12. COMPETITION POLICY IN THE ANDEAN COUNTRIES:
A POLICY IN SEARCH OF ITS PLACE

Ana Julia Jatar and Luis Tineo*

In the Andean region, competition policy is the new kid on the block. It has come as a result of the trade liberalization and regulatory reforms developed in each country since the early 1990s. It has also been part of the “open regionalism” approach adopted by the Andean Countries. Effective competition is expected to develop by exposing the highly concentrated and protected markets of the region to international competition. Competition policy plays three important roles in this process. First, it enhances market access for new competitors. Second, it protects the competition process from restrictive business practices. Third, and most important, it fosters economic efficiency and consumer welfare. A complete policy in place will be instrumental in promoting an environment conducive to investment and business activities in the region.

To date, the approach to competition policy has varied, and the policy has been applied very differently in the Andean region. First, three of the five Andean countries—Colombia, Peru, and Venezuela—have adopted competition laws that are enforced by independent agencies. The other two countries—Bolivia and Ecuador—have made competition policy rely solely on trade liberalization and deregulation measures. Second, although the existing laws and institutions have been built on the same foundation, each country has set different policy priorities that have notably influenced the enforcement outcomes. Third, the lack of consideration for competition when framing other public policies has opened the way for exemptions and the reinstallation of protectionist measures at the behest of vested interests. Finally, competition policy has been pursued from a purely domestic point of view, and countries have lost the regional perspective to which they are committed by the Andean integration project.

This chapter analyzes the implementation of competition policy in the Andean region and its role in improving trade, investment, and market integration. By and large, the Andean countries have successfully harmonized most of their trade policies. In some cases, namely, investment, intellectual property, standards, and subsidies, the Andean rules are the reference for domestic enforcement. This has not been the case, in competition policy. Firms are subject to rules that are unevenly applied in some countries and which simply do not exist in others. The chapter will revolve around a basic message: to fully advance the integration of the Andean markets, competition policy must be enforced comprehensively and consistently both at the national and subregional levels. As firms expect to operate not in a particular country, but on the larger market provided by the integration scheme, institutional and enforcement harmonization is necessary. Otherwise, competition policy, as currently seen, may impair the benefits that a wider regional market promises for investors and consumers.

The first section in this chapter presents the background, including the common features of the competition policy existing in the region. The second section examines the experience of Colombia, Peru, and Venezuela in implementing and enforcing competition policy. The third section reviews the Andean Community’s competition policy. Finally, policy recommendations are provided as final comments.

SAME TRADITIONS, SAME LAWS, SAME INSTITUTIONS

Promoting the conditions for wider market access and efficiency through competition has been a difficult challenge for the Andean countries. Decades of government regulations and subsidies, tariff protection, and exclusive licenses for the development of infant industry stimulated private sector activities based largely on collusive and monopolistic practices. Most of these practices had only the illusion of success while being highly inefficient. In exchange for such policies, cooperative agreements among competing firms were developed to negotiate prices and other trade restrictions with governments. This government and business behavior is expected to change with the enforcement of competition policies and laws.

Market entry and access are the key elements of every transition toward open markets. In theory, the greater the access to new participants, the greater will be trade flows and therefore consumer options, quality, and prices. Inefficient firms exit, leaving those firms able to overcome the challenges of competition. In practice, however, this sequence is often affected in two ways. The first is through private anticompetitive practices like collusion between competitors and the abuse of a dominant position. The second is through government-based barriers, including such traditional tariff and nontariff measures as export cartel exemptions, import-export licensing restrictions, rules of origin, and government procurement and technical standards. In developed countries like the United States where entry is not such a relevant issue, competition policy has traditionally focused on preventing and prosecuting private anticompetitive or antitrust practices. In the Andean countries, however, where entry is indeed an issue, competition policy has a broader scope. It must focus equally on private practices and public policies affecting competition conditions (Khemani and Dutz 1996).

As just mentioned before, competition policy has been actively pursued by Colombia, Peru, and Venezuela. Since the early 1990s, policy has consisted of a blend of trade liberalization and enforcement of competition laws by independent agencies. Although these countries share many similarities in their general approach to competition, there are also many differences in the substantive implementation and enforcement of the rules, due in part to the early stages of policy formation and the political conditions of each country. In Bolivia and Ecuador, competition policy has been limited to trade liberalization and sectoral deregulatory efforts. Competition laws are nonexistent and, given the slowing of their reform process, progress in this area in the near future seems unlikely.¹ As this chapter addresses competition issues in unregulated markets, the remaining analysis will focus primarily on the former set of countries.

