Vol. X No.6
June 2005


Competition Law and the Threat of Delayed EU Accession

Competition Law and the Threat of Delayed EU Accession
Romania is taking its final steps on the road to European Union membership. It has obtained the status of a functioning market economy and the approval of EU Member States who signed the EU Accession Treaty with Romania on April 25, 2005. However, Romania’s entry could be postponed by one year if the EU’s executive commission recommends to the member state leaders that, due to persistent shortcomings in the reforms Romania has pledged to make before the accession date of January 1, 2007, it is not ready to join. This delay in accession is stipulated in the safeguard clause contained in Romania’s provisional approval, and it can be invoked if the EU determines that Romania has deficiencies in two of the thirty-one negotiation chapters closed on December 8, 2004: Chapter 6 on Competition and Chapter 24 on Justice and Internal Affairs. The threat of postponement was made even more concrete on May 12, when EU Competition Commissioner Neelie Kroes warned the Romanian government, in a speech at the European Institute of Romania in Bucharest, that it has still not done enough to meet EU Competition criteria.

Chapter 6 on Competition was one of the last two remaining chapters necessary for the finalization of the negotiations on Romania’s application to the EU. To this end, Romania promised to meet certain criteria in the areas of, among other matters, state aid, anti-trust, and the administrative capacity of the authorities in charge of enforcing competition legislation. Romania has already begun implementing and will continue to apply EU standards regarding competition: it has adopted laws that reflect EU legislation in this area, and it has shown an increase in sanctions against non-complying companies. However, according to Commissioner Kroes, a Chapter 6-triggered safeguard could still be invoked if Romania does not do more to make the required improvements, most notably in the domains of state aid and an improved record of implementation of competition laws.

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State Aid
EU law generally does not allow state aid that may favor certain companies to the detriment of others because this practice may distort the fair competition environment. When state aid is given, it must be limited in time and extent, and must be given only in certain situations and for the advancement of certain goals, such as for regional development, for the protection of the environment, for research and development, and for small and medium size business promotion, and it is granted only with the permission of the competent competition authorities (in the EU, this authority is the European Commission, and in Romania, it is the Competition Council). There exist even more restrictive and at times prohibitive regulations of state aid in certain industries, such as steel, mining, automobile and naval construction.

In Romania, state aid is regulated by Law no. 143/1999, amended by Law no. 603/2003. These amendments have as their scope the further harmonization with EU laws, including an improvement in the supervision and control of state aid, the evaluation of the impact that state aid has on the market, and the identification of illegal state aid (i.e., state aid granted without the authorization of the Competition Council). Consequently, the Romanian provisions that deal with state aid often greatly resemble EU law on this subject. Under Romanian law, state aid is defined as any support, regardless of its form, from state funds, granted by public authorities or by other institutions that administer public funds. The Competition Council must expressly authorize any state aid, regardless of the beneficiary, with certain exceptions stipulated by law. State aid may be granted in the form of a transfer of public funds to a private company, or in the form of the state’s giving up of future income from a company thereby conferring on the company a benefit that it would otherwise not have received. The means by which the government can grant state aid include, but are not limited to, state subsidies, debt cancellation, the undertaking of a company’s losses by the state, exemptions, discounts or extensions on taxes, and preferential interest loans. State aid can be awarded in a number of areas such as research and development, small and medium businesses, environment protection, labor, regional development, promotion of exports, promotion of culture, conservation of national patrimony, and promotion of health and education.

According to the latest update on the “State Aid Scoreboard” Report, Romanian state aid comprised 2.82% of the GDP in 2002, greatly exceeding the 0.4% EU average and the 1.42% average of the new EU member states. Nevertheless, in the last three years, the percentage of state aid out of the GDP has continuously decreased in Romania, reflecting Romania’s desire to achieve EU standards in this domain as well as its own goal of eliminating the distortion that state aid can produce on competition and in the market.

