infringe-ments would otherwise persist orremain unsanctioned.

Work sharing in the network will notmean that a large number of cases will be re-allocated between authorities.Under the new antitrust procedures,there will be no notifications. Cases will be taken up following complaints or ex-officio. In most instances, theauthority that receives a complaint orstarts an ex-officio proceeding will remainin charge of the case. Re-allocation of a case will be the exception.

Information obligations in the network

The Notice also provides additionalexplanations on how the members of the network will comply with their mutualinformation obligations laid down inArticles 11(2), (3) and (4), as well as Article 14 of Regulation 1/2003.

Under these provisions:

■ The Commission informs the MemberStates’ competition authorities aboutcases that it has started underArticles 7 (prohibition decisions), 8(interim measures), 9 (commitments),10 (finding of inapplicability) and 29(1)(withdrawal of the benefit of a blockexemption) of Regulation 1/2003.This corresponds to the equivalentobligations of the Commission underthe existing Regulation 17.

■ Member States’ competitionauthorities inform the Commission of new cases started by them at an early stage of proceedings, before or without delay after the firstinvestigative measures. In practice,this (concise) information will be fedinto a common IT application that will permit access by all authorities in the network. The aim of this is toidentify multiple complaints and todraw conclusions on which authority is well placed to deal with such casesat an early stage.

■ The Commission consults theAdvisory Committee, composed ofrepresentatives of Member States’competition authorities, prior to thetaking of decisions pursuant toArticles 7, 8, 9, 10, 23 (fines), 24(2)(periodic penalty payments) and29(1) of Regulation 1/2003.

■ The Member States’ competitionauthorities must inform theCommission, no later than 30 daysbefore adoption, about any decisionthey envisage requiring an infringe-ment be brought to an end, acceptingcommitments or withdrawing the benefit of a block exemptionRegulation. This information will betransmitted via secure e-mail. Its pur-pose is to ensure coherent applicationof the EC competition rules.

Exchange of information andmutual assistance

Regulation 1/2003 does not only envisage cooperation between theCommission and Member States’competition authorities. It alsoestablishes new powers for the MemberStates’ competition authorities that areaimed at enhancing cooperation betweeneach other. Pursuant to Article 12 ofRegulation 1/2003, all authorities in the network can exchange information,including confidential information, thatwas collected for the purpose of applyingArticles 81 or 82 EC and use suchinformation in evidence.10

Furthermore, Article 22 ofRegulation 1/2003 enables the Member States’ competition authoritiesto request each other to carry out fact-finding measures in their respective territories. This will enhance the ability of individual national competition authori-ties to deal with cases that, while theirmain effects are in the territory of theauthority in question, require factfindingmeasures in another Member State.


Cooperation between the competition authorities in the EU 57

Work sharing in the network will not result in a large number of cases being re-allocatedbetween authorities. In most instances, the authority that receives a complaint or starts an ex-officio proceeding will remain in charge of the case.

Competition authorities in the acceding countries

The enlargement of the EU, with the new Member States11 set to join inMay 2004, provides further challengesand opportunities for competitioncooperation. In order to meet thesechallenges, the accession negotiationprocess in the competition field hasprepared the acceding countries for anactive role in competition enforcement.

Negotiations on the competition chapter were based on the conclusionsof the Copenhagen European Council inJune 1993, which defined the criteriathat Candidate Countries have to meetbefore they can join the EU. In theeconomic sphere, these criteria requirethe existence of a functioning marketeconomy as well as the capacity to copewith competitive pressure and marketforces within the EU.

This “economic criterion” of theaccession negotiations in the field ofcompetition policy was translated into aprinciple whereby Candidate Countriesare seen as ready to join the EU only iftheir companies and public authoritieshave become accustomed to acompetition discipline similar to that ofthe Community well before the date ofaccession. This was considerednecessary to ensure that the economicactors in these countries would be ableto withstand the competitive pressuresof the internal market resulting from thefull and direct application of thecompetition acquis upon accession.

The requirement to adapt to acompetition discipline well beforeaccession stemmed both from the needto preserve the internal market disciplineafter enlargement, and from thedifficulties that would arise in CandidateCountries if they had to suddenly adaptto the application of the acquis. A solidpre-accession preparation was thereforeconsidered essential.

This led the EU to conduct negotiationson the basis of a requirement of an actual enforcement of the rules, and not only on commitments by theCandidate Countries. This meant that the negotiations on competition provedmore prolonged and demanding thananticipated.

In translating the principles into concreterequirements, three elements had to bein place in a Candidate Country before thecompetition negotiations were concluded:

(i) the necessary legislative framework;

(ii) an adequate administrative capacity(in particular, a well-functioningcompetition authority); and

(iii) a credible enforcement record of thecompetition acquis.

However, these requirements were not only based on the political context of the negotiations, but also on the legal framework of the bilateral EuropeAgreements that the EU had concludedwith each of the ten Candidate Countriesfrom central and eastern Europe (the Europe Agreements). 12 TheseAgreements already provided a solidlegal basis for the accession preparationin the area of competition policy.

A basic principle in each of the EuropeAgreements reflects Articles 81 and 82of the EC Treaty. These provide that allagreements between undertakings,decisions by associations of undertakings,and concerted practices betweenundertakings which have as their objector effect the prevention, restriction ordistortion of competition, as well as anabuse by one or more undertakings of adominant position, are incompatible withthe Europe Agreements insofar as theymay affect trade between the Communityand the associated country. The EuropeAgreements also state that the basis to assess practices contrary to thisprinciple is the criteria arising from theapplication of the Community competitionrules – the competition acquis.Furthermore, the Europe Agreements have also specifically obliged theCandidate Countries to approximate theircompetition legislation with that of the EU.

The Europe Agreements have constitutedan essential pre-accession instrument inthe competition field, by establishing aclear benchmark, facilitating internal law making and the setting up ofcompetition authorities.

As a result, competition laws in theacceding countries already follow themain principles of the Communityantitrust rules as regards restrictiveagreements, the abuse of dominantposition and merger control. Competitionauthorities in the acceding countrieshave been set up for quite some time,and they have acquired experience inapplying these rules. They have alsobenefited from extensive training providedby the Commission, Member States anda variety of outside experts. An enforce-ment practice has been built up overseveral years and has gradually beenbrought to focus on cases with a moreimportant impact on the market structure.


The Europe Agreements have constituted an essential pre-accession instrument in thecompetition field by establishing a clear benchmark and facilitating internal law-making and the establishment of competition authorities.

This process means that the competitionauthorities in the acceding countrieshave the advantage of already operatingunder equivalent rules, and they are alsoused to a culture of close cooperation. A considerable number of so-calledtwinning projects, with Member States’competition authorities taking on long-term training commitments in CandidateCountry authorities, have led to closeprofessional contacts between theauthorities. Recurring events organisedjointly for all the Candidate Countrycompetition authorities have also resultedin cooperation between these authorities.Furthermore, there has been a continuousclose cooperation between the authoritiesand their counterparts in the EuropeanCommission’s competition directorate on a number of case-related issues.

Another important result of the processis that players in the market, as well as the public authorities, have becomeincreasingly aware of the competitionpolicy framework, both in the nationaland the Community context. This willhelp companies in the coming yearsovercome the challenges of integratinginto the enlarged internal market.

The acceding countries have also over the last year been invited to meetingsbetween the Commission and the Member States’ competition authorities.In particular, this means that they havebeen fully involved in the construction of the new ECN. Together with the pre-accession preparations, this shouldhelp to ensure the new network’s smooth operation.

Conclusion

The EU faces the very exciting challengeof deepened cooperation between itscompetition authorities. The aim of thiscooperation is to make enforcementmore efficient for the benefit of theeconomy in general and consumers in particular. The reform is timed tocoincide with the accession of ten newMember States. Thanks to their pre-accession preparations, they are already well prepared for facing the new challenges jointly with thecurrent Member States.

Notes1 Council Regulation (EC) No. 1/2003 of 16

December 2002 on the implementation of therules on competition laid down in Articles 81and 82 of the Treaty, OJ L 1, pages 1-25,04.01.2003.

2 Council Regulation No. 17 of 6 February 1962,First Regulation implementing Articles 81 and 82(Articles renumbered) of the Treaty, OJ 13,p.204/62, 21.2.1962 , last amended byRegulation (EC) No. 1216/1999, OJ L 148, p. 5,15.6.1999.

3 Article 1 of Regulation 1/2003.

4 Article 3(1) of Regulation 1/2003.

5 Article 35 of Regulation 1/2003. When theRegulation was adopted, only one Member Statedid not yet have a competition authority. SomeMember States are in the process of introducinglegislation which grants the power to theirauthorities to apply Articles 81 and 82 (fully) inaddition to national competition law.

6 The jurisdictional criterion in Articles 81 and 82EC is often referred to as ‘effect on trade’. At the time of writing, the Commission was in theprocess of issuing a new Commission Notice onthis notion, together with a series of other Notices(cf. below for the Notice on cooperation within theNetwork). The draft Notice was published forconsultation in OJ C 243/10 of 10.10.2003.Commission Notices in the antitrust field areavailable on http://europa.eu.int/comm/competition/antitrust/legislation.

7 This notion is laid down in Article 11(1) ofRegulation 1/2003.

8 At the time of writing, the Notice on cooperationwithin the Network of Competition Authorities waspublished in draft form for public consultation inOJ C 243/10 of 10.10.2003; references in thepresent article refer to this version.

9 Commission Notice on cooperation within the Network of Competition Authorities (FN 8),paragraph 5ss.

10 For more ample information, see Article 12 ofRegulation 1/2003 as well as the Notice onCooperation within the Network of CompetitionAuthorities (FN 8), paragraphs 26 ss.

11 Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Republic and Slovenia.

12 Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania,Slovak Republic and Slovenia.

AuthorPhilip LoweDirector-General for Competition

Directorate-General for CompetitionEuropean CommissionB-1049 BrusselsBelgium

www.europe.eu.int/comm/dgs/competition

All views and opinions expressed in this article arepersonal and do not necessarily represent those ofthe European Commission.

59

The changing nature of competition:

the Russian response

The changing nature of internationalcompetition, which is stronger and more broadly based as a result ofglobalisation, together with Russia’sincreasing integration into the globaleconomy, have resulted in greatercompetition within Russia. This has been accompanied by an upsurge in the takeover of Russian companies byforeign transnational corporations on theone hand and greater protectionism onthe part of some of Russia’s foreigntrading partners on the other hand.

These circumstances have led to agrowing role for Russia’s anti-monopolyauthorities in ensuring fair competition in Russia’s markets and in its foreigntrade. There are significant changes to be addressed by the anti-monopolyauthorities:

■ the number of cases involvingmonopolistic activities beinginvestigated in Russia is rising;

■ the number of cases involvingeconomic concentration has alsoincreased substantially;

■ transaction participants are changing,with the number of participatingforeign firms on the increase; and

■ more applications are being receivedfrom domestic manufacturers seekingthe protection of the domestic market from the adverse effects of foreign competition or seekingassistance in remedyingdiscrimination in foreign markets.

All these developments point toincreased competition in Russia’sdomestic markets, greater legal awareness on the part of domestic manufacturers, and increased confidenceon the part of entrepreneurs in the anti-monopoly authorities when it comes to exercising their legal rights to protection in the market.

