Fast-moving consumer goods retail sector
One of the duties assigned to the Competition Authority by the Law on the Protection of Competition (4054) is "to provide opinions regarding the decisions to be adopted on competition policy, and the relevant legislation". The authority recently published its Competition Report, which covers assessments and suggestions regarding 11 markets across a number of different sectors.
The report aims to:
- analyse the competitive environment in certain sectors;
- identify the behavioural, structural and legal grounds that prevent the progress of competition in these markets; and
- offer suggestions to policy makers for eliminating these obstacles.
The report includes the authority's assessment of:
- the electricity market;
- the natural gas market;
- the aviation industry;
- the rail transport industry;
- the maritime transport industry;
- the road transportation industry;
- the broadband internet connection market;
- the digital platform management market;
- the banking market;
- the pharmaceuticals industry; and
- the retail market for fast-moving consumer goods.
Each market is discussed in relation to the three main issues that restrict competition - namely, market structure, applicable regulations and the behaviour of players in the market.
This update offers a brief summary of the authority's assessment for each market.
The electricity market has recently undergone a reform process following the introduction of a policy that aims to reduce inefficiencies resulting from the sector's vertically integrated structure. The electricity consumed in Turkey is mostly generated within the country, with 68% of the installed power controlled by the government. Although the liberalisation process initiated through the Law on the Electricity Market (4628) is rapidly developing, privatisation continues to cause issues. Competition Authority precedents concerning the liberalisation process aim to prevent an undertaking from being in a dominant position following privatisation, in order to facilitate:
- the unbundling of transmission and distribution;
- the ability of consumers to choose their providers; and
- coordination and cooperation between the Energy Market Regulatory Authority and the Competition Authority.
Functional unbundling should be regulated by secondary legislation and the unbundling practices should be subject to an effective controlling mechanism. Further to the Competition Authority's TEDAŞ opinion, distribution companies must carry out production and retail sales operations through separate legal entities. The barriers to opportunities for consumers to change provider are decreasing year on year - it is hoped that all consumers will soon become eligible for switching. However, decreasing the eligible consumer limit is insufficient in itself and the costs of switching should also be analysed.
The Competition Authority has briefly stated that although the electricity market has matured, further development is necessary in order to increase private sector investment and create a competitive sector. Privatisation will remain the main agenda topic for the liberalisation of the electricity sector. The key issues for increasing competition in the electricity market, as indicated by the authority, are:
- creating a competitive market, to be set as the main target for privatisation;
- introducing regulations concerning the unbundling of transmission and distribution from competitive market operations;
- taking the necessary steps to decrease switching costs;
- studying the consumer competition culture; and
- developing the relationship and cooperation between the Energy Market Regulatory Authority and the Competition Authority.
Natural gas market
Turkey consumes more natural gas than it produces. Long-term purchase agreements have therefore been signed with a number of different countries, in particular Russia and Iran. The main governing legislation of the natural gas market is the Law on the Natural Gas Market (4646) which aims to liberalise the natural gas market and open it to competition. The Energy Market Regulatory Authority regulates tariffs and connection fees for transmission and distribution that show natural monopoly characteristics. The difficulty of developing a consistent competition policy should not be disregarded due to the complex nature of the market's value chain. During the liberalisation process, third-party access to transmission, distribution and storage have gained importance.
The main element of the competitive structure being targeted during the liberalisation process is the competitive pricing mechanism. Another problematic area is the maintenance of competition at the retail level. Various questions also arise in relation to the way in which distribution companies that have exclusive customers determine purchase and sale conditions and last resort supply liability. Furthermore, the current position of the Petroleum Pipeline Corporation (BOTAŞ) in terms of horizontal concentration and the wholesale market is important. Issues such as whether BOTAŞ's market share should be decreased and the applicability of alternative methods in this manner should also be addressed. The authority has concluded that within the process of liberalisation, competition policy should focus on:
- the effective regulation of transmission and distribution activities that show natural monopoly characteristics;
- the functioning of a competitive pricing mechanism;
- a decrease in the concentration level of a market that has a state monopoly background; and
- the restructuring of BOTAŞ in functional terms.
