Romania made significant progress in opening its markets to competition and integrating its economy with the EU’s internal market. In preparation for EU accession in 2007, Romania was one of the fastest reforming countries in Europe. The reforms were driven by requirements to bring national laws in line with existing EU norms and regulations that form the acquis communautaire. The reforms were aimed at adjusting regulations to make Romania’s regulatory framework consistent with that of the EU and its competitive market economy.
They made it easier for businesses to get credit, employ workers, protect investors, obtain licenses and trade across borders, and close down. But after EU accession in 2007, Romania suffered from ‘reform fatigue,’ and many planned reforms never took place. This was most apparent in the energy and transport sectors and in modernizing state institutions (World Bank, 2013).
Romania’s growth reveals a vulnerable competitive environment and the need to enhance its export competitiveness in order to achieve greater economic convergence with the rest of the EU. Per capita GDP increased from 31 percent of the European average in 2000 to 55 percent in 2014 (IMF, 2014). Much of this growth was driven by a reallocation of labor from less productive sectors like agriculture, to more productive sectors like services and construction. The global financial crisis of 2008 stalled Romania’s economic growth. In 2009, Romania’s economy contracted by a stunning 6.6 percent; in 2010 it contracted by 1.5 percent.
More recently, Romania’s economy has slowly begun to recover from the economic crisis of 2008. In 2014, Romania recorded one of the highest GDP growth rate in the EU at 2.4 percent. This placed GDP per capita at about half of the EU average in 2014. According to the World Bank (2014) this growth was driven by export performance and a strong year for agriculture.(1) However, Romania’s competitive environment still compares unfavorably with that of other EU countries, for several reasons, notably restrictive regulations, barriers to FDI and widespread state participation in the market.
Romania’s ability to prosper in the EU’s common market requires a stronger competition policy framework. This rests on two complementary pillars: opening markets to competition by addressing sector specific constraints; and enforcing competition policies (Figure 1). Both pillars rely on an institutional setup that can foster and guarantee healthy market conduct. The independence – that is, autonomy of decisions – of the competition authority and promoting competition rather than consumer protection, seem to drive total factor productivity (TFP) growth. In a study using cross-country evidence, Voigt (2009) estimates that the de facto independence of the competition authority in a developing country can translate, on average, into a 17 percentage point reduction in the TFP gap with the United States.
The 2010 functional review of the RCC highlighted the need for a whole-of- government approach to integrate competition principles into Romania’s public administration. The review of the RCC was part of a broader strategic and functional assessment of Romania’s central public administration by the World Bank on behalf of the Government of Romania(2). Compared with counterparts in the EU, several areas of competition policy enforcement required improvement, particularly improving cartel enforcement. The conclusion of anticompetitive business practice cases more timely was a priority that needed to be addressed. Workloads focused primarily on merger review procedures with few resources available for conducting advanced economic analyses. Systematic monitoring of state aid rules was key given wide-spread state support to State Owned Enterprises (SOEs). And there were few internal targets to track the performance of the RCC’s enforcement and advocacy.
Based on the recommendations of the functional review, the RCC and the government endorsed a Reform Action Plan (2012) that proposed a three-prong strategy to strengthen Romania’s competitive framework:
- The government needs to take practical steps to deepen its commitment to advancing competition in Romania. For this mission, the RCC needs a major internal restructuring to move personnel and resources to the frontline of competition enforcement, especially in identifying and breaking cartels and the abuse of dominance practices.
- The RCC should sharpen its mission, undertake and publish a coherent strategy backed by results indicators in line with EU comparators, and strengthen the quality control and priorities of its strategic efforts.
- The RCC should strengthen its capacity by promoting program-based budgeting, public accountability, merit-based human resource management, and modern information technology and communication infrastructure.
At the RCC’s request, the World Bank initiated a Reimbursable Advisory Services (RAS) program with the Romanian government. This program’s goal was to implement the Action Plan and to improve effectiveness of competition policies, including the enforcement of the competition law and integration of competition principles in sectoral policies.
The program provided targeted advice to address challenges in the RCC’s core functions: legal and policy framework that governs competition; an operational framework that enables a well-functioning competition agency; the enforcement of the competition law; and the creation of a competition culture through a strong competition advocacy program. Competition policy ultimately ensures effective market functioning, while state aid control is particularly important to enhance effectiveness of public sector spending and rationalize support measures to SOEs. The RAS took place from June 2012 to May 2015.
