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Report on Developments and Enforcement of Competition Policy and Laws in the Western Hemisphere

Submitted by the OAS Trade Unit to the FTAA Working Group on Competition Policies


Colombia: Report on Developments and Enforcement of Competition Policy and Laws (1992 - 1996) (Continued)

c. Telecommunications Sector

Comunicación Celular S.A. "Comcel S.A." and Celular Móvil de Colombia "Celumóvil S.A."

Comcel and Celumóvil, businesses that operate mobile cellular phone service as State franchises, operate exclusively within the country's eastern sector. Given the business context and the nature of the market in which these firms operate, the administrative barriers keep out other competitors, so that Comcel and Celumóvil constitute a shared monopoly.

The Office of the Superintendent was informed that Corcel S.A. and Celumóvil S.A. charged the same rates for connection, the basic service and call minutes; also, the rate they were charging customers who signed up for service between June and October 1994 was allegedly different from the rate charged those customers who signed up for service in February 1995 and thereafter, even though the service was the same.

A preliminary inquiry resulted in 1995 Resolution No. 840, instituting an investigation of the cellular mobile phone service in the eastern sector of the country to determine whether a dominant position had been abused, in violation of Article 50.2 of Decree 2153/92, by establishing different rates for identical operations, thus putting one group of customers at a disadvantage vis-a-vis like customers, and whether Article 47.1 ibidem had been violated in the form of an alleged price-fixing agreement.

Early closure: Through Resolution No. 1736, dated November 15, 1995, the Office of the Superintendent decided to close the investigation into Corcel and Celumóvil since assurances had been given that any alleged discrimination in the form of higher rates for certain groups of customers with the same service would be eliminated. The two businesses were given a period of 30 days in which to inform the Office of the Superintendent of their new plans, the commercial features of those plans, the number of customers for every plan and the rates charged, so that any alleged discrimination among the various plans would be eliminated, which is in effect what happened.

d. Health Sector

Colombia's Law 100, passed in 1993, reorganized the health side of the social security system, which consists of health promoter agencies, institutions that provide health services and prepaid medical care agencies.

Prepaid medicine is the organized, established system for handling medical care and delivering of health services and/or for handling, either directly or indirectly, the services included under a pre-established health plan that charges a regular, pre-set fee.

The health promoter agencies are for basic organization of the social security health system, enrolling Colombians into the system, raising financial resources and providing health services, either themselves directly or through health care providers.

Based on complaints filed in 1996, mainly by pre-paid medical care companies and health promoter agencies, the Office of the Superintendent for Industry and Commerce instituted eleven (11) investigations into the Colombian associations of orthopedic surgery and traumatology, cardiology, urology, nephrology, gastroenterology, radiology, obstetrics and gynecology of the Atlantic, neurosurgery (Atlantic section) and the Colombian Federation of Obstetrics and Gynecology, for alleged violation of the rules on free competition and restraint of trade, on grounds that they engaged in the following practices: price fixing, creation of discriminatory terms, refusing to provide a health care service in retaliation for the price policy and refraining from providing a health service, cutting off the service or adversely affecting the delivery of same.

These practices are covered in 1994 Decree 1663, which regulates the competition in the health sector with an across-the-board prohibition of any act or agreement that inhibits or contrives free competition within the market for health services and those practices that constitute an abuse of a dominant position.

To make each service provided as lucrative as possible, health professionals who are members of associations in their respective areas of specialization have assigned each medical procedure a certain point value, depending on its complexity. The point values are in relative value units [Unidades de Valor Relativo - U.V.R.] and each unit has a peso value. This is the alleged price fixing. These decisions were approved by the associations' general assemblies or executive boards. If the rates set by the association are not accepted by the prepaid medical companies or health promoters, the professionals allegedly refused service.

In this case, the Office of the Superintendent posited that the health professionals engage in commerce in the sense that they provide their services in exchange for the same fees; this business is practiced in the "health services market", whose organization and activities are both subject to the law governing competition.

Health specialists in a given field are each other's competition; this creates the possibility of collusive agreements among them that are contrary to free competition.

Invoking Article 52 of Decree 2153/92, the alleged offenders requested that the investigation be concluded and to that end promised to eliminate the peso value assigned to each medical procedure, to eliminate all discriminatory practices and to provide health services regularly. Eight (8) investigations have been concluded in this manner.

