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Advocacy and Capacity Building on Competition Policy and Law in Asia
| CUTS Centre for Competition, Investment & Economic Regulation (C-CIER) is implementing a two-year project entitled ‘Advocacy and Capacity Building on Competition Policy and Law in Asia’ (7Up2), supported by the State Secretariat for Economic Affairs, Switzerland (SECO), the Swiss Competition Commission (COMCO) and the Department for International Development (DFID), UK. The project endeavours to accelerate the process towards a functional competition policy and law for selected countries (Cambodia, Lao PDR, and Vietnam in Southeast Asia, and Bangladesh, Nepal, and India in South Asia), and advance an enabling environment for the law and policy to be better enforced. The project is undertaken in partnership with renowned
institutions in each of the project countries. Details of the project
are available at
http://www.cuts-international.org/7up2.htm |
The Cambodian Institute for Co-operation and Peace, the 7Up2 project advocacy partner in Cambodia, organised a half-day workshop entitled “First Policy Dialogue on Competition in Cambodia: Practices and Legal Framework” on March23, 2006. There were 30 participants from the Ministry of Post and Telecommunications, the Ministry of Commerce, the Ministry of Land Management Urbanisation and Construction, the Ministry of Information, the Economic Institute of Cambodia, and the Rural Development Bank, etc. Professor Chey Entaro, Member of the Jurist Council of the Council of Ministers of Cambodia was the keynote speaker of the dialogue, in addition to Nuth Monyrath, Researcher from the Economic Institute of Cambodia (EIC) – the project research partner organisation in Cambodia, and Ham Samnang, Senior Research Fellow of CICP. The policy dialogue recognised that Cambodia does have a few policies and laws, which deal directly and indirectly with competition issue; however, it is not enough. The country still needs a good competition policy including antitrust law, which will promote an enabling environment for free and fair business. It was also felt that most
of the participants seem to have poor knowledge about competition
issues and the competition law. More workshops and training, therefore,
should be conducted in this area. TRAINING WORKSHOPS FOR BANGLADESHI ECONOMICS JOURNALISTS AND CONSUMER LEADERS Two training workshops on competition policy and law were organised in Dhaka by Unnayan Shamannay – the 7Up2 project advocacy partner organisation in Bangladesh on April 13-17, 2006, for economics journalists and consumer leaders in the country respectively. A total of 12 journalists from all leading newspapers in the country and 10 consumer leaders attended the workshops. In addition to equipping the participants with basic principles about competition, competition policy and law, the workshops also dealt with issues pertinent to the same in Bangladesh, such as the competition scenario and the state of consumer rights in the country, the needs for an appropriate competition policy and law therein, competition policy and international trade, competition law and consumer welfare, the role of consumer leaders in promoting consumer rights, etc. Several real-life examples were quoted during the course of training, with input from the research findings of the 7Up2 project. The workshops were widely covered by the media in Bangladesh. TRAINING WORKSHOP FOR VIETNAMESE ECONOMICS JOURNALISTS Subsequent to the training in Bangladesh, a workshop of similar format and methodology was organised in Hanoi, Vietnam on April 27-28, 2006 by CUTS, in collaboration with the Central Institute for Economic Management (CIEM) – the project research partner in Vietnam, and the Vietnam Journalists’ Association (VJA), for economics journalists and reporters from the VJA. During the two days of the workshop, a total of 75 journalists and reporters from various leading newspapers and magazines in Vietnam were present and were pro-actively participating in the course of training by posing various questions originating from their daily experiences with competition issues for suggestions by experts. The VJA expressed their eagerness to be further engaged with the project, especially for further training on competition, which is a very new subject in Vietnam. It was suggested that a more concrete relationship should be established between the competition authority of Vietnam and the media, for mutual benefits as well as for the sake of a healthy competition culture in Vietnam. Further details of all the above-mentioned events, along with the presentations, will soon be made available from the Project web page at http://www.cuts-international.org/7up2.htm.