The competition laws of Colombia, Peru, and Venezuela narrowly aim to promote and protect competition in order to enhance economic efficiency and consumer welfare. In pursuit of these goals, the laws contain three components relevant to market access: business anticompetitive behavior, merger review, and promotion of competition conditions in the economy. The laws also provide for specific enforcement mechanisms and institutions to which both private firms and public entities are subject.²

With regard to anticompetitive behavior, all the laws are quite similar. Modeled on Articles 85 and 86 of the Treaty of Rome, these laws focus on business practices that are likely to restrict or affect competition, and they list specific conduct prohibitions. For enforcement and methodological purposes, these prohibitions are separated into two groups. The first group consists of bilateral practices that include horizontal and vertical restraints on competition. Horizontal restraints relate to collusive agreements among suppliers of the same or similar goods to restrict competition. Such practices include price-fixing, input or output restraints, market allocation, restriction of market access, and bid-rigging practices. Vertical restraints relate to agreements between suppliers and distributors to restrict competition. These include resale price maintenance, exclusive dealings, exclusive geographic designations, tying arrangements, boycotts and refusals to deal. The second group of prohibited practices focuses on unilateral restraints imposed by firms with a large share of market power, so-called abuses of dominant position. In such abuses of power, firms are not only able to restrict competition already in place, but are also able to prevent entry of potential competitors through predatory pricing and other means of raising the entry costs for rivals.

The concept of dominance is highly useful for enforcement in countries like the Andean ones. Following decades of protectionism, the Andean markets are highly concentrated. Typically a sector has a dominant firm. Placing emphasis for enforcement on behavior and punishing only the abuse of a dominant position make enforcement less traumatic than if emphasis is placed on correcting the market structure (number of competitors or degree of concentration), as is often the case under a U.S.-type approach. If the emphasis were not placed on the behavioral aspects of competition, there would be an increased risk of focusing more on corporate divestitures and other structural remedies. For the Andean countries, which are just beginning to open their economies to international competition, optimal firm size is still unknown. Markets, as well as institutional capabilities, must be able to develop further before we can understand better their structure and functioning.

Though the laws on anticompetitive behavior are similar, they actually differ radically in their approach to merger control. Differences in this area relate to the approach toward market power and industry concentration as a result of merger and joint venture activities. These transactions are a source of concern, as they may cause a reduction in the number of competitors and may increase market power and the likelihood for anticompetitive behavior. Given the high level of concentration and the small number of competitors established in the Andean markets, merger operations may have a great impact. Nonetheless, mergers and joint ventures can also strengthen the international competitiveness of firms and increase economic efficiency. In a reasonably open market with low barriers to entry, any action by the merging firm intended to raise prices or reduce output would be disciplined by the entry of new competitors.

Based on this range of concerns, the merger provisions vary. In most countries, despite procedural differences, merger analysis is based on the European concept of abuse of dominance. Under the European concept, mergers are of concern only as long as they have anticompetitive practices. In contrast, the U.S. merger system is based on the narrower concept of market power. Mergers in the United States are of concern because they lead to an increase in market concentration and a decrease in the number of competitors. Generally, the European dominance approach is more relaxed because it aims at encouraging firm integration and the formation of efficient large firms. The U.S. approach is more cautious about firm integration because it favors market structures that are based on rivalry. Not surprisingly, the threshold for premerger notification in Europe is substantially higher than in the United States. The combination of high thresholds and the use of the likelihood of dominance abuse not only leave European firms freer to merge, but also provides the Competition Commission with less technical standards for analysis than in the United States.

In the Andean region the competition agencies have not yet developed a clear approach to dealing with mergers. In practice, there has been an inconsistent mixture of the two systems. Depending upon the circumstances, each agency has shifted from the European practice of assessing dominance to the U.S. practice of assessing market power. For instance, Colombian law provides for a mandatory premerger notification system with extremely low thresholds, whereby the competition agency reviews either the likely restrictive effects or the economic efficiencies of the transaction in the relevant market to allow it or ban it before consummation of the merger. Venezuelan law provides for an after-the-fact review system by which the competition agency may prohibit a merger if it restricts or creates a dominant firm in the relevant market. Peruvian law does not provide for merger control. This divergent approach in such a critical area of competition policy has added new obstacles to investment and denied the region of a key tool for the integration of firms.

