MERGER CONTROL MUST FALL WITHIN NATION’S NEEDS

Key concern is to avoid the perception that Singapore is protectionist

By Lim Chong Kin

The coming into force of the merger control provisions in the Competition Act on July 1 marks the final phase in the implementation of competition law in Singapore.

It remains an open question, however, as to the competition policy that the Competition Commission of Singapore (CCS) will embrace in implementing the new law.

Clearly, the competition policy adopted by CCS will determine the outcome of the new law, which will in turn shape Singapore’s competitiveness.

The stakes are high given the increasing encroachment of other regional economies on our traditional strengths, as is the rise of China.

Singapore’s stature as a small and open economy makes it compelling for Singapore to adopt a more “nationalistic” competition policy – one that recognizes the possibility of approving otherwise anti-competitive mergers to create “national champions”.

Yet, from a theoretical point of view, this is the antithesis of a merger regime under the competition law which aims to prevent monopolies being created.

So, is there a case for national champions in Singapore? Ultimately, this calls for a delicate assessment of the benefits to Singapore’s overall economy, even if there is a risk that domestic competition may be compromised.

A real-life example of how a national champion is allowed to come about in spite of an active merger regime is in New Zealand.

In March 2000, New Zealand’s two largest dairy companies proposed a merger to create Fonterra, effectively a national champion. The new entity controlled over 96% of the domestic market, but at the same time became the world’s fifth largest dairy company.

The reason cited by the New Zealand government for creating this national champion was essentially to ensure that New Zealand’s dairy companies (through the newly created national champion) could continue to compete on the world stage.

Fonterra’s size, dominance and success in the world’s dairy markets were cited as critical to the New Zealand economy as a whole.

In other words, it was in the national interest to create such a large dairy giant, even though domestic competition would be clearly eliminated.

Singapore’s Competition Act prohibits mergers that have or are expected to result in a substantial lessening of competition in Singapore.

At the same time, mergers which significantly reduce competition, but have far reaching benefits for Singapore’s economy as a whole, may be allowed to proceed under the Competition Act.

In its response to public submissions on the proposed merger regime, the CCS has identified one such instance to be where a merger leads to a reduction of domestic competition in Singapore, but “where the primary purpose is to create an enterprise, capable of competing in markets outside Singapore”.

National champion avenue

This appears to be an implicit recognition by the CCS that it may permit the creation of national champions capable of competing in markets outside of Singapore.

Even if the CCS rejects the merger, the Competition Act provides for the Minister to veto any negative decision of the CCS on public interest considerations, such as strategic interest.

The creation of a national champion could be of strategic interest if it enhances Singapore’s economy as a whole. In this respect, Singapore follows Germany’s competition law in so far as Germany also allows ministerial intervention to overwrite a negative decision from its competition regulator.

The German Economics Ministry has used this power to overrule the Federal Cartel Office decision, to allow Eon AG’s proposed $10.2 billion takeover of Europe’s largest gas importer, Ruhrgas AG.

The German ministry justified its actions on the basis that the takeover would produce a powerful national champion to negotiate in international markets.

Despite these international precedents, adopting a nationalistic competition policy is not without its dangers. The common criticism is that national champions are in effect government-sanctioned monopolies and their creation would only result in high domestic prices and reduced consumer welfare.

This could intrinsically harm consumer interest, especially if the monopoly is largely left unregulated. Hence, a policy of compromising competition in favour of creating national champions has been criticized by economists.

For example, Professor Michael Porter of Harvard University argues that “creating a dominant domestic competitor rarely results in international competitive advantage”.

However, there are sufficient measures available to the CCS to guard against any abuse arising from the creation of a national champion. For example, the CCS has the ability to extract binding commitments from merging parties.

Thus, if the CCS is concerned about domestic competition it could require the merged entity to give behavioural undertakings such as not increasing prices in the local market for a fixed period.

In any event, these criticisms would have to be balanced against the arguments in favour of creating national champions in a small and open economy like Singapore.

It is an attractive argument that Singapore needs strong domestic enterprises that can withstand competition from foreign giants.

In certain markets, high concentration levels may be necessary before enterprises can realize significant economies of scale and scope.

Size does matter in some markets and any local enterprise would need to be of a certain critical mass before it can be competitive on a global scale.

A good example would be in the banking industry where Singapore banks were recently encouraged to merge in order to acquire sufficient critical mass to enable them to compete effectively with the large foreign banks.

Any short term loss of domestic competition in Singapore could be far outweighed by the newly created ability to effectively compete with foreign competitors both domestically and internationally.

Moreover, policymakers in Singapore have always prioritized efficiency and productivity in the face of global competition.

Parallel concerns have been echoed in the competition policy of Hong Kong, a similarly thriving small and open economy. The Competition Policy Review Committee (CPRC) of Hong Kong recently recommended against the inclusion of a merger control regime in Hong Kong’s proposed competition law.

According to the CPRC, the existing oligopolies are a result of normal free market forces at work in a small economy like Hong Kong.

Echoing efficiency concerns, the CPRC highlights that very often in a small economy such as Hong Kong’s, large firms are needed to achieve economies of scale and operational efficiencies.

It is a noteworthy reminder to Singapore that Hong Kong has decided to adopt competition law without any form of merger control.

Merger control downside

Merger control law imposes significant business costs on compliance and whether this will impact on the foreign investors’ decision on the legal jurisdiction to locate their operations remains to be seen.

Recently, Japan revised its merger guidelines to raise the threshold of mergers that will be subject to review.

The head of Japan’s Fair Trade Commission (FTC), has said that the new merger guidelines were not crafted to create Japanese national champions or stifle foreign competition.

In the same breath, however, the chairman of the FTC stresses how important it is for Japanese firms to “restructure their business model and use M&A as a tool to make corporations more efficient”.

This shows that the Japanese policy makers need to balance the interests of foreign investors who look toward greater competitiveness and domestic companies that are grappling with global competition.

Any competition policy that Singapore adopts to encourage national champions must be carefully articulated and not be overtly protectionist because doing so may well jeopardize foreign investments that are vital to Singapore’s economy.

It is Singapore’s strategy to encourage free trade and this is done through the many bi-lateral and multi-lateral free trade agreements it has signed.

It could become an affront to our international trading partners if Singapore is perceived to be a protectionist country.

A small and open economy like Singapore cannot afford to be so perceived. Whatever the underlying justification, such a perception will do more harm than good.

The writer is director and co-head of Drew & Napier LLC’s competition law practice group.

This article was first published in The Business Times (5 July 2007).