Challenges for Russia’scompetition policy andcompetition authority

These developments also pose newchallenges for Russia’s nationaleconomic policy in general, and itscompetition policy in particular. Action is needed to:

■ make the regulation of competitionmore effective;

■ introduce new approaches in light of globalisation;

■ simplify and simultaneously increasethe effectiveness of the system ofanti-monopoly control; and

■ move to new forms of internationalcollaboration that will ensurecooperation between competitionauthorities when investigatingbreaches of anti-monopoly legislationthat have transnational effects.

The attainment of these objectives willrequire specific changes in thelegislative, methodological, enforcementand international activities of Russia’scompetition authority, the Ministry of theRussian Federation for Anti-MonopolyPolicy and Support for Entrepreneurship(MAP Russia).

The legislative framework

Although Russia has only had anti-monopoly legislation in place for just over ten years, its development isvirtually complete. Russia currently has a well developed system for regulatingcompetition, based on principlesembraced by the world community.

Pursuant to the federal laws on“Competition and Restriction ofMonopolistic Activities on CommodityMarkets”1 and “Protection of

This article looks at selected aspects of the development of competition policy in Russia,focusing on how Russia’s anti-monopoly legislation can be improved and on theimportance of international cooperation between competition authorities.

Lessya DavydovaHead of Department for International Relations and Methodology of Competition Policy, Ministry of the Russian Federation for Anti-Monopoly Policy and Support for Entrepreneurship


The changing nature of competition: the Russian response 61

Competition in the Financial ServicesMarket”, 2 MAP Russia is implementingstate policy in developing competition inthe commodities and financial markets,and monitoring compliance with anti-monopoly legislation. MAP Russia’sactivities extend to regulating the anti-competitive practices of both privatecompanies and of state agencies, andinclude such key functions as prohibiting,preventing and halting abuses ofdominant position and anti-competitiveagreements, as well as controllingeconomic concentration.

During numerous meetings held atvarious levels with representatives of the European Commission, it wasrecognised that Russia’s competition law is not incompatible with that of the European Union (EU).

The success achieved by Russia indeveloping its competition policy hasbeen recognised by its admission as an observer to the OECD’s CompetitionCommittee. MAP Russia is also an activeparticipant in the work of the InternationalCompetition Network (ICN), the recentlyestablished informal association of anti-monopoly authorities. The ICN isconcerned with identifying key prioritiesfor developing international competitionpolicy and discussing the convergence of rules for the regulation of competition.

Recent changes to Russia’s anti-monopolylaws, based on international practice, arehaving a positive effect on the Russianeconomy. For example, the convergenceof competition rules has helped to createa uniform legal framework for commercialactivities on the international market,which in turn has stimulated the develop-ment of trade and investment linksbetween Russia and foreign countries.

In addition, the existence of domesticanti-monopoly laws that meet internationalstandards (alongside effective enforce-ment) is traditionally regarded as animportant indicator that the economy of the country is “market-based”. Theconvergence of Russia’s anti-monopolylaws with international principles hashelped to strengthen Russia’s image as a market economy.

Legislative changes required

While the recent changes have been welcomed, current trends in the develop-ment of Russia’s economy, together withanti-monopoly standards adopted by theinternational community, mean that Russiamust further improve its competition lawsto bring them more closely in line withinternational principles.

One area where competition law can be improved is the regulation andcontrol of agreements, or concertedactions, of commercial entities thatrestrict competition. This area is closelymonitored by the anti-monopoly authori-ties of developed countries and by inter-national organisations in order to uncoverso-called “hard-core cartels”. These areregarded as the most damaging form ofanti-competitive practice.

In Russia, the problem of curbingcommercial agreements and concertedactions that restrict competitioncontinues to be extremely complex, not least because of the difficulty ofobtaining evidence. Experience showsthat anti-competitive agreements aregenerally found in sectors characterisedby a high degree of concentration ofcapital and production capacity, whichinclude the natural monopolies.

Traditionally, many of the complaints considered by anti-monopoly authoritiesinvolve companies in the fuel and energysector (for example, the light petroleumproducts market), where the major viola-tions relate to price fixing. But concertedactions are not limited to a single sectorand often extend to the whole productioncycle of a product and its sale.

While the negative effect of cartelagreements on competition in a givenmarket is understood, the Russian anti-monopoly authorities experienceconsiderable difficulties in identifying,curbing and proving the existence ofconcerted actions. This is partly becausecurrent legislation is incomplete, butmainly because the powers of the anti-monopoly authorities are not wide enough.

A number of amendments to the Law on Competition and Restriction ofMonopolistic Activities on CommodityMarkets were adopted in 2002, in orderto tighten control over anti-competitiveagreements and make their detectionand proof more effective. For example,the law now imposes a direct ban on theconclusion of agreements between com-petitors – irrespective of their position inthe market – if the implementation ofthose agreements could lead to theestablishment (or maintenance) of price-fixing, discounts, mark-ups, surcharges,the splitting-up of markets along geo-graphical lines, or a refusal to enter intoagreements with particular vendors orbuyers (clients).


While recent changes have been welcomed, current trends in the development ofRussia’s economy, together with anti-monopoly standards adopted by the internationalcommunity, mean that Russia must further improve its competition laws to bring themmore closely in line with international principles.

The amendments adopted in 2002 also provided for a system of advancemonitoring of draft agreements by theanti-monopoly authorities to determinewhether they might restrict competition if implemented. The notification of agree-ments by economic entities to the anti-monopoly authority is voluntary. However,if an agreement is not submitted inadvance to the anti-monopoly authorityfor approval and it is subsequently found to restrict competition, the agree-ment is automatically deemed to be a breach of anti-monopoly law, and there-fore prohibited.

Consequently, advance notification ofagreements allows entities to be certaintheir agreements comply with the anti-monopoly law and will not be subjectedto scrutiny by the anti-monopoly authoritiesin the future. In this respect, Russianlegislation is in harmony with that ofEuropean countries.

However, further improvement of the anti-monopoly regulation system is requiredin order to strengthen the powers of theanti-monopoly authorities to investigate,and obtain evidence of, anti-competitiveagreements.

Other changes are required to create a more effective system for controllingthe process of economic concentration.Russia today is experiencing highly significant developments that involve the redistribution of capital: growinginvestment by companies; increasedinflows of foreign capital; the establish-ment of large, vertically integrated entities; and a shift in market influences.

The excessive state control that currentlyexists in Russia could be reduced byfurther raising the threshold for notifyingtransactions and by moving to a two-stepsystem for reviewing applications,depending on the size of the deal. The doubling of thresholds introduced by amendments in October 2002 failedto produce a perceptible reduction in the number of cases considered by MAP Russia and its regional branches.3

In order to have a greater impact, there are current plans to increase thethreshold by a factor of 150 to 30 million minimum wages.4

Another proposal being discussed is theabolition of the anti-monopoly authority’spowers to establish and maintain a regis-ter of commercial entities which havemore than a 35 per cent market share in a particular product. This informationis not particularly valuable for operationalpurposes, but maintaining it represents a major workload for MAP Russia.

These proposed amendments to Russianlegislation are based on current commontrends in the reform of competition lawabroad and are intended to free Russia’santi-monopoly authority from consideringcases that do not have a significantimpact on competition. This would allow it to focus its attention on moresignificant transactions, in particular onmonitoring the establishment of large,vertically integrated companies, and theacquisition of equity stakes in Russianenterprises operating in sectors, orindustries, of strategic importance forRussia. It would also reduce administrativebarriers to business.

There is also an urgent need to improvelegislation aimed at halting abuses ofdominant market position. Experienceshows that abuse of dominant positionrepresents the most common breach of anti-monopoly legislation. More thantwo thirds of these types of complaintsconcern the fuel and energy, transportand telecommunications markets.

Such markets tend to be oligopolies –markets dominated by a small number ofcompanies. Two or more companies thathave significant market share, which actin parallel without obviously coordinatingtheir actions in advance, still harm thecompetitive environment of that market.There is an urgent need to introduce intoRussian competition law a concept suchas “joint dominance” and the relevantcriteria to define it.

Another area of competition law that needsto be developed in Russia is the creationof an effective system for controlling theprovision and use of state aid. In contrastto the rather advanced legislation govern-ing anti-monopoly control of companies’activities, the legislative framework forthis aspect of competition law is stillbeing developed.

Yet another aspect of Russia’s competi-tion regulatory system that requiresimprovement is enforcement, which needsto be made more effective by increasingthe severity of penalties for violations of anti-monopoly law. Penalties are much lower in Russia than in developedcountries. These low penalties are anobstacle to the effective application ofanti-monopoly regulations, which in turndiscourages the inflow of foreign invest-ment and hampers the development ofcompetition in Russia’s goods markets.

Given the list of tasks facing Russia’santi-monopoly authorities, the furtherimprovement of anti-monopoly legislationis impossible without a new law on competition. The first Law on Competitionand the Restriction of MonopolisticActivities on Commodity Markets wasadopted in 1991, but its structure issuch that it cannot accommodate all the necessary changes called for by the demands of modern economics and positive international experience.The Ministry is therefore preparing a new Law on Competition.


The changing nature of competition: the Russian response 63

Cooperation betweencompetition authorities

Russia’s expanding trade links andincreasing exposure to internationalcompetition also dictate that Russia’santi-monopoly authorities should enhancecooperation with their counterparts inother countries, both bilaterally andwithin the framework of internationalorganisations. This is being done withsome success by MAP Russia.

However, as regards the investigation ofspecific cases or complaints, cooperationbetween MAP Russia and foreign andinternational authorities remains limited.This is due to economic conditions, alack of information resources, and theabsence of a formal basis forcooperation between Russian and foreigncompetition authorities.

In view of the expanding operations ofRussian companies in foreign markets, in particular in the EU, where Russiancompanies have already been involved in investigations by the EuropeanCommission,5 it is vitally important thatmechanisms are put in place for practicalcooperation between Russian and foreignanti-monopoly authorities in investigatingviolations of competition regulations thathave a transnational effect.

For example, despite long-standingcooperation between Russia and the EUon competition matters generally, andthe positive relations between MAPRussia and the EU Directorate-Generalfor Competition, until recently there wasno interaction at all between thetwo bodies in their day-to-day operations.There was no coordination of theiractivities: decisions of one authorityaffecting the activities of companiesregistered in the territory of the otherwere made unilaterally and withoutconsultation.

For a number of years there wereongoing consultations between theEU Directorate-General for Competitionand the Russian entity OAO Gazpromconcerning the “territorial restrictions” in OAO Gazprom’s long-term energysupply contracts to the European market,and whether such restrictions conflictedwith EU competition law. After several

requests, MAP Russia representativeswere given the opportunity to participatein the consultations. In large part due to this participation, the two sides wereable to agree on the need to settle theissues through the consultation processrather than resorting to a fully fledgedanti-monopoly investigation by theEuropean Commission.

The coordination of investigations bydifferent competition authorities hasgenerally taken the form of agreementsand programmes on cooperation. A number of such arrangements withcompetition authorities are in place,including those in Bulgaria, China,Finland, Hungary, Latvia, Poland, and Romania.