Bangladesh Tax
Anomalies Make Local Machinery Costlier Explaining why the sector is trailing far behind its potentials, they said that the imposition of value added tax on the local agro-machinery made them costlier than the ones imported, and discouraged farmers from buying locally-manufactured farming equipment. “Local manufacturers have to pay value added tax on every product, but no VAT or tax is needed for imported agro-machinery”, said Abdus Samad, vice-president of the Agricultural Machinery Manufacturers Association, Bangladesh – a group of about 50 small and medium engineering workshops. Samad also said that cash-strapped manufacturers do not have any access to bank loans and there is no fund support from the government as well, demanding that the government extend loan facilities to farm machine makers and incorporate farm technology into the vocational education curriculum. Agricultural officials attributed the high price of raw materials, lack of publicity of the machinery and low purchase capacity of the farmers to the non-expansion of the sector. Dissemination of information and demonstration of the agro-machinery by the Department of Agricultural Extension (DAE) are not up to the mark, and the government has to eliminate the price gap between the imported and locally manufactured machinery for the growth of the local sector, said the research director of the Bangladesh Institute of Development Studies, M Asaduzaman. Officials of the DAE, however, said that the local manufacturers very often use their own methods and technologies that make their products inferior compared to foreign ones and reduce their acceptability. (New Age Business – The Daily Newspaper, 16.04.06)
The view emerged on the closing day of the two-day workshop on competition policy and law, organised by Unnayan Shamannay, a local research agency, with support from CUTS International of India. The workshop was designed to make media people aware of the importance of competition law to safeguard producers and consumers. “Flexibility is the rule of game in the arena of international trade and has to adjust the trade policy time to time so that it can be effective for the country”, said M.A. Razzaque, assistant professor of the Dhaka University Economics Department. He said, as domestic producers have to compete with international firms in the local market due to import liberalisation, delicate balancing is essential for fixing tariffs. “Liberalisation could be an effective means for dealing with monopoly and oligopolistic market structure”, he said. Razzaque also said that under the preferential trade arrangement or trading bloc, the government has to set trade policy taking into account that periodical adjustment might be required to ensure the gains from such arrangements. “Consumers may be deprived from the benefit of such trading arrangements if the trading partners take the opportunity of captive market situation”, he added. The economist cited an example wherein under the South Asian regional preferential trade arrangement, sugar can be imported at US$0.46 per kg from India with zero tariff rate against US$0.93 from rest of the global market. “But, the huge price gap may provoke traders to form a cartel and charge US$0.70 per kg for Indian sugar”, he cautioned. “Against the backdrop, the government could reduce the import tariff to such a level that sets sugar price somewhere near US$0.58 a kg and discourage the cartel”, Razzaq added. The economist was of the view that whatever be the rationales for protecting the local industries, they cannot continue for an unlimited period of time, as such steps would encourage inefficiencies and wastage of resources. Selim Raihan, also assistant professor at the Dhaka University Economics Department said that the government should adjust import tariffs from time to time for ensuring better competitiveness and consumers’ welfare. Raihan is of the view that integrated policy framework is essential so that existing economic and trade policies can encourage competition and discourage anti-competitive behaviour. Both economists, however, agreed that as tariff cut would eventually lead to revenue loss, the government has to plug the loopholes of other revenue generating areas like income tax and land tax. Atiur Rahman, chairman of Unnayan Shamannay, in his concluding remarks said that Bangladesh couldn’t keep pace with important trading partners like India without updating trade policy and framing a competition policy. (New Age Business – The Daily
Newspaper, 16.04.06) Cambodia Losing
Battle Against Illegal Drugs Going by the 2005 National Authority for Combating Drugs (NACD) report, Cambodia is laced with drug trafficking routes, its airports are used to ship heroin to Australia, Singapore, and Hong Kong, and the number of drug offences have shot up by almost 70 percent since 2004. And as said by NACD Technical Advisor, Graham Shaw, the annual budget for the NACD has not changed in the last five years, leaving the government woefully ill-prepared to tackle any impending challenges. “The budget is approximately US$200,000 to $50,000 for the entire operation”, Shaw said. “Cambodia is basically starting from nothing. Everything needs to be developed, the hardware and the software. And the drugs aren’t going to wait for the Ministry of Finance”. Shaw added, “In fact, it’s only this year that the Ministry of Health has shown action, before they rarely even talked about it. Since 2003, there have been several key policy speeches by the Prime Minister and others, and some policy action