competition policy in asean – case studies 22 september 2008, canberra

Competition Policy in ASEAN – Case Studies

22 September 2008, Canberra

2

Context

► For Economic Research Institute for ASEAN and East Asia (ERIA)

3

Outline

► Purpose► Approach► Case studies► Ease of economic activity► Sector characteristics► Cross-country comparisons

4

Purpose

► Research questions:1. Should all ASEAN countries adopt competition

policies

2. Should ASEAN countries integrate their competition policies

5

Purpose

► To explore question 1:– Review international experience – from introduction

of competition policies in other transition economies– Explore case studies in ASEAN – this project

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Approach

► Select three sectors► Compare in ASEAN countries at different stages

in developing competition laws► Examine whether significant differences in

market conditions and outcomes

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Approach

► Hypothesis:– Countries with competition laws have more

competitive markets and more efficient market outcomes

– Should see: • Fewer barriers to market entry• Fewer restrictive business practices• More suppliers• Lower market concentration• More frequent supplier entry and exit and consumer switching• Higher productivity• Lower margins and prices

8

Framework

► Structure-conduct-performance framework:– Market performance follows from the structure of the

market and the conduct of its participants– Competitive structural conditions encourage

competitive behaviour, through efficient incentives and signals, which promotes competitive and efficient outcomes

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FrameworkB

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gro

und

Co

nd

itio

ns

Market StructureSeller concentrationBuyer concentrationEconomies of scale and scopeBarriers to entryProduct differentiationVertical integrationDiversification

Market ConductPricing and outputInvestmentCompetitive behaviourR & DAdvertising and productpromotionMergers

Market PerformanceAllocative efficiencyProduction efficiencyProfitabilityInnovative efficiencyProduct varietyExport/import substitutionIncome distribution

DemandPrice elasticityIncome elasticityBuyer tastesType of saleVariability

SupplyTechnologyTransport costsImport potentialComparative advantage

Product differentiation and salespromotion

Product innovation

Profitability

Process innovation

Public PolicyCompetition policyTrade policyTax policyForeign investment policyResource management policyLabour market policy

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Case studies

Cement Telecommunications Transport and logistics

Competition laws in force

Indonesia √ √

Singapore √

Thailand √ √ √

Vietnam √ √

Competition laws in development

Malaysia √

Philippines √ √

No comprehensive competition laws

Brunei Darussalam √

Cambodia √ √

Laos √

Myanmar

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Ease of economic activity

► Are competition laws conducive to general economic activity

► A number of international measures of ease of, or impediments to, general economic activity:– Ease of Doing Business– Index of Economic Freedom– Economic Freedom of the World– Competitiveness Scoreboard– Corruption Perceptions Index

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Ease of economic activity

New ZealandAustralia

Japan

Korea

India China

MyanmarLaos

Cambodia

Vietnam

Singapore

Thailand

PhilippinesIndonesia

Brunei

Malaysia

0

20

40

60

80

100

120

140

160

Aver

age

rank

ing

Corelation coefficient between status of competition laws and ease of economic activity = 0.68

Competition laws in forceCompetition laws in developmentNo comprehensive competition laws

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Sectors

► Cement► Telecommunications► Transport and logistics

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Cement

► Natural tendency towards geographically-concentrated monopoly or oligopoly

► Marked economies of scale and high minimum efficient scale – favour supplying markets from a small number of large plants

► Plants run most efficiently at high capacity utilisation rates and marginal costs rise quickly as production falls below optimal levels

► But low value-to-weight ratio and high transportation costs – favour a larger number of smaller, higher cost plants located close to dispersed markets

► Very energy intensive – largest component of variable costs

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Cement

► High fixed relative to variable costs, high industry entry and exit costs due to capital investment in plants

► Competitive pressure from imports limited by high costs of entry – cement imported in bulk requires a bulk handling facility and shipping in bags incurs extra handling costs

► Closely connected with the volatile construction sector – often has difficulty balancing demand and supply and avoiding under and over-capacity

► Low price elasticity of demand due to the lack of substitutes – reducing prices would redistribute demand between producers rather than increase aggregate demand

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Cement

► Under combination of high fixed costs and volatile but price inelastic demand, producers seek to avoid competing on price when demand declines