To date, agreements have been reachedfor the provision of assistance in:

■ investigating cases of unfair businesspractices carried out by economicentities located within the territory of the parties;

■ providing information on economicentities carrying out economicactivities on the territory of the otherparty;

■ providing notification of cases ofunfair trading practices by economicentities of third countries with a viewto preventing similar violations on theterritories of the parties, and so on.

The bilateral agreements provide a mechanism for the exchange ofinformation, setting out confidentialityrules, the responsibilities of the partiesand the timeframe for data submission.

The competition authorities have alsoagreed to inform each other of measurestaken to ensure compliance with theirrespective domestic competition laws; to engage in the voluntary exchange of information; and to promptly arrangefor joint consultations at the request of either authority.

Such joint action has periodically been taken by competition authorities.For example, in 2001, the KareliaRegional Office of MAP Russia and theFinnish competition authority exchangedinformation concerning a complaint fromthe Central Union of Agricultural ProduceConsumers and Foresters against three

Finnish timber producers importing birchfrom Russia, and six Russian companiesselling timber.

The Finnish competition authorityinvestigated the case but found nohorizontal or vertical agreement on theexport of timber that required itsparticipants to coordinate their pricepolicy. However, the Finnish competitionauthority was concerned that thebehaviour of these commercial entitiescould restrict competition in the Russianmarket by influencing the ability ofcompeting producers to set free pricesfor their products. This might bring thecase within the purview of the RussianLaw on Competition and Restriction ofMonopolistic Activities on CommodityMarkets. An investigation was carried out by the Karelia Regional Office ofMAP Russia, but the office determined thatthere was no breach of Russia’s anti-monopoly laws by the economic entities.

In another case, effective cooperationbetween the Bulgarian and Russianauthorities led to the detection of aviolation of anti-monopoly laws by aBulgarian firm that sold car tyres on theBulgarian market and that had registereda tyre brand patent with the Bulgarianpatent office. The tyres were similar to brands produced and registered in Russia. The complaint related to analleged violation of a 1998 agreementbetween the patent offices of Bulgariaand Russia that provided the basis for cooperation on the identification of industrial property. In the course ofthe investigation and on the basis of the facts, the Bulgarian Commission for Competition Protection cancelled theregistration of the patent in Bulgaria andimposed a fine of 100,000 lev againstthe Bulgarian firm.

As a result of this effective cooperationbetween Russia and Bulgaria, a violationof international intellectual property lawwas averted and the rights of Russianmanufacturers were restored. This helped to strengthen cooperationbetween the two countries in the field of competition law.


Conclusion

The experience of examining a large number of competition cases in recentyears involving foreign companiesconfirms the importance of cooperationbetween competition authorities. Such cooperation enables the Russian competition authority to curbtransnational anti-competitive practicesand to play an active role in protectingdomestic manufacturers in internationaland internal markets.

Notes1 Law of the RSFSR 948-1 “On Competition and

Restriction of Monopolistic Activities on CommodityMarkets” of 22.03.91 (As amended 24.06.92;25.05.95; 06.05.98; 02.01.00; 30.12.01;21.03.02; and 09.10.02).

2 Federal Law 117-FZ “On Protection of Competitionin the Financial Services Market” of 23.06.99 (asamended 30.12.01)

3 The threshold was doubled to 200,000 minimumwages. “Minimum wages” is a unit of measurementin Russia, and its current rate is 100 roubles = 1 minimum wage. Two hundred thousand minimumwages is equivalent to approximately 20,000,000roubles (approximately US$ 700,000).

4 Approximately 3 billion roubles (approximatelyUS$ 100,000,000).

5 Both OAO Gazprom (the Russian gas producer) and Alrosa Company Limited (the Russian diamondproducer) have been involved in investigations by the Directorate-General for Competition.

AuthorLessya Davydova

Head of Department for International Relations and Methodology of Competition PolicyMinistry of the Russian Federation for Anti-Monopoly Policy and Support forEntrepreneurship11, Sadovaya-Kudrinskaya str.123995, D-242, GSP-5, MoscowRussia

Web site: www.maprf.ru

65

Czech Republic:competition rules in transition

In recent history, the Czech Republic has moved from a soviet style centrally-planned economy with artificially createdmonopolies to a market-oriented economywith an independent competitionauthority. There have been many changesin competition law and policy during thelast 50 years and laterally these changeshave been driven by the Czech Republic’simminent accession to the EuropeanCommunity (EC). Despite much progress,challenges remain, including furtherharmonisation with EC competition lawsand regulations, adoption of appropriatemechanisms to permit the taking ofdecisions with a Community dimensionand enhancement of investigative powersof the competition authority.

It is an uncontested fact that any form of competition needs a set of rules bywhich it can be tested as being fair orunfair. In addition, there also needs tobe an authority to enforce compliancewith such rules. Since the beginning ofthe 20th century there has been regulationof unfair competition between individual

competitors who wished to protect theirprivate interests and to defend thembefore courts in private law litigation.

Less common, at that time, was the idea of having rules to protect the public interest in competition itself. For example, rules were developedpreventing the creation of a dominantposition in the market by undertakings,either by means of cartel agreements or by establishing private monopolies. In particular, the attitude towards cartelagreements has been rather ambiguous.

On the one hand, their prohibitioncontravened the proclaimed freedom of contracting, which has been the basic principle of all civil codes. Cartelagreements themselves were regardedas a positive instrument for enablingsmaller enterprises to survive in therelevant market. On the other hand,there has been a danger that, under theconstraints of limited competition, thecartels might abuse their market powerto the detriment of the economy and ofconsumers by overpricing their goods.

Unlike the US, those European countriesthat decided in favour of the existence of cartels and private monopolies eitherlimited themselves to controlling thedangers by means of general regulationin respect of fair contracting, or byadopting special cartel legislation. Suchlegislation provided for state monitoringof cartel agreements once they wereagreed to ensure the cartels did notabuse their economic power, particularlyin the realm of their price policy. Thesupervision and enforcement of fairconduct was the responsibility of therespective economic ministries. Cases of abuse were investigated and decidedby extra-judicial special administrativebodies. This was the situation in pre-warCzechoslovakia.

World War II marked a turning point inthe attitude towards cartels in Europe. In western Europe, new cartel laws wereenacted in the 1950s. The TreatyEstablishing the European Community,as in force from 1 February 2003 (theEC Treaty) particularly stressed the needfor undistorted competition throughoutthe Community. 1 To attain this objective,

Jindriska MunkováAssistant-Chair for European Law, Charles University, Prague;Attorney at Law; Member of the Legislative Council of the Government of the Czech Republic

ˆˆ

The Czech competition authority has had a tumultuous history: from quasi-independentbody, to government ministry, and finally to independent authority. While the country’santicipated accession to the European Union has had a positive influence, somechallenges remain. These include the further harmonisation of regulations, adoption ofmechanisms to deal with Community matters and the enhancement of the competitionauthority’s investigative powers.


Czech Republic: competition rules in transition 67

competition rules were enacted for bothundertakings and states. These coveredagreements and illicit practices, theabuse of the dominant position and state aid. A special regulation on mergersonly came into force thirty years later,though prior to 1989 merger cases weredecided on the basis of a combinationof Articles 81 and 82 of the EC Treaty.

Eastern Europe – Czechoslovakiaincluded – adopted a soviet system of planned economies and artificiallycreated monopolies, within which therewas no place for any competition

whatsoever. However, in Czechoslovakiathere was a short-lived attempt to“improve the system of the plannedeconomy”, part of which consisted of re-introducing modest competition rules,which were based on Articles 81 and 82of the EC Treaty. At the same time anAct on Competition covering both unfaircompetition and cartel law was planned.2

One of these rules, a slightly modifiedwording of Article 82 of the EC Treaty,survived the 1970s “normalisation”process and became Article 119a of thethen Czech Economic Code. Thoughtheoretically praised at the time of itsadoption as a very useful provisionagainst the prevailing power of statemonopolies, it was never used duringthe communist regime.

Modern Czech Republic history: leading to anindependent regulator

After the re-introduction of the marketeconomy in 1990, there was an urgentneed to re-install the rules oncompetition and to set up an authorityfor their enforcement. The provisionsagainst unfair competition have becomepart of the Commercial Code, withordinary courts deciding upon casesarising out of application or infringementof the Code. In 1991, a special cartellaw was enacted (the 1991 Cartel Law). 3

On the substance of the competitionrules and cartel law, there could be no going back to the pre-war nationalregulation. (This was based on otherprinciples.) It was recognised that it was necessary to follow contemporaryEuropean legislation. Drafting thesubstantive competition rules was arelatively easy task, with the principlesof the Articles 81 and 82 of theEC Treaty and the new Regulation on mergers 4064/89 EC being copied.However, drafting the constitution of therespective authority to enforce the Act,including procedural provisions, provedmore complicated.

In the then Czechoslovak FederalRepublic, the solution was to form three separate authorities, one federaloffice and two national ones. Only thepresident of the federal office was giventhe status of minister. On the nationallevel, the offices remained independentadministrative bodies.

This situation changed after the electionof 1992 and the split of Czechoslovakiainto two independent republics. In theSlovak Republic the anti-monopoly office remained the same. In the CzechRepublic, the office became the Ministry

for Economic Competition and the headof the Ministry was a member of the government. 4 The reasons for thesechanges were purely political. This shifthad practically no affect on the compe-tences of the Ministry in deciding uponcompetition matters, nor was the Ministryattributed any special competence vis-à-visthe government. 5 On the contrary, theminister was bound by the majority votein the government.

The question of the Czech system’scompatibility with European competitionlaw and practice was first raised afterthe conclusion of the AssociationAgreement/Europe Agreement of 1995.The issue was considered in a study onthe overall compatibility of the presentregulation with the EC Law,6 but from atheoretical view rather than in responseto any explicit demand by the public orthe European Commission.7

After the 1997 election there was areduction in the number of ministriesand the Ministry for EconomicCompetition became the independentCompetition Office (the “Office”) againwithout affecting its competence to dealwith competition matters. However, thistime the change was more profound inanother way: the relevant legislationunderlined the institutional independenceof the Office and the political independ-ence of its head. The president of theOffice is appointed by the President ofthe Czech Republic and during the termof appointment the president cannot bemember of any political party. 8


After the re-introduction of the market economy in 1990, there was an urgent need to re-install the rules on competition and set up an authority for their enforcement.

Current legislative provisions

The 1991 Cartel Law was replaced in2001 by Act No. 143 (the 2001 Law).This is not new in essence but is moredetailed and very closely linked toRegulation 17/1962 EEC, and the rele-vant provisions of Regulation 4064/89EC, as regards the competence of theOffice to deal with competition matters.The Act also includes eight block exemp-tions which are more or less a transla-tion of the respective EC Regulations.The Office decides on cartel agreementsand illicit practices (including any applicable exemptions), the abuse ofdominant position, and on mergers. It also supervises the behaviour of competitors in the market and publishesnotifications of cartel agreements andmergers, as well as its own decisions on cases that come before the Office.

As regards proceedings, at present thebasic regulation is contained in specialAct No. 71/1967 Coll., 9 on proceedingsin administrative matters, which includesa few specific provisions in respect ofthe Act on Economic Competition.

