Old habits die hard in CEEC economies

Date: 30/10/1997

By Chris Johnstone

PROSECUTOR Solinsky, the central character in Julian Barnes' Bulgarian-based novel The Porcupine, attempts to put the country's Communist past on trial, but is increasingly haunted by the impression that he himself is following in the footsteps of his party predecessors.

He is not alone in concluding that old habits die hard. After casting his eyes over competition rules world-wide, Competition Commissioner Karel van Miert, the EU's leading opponent of state subsidies and unfair practices, concluded recently that the countries of central and eastern Europe (CEECs) still have to learn to apply regulations and turn off the flow of government funds to industry.

“Much remains to be done to install a full competition culture,” stated a recent report by the Commission.

Developing strong competition policies and disciplining old habits on subsidies is one of the conditions for applicant countries to join the EU and their progress has already been weighed up by the European Commission in deciding which ones should be first in line.

Competition, anti-trust and state aid authorities have sprung up in all the candidate states, but they have a variable bark and bite, with some kept on a very short leash by their governments.

EU officials draw a general distinction between slowness in putting in place procedures and practices to curb subsidies and the altogether more promising signs that countries are prepared to clamp down on companies' anti-competitive practices.

In the area of anti-trust action, most countries in central and eastern Europe have moved fast to prevent the free market from becoming a free for all.

However, even here they are haunted by their past. Many countries had established monopolies in place before the fall of the Berlin Wall and it has not always been possible to break them up before selling them off. “Sometimes, rules setting a 30&percent; maximum market share have had to be ignored when foreign companies have come in and bought up businesses with around 60&percent; of the local market,” said one observer. “Competition authorities are often coming into conflict with governments that are trying to bring in foreign investment.”

Hungary, the Czech Republic, Poland, some of the Baltic states and Romania are picked out by many as having advanced furthest in establishing authorities to tackle cartels and anti-competitive practices.

Hungary already has similar laws in place to those of the EU and is following up with secondary legislation on such issues as block exemptions, which will automatically exclude certain types of agreements from competition scrutiny.

However, there is a concern that not all the bodies involved have the muscle and expertise to do the job. “It is a question of enforcement. Sometimes the authorities may not have all the powers to mount major investigations. If you have a hard-core cartel, you must have the necessary powers,” said another EU official.

Some existing laws create severe problems for anti-trust authorities. Polish rules ensuring confidentiality and business secrecy are just one example. Officials warn that unless these are changed, investigations of cartels and state aid will face severe problems.

There is also an impression that some authorities are being side-tracked into giving too much priority to following up complaints from consumers and small businesses, and are casting their net far too wide in dealing with mergers.

“They do seem to deal with the small potatoes,” said one official. “Sometimes they are looking at cases where firms only take a 25&percent; share stake. Poland, for example, dealt with 400 merger cases last year.”

The small number of notifications of competition cases by companies and the lack of examples involving resale price maintenance are also a cause for concern. In addition, while most of the anti-trust authorities are adequately staffed, low wages and the lure of the private sector mean they often lack experienced lawyers.

Staff have quickly picked up the theoretical knowledge about anti-trust procedures, but lack the practical skills needed to mount raids on companies.

The independence of these new cartel busters in central and eastern Europe is also questionable. Some anti-trust authorities in the region have been rather uncomfortably grafted on to existing ministries (most often those for economic or financial affairs) and have not been given the degree of independence their mission requires.

In the area of state aid, the uniform impression is that a lot more needs to be done. “Here, they are just beginning,” said a Commission official.

That assessment embraces countries such as Hungary and Poland which have otherwise made good progress in the sphere of competition policy. Others, such as the Baltic states, have framed ambitious policies to deal with state aid, but it remains to be seen whether these will be adequately enforced.

These critical assessments take into account the fact that the EU is not looking for the CEECs blindly to reproduce Union state aid disciplines. It is prepared to give the extra leeway on subsidies required for economies in transition, as has already been shown in the case of the former East Germany.

The EU argues that tackling state aid should provide the longer-term reward of helping to get national economies in shape by curbing preferential tax treatment or reductions for companies as well as tax arrears and evasion, subsidised interest rates, debt write-offs and over-generous incentives accompanying privatisation.

Sometimes, subsidies are given by local authorities which feel no need to notify their actions to the government. In many cases, certain types of support are a relic from the centrally planned economy in which no real track was kept of what funding was being given.

There are signs that the CEECs are changing their ways - if only to meet the obligations set out in their Europe Agreements with the Union.

At the end of next month, the European Parliament will review an agreement between the EU and Czech government setting a clear framework for dealing with subsidy questions. Other applicant countries in the region are expected to follow Prague's example, with the Czech rules serving as the model.

The Europe Agreements forbade state aid being given by either side which could have an effect on trade between them. They also demanded that the CEECs approximate their competition rules to those of the EU - but gave no deadline and imposed no sanctions for failing to do so.

The new framework will allow each side to raise state aid questions and to try to resolve them without being in the uncomfortable position of deciding if and when to resort to trade sanctions. The implementing rules will also call on each side to draw up a list of all the direct and indirect aid being provided.