In early February 1997, the Office of the Superintendent of Industry and Commerce sent letters to the presidents of the national medical associations advising them of the proceedings conducted and warning them against engaging in practices that are violations of the rules governing free competition and to avoid future violations.

e. Industria Fosforera Nacional

This case began on the basis of newspaper reports published in mid-June 1995, which spoke of practices used by Fonandes S.A. that were alleged to be violations of the laws on competition and restraint of trade.

This office, in keeping with articles 11.1 and 52 of Decree 2153/92, instituted a preliminary inquiry which resulted in Resolution 1264, of September 7, 1995, ordering an investigation of FONANDES S.A. to determine whether, under Article 46 of Decree 2153/92, the provisions of Article 1 of Law 155 of 1959 and Article 48.1 of Decree 2153/92 had been violated. The former prohibits practices that affect free competition and the second concerns violation of the advertising rules contained in the consumer protection law. The alleged violations in this case were the following:

    * The use of a sales technique known as 2x1, whereby one box of matches was given away free of charge for every box purchased, at what were alleged to be ridiculously low or predatory prices.

    * Use of the same sales technique continuously since January 1995, with no indication of when the offer would expire.

The investigation found that the practices under investigation did not constitute a violation of the competition-related laws and laws against restraint of trade, as the following analysis shows:

    The 2x1 sales technique used by Fonandes S.A. for the first four months of 1995, represented 5.71% of its total sales and when the production costs -including the cost of the promotions and the sales price to the distributor- were factored together, profits were within reason. Therefore, the prices could not be said to be either ridiculously low or predatory.

    Fonandes S.A. had a lower cost structure than its competition (which have now all disappeared), particularly because of its advanced technology, which enabled it to keep its total costs down. Taking advantage of the competitive edge allowed by its low production costs, Fonandes used promotional techniques without having to sell at below-cost prices or prices that were either extremely low or predatory.

    The market for matches in Colombia reorganized itself as a consequence of the competitiveness of the participating businesses, but not as an effect in any way attributable to the restrictive trade practices described in Resolution 1264 of 1995. This was how Fonandes S.A. managed to considerably increase its market share between January 1, 1994 and June 20, 1995.

    In order for the second charge, which concerned the use of the so-called 2x1 sales technique without indicating when the promotional offer would expire, to be considered contrary to free competition, its intent or effect must be an undue restraint of free competition. For the reasons explained above, this was not proved during the course of the investigation.

    Through Resolution 1097 of June 7, 1997, the investigation was closed. No sanction was imposed against Fonandes S.A. or its legal representative.

f. Unión Colombiana de Empresas de Publicidad - UCEP

With Resolution No. 2406 of November 8, 1996, an inquiry was opened to investigate the Unión Colombiana de Empresas de Publicidad -UCEP- on charges of fixing the commission that advertising firms charge their clients at 17.65%, by means of collective recommendations to their member agencies to the effect that "UCEP agencies may not reduce the agency commission or the alternative means of compensation to compete among themselves when two or more agencies are invited to present bids or make offers to potential advertising clients. They must inform the competition of the percentage commission or amount of equivalent remuneration that they are going to offer, and may not offer less at the time they submit their bids." These were the terms of Agreement No. 004, issued by the UCEP Executive Board.

Said Agreement also stipulated that "practices that violate the preceding provision must be reported to the Association's Executive Board, which shall have the authority to apply the statutory sanctions that the severity of the offense calls for."

An analysis of the information obtained from each of the UCEP advertising agencies found that most applied and used the 17.65% commission on their clients' net investment in the media; others charged 15% on the gross value of the clients' investment, which is equivalent to the 17.65% charged on the net value of the investment; several agencies argued in favor of charging differing percentages, according to the volume of the investment. All, however, suggest that the maximum allowable percentage should be 17.65%.

For the Office of the Superintendent, the practices described above are "group recommendations", the kind of guidelines or instructions that unions, associations, federations or groups of businesses issue either publicly or privately. Their intent is anti-competitive under the law, regardless of whether the agencies to which the recommendations are addressed follow them.

