Monday, December 15, 2008

Competition Law Reform – The Way Forward

Dan Ryan is a Director of the Lion Rock Institute - 2008.12.15

The Hong Kong government has raised expectations that some sort of competition-related reform will be introduced in the territory in 2009. Although it may surprise some, we are in favor of this. What we are against is that nature of the proposal that the government wants to introduce. From the outset The Lion Rock Institute has been one of the leading (and lonely) critics of the proposal. Now the chorus of critics is growing.

The key problem with the proposal is that it subjects private enterprises to a regulatory regime which is inappropriate for those that operate in extremely open and competitive markets. At the same time the proposal does nothing about those entities which operate in those markets that are protected from new competitors by government regulations. The proposal also excludes and contains principles which are inappropriate for regulating statutory entities which engage in commercial activities that unfairly compete with the private sector. If the current proposal is enacted we would thus get the worse of both worlds – legal uncertainty and unnecessary costs on private business and inertia in those government-protected industries which do require reform.

In the interests of moving the debate forward we believe it is better to focus on those areas where there is wide agreement on the need reform and which, unlike the current proposal, would actually do some good. The key focus should be on those statutory entities, regulations or regulatory bodies which restrict competition in Hong Kong. Let me give you a couple of examples.

The Law Society is charged with regulating the legal profession in Hong Kong. Unfortunately many of its regulations impose overly-restrictive burdens on foreign solicitors practicing in this city that go beyond the need to simply ensure quality & standards. For example, foreign practitioners who have already gone through years of practical and university training have to sit exams in Hong Kong's arcane system of land tenure even though they will never practice in that area in their lives. Ask any foreign lawyer who has had to sit they exam and they will tell you how crazy this is. This type of restrictive barrier forces up the price of legal services for all Hong Kong consumers and makes the legal market less competitive than it should be.

Another good example is the Hong Kong Exchange. The exchange is a for-profit company which is sheltered from foreign competition by overly restrictive government regulations. In Europe and the United States regulatory changes have allowed alternative trading systems such as Chi-X a greater role in the market. These entities have provided competition to the existing exchanges and drastically cut trading costs and improved efficiency. In Hong Kong the regulatory regime is such that it restricts their operations here.

The Hong Kong Jockey Club is another area in need of competition reform. Like others, we acknowledge there may be good social policy reasons for limiting gambling in the city. However, this does not automatically mean that one entity should be given a monopoly on the provision of gambling services. We believe there is scope for an open and transparent inquiry into how new operators may be introduced while retaining those restrictions which are deemed necessary for social policy reasons.

One of the most politically sensitive areas is the retail grocery and petrol markets. It is an area which people rely on every day but also an area where a great deal of unsubstantiated allegations have been made. The argument (often presented with very little hard evidence) is that the government land auction process and other regulations favor existing incumbents. We would be in favor an open and transparent inquiry into the way that land auctions take place in Hong Kong which would also examine any government regulatory restrictions which might prevent the entry of new entities into the retail supermarket and petrol markets.

We believe that the reforms of the type we have outlined above are something that all those who genuinely believe in increasing competition in Hong Kong can get behind. They are proposals which can be supported while staying true to the city's pro-market principles and at the same time exposing to rightful scrutiny those areas where existing government regulations favor particular businesses over others. We look forward to working with all those who want to make this reform happen.

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