As a result of the steps taken for the liberalisation of the civil air transport industry, this sector has demonstrated rapid development and significant change. There have been a number of substantial market entries and, in light of the Competition Authority's previous decisions, Turkish Airlines maintains a dominant position in the market. The most important regulations in terms of competition are the Slot Application Instruction of the General Directorate of the State Airports Authority and Turkey's bilateral air transportation agreements with other countries.
Despite positive developments regarding the industry, there are still significant competition problems, with the regulations on slot allocation and the bilateral agreements still restrictive. Slot allocation is mainly organised in light of the Air Transport Association criteria and thereby with 'use it or lose it' or grandfathered rights. Studies are ongoing in relation to the development of an alternative to the administrative allocation method and with the aim of resolving inefficiency. Furthermore, it is generally accepted that slot allocation should be carried out by an independent unit, in order to preserve the objectivity of the slot allocation transaction. Following a 2010 amendment, slot allocations are coordinated by the General Directorate of State Airports Authority.
In relation to bilateral agreements, the largest competition problem for agreements signed before 1970 is that they cover only one airline within their scope and obstruct other airlines from operating the agreed routes. Since 1970, liberalisation has been mainly accepted in aviation agreements. Under bilateral air transport agreements, Turkey assigns singular or multiple carriers for scheduled services. It would therefore be prudent for such agreements to be converted, including changing singular assignments into multiple assignments in order to increase competition in the market, thus removing the barriers to entry on certain routes. Coordination of slot allocation by the General Directorate of State Airports Authority has negatively affected the competition environment. As a result, it would be beneficial to establish an independent civil aviation entity with sufficient administrative and technical capacity and to take measures regarding slot allocation, in order to enable independent operation to facilitate market entry and create an efficient competitive environment.
The rail transport industry is not open to competition, with the current legislation providing the state railway with a legal monopoly. However, Turkey has attempted to pursue a policy that is in line with the structural regulations and technical requirements enacted by the European Union. In the railway industry, infrastructure services present natural monopoly characteristics. In this respect, the draft Law on General Railways and draft Law on Restructuring of the Turkish State Railways separate infrastructure and transportation and liberalise rail transport. If the activities of infrastructure and transportation are considered separately, infrastructure investments can be accepted as sunk costs and vehicles used in the area of transportation can be said to cause a significant amount of financial burden. With the reforms to be realised, the rail is expected to be an industry with multiple players, with an efficient transport system and many new entrants to the market.
Where the conflicts between infrastructure management and railway management also cause competition law violations, the simultaneous supervision of the Competition Authority and General Directorate of Railway Transportation may result in legal uncertainty and a waste of resources. Therefore the following changes should allow the railway transportation industry to adopt a competitive structure after the liberalisation process:
- granting operational independence to the authority for regulating railway competition;
- taking the necessary measures to prevent the anti-competitive effects arising from the privileges provided to Turkish Railway Transport (while granting licences and certificates to it);
- abolishing base prices for transportation activities; and
- creating secondary legislation to support the market's competitive structure.
The maritime transport industry includes passenger transport, freight shipment and port management. It is formed of various different sub-markets and service lines. The main developments concerning maritime transport are containerisation, global supply chains and the 'hub and spoke' system. These developments have also had a significant effect on port management activities, mainly by increasing the level of competition between ports. The maritime transport sector is regulated by the Ministry of Transportation, Maritime Affairs and Communication. Competition problems concerning this sector arise from:
- the structure of the market; and
- ineffectiveness and a lack of competition power.
According to the Competition Authority's precedents, claims of competition law violations are mostly concentrated on container port management and roll-on/roll-off (ro-ro) transportation services.
There are high concentration rates in container handling, as well as in ro-ro transportation, since the undertakings operating in these sectors are very limited. Although some investment requirements were brought in following privatisation of the ports, these are insufficient for the emergence of trans-shipping ports. Since the ports have no connection to the railways, maritime transport is highly dependent on land transport. As a result, resolving the lack of infrastructure is important for both improving competition in this sector and increasing the competition power of Turkish ports. Turkey is able to use only a limited amount of its potential for maritime transport and the changing structure of the logistics sector should be taken into account while determining the policies regarding the development of maritime transport. The Competition Authority has concluded that:
- the functioning of a competitive environment should be encouraged by increasing the number of undertakings operating in ro-ro transportation;
- policies should enable undertakings to invest in the operation of modern passenger and cargo ships;
- the capacity and infrastructure for handling services should be increased; and
- policies should enable investment by foreign undertakings that are active in port management or liner passenger transportation.
