The Monopolies Commission has submitted its seventeenth main report (biennial report) to the Federal Minister for Economic Affairs and Technology in accordance with Section 44(1) of the Act against Restraints of Competition (GWB). The report is entitled ‘Less State, More Competition – Healthcare Markets and State Aid in the Competition Framework’. The title indicates that state intervention and regulation – despite all the progress made in privatisation and liberalisation, driven in particular by the primacy of European law – remain at an excessively high level.
In accordance with its statutory remit, the Monopolies Commission is required to examine the current state and development of corporate concentration and, furthermore, to assess decision-making practice under competition law. In addition, the main report contains an introductory chapter on current issues in competition policy and two special chapters on competition and regulatory issues in the hospital sector and on state aid control under European law.
In the introductory chapter, the Monopolies Commission discusses competition policy aspects of railway privatisation as well as the European Commission’s proposals for unbundling in the energy sector. It also comments on the transition from regulation to competition supervision in telecommunications markets. To improve its information base, the Monopolies Commission recommends legislative proposals concerning cooperation with the Federal Statistical Office and access to procedural files held by the Federal Network Agency.
Railway privatisation
The Federal Government has decided to allow private capital to acquire a stake in Deutsche Bahn AG (DB AG) before the end of 2008. To this end, the current companies responsible for freight transport, passenger transport and regional transport are to be merged into a new company covering the transport and logistics sectors. DB AG, as its – as yet – sole shareholder, is to sell up to 24.9% of the subsidiary to private investors. Furthermore, DB AG will continue to hold 100% ownership of the network company. DB AG, for its part, will remain wholly owned by the Federal Government; the Federal Government will thus also remain the sole owner of the infrastructure.
The Monopolies Commission regards this partial privatisation process as a significant step forward compared with previous privatisation plans for DB AG. Although the desirable separation of the network and operations is still not being implemented consistently, it remains a possibility. The unified group management of the network and transport companies is not only a cause for concern from a competition policy perspective, as it allows for discrimination against private operators on the network. There are also concerns regarding European Union law, as the EU’s railway directives require the transport and logistics division to be effectively independent from the network division, a requirement that would be seriously jeopardised by the existence of a joint holding company.
The Monopolies Commission opposes the calls made in political circles for a moratorium on changes. DB AG must have the option of raising further private equity capital even beyond the agreed 24.9% threshold. A moratorium on changes would be incompatible with the fundamental principle of Article 87e of the Basic Law, nor could it be introduced by means of a collective agreement.
The Monopolies Commission considers the Federal Government’s intentions regarding the use of the proceeds from the sale, which are received by DB AG (i.e. the holding company), to be problematic. Any allocation of funds by this state-owned enterprise to its subsidiaries constitutes state aid within the meaning of Article 87 of the EC Treaty; the permissibility of such aid is more likely to be affirmed in relation to infrastructure than in the case of grants to transport companies, given the associated distortions of competition vis-à-vis private competitors.
Unbundling proposals for the energy sector
The Monopolies Commission takes a critical view of the European Commission’s proposals for the unbundling of transmission and distribution network operators. The practical implementation of these proposals entails significant economic risks, which is why the impact of unbundling on energy prices is also unpredictable. The proposed vertical separation of the networks will not directly resolve the underlying problem – the high concentration of suppliers in the electricity market – and, at best, will only do so in the long term. The Monopolies Commission has fundamental doubts about the effectiveness of the EU’s unbundling instrument for the gas sector, as the vast majority of gas supply comes from companies headquartered outside the EU. Their pricing policies are beyond the Union’s control.
Ownership unbundling, in particular, constitutes a significant encroachment on private property rights. This may result in protracted legal disputes, particularly as the Community’s legislative competence with regard to property law is highly questionable. Another significant point of criticism is the asymmetrical impact of ownership unbundling across the individual Member States. Where companies are state-owned, the Commission’s proposals stipulate that it is sufficient for two separate public bodies to exercise control over extraction or generation and distribution activities on the one hand, and transmission activities on the other. If, however, the group in question is privately owned, it should not hold any significant shareholdings in the network company following vertical unbundling. In view of the risks outlined, the Monopolies Commission recommends consolidating the existing network regulation through targeted measures over the next two to three years, and therefore welcomes in principle the planned tightening of the existing unbundling provisions of the Energy Industry Act within the framework of the so-called ‘third way’. However, it agrees with the European Commission that the requirements imposed on network operators must be further tightened. In addition, the detailed package of measures proposed by the Monopolies Commission in its special report on the energy market should be implemented swiftly.