Proceedings under the Act can be started either at the request of theparties involved (such as seekingexemption from the prohibition of cartelagreements or approvals of mergers), or by the Office itself. This includescases in which the initiative to start the investigation, such as infringement cartel provisions or abuse of thedominant position, generally lies with the complainant. Where the Office startsthe investigation, the complainant is not a “participant” in the proceedings.This position is reserved only for theparty on whose rights and duties theOffice shall decide. However, underexisting regulations, the complainant

can petition to be given the status of a participant to the proceedings. The Office is not, however, obliged todecide in favour of the complainant. 10

The Office has the same powers toinvestigate competition cases as thosegranted to the European Commission,and has at its disposal a variety ofpenalties to impose on parties for notcomplying with the Act or with obligationsrelating to an investigation by the Office.

Appeals against the decisions of theOffice are first filed as a complaint to the president of the Office. Following adecision by the president, the secondavenue of appeal is an administrativeaction to be brought to the court. Thefinal court of appeal is the HighestAdministrative Court.

Changes ahead

The reform of European competition law by Regulation 1/2003 EC, whichabolished Regulation 17/1962 EEC,11

significantly affects the Czech Act onEconomic Competition, due to the closelink between the Act and Europeanlegislation. 12 The 2001 Law is thereforebeing amended, with the new provisionsdue to come into force by the time theCzech Republic joins the EU on 1 May2004. The draft amendment is being discussed in the chamber ofdeputies of the Czech parliament (at the time of writing). The rationale for the amendment is, in line with theEC Regulation, to enable the Office to decide future competition cases with a Community dimension.

The draft amendment provides forsubstantive and procedural changes as follows:

■ Only legal exemptions shall apply, andit will be up to the participants in themarket to decide whether they complywith the law or not. The Office will startproceedings only in cases of assertedand ascertained infringement of theAct, with respect to both cartelagreements and illicit practices or the abuse of the dominant position inthe market.

■ In line with Regulation 1/2003 EC, the Office will take decisions regardingthe ending of the infringement, theordering of interim measures,accepting commitments (which shallbe ordered by a decision) andimposing penalties.

■ With respect to participants toproceedings, the draft has returned tothe previous regulation, reserving thisstatus only to persons on whoserights and duties the decision willhave to be taken. A complainant willnot be able to become a participant.The rationale is that Communitycompetition law gives these personsonly the right to be heard, which canbe sufficiently secured, in the opinionof the Office, by allowing such partiesas witnesses. The Act onAdministrative Proceedings willcontinue to be the basic proceduralregulation in the future.

■ The draft contains very detailedprovisions relating to the investigativepowers of the Office, as enlarged bythe aforementioned EC Regulation.This Regulation will also require thecorresponding amendments of otherActs, for example the Civil ProcedureCode and the Act on the Police of theCzech Republic. However, the draft


Czech Republic: competition rules in transition 69

An institutionally and politically independent authority, increasing awareness of court decisions and a system for judicial review are all safeguards for the correctadministration of justice in competition matters within the Czech Republic.

Notes1 B. van der Esch, “The system of undistorted

competition of Art. 3f of the EEC Treaty and theduty of Member States to respect centralparameters thereof”, Fordham International LawJournal, No. 2, Winter 1988.

2 Cf. K. Knap, “Hospodárská soutez” (Economiccompetition), Orbis, Pratur, 1972.

3 Act No. 63/1991 Coll.

4 Cf. Act No. 474/1992 concerning amendment inthe system of central administrative authorities.

5 Cf. J. Munková, “Zákon o ochrane hospodárskésouteze, Komentár ” (The Act on the Protection ofEconomic Competition, commentary), C.H. Beck,pp.132, Prague.

6 Cf. J. Munková, “The Compatibility of the Act No. 63/1991 Coll. as amended with the EC Law”, Prague 1995 (unpublished).

7 Cf. The Implementation Rules No. 1/1996 ,concerning the implementation of Art. 64 of theEuropean Agreement constituting the Accession of the Czech Republic to the European Communityand its Member States.

8 Cf. Act No. 187/1999 Coll.

9 This Act is very general and so it is still applicable;however, it was drafted in a different political andeconomic situation and will be replaced by a newAct during 2004.

10 So far in only one case has the status of aparticipant been granted to the complainant.

11 Cf. J. Munková, “Reforma procesního predpisu proaplikaci soutezních pravidel ES” (The reform of theRegulation of the proceedings for the application ofcompetition rules of the EC), Právní rozhledy 5,s.229, (2003).

12 Cf. J. Munková, “Reforma evropského soutezního práva a její vliv na soutezní predpisy a rozhodování soutezních vecí Úradem a soudy v CR” (The Reform of the Europeancompetition law and its influence on competititonrules and the decision making by the Office andCourts), Právní rozhledy 7, príloha Evropské právo,s.18 (2003).

AuthorJindriska MunkováTel: +420 22 495 11 45E-mail: [email protected]

Assistant-Chair for European Law, Charles University, Prague; Attorney at Law;Member of the Legislative Council of the Government of the Czech Republic

Law Office Munková Zoufaty and PartnersNárodní tr.10110 00 Prague 1Czech Republic

ˆ

ˆˆ

ˆ

ˆˆˆˆˆ

ˆˆ

ˆˆ

ˆˆˆˆˆ

ˆˆˆ

does not include any provisionconcerning the burden of proof as inArticle 2 of Regulation 1/2003 EC.

■ As before, the Office will be allowed toimpose penalties for the infringementof the provisions of the Act and for not complying with the decisions ofthe Office.

What is still under discussion is theexistence of the block exemptions issued by the Office. At the time of theirenactment, it was the only constitutionallyadmissible way of complying with theCzech Republic’s international obligationsstemming from Article 6 of theImplementation Rules No. 1/96. Thisstated that the principles of the blockexemption should be applied as far aspossible. When the Czech Republicbecomes an EU member state, theregulations on block exemptions will be directly applicable and the nationalregulation will not in all cases be fullycongruent. This might lead to problems,particularly in the national application ofsuch exemptions.

Conclusion

Competition rules have been in force, in one form or another, in the CzechRepublic for the past 13 years. There is an institutionally and politicallyindependent authority to enforce them. There is a significant number ofEuropean Court decisions which areknown to both the parties affected by thecompetition rules and to the Office itself,which has often used these decisions asgrounds for its own decisions. Finally,there is a system for the judicial reviewof the Office’s decisions. All thesefactors are a safeguard for the correctadministration of justice in competitionmatters within the Czech Republic.


Enforcement of competition rules

in Lithuania: the first decade


This article focuses on the developmentof the Lithuanian competition authority’sinstitutional structure during its shortten year history. Starting with an overviewof the early days of the national competi-tion authority, which acted as a govern-mental agency, the article continues with a review of the current status of the Competition Council as an independ-ent state institution appointed by thePresident. In the final section the mainchallenges and reforms related to theaccession of Lithuania to the EuropeanUnion (EU) are outlined.

Background

The relatively short history of Lithuaniancompetition law, which started with theadoption of the first Law on Competitionon 15 September 1992 (the “1992 Lawon Competition”), has been marked by agradual harmonisation of national compe-tition rules with the European Community(EC) competition law standards.

Although the 1992 Law on Competitionwas, to a certain extent, influenced by US antitrust law (for example, it did not impose restrictions on verticalagreements unless one of the partieswas a dominant undertaking), its basic

structure and terminology followed theEuropean tradition. Lithuania’s integrationinto the EU was a clear political aim fromthe mid 1990s and that shaped all furtherdevelopments in the competition law area.

The Europe Agreement, establishing an association between EuropeanCommunities and their Member Statesand Lithuania, was signed on 12 June1995 and came into effect on 1 February1998. Under this agreement, thecompetition system for trade relationsbetween the Community and Lithuaniahad to be based on the requirements set out in Articles 85, 86 and 92 of theEC Treaty, bringing the Lithuanian ruleson competition in line with those of the EC. With this in mind, the new Lawon Competition was enacted in 1999(the “1999 Law on Competition”).

Similarly, the institutional structure of the national competition authority evolvedwith the aim of meeting the standardsset by expected EU membership. Theauthority started functioning in 1992 as a governmental agency formallydivided into executive and decisionmaking branches, with a predominantrole for the former. 1 By 2000, it hadbecome an independent unitary body.

It would be interesting to analysewhether moving from a government-dependant body to an autonomous oneresulted in a more efficient enforcementof competition rules. Such analysis, considering its complexity, would go farbeyond the scope of the present article.Nonetheless, the overview of the institu-tional developments during the ten yearhistory of the Lithuanian competitionauthority may be interesting for thoseresearching the correlation between theinstitutional framework and the effective-ness of enforcing competition rules.

The second and third sections of thisarticle will cover the institutional aspectsunder the 1992 Law on Competition and the 1999 Law on Competition.Section four will cover the main difficul-ties faced by the competition authoritybefore Lithuania’s accession to the EUon 1 May 2004. In the same section we will also review the latest draft of the amendments of the 1999 Law onCompetition, which give us an idea ofhow the authority intends to respond to the new challenges.

Accession to the European Union has greatly shaped the development of competition lawand policy within Lithuania over the past decade. Like other accession countries, however,continuing challenges remain. Lithuania is currently reviewing its competition law andamendments are expected to be adopted in 2004.

Sarunas Keserauskas Associate and Arnoldas Klimas AdviserLaw Firm Lideika, Petrauskas, Valiunas ir partneriai

ˆ

Institutional framework underthe 1992 Law on Competition

The 1992 Law on Competition providedfor two state administrative bodies thatwere empowered to ensure compliancewith competition rules.

One body was the State Competition and Consumer Protection Office, a governmental agency (the “CompetitionOffice”). It had the status of a permanentexecutive institution conducting investiga-tions in cases of alleged violations of the1992 Law on Competition.

The other body was the CompetitionCouncil, a separate entity set up by the government. Although bearing thesame name as the current competitionauthority, 2 it had significantly fewerpowers. The Competition Council actedas a collegial decision making bodyapplying sanctions for violations ofcompetition, while all the preparatory and investigatory work was carried out bythe Competition Office. The CompetitionCouncil also had a limited involvement inthe preparation and adoption of legalacts implementing the 1992 Law on Competition.

Therefore, the 1992 Law on Competitioncreated an institutional structure domi-nated by the executive branch, with thedecision making body assigned only anancillary role.

The legislative provisions establishingthe Competition Office and theCompetition Council also ensured thedominant role of the former. Both institu-tions, however, were governmental agen-cies lacking the formal independencefrom the government, which is enjoyed by the current competition authority.

The Competition Office was headed by a Director who was appointed anddismissed by the Prime Minister. ThePrime Minister also appointed anddismissed the Director’s deputies

The Competition Council was a collegiatebody of seven persons appointed by the government. Four candidates wereselected on the basis of references from consumer, science, business and industrial organisations, while theremaining three were seconded from orassigned by the Competition Office. TheChairperson of the Competition Council,however, was always the Director of theCompetition Office. In other words, theexecutive body was given the opportunity,both de jure and de facto, to exercise asignificant influence over the decisionmaking institution.

Both the executive and decision making competition bodies werefinancially dependant on the government.The salaries of the members of theCompetition Council were paid out of thebudget of the Competition Office, whichwas determined by the government andapproved by the parliament.