implemented, but the human and financial requirements have not been forthcoming. Last year, the NACD and the UNOCD developed the first Master Plan for combating drugs over five years for the cost of about US$7mn. To date, I am not aware of any government financial support for that plan”. The report found that methamphetamine – locally known as yama – is by far the most prevalent drug in Cambodia and the greatest cause of addiction. The NACD has reported that there are 6,876 drug addicts in the nation, but Martin Lutterjohann, NACD expert has estimated that there are as many as 50,000. According to the NACD, methamphetamine is smuggled into Cambodia from Laos and Thailand through such border provinces as Koh Kong, Battambang, Banteay Meanchey, and Preah Vihear – where two men, in possession of 24,000 yama pills, were arrested on February 20, this year. The report stated that Stung Treng province was the main gateway for smuggled yama that in some cases might have originated in Myanmar, formerly Burma. “Cambodia is not important as a drug producing centre, but since Thailand’s war on drugs after 1997 it became a transit country”, Lutterjohann said. “The bulk of the meth comes down the Mekong from the Wa region of Burma. The United Wa Army controls the drug trade and they have a deal to control methamphetamine and heroin”. (Phnom Penh Post, 24.02.06 –09.03. 06) ‘Best
Ever’ Poverty Reduction Card “No survey anywhere is flawless, but this one is good”, said Tim Conway, World Bank Poverty Specialist. “This is probably the best survey Cambodia has ever had”. Prime Minister Hun Sen, speaking at the launch of the report, said that since 1994, there has been a decline of at least one percent per year in the number of people living below the poverty line in Cambodia. “This assessment can help
to clarify the misconception by some members of the international
community that Cambodia’s rapid growth over the past decade did not
contribute to poverty reduction in the country”, he said. “If you take the weight off an economy, if a situation of conflict ends, then you would expect to see growth. But the question is ‘What are you going to do for the next ten years?’ What drove growth over the last decade might not be what drives it over the next”, Conway said. The World Bank Poverty Assessment draws on a number of sources using both qualitative and quantitative data to gain an understanding of the dynamics of poverty within Cambodian society. Both the government and the World Bank have agreed that Cambodia needs to develop strategies to ensure a more even distribution of wealth. The inequitable distribution of the fruits of economic growth has led to increasing polarisation along urban/rural and rich/poor fault lines. Hun Sen said in his speech: “We need to widen the reach so that the poor gain more from each point of GDP growth. Our first priority is to create conditions that allow agriculture to grow”. But the report highlighted some serious obstacles blocking agricultural development. “Below-potential agricultural and rural growth can be explained primarily in terms of poorly defined property rights, inadequate and degraded infrastructure for water control and transport, and a combination of low levels of human capital and high levels of household-level vulnerability”, the report said. Both the government and the World Bank emphasised the need to diversify the economy. The importance of agriculture was, however, the central message of the poverty assessment. “Industry and services do matter, but, at the moment the case must be made overwhelmingly for agriculture. The vast majority of Cambodia’s poor are farmers. Over the next five years if we are to reach the poor we need to do something about agriculture”, said Conway. (Phnom Penh Post, 24.02.06 –09.03.
06) India Improving
Competition In The Petroleum Sector The Rangarajan committee report on pricing and taxation of petroleum products had estimated that petro products get a protection level of 40 percent. It recommended the customs duty on petroleum products be reduced. Yet, the Budget came and went with no reduction in customs duty on petrol and diesel, and the oil PSUs continue to be provided with 40 percent protection for their value addition. It is this loss of super-normal profits that the oil PSUs cry about, not real losses. As there is almost no import of diesel or petrol, government revenues would not be affected even if import duty on them were abolished. The continuation of the high import duty on diesel and petrol is surprising; as for all other industrial products it was reduced to a maximum of 12.5 percent. The NCAER’s latest quarterly economic update, released in April 2006, has estimated GDP to grow at 7.7 percent in 2006-07, a drop from 8.1 percent in 2005-06. This factors in an increase of 8% in the price of domestic crude and recommends an early increase in the price of petro products. If GDP is likely to decline, should the government raise the prices of diesel and petrol, an action that could make GDP decline steeper? Are petrol and diesel under-priced? If it were so, could Reliance Industries have earned high profit margins from their refinery operations? The problem is in the methodology adopted for fixing retail prices. Domestic prices are determined on import parity based pricing, in which the notional import duty, notional sea transport cost and notional port handling costs are added, though these are not incurred. The oil companies have become so used to these unearned profits that they do not want the pricing to be based on costs.