Concerning the promotion and creation of competition conditions, so-called competition advocacy, the approach of countries is similar. Policy in this area deals with the capacity of the competition agencies to watch over public policies that affect competition, particularly market entry conditions. Public policies—typically trade measures (tariff and nontariff barriers), sectoral regulation of natural monopolies, and privatization of public enterprises—may facilitate anticompetitive practices and decrease of competition. These measures may also raise the costs of entry and reduce incentives for new participants. Under these conditions, firms are more likely to lawfully collude or abuse their market power. Competition advocacy thus prevents anticompetitive practices by promoting the functioning of market mechanisms and rent-seeking behavior (Rodríguez and Coate 1997). In liberalizing economies, this is a chief pro-competitive policy because it provides a highly effective way of facilitating market access.

Promoting competition in highly regulated markets is a difficult task. Its success depends largely on how well the concept and values of competition are inserted into the policymaking process of each country. Competition policy is related to, yet is often in conflict with, core areas of industrial and trade policy, such as tariff protection, subsidies, antidumping, government procurement, and standards. Because these trade policies typically aim to protect domestic firms and restrict market access and foreign rivalry, a competition goalkeeper has to be part of the government structure. In many countries the competition agencies have found that this role is even more important than traditional law enforcement, at least during the transition period. Yet many cartel activities and abuses of dominant positions are lawful in many markets because of protectionist measures. Settling battles against more powerful government agencies and well-organized interest groups, however, requires committed institutions and political support from the very heads of governments. In an environment in which governments are still shifting from interventionism to open markets, competition advocacy has shown partial effectiveness only in Peru and Venezuela, where the competition agencies have contributed to regulatory reforms and opening markets.

As for matters of institution building, the competition agencies have followed a similar route. Law enforcement is carried out by independent agencies headed by fixed-term appointees. The competition agencies have two functions: investigation and adjudication. Investigation and proceedings are conducted by technical units or secretariats following procedural rules set out by law. The findings are submitted to the superintendents in the case of Colombia and Venezuela, and to the commission in Peru, for adjudication. Rulings of the agencies may declare illegal practices, order divestiture of mergers, and impose sanctions. All countries guarantee private rights of action to claim civil damages to those affected by anticompetitive practices. Likewise, these countries guarantee rights to affected parties to appeal the rulings of the agencies to courts of justice, including the supreme courts (OAS 1997b).

As part of their activities, the competition agencies devote a great deal of time to disseminating the goals of the laws and create a competition culture in each country (OAS 1997c). The agencies have also benefited from personnel training and technical assistance from various sources, including the United Nations Conference on Trade and Development (UNCTAD), the World Bank, the European Union, and the U.S. Federal Trade Commission and the Department of Justice. This assistance has allowed the agencies to learn enforcement standards and methodologies for market assessment widely applied in other jurisdictions (Kovacic 1997).

ENFORCEMENT: DIFFERENT PRIORITIES, DIFFERENT OUTCOMES

In this section we demonstrate that, although many goals, functions, and institutions seem similar, at least in design, significant differences in the enforcement records in each country come to light.

Colombia: Leveling the Field for Better Times

Colombia has the oldest competition law among the Andean countries.³ Law 155, passed in 1959, was intended to follow the U.S. antitrust approach against monopolies and large firm size. It deals basically with two antitrust areas: traditional business anticompetitive practices and mergers. After a general statement prohibiting all conduct aimed at restraining competition, the law sets a few specific prohibitions for cases of price-fixing, output restraints, market allocation, abuse of dominant position, and resale price maintenance. At the same time, the law gives the government power to allow restrictive agreements among firms aimed at stabilizing basic sectors or sectors of public interest to the economy. With regard to mergers, the law establishes a mandatory premerger notification system. Plans for mergers of firms whose combined productive assets are worth more than 20 million pesos must be submitted for government approval because of the likelihood that the merger may restrict competition.

Despite its straightforwardness, there has been no real enforcement of this law. According to the records, not even one case was prosecuted or solved by the government during the first three decades of its existence. Two factors prevented the law’s implementation. First, infant-industry protectionism and import-substitution policies were actively pursued to foster the development of basic private industries, such as coffee, textiles, cement, agriculture, and beer. These policies, along with high tariffs, made the Colombian economy among the least open to foreign competition in the Andean region, second only to Ecuador. These results were two faces of the same coin: rapid industrial growth and consolidation of monopolies and oligopolies.