The road transport industry has low barriers to entry, which causes a surplus. Additionally, seasonal differences in the supply-demand balance are the source of the main competition concerns. The concentration ratios of road transport between large cities are generally low (ie, there is a competitive structure). However, the concentration ratios of road transport between small cities are high. This market is also significantly affected by the black economy, which has been the subject of numerous comments by the Competition Authority. Furthermore, undertakings often issue tickets to consumers that do not reflect the real route and the real price. In this way, undertakings can sell cheaper tickets than their competitors and still appear to comply with the minimum price list set by the Ministry of Transportation, Maritime Affairs and Communication. This method generally constitutes an exclusionary practice on the competitive routes.
Undertakings that operate in this market are often under restrictive agreements, due to the structural problems of the market (eg, disharmony between supply and demand). These restrictions are mainly local, not related to the whole country. In this respect, an increase in the number of players active in the whole country, by means of mergers or institutionalisations, could be beneficial. Such developments would also bring about competition in relation to service instead of price. Effective cooperation between small, local undertakings and national undertakings should be conducted. The black economy should be prevented and new regulations should be introduced that will encourage undertakings to reach a sufficient scale and remove excess capacity.
Broadband internet access
In Turkey, the broadband internet access market is regulated by the Information and Communication Technologies Authority. The market is dominated by Türk Telekom, which has a monopoly in copper cable infrastructure and provides internet access through its affiliate TTNET via this infrastructure. Similarly, Türksat provides internet access through the cable television network and mobile operators provide internet access through mobile networks.
Since the construction of telecommunications infrastructure requires considerable investment, the establishment of alternative networks is considered unlikely in economic terms. Generally, the broadband internet access market in Turkey is characterised by a low level of competition, as alternative technologies cannot be used efficiently yet and customers are required to pay high prices for a low-quality service.
Türk Telekom/TTNET holds a dominant position in the market with a high market share that is above EU averages. Problems regarding access to the broadband internet infrastructure by alternative operators result from both Türk Telekom's activities and an inability to implement the necessary regulations. Both the Competition Authority and the Information and Communication Technologies Authority have intervened in Türk Telekom's acts; the Competition Authority has issued numerous decisions concerning access problems in the broadband internet market. The Collaboration Protocol, executed between the Competition Authority and the Information and Communication Technologies Authority, states that:
- improvements to alternative technologies for broadband internet access should be encouraged;
- primary regulations should be efficiently implemented; and
- the Competition Authority and the Information and Communication Technologies Authority should coordinate and collaborate in order to establish a competitive market structure.
Digital platform management
The problems concerning the digital platform management market stem from two causes - namely, access to content and use of equipment. In Turkey, the most important content in terms of the digital platform management market concerns broadcasting rights to the Süper Lig, Turkey's top-tier football championship. The sale of such rights is regulated under the Act on the Establishment and Duties of the Football Federation (5894). Article 13 of the act enables the combined sale of broadcasting rights. Under this procedure, the Football Federation issues a broadcasting tender specification and, as a result of the tender realised by such specification, a single operator owns the broadcasting rights for a certain period. The first problem concerning the regulations on broadcasting rights is the duration of the rights that are subject to tender and the winner's right to an automatic extension. Furthermore, the duration of the broadcasting right is longer than that deemed appropriate by the European Commission. As a result of the most recent tender in Turkey, a single platform has owned the broadcasting rights of the Süper Lig for over 13 years, which makes entry to the paid television broadcasting market highly difficult. In this regard, it is hoped that in future Article 13 of the act will be regulated in a manner that would not lead to the exclusion of assessment of the Football Federation's competence under Law 4054.
With regard to the use of equipment, every platform operator uses different set-top boxes in Turkey. Therefore, if viewers wish to subscribe to a different platform, they must acquire a new set-top box, despite the fact that it would be technically possible for the same set-top box to be used to receive other broadcasts. The obligation to purchase different set-top boxes for watching different platforms' broadcasts has various disadvantages for both consumers and any new platform operators that hope to enter the market. Following the purchase of the first box, consumers may be unwilling to purchase a second box, due to the additional cost and extra space required. This situation prevents end users from changing providers or receiving a service from a second provider. Therefore, set-top boxes, which demonstrate a sunk cost for consumers due to their individual technology, often constitute an entry barrier for potential operators. It is therefore hoped that the equipment's interoperability will be regulated by the relevant authorities in future.
