The important role of competition authorities in promoting competitive neutrality

The competition policy community often focuses on the actions of companies, but the state may also adopt measures that significantly distort the competitive landscape. In the run-up to the 2021 Global Forum on Competition, the OECD’s Jordi Calvet Bademunt and Sophie Flaherty analyse how state intervention can affect competitive neutrality and the main tools available to competition authorities to help ensure a level playing field.

“Competitive neutrality” is defined by the OECD as a principle whereby all enterprises are ‘provided a level playing field with respect to a state’s (including central, regional, federal, provincial, county, or municipal levels of the state) ownership, regulation or activity in the market’. A level playing field will allow the most efficient firms with the best products to enter the market and expand, while pushing inefficient firms to exit. Competition is encouraged, meaning that resources are optimised, productivity increases and consumers enjoy the benefits of lower prices, more choice, better quality products and services, and more innovation.

Competition distortions

State intervention can distort the level playing field in a number of ways, disrupting market dynamics and softening competition by favouring some market players over others.  Examples include:

  • Exemptions to competition law for specific firms or sectors may significantly undermine competitive neutrality. To ensure competitive neutrality, competition law should apply and be enforced in a non-discriminatory manner to all enterprises, unless overriding public policy objectives require otherwise. In addition, existing exemptions should be regularly re-assessed to see whether they are still justified and proportionate.
  • Regulatory frameworks may also treat some market players (including public, private, domestic, and foreign enterprises) differently to others, either because they are not applicable to all competitors or because they provide for selective exemptions for certain requirements. Competitive neutrality requires that all enterprises competing in a market are subject to the same regulatory requirements, irrespective of their ownership, nationality or legal form.
  • Public procurement. Legislation and tender terms may establish requirements or processes that favour specific types of companies, like state-owned enterprises (SOEs) or domestic businesses, over others. Where measures are adopted to support certain companies (such as small and medium enterprises) on public-policy grounds, they should be carefully considered in terms of their effectiveness and their likely impact on competition.
  • Public support measures are financial advantages provided by the state to enterprises, which may selectively favour certain firms, giving them a competitive advantage in the market over competitors. To preserve competitive neutrality, competition impacts should be considered in the design and granting of public support measures.
  • Rules determining the grant of exclusive and special rights, specifically for the provision of public services may give some enterprises undue advantages over others and in turn distort competition. Competitive neutrality can be protected by selecting public service operators through an open, fair and transparent bidding process; adopting fair and transparent public service compensation standards; and clearly defining any exclusive right and limiting it to the fulfilment of the public service obligation.

Participants at the 2021 Global Forum on Competition will discuss potential competitive neutrality distortions arising from state actions and the role of competition authorities in levelling the playing field. The discussion will build on the OECD’s extensive work on competitive neutrality, which culminated in the recently adopted Recommendation on Competitive Neutrality.

Tools for competition authorities

Competition authorities have a number of specific tools they can use to promote competitive neutrality. These tools can be broken down into three broad categories.

The first set of tools involves legal powers for competition authorities to prevent regulatory and administrative acts that distort competitive neutrality. The extent of these powers varies greatly across jurisdictions. In some, competition authorities can directly remove anti-competitive acts and even fine public bodies (generally SOEs) and public officials. However, in other jurisdictions, competition authorities can only challenge acts that harm competitive neutrality before a court. Binding decisions (of an authority or a court) can be particularly effective in promoting competitive neutrality.

The second set of tools include those allowing competition authorities to review legislation and contribute to reform initiatives by providing advice to government on their potential competition implications. Competition authorities are well-placed to conduct competition assessments, given their technical capacities – and they can conduct them pursuant to specific powers or obligations or as a part of their general advocacy functions. Competition assessments are typically carried out through mandatory regulatory impact assessments, ad hoc assessments of laws and regulations and market studies or sector inquiries. Although competition authorities’ recommendations are often non-binding, various authorities have reported a positive impact of their advocacy efforts.

The third set of tools are those dealing with the control of public support measures. Although most competition law regimes around the world have a limited role in this area, very few authorities can rely on more general powers allowing them to intervene against anti-competitive state interventions (usually those by local and provincial governments). The European Union is one of these few exceptions, having adopted a state aid regime that involves both an ex-ante screening procedure and an ex-post assessment mechanism. However, the primary role for most competition authorities in relation to public support is advocacy. Competition authorities can, for example, support governments by drafting guidelines for public bodies that incorporate competition considerations in the design of public support measures.

Some may argue that competitive neutrality issues may not be easily addressed within the existing enforcement powers of many competition authorities, but enforcement powers do exist and advocacy remains a powerful tool. Competition authorities can help minimise distortive state actions by engaging with governments and administrations to convince them of the benefits of levelling the playing field and by supporting them in designing a competitively neutral framework.  

The OECD Global Forum on Competition celebrates its 20th anniversary on 6-8 December 2021 and will include a session on the promotion of competitive neutrality by competition authorities.

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2021 OECD Global Forum on Competition Blog Series

Blog 1 : Trade and Competition: Best Friends Forever?

Blog 2 : What can economics contribute to abuse of dominance investigations?

Blog 3: The important role of competition authorities in promoting competitive neutrality

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