Igor Artemiev - The end of the epoch of national champions

Igor Artemiev
Head of the Federal Antimonopoly Service (FAS Russia)

Unfortunately, we are living in the period of crisis. And in the period of crisis all countries face restrictions of competition. When “Transaero” withdraws from the market because the company failed financial management, obviously the air transportation market is being monopolized. How many other companies have collapsed over recent years?

Competition restriction should be countered with antimonopoly, tariff, investment and public procurement policies. If we succeed, the future will not be lost and we will not be doomed to keep going over the same ground, generating and then correcting the same errors.

In crisis the government has sharply increased capabilities of the antimonopoly body and antimonopoly regulation in public defence procurement, tariffs, and support for small and medium business, the work of state-run companies and corporations, and in the construction industry.

Tariffs

Let’s look at synergy. Where did we start in tariff regulation? With procurement by state-run companies: we began applying the benchmarking method to compare prices for specific procurements and found that wherever we come, procurements are widely based on overrated prices. Benchmarking – a comparable market method is much more efficient than the estimated prime costs method or, for instance, the retro-method. Given that, naturally, we evaluate the level of market monopolization. So there you have a combination of public procurement and antimonopoly policy for the purposes of tariff regulation.

If the entire tariff policy, public procurement, etc., will be dominated by the primacy of antimonopoly policy, they’ll obtain a new quality. The tariff policy is now turning 180 degrees.

Earlier it was expected that government regulation should be introduced for a wider range of goods, there should be even more etatism in the economy, registering and approving the costs by the tariff regulator and nobody can escape tariff regulation. But why ports and airports are in the Register of natural monopolies? Ports on the same shore madly compete with each other. Moscow Air Hub shows exemplary competition. What kind of monopolies are stevedoring companies? It’s time to remove the telecommunications sector from tariff regulation because prices for cellular services in many cases are lower than the telecommunications tariffs. We seek to drastically narrow rather than expand such regulation.

The same can be said about the number of regulated tariffs: there are thousands of them instead of dozens. Tariffs for natural monopolies should be introduced only on the basis of the “inflation minus” principle. We should forget about “inflation plus”. Monopolies should be given tariffs only in exchange for a cost-cutting programme.

The old policy was designed to support the “national champions”, which certainly are mostly natural monopolies by no coincidence. All this was done to the detriment of consumers for whom such support turned into a steep rise in tariffs against absolute inefficiency of monopolies in construction, modernization of production, with huge expenses and inflated staff.

A number of national markets broke down into two, three or four segment, which boundaries were measured by a railway tariff radius. The tariffs were overrated to such an extent that made it unprofitable to carry goods to other regions.

Moreover, the railways lost their freight base. They must rapidly reduce the tariffs to return this base, winning it back from marine and road transport.

We must change both awareness of the issue and thousands of statutory acts; a lot of the methods used by the Federal Tariff Service must be corrected. All of them were aimed at a single goal: raise tariffs, do everything for the “national champions”.

Competition between technologies should become mandatory at the first stage of large projects. Typically, tenders are organized in a single step when a technical assignment specifies a particular technical solution although there are dozens of others. Is it difficult to have a two-step tender when the first step is focused on competition between technologies? Why don’t our monopolies apply this obvious approach and instead preference is given to a single supplier? It is the “kick-back impartibility principle”. Therefore, two-stage tenders should be introduced regulatory.

Public procurement has enormous cost-cutting resources. 48% of procurement right away go to a single supplier and other 41% are disguised under the labels of “non-alternative choice” or “extraordinary procurement”. In total, 90% of procurement are non-competitive. Just for this, I would put 0% tariff indexation to all. It is simply a travesty of the federal legislation. The State Duma adopted in the first reading amendments to No.223-FZ Federal Law (on procurement of goods, works, services by particular types of legal entities), that improve the scheme. Unfortunately, any law can be circumvented.

If No.223-FZ Federal Law helps economize at least as much as was saved applying No. 44-FZ Federal Law on contractual system for state and municipal procurement, the savings will reach 1 trillion RUR.

A cost-cutting programme must cover at least three areas: operational costs, maintenance-and-investment costs, and financial-and-economic costs. Why, for instance, no efforts are undertaken to decrease debt receivables that can reach hundreds of billions RUR for natural monopolies.

Sale of non-core assets should continue. Monopolists control mass media, travel agents, medical institutions, and sport clubs. Nobody intends to immediately take the “Locomotive” club from “Russian Railways” out of consideration for the sport funs. Generally, however, it is private business that should finance football and ice hockey teams, and so on. Right now such costs are shifted in the tariffs.

