Competition law in the time of Covid and beyond
By Atty. Johannes Benjamin R. Bernabe
June 24, 2020

 

Much is being said about the need to adjust laws and regulations to facilitate business operations and economic recovery during the community quarantine and the “new normal” that comes after. Initiatives abound in both houses of Congress seeking to grant loans, subsidies and other financial packages in favor of affected businesses.

There are calls as well on government agencies and local governments to implement strictly the timelines and procedural guidelines under the Ease of Doing Business Act. Certain quarters likewise ask that the Philippine Competition Commission’s authority to review mergers and acquisitions be clipped for the time being. There is even a proposal to suspend the power of the PCC to charge and prosecute cartels and entities that abuse their market power during this pandemic and for at least a couple of years thereafter. If these restrictions on PCC’s mandate are adopted, consumers and ordinary Filipinos may very well end up bearing the burden.

Mergers and acquisitions are indeed generally harmless to competition. Many times the increase in scale brought about by these transactions results in enhanced ability to efficiently deliver more goods and services to a wider band of consumers. From the PCC’s experience, however, there is bound to be at least one or two mergers every year that are likely to substantially lessen competition and consequently inflict harm on consumers. These are the transactions that the PCC has to have the power to prohibit or subject to conditions prior to being cleared. An example of these is Grab’s acquisition of Uber in April 2018, which resulted in price and service quality commitments being imposed by PCC to remedy or mitigate the harm to competition and consumers brought about by Uber’s subsequent exit from the market.

The call for suspending PCC’s authority to review mergers and acquisitions is made in the belief that given the difficulties businesses have had to endure during this pandemic, many are unlikely to continue operating unless they consolidate or are acquired by larger companies. This is meant to complement the loans and subsidies that these failing firms are intended to receive as “bailout” from the government. It should be noted however that the Philippine Competition Act anticipated these kinds of difficulties that firms may encounter and provided for a ‘failing firm defense’ when troubled firms merge. Section 21 of the PCA states that mergers or acquisitions which would otherwise be prohibited may be exempted from such prohibition by the Commission when a merging or acquired party is “faced with actual or imminent financial failure” and the transaction “represents the least anti-competitive arrangement among the known alternative uses for the failing entity’s assets.”

Mention has also been made that apart from these failing firms, businesses should be allowed to consolidate so that they can achieve efficiencies necessary to tide them over the crisis we are facing. On this point, it is perhaps worth recalling that not all mergers are subject to review by the PCC; only the largest among these, i.e., those where either of the merging parties has assets or revenues in the Philippines in excess of P6 billion, and where generally, the value of the assets being acquired or the revenue generated by these assets in the Philippines exceed P2.4 billion, may be reviewed by the PCC.

The most vulnerable and predominant business entities in the country, the micro, small and medium-sized enterprises (MSMEs) can consolidate all they want, and they will not likely qualify for review by the Commission. For large firms, the argument that they are ‘too big to fail’ and should thus be exempt from any review appears to be premised on a short-term perspective. While the mergers or acquisitions made by large firms may ensure production and continued employment for their workers now, if the transaction results in the unintended foreclosure or raising of barriers to entry or expansion of competitors in the industry, the avowed objectives of productivity and employment will be sacrificed for the industry as a whole.

With the loss of competition, consumers will suffer from less choice. Not only that, but the merged and enlarged entity—facilitated through a relaxation of competition law and policy—will likely be entrenched in a position of market power that will almost certainly outlive the current crisis. Such market power, given the experience of other competition authorities around the world and the context of Philippine business realities, may lead to high prices, deterioration of quality of goods and services and lack of innovation in the medium to long term. Hence, while we may have solved some problems in the short run, we may be creating problems of a more permanent nature.

Beware, the ones who will bear the brunt of these pitfalls will be you and I, the ordinary consumers.

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A lawyer by profession, Commissioner Johannes Benjamin R. Bernabe served as adviser to the Congress in the drafting of, and deliberations on the Philippine Competition Act. Prior to his appointment at the Philippine Competition Commission, he served as the Philippines’ lead trade negotiator at the World Trade Organization and was a senior fellow at the International Centre for Trade and Sustainable Development—both in Geneva, Switzerland.

 

(Originally published on Business Mirror’s Competition Matters column on June 24, 2020 here.)