Telecommunications markets
When assessing the need for regulation in telecommunications markets, the inadequacy of competition law is regularly justified by citing structural differences between competition law and regulatory law. As such differences always exist, there is a risk that sector-specific regulation will be maintained for longer than necessary. The Monopolies Commission advocates applying high standards when assessing this criterion under Section 10(2) of the Telecommunications Act (TKG). It rejects the idea of introducing an intermediate step in the transition from sector-specific regulation to general competition law. This applies both to the proposal to enshrine in the TKG a system of abuse control independent of a determination of the need for regulation, and to the idea that the Federal Network Agency should act as a competition authority and apply competition law within the framework of abuse control in telecommunications markets. In the former case, compatibility with European law would already be doubtful; in the latter, there would be a risk of divergent application of competition law.
Trends in Concentration
In accordance with its statutory mandate, the Monopolies Commission reports regularly on the status and trends in corporate concentration in Germany. For the first time, the statistical business register—which covers the German business landscape to a large extent—is available for this purpose. Instead of the companies previously considered (those with 20 or more employees in mining, manufacturing and construction – totalling around 51,000 entities – the register now covers over 3 million enterprises with an annual turnover of at least EUR 17,500 and/or at least one employee subject to social security contributions, spanning almost all sectors of the economy.
Using this expanded database, the Monopolies Commission was able to establish that concentration has increased in many sectors of the mining and manufacturing industries.
The study into the macroeconomic significance of corporate groups across all economic sectors shows that 6.3% of companies in Germany belong to a group. These account for around 66% of turnover and 53% of the workforce. The share of corporate groups is particularly high in the sectors of mining, manufacturing, energy and water supply, as well as transport and communications.
Although German companies belonging to a group with a foreign parent company account for only 0.7% of all companies, they account for around 19% of total turnover and 10% of the workforce. Foreign parent companies from the USA have the highest share of turnover, followed by those from the UK, the Netherlands, France and Switzerland.
In order to make more targeted use of the information from the expanded database for the analysis of competition policy issues, the Monopolies Commission wishes to utilise new procedures for data access at the Federal Statistical Office. As this requires a change in the law, the Monopolies Commission is proposing a revision of Section 47 of the Act against Restraints of Competition (GWB), which governs cooperation between the Monopolies Commission and the Federal Statistical Office.
The Monopolies Commission has once again examined the concentration and the degree of interdependence among the hundred largest companies in Germany. The share of large enterprises in the net value added of all enterprises in the Federal Republic of Germany rose to 18.0% during the reporting period, the highest figure since the 2000 reporting year. There is a downward trend in capital holdings and personnel links amongst the large enterprises under consideration.
Antitrust decision-making practice
In the abuse proceedings against the owner of the Rossmann drugstore chain for breaching the prohibition on below-cost selling, the Monopolies Commission has criticised the Federal Cartel Office’s interpretation of the provision. The case also provides an opportunity to address fundamental problems in the practical application of the provision, which is actually intended to protect smaller competitors from the market power of larger rivals. The present case shows that this objective is being missed to the detriment of consumers and that there are considerable problems in the practical application of the provision.
Merger control has recently revealed a surge in hospital mergers. In the Monopolies Commission’s view, the consolidation process now underway should be monitored more closely by tightening the threshold criteria. The Monopolies Commission therefore proposes lowering the trigger threshold for hospital mergers to one-third of the current level.
The Monopolies Commission has reached a different assessment in several other proceedings before the Federal Cartel Office, pointing out, amongst other things, the potentially underestimated risks posed by concentration in the air transport sector as a result of several takeovers involving Germany’s second-largest operator, Air Berlin.
In several European merger cases, Member States have attempted to influence the decision. For example, in the E.ON/Endesa case, Spain contested the European Commission’s exclusive jurisdiction and imposed a series of conditions itself. The Monopolies Commission strongly opposes national policies that promote the creation of ‘national champions’ and subordinate competition policy considerations to industrial policy interests. The Monopolies Commission also examines the European Commission’s increasingly economic-based approach. Among other things, it criticises the fact that time-consuming and costly economic studies are commissioned even in cases where they do not yield any additional insights. In a number of clearance decisions by the European Commission, the Monopolkommission considers the commitments made to be ineffective or insufficient. Against this background, it welcomes the planned stricter approach to the practice of commitments. This also includes the fact that, in future, the merging parties will more frequently have to fulfil their commitments before they are permitted to complete a merger.
Hospital sector
The German hospital market is undergoing radical change. Challenges arise from the financing of hospital services, which in recent years has been characterised by the transition to DRG flat-rate payments and the gradual withdrawal of the federal states from investment funding. An ageing population and advances in medical technology are further exacerbating the cost situation. Hospital operators are therefore responding with ongoing rationalisation, an increase in hospital mergers and the privatisation of public hospitals.