We have bulked-up, lazy, completely slack “national champions”. They should be invigorated.

Small business

We liberate small business from our control through immunities. For companies with less than 400 million RUR revenue, immunities are introduced for abusing dominance, agreements (except cartels) and retail chains.

First Prime-Minister Igor Shuvalov suggested that in procurement private companies with over 7 billion RUR revenue should give 10% of lots to small and medium business. It means sharing social responsibility, but I think that private business also has nothing to lose. There can be pre-qualification and then companies will be able to choose a small company that will perform high-quality job. And today such small business is available in Russia. It is looking for a job and can’t find it.

Year in review

I believe that we have witnessed the final shaping of, perhaps the best system of exchange trading with oil products in the world. By the end of the year, for instance, the costs of diesel fuel will go up by maximum 5–6%, and gasoline - by 9% against the 12.2% inflation rate.

Trading with natural gas started, which means possible deregulation of gas prices. Strange as it may seem, thanks to exchange trading with oil a pretty competitive gas market was formed. At the same time, strict regulation of transportation tariffs must remain.

The Rules for non-discriminatory access for the infrastructure to install telecommunications networks are adopted. Investors are able to connect to the networks and the owners can earn reasonable, although not monopolistic money. This way a network will be developing. If we adopt the same rules for the railway transport or the gas sector, favourable environment for investments will also be built up in these spheres. I mean investments in the approach lines, construction of the main gas pipelines by oil companies to the tie-in point on the “Gazprom” pipe.

A big, hard-won reform is the Forth antimonopoly package. It enhances regulator’s efficiency and reduces administrative pressure upon business.

The Prime Minister signed the Standard for developing competition in the regions.  It has a principal difference from the preceding standards: targets are digitalized - a share of private pre-school institutions and schools, a share of expenses for private medicine. It reduces budgetary spending. Why purchase, for instance, a bus using budgetary funds if a private investor can be involved.

The fifth package

What will be included in the Fifth antimonopoly package? It is still to be discussed.

Certainly, it should comprise the balance of intellectual property rights and antimonopoly regulation. We must contrapose the methods of antimonopoly regulation to bad practices of transnational corporations, especially where public interests of the state are concerned: for instance, protecting human life and health.

The fifth package will give a definition of antimonopoly compliance and outline the consequences of its bona fide application.

The most efforts are put in large-scale changing of the tariff legislation. Simply speaking, all norms must be rewritten. The policy should make a U-turn.

Finally, the Law “On Natural Monopolies” (1995) should be abolished. It will symbolize the end of the history of “national champions”. They must be forced to aim at efficiency rather than size. We think it would not be such a bad idea if the law on competition includes a new Chapter on “Infrastructure Monopolies”. And if only network assets remain under such infrastructure monopolies, we will make a revolution in legislation.

Undoubtedly, the package should also have provisions on parallel import and class actions.

***

Regulator fields questions

This year the plenary session had a new format: instead of traditional reports, participants were able to pose questions to the regulator – the Head of the Federal Antimonopoly Service (FAS Russia) Igor Artemiev who talked about his vision of the future of FAS.

Anna Numerova, Chairperson, the General Council of the Non-Profit Partnership for Competition Support, a counsel at “Egorov, Puginsky, Afanasiev and Partners” Law Offices: Mr. Artemiev, what’s your vision of the antimonopoly policy in 5 and 25 years?

The Head of FAS Igor Artemiev: There will be five quite successful years. In the period of crisis the antimonopoly body is in demand more than ever. There will be more struggle, more – excuse me – jerkiness, because we shall have to make decisions that too many will not like. As for the 25-year prospects, by that time they will certainly release FAS. The Universe is increasingly expanding and then tends to squeeze back. A negative scenario is when instead of FAS there will be a small district branch of Rospotrebnadzor [the Federal Consumer Rights Protection Service]. A positive one is when other regulators will be responsible for public procurement and trade – I dream of it – and FAS remains an antimonopoly body, among the top ten in Europe.

Anna Numerova: How did economic sanctions influence the antimonopoly policy? Foreign investors did not feel disadvantaged?

