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Competition developments in key sectors

Romanian Competition CounCil

2012

Electricity sectorRail freight sector

Telecommunications sector Competition in the food retail sector

Insurance sectorBanking sector

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2012

TABLE OF CONTENTS Foreword ......................................................................................................................2

1. Introduction .............................................................................................................3

1.1. Remarks on the evolution of the national economy ..................................................................... 3

1.2. Remarks on the role of competition policies in the recovery and development of the economy ....................................................................................................... 4

1.3. The relevant market within the context of a competition status analysis ....................... 5

2. Indices that substantiate the assessment of competition ....................... 6

2.1. Sectorial indices ............................................................................................................................................... 7

2.2. Market indices ................................................................................................................................................ 11

3. Competition in key sectors ............................................................................... 13

3.1. Electricity sector .............................................................................................................................................13

3.2. Rail freight sector ..........................................................................................................................................21

3.3. Telecommunications sector .................................................................................................................. 28

3.3.1. Market of audio-visual program retransmission services ............................................. 28

3.3.2. The impact of frequencies auction in the telecommunications sector .................34

3.4. Competition in the food retail sector ............................................................................................... 42

3.4.1. Own Brands............................................................................................................................................. 54

3.5. Insurance sector ...........................................................................................................................................57

3.6. Banking sector .............................................................................................................................................. 64

3.6.1 The Market for non-cash payments – a part of the banking system .........................75

http://www.consiliulconcurentei.ro/en/about-us.html

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Foreword This report belongs to a series of measures that Romanian Competition Council has initiated in order to monitor the way in which markets func-tion and to assess the competition climate in the key sectors of the national economy.

This report proposes and assessment of the dynamics of several aspects that may influence competition levels in six economic sectors, which are particularly relevant to the national economy. At the same time, this report also vies to be a permanent work tool, based on which basis the Competi-tion Council will be able to represent both the actual status quo of competi-tion, as well as the impact of competition policies and other Government measures on the competition climate in a given economic sector.

This year’s report employs indices for measuring the development of com-petition in the electric energy, railroad freight transport, insurance, and banking sectors. It also presents relevant aspects on the evolution of com-petition in the food retail sector and highlights legislative issues in this sec-tor. The report also sheds light on the involvement of the Competition Coun-cil in the ensemble of actions undertaken by the national telecommunica-tions regulator, within the context of the usage rights granting procedure for radio frequencies.

Monitoring the economic sectors, which ensure production factors or vital services for the national economy as a whole, namely banks, energy, trans-portation, and insurance is one of the Competition Council’s priorities. On the other hand, sectors such as food retail or the re-broadcast of audiovisual programs are highly important for individual consumers, as they bear an el-evated degree of social relevance.

Competition policies are horizontal public policies with their own dynamic, which is influenced by the evolution of economic theory. However, the ef-ficient implementation of competition policies is achieved at sector level, and there exist fields in which they need to be harmoniously reconciled with the specific policies of the regulating authorities.

The endeavors in this report will also continue throughout the following years, both through a comparative assessment of the competition in some of the sectors that have already been assessed, as well as through the intro-duction of several new sectors, which have been deemed highly important for the national economy.

President,Bogdan M. CHIRIŢOIU

http://www.consiliulconcurentei.ro/en/about-us.html

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2012

1. Introduction

1.1. Remarks on the evolution of the national economy

After three years of profuse recession, the Romanian economy has undergone significant structural changes. Among the most important developments, the following are noteworthy: a change in the economic sectors’ share within the formation of the GDP (the most noticeable development is industry’s share increase – from 22.8 per cent in 2008, up to 26.5 per cent in 2011, respectively), inflation’s decrease to a historic minimum, against the back-drop of a decrease in domestic consumption, the significant devaluation of the national currency, the downturn in lending activities, and the shift in focus, from consumption and investment toward export.

Chart 1. The structural evolution of Romania’s GDP 2008 v 2011

SOURCE: NSI

Crossing a crisis period of such amplitude saw the elimination of several undertakings from the market, particu-larly small and medium undertakings. At the same time, major multinational corporations decided to curb their activity or to definitively withdraw from the Romanian economic system.

The current report analyzes six economic sectors with a major impact on the national economy, from the per-spective of the evolution of the competition levels observed in these sectors.

The analysis is based on a system of indices that generate an integrated outlook on the state of competition, while also allowing its evolution in time to be assessed, in the analyzed sectors.



1.2. Remarks on the role of competition policies in the recovery and development of the economy

The notion according to which efficient competition contributes to economic development is a generally ac-knowledged principle, on which the large-scale espousal of competition policies is based. Moreover, this is prin-ciple is supported both by a vast corpus of empiric evidence, as well as by economic theory. Throughout history, the main arguments in support of competition policies have mainly focused on the added efficiency that compe-tition generates, both at the level of undertakings (eliminating x-inefficiency), as well as on the markets’ efficiency in functioning (maximizing the consumers’ welfare). At the same time, a dispute exists among competition policy experts, regarding the direction of the correlation between the strict enforcement of competition rules and the phenomenon of technological innovation inhibition.