From the economic standpoint, the recommendations not to raise prices or to raise them by "x" amount, affect the market's competitive forces and competition can be significantly affected because some factor like prices is being tampered with.

The investigation ended with Resolution No. 2678, dated December 10, 1996, when the association under investigation gave assurances to provide the agreement whereby the Executive Board decided to REVOKE Agreement No. 004 in full, the latter being the source of the controversy. The new agreement stipulates that the amounts in question will be established by supply and demand. The UCEP further pledged to inform the general public that the system and amount of remuneration used by UCEP agencies is open-ended and governed by the laws of supply and demand in the advertising market and private business arrangements.

g. Tourism sector

Asociación Nacional de Agentes de Viaje y Turismo - ANATO

Resolution No. 2437 of November 15, 1996 ordered that the ASOCIACIÓN NACIONAL DE AGENTES DE VIAJE Y TURISMO "ANATO" be investigated for entering into an agreement to fix the marketing terms for the loans that the travel agencies make, since in a resolution adopted at ANATO's Congress in June 1996 and ratified by its General Assembly, the methods of payment were established for ANATO member travel agencies. The loans that those agencies were making were suspended because of a steady increase in defaults on airline ticket sales.

The economic analysis done by the Superintendent Delegate for Competition Promotion found that apart from price, volume of production and of product distribution, one of the most important factors in marketing goods or services is method of payment. The agreements on the credit terms for ANATO agency clients, stipulated in the resolution and in the circular establishing the "methods of payment" can constitute a cartel among competitors and thus be a probable violation of the laws governing competition and restraint of trade.

Inasmuch as the Superintendent of Industry and Commerce is authorized to close investigations into alleged violations of laws relating to competition and restrictive trade practices if, in his/her judgment, the alleged offender offers sufficient assurances that it will desist from or modify the practices for which it is being investigated, the Executive Director of the National Association of Travel and Tourism Agents "ANATO" offered to revoke Circular No. 026 of August 9, 1996, and to submit to the next ANATO Assembly a proposal that Resolution No. 1, passed at the Assembly held in 1996, be revoked.

The Office of the Superintendent set an additional condition for acceptance of the ANATO offer, which was that within a period of no more than ten (10) days, once notification of that resolution is given, 1996 Circular No. 026 be cancelled, that the measure and the reasons for it be published in a newspaper with nationwide circulation, and that ANATO members be advised of the commitment to abide by the rules on free competition. Because of the immediacy of the newspaper report requirement, ANATO filed an appeal arguing that the publication ordered by the Superintendent's Office was pointless, since there had already been ample coverage of the investigation in the newspaper La República, November 29, 1996 issue, and the newspaper El Tiempo, the May 29, 1997 issue.

To settle the appeal, the Superintendent's Office found that the publication itself was a means of informing the consumer, a purpose already achieved with the newspaper accounts mentioned earlier; also, the public was made fully aware that practices such as those being investigated are prohibited because they are bad for the economy.

B. Mergers and economic combinations

1. Summary

In the period from 1993 to 1997, the Office of the Superintendent for Industry and Commerce studied and approved a total of 230 requests for legal and economic combinations. A high percentage of the requests studied and approved are from businesses that belong to the same group of shareholders; these businesses are controlled. Another not insignificant percentage are from businesses that have a relatively small market share and therefore cannot significantly affect the market's structure. This type of request is presented because 1959 Law 155 requires that mergers be examined whenever the assets of the individual businesses or of the businesses taken together total twenty million pesos (approximately US$20,000).

The information supplied by the businesses applying for economic combinations is considered confidential under Article 4, paragraph 3 of Law 155 of 1959.

2. Significant cases

a. Cement sector

Cementos Diamante S.A. and Industrias e Inversiones Samper S.A.

The transaction reported in 1996 was the merger of the Colombian firms Cementos Diamante S.A. and Industrias e Inversiones Samper S.A., through an acquisition by Cemex S.A. de C.V., which had a majority position in the companies because it owned over 50% of the stock in CEMENTOS DIAMANTE S.A. and a majority stake in INDUSTRIAS E INVERSIONES SAMPER S.A., through its subsidiary Capital Colombia Holdings.