Energy is the driving force for economic growth. Public policy should ensure no scope for over-pricing energy products, as that retards growth. There is no reason why the customs duty rate on petroleum products cannot be reduced now. A lowering of the duty to five percent, the same as for crude, would also promote competition, as it would allow private marketers to recommence operations. The opening of the Indian economy in the 1990s was followed by policy announcements to allow freedom in marketing of petroleum products. Private sector marketing of LPG was initiated and, more recently, of petrol and diesel. Many private players entered, but due to the implicit subsidy, the prices prevailing ensured private marketers could not run profitable operations. The skewed pricing of petro products not only affects tax revenues, but also leads to misallocation of resources through the economy. The additional investments that could have been made are lost, with the jobs this extra investment would have generated. The development of non-conventional energy sources is deferred because these are not commercially viable in the face of low-priced petroleum products. Moreover, the prices of petroleum products, by not reflecting their scarcity value, lead to wasteful use. The result is that energy efficiency in India is among the lowest in the world. The government-dictated retail prices are adversely affecting private oil marketing companies. Reliance Industries has sought a level playing field with the PSEs by demanding that private sector marketers also be given a subsidy equal to what the PSEs implicitly get. An essential element of competition is the ability of companies to determine prices based on market conditions. For this to happen, the Administered Pricing Mechanism needs to be truly buried. There is a silver lining: the Petroleum and Natural Gas Regulatory Board Bill, introduced in Parliament in December 2005, is expected to be passed soon. It is expected that as with other regulatory bodies, the principles of competition will be enforced by the Board. (Shrawan Nigam, The Financial Express, 08.05.06) Courier
Companies Express Concern Over Draft Postal Bill Chris Callen, Country Manager of DHL Express, said that while he was delighted that the Government has decided to enter into a debate, there are concerns about three main provisions in the draft Bill. "First, the definition of a `letter', preventing courier companies from delivering letters below 300 gm, distorts the level playing field. Second, there is no need to appointment a postal regulator in the industry which is doing well on its own adding to the economy. Third, we are very concerned about the 10 percent of revenue levied for USO fund. "We will ask for transparency in the accounts of the Postal Department to know how the money will be utilised. Implementation of the Bill in the current form will put a number of courier companies out of business." Anil Agarwal, President of Asssocham, said: "Preventing the courier industry from carrying postal packets below 300 gm will create monopolistic tendencies and discourage competition. It should be left to the consumers to decide whether they would like their postal deliveries through State-owned post offices or by way of private couriers." Pradeep S Mehta, Secretary-General of Consumer Unity and Trust Society, said: "If the proposed amendments are enacted, it would imply that consumers are denied a choice. Even if they have urgent time-bound documents they will have to perforce use post. This will also wipe out a vibrant segment of our service sector economy and with it, over a million jobs." Defending the decision, the Postal Department said: "The monopoly over a specific part of the letter mail up to a specified weight limit is essential as the Department of Posts is required to fulfil the Universal Service Obligation (USO), which involves postal coverage to financially non-viable areas also at affordable rates for the common man. Courier companies are operating only in creamy areas and big business centres with sole motive of profit without corresponding responsibility towards deprived class of people residing in rural, remote, hilly, tribal and inaccessible." P.C. Sharma, CEO of XPS Courier & Air, said: "The express and courier segment provides employment to a large section of the population, essentially members from the economically weaker sections, who would be rendered unemployed. The Government should, therefore, review its decision and look into the interests of the community at large." (The Hindu Business Line, 21.04.06) Lao PDR Amplifying
Girth The transformers are being improved to prevent power cuts in Vientiane in future. Some villagers believe that the blackouts in Vientiane are due to power shortages. Khammany Inthirath, Deputy General Manager of EdL, stated that the reason for irregular electricity supply in certain areas was owing to the work being carried out in the transformer stations, and also improvements to the transmission current in the capital. “This is why we have to cut the electricity supply for a while to repair them. All of our work is expected to be complete in June this year”, Inthirath said. He went on to add that on March 19, electricity lines, poles, and some transformers were broken in Naxaithong, Xaythany, and Hadxaifong districts and needed repairs: “Our equipment is quite old, so we have to improve it. Many people now have access to electricity so we have to increase the production capacity and current to transmit to the villagers”. Electricity use is on the increase in the dry season, as people often use air conditioning, fans, and other household equipment. They also use power for the purposes of irrigation and an increasing number of industrial functions. Last month, the use of electricity was 42 million kwh, and the figure jumped to 51 million kwh for this month, and is expected to increase number to between 54 million