As several theoretic contributions have outlined, it can be argued that the relationship between the intensity of competition and increases in productivity bears the shape of an upside-down U, owing to the manifestation of two effects: a positive one – of allotting resources and a negative one – of the motivation behind profit. Specifically, levels of competition which start out low will benefit from an increase, which will lead to using resources more efficiently, yet without significantly diminishing the undertakings’ motivation. On the other hand, markets with sufficiently high levels of competition will only experience marginal gains in resource allotment efficiency, but with important consequences on the undertakings’ motivation to innovate.

The fundamental implication of the above arguments is that each market has its own optimal competition level and competition policies need to take this level into consideration.

Beyond the controversy regarding the impact of competition policies on technological innovation, an insuffi-ciently debated aspect is the existence of a link between competition and short-term economic growth. This link, should it exist, is neither direct, nor easy to measure. It can, however, be identified through an analysis of competi-tion in major economic sectors. Energy, transport, and capital represent fundamental inputs (production factors) for the other sectors, while the role that insurance plays in risk management is also extremely important.

Table 1. Sectors of the economy of great importance to the competition authority

Sectors Monitored for Their Impact on the Economic Environment as a Whole

Sectors Monitored for Their Impact on Individual Consumers

Energy Pharmaceutics

Financial and banking Medical services

Transport Food retail

Constructions (including construction materials) Media

Telecommunications Liberal professions

Insurance Real estate

Vehicle, tool and equipment production Public utilities

The above list is neither exhaustive, nor restrictive, as certain sectors are both greatly important to the functioning of the economy as a whole, while also having a significant impact upon consumers (the banking sector). For this year’s report, we selected both sectors that are important from an economic environment perspective, as well as sectors that are important from the point of view of the impact they have upon individual consumers.

The term of ‘economic’ sector employed in this report generically refers to a field of the national economy, which comprises the production and sales of goods and services that share certain characteristics in point of functional-ity or utility.

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20121.3. The relevant market within the context of a competition status analysis

The level of competition manifested on a certain market depends on several factors, among which the market’s structure, the characteristics of the product (homogenous, differentiated, etc.), or certain characteristics of product demand (elasticity versus price, seasonal cycles, etc.).

Economic theory indicates that, in order for a market to display perfect competition, it needs to fulfill the follow-ing conditions cumulatively:

There exists a very large number (infinite) of producers and consumers respectively;

Transaction costs are null;

There are no restrictions placed upon entering and exiting the market;

The sales price is equal to the marginal production costs. This condition involves zero profit, which means that no undertaking can achieve positive revenue on a market with perfect competition;

No undertaking on a market with perfect competition can influence market prices one-sidedly, meaning that the producers’ market power is null;

The concept of a market with perfect competition is purely theoretical, since such a market does not exist in real-ity. In order to successfully define a market with satisfactory competition, we shall employ a set of quantifiable indices that refer to each of the characteristics mentioned above. Also, in order for the market or respective sector to qualify as competitive, it is necessary to define a set of minimum acceptable thresholds.

At the level of the competition authority, investigations regarding the competition status quo require defining the basic functional unit, namely the relevant market.

The relevant market is the main instrument to delineate the framework within which competition among un-dertakings manifests or is affected. As the national and community legislative framework indicate1, the relevant market is defined in relation to two components: the product’s relevant market and the geographically relevant market.

Since assessing the state of competition in the sectors of the economy involves a top-down2 approach, it makes sense to discuss the indices of the state of competition on the product’s relevant market. From this point of view, the concept of relevant market employed in this study comes close to the term of commercial or retail market.

It is important to note that the indices defined for the analysis of the state of competition in an economic sector can also be used within the rigorous framework of the relevant market, as defined within the context of a com-petition investigation whose object has been clearly determined.

At the same time, an economic sector includes one or several producer undertakings, one or several intermediat-ing undertakings (downstream), one or several main products, and one or several relevant markets, respectively.

1 Instructions regarding the definition of the relevant market (published in Romania’s Official Journal, Part I, no.553, on August 5, 2010) and the Communication of the European Union regarding the definition of the relevant market under the scope of community competition law (published in the Official Journal of the European Union, C Series, no. 372, on December 9, 1997).2 Assessing the competition can be undertaken at market level, within sectorial investigations performed by the competition authority (the bottom-up approach). At the same time, assessing the competition can also be performed at sector level, based on a system of indices that target on the state of competition (the top-down approach).



A full evaluation of the state of competition in a given economic sector requires the analysis to be undertaken on all those segments. Certain segments or markets can well function properly from the point of view of competition, while other markets or segments within the same-self economic sector report serious competition distortions.

The current study will employ the same principles on which the definition of the relevant market in competition investigations relies, in order to delineate relevant markets:

- Supply side substitutability and, respective, demand side substitutability

- Existent competition pressures and/or potential competition.