A. IMPROVED LEGAL AND REGULATORY FRAMEWORK GOVERNING COMPETITION
I. Competition Law
A better alignment of the RCC’s legal and policy framework, mission, and institutional capacity was one of the key strategic areas identified to sharpen its effectiveness in promoting competitive market conditions. To achieve this goal, the RAS aimed to make the RCC more agile and bring the RCC’s legal framework in line with EU regulations. Further aligning Romania’s competition policy framework with the EU’s is not only a legal obligation – it is an opportunity to further benefit from economic integration with the European internal market.
An effective competition policy framework depends on the quality of the competition law and the ability to implement it. Typically, competition law aims at promoting market efficiency, low prices, and high quality goods and services. The objective is to encourage open markets that allow new businesses to enter and compete on equal footing with competitors, thus encouraging efficiency and innovation.
Competition laws cover business practices that restrict, distort, or prevent competition among firms. Restricted competition can stem from anticompetitive agreements among competitors or from a firm’s dominant position in a market. In addition, competition laws contain provisions on merger control to prevent harmful concerted practices that may result from certain economic concentrations. The World Bank Group team identified key elements that appear to limit both the quality of the Romanian Competition Law as well as the ability of the RCC to implement it.
While the current version of the Romania Competition Law(3) is broadly in line with the EU rules, it does not allow the RCC to focus on public interest cases and policies coherent with the agency priorities, thus wasting time and resources on nonpriority cases. Within the broad scope of functions and tasks assigned to competition agencies, priorities become essential. Unlike sector regulators, which have a clearly defined scope of intervention, competition agencies have to assess the behavior of economic agents across many sectors. Setting priorities of casework and non-casework is crucial for an agency to operate effectively with increasing caseloads and limited resources. An effective competition law should enable the RCC to set priorities based on the expected effects of its actions.
Finding the correct balance between transparency, procedural fairness, and the rights of the defense on the one hand, and the need to proceed efficiently with deciding complex cases within reasonable deadlines on the other, presents a constant challenge to competition authorities. On any given case, many procedural decisions that need to be taken – either internally, by the President of the RCC, or externally by the Bucharest Court of Appeals – can hinder efficiency and lead to unnecessary delays.
The Romania Competition Law at the beginning of the project, unduly burdened the private sector through redundant or unnecessary procedures, increasing the cost of doing business in Romania. For example, a presumption of dominance set at 40 percent of market share and burdensome merger review procedures – including low notification thresholds, highly complex information requests, and long review periods – limits the ability of Romanian companies to compete. Moreover, the position and liability of the private sector in certain antitrust cases need to be taken into account in relation to the current scope of sanctions. The criminal enforceability of antitrust violations, especially where the conditions and criteria to sanction individuals for antitrust crimes must bring a higher degree of certainty.
The World Bank’s analysis identified provisions of the competition law that limit the ability of the RCC to prioritize actions. To enhance the RCC’s efficiency, its ability to prioritize competition complaints needs to be revised. Additionally, when complaints are rejected, complainants still have a right to be heard. This represents a superfluous administrative burden for the RCC that goes beyond international standards for due process and can be eliminated. Furthermore, after a thorough investigation, cases that still reveal no infringement of competition rules should be quickly closed.
In line with EU practice, the World Bank Group team proposed that case-related management functions should be reshuffled to an independent ‘hearing officer’. This ‘hearing officer’ would be in charge of a number of procedural concerns, including matters of confidentiality and legal privilege. Secondly, assigning case handlers should be assigned to a neutral registrar.
Further amendments – recommendations to the Romania Competition Law include:
- Empowering the RCC to focus on cases and mergers that are coherent with its priorities and that have a greater impact on competition law and develop fast-track procedures for less important mergers;
- Enhancing procedural effectiveness through the de-judicialization of competition enforcement;
- Reducing unnecessary burdens on the private sector, by clarifying the obligation to consult with the Supreme Council of National Defense (CSAT), better articulating the RCL with the TFEU, and deleting the 40 percent threshold for the presumption of dominance. Improving the RCC’s enforcement and sanctioning powers by replacing ‘total turnover’ by ‘affected turnover’ and by encouraging the Prosecutor’s office to criminally prosecute cartels;
- Removing the government’s ability to impose price controls.
New modifications were brought to the RCL by Emergency Ordinance 31 of June 30, 2015. Among the changes:
- Competition Regulatory Impact Assessment gets strengthened: the RCC can issue advisory opinions and assents not only for normative proposals but now also for public policy proposals. The central and local authorities are now obliged to ask RCC’s opinions when they initiate such proposals which might have a potential distorsive effect on competition.