► International experience suggests: – Complete deregulation unlikely to result in more competitive

producer behaviour due to incentive for price collusion– Regulatory intervention to increase competition would not

necessarily result in better outcomes for consumers due to the large economies of scale and high capital intensity

– Optimal approach appears to be – accept market concentration in a small number of large producers and focus on constraining any abuse of their market power

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Telecommunications

► A “network industry”► Traditionally seen as a natural monopoly:

– Reproducing the network is a major cost barrier to new entrants– Historically, network and service providers have tended to be

integrated

► Worldwide, countries are seeking to improve effectiveness and efficiency by separating network and service components and promoting competition in the latter

► Many have also introduced reforms to separate policy makers, regulators and operators, given the different skills required and incentives faced

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Telecommunications

► Case for separation:– Service providers need access to, but not necessarily ownership

of, networks – Operating networks and providing services are very different

businesses, involving very different types of investments and requiring different management skills

– Separation lowers the cost of entry into the market for services, enhancing competition between providers and enabling development of specialised customer services

– Removes ability to inhibit competition by using network profits to subsidise services in markets that might otherwise attract competitors

– Makes interconnection costs more transparent

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Telecommunications

– Provides network owners with incentives to maximise utilisation regardless of signal source and to expand coverage, but little incentive to over-invest, which is common where networks and services are bundled

– Inefficiencies introduced by some duplication of networks may be small relative to operational inefficiencies resulting from a lack of competitive pressure

– Separation also simplifies competition regulation, in needing to apply to network operations only

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Telecommunications

► Asia:– Moving away from traditional public monopolies – But still reluctant to allow unrestricted entry, to

eliminate limits on private and foreign ownership and to establish strong independent regulators

– Liberalisation to increase competition generally introduced earlier and to a greater degree in mobile services than in fixed line sector

– Growth of mobile sector aided by popularity of pre-payment plans

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Telecommunications

► International experience suggests:– Entry restrictions increasingly difficult to justify– Can ensure social objectives such as “universal

access” by adopting regulatory principles to prevent abuse of market power and to require compliance with minimum standards for reliability, quality and social outcomes

– Liberalisation and competition insufficient to reduce unit costs – requires reform in combination with technological development, increasing usage and maturing competitive market

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Transport and logistics

► Very broad area, of variable data availability and quality

► Focus on:– A broad indicator – trade freedom – the ease with

which goods and services can move across borders– One specific sector – sea freight – competition in port

services

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► Difficult to distinguish between different causes of costs and delays in cross-border movements, whether:– Insufficient competition in markets for transport services (e.g.

monopoly suppliers, high market concentration, collusion by incumbents)

– Official barriers to entry (e.g. tariff and non-tariff barriers, border entry requirements, national flag carriers)

– Poor transport infrastructure (e.g. insufficient port capacity, poor quality roads)

– Administrative difficulties (e.g. complex or inefficient border procedures, unofficial charges)

– Cultural and social impediments (e.g. language, road signs and traffic rules)

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► Interested in not only barriers to entry from outside each country, but also barriers to domestic new entrants

► Measures of the ease of cross-border trading may be more a reflection of trade policy than of domestic competition policy and conditions

► But may still be informative to examine how trade freedom varies across countries that have different states of competition law

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Cross-country comparisons

► Rigorous analysis hampered by limited availability of robust and comparable data

► Evidence available is also somewhat circumstantial – does not prove a causal link

► Observed differences in market conditions and outcomes might reflect influences other than competition laws, such as:– Other institutions and infrastructure underlying economic activity– Other government policies – economic development, trade policy– Specific sector characteristics or policies

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► Difficult to discern to what extent presence/absence of competition laws may have contributed to observed differences

► But a crude comparison:– Does suggest some correlations, if not necessarily

causal relationships– Does show some signs of better market conditions

and outcomes in countries where competition laws are more advanced

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Cross-country comparisonsIndonesia Singapore Thailand Vietnam Malaysia Philippine

sBrunei

DarussalamCambodia Laos Myanmar

Status of competition laws √√ √√ √√ √√ √ √ x x x x

Ease of economic activity √ √√√ √√ √ √√ √ √ x x x

Cement

Market concentration x x x

Excess capacity x √ √√

Barriers to entry √ x √

Output and prices √ √√ x

Telecommunications

Market concentration √ √ √√

Barriers to entry x x √

Output √√ √√ √√

Prices x √√ √√


Trade freedom √√ √√√ √ √ √√ √√ √√ x x

Sea freight √ √√ √√√

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► Quite high correlation between competition laws and ease of economic activity generally

