Saturday, June 7, 2008

Exchange with the Government on Competition Law

See LRIs Exchange with the Government in the South China Morning Post.

"Obstacle course

A proposed law will probably discourage business competition, rather than protect it Dan Ryan
SCMP May 29, 2008

Earlier this month the government released its much-anticipated report on its proposal to introduce a cross-sector competition law. Those looking for a compelling rationale for why we need such a law will be left scratching their heads. Not only does the report contain some glaring omissions, but it also reveals a basic misunderstanding about the nature of competition itself.

The report claims to be based on sound economics yet not one single economist is cited in the whole 57-page document. Any intellectually honest exercise would have at least taken account of the host of economists who think that competition laws make no sense. These include Alan Greenspan, Nobel-prize winners Milton Friedman, James Buchanan, and Ronald Coarse, as well as other leading economists like Thomas Sowell and William Baumol. Which economists is the government relying on to support its claims that the competition law it is proposing is right for Hong Kong? The report does not say.

You will also search in vain in the report for any type of cost-benefit analysis on the proposed competition law. The report makes speculative and unsubstantiated claims about the supposed benefits of introducing the new regulator but ignores or downplays the very real costs to the economy. The only clear statement about costs in the report is that the annual budget for the new regulator will be at least HK$86 million. But that is just the tip of the iceberg. The more significant costs are the regulatory risks and compliance and legal fees that all Hong Kong businesses will face under the proposed regime. Such costs will inevitably and regrettably have to be passed on to consumers in the form of higher prices and a less diverse range of goods. Where is the hard evidence that such additional regulatory burdens and costs will actually result in a net benefit to the Hong Kong economy as a whole? Again, the report does not say.

Most significantly (and frankly embarrassingly) is the fact that nowhere in the report do the authors actually define what they mean by "competition". Surely, you say, a report which cost the government more than HK$16 million to produce and which takes competition as its core subject matter must have defined the term somewhere? Sorry to disappoint, folks. It's just not there.

The absence of a definition of competition is troubling when you actually consider that the focus of the law is to give the regulator wide-ranging powers to take action against businesses which engage in conduct that supposedly "substantially lessens competition". One might reasonably ask - if the term "competition" itself is not defined - how does the regulator know whether some form of business behaviour substantially lessens it? "Oh, leave it to us," they say. "We will decide what is competitive and what is not". Such a vague law with such arbitrary powers of enforcement would make Robert Mugabe blush. There are concerns in some legal circles that giving a regulator such dramatic powers over the private sector may infringe the Basic Law.

The absence of a definition of competition also points to a deeper misunderstanding in the report. Competition, properly defined, has nothing to do with the behaviour of particular market participants. Rather, it is where there is the potential for a new market participant to compete for the consumers who are currently buying their goods and services from one or more market participants.

Hong Kong has traditionally understood that competition is only reduced when government restricts market entry of new competitors through tariffs, arbitrary licensing schemes or overly complicated government regulation which favours incumbents and outright bans on competitors. This is why, instead of introducing a competition law, Hong Kong has focused instead on ensuring that in most industries there is an open market. The message is clear - to create competition, create an open market.

In an open market - where there is no government restriction on a new competitor entering - all that happens if companies agree to jointly raise prices or submit similar bids is that an opportunity is created for a new competitor to steal customers away by offering a lower price or win the tender by submitting a lower bid.

Most Hong Kong businesses understand this instinctively. All that a competition regulator would do is penalise honest commercial operators and turn legitimate business competition into legal disputes. Who wants that?

The proposed law would also do nothing to open up those few industries in Hong Kong in which new competitors are prohibited, for example gambling.

Plans to introduce such a massive change on the basis of such a deeply flawed report should be of concern to all Hong Kong businesses and consumers. Those of us who oppose the proposed competition law are not against competition. We believe instead that this proposal is unnecessary regulation of the economy and a bad arbitrary law that would actually reduce competition and threaten Hong Kong's hard-won economic success.

Dan Ryan is a director of The Lion Rock Institute"-SCMP

Jonathan McKinley, the secretary for commerce and economic development, replied to LRI in "Hong Kong people clearly think a competition law is needed," printed in the SCMP on Jun 03, 2008

Mr. McKinley wrote that the government defined competition in the 2006 public discussion document,"Promoting Competition - Maintaining our Economic Drive". He went on to mention that consultations showed the local community supported competition law. We would argue that since the government and their statutory bodies don't know exactly what such a law encompasses, the public probably hasn't been well educated about it either. Mr. McKinley continued to disagree with LRI, supposedly citing factual errors in LRIs article, first targeting the quote LRI made on the annual budget for the proposed competition commission and the total cost of consultation paper. Indeed, the SCMP has listed in Jimmy Cheung's "HK$245m consultancy bill raises eyebrows" dated April 9, 2008, that the Commerce and Economic Development Bureau did commission the law firm Arcully, Fong & Ng and Gilbert + Tobin to advise on the introduction of a competition law, at a cost of more than HK$16 million. Straight from Gilbert + Tobin, the Detailed Proposals are a distillation of a series of reports that the firms were commissioned to do.

LRIs response to the Government: "Public finds competition law confusing
Jun 07, 2008

I refer to the letter by Jonathan McKinley, for the secretary for commerce and economic development ("Hong Kong people clearly think a competition law is needed", June 3). Mr McKinley alleges I have my facts wrong in my article ("Obstacle course", May 29) where I criticised the government's proposal for a competition law regulator.

He claims I am incorrect when I state that the competition law consultation paper "cost the government more than HK$16 million" to produce.

I refer Mr McKinley to the article ("HK$245m consultancy bill raises eyebrows - many studies overlapped, legislators learn", April 9), which said: "The Commerce and Economic Development Bureau commissioned the law firm Arculli, Fong & Ng and Australian firm Gilbert and Tobin to advise on the introduction of a competition law, at a cost of more than HK$16 million."

He also alleges I am incorrect when I claim that the annual costs of the new competition regulator would be "at least HK$86 million".

I refer Mr McKinley to the government's own website ( hk/en/category/businessandfinance/080506/html/080506en03001.htm), where it states that the competition commission would require an annual budget of up to HK$80 million "and the initial cost of operating the [competition] tribunal would be about [HK]$6 million a year".

Does Mr McKinley still dispute the figures I cited in my article? If so, he has an obligation to inform the public clearly what the full costs have been and will be, including the indirect compliance costs which will be imposed on Hong Kong businesses.

His letter also does not respond to the broader questions in my article, including why the government has ignored the host of prestigious economists who think a competition law does not make sense and why there has been no hard evidence that the proposed regulator will bring a net gain to Hong Kong.

Mr McKinley says he speaks for the people of Hong Kong on this plan for the introduction of this new regulator. But no vote has been taken on this issue and our own surveys to date indicate that the public is confused about the issue and sceptical of the government's plans.

It has every right to be. The muddle the government has got itself into on this issue is apparent from its very response to my article, which I stand by.

Dan Ryan, director, The Lion Rock Institute" -SCMP

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