kwh and 55 million kwh in April and May. In the winter months, from November to February, usage averages 40 million kwh. Hot season usage is around 52 million kwh, an increase of 30 percent from winter and a 12 percent increase compared to the wet season, when usage stands at 46 million kwh. Inthirath said that in the wet season Lao exports a lot of electricity to Thailand, while in the dry season it buys back some to meet domestic demand. He urged people to switch off lights and air conditioning when they leave house. Air conditioning should be regularly cleaned for safety and should run at 25 degrees Celsius, adding that saving electricity helps the country export more power to other countries, bringing income to develop the country. The Lao government is working towards making the country a reservoir of power in the region. By 2020, the number of dams will increase to 29 with a combined capacity of around 9,000 mw, and 90 percent of the population will gain access to supply. (Vientiane Times, 30.03.06) Coffee:
Wilting Exports Last year, Laos exported only 85, 000 tonnes of coffee, whereas in the previous year 23, 500 tonnes of coffee were exported. Dry weather and damage caused to the crop by insects were cited as main reasons for lean exports. Sisanouk added that the same problems were prevalent last year and have yet to be resolved. Sisanouk said that in Champassak province, last week, a meeting had been held to discuss the establishment of a coffee board committee, which would include farmers, coffee exporters, and coffee supporters. The board would also include the participation of the Ministry of Agriculture, the Ministry of Commerce and the Ministry of Industry and Handicraft. “If we have a coffee board, we will be able to attract more attention and support for the development of Lao coffee production”, Sisanouk said, adding: “This will most likely stimulate coffee production”. Sisanouk also said, “Actually, the average price of coffee this year is higher than the previous years, but the production has decreased, so the earnings made from exporting coffee will also decrease”. Last year, the average price for Lao coffee was about US$800 per ton, while this year it is more than US$1,000 per ton. Prices are based on the world market prices for Robusta in London and Arabica in New York. Lao coffee is said to be among the best in the world, and is grown organically, without chemical treatment, at 800-1,200 metres on the Bolovens plateau. The plateau has moist soil – dark brown volcanic in some areas, good rainfall, and cool weather throughout the year. Two years ago, Lao people were introduced to Lao instant coffee and regular Lao coffee. Nowadays, only Lao coffee is served in many restaurants and hotels around the country. (Vientiane Times, 23.03.06) Nepal Indian
Budget Terrifies Nepal Besides, the Indian growth rate at more than eight percent stands much higher than the snail pace growth rate of the Nepali economy, wobbling at around two percent. With such stark difference between these neighbouring economies several problems would creep into Nepal. The Indian market is growing as an exciting destination for investment, as a result of which capital flight is very likely to take place from Nepal to India. Moreover, the provisions of the budget have also been attractive for foreigners to invest in India including investment in the debentures issues by the Indian banks. The immediate implications of a provision to levy four percent countervailing duty on imports are already evident by the fact that exports of manufactured goods have stopped immediately after the announcement of new Indian budget Moreover, the budgetary plan to construct more roads and the reduction of railway fares would further enhance trade among different places within India discouraging exports from Nepal into India. (New Business Age, March 2006) Facing
Wheeling Constraint The crux of the matter being opposed is the provision to unbundle the NEA into separate entities for power generation, transmission, distribution and engineering services. The workers are criticising this step, as it will reduce their union strength. The new ordinances being promulgated are to implement the new Hydropower Policy of 2001, which was brought out after extensive interactions with the private sector. The focus of the new policy is to attract further investment in the hydropower sector and regulate the electricity sector; as such the Nepal Electricity Regulation Commission Ordinance will be promulgated simultaneously with the Electricity Ordinance. While some people view that as power is a raw material and no country can hope to develop itself by exporting raw material only and thus the idea of exporting power is not in the long-run interest of the country, others give the example of Bhutan, which has recorded a tremendous increase in its per capita income by exporting power. Even if the Nepali parliament is reconvened and the treaty between India and Nepal is ratified, Nepal-India power trade will face a roadblock. The transmission line between the countries does not have the capacity to wheel the projected load of power trade. The wheeling problem is present not just for export. So far, each new power project has its own transmission line to connect it to the national power grid. As the transmission line cost adds to the total project cost, the cost of the power produced tends to be higher than what it should be. Moreover, the present 132 KV lines are not sufficient for the system and thus they are causing a lot of technical leakage of the power transmitted. (New Business Age, March 2006) Vietnam Telecom