► In case study sectors, correlation between competition laws and market conditions and outcomes is most strongly positive for:– Cement output and prices – Trade freedom

► But negative in some sectors, most strongly for:– Excess capacity in the cement sector– Market concentration and barriers to entry in the

telecommunications sector– Sea freight

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► Cement:– The Philippines has greater excess capacity and lower

barriers to entry, and therefore rates as more conducive to competition, than Indonesia and Thailand, both of which have more established competition laws

– But market performance in terms of output and prices rates lower in the Philippines, reflecting suspected price collusion

– Market concentration is high in all three countries, reflecting the characteristics of cement production

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Cement

Indocement Tunggal Prakarsa

30%

Holcim Indonesia15%

Semen Andalas Indonesia

4%

Others6%

Semen Tonasa8%

Semen Padang12%

Semen Gresik25%

Indonesia

Holcim37%

Fortune11%

FR6%

Northern5%

Taiheiyo4%

Apo12%

Others10%

Solid9%

Republic6%

Philippines Price (US$/tonne)

0

10

20

30

40

50

60

70

80

90

Indonesia Thailand Philippines

Siam Cement

42%

Siam City

24%

TPI Polene

17%

Others

3%

Asia Cement

10%

Jalaprathan

4%Thaiand

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► Telecommunications: – Even without competition laws, Cambodia rates better

in terms of market concentration, barriers to entry and prices than Thailand and Vietnam, which both have competition laws, reflecting early liberalisation and competition in its mobile sector

– All three countries have seen marked increases in output, as well as improvements in quality

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Telecommunications

Price (US$, 3 minute call, mobile, peak)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

2003 2004 2005

Thailand

Vietnam

Cambodia

Thailand

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

1990 1992 1994 1996 1998 2000 2002 20040

10

20

30

40

50

60

70Waiting list for fixed lines (left axis)Faults per 100 fixed lines (right axis)

Cambodia

0

1

2

3

4

5

6

7

8

1990 1992 1994 1996 1998 2000 2002 2004

Fixed lines per 100 inhabitantsMobile phone subscribers per 100 inhabitants

Vietnam, connection charge (Vietnamese dong)

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

1990 1992 1994 1996 1998 2000 2002 2004

Connection - fixed line, residentialConnection - fixed line, businessConnection - mobile

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► Transport and logistics:– Trade freedom is generally greater in countries that

have implemented or are developing competition laws– But in sea freight, Malaysia, which is considering

whether to introduce competition legislation, rates better than Singapore and Indonesia, both of which have competition laws in force, reflecting its less concentrated market and more room to expand capacity

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Terminal handling charges (US$)

0

50

100

150

200

250

300

Indonesia Singapore Malaysia Thailand

20 foot equivalent unit

40 foot equivalent unit

Time and documents required to import and export

0 10 20 30 40 50 60

Laos

Cambodia

Vietnam

Philippines

Thailand

Indonesia

Brunei

Malaysia

Singapore Time for import (days)

Time for export (days)

Documents for import (number)

Documents for export (number)

Ease of Doing Business - Trading Across Borders (ranking)

0 20 40 60 80 100 120 140 160 180

Laos

Cambodia

Vietnam

Philippines

Thailand

Indonesia

Brunei

Malaysia

Singapore

Economic Freedom of the World - Freedom to Trade Internationally (score out of 10)

4

5

6

7

8

9

10

1970 1975 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005

Singapore

Philippines

Malaysia

Thailand

Indonesia

Vietnam

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Conclusions

► For case study sectors, as for ease of economic activity more generally:– High but not perfect correlation between competition

laws and market conditions and outcomes– Competition laws generally make a significant positive

contribution, but are not the sole determinant of how well markets behave and perform

– Other influences can compensate for less developed competition laws or detract from more developed competition laws

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Conclusions

► Implication for policy makers – developing, implementing and enforcing competition laws: – May not be sufficient to achieve competitive market

conditions and outcomes in all sectors – Nor necessary for some sectors – But can generally be expected to be significantly

conducive– Need to consider sector characteristics