One of the perennial questions in this area of law is: which competitioninstitution is better, the one that acts inclose cooperation with the government,or the one that is independent from thegovernment but which might not alwayshave political support for its actions?Addressing this issue would require athorough comparative analysis ofdifferent institutional models found inlegal systems around the world, andeven then the answer might not be clear.However, this does not prevent theauthors from making certain observationson the institutional structure set by the1992 Law on Competition.

There seems little point in discussingwhether the two competition institutionswould have worked better if they hadbeen independent from the government.In most cases this would be a specula-tive argument. There have, however,been situations when the outcome of a specific case might have been different ifthe competition authority had been allowedto have the final say on the matter.

For example, the 1992 Law onCompetition allowed the government tooverrule a decision of the CompetitionOffice prohibiting a concentration. Thegovernment made use of this power onlyonce,3 but without this intervention theconcentration in question would havebeen prohibited.

This example is a good illustration ofhow subordinating the competitionauthority to the government changed thecourse of events. There were alsobroader implications arising from thesubordinated status of the competitioninstitutions under the 1992 Law onCompetition.

In particular, the Competition Office was overloaded with functions that arenot entirely appropriate for a competitionauthority. (It should only deal withantitrust, mergers and state aid.) Apart from its main task of investigatingbreaches of competition rules, theCompetition Office had responsibilities in three more areas:

■ Pursuant to the Consumer Protection Law of November 1994,the Competition Office was thecoordinating institution in the field of consumer protection. After theadoption of the 1999 Law onCompetition, these competenceswere transferred to the newly formedCompetition Council and remained


Enforcement of competition rules in Lithuania: the first decade 73

Making the Competition Office responsible for numerous tasks, some of which are notreconcilable with the traditional aims of a competition authority, might result in an inefficientuse of already scarce financial resources.

there until a special body, the NationalConsumer Protection Council, wasestablished and started functioning in early 2001.

■ The 1998 Anti-dumping Law entrustedboth the Competition Office as anexecutive institution and theCompetition Council as a decisionmaking body with powers to administercompliance with anti-dumping rules.Such powers remained with the newCompetition Council formed underthe 1999 Law on Competition untilthey were transferred to the Ministryof Economy after the major amend-ments of the Anti-dumping Law cameinto effect on 1 April 2002.

■ Control over prices was, andremains, the most controversial of all the competences assigned to the Competition Office. The basisfor such a competence can be foundin the 1990 Law on Prices. Thisentrusted the Competition Office(until 19 July 1995 the Prices’ andCompetition Office) with the responsi-bility of ensuring compliance withprice control measures adopted bythe government. The new CompetitionCouncil retains its competences in the price control area.

Examining the activities of theCompetition Office and the CompetitionCouncil from 1992 to 1999, it is not possible to say that decisions weredirectly influenced by the dependence of these authorities on the government.However, the possibility of indirecteffects should not be overlooked.Indeed, it seems reasonable to arguethat making the Competition Officeresponsible for numerous tasks, some of which were not reconcilable with thetraditional aims of a competition authority,might have resulted in an inefficient useof already scarce financial and humanresources.

Institutional reforms introducedby the 1999 Law on Competition

After the adoption of the 1999 Law onCompetition, the former two competitioninstitutions were reorganised into asingle Competition Council. This movewas accompanied by two importantinstitutional changes.

First, the dominance of the executivebranch, formerly represented by the Competition Office, over the decision making body was abolished. The Competition Council, comprised of five members, is now the onlyadministrative institution responsible forenforcing competition rules in Lithuania.

The investigatory functions, previouslyvested with the Competition Office, havebeen transferred to the administration ofthe Competition Council. The administra-tion is a separate unit whose tasks aredefined in work regulations approved bythe Council itself. There is now a betterseparation between executive and deci-sion making functions as none of thestaff of the administration is a memberof the Competition Council (under the1992 Law on Competition, three of theseven members of the CompetitionCouncil were delegated from theCompetition Office).

The second major change involved the transformation of the competitionauthority from a governmental agencyinto an independent state institution.Under the 1999 Law on Competition, the Competition Council consists of theChairperson and four members appointedby the President of the Republic ofLithuania, on the recommendation of the Prime Minister.

The independence of the authority isreinforced by the fact that members ofthe Competition Council are appointedfor a fixed term. The Chairperson of theCompetition Council is appointed for a term of five years, while for otherCouncil members the term is six years.Also, the members of the CompetitionCouncil can only be dismissed onspecific grounds provided in the 1999Law on Competition.

This is in stark contrast to the provisionsof the 1992 Law on Competition. Under this law, the term of office wasonly three years and members of theCompetition Council could be dismissedunder general rules of labour law, as the1992 Law did not provide for any specificgrounds of dismissal.

One of the main arguments in favour of making the competition authority independent was that if it remained aninstitution subordinated to the govern-ment, it would not be able to exerciseeffective control over the anti-competitiveactions of other governmental agencies.The 1992 Law on Competition applied togovernmental agencies and, with certainmodifications, such provisions wereretained in the new law.

As presently formulated, the 1999 Lawprohibits governmental and municipalauthorities from adopting any legal actsor other decisions which grant privilegesto, or discriminate against, any individualundertakings or their groups, and whichbring about, or may bring about, differ-ences in the conditions of competitionfor competitors in the relevant market.The exception is where such differencescannot be avoided as a result of complyingwith the laws of the Republic of Lithuania.4

As the independence of the competitionauthority is not an end in itself, an interesting question is whether therestructuring provided any positiveresults in terms of a better enforcementof competition rules. A complete answerto this question requires a careful com-parative analysis of the authority’s workbefore and after the enactment of thenew law. Moreover, such analysis cannotbe limited by a simple statistical assess-ment as statistics do not give a clear picture of the nature and sophisticationof cases. This task goes beyond thescope of the present article.

Nonetheless, certain changes are quite obvious and deserve mention. The most important positive change was that the numerous competences ofthe former competition authority5 weregradually cut down and the institutionwas able to focus on the traditionalareas of antitrust, merger control andstate aid. As a result, the Competition


Council achieved a better allocation ofboth financial and human resources,allowing increasing operational efficiency.This has resulted in more investigationson prohibited agreements and abusivepractices.6 On the basis of our practicalexperience, it also appears that thecases under investigation have becomemore “serious”.

Future challenges

In addition to the institutional changes introduced by the 1999 Law on Competition, the Competition Councilis once again facing new challenges. This time they are related to Lithuania’sforthcoming EU membership which startson 1 May 2004.

The main task for the competitionauthority is to prepare for the newenvironment, which includes becomingpart of the network of competitionauthorities (NCA) of the EU MemberStates. This will inevitably require theCompetition Council to comply withhigher working standards. In order toensure vigorous enforcement of not onlynational but also Community competitionrules, the Competition Council will haveto increase its operational efficiency, and develop skills and proceduresenabling effective cooperation with the European Commission and othermembers of the NCA.

In response to these challenges, theCompetition Council is, at the time ofwriting, preparing amendments to the1999 Law on Competition that areexpected to be approved in 2004.

Examining the latest draft of theamendments, the Competition Councilhas adopted a rather modest approachinstead of using this opportunity toinstigate a major overhaul of nationalcompetition law.

As far as pure institutional changes are concerned, these are likely to beminimal. Under the draft amendments,

the same person could be appointed asa member of the Competition Council or its Chairperson for no more thantwo terms of office. The current draftalso proposes better social and workguarantees for the members of theCouncil when their term of office expires.Taken together, these two modificationsappear to be a further reinforcement of the independence of the nationalcompetition authority.

There are, however, certain moresubstantive amendments being proposedthat would have a direct effect on thework of the Competition Council.

First, the Competition Council proposesto abolish the current administrativeauthorisation system and shift to thelegal exception system following theexample set by the new EC CouncilRegulation 1/2003.

On the one hand, this move seems to be justified. It would be quite irrational to have two different systems ofantitrust enforcement: the administrativeauthorisation system for agreements thatdo not have an effect on trade betweenMember States, and the legal exceptionsystem for agreements having aCommunity dimension.

On the other hand, despite the optimistic expectations that the newlegal exception system will reduce theEuropean Commission’s workload, thereare no grounds to believe that similareffects could be achieved in Lithuania.Unlike the European Commission, theCompetition Council has never beenoverloaded with notifications for individualexemptions, and therefore abolishing theadministrative authorisation system is notlikely to free up any resources and orincrease its operational efficiency.

The second notable change proposed bythe Competition Council is the increaseof fines for violations of competitionrules. Under the current law, the Councilcan impose fines on undertakingsranging from LTL 1,000 (approximately€290) to LTL 100,000 (approximately€29,000). Fines in the form of a certainpercentage of turnover (up to 10 percent) can only be applied if aggravatingcircumstances are established. Due to a very narrow interpretation of theterm “aggravating circumstances”, theturnover-based fines are extremely rareand imposed mainly on undertakings that have committed repeated violationsof competition rules.

Under the proposed amendments of the1999 Law on Competition, the Councilwould be able to apply fines up to10 per cent of annual turnover withoutany restrictions. The Competition Councilhopes that the threat of large fineswould, on the one hand, act as apreventive measure and, on the otherhand, ensure the effectiveness of theleniency programme.7 In fact, theleniency programme presently exists only on paper as, to the best of ourknowledge, there has not been a singleinvestigation initiated by a whistle-blower.It is important to add here that the need


Enforcement of competition rules in Lithuania: the first decade 75

The transformation of the Lithuanian competition authority from a governmental agency to an autonomous body was instrumental in reinforcing free market values and developing a competition culture.


for the leniency programme does notdepend so much on the possibility oflarge fines, but on the likelihood thatthese fines would be vigorously appliedby the competition authority.

Finally, there is a set of proposedamendments dealing with certainprocedural aspects of the futureapplication of EC competition rules, suchas the exchange of information betweennational competition authorities, and thecompetence of national courts. The mainaim of these modifications is to facilitateinstitutional cooperation as provided inthe new EC Council Regulation 1/2003.

Conclusion

In many ways this article raisesquestions and leaves them open forbroader comparative studies rather thangiving immediate answers. Indeed, theremight be no definitive answer to theindependence v subordination dilemma,as global practice shows that both formsof competition authorities – independentor subordinated to the government – canwork efficiently.

What Lithuania’s experiencedemonstrates, however, is that certaininstitutional structures might bettercorrespond to the needs of a particularperiod of time. The transformation of theLithuanian competition authority from agovernmental agency to an autonomousbody was instrumental in reinforcing freemarket values and developing acompetition culture. The independentinstitution was better suited to deal withthe potential distortions of competitioncaused by the remaining participation ofthe state in the market.

At the end of 2003, privatisation hassignificantly reduced the role of state-controlled businesses. The CompetitionCouncil should therefore prepare to meetthe new challenges offered byprospective EU membership and theneed to operate in the larger network of national competition authorities.

Notes1 On the institutional structure under the 1992 Law

on Competition see Section 2 of this article.

2 For more details on the status of the CompetitionCouncil under the 1999 Law on Competition, seeSection 3 of this article.

3 In 1998 the Government approved the acquisitionof several Lithuanian sugar factories by a singleinvestor; this transaction had previously beenblocked by the Competition Office.

