Joint dominance in the capital region
Remedies offered found insufficient
Decision in three months
A history of trouble
Comment
The Competition Authority has proposed that the Market Court prohibit NCC Roads Oy (NCC) from acquiring the asphalt paving business of Destia Oy and Destia Kalusto Oy (Destia). The authority considers that the acquisition would lead to a joint dominant market position in the capital region between the largest remaining contractors, NCC and Lemminkäinen Infra Oyj (Lemminkäinen). This was the second acquisition ever proposed to be prohibited by the authority and the first in over a decade.
Joint dominance in the capital region
In April 2011 NCC notified the Competition Authority of its intention to acquire the asphalt paving business of Destia, the former Finnish Road Administration. A second phase investigation began in May, and in August 2011 the authority proposed that the Market Court prohibit the contemplated acquisition.
The authority considered there to be three relevant product markets in the asphalt business: state contracts, municipal and private contracts, and the sale of asphalt mix to other contractors. The authority argued that the acquisition would significantly impede competition in the asphalt mix market in the capital region. The notifying party disputed the authority's market definition, arguing that the production and selling of asphalt mix did not constitute a separate market, but were rather a part of the asphalt paving market, as asphalt mix is mainly produced for a company's own use.
There are currently three companies with fixed asphalt stations in the capital region: Lemminkäinen, NCC and Destia. According to the authority, smaller contractors depend on the asphalt mix bought from these three suppliers in order to compete with them. The authority argued that the acquisition would result in a joint dominant position between Lemminkäinen and NCC in the production and sale of asphalt mix in the capital region. They could control the asphalt paving market through the production of asphalt mix, either by refusing to sell it to other contractors or by charging prices above competitive level. This in turn would increase the price level of asphalt paving work.
Remedies offered found insufficient
To eliminate the concerns presented by the authority, NCC suggested various remedies. It offered a number of behavioural remedies to facilitate the possibility for market entry, including an obligation to sell asphalt mix to competitors under conditions monitored by an independent expert, and one remedy of a structural nature: the possibility to sublease land near the capital for a competitor to establish its own fixed asphalt station and enter the market. The notifying parties were unwilling to propose a solution which would have led to the divestment of one of the existing asphalt stations held by the combined entity.
The remedies offered by NCC were insufficient to satisfy the authority that the markets would remain competitive after the acquisition. The authority referred to current practice under the EU merger control regime, which emphasises the importance of structural remedies. The authority's major concern was that the remedies offered contained few structural elements; and if there was no new market entrant establishing its own fixed asphalt station, only behavioural remedies would be left. The behavioural remedies were not considered sufficient because they were complex and would require constant monitoring.
Decision in three months
According to the Competition Act, the Market Court must issue its decision within three months of the authority's prohibition proposal. The Market Court may prohibit the acquisition as proposed by the authority, approve it without conditions or impose conditions to the implementation of the acquisition. The parties may further appeal the decision to the Supreme Administrative Court.
A history of trouble
Finnish asphalt companies have a history of trouble with the Competition Authority. In the early 2000s the authority suspected several asphalt companies of operating a nationwide cartel. In 2009 the Supreme Administrative Court imposed record fines of €82 million on seven companies - NCC and Lemminkäinen among them. Destia was suspected of having participated in the cartel, but no fines were imposed.
It is difficult to say how these previous investigations may have affected the authority's recent decision. Notably, however, controlling the sale of asphalt mix was claimed to be one of the methods used by the cartel members to ensure that companies without their own production capability followed the cartel agreement.
Comment
Finland's new Competition Act will enter into force on November 1 2011. The new act replaces the existing dominance test, which was applied in this investigation, with the so-called 'significant impediment to effective competition' test, thereby harmonising Finnish law with the EU Merger Regulation.
During the second stage investigation, the Competition Authority also assessed the competitive impacts of the merger on the asphalt paving markets for state, municipal and private contracts, as well as the asphalt mix market outside the capital region in Finland. The authority concluded that the threshold for intervention defined in the Competition Act (creation or strengthening of a dominant position) was not exceeded. Given the limited number of market participants in some of the investigated asphalt paving markets, it could be argued that the assessment under the new test could have been different.
For further information on this topic please contact Hanna Laurila or Toni Kalliokoski at Dittmar & Indrenius by telephone (+358 9 68 1700), fax (+358 9 65 2406) or email ([email protected] or [email protected]).
September 29 2011