Defending Competition in the Paraguayan market
Casa Grüter, a small domestic grocery store chain, created quite a commotion in Paraguay when it accused its distributors into boycotting them. According to publications in local newspapers, the larger supermarkets had supposedly told numerous domestic distributors they would stop doing business with them if they continued doing business with Casa Grüter. The proprietors of Casa Grüter say they were being targeted because of their low prices achieved through selling goods with a lower profit margin.
Casa Grüter had little hope of stopping the practice, outside of leaking the news to the press, because Paraguay remains one of the few countries in Latin America without a Competition Law. However, the recently Defense of Competition bill (DOC bill) submitted to the Parliament is positioned to change this reality.
In 2003, the Ministry of Industry and Commerce (MIC) commissioned an European consultant to draft a bill for the country’s first competition laws. In July, 2008, the House of Delegates passed the bill during the last session of the 5 year term, without any discussion. Business leaders from various industries decried the potential law, saying that it was too harsh and could be manipulated for political and economic gains due to weaknesses in its design. The Senate rejected the bill based partly on the promise from business community that they would improve the old bill. The DOC bill is the result of this effort. As the only significant draft of legislation of its kind, early signs point that the DOC bill could pass in the near future.
The DOC bill was modeled after similar legislation found in the Mercosur, United States, European Union, and UNCTAD model guidelines. The current DOC bill makes several improvements over the 2008 bill rejected by the Senate, concerning anti-competitive conducts, abuse of dominant position, mergers control, and most importantly, autonomy of the regulatory body.
The drafters kept both consumer and business interests in mind and also took account of Paraguay’s unique market situation and national commercial policies; i.e. he country’s position as a land-locked country nestled between two of the continent’s strongest economies (Brazil and Argentina), subject to the unstoppable flow of their goods, coupled with a vibrant black market, and local industries trying to grow large enough to compete with others in the regional market.
The DOC bill restricts anti-competitive conduct, modeled after the UNCTAD guidelines, using the rule of reason as opposed to the per se rules in the previous bill. Under the old bill, certain restricted conduct would have had little to no effect on competition but would still violate the law. The DOC bill focuses on only restricting conduct that effectively harms competition, giving business more operational freedom than the previous bill.
The DOC bill also applies the rule of reason to firms that possess a dominant position in the market. Under the old bill, any business with a 30% market share was considered to have a dominant position and had to operate with many overly burdensome restrictions. A blanket 30% rate fails to convey the realities of the Paraguayan market, where a domestic business trying to compete regionally may need a large market share at home to survive.
For instance, a Paraguayan company with a 50% share of in the Paraguayan market may still be quite small compared to a Brazilian or Argentinean company with only a 10% market share in their respective countries.
The DOC bill gives the enforcement authority the flexibility to consider each individual market, along with additional factors, to determine what market share percentage should be considered a dominant position. Businesses are not punished for their dominant position, only for their abuse of that position.
The old bill made mergers and acquisitions difficult, requiring reporting and approval from the Ministry of Industry and Commerce before mergers or acquisitions would be allowed to take place. The DOC bill raises the minimum threshold for such reporting. A business would only report the merger or acquisition when it raised their market share over 40% or gross income over 120.000 times the mandated monthly salary (US$ 38 Millions). It does so to decrease government intervention in mergers and acquisitions that would not have a negative effect on competition or the market.
The DOC bill places enforcement authority in a new autonomous entity called the National Commission of Competition (Conacom). The previous bill gave sole enforcement authority to a mid-level office within the MIC. The private sector unanimously voiced concern that this structure could be abused, motivated by political or other forces rather than by concern for the market.
The Conacom’s structure helps relieve these worries because its agency independence and the election process, which involves a board comprised equally of public and private sector representatives that should oversee the process to create a short-list of qualified candidates (the President of the Republic chooses the commissioners from the short-list), better ensures it will possess the requisite expertise and autonomy to successfully fulfill its duties.
The MIC asked the US FTC and the UNCTAD Competition Policy Branch for assessment of the DOC bill. Upon reviewing the legislation, both generally agreed that such draft has a balanced approach and complies with most of current standards in competition legislation, suggesting few changes. Hearings at the Lower Chamber are going to be held during the third quarter of 2010.
Politicians, business community and consumers agree that passing the DOC bill will bring Paraguay’s competition laws on par with its neighbors while helping improve the transparency, predictability, and viability of its growing competitive market. This will be another of many recent positive steps aiding in the development of the country by creating a better business culture and environment.