The transaction materialized because of a public stock offering of 73.33% of the outstanding stock in Industrias e Inversiones Samper S.A. The two businesses to be merged would remain on the market as legally separate entities, but would be guided by the same interests or by the same business policy.

Cemex S.A., a Mexican company, is the largest multinational cement company in the hemisphere and the fourth largest in the world. It can produce upwards of 47 million tons, employs over 17,212 workers in 613 plants, and has port terminals, distribution centers, and nearly 2.6 billion in sales each year.

Market analysis: The businesses filing the request are in the construction business and produce and distribute, among other things, cement and concrete, which are the most representative products in the sector. Therefore, there are two relevant markets: the first is the cement market, and the second the concrete market.

The cement market: Grey cement, which is the most commonly used material in the construction industry, is a grey dust composed of calcium silicates. There are several grades, the distinguishing factor being resistance. The grade most commonly used is Grade I, which is for general use and is used mainly in the construction of houses, buildings, bridges, brickwork, and others. This product has no substitute.

White cement is one from which all iron minerals have been extracted to create a white dust used mainly for decorative purposes. Because this type of cement represents 1.2% of sales on the country's cement market and because the merger will not change that, this white cement was not included within the relevant market for the product. In the construction industry, the view is that this product has no substitute.

Grey cement has traditionally be distributed in the form of direct sales from the factories to large-volume consumers, such as construction companies and public works contractors, either at the production plant or at the place where the product will be used. Cement is also sold to wholesalers that purchase at the production plant and then sell to retailers. Cement is marketed in two forms: in bulk and in 50-Kilogram sacks. Approximately 70% is sold in sacks and the remaining 30% in bulk.

Summarizing, the relevant market in this transaction is the market for the production and marketing of grey cement in 50-Kilogram bags, as well as domestic bulk sales.

The cement industry in Colombia is a subsector in which the bulk of market is controlled by a relatively small number of producers. Statistics obtained from the Instituto Colombiano de Productores de Cemento (ICPC) show that for 1995 there were five main producers, as follows: The Argos group, with a 45.7% market share; the Diamante Group, with a 23.6% market share; then Cementos Samper S.A., at 11.8%, Cementos Boyacá at 10.9%, and Acerías Paz del Río at 7.3%.

The concrete market: Premixed concrete that most exactly meets the technical specifications needed for the work for resistance or the product's aquosity was the only concrete included within the relevant market. There are no guarantees that concrete that is mixed on the job will meet the necessary specifications. Given that fact, these two types of concrete cannot be regarded as perfect substitutes for each other.

According to information supplied by the Instituto Colombiano de Productores de Cemento (ICPC) for 1995, the firms participating in the relevant market for concrete are: Central de Mezclas S.A. -50% owned by the Samper Group- and Concretos Bogotá -50% owned by the Argos Group- together accounting for 34.95% of the market for pre-mixed cement; Concretos Premezclados, which belongs to the Holderbank Group, with a 27.75% market share; Cementos Diamante S.A., with a 21.86% market share, and the concrete companies owned by the Argos Group, which have a 15.42% market share.

After its analysis, the Office of the Superintendent found that since there is another group that controls a larger share of the market than the company resulting from the proposed merger would ever have, the merger between Cementos Diamante S.A. and Industrias e Inversiones Samper S.A. would stimulate competition in the sector.

Since Cemex S.A. is behind the merger, the procedures used by Industrias e Inversiones Samper S.A. would be modernized as innovative systems are introduced into its operations. It might eventually be able to move into the international market.

Similarly, the controls that Cemex uses to protect the environment around the world, through modern anti-contaminant systems and the methods used to mine for the needed raw materials can be used in Colombia.

b. Sale of assets of PRODUCTOS DIETETICOS DIETESYN S.A.

The transaction reported in 1996 was that the Colombian firm (Productos Dietéticos DIETESYN S.A.) would transfer to the Colombian branch of the foreign owned Monsanto Colombiano Inc., all assets involved in the manufacture and distribution of the product lines that go by the Colombian brand names SABRO, CHOCO-SABRO, SABRO-FRESH, the health records on those products, certain raw materials used in the preparation process, the packing material, promotion, a percentage of the portfolio, the global list of clients and buyers of the products, and the codification that would enable the purchaser to sell and distribute the products in all supermarkets and drugstores where those products are currently being marketed to the public.