The second factor was a natural consequence of the first. The powerful firms, trade associations, and conglomerates that historically developed in the shadows of the industrial policy became the main constituency of governments. This bred a mutually cooperative relationship that did not mix very well with an independent competition policy. Competition law was seen more as a warning signal than as a serious remedy against the abuses of the existing government-promoted monopolies and oligopolies. The fact was that protection and collective rent-seeking behavior was more important than competition. As one former Colombian minister commented, “It [did] not make much sense to try to promote competition through the enforcement of antitrust legislation, when in the office next door, in the same ministry, they [were] trying to keep competitors out of the country and to protect domestic production with high tariffs and quantitative barriers.” (Hommes 1996)

Within the scope of the economic reforms introduced by the Gaviria administration in 1991, competition was fostered through trade liberalization and economic and investment deregulation. Price controls were lifted, and prices began to be set at lower levels according to international reference. This dynamic led Colombian firms to restructure in order to gain international size and develop economies of scale. Although Law 155/1959 remained unaltered, new provisions enacted by Decree 2153 of 1992 supplemented the old law to update its concepts and reinforce the powers of the competition agency. Decree 2153 also significantly reduced the degree of government discretion in competition matters.

Concerning conduct, the decree expanded the list of prohibitions and provided specific standards for the assessment of infringements. Unlike the old law of 1959, the decree clearly defined the basic antitrust concepts related to conduct and structure. It provided a “de facto”standard against horizontal practices—such as price-fixing; discriminatory practices; market, supply, or quota allocations; tying arrangements; output restraints; refusals to deal; and bid-rigging—while leaving vertical practices to a “rule of reason” analysis. The decree also specified conduct that was considered an abuse of dominant position under a rule of reason standard of analysis. Finally, the decree exempted cooperative agreements for research and development. With regard to merger review, the decree introduced exceptions for efficiencies by which mergers that were found to be anticompetitive might nonetheless be allowed if the merging parties demonstrate that efficiencies are greater than the restrictive effects on the market.

From an institutional standpoint, Decree 2153 charged the newly created Superintendency of Industry and Trade with enforcement of the law. The superintendency is an independent body from the executive branch that is headed by a superintendent. Competition law enforcement is one of the three functions assigned to the superintendency; the other two functions are consumer protection, management of the intellectual property rights system, and supervision of the chambers of commerce. For competition matters, a deputy superintendent is charged with investigations and merger analysis. Once investigations are concluded, the deputy submits the findings to the superintendent for final adjudication. The superintendent may act on his own criteria with regard to opening and conducting investigations, and imposing sanctions and fines.

The agency’s decisions may be reviewed only by the courts of justice. Furthermore, the decree enlarged the superintendency’s functions by charging it with a role in competition advocacy. The agency may advise other government bodies on regulations affecting market entry and competition issues in natural monopolies and privatization. This upgraded the Colombian competition agency from an antitrust enforcer to a government advisor in competition policymaking. These improvements in enforcement and policy formulation promise more active competition in the Colombian economy.

Since 1992, when the superintendency began to operate under the new framework, there have been 142 cases related to conduct violations. In 1993, 22 cases were filed, 30 in 1994, 69 in 1995, and 21 in 1996 (OAS 1997c). According to the record, the majority of the cases were closed for lack of merit. Formal investigation has been conducted in 27 cases. Nine of these cases were dropped at the plaintiff’s request, and 18 cases were settled before the agency. The issues at stake were price-fixing, resale price maintenance, exclusive practices, and abuse of dominant position. The relevant investigations were carried out in the automotive, cellular, and health industries.

The superintendency has not reached a formal decision in any of the 27 cases examined. The agency’s practice has been to settle the cases by reaching consensual agreements with the firms involved in the investigations. Consensual agreements are a means of settlement for restrictive business practices. According to Decree 2153, the superintendent may close an investigation if the defendant pledges sufficient guarantees that it will cease or amend the allegedly anticompetitive practice. This is thought to be a positive approach to ease long-term changes in business behavior.

Consensual agreements have yielded a number of benefits in the Colombian transition process. They have minimized the impact that sanctions may otherwise have had in the economy. They have also provided the agency and firms with a mutual understanding of the laws and markets. This, in turn, has created a competition culture among the participants, as well as the conditions and expertise for stricter enforcement of the law. So far, the superintendency has reached consensual agreements with such powerful industries as cement manufacturers, breweries, and health service providers. The agency also has dealt with abuse of dominant position among important state-owned companies, such as railroads, and oil and energy companies. According to these settlements, the industries have pledged to end the alleged anticompetitive practices, being warned that further violations of the agreements will be punished.