- The RCC takes a leader role in eliminating distortive legal provisions in a certain industry by promoting specific reluations to eliminate such distortive provisions (art.25 alin.3), can even impose via decision measures for undertakings with the aim of eliminating the distortions.
- The company which admits its offence throughout the investigation can benefit from a reduction of the fine between 10% and 30% of its initial value. It should be noted that previously the law provided for a reduction of only 10%.
- The Competition Law was introduced the procedure of settlement. This procedure has advantages both for the competition authority and for companies. The settlement mechanism consists in admitting the anticompetitive offence during the investigation. Until now, companies could admit that they have committed an anticompetitive offence only after the completion of the investigation report. If the company decides to challenge the decision of the RCC, the settlement ‘offer’ is canceled and the admittance of guilt will be used against the company.
- The RCC can now investigate any premise on which an undertaking performs activities and not only the HQ.
- The case handler is now proposed by the Director General and then formaly appointed by the President.
- The investigation decisions are now communicated to the undertaking within 120 days (vs. as soon as possible, in the former provisions).
Other important recommendations were acknowledged by RCC who will been preparing new modifications to the competition law on:
- Removing merger notification thresholds from its text and including them in merger regulations that can be regularly updated without cumbersome legislative procedures;
- Eliminating the threshold for a presumption of dominance;
- Providing greater legal certainty by clarifying deadlines and prescription term provisions;
- Removing provisions on price controls;
- Limiting the opportunity to challenge the RCC’s final decisions before the Court of Appeal on grounds of access to file and confidentiality;
- Creating an independent procedural officer position, separate from the enforcement teams within the RCC, specializing in access to file, confidentiality, and other procedural matters;
- Clarifying provisions on legal privilege and on fining rules (e.g., the introduction of the possibility to reward whistle-blowers with an amount up to 1% of the fine imposed by the RCC; establishing a legal deadline for parties to propose commitments eliminating the cause of the infringement and apply for a fine reduction).
II. Unfair Competition
In addition to the mandate to protect free competition in Romania, the RCC is in charge of applying the Unfair Competition Law(4). This law seeks to punish unfair commercial practices that, rather than affecting the market as a whole, affect the position of individual competitors and their sphere of interests. Unfair commercial practices include, for instance, betraying business secrets or violating the reputation of a business.
An effective regulatory framework for unfair commercial practices must be consistent with procedures to fight antitrust violations under the Romanian Competition Law. In addition to loopholes(5) in the UCL and overlaps with the RCL, the effectiveness of the UCL has been hampered by the RCC’s inability to prioritize unfair competition cases and make clear distinctions between the RCL and the UCL (for example, distinguishing unfair prices from predatory pricing).
The advisory services program recommends establishing a 'de minimis test', where an infringemenet occurs only if it prevents achieving the objectives of the law. Also recommended is an ‘opportunity test,’ where the RCC becomes involved only if the public interest or market structure are affected.
The recommendations were adopted in a government ordinance in August 2014. Government Ordinance 12/2014, modifying Law 11/1990 on fighting unfair competition, protects consumers, competitors, and other market participants in a way that complements and expands the scope of other laws, such as the RCL or the Consumer Protection Law(6). Ordinance 12/2014 incorporates core RAS recommendations, including an ‘opportunity test’ to trigger RCC’s competence (i.e. public interest or the market structure needs to be affected) and a general unfair competition law catch-all clause(7).
Furthermore, it offers a clearer definition of the purpose of the law and aligns the terminology used with EU law. In addition to Ordinance 12/2014, the RCC has enacted a Procedural Regulation on November 24, 2014, which clarifies the opportunity test and issues of capacity to submit complaints with the RCC(8).
As a medium-term strategy, the RCC intends to undertake an ex post analysis of the new unfair competition policy with the assistance of the World Bank.
Arabela Aprahamian, Senior Operation Officer, Global Practice Trade & Competitiveness
Alexandru Stanescu, Operations and Legal Consultant, Global Practice Trade & Competitiveness
Georgiana Pop, Economist, Competition Policy Team, Global Practice Trade & Competitiveness
Luisita Guanlao, Lead Information Officer, ITSQS
Graciela Miralles Murciego, Competition Specialist, Global Practice Trade & Competitiveness
Gonçalo Coelho, Competition Consultant, Competition Policy Team, Global Practice Trade & Competitiveness
Martha Martinez Licetti, Senior Economist, Global Practice Trade & Competitiveness
Denisa Popescu, Senior IT Officer, Data and Information Management
For the complete version of the article, please see Romanian Business Digest 2015, here.