The Financial Assistance Program Memorandum: Far-Reaching Reforms for Competition and Regulatory Law

Introduction

Enhancing the competitiveness of the Portuguese economy through structural reform is one the main issues addressed in the Memorandum of Understanding signed on May 17 2011, by the Portuguese Government, the European Commission, the European Central Bank and the International Monetary Fund. This Memorandum, which established the basis for the economic and financial adjustment programme that will allow Portugal to benefit from a financial assistance package worth up to €78 billion, was recently revised on 1 September 2011, following the first quarterly review by the international authorities.

Several of the proposed reforms are related to or inspired by competition law. They include:

• the revision of the Competition Act;
• greater independence and resources for the Competition Authority and sector-specific regulators;
• the creation of a specialised competition appeals court and a specialised IP court as part of an ambitious reform of the judicial system; and
• a vast range of measures to enhance competition in regulated sectors, such as energy, communications, postal services, healthcare, transport and the regulated professions.
  
  

Revision of Competition Act

The Government proposes to implement measures to “improve the speed and effectiveness of competition enforcement”. It has undertaken to present Parliament, by December 2011, with a bill to amend the Competition Act (Law 18/2003).

Procedural rules

The principal aim of the reform is to make competition law as independent as possible from administrative and criminal procedural law, thereby ensuring effective enforcement of competition rules. The subsidiary application of criminal law procedures to competition law infringement actions has raised concerns in recent years and has resulted in the courts quashing a number of Authority decisions on procedural grounds.

The Government will also seek to “ensure greater clarity and legal certainty in the application of procedural administrative law to merger control”, although the subsidiary application of administrative procedures to merger control cases has raised relatively little controversy.

Opening competition investigations

The Government proposes to “rationalise the conditions that determine the opening of investigations, allowing the Competition Authority to assess the relevance of the claims”. At present, the Authority is legally bound to initiate an investigation when it receives a complaint in respect of an alleged infringement.

Merger Control

The Memorandum states that “necessary procedures are to be established” to bring Portugal’s law on merger control more closely into line with the EU Merger Regulation (139/2004), in particular, regarding the thresholds for a concentration to become subject to compulsory filing. Portugal’s competition regime incorporates both turnover and market share jurisdictional thresholds. Although in recent times there have been calls for the market share threshold to be repealed or revised, it plays a part in the merger control rules of a number of jurisdictions, such as Spain or the United Kingdom.

Another likely change in the field of merger control concerns the substantive test for the assessment of mergers. The so-called “dominance test”, whereby a concentration is prohibited if it creates or reinforces a dominant position in a relevant market that impedes effective competition, is likely to be replaced by the “significant impediment of effective competition” test, in use in EU law since 2004.

Competition Authority and Sector Regulators

The Government is committed to ensuring that national regulators have the necessary independence and resources to exercise their responsibilities. An independent report will be commissioned from internationally recognised specialists, to be delivered by March 2012. The report will benchmark appointment practices, responsibilities, independence and resources of the main authorities against best international practice. On the basis of this report, the Government will present a proposal to Parliament by June 2012 to implement the best practices identified and reinforce the independence of regulators.

A key issue in this respect will be the nomination of the heads of regulatory agencies, who, at present, are appointed by the government with no external oversight (as is the case of the Competition Authority). There have been a number of recent proposals to increase the independence of the regulatory agencies, including the transfer of powers of appointment to the President, subject to the confirmation of Parliament.

New competition appeals court

The Memorandum sets out a comprehensive and ambitious set of reforms to improve the operation of the courts. As part of the reforms, Law 46/2011 has recently created a specialised “competition, regulation and supervision” appeals court and a specialised Intellectual Property court, which the Government commits to be fully operational by March 2012.

Although the creation of a specialist appeals court is welcome, the implementation of the proposal remains uncertain. When it becomes operational, this court will have jurisdiction to hear appeals against decisions by all of Portugal’s independent regulatory agencies, including sector regulators for the banking, insurance, capital markets, media and communications sectors - as such, it will hardly be a dedicated competition forum. One way of ensuring that the Memorandum commitment is met would be to establish a specialised chamber within the new court that deals exclusively with competition law cases.

Increased competition in regulated sectors

The Government has pledged to “address excessive profits and reduce the scope for [unsustainable] profit-seeking behaviour” in a number of regulated sectors.

Energy

The Government will seek to increase competition in the energy markets and to further the integration of the Iberian energy markets. It will also anticipate the full liberalisation of the energy sector by phasing out regulated tariffs by January 1, 2013. The main principles for this have already been approved by Resolution of Council of Ministers 34/2011, and implementing legislation is to be approved until the end of the year.