A recent case, settled by the superintendency in April 1997, illustrates how this mechanism has worked. In the Ferrovias case, a Colombian state company, owner and operator of the national railroad network, was investigated for alleged abuses of dominant position in the transport of coal in Colombia’s northern region. Drummond, one of the nine private firms dedicated to coal exploration and exploitation, had an exclusive contract with Ferrovias to transport a set amount of coal yearly for 30 years. The contract also conditioned the transport of other firms’ coal upon Drummond’s prior approval. At a firm’s request, the superintendency examined whether Ferrovias’ exclusive contract resulted in discriminatory treatment affecting the competition conditions of the other firms. The superintendency conducted a detailed analysis of the relevant market, demand and supply substitutability, and the effects of the contract in that market. Because of the absence of options for coal transport and given that the coal firms competed in markets other than the Colombian one, the superintendency found the contract discriminatory and restrictive of competition. Further, it found that the contract would give Drummond advantages in private and public coal procurement bids because it had exclusive rights to use the railroad system. Ferrovias accordingly agreed to drop Drummond’s exclusive rights and allowed other firms to use Ferrovias’ service without restriction (OAS 1997c).

Although the law provides for heavy fines for violations, the use of this power has been superseded so far by consensual agreements. This explains why the Colombian competition law has not had the impact seen in Peru and Venezuela. Rather, it appears dormant. Although beneficial in times of crisis, the exclusive use of consensual agreements has prevented the superintendency from developing sound criteria and enforcement precedents. Furthermore, it has deprived consumers from recovery of the social cost and injury caused by certain restrictive practices. Concerns about this practice arise out of its discretion and flexibility. The fact that the agency may settle its investigations, even those involving per se violations, is a risky exercise. In the long run, consensual agreements may well become new forms of cooperation in which the agency may tend to favor industry concerns rather than those of consumers. As they proliferate, the agency may be captured by this tool. This may reduce the credibility and limit the usefulness of the law.

Turning to the area of mergers, the superintendency has been busy processing the mandatory premerger notifications as described earlier. Since 1992, 212 notifications have been filed before the agency (OAS 1997b). All transactions have been either approved or simply not opposed. In most cases, the agency has found that the merging firms have little market power and that there is no need to worry about likely anticompetitive effects. In some other cases, notifications have targeted firms’ conglomerate consolidations. One aspect of concern is the burdensome load of merger reviews carried out by the Colombian agency. Much of this workload stems from the excessively low thresholds set by the 1959 law. This has caused virtually every transaction to be submitted for approval. Merger analysis is the most time-consuming task in competition enforcement. So far, it seems that big mergers have not yet occurred, and merger review has turned out to be a bureaucratic routine that diverts important resources from the agency. As recognized by the superintendency itself, these thresholds need to be updated. This would allow the agency to focus effectively on transactions that are likely to impact the market and to develop methodologies accordingly.

With regard to competition advocacy, the agency has not participated actively in matters of public policy. Rather, it has dedicated its efforts to disseminating information about the scope and goals of the competition regulations among firms and the public across the country. The agency is a member of the Committee of Trade Practices in which antidumping and countervailing duty cases are decided. Competition considerations in such cases have not been addressed in this committee, and the agency instead has acted as any other trade enforcer. The participation of the agency in privatization and other regulatory processes has been rather limited and has had little impact on the competition conditions of those markets. An important issue to deal with is the lack of coordination among the number of agencies charged with competition matters as a result of sectoral regulations, such as in banking, insurance, public utilities, and telecommunications. As there is an agency for each of these areas, so there is a competition policy approach for each area. This diversity has yielded varied outcomes, which has sometimes cancelled out the decisions of one agency over those of the other. This has been reported, for example, between the competition agency and the banking agency on the treatment of certain practices under the competition law and the banking law (Alarcón 1997).

An assessment of Colombia’s renewed commitment to competition policy shows that despite the improvements introduced by the new legislation, policy and law enforcement remains insufficient. The timid involvement of the agency in supporting the opening of the Colombian economy may enhance the concentration and dominant position of the traditional conglomerates, and may add to government hindrance currently seen in the Colombian markets. The political weakness of the present government has contributed to this result. It seems that a more active antitrust enforcement of firms might boost an undesired opposition from the private sector, taking away the political constituency of the superintendency within the government.