European Commissioner Kroes has stated that Romania must implement more extensive measures for controlling state aid before it can be admitted into the EU. To this effect, Commissioner Kroes has clarified what shall be understood as existing aid, defined as state aid awarded prior to the accession of Romania to the European Union. She has emphasized that not all pre-accession aid will be automatically considered “existing” and therefore irrevocable, but will have to not only be authorized by Romania’s Competition Council, but also submitted to the European Commission for further approval. Moreover, no state aid will be given “existing aid” status until Romania’s enforcement record improves to the EU’s satisfaction. If this enforcement record is not satisfactory, all aid will be considered “new aid” and will have to be reviewed by the European Commission upon accession. Should the state aid be considered inappropriate by the European Commission, it may be revoked and even recovered after accession.

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The Competition Council and its Enforcement Record
As noted above, Chapter 6 safeguards could be invoked if Romania shows shortcomings in the required improvements of not only state aid regulations, but also of the capacity and effective control of the Competition Council. Romania has promised to apply the acquis communautaire, to train the experts of the Competition Council, to develop the administrative competence of this agency, to monitor state aid, and to carry out investigations. Thus the Competition Council has the responsibility of showing an enforcement record demonstrating the effective implementation of competition legislation in conformance with EU law. However, until now, the Competition Council’s enforcement record has been unsatisfactory to the EU, and this is due in part to the fact that Romania has not yet met the standards for strengthening the administrative capacity of the Council in terms of its financial and human resources as promised at the December 8, 2004 closing of its accession negotiations.

Commissioner Kroes stated in her May 12th speech that it is not enough for Romania to simply adopt the legislative framework that the EU requires for accession, but must also show that the Romanian Competition Council is properly administering the necessary regulations by producing a credible track record of enforcement. Commissioner Kroes has further stated that this unsatisfactory record has been detrimental to Romania’s efforts to attract foreign investors.

Romania’s law on competition is Law no. 21/1996, and it was modeled on Articles 81 and 82 of the Treaty Establishing the European Community. Competition Law no. 21/1996 was amended to further harmonize it with EU law by Emergency Ordinance no. 121/2003. Romania’s competition law stipulates that the Competition Council, headquartered in Bucharest, is a legal entity having autonomous administrative authority in the competition domain. The Council’s members are appointed by the President of Romania at the recommendation of the Government. From a functional point of view, this autonomy implies that the Competition Council can establish its own administrative regulations, its own staff, and its own methods of implementation and supervision.

There are several potential problems that might affect the independence and control for which the Competition Council is striving. One possible way in which its autonomy could be undermined appears in the procedure by which the government appoints Council members; for example, the selection of members could be based on questionable criteria unrelated to the candidates’ professional and moral reputation. Another possible source of difficulties for the Council’s effectiveness is in the professional qualification of the Council’s staff, such as its inspectors; Romania has promised to provide for the training of its inspectors in order to create a more competent institution in line with EU standards. Finally, another potentially weakening factor in the effort to strengthen the Competition Council may be financing. According to the law, the financing of the Council’s activities comes from the state budget. Taking into account Romania’s promise to improve the autonomy of its Competition Council in order to meet the criteria for accession, the state should allocate a larger percentage of funds, at least until 2007, in order to facilitate the achievement of EU objectives in this domain.

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Romania’s political commitments to the EU in order to ensure timely accession must be met not only by the superficial adoption of legislation that conforms with the acquis communautaire, but by the actual implementation and enforcement of these laws. Failure to do so could lead not only to a postponement in joining the EU, but could also act as a deterrent to potential investors looking for a stable and safe market. This coming November, the European Commission will issue a report on Romania’s progress in, among other areas, competition. Based on the findings of this report, the Commission will either recommend accession in 2007 or will recommend a one-year delay. Romania is already showing signs of improving its enforcement record and heeding the advice of EU authorities. On May 26, the Competition Council issued a 28.5 million-euro fine, its most drastic measure to date, to the country’s three cement producers for price fixing. European Competition Commissioner Kroes’s warning will hopefully motivate the Romanian government to continue making the improvements it has already begun to make on the road to joining the EU and creating a stronger economic and business environment.

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Editors Note: It is our policy not to mention our clients by name in The Romanian Digest™ or discuss their business unless it is a matter of public record and our clients approve. The information herein is correct to the best of our knowledge and belief at press time. Specific advice should be sought from us, however, before investment or other decisions are made.

Copyright 2005 Rubin Meyer Doru & Trandafir, societate civila de avocati. All rights reserved. No part of The Romanian Digest™ may be reproduced, reused or redistributed in any form without prior written permission from the publisher.

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