4 Article 4, paragraph 2 of the 1999 Law onCompetition.

5 See explanations in Section 2 of this article.

6 Some statistical data about investigations carriedout by the Competition Council can be found at theCouncil’s Web site www.konkuren.lt.

7 The leniency programme provides that under certainconditions, undertakings which have committed aviolation of the competition rules may be grantedfull immunity from, or a reduction in, fines. Notably,the leniency programme is not limited to cartelcases, but also extends to abuses of dominantposition.

AuthorsSarunas KeserauskasAssociateTel: +370 5 268 1806 (direct)E-mail: [email protected]

Arnoldas KlimasAdviserTel: +370 5 268 1821 (direct)E-mail: [email protected]

Law Firm Lideika, Petrauskas, Valiunasir partneriaiLabdariu

˘■g.5

LT-- 01120 Vilnius, Lithuania

Tel: +370 5 268 1888 (switchboard)Fax: +370 5 212 5591Web site: www.lpvp.lt

ˆ

Competition law enforcement mechanisms

European Union (EU) competition policy hasbeen very much in the news over the pastfew years, mainly due to the increasinglyassertive approach being taken by theEuropean Commission (the Commission) in matters such as the Schneider Legrandor TotalFina/Elf mergers.

Although none of the countries which areexamined in this article are yet members of the EU, the acquis communautairehas already helped build a moderncompetition law framework in most of the countries reviewed.

The competition environment of the EU’seastern neighbours should be of interestto investors in these countries, who willno doubt be familiar with EU competitionrules and will therefore be reassured bythe gradual alignment of national legislationwith EU regulations.

This article looks at the competition,institutional and enforcement mechanismsin each of the following countries: theCzech and Slovak Republics, Hungary,Poland, Romania and Russia.

Each of these countries are countries of operations of the European Bank forReconstruction and Development (EBRD),and of Gide Loyrette Nouel.

Czech and Slovak Republics

The competition law enforcementmechanisms in the Czech and SlovakRepublics are similar and are thereforeexamined together.

Institutional framework

The competition authority in the CzechRepublic is the Office for the Protection ofCompetition (the “OPC”). 2 The OPC is anindependent body headed by a chairmanappointed by the President of the CzechRepublic, on the recommendation of thegovernment, for a term of six years. The same person may not serve for morethan two successive terms. The chairmanmay not be a member of any politicalparty or movement. Only the President of the Czech Republic may dismiss theOPC chairman and only on the followinggrounds: not effectively holding office fora period longer than six months, impairingthe OPC’s independence or impartiality, or bringing the OPC into serious disrepute.

Transparency in the decision-makingprocess is enhanced by the publication of all decisions in the official Collectionof Decisions and on the OPC Web site. 3

The competition authority in the SlovakRepublic is a central state administrativebody, independent in its decision makingprocess: the Anti-monopoly Office(the “AO”).4

The AO is headed by a chairmanappointed by the President of the SlovakRepublic, upon the recommendation of thegovernment, for a term of five years. Thesame person may not serve for more thantwo consecutive terms. Only the Presidentof the Slovak Republic may dismiss theAO chairman and only on the followinggrounds: a criminal conviction or a finding of criminal negligence connectedwith the performance of his functions, not holding office for a period longer than six consecutive months, or conductwhich is incompatible with the position of chairman.

Transparency in the decision makingprocess is enhanced by the publication of all decisions made by the AO in theofficial journal and on its Web site. 5


This article provides a practitioner’s view of the institutional framework, appealmechanisms and available sanctions relating to competition law and policy in five centralEuropean countries and Russia. The positive influence of preparations for European Unionaccession is also highlighted. Key for the future will be specialist training for judges andcompetition authorities.

Jean Rossi Attorney, Gide Loyrette Nouel 1

Appeal mechanisms

There are two types of appellateproceedings in the Czech and SlovakRepublics for competition matters:

Administrative Review

The administrative decisions of the OPCand the AO are subject to administrativereview. A request for review may be filedwith the OPC or the AO within 15 daysfrom the date of receipt of the relevantdecision. Such a review is referred to asa “rozklad”.

In the Czech Republic, the chairmanappoints a commission (there are noparticular legal requirements relating to the number of members of thecommission, etc.) to review the decision.Based on the findings of the commission,the chairman may uphold, change orrepeal the decision. Although the chairmanis supposed to base his decision on thecommission’s proposal, he may adopt adecision different from that proposal.Since the OPC provides no informationon its decision making process, it is difficult for an outside observer to say how frequently the commission’sproposals are adopted by the chairman.

No further administrative appeal is allowed.

In the Slovak Republic, the administrativereview of decisions of the AO is carriedout by a special appellate commission,which consists of seven members: thechairman of the Office, the vice-chairmanof the Office and five other membersappointed by the government upon thechairman’s proposal for a period offive years. The quorum is:

■ the chairman and four other members present;

■ the vice-chairman and four othermembers present; or

■ the chairman and the vice-chairmanand three other members present.

Decisions are taken by the majority of the commission members present; in case of an equal number of votes, the chairman has a casting vote.

Judicial review

Decisions of the chairman of the OPCand of the appellate commission of theAO may be subject to judicial review.6

Applications for judicial review must befiled within two months from the date ofreceipt of the relevant decision (thisperiod may not be extended). The judicialreview application may only be filed if allprevious administrative remedies, suchas “rozklad”, have been exhausted in thenormal course of proceedings. The judicialreview does not suspend the effect of the decision under review, save inexceptional cases at the request of the interested party.

Up until 31 December 2002, in theCzech Republic final decisions of theOPC chairman were reviewed by theOlomouc High Court. However, this court was only able to review questionsof law arising from the relevant adminis-trative decision. This was judged asbeing inconsistent with Article 6 of theEuropean Convention of Human Rightsand declared illegal by the CzechConstitutional Court.

Subsequently, from 1 January 2003, a new system of administrative court proceedings came into effect, involvingregional courts (with panels ofspecialised judges on administrativeissues in general) and establishing aSupreme Administrative Court in Brno.The regional courts are empowered toreview not only questions of law, but also the merits and facts of the decision.Due to the location of the OPC in Brno,the competent court in the matters ofcompetition is the regional court in Brno.A special appeal (in Czech, “kasacnístí znost”) against the rulings of theregional court in Brno can be further filed with the Highest AdministrativeCourt, also situated in Brno. Onlyquestions of law may be so appealed.

In the Slovak Republic, appeals from thedecisions of the appellate commissionare reviewed by judges within the SupremeCourt who specialise in administrativelaw. There are no judges who specialisespecifically in competition law.

In addition, the Slovak judicial reviewsystem still only allows for reviews onquestions of law rather than a full judicialreview. Although this may be consideredas inconsistent with Article 6 of theEuropean Convention of Human Rights,no change is planned in this respect inthe foreseeable future.

A decision of the Supreme Court upholdingthe AO’s decision may be further appealedto the Supreme Court. The matter is thendecided by a different panel comprisingthe chairman of the Supreme Court andfour judges. If the Supreme Court hasquashed the AO’s decision because ofinsufficient finding of facts, lack of clarityor insufficient justification of thedecision, no appeal is permitted.

Sanctions

The sanctions imposed for failure tocomply with competition law in the Czechand Slovak Republics are similar: theimposition of fines. There are no otherforms of penalties such as injunctions.

The OPC and AO may impose fines of up to CZK 10 million (approximately€334,000) and up to SKK 10 million(approximately €250,000), respectively,or 10 per cent of the net turnover of theentities concerned in respect of a breachof the competition laws. When ruling onthe amount of the fine, the Office musttake into account both the seriousnessand the duration of the breach.

The Czech OPC is able to impose fines of up to CZK 1 million (approximately€33,000) when a decision is notcomplied with. The amount of a fine isdiscretionary within this limit. However,the Slovak AO has no such authority.


Competition law enforcement mechanisms 79

The OPC can impose fines no later thanwithin three years after the OPC learnedabout the breach (for the AO, the limit isfour years after it started administrativeproceedings) and no later than ten yearsafter such breach took place (eight yearsfor the AO). Fines may be imposedrepeatedly. Unpaid fines may be enforcedby the courts or bailiffs.

Although not always free from politicalinfluence, the OPC and AO have graduallysucceeded in establishing and maintainingeffective competition in a substantialmajority of local relevant markets. Only ina very small minority of cases – typicallythose in which governments have exertedpressure when seeking important foreigninvestments – have their decisions con-tributed to the creation of monopolisticor oligopolistic markets.

Judicial review has played a key part inensuring the legality of the competitiveenvironment. However, while the judicialmachinery has become effective inensuring respect for due process, it is much less versed in competition law aspects and so requires continuedtraining in this area. All in all, however,the judiciary’s record in applyingcompetition law concepts – includingtheir application in accordance withEC law – can be given positive marks.

Hungary


The competition authority in Hungary is a public institution, which is independentfrom the government and which reportsto the Hungarian parliament: theHungarian Competition Authority (the“HCA”). Hungarian competition law isprincipally contained in Act LVII of 1996on the prohibition of unfair and restrictivemarket practices (the “Act”) as modifiedby Act CXXXVIII of 2000.

The HCA is headed by a presidentappointed by the President of Hungary onthe recommendation of the Prime Ministerfor a term of six years. The same personmay not serve more than two terms. The president may be dismissed only bythe President of Hungary on the recom-mendation of the Prime Minister and onlyon the following grounds: the personbecomes unworthy or incapable of fulfilling the functions of president, the president fails to make a property declaration or intentionally supplies afalse property declaration, or if an incom-patibility arises with certain activitiesmentioned in the Act.

Under the Act, the president and vice-president of the HCA, the members ofthe Competition Council (see below) andthe investigators can accept no otherduties (with the exception of scientific,educational, artistic activities and activi-ties relating to copyright protection,industrial rights protection, proofreadingand editing activities), can pursue noother business activities, and cannot be the senior officers or members of the supervisory boards of economicassociations and cooperatives.

The decision making body within the HCAis the Competition Council (the “Council”).The HCA has jurisdiction in all casesrelating to competition supervision whichdo not fall within the competence of thecourts (unfair competition, violation ofgood reputation, credit worthiness, lawfulinterests of competitors, etc.).

Appeal mechanisms

A review of the merits of Council decisionsmay be requested within 30 days. Therequest for review is submitted to theCouncil, which then transfers the claim,along with the files relating to it, to thecompetent court within eight days.Council decisions under review are not suspended pending review.

The court may set aside the Councildecision and either give its own decisionor instruct the Council to re-examine thematter. Experience shows, however, thatCouncil decisions are usually upheld bythe courts. Out of all the appeals heardsince 1997, the court has only set asidethe Council’s decisions seven times. It has only reduced the amount of finesimposed six times during the sameperiod. This is probably due to the fact that the court does not have muchexperience in competition law matters.

Sanctions

Council decisions are final and enforce-able if no appeal has been lodged withinthe above mentioned time limit, or if anavailable legal remedy has been waivedby, or is precluded by, the Act.

Fines imposed by the Council and notpaid within the time due carry interest at twice the Hungarian National Bank’sprime rate and constitute public debt.They are collected, like taxes, by thecompetent tax authority.

Hungarian competition legislation isefficient, and economic entities observedecisions given by the Council. However,the lack of experience of Hungariancourts in competition matters is the key reason for the weakness of theHungarian appeal mechanism.