Market Enters a New Race With the appearance of EVN Telecom and Hanoi Telecom, a balance between GSM and CDMA ‘factions’ will be reached, with three using GSM technology (VinaPhone, MobiFone, and Viettel) and three using CDMA technology (S-Fone, EVN Telecom, and Hanoi Telecom). At that point in time, “Technology proving its preeminence will win”, said chairman Dong Seob Jee of the Republic of Korea’s SK Telecom Group. 2006 has been forecast as a year for value added services on mobile phones as mobile service providers began to exploit EDGE and 3G technologies. Experts also predict that in 2006 Vietnam will have now around 10mn new mobile phone subscribers. According to EVN Telecom Director Nguyen Manh Bang, service quality rather than charges are now the major problem. “That’s why we don’t dare provide mobile services until we cover the whole country”, he said. Last year’s race among mobile service providers resulted in problems for subscribers such as network jams and connection failures. According to Deputy Minister of Post and Telecommunications (MPT), the ministry this year will strictly control charges and service quality. Service providers will have to achieve public service quality standards and provide monthly reports to the minister about network quality. MPT will also make regular instructions and any provider that does not ensure service quality will be fined under the current rules. (VNE, 09.02.06) How
to Regulate the Used Car Imported Market? Deputy Head of the General Department of Customs (GDC), Dang Thi Binh An, acknowledged recently that it would be difficult to track used car imports citing a multitude of models in different states of repair, while prices and date of manufacturing also vary. An said that GDC is working on a solution that would ensure effective management of imports. Under the plan, taxes would be based on payment prices shown on the bill of sale. She also revealed there would be other methods for reference in order to avoid conflicts between importers and customs agencies. Minister of Trade Truong Dinh Tuyen also stressed that strict measures would be applied to prevent the import of vehicles too old to be safe, to avoid turning Vietnam into an auto ‘rubbish dump’. With the latest measure, the current tax of 150 percent will no longer be applied. Vietnam is likely instead to impose both percentage and fixed rates on used imports. If so, customs agencies would then levy fixed sums, at US$10,000 or US$15, 000 for example. Total tax sums paid by importers would be defined after adding the certain percentages of the selling prices to the fixed sums. Technical standards will also be put into place to limit the number of imported cars. Only autos with less than five years of use would be allowed. In addition, second-hand imports must meet technical requirements to be set by the Ministry of Science and Technology and by the Ministry of Transport. The Ministry of Trade will meet to discuss the issue in the coming weeks. (VietNamNet, 20.02.06) Airlines
Bicker Over Competition Luong Hoai Nam, Managing
Director of Pacific Airlines: Pacific Airlines has sufficient evidence…. The Government of Vietnam then assigned the Ministry of Finance to deal with the debt and restructure the operations of Pacific Airlines, a task the ministry has not completed. Perhaps Vietnam Airlines thinks that Pacific Airlines isn’t paying its dues, so it must be downtrodden in the market. According to Decision 64 of the Prime Minister, debt incurred over the period before January 21, 2005 belongs to the Ministry of Finance, not Pacific Airlines. Vietnam Airlines knows this clearly. To service debt incurred after that date, Pacific Airlines will pay Vietnam Airlines as normal. In the letter to the Ministry of Finance and the Civil Aviation Administration of Vietnam, on what grounds did Pacific Airlines base its argument that Vietnam Airlines has violated the Competition Law? Vietnam Airlines holds 85 percent of the local aviation market. According to the Competition Law, an enterprise that has market share of 30 percent upwards is considered the controlling force and must be monitored under the Competition Law. The authorities must evaluate whether Vietnam Airlines broke the law. But in an interview with Tuoi Tre Newspaper, Pham Ngoc Minh, Deputy General Director of Vietnam Airlines, said that Pacific Airlines launched a sales promotion that forced Vietnam Airlines to follow suit. Pacific Airlines reduced airfares once before Vietnam Airlines, on the HCM City – Hanoi route we cut fares from VND1.5mn to VND1.35mn from of May 1, 2005. In our view, it was not a reduction in price as a sales promotion, but a pricing adjustment to ensure our fares were reasonable for a cut-price carrier. This was an internal decision, and of course sets a different standard from those Vietnam Airlines adheres to as a full service airline. This is the product/service and fare structure that makes Pacific Airlines competitive. Regarding reductions on airfares for domestic routes, starting with the cutting of airfares on redeye flights to VND1mn/passenger on the HCM City – Hanoi route till on April 10, 2006, Vietnam Airlines reduced their prices first, forcing us to do the same to maintain sales. We have sufficient evidence that Vietnam Airlines made their price reduction before Pacific Airlines, including the reduction on April 10, 2006, which was straw that broke our back, and we were forced to complain to the authorities. It is abnormal that most of Vietnam Airlines domestic flight price reductions in 2005-2006 were conducted at a time when fuel prices were high. Even Vietnam Airlines faced difficulties, which were compounded m for Pacific Airlines because we mainly provide domestic flights and on domestic air routes we are not allowed to collect fuel surcharges. Pham Ngoc Minh, Deputy General Director of Vietnam Airlines: I’ve told Pacific Airlines not to offer such promotions. What were your thoughts when Pacific Airlines said that Vietnam Airlines was violating the Competition Law? There will have to be a judgment. They launched their sales promotions first, so why are they hounding us? I myself warned them many times to not launch sale promotions, but they still did. They