All technical and financial information obtained through previous studies on the products' marketing and acceptance by clients would also be transferred, as would studies involving any type of consulting on the manufacture, marketing and distribution of the products, including all production-related formulas and information and the inventories on hand as of the date on which the transaction takes effect.

Market analysis: The annual growth rate of the pharmaceutical industry in Colombia has been higher than the average of the gross domestic product. In the last ten years, annual growth of the pharmaceutical industry has been averaging around six percent (6%). There are some 315 businesses in this sector, and a large percentage are of foreign origin (European and American, especially); their affiliates represent the world's major, brand-name manufacturers.

The market is divided into two main client groups: private consumers and public health and social security institutions. Monsanto and Dietesyn supply the private consumers.

The enormous variety of products is a main factor within this industry, evident not just from the competition but also from the products manufactured by the same firm. It frequently happens that the same chemical substance is marketed under two or more different labels and at different prices. This variety and differentiation, coupled with scientific advances, are used as a strategy to improve the volume of operations to cope with the many competitors, the relatively small size of the domestic market and the low per capita income.

Relevant market: The affected market is the market for sugars and sweeteners. Geographically speaking, the domestic market is very lopsided, since according to information provided by A.C. Nielsen de Colombia, Abbot Laboratories has the highest volume of sales and in 1995 had a 50% market share; Monsanto has 6.50%, and Dietesyn has 30.50%. This would make this market an oligopoly, which is a market in which the number of suppliers is small, each one selling a distinctive product; any other participants in the market have to take the major players into account because of the latters' power to influence competition.

Product market: The product market was determined to be a line of sugars and sweeteners and includes the various products made from sugar, honey, and brown sugarloaf used by the consumer to sweeten foods and located among the dietary, foodstuffs and nutritional products, distributed nationwide in three different forms (tablets, powder and granulated).

Sabro, in its various forms, is marketed directly or indirectly via traditional and nontraditional channels. The traditional include the supermarket chains and buying clubs across the nation; the nontraditional include the wholesalers or warehouses, retailers, drugstores, restaurants, hotels, clubs and sports clubs, clinics, regional sports offices and businesses with large staffs.

The nearest substitutes are products of the same kind of sweeteners, since they serve the same purpose for both sets of consumers and have similar characteristics.

Even though the products are strongly identified with the brand of the manufacturer or laboratory that produces them and with the brand names used, the consumer has no significant reaction to any particular brand. The competing products come in the same forms and in similar packaging. The consumer can find a variety of sweeteners in the same distribution channels (supermarkets and drugstores), which facilitates substitution.

After examining the case, the Office of the Superintendent found that the companies that are the parties in this acquisition could not alter the market's present structure because: a) production does not drop following the asset acquisition because Laboratorios Synthesis Ltda. will keep the same production procedures, costs and quality that the company being transferred (Productos Dietéticos Dietesyn S.A.) now uses; b) the firms participating in the acquisition could not influence prices independently of the competition, because the latter has a large share of the market, has access to supply sources, to inputs, and to distribution systems to offset any effect and restore the market to its original state, and the fact that there are no significant barriers to keep out new competition; c) the purpose of the acquisition is to take advantage of the experience and resources of the company acquiring the assets to make production more efficient; d) any price moves the merged companies might make would have to take consumers into account, since there are substitutes available to which consumers could switch.

III. Regulatory and Trade-Policy Considerations

    -The Office of the Superintendent for Industry and Commerce has a role in the National Competition Strategy in which the major government agencies take part. Specifically, the Office of the Superintendent works on the issue of promoting competition, including the measures that the State will take in pursuing that strategy.

    -As for foreign competition, the Office is represented on the Trade Practices Committee, which is coordinated by the Instituto Colombiano de Comercio Exterior and which decides when antidumping and countervailing duties will be imposed.

    -Although Article 2, paragraph 20 of Decree 2163/92 stipulates that the Office of the Superintendent has the authority to advise the national government when the latter devises policies on promoting competition, it has played a relatively small role in developing the strategies for privatization and regulation, for example.

Continue on to Section IV: Consultation, Information and Other Initiatives

 
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