Regulatory interventions are bringing the DRG flat-rate payment system back towards a fee-for-service model and promoting the standardisation of treatments and procedures, which saves costs, but also limits hospitals’ scope for manoeuvre and prevents the heterogeneous preferences of patients from being reflected in a correspondingly differentiated and efficient range of services. Obstacles to innovation and economic efficiency are also inherent in the centralised hospital planning carried out by the federal states and in investment support for planned hospitals. The Monopolies Commission advocates a hospital planning system that no longer focuses on guaranteeing comprehensive hospital care, but is instead geared towards ensuring only the necessary minimum level of care. For all other areas, a funding system must be found that allows hospitals to tailor their services to local needs in a competitive environment and to develop them continuously.
The Monopolies Commission therefore supports a return to a monistic hospital funding system. Under this system, all operating expenditure and investment would be covered by flat-rate payments per patient case. Additional services deemed desirable for policy reasons could then be efficiently secured through competitive, recurring tenders. It is not necessary to clear the existing investment backlog before introducing the monistic system.
To further strengthen competitive influences on hospital care, the Monopolies Commission proposes the introduction of special optional tariffs within the statutory health insurance system. Health insurance funds should conclude selective care contracts with individual hospitals for these optional tariffs. Insured persons would be given the option, through voluntary opt-out, to choose a tariff that is cheaper than the standard tariff and, in return, to receive elective hospital services only at the selected contract hospitals of their health insurance fund. In these hospitals, insured persons can then continue to receive treatment to the full extent covered by the statutory standard tariff. The cost-efficiency benefits of the optional tariffs are to be passed on to insured persons in the form of lower premiums. In this context, price differentiation is desirable, as it sends the right signals to insured persons regarding the cost-efficiency of their tariff choice.
European State Aid Control
The European Commission has announced a comprehensive reform of European state aid control (Art. 87 et seq. of the EC Treaty). The current Competition Commissioner, Kroes, attaches considerable importance to this reform and has described it as the ‘flagship project’ of her term of office. In its State Aid Action Plan, published in November 2005, the European Commission identifies as a key reform objective the adoption of a more economically based approach (‘more economic approach’). The new approach in state aid law is not identical to the methods and concepts which the European Commission has long been pursuing in the context of a ‘more economic approach’ under EU competition law (Articles 81 and 82 of the EC Treaty).
The European Commission intends, as part of the compatibility assessment carried out in state aid control at the level of justification (Article 87(3) of the EC Treaty), to carry out a three-stage balancing test in which it places the criterion of market failure at the centre of its analysis. As the grounds for exemption in Article 87(3) of the EC Treaty are formulated in very broad terms, the Monopolies Commission generally regards it as positive that the European Commission is clarifying its approach to the compatibility assessment. This enhances the transparency and the economic basis of this assessment at the level of justification compared with previous practice.
The Monopolkommission recommends, however, that the objective potential of an aid measure to distort competition and affect trade between Member States be assessed at the earlier stage of the factual assessment (Article 87(1) of the EC Treaty) and, in this respect, – as is the case under EU competition law – to require ‘appreciability’ as an unwritten criterion. In this way, it can be avoided that the scope of the prohibition on state aid extends to cases of minor cross-border significance with a purely local focus.
In the Monopolies Commission’s view, the procedure applied in state aid control should be reformed and, in certain respects, brought into line with the procedure under EU competition law. In this context, the procedural rights of competitors and aid recipients should be strengthened, the European Commission’s powers of investigation in relation to undertakings should be improved, and shorter, binding approval deadlines should be introduced. The Monopolies Commission also recommends that it be made easier for state aid recipients, affected competitors and their associations to bring actions before the Community courts. Legal protection at national level should be regulated in a coherent manner and take account of the requirements of state aid law. In particular, the right to bring legal action should be granted to associations, including those from other EU Member States.
In the Monopolies Commission’s view, it is essential to simultaneously implement effective complementary control at national level. This is because European state aid control is focused solely on competition within the internal market and does not empower the European Commission to monitor the proper use of Member States’ resources as such. As long as no such competence exists, Member States are called upon to effectively prevent the waste of public funds resulting from excessive state aid by introducing control mechanisms.
Finally, aid (subsidies) granted by the EU itself – which, unlike measures taken by Member States, do not fall within the scope of EU state aid control – should also be subject to closer scrutiny. In this regard, consideration should be given to transferring the supervision of the EU’s own subsidies, together with the supervision of Member State aid, to a newly established, independent European supervisory authority that can operate free from political influence.
On a personal note
Commission members Prof. Katharina M. Trebitsch, Jörn Aldag and Prof. Dr Dr h.c. Jürgen Basedow stepped down from the Monopolies Commission at the end of their second term of office on 30 June 2008. On the recommendation of the Federal Government, the Federal President appointed Dr Angelika Westerwelle and Prof. Dr Daniel Zimmer to replace them; preparations for the appointment of a further member of the Monopolies Commission are not yet complete. The terms of office of Commission members Prof. Dr Justus Haucap and Peter-Michael Preusker will end on 30 June 2010.