Independent enforcement of competition law in a transition economy is not an easy task. The Colombian case shows it. The ability to prosecute collusion in a society as deeply rooted in government–private sector partnership as is the case in Colombia is a matter that must be addressed. While waiting for better times, however, Colombia should continue leveling the playing field and creating a competitive culture. This may include personnel training, development of methodologies for analysis, monitoring of market conditions, and more involvement in regulatory matters and government-based entry barriers. These quests will leave beneficial results when the current crisis is over.

Peru: Creating a Competition Culture

Trade and investment promotion have been at the core of the economic reform program launched by the Fujimori administration in 1991. Aggressive trade liberalization and privatization efforts were supported by decisive economic deregulation in all sectors. As a result, trade and investment flows increased significantly compared with the levels prior to the reform program. The laws of foreign investment and competition, both enacted in 1991, have been the main statutes for market access promotion.⁴ The foreign investment law establishes basic guarantees to free initiative, competition and access to all sectors, including sectors traditionally reserved for state-owned entities, such as public utilities, with a few exceptions in the natural resource and energy sectors. The law also declares that price-setting will rely on the market with the exception of public utility rates. Finally, the law provides guarantees against any government-based discrimination.

The competition law is the result of a constitutional prohibition against monopolistic practices. Seeking efficiency and consumer welfare as its objectives, the law focuses exclusively on anticompetitive conduct. Although monopolies and oligopolies are a concern, the target of the law is the actual performance of business practices that restrict or impede competition. Accordingly, anticompetitive conduct may come from two sources: bilateral trade restrictions and unilateral abuses of dominant position. Restrictive practices, considered per se violations, include price-fixing, output restraints, market allocation, and price discrimination. Other restrictive practices, such as vertical agreements, may be authorized under a rule of reason standard if they improve production and efficiency and do not harm consumers.

Concerning abuses of dominant position, the law focuses on the firms’ ability to act independently from their competitors or consumers. The standard of analysis for these practices is quite flexible. The agency must determine the dominant position by measuring several factors, including, among others, market share, market concentration, entry barriers, and potential competition. Once dominance is verified, the agency must determine whether the firms have abused such dominance by means of anticompetitive practices. The law has left the determination of such conduct to the Competition Commission for which an illustrative list of practices was issued. It includes refusal to deal, price discrimination, and tying arrangements.

In Peru, mergers and other economic concentrations are not subject to the competition law.⁵ Therefore, firms may freely integrate, unify assets, or undertake joint venture efforts without being subject to official scrutiny under market structure considerations. Merging firms may nevertheless be examined under conduct standards. The reasoning behind this absence of merger policy has conceptual and practical considerations. Peru’s efforts toward lowering entry barriers seem to be an adequate policy to offset the effects that some mergers may have in some markets. On the other hand, the Peruvian policy in favor of mergers seems also to encourage the rationalization of the production process and the achievement of firms’ larger size and economies of scale.

In practice, merger policy is the most costly and complex enforcement mechanism. It focuses on measuring the likely effects that the increase of firms’ size may have on the market. The goal is to prevent the acquisition of market power that enables firms to easily restrict competition. Because it deals with future events, merger analysis is not an easy task. It requires precise information and accurate use of economics in order to properly define the relevant markets, the market power of the merging firms and measure whether competition is at risk. Limited resources, balanced against the foreseen low impact of mergers on the Peruvian market and the harm that erroneous decisions might inflict to the competition process, do not seem to justify a mechanism for merger review.⁶

The law enforcement role is undertaken by the Competition Commission of the National Institute for the Protection of Free Competition and Intellectual Property (INDECOPI). INDECOPI is a multifunctional agency, independent from the executive branch, in charge of promoting and enforcing a variety of newly passed market regulations. Under INDECOPI’s jurisdiction are the laws on competition, antidumping and countervailing duties, consumer protection, unfair competition and advertising, technical barriers, and intellectual property rights. INDECOPI also deals with the removal of entry and exit barriers and economic deregulation. Each area has an independent commission. Each commission has a technical secretary in charge of conducting investigations and issuing preliminary findings for final adjudication. Final rulings may be appealed before INDECOPI’s tribunal. This tribunal, also an independent body within INDECOPI, has the authority to upheld or overrule the commissions’ findings. For all these tasks, the commissions and the tribunal count on the backing of INDECOPI’s full-time staff. This wide jurisdiction over market issues facilitates a comprehensive policy and enforcement approach toward the issues affecting competition and market access in Peru (OAS 1997b).