launched their promotional programmes in the off-season, and we were then forced to follow suit. But Pacific Airlines said that Vietnam Airlines launched sales promotion programmes before them…. One week after their sales promotion programmes were launched we launched our programme. I met with their leaders to talk about this. They launched, and then we also had to. The issue here is that we have to see who did what first and for what purpose. In the off-season, airlines have to launch sales promotion programmes. That’s normal. There are only two airlines in this country, and they can’t cooperate. Pacific Airlines also said that it is suffering because it is unable to offer five services for which Vietnam Airlines holds the exclusive right? That’s correct. They don’t inject money into the industry, so we don’t offer them any extras. We feel that they are competing on our backs. They don’t inject money? In what way? They pay fairly for foodstuffs
and fuel supplies. But for ground services, not only do they not pay;
they have an attitude of “I am customer at your airport so you have
to serve me”. Then they pay us nothing. For a long time, since Mr Nam worked with Pacific Airlines, the airline has paid us nothing. The sum is large and we have the bills. But Pacific Airlines said that because Vietnam Airlines competes unhealthily, the financial situation of Pacific Airlines is worse off, affecting the scheme to restructure Pacific Airlines… Perhaps this is an action to vindicate Pacific Airlines’ losses. I can confirm that launching noisy sales promotion campaigns in the domestic market is akin to drinking poison. I don’t support that policy. This is similar to the telecom sector. When new companies get rowdy and launch promotional campaigns, why should their competitors do nothing? It is a different story if we start hawking sale programmes first. Vietnam Airlines actually stopped promotional campaigns in the low season. It was only when Pacific Airlines launched its first programme that we were forced to follow suit. Nguyen Tien Sam, Deputy Minister of Transport, Head of the Civil Aviation Administration of Vietnam: Why do we have to resolve this issue for them? How would you comment on the information in Pacific Airlines’ letter? This is really a problem for those two enterprises. The state management body only controls the ceiling price. For the floor price, enterprises can decide that for themselves. There isn’t much we can do to resolve this issue. These airlines should negotiate and reach agreement with each other. Vietnam Airlines said that with such competition, they are forced to participate in promotional programmes… That’s the issue of enterprises. We perform state management tasks as required by law. Anything that doesn’t break the law is a problem for the enterprises concerned to fight out. In its letter, Pacific Airlines mentions five services exclusive provided to Vietnam Airlines… One enterprise has the right to hire any other which is able to provide services that they need. If they can’t find a provider it will prove a very big problem for them. That’s really the crux of why they are complaining to us. What will the Civil Aviation Administration of Vietnam do? The problem really has little to do with us. As I’ve said many times, why are we being asked to solve their problems for them? Speaking on the Vietnam Airlines and Pacific Airlines airfare controversy, lawyers said that it is difficult to ensure equality when a monopoly still exists clearly. According to some lawyers, the state should intervene in this case to ensure fair competition between the two airlines. Pham Thanh Binh from the Hong Ha Lawyer Office in Hanoi said that only concerned authorities can define whether Vietnam Airlines has broken the Competition Law as Pacific Airlines has alleged. According to Article 11 of the Competition Law, an enterprise is considered to have market control if it accounts for greater than 30 percent of market share. In the domestic aviation market, Vietnam Airlines claims a 75 percent market share, so has very definite control. The Article 13 of the Competition Law stipulates that an enterprise that has a controlling position is barred from taking advantage of its position to harm competitors, including through sales and provision of goods and services at less than production cost to hurt rivals. However, defining whether Vietnam Airlines reduced airfares on the same routes as its weaker rival, as a deliberate and calculated measure against Pacific Airlines, and therefore violating the Competition Law is difficult. There are myriad of complications, the most difficult being demonstrating that Vietnam Airlines fares are lower than cost, according to Binh. "In my opinion, just assuming Vietnam Airlines is violating the Competition Law because it is a much stronger company than Pacific Airlines is wrong," he said. Related to the earnings of airways, experts said that in the aviation business, the deciding factor in profits is the seat occupancy, not the reduction of airfares. At present, if the seat occupancy rate is more than 90 percent, airlines will turn profit, but they will incur losses at 70-80 percent. So it is necessary to consider whether the two airlines have to cut airfares to ensure seat occupancy rates. Pham Chi Lan, of the Prime Ministerial Research Committee, commented that Vietnam Airlines also suffers from external pressures and it has to cut airfares to maintain its position. Nevertheless, Pacific Airlines is still weaker because to expand its air routes, the firm has to ask for permission. Moreover, it doesn’t have the access to ground services supplied to foreign aircraft, which Vietnam Airlines has. In this situation, according to Lan, the best way is for both sides to develop their competitiveness and Pacific Airlines should be allowed to invest in some ground services. In a broader view, Vietnam should establish new airlines that rival