The implementation of the Third EU Energy package (directives 2009/72/EC and 2009/73/ EC) is to be completed until March 2012, following the recent amendment to the framework laws for electricity and gas by Decree-laws 77 and 78/2011. In addition, until the end of 2011 the Government will review the efficiency of support schemes for cogeneration and renewables (including options for reducing the implicit production subsidy), and reassess the legacy support measures associated with the production of electricity.

Communications

The Memorandum expresses the aim of increasing competition in the communications markets by lowering entry barriers and facilitating the entry of new players. Besides the recent implementation of the EU “Better Regulation” Directive (2009/136/ CE) by Law 51/2011, of 13 September, this will be achieved by:

• launching an auction of spectrum for the assignment of further radio frequencies for broadband wireless services, in full compliance with the principles of EU law, until the end of December 2011;.
• lowering mobile termination rates (September 2011);
• reducing restrictions on the mobility of consumers, along the lines proposed by the Competition Authority (September 2011), reviewing barriers to entry and adopting corrective measures (March 2012); and
• renegotiating the concession contract for the provision of universal services, and launching a new tender for the designation of universal service providers (December 2011).

Healthcare

The Government proposes to increase competition among private healthcare providers. It is committed to assessing compliance with EU competition rules in the provision of services in the private healthcare sector by March 2012.

Postal Services

The Government will further liberalise the sector by implementing the EU Third Postal Directive (2008/06/EC), and will ensure that the sector regulator retains adequate powers and independence in view of its increased role in monitoring prices and costs by September 2011.

Rail Transport

The rail regulator’s independence and competences are to be strengthened, and the state-owned railway operator will be made fully independent of the state. The government also proposes to revise the existing public service obligations to allow for the gradual introduction of competitive tendering (September 2011).

Regulated professions

The government has promised to:

• review and reduce the number of regulated professions, in order to fully implement the Services Directive (2006/123/EC).
• eliminate restrictions on the use of advertising in such professions;
• improve the legal framework for recognition of professional qualifications; and
• relax the requirements for cross-border service providers in Portugal.

Amendments to the existing legislation will be presented to Parliament by December 2011, and are expected to be approved by March 2012.

State's special rights over privatised companies

The Government has already fulfilled the commitment to eliminate all provisions that give the State special rights over the decision-making processes of public companies, further to the revocation by Decree-law 90/2011, of 25 July of legislative provisions on special rights of the State over EDP, GALP and Portugal Telecom (the former incumbents for electricity, fuel and gas, and telecommunications), and the amendment to the companies’ articles of association approved in shareholders’ meetings held in July and August.

In addition, public bodies will not conclude, as shareholders, agreement which influence the management or control of companies or hinder the free movement of capital. (The participation of the State, through CGD, in the shareholder agreement in GALP, will cease with the full privatization of GALP by December 2011). The Government also commits, in the forthcoming privatisations, not to set or allow holding or acquisition caps beyond each privatisation transaction.

Comment

This bold and far-reaching programme sets a strict implementation schedule, and the international authorities will monitor its progress by means of quarterly implementation reports. The first report, issued on 12 August 2011, was overall positive.

The Government is expected to release a draft proposal to revise the Competition Act in the coming weeks. The proposal is likely to incorporate the commitments in the Memorandum and should be based in a proposal sent by the Competition Authority not yet made public.

In this context, the Círculo de Advogados Portugueses de Direito da Concorrência, an association of the competition practitioners in Portugal chaired by MLGTS partner Carlos Botelho Moniz, recently presented to Parliament and to the Government a reflection paper on the revision of the Competition Act.

Suggested amendments focus in particular on:

• procedural rules, especially on judicial secrecy and access to the authority’s files, reasoning in statements of objections, time limits for exercising rights of defence, complainants’ rights and rights of appeal;
• the clarification of substantive rules on unilateral conduct;
• powers to impose fines for infringements of Articles 101 and 102 of the Treaty on the Functioning of the European Union and to accept commitments to end antitrust investigations;
• detailed criteria for the calculation of fines;
• the introduction of a settlement procedure for cartels; and
• measures to incentivize competition law enforcement by private parties directly before the courts.

Given the scope of the expected changes, it is hoped that the proposal will be subject to public consultation before it is presented to Parliament. The Minister for the Economy has publicly committed to doing so.

Note: an earlier version of this article was published in the International Law Office Competition Newsletter of 9 June 2011.