Igor Artemiev: It’s in Russia that too many felt very disadvantaged so a large-scale import-substitution programme was born. And in plenty of cases it became more important that the antimonopoly policy. Import-substitution programmes are expensive and will lead to competition restriction, and our job is to make sure it does not become excessive. We propose the following principle – “the third is not none”: implementing mport-substitution programmes when there are two Russian companies and a third is a foreign company. If in some field import substitution is vital and Russian production is created from scratch, the programme must be introduced for a particular period and FAS shall strictly watch prices applying the current antimonopoly law. In some sense we will be the only hope for consumers that the sector will avoid a gigantic price upsurge. Competition does not feel well where the words about the “national security” emerge.

Anton Rogachevsky, Vice-President on Legal Issues, “Baltika”: FAS proposes to obligate large private companies to give a part of procurement to small and medium business. Perhaps, it makes sense now to concentrate on other methods of support, for example, subsidies and state guarantees?

Igor Artemiev: I do propose to discuss this norm: it can be a tough, imperative one or there might be stimulating measures. For instance, if a large company gets support from the state, it should place some procurement with small business. May be some companies voluntarily agree for this as an experiment. At some point such a measure was adopted in the US, and it is adopted in Germany. We will certainly discuss the proposals with business. For natural monopolies it should be tough, 100% imperative. For the government customers – 200% strict measures are needed. And for private business the norms undoubtedly should be softer. We’d most like to understand, however, what prevents private companies from giving some procurement to small and medium business. A lot of companies already do it. We expect that the draft project will be submitted to the State Duma [the Lower Chamber of the Russian Parliament] at the beginning of 2016 and will become effective from 2017 to give a year for adjustment.

Anatoly Maltsan, a member of Competition Development Committee, Russian Union of Industrialists and Entrepreneurs: The Constitution allows restricting rights and liberties for particular purposes: protecting the fundamental principles of the constitutional system, public morals, health, rights and legitimate interests of other persons, national defence and state security. Some lawyers think that it is unlawful to restrict large business in the interests of small companies if we do not talk about natural monopolies and state-run companies.

Igor Artemiev: Such a restriction is necessary for economic security of the state, and achieving a well-balanced economy. In sustainable economies small business accounts for 50% GDP and more. I’d like to emphasize once again that I do not exclude a stimulating rather than a prohibiting option. We just need to figure out how to stimulate. Tax benefits are a taboo but other options are possible.

Ksenia Tyunik, a senior layer, White & Case: Going back to the issue of economic sanctions. Does the Antimonopoly Service have plans and possibility to hold foreign companies liable for refusing to work with Russian consumers because of the foreign sanctions?

Igor Artemiev: We do not have such an intention and desire. If life forces us, I do not exclude it.  First of all, however, it is difficult to prove at Court that a refusal to enter into a contract was unlawful. Second, such companies must have the dominant position on the market and there are not so many cases like this. Third, it is a political issue and many things are solved through negotiations. The antimonopoly body is not going to breed a conflict, and politics is a prerogative of the Government and the President.

Dmitry Timofeev, Legal Director, “Rosvodokanal”: Our company, on the one hand, invests private money in the sector that used to be the state function; on the other - we are exactly a natural monopoly that lives off tariffs. Should the yield level of commercial operators still be put in the tariffs or we should rather feed on cost-cutting?

Igor Artemiev: Our approach to tariffs is the “inflation minus” method; there are, however, two exceptions. First, in a transition to long-term regulation tariffs should be higher in the first years: a little bit lower or even equal to the inflation. It is necessary in order to attract investments. Second exception concerns reforms. For example, nowadays water pipelines are transferred to concessions; approximate investor requests reach 270 billion RUR. We propose to increase from 7% to 20% the water and water drainage share in the utility tariff that equals 4%. It should be done to the prejudice of heating and other utility services. The same approach must be for all sectors where long tariffs are set and private investors come.

Olga Nikitina, LG Electronics: You said that parallel import is one of the prospective lines of the fifth package. When do you expect to legalize parallel import? Are there any plans to keep preferences for foreign brands that have own production in Russia?

Igor Artemiev: The decision will be up to the Eurasian Economic Commission. All five member-countries agreed to discuss the issue. Approximate arrangements are reached on exemptions from the regional principle in favour of the international principle. Each country, however, wishes to propose a particular range of goods, and the first exemptions will be for those goods, where the interests of all five countries meet.  Russia proposes medicinal drugs, medical products, baby stuff, drilling and spare car parts. Our colleagues partly agree, partly disagree. It will take several years; I believe that parallel import will be legalized by 2020, although I would prefer to accelerate the process. FAS is already working on amendments to the law. Also there should be immunity for localized production. Investments must be safely protected.