Regulation 1/2003 EC, which comes into force on 1 May 2004 for the EU accession countries, provides for thedirect application of Articles 81 and 82of the Treaty Establishing the EuropeanCommunity, as in force from 1 February2003 (the EC Treaty) by nationalcompetition authorities and nationalcourts. Consequently, the Hungariancourts will have more responsibility in thecompetition field and Hungarian judgesare being trained in preparation for this.


Poland


The competition authority in Poland is a central administrative body reporting to the Prime Minister: the Office for theProtection of Competition and Consumers’Interests (the “OPCC”).

The OPCC is headed by a president and vice-president appointed by thePrime Minister for a five-year term. Thepresident may be dismissed by the PrimeMinister if the president takes up otheremployment (with the exception ofuniversity practice), undertakes acommercial activity, is appointed as a company officer, has a criminalconviction, or is guilty of gross failure to fulfil the functions of president.

The decisions and prescriptions of thepresident, as well as court rulings issuedpursuant to appeals against decisions ofthe president, may be published in theOPCC official journal.

Appeal mechanisms

Administrative decisions of the president related to competition law may be appealed against to a specialcourt set up within the Regional Court of Warsaw (the “Anti-monopoly Court”).Appeal applications must be filed withintwo weeks of the date of receipt of therelevant decision. The appellateproceedings are governed by theprovisions of the Code on CivilProceedings on commercial matters.

Appeal applications must be filed directlywith the OPCC president, who transfersthem immediately to the Anti-monopolyCourt with all related proceedings files.However, the OPCC president may findan application justified, and in such case does not transfer the matter to the Anti-monopoly Court but overrules or changes the initial decision, partiallyor in its entirety. The appealing party isimmediately informed and receives a newdecision from the OPCC president. Sucha decision may then be appealed againstto the Anti-monopoly Court.

An appeal does not automaticallysuspend the decision being appealed,but the appellant may apply to the Anti-monopoly Court for a suspension forthe duration of the court proceedings.

The Anti-monopoly Court may either reject the appeal (where the appeal is groundless, or for formal reasons), orset aside the decision of the presidentpartially or in its entirety by issuing aruling on the decision’s merits (in suchcase, the matter is not transferred backto the OPCC).

The Anti-monopoly Court ruling may be appealed to the Supreme Court,whatever the amount involved, but onlyon questions of law (in Polish, “kasacja”).The appeal must be filed within 30 daysfollowing the date of receipt of the rulingof the Anti-monopoly Court.

Where the Supreme Court finds the appeal justified, the ruling of the Anti-monopoly Court is set aside either partially or in its entirety, and the matter is transferred back to the Anti-monopoly Court for reconsideration.The Anti-monopoly Court is bound by the legal interpretations of the SupremeCourt, and an appeal to the SupremeCourt will not be heard if it is based on arguments contrary to a legalinterpretation already made by the Supreme Court.

Sanctions

A system of fines is imposed by theOPCC president for failure to comply withthe competition law. There are two typesof penalties:

■ Obligatory penaltiesThese range from €1,000 to €50,000(zloty equivalent) and occur when anentity violates the merger provisionsof the Competition Act (for instancefails to file a notification of merger, or proceeds with a merger beforeobtaining a clearance decision of the president of the Office).

■ Discretionary penaltiesThese range from €1,000 to €5 million (zloty equivalent) andrelate to practices which limit or eliminate competition; between €200 and €5,000 if no information,or incorrect or false information wasprovided during merger inspectionproceedings; and between €10 and€1,000 for each day of delay in complying with a decision of theOPCC president or the ruling of the Anti-monopoly Court. The OPCC president is empowered to imposefines in order to enforce rulings ofthe Anti-monopoly Court.

In addition, the competition law allowsthe OPCC president to impose penaltiesfor breach of the law on a natural personacting as a manager or being a memberof a managing body of an entity or agroup of entities (up to a limit of tentimes the average remuneration of theabove persons).

Fines imposed by the president may be appealed to the Anti-monopoly Court.Such fines constitute revenues of thestate budget and may be collectedpursuant to executory administrativeproceedings.7 Briefly, these proceedingsconsist of forced seizure of assets, andmeasures related to bank accounts andother property of a debtor.

Polish competition protection legislationis efficient and the OPCC functionssatisfactorily. Taking into account theEU’s new procedural regulation, theremay have to be further strengthening of the OPCC’s administrative capacity.Special training for judges of the Anti-monopoly Court should also be further developed. The enforcementrecord is generally considered satisfactory.



Romania


There are two competition authorities in Romania: the Competition Council, 8

an autonomous administrative authority, and the Competition Office, a specialisedauthority reporting to the government.Their common aim is to provide for a competitive environment in theRomanian market.

The Competition Council is the primarycompetition protection authority. TheCompetition Council’s main areas ofcompetence are to investigate caseswhich could lead to the infringement of competition regulations; to analysenotifications; to give decisions oncompetition issues; and, if necessary, to impose the relevant fines.

The Competition Office is a specialisedgovernment body in the competition fieldwhose job is to supervise the compliancewith competition regulations; to enforcethe decisions of the Competition Council;to regulate market mechanisms(especially regarding prices); and tomonitor state aids.

Competition Council members areappointed by the President of Romaniaon the joint recommendation of theRomanian Senate and Chamber ofDeputies for terms of five years. Thesame person may not be appointed formore than two consecutive terms.

Appeal mechanisms

Administrative review

A decision given by the CompetitionCouncil or by the Competition Office that orders a fine, pursuant to aninfringement of legal provisions related to economic concentrations (mergers) or anti-competitive behaviour (prohibitedconcerted practices and abuse of adominant position) may be appealed tothe president of the Competition Councilor the chief of the Competition Officewithin 15 days of its notification to theundertakings concerned.

Judicial review

Decisions of the president of theCompetition Council and the chief of theCompetition Office handed down via theadministrative appeal mechanismdescribed may be challenged before theadministrative section of the SupremeCourt of Justice (the “SCJ”), within15 days from the date of notification of the relevant decision.

In addition, the following decisionsissued by the Competition Council may be directly challenged before theadministrative section of the Court of Appeal of Bucharest (the “CAB”),within 30 days of their notification:

■ decisions concerning the infringement of the provisions of the Competition Law related to anti-competitive behaviour;

■ decisions concerning the exemption,or refusal of exemption, of anti-competitive concerted practices;

■ decisions concerning the authorisationor refusal of economic concentrations.

Filing an appeal does not automaticallysuspend the effects of decisions pending appeal. However, upon request,the president of the CAB may suspendthe enforcement of the challengeddecision. CAB decisions may beappealed to the SCJ.

Certain decisions with respect to the imposition of fines may be directly challenged by the concernedundertakings before the competent Court of First Instance, within 15 daysfrom its notification, pursuant to theprovisions of Ordinance No. 2/2001 on the contraventions regime.9

Sanctions

Different measures may be imposed in respect of breaches of theCompetition Law:

(i) Express or tacit agreements orclauses providing for anti-competitivebehaviour prohibited under theCompetition Law are deemed to benull and void.

(ii) Should an undertaking not abide by a decision given by the CompetitionCouncil or the Competition Office, theCompetition Council may fine theundertaking up to 10 per cent of itsyearly turnover.

(iii) If an undertaking is abusing adominant market position and doesnot abide by a decision of theCompetition Council imposingmeasures and sanctions “in order to re-establish the situation and toprevent the abuse”, and in case of a simultaneous “serious offence of a major public interest”, theCompetition Council may ask theCourt of Appeal (“CA”) to intervene in order to eliminate the marketdominance. The CA can use measuressuch as the annulment of contracts,the limitation of access to the market,the sale of assets, and therestructuring of the concernedundertaking. The decision of the CAmay be challenged before the SCJ.

(iv) Additional profits made byundertakings as a result of aninfringement of the provisions of theCompetition Law may be confiscatedand paid to the state budget.

(v) Romanian competition authoritiesmay also impose fines of:

– up to ROL 250,000 (approximately€7)/day, until accurate andcomplete information is submittedto the relevant authority or until theconcerned undertakings submit tothe control of the relevantcompetition authority;

– up to ROL 750,000 (approximately€20)/day, for failure to abide bythe provisions of the CompetitionLaw related to the prohibition ofanti-competitive behaviour or anti-competitive economic concentra-tions, or decisions of theCompetition Council imposing con-ditions related to the authorisationof an economic concentration.


In relation to Romania’s future membership of the EU, the EuropeanCommission recommended that the func-tioning of the administrative authoritiesshould be improved, with particularemphasis on improving the efficiency ofthe legal framework for competition.10

This prompted the Competition Council to tighten its control over anti-competitivebehaviour. Indeed, in 2002, theCompetition Council handed down a significant decision: a fine of over€23 million for the infringement of theCompetition Law related to prohibitedconcerted practices.11

However, when dealing with competitionissues in the course of appeal procedures,the courts generally lack specialiseddivisions or trained judges. In practice,Romanian courts generally follow thedecisions of the competition authorities.From time to time, the courts modify theamounts of fines.

In order to achieve better enforcement of competition legislation, amendmentsto the Competition Law are planned. Two important improvements have been proposed:

■ the abolishing of the CompetitionOffice and the concentration ofenforcement powers into a singleautonomous administrative body, theCompetition Council; and

■ the specialisation of the courts incompetition matters and moreefficient judicial control over decisionsrendered by the Competition Council.

On the request of the EuropeanCommission, the Romanian competitionauthorities have continued to developand strengthen the control of compliancewith the competition rules. In view of theforthcoming legal reform, the envisagedspecialised training of the competitionand judicial authorities should lead to a more effective enforcement of thecompetition regulations.

Russia


The competition authority in Russia is aministry within the government: theFederal Ministry of Anti-monopoly Policyand Support of Entrepreneurship (MAP)and its regional departments. The basiccompetition law provisions in Russia are contained in the Federal Law “On Competition and Limitation ofMonopolistic Activities in the Market”(the “Law”). 12

The Law is widely considered as beingoutdated and not meeting the demandsof the current development of themarket. However, in spite of a number ofamendments introduced over the pastfew years, there has been no significantmodification of the Law. The drafting of a new law has started but its adoptionis not expected before 2005.

More detailed procedural rules forconsidering competition cases wereadopted by MAP in 1996 (the “Rules”). 13

Appeal mechanisms

The Law envisages two types of acts:

■ decisions (such as approval oftransactions subject to the Law); and

■ prescriptions (such as orderingpractical measures to cure a breach of the Law). Both may be appealedagainst by any party potentiallyaffected by the relevant act of MAP or its regional department.

As a result of the dual organisation ofthe Russian judicial system, dependingon the nature of the applicants suchappeals are heard either by the courts ofcommon jurisdiction (for individuals notengaged in an entrepreneurial activity), or by the Arbitrazh courts, which arestate commercial courts (for applicantsengaged in an entrepreneurial activity).The functioning of the two court systemsis based on common principles, but considerable differences in approach are also common.