Vietnam Airlines to ensure an end to the monopolistic nature of the current market. With the aviation sector, still a throwback to nervousness related to national security and sky sovereignty, the state may not allow the establishment of private airlines, but will tolerate joint stock firms formed from state capital, provided that they are not subsidiaries of Vietnam Airlines. According to Lan, disputes in the aviation market are a direct repeat of problems in the telecom market last year. It shows that while new enterprises means more competition; equality in the competitive environment is lagging behind. "The dispute between these two firms is a big issue. If the Civil Aviation Administration of Vietnam, the state management body in this field, doesn’t intervene, who will?" Lan questioned. According to her, the most irrational point is that the market can’t support competition between one very big and one very small company. Moreover, the bigger company controls the infrastructure. "We don’t hold responsibility to deal with this case, but if it is necessary, we can research and advise the Prime Minister about this case," said Lan. Aside from the Civil Aviation Administration of Vietnam, the Competition Department under the Ministry of Trade also needs to get involved in the case if it identifies signs of violation of the Competition Law, even is neither side petitions for investigation. According to lawyer Binh, if Vietnam Airlines is selling services at less than cost to hurt its rival, it could be fined 5-10 percent of its total turnover in the fiscal year prior to the violation date. Several supplementary forms of punishment may also be applied. (Various sources) Air Cargo Shaken By Price-Fixing
Probe Asian airlines are waiting anxiously for the other shoe to drop in a price-fixing scandal whose widening global net has cast a pall over the US$50bn on air-cargo business. Japan Airlines, Cathay Pacific Airways, Singapore Airlines, Nippon Cargo Airlines and two South Korean carriers – Korean Air and Asiana Airlines. The probe comes at a time when Asian airlines are licking their chops over the burgeoning air cargo business in China. With Chinese airlines still primarily focused on the passenger side of aviation, foreign carriers are positioning themselves to take advantage of the booming sector. There was considerable alarm in the industry when the price-fixing probe made headlines around the world during mid February this year with raids at the offices of several air cargo carriers in Europe and the US conducted by investigators from the European Union and the US Justice Department. The EU and the Justice Department have not made public any specific charges they may plan to bring against the suspect airlines — which also included United Airlines, American Airlines, Air France, KLM, British Airways, Lufthansa and Scandinavian Airlines. But Scandinavian Airlines said investigators who raided the company's offices in Copenhagen were searching for evidence related to surcharges levied by the airlines to offset rises in the price of fuel as well as the cost of additional security in the aftermath of the events of September 11, 2001, and war-risk insurance premiums resulting from the US invasion of Iraq. The European Commission issued a statement calling the raids an initial investigative step that did not establish culpability. The statement said that such inspections do not mean that the companies are guilty of anticompetitive behaviour. According to Justice Department spokeswoman Gina Talamona in Washington the antitrust division is investigating the possibility of anticompetitive practices in the air-cargo industry. The airlines have pledged their full cooperation with the investigation. With both sides playing it so close to the vest, speculation is rife about the nature of the potentially damning evidence for which investigators are searching. Industry insiders believe the probes must involve the fuel surcharge formula devised by Lufthansa, which is used by many carriers around the world. The formula calls for a review of fuel prices every two weeks and adjusts surcharges accordingly. But if it is the focus of this elaborate, transnational collaboration, why then the highly public, heavy-handed response of raiding airline offices when the formula can be found easily on Lufthansa's website? Indeed, many carriers adopted the formula in response to the pleas of their customers, who desired greater predictability when planning transportation costs. Surcharges commonly add 25 percent to the price of transporting goods between Asia and Europe. Air cargo is responsible for a significant chunk of revenue at some airlines — for example, 32.7 percent at Korean Air, 29 percent at Asiana and 28.5 percent at Cathay Pacific, according to the Association of Asia-Pacific Airlines. From October to December last year, air cargo amounted to 10 percent of overall revenue for JAL. Air cargo accounts for 12 percent of all revenue in the world's aviation market, according to the International Air Transport Association. US aircraft maker Boeing has projected that the cargo market will grow by an average annual rate of 6.2 percent over the next 20 years, which is higher than the projected growth rates for passenger traffic and for the global economy as a whole. So, whatever the ultimate findings of the multi-pronged investigation launched with such fanfare last week, the stakes are high. Guilty verdicts would almost certainly put a damper on the growth of the air-cargo market, although at this point investors are hanging in there, with most Asian airline stocks rising last week. The EU can impose a fine for cartel activity of up to 10 percent of annual sales, although two-three percent is more common. In the US, such activity is a criminal offence that can result in lengthy jail terms. So when the other shoe drops, it might drop hard. (Kent Ewing, Asia Times Online,
21.02.06) |