The Competition Commission began its activities in 1994, and since then has focused on anticompetitive practices and abuses of dominant position. Between 1994 and 1996, 57 cases were investigated. Of these, 52 investigations were opened at the request at of individuals and 5 at the commission’s initiative. The investigations were broken down as follows: 21 investigations were for restrictive practices, 22 for abuse of dominant position, and 26 were a mix of both. Nearly 36 cases ended with a formal decision, while the rest were dismissed for lack of merit or relevance. Abuse of dominance cases centered around discriminatory treatment and refusal-to-deal practices, whereas restrictive conduct cases concentrated almost exclusively on collusive arrangements to fix prices. In seven cases the Commission found merits and fined the firms involved (OAS 1997c; INDECOPI 1994, 1995, 1996). Two cases, both initiated by the Commission, have had particular implications in shaping the policy toward conduct violations. The first one, decided in 1995, involved 18 wheat flour producers charged with price-fixing. The second case, decided in 1996, involved 16 poultry producers also for price-fixing. In both cases, the Commission found the firms guilty, and significant fines were imposed.

In the broiler case, the Commission ex-officio investigated the pricing practices of 16 poultry producers in Lima between 1995 and 1996. A six-month investigation, which included extensive examination of documents, interviews, and close monitoring of prices and other market conditions, concluded that the producers had coordinated actions to reduce poultry production and raise prices. To achieve that goal, the producers formed a cartel through which they agreed to reduce poultry production, limit sales to a fixed-weight poultry, discontinue breeding facilities, eliminate existing fertile eggs, and decrease their imports to force other firms to join the cartel or buy eggs from them. Furthermore, the producers agreed to reduce prices to encourage more poultry consumption to get rid of the surplus and avoid the entry of new competitors. The Commission found that soon after these practices yielded successful results, the cartel unlawfully increased the prices.

The case, a typical textbook example, provided an opportunity to deal with several important issues related to horizontal restraints. First, the Commission declared that price fixing, output restrictions, and raising of entry barriers were the most serious offenses to the Peruvian competition system. Second, it stated that price-fixing was a per se violation of the law, and that therefore, market power, efficiency, and other tempering considerations did not have merits in these cases. Third, the Commission improved its investigation methodology and defined some rules for evidence gathering. Finally and noteworthy, the Commission imposed the highest fines seen at present in Latin America for a price-fixing violation. For other countries in the region, the broiler case is a good example of how to approach cartel cases. In developed economies, agreements like the poultry cartel are solved in a straightforward manner, based solely upon the evidence of concerted actions. The Commission instead solved the case with a more educative goal in mind. It explained the nature of the changes, the underlying goals of the anticartel provisions and defined the limits of cooperation among firms under the competition law.⁷

In addition, the case showed the Commission’s degree of decisionmaking and enforcement independence. Poultry producers have traditionally been among the most powerful business groups of the country. In fact, poultry products are among those in highest demand, especially by the low- and middle-income population. In the past, poultry products were subject to price controls, which resulted in close links between governments and producers to coordinate supply. With competition rules in place, government and private sector are not collaborators any longer. To declare these collusive arrangements, which were formerly promoted by the government, unlawful was a difficult test for the Commission. President Fujimori himself publicly supported the independence of the Commission, despite the political lobbying for protection from the affected firms. The decision, still on a long road of appeals, clarified the role of INDECOPI in competition matters, and showed the stick that the agency could yield to enforce its decisions after two years of promoting the transition to competition.

Although the broiler case had a great impact in Peru, law enforcement is an activity still cautiously executed by the Commission. Many cases are dealt with by means of preventive consultation with the firms. The creation of a competition culture and the lowering of statutory entry barriers are activities on which the Commission spends most of its time and resources. In this regard, INDECOPI provides counseling services on contracts and other agreements likely to restrict competition. INDECOPI’s Market Access Commission also contributes to these goals by identifying statutes and regulations likely to interfere in the market or discriminate against new participants. Efforts in this area have dealt with the elimination of market barriers created by regional and local governments. Among the most significant entry barriers have been the imposition of taxes on interregional trade and commerce, on local advertisement, and on the use of public roads, since such taxes increase business costs, especially for those small firms. In 95 percent of cases, the Commission has found such taxes in violation of market access regulations, and local governments have been fined. The main investigations involved Peru’s two most important local governments, Lima and San Isidro (OAS 1997c). Such investigations have put INDECOPI on the front pages of the newspaper because they are seen as new forms of central government interference in local affairs. Nevertheless, competition and consumer welfare considerations have so far prevailed over strong political pressures.