The competition problems regarding the banking market are of either a structural or a legal and behavioural nature. The main structural problems are:
- information asymmetry;
- substantial switching costs, which increase the duration of the bank-customer relationship; and
- the functioning and nature of the payment system.
Furthermore, in parallel with a decrease in the number of banks in operation in Turkey, the concentration ratio is very high in terms of the size of assets in the banking market. As for the legal and behavioural problems, the cooperation between banks in relation to card payment systems is subject to exemption under Article 5 of Law 4054. In addition, as a result of Article 19 of the Banking Law (5411), some mergers and acquisitions that might cause concentrations need not be approved by the Competition Authority.
In order to increase competition in the banking market, the barriers that restrain the function of competitive dynamics should be abolished or their effects should be equalised. The following solutions have been proposed:
- the exception clause in Article 19 of Law 5411 should be removed for mergers and acquisitions of banks;
- information asymmetry between banks and consumers should be reduced;
- agreements related to banking services should be made more competitive; and
- new regulations enabling customers to switch to another bank and decreasing the switching costs should be enacted.
Furthermore, establishing cooperation between the banking authorities and the Competition Authority is also important.
The human medicine industry consists of suppliers, wholesalers and retailers. Competition concerns mainly occur at the retailer level. Due to the structural and behavioural competition problems at the retail distribution level, no price competition occurs between pharmacies. Consumer preference and access to medicines are therefore restricted. Moreover, the sale and distribution of medicine is subject to government control, through price regulations and a reimbursement system. The Law on the Turkish Pharmacist Association (6643) authorises the association to agree protocols with all entities that receive a health service from pharmacies. Furthermore, structural problems are mainly a result of the protocol signed between the Pharmacists Association and the social security authorities, which prevents the holder of a prescription from choosing his or her preferred pharmacy. The following action should therefore be taken to improve competition in the sector:
- Competition between pharmacies should be maintained and considered by all authorities.
- Articles 4 and 39 of Law 6643 should be interpreted without causing a competition violation. If this is impossible, the articles should be clearly redrafted.
- A system should be designated to allow for an increase in the level of competition in the retail market within the structure of the current reimbursement system.
- Suggestions on geographical and population criteria for establishing a pharmacy (which currently cause an entry barrier) should be offered.
Moreover, in order to increase competition at retail level within the structure of the current reimbursement system, a system should be developed whereby pharmacists are encouraged to offer lower-priced medicines among the equivalent medicines and where the advantages gained by the choice of the medicines are passed on to the end consumer.
Fast-moving consumer goods retail sector
As a result of the structural change and increase in concentrations within Turkey's retail market for fast-moving consumer goods, organised retailers are gradually gaining power in their vertical and horizontal relations and through their roles in determining the commercial conditions on the supply chain through purchasing power. The use of high purchasing power to eliminate competition in the supplier market by fast-moving consumer retailers may cause some suppliers to exit the market in the long term and therefore lead to an increase in the concentration ratios in the supply market. Furthermore, an ever-increasing number of small-sized acquisitions and acquisitions aiming to enter new regional or local markets have started to have a greater effect on competition. The Competition Authority has also determined that organised retailers reflect their buying power disproportionately to suppliers in certain situations. Moreover, fast-moving consumer goods retailers create their own private-label goods and therefore become competitors of the suppliers. In addition, the difficulty of finding an appropriate location for a store may be considered a barrier to entry and the purchasing power of fast-moving consumer goods retailers may make it difficult to enter the market.
The Competition Authority handles the purchasing power of the retail market on the basis of the rule of reason analysis (instead of a traditional market power approach). The authority stipulates that the turnover thresholds for notifying concentrations may be decreased only in relation to the fast-moving goods retail. Moreover, a code of conduct and an ombudsman system may be established. This principle is based on the fact that the parties may act in accordance with predetermined ethical and equitable rules without any public interference. The Competition Authority foresees that supplier-retailer agreements should be periodically submitted to the authority so that it may observe the organised retail market.
For further information on this topic please contact Gonenc Gürkaynak at ELIG by telephone (+90 212 327 17 24), fax (+90 212 327 17 25) or email ([email protected]).