Although the Law does not envisage aspecial procedure for appealing againstacts of the regional departments to theMAP central office, the Rules provide that MAP may repeal such acts if theyare ultra vires the authority of respectivedepartments or are made in violation ofthe applicable legislation. The decisionon repealing an act of a regional depart-ment must be taken by the minister incharge of competition matters.14

Therefore, on the basis of the Rules, it ispossible to appeal to the central office inrespect of a particular act of a regionaldepartment which violates the applicablelegislation, and this act may be reviewedby the minister. However, there are noexpress procedures for challengingdecisions of the regional departments inthis way, which renders such an appealmechanism uncertain at best.

The Law provides for limited rights ofappeal. Decisions of the competitionauthorities may be appealed within threemonths of the decision date.

The enforcement of certain decisions and prescriptions (the first group of acts)is suspended when an appeal is broughtagainst them, while in other cases (the second group), enforcement is not affected pending appeal. The firstgroup of acts (usually contained inprescriptions) comprises:

i) acts which order payment to thefederal budget of income received asa result of breaching competition laws;

ii) acts which order the split-off of anentity; and

iii) acts which order modification,rescission or execution of contracts by respective undertakings.

The second group includes all other acts falling within the general authority ofMAP as described in the relevant articleof the Law.




Sanctions

Russian legislation provides for civil,administrative and criminal liability forviolation of anti-monopoly laws.

According to the Code of AdministrativeOffences of the Russian Federation, theamount of administrative fines at thedisposal of the competition authoritiesvaries for different types of breaches ofthe competition legislation. Fines ofbetween €1,200 and €6,000, (roubleequivalent) can be imposed on legalentities, and of between €10 and €150,for officers of such legal entities.

The violation of the competition rulesmay be also subject to criminalprosecution. The Russian Criminal Codeprovides for the following sanctions withregard to violations such as setting upmonopolistic prices and actions aimed to restrict competition: fines of between€600 and €2,000 (rouble equivalent) or imprisonment for between two andseven years (for example, where thecrime is committed repeatedly or by anorganised group and causes destructionor damage to a third party’s property).

Contracts and transactions concluded in violation of the applicable rules maybe declared void by the court on theinitiative of the competition authorities.The income obtained as a result of the violation of anti-monopoly laws issubject to recovery for the benefit of the federal budget.

In practice, the application of theRussian competition legislation, and, inparticular, the functioning of the appealmechanisms envisaged in the Law, israther controversial. Both the acts of the competition authorities and courtjudgments rendered lack consistency,which reflects the inadequacy and super-ficiality of the existing legislative rules.The introduction of new anti-monopoly legislation, and the development of thepractice of competition law, including thetraining of judges and law enforcementofficers, should be viewed as one of thepriorities of the legal reform whichRussia is currently undertaking.

Conclusion

Although the national competition lawframeworks examined differ, the generalprinciples underlying them are often similar. This is because the majority ofthe countries considered in this articlehave implemented EU legislation andpractice in view of their intention to accedeto the EU. Not surprisingly, therefore, theRussian system differs greatly from therest. The Russian competition authorityis a federal ministry, and its competitionlaw is often viewed as outdated.

The competition regulatory systems ofPoland, the Czech and Slovak Republicsand Hungary, which are due to join theEU in 2004, generally provide for

(i) independent decision-making by thenational competition authorities;

(ii) administrative and/or judicial reviewand appeal procedures relating to thedecisions of the national authorities;and

(iii) fines in respect of breaches of com-petition law. The national competitionsystems of these countries will gradually be fully aligned with EU law.

For instance, the new EU regulation ondirect applicability of articles 81 and 82of the EU Treaty (Regulation 1/2003 EC)will require the further strengthening ofnational competition protection,administration and judicial authorities.

However, all the competition lawenforcement systems which we havereviewed were introduced from thebeginning of the 1990s, and thereforethere is little case law on the subject.Another common characteristic is thatthe appellate institutions are reluctant to reverse the decisions of the nationalcompetition authorities, perhaps owing to a lack of trained personnel.

Notes1 The author wishes to thank the members of

the GLN offices in the Czech Republic, Hungary,Romania and Russia for their contributions to this article.

2 The scope of activities of the OPC, as well as its organisational structure, are defined by theAct No. 273/1996 Coll. on the scope of activitiesof the OPC, as amended by the Act No. 187/1999Coll. The competition law institutional framework inthe Czech Republic has had a turbulent history.The original competition authority, the Czech Officefor Economic Competition, was established in1991 as an independent body. In 1992, the Officewas replaced by the Ministry of EconomicCompetition to deal with the issues of privatisationand economic transition. Following the 1996 parlia-mentary elections and the restructuring of thestate administration system, the Ministry was re-established as the independent OPC, pursuant tothe Act No. 273/1996 Coll. mentioned above. Inthe Slovak Republic, the history of the institutionalframework was more continuous; nevertheless, itschairman was appointed by the government until 30 April 2001.

3 Please see www.compet.cz.

4 The scope of activities of the Anti-monopoly Office, as well as its organisational structure, are defined by the Act No. 136/2001 Coll. on the protection of economic competition amendedby Act No. 465/2002 Coll.

5 Please see www.antimon.gov.sk.

6 In the Czech Republic, Act No. 150/2002 Coll., theAct on Administrative Court Proceedings, effectiveas of 1 January 2003. In the Slovak Republic, ActNo. 99/1963, the Act on Civil Procedure.

7 Law on executory administrative proceedings dated 17 June 1966 (unified text of this Law was published in Dz.U.02.110.968).

8 More information on the official site of theCompetition Council: www.competition.ro.

9 The Competition Council or the Competition Officecan apply a fine for the supply of misleading orincomplete information, the refusal to supply theinformation requested, or the non-fulfilment of an obligation or condition set down in theCompetition Law.

10 See the European Commission’s regular report(annual) on Romania’s progress towardsaccession, published on 5 November 2003.

11 Decision No. 168/2002 of the Competition Council.

12 Law of RSFSR “On Competition And Limitation ofMonopolistic Activities in the Market” No. 948 –Idated 22 March 1993, as amended.

13 Rules for Considering Cases on Breaches of Anti-monopoly Legislation, adopted by Order ofState Committee of Anti-monopoly Policy No. 91,dated 25 July 1996.

14 Decree of Government No. 793 dated 12 July1999, “On adoption of Regulations on Ministry ofAnti-monopoly Policy and Support ofEntrepreneurship”, as amended.

AuthorJean RossiTel: +48 (22) 583 67 01 Fax: +48 (22) 583 67 67E-mail: [email protected]

AttorneyGide Loyrette NouelDariusz Tokarczuk i Wspólnicy --Kancelaria PrawnaGLN Spólka Komandytowa Stratos Office Centreul. Ks. l. Skorupki 5 00-546 WarszawaPoland

Law in transition is a publication of the Office of the General Counsel of the EBRD. It is available in English and Russian. The editors welcome ideas,contributions and letters, but assume no responsibilityregarding them. Submissions should be sent toMichel Nussbaumer, Office of the General Counsel,EBRD, One Exchange Square, London EC2A 2JN,United Kingdom; or [email protected]

The contents of Law in transition are copyrighted and reflect the opinions of the individual authors and do not necessarily reflect the views of theauthors’ employers, law firms, the editors, the EBRD’sOffice of the General Counsel or the EBRD generally. Nothing in the articles should be taken as legal advice.

© European Bank for Reconstruction andDevelopment, Spring 2004

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by anymeans, including photocopying and recording, withoutthe written permission of the copyright holder. Suchwritten permission must also be obtained before anypart of this publication is stored in a retrieval systemof any nature.

European Bank for Reconstruction and DevelopmentOne Exchange SquareLondon EC2A 2JNUnited KingdomTel: +44 20 7338 6000Fax: +44 20 7338 6100http://www.ebrd.com

Law in transition is printed on Hannoart Silk,an environmentally responsible paper which is 100% TCF (Totally Chlorine Free).

Printed in England by Beacon Press using theirenvironmental print technology. The printing

inks are made using vegetable based oils. No film orprocessing chemicals were used. The Beacon Press isa Carbon Neutral™ company and is registered to ISO14001 and EMAS.

Ref: 5878 Law in transition 2004.

ISSN 1683-9161

EBRD Legal Transition and Knowledge Management Team

Michel NussbaumerSenior Counsel, Team Leader

Paul ByfieldLegal Information Specialist

Hsianmin ChenCounsel, financial markets andcorporate governance

Frédérique DahanCounsel, secured transactions project

Paul MoffattCounsel, telecommunications regulatory reform

Mahesh UttamchandaniCounsel, insolvency legal reform

Alexei ZverevCounsel, concessions/Russia legalreform

Irena DajkovicAssociate

www.ebrd.com/law

Legal transitiondevelopmentsInformation on legal developments in the EBRD’s countries of operationscan now be found on the EBRD Web siteat www.ebrd.com/law.

LiT onlineA supplement to Law in transition ispublished in the autumn of each yearunder the title LiT online. It is availablein English and in Russian atwww.ebrd.com/law.

Law in transition is a publication of the Office of the General Counsel of the EBRD. It is available in English and Russian. The editors welcome ideas,contributions and letters, but assume no responsibilityregarding them. Submissions should be sent toMichel Nussbaumer, Office of the General Counsel,EBRD, One Exchange Square, London EC2A 2JN,United Kingdom; or [email protected]

The contents of Law in transition are copyrighted and reflect the opinions of the individual authors anddo not necessarily reflect the views of the authors’employers, law firms, the editors, the EBRD’s Officeof the General Counsel or the EBRD generally. Nothingin the articles should be taken as legal advice.

© European Bank for Reconstruction andDevelopment, Spring 2004

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by anymeans, including photocopying and recording, withoutthe written permission of the copyright holder. Suchwritten permission must also be obtained before anypart of this publication is stored in a retrieval systemof any nature.

European Bank for Reconstruction and DevelopmentOne Exchange SquareLondon EC2A 2JNUnited KingdomTel: +44 20 7338 6000Fax: +44 20 7338 6100http://www.ebrd.com

Law in transition is printed on Hannoart Silk,an environmentally responsible paper which is 100% TCF (Totally Chlorine Free).

Printed in England by Beacon Press using theirenvironmental print technology. The printing

inks are made using vegetable based oils. No film orprocessing chemicals were used. The Beacon Press isa Carbon Neutral™ company and is registered to ISO14001 and EMAS.

Ref: 5878 Law in transition 2004.

ISSN 1683-9161

EBRD Legal Transition and Knowledge Management Team

Michel NussbaumerSenior Counsel, Team Leader

Paul ByfieldLegal Information Specialist

Hsianmin ChenCounsel, financial markets andcorporate governance

Frédérique DahanCounsel, secured transactions project

Paul MoffattCounsel, telecommunications regulatory reform

Mahesh UttamchandaniCounsel, insolvency legal reform

Alexei ZverevCounsel, concessions/Russia legalreform

Irena DajkovicAssociate

www.ebrd.com/law

Legal transitiondevelopmentsInformation on legal developments inthe EBRD’s countries of operations cannow be found on the EBRD Web site atwww.ebrd.com/law.

LiT onlineA supplement to Law in transition ispublished in the autumn of each yearunder the title LiT online. It is availablein English and in Russian atwww.ebrd.com/law.

Documents

Law in transition 2004 - European Bank for Reconstruction and … · 2011. 2. 16. · Richard Bate, Kate Hardy, Angela Hill Anthony Martin, Jon Page Photographs Mike Ellis (pages