An assessment of Peru’s competition policy shows how effective this policy can be when approached with clear objectives and political support. The Fujimori administration’s trade and regulatory policies are the most market-oriented in the region. Reforms in these areas have ranged from changes in constitutional provisions to complete dismantling of access barriers. Consistency and coordination among economic policymakers in both congress and in the executive branch have been key determinants in creating a stable environment for competition. The other element has been the innovative institutional setting provided to INDECOPI. As INDECOPI watches over all measures and regulations dealing with competition in the broadest sense, it has been easier to identify those bottlenecks likely to affect the functioning of the market. Given the emphasis on protecting consumer welfare by means of promotion of more competition, the activities have primarily focused on freeing markets of the obstacles still remaining in the economy.

The fact that protectionism has been soundly rebuffed by the government has assured that no big battles have taken place between INDECOPI and other offices. Therefore, the typical conflicts between trade and competition goals have been minimized. For instance, in the always-appealing area of antidumping and subsidies, the INDECOPI Commission has imposed duties on only a few occasions, and is the body that least makes use of these mechanisms in the region. The same can be said for technical standards, in which INDECOPI is also the least likely to use standards as protectionist measures. Of course, further coordinating efforts are necessary among INDECOPI’s seven Commissions, as well as between INDECOPI and Peru’s Privatization Commission on potential competition restrictions coming out of the regulatory framework for public utilities. Additionally, INDECOPI requires further strengthening of its market analysis and investigation capacity. As INDECOPI becomes a more utilized institution, enforcement, especially in the area of restrictive practices, should be more active.

Thus far, competition policy has worked well in Peru. The political stability and the friendly approach of the president and his cabinet toward INDECOPI’s role in the economy has contributed to the success of the agency’s agenda. How dependable the approach will be toward competition with regard to particular individuals rather than to institutions remains an open question.

Continuation: Venezuela: Getting Closer to the Right Balance

* Ana Julia Jatar is a Senior Fellow at the Inter-American Dialogue, and Luis Tineo is a Senior Trade Specialist at the Organization of American States. The authors thank Joaquín Molina for valuable research assistance. They also appreciate the beneficial discussions and comments provided by Gerald Meyerman, William Kovacic, A. E. Rodríguez, Barbara Kotschwar, and José Tavares de Araujo. The views and analyses are the authors’ and should not be attributed to the Inter-American Dialogue or the Organization of American States.

1 In Bolivia, for instance, the Sectoral Regulation System Law (SIRESE) provides an innovative and comprehensive approach toward competition for firms operating in the telecommunications, electricity, transportation, hydrocarbon, and water sectors. In these sectors, firms must operate according to principles of free competition and economic efficiency and, as in other competition laws of the region, conduct and merger transactions likely to restrict or distort competition are prohibited (OAS 1997b).

2 For a comparative review of the competition laws and institutions existing in Latin America and the Caribbean, see Tineo (1997).

3 The Law on Restrictive Business Practices No. 155 (December 24, 1959). This law was regulated by Decree 1302 of 1964. Aimed at strengthening law enforcement, the government issued the Decree-Law No. 2153 of December 30, 1992, which granted broader powers on competition to the Superintendency of Industry and Commerce (OAS 1997b).

4 The Law to Eliminate Monopolistic Controlling and Restrictive Practices of Free Competition, Decree-Law 701, November 5, 1991. Other competition regulations include the Law Creating the Institute for the Protection of Free Competition and Intellectual Property (INDECOPI), Decree-Law25.868, November 18, 1992 (amended Decree-Law 26.116, December 28, 1992) (OAS 1997b).

5 Specific regulations dealing with merger control have been issued in sectors like public utilities and telecommunications.

6 Arguments against the adoption of merger control in recent liberalizing economies have been presented by Rodríguez (1996). According to Rodriguez, the merger component is not essential during the transition period, but in the long run. During the transition to a market economy, mergers should not be controlled like in developed economies as they are drove by efficiency considerations rather than by monopolistic ones. This approach has been the basis for Peru’s explicit spurning of merger control.

7 In a recent paper, Rodríguez (1997) provides a review of this decision and examines Peru’s challenges in going from interventionism to the market.