2. Indices that substantiate the assessment of competitionThe indices for assessing competition employed in this report will be classified as:

- Sectorial indices

- Relevant market indices

It is worth noting that this classification has been made for orientation purposes, as some of the indices can be used both at relevant market level, as well as at sector level. The important aspect is that the simultaneous and correlated assessment of all these indices provides information regarding the state of competition in a given sec-tor. Also, it allows the identification of sectors which bear elevated risks for the emergence of behaviors that might negatively impact the state of competition – sectors with competition-affecting risk potential.

Chart 2. Indices employed in assessing the state of competition

A. Sectorial Indices B. Relevant Market Indices

The number of undertakings in the sectorThe evolution of profitability ratios (ROE

/ ROA)

The mobility ratio within the sector The occurrence of consumer petitions

The import penetration ratio Barriers to entry

The Herfindahl-Hirschman Index (HHI) The evolution of the product’s price

The turnover per sector employee average

Other specific indices

The degree of differentiation among products in the sector

The presence of scale economies

The concentration ratio (CR)

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20122.1. Sectorial indices

The number of undertakings in the sector

The number of active undertakings within a sector provides the first set of information regarding the structure of the market and the state of competition within that given sector. It is a well-known fact that the sectors which re-quire significant capital investments are populated with a lower number of undertakings than sectors with lower capital investments. This difference is more acute in those economic sectors in which capital investments are potentially irrecoverable. Also, those industries in which production technologies are scale economies naturally favor undertakings with major capital investments.

An undertaking decides to enter a given sector of the economy or a specific market when the flux of revenue expected within a reasonable span of time equals the level of irrecoverable costs associated with the initial in-vestment demanded upon entry to the market.

The mobility ratio within the sector (churn rate)

The evolution of the number of undertakings within a certain sector provides information regarding the existing barriers to entry and the level of competition pressure, which exists in that sector.

2011 - 2010

2011 Number of companies Number of companies

Number of companiesMobility ratio =

There normally exist sectors of the economy which favor a higher undertaking mobility ration, yet observing the evolution in time of this index provides information regarding the evolution of the intensity of competition levels within a given sector.

The import penetration ratio

Imports increase the level of competition pressure on a certain market and lower the likelihood that illegal agree-ments should emerge.

Yearly product import volume

Yearly product consumptionImport penetration ratio =

Also, it is likely that, within the context of accelerated globalization and of markets opening up for transnational undertakings, an undertaking with a significant market quotient should have limited market power, on account of the threat posed by transnational companies and of the imminence of imports, specifically.

The Herfindahl-Hirschman Index (HHI)

The HH index is the most frequently used for gauging the market concentration ratio. Its value ranges between zero (perfect competition) and 10,000 (monopoly).

2

1

N

ii

HHI S=

=∑

where N is the number of undertakings active on the market. S

i is the market quotient of undertaking i.



This being said, there are no unanimously accepted levels to this quotient for classifying a given market within the following categories: weakly concentrated market, market with average concentration, strongly concentrated market. The following table presents the levels employed by the European Commission, namely the Department of Justice – Federal Trade Commission - USA.

Table 3. Agreed signification levels for the Herfindahl-Hirschman Index

Concentration Degree HHI Value

European Commission DoJ-Antitrust Division + Federal Trade Commission

Low < 1000 < 1500Average 1000 – 2000 1500 – 2500High > 2000 > 2500

It is worth highlighting the fact that the HH Index points to the structure of a market at a given point in time. This index can provide a distorted image of a highly dynamic market, which record significant structural changes over short periods of time.

What is more, for markets on which there exist products with differentiation potential, i.e. with a rich assortment rate, the HH Index can provide erroneous information regarding the real evolution of competition.

Box 1. The impact of product differentiation on the value of the HH index

A differentiated product is a product that features more assortments differentiated through various characteristics (qualitative). Between these assortments there can exist, as well, a certain degree of substitutability.There is an inverse relationship between the degree of substitutability and the degree of product differentiation. Due to product differentiation, efficient undertakings might function on the same market as inefficient undertakings, some consumers will prefer the product assortments of the less efficient undertakings. This means that the undertakings benefit of a certain degree of market power, precisely due to product differentiation.As a consequence, if the degree of differentiation increases on a certain market, this implies that the substitutability of the existing product assortments decreases. This also means that the level of competition will decrease on that particular market.The market shares of the efficient undertakings will decrease, because there will be fewer consumers who will prefer their product assortments (due to the increase in the degree of differentiation). At the same time, there will be an increase in the market power of companies, and this will translate into higher margins (i.e. a higher spread between the market price and the production costs).Due to the opportunity of increased margins on the market with a high degree of product differentiation, the will be new undertakings entering on the market.In conclusion, in the presence of an increase in the degree of product differentiation there will be an increase in the market power of the undertakings active on the market, and this will lead to an increase in the equilibrium market price but also to a reduction in the market shares of efficient undertakings.The decline in the market shares of undertakings present on the market will lead to a decrease in the value of Herfindahl-Hirschman index, and this in turn will suggest an increase in the competition on the market, something that is in contradiction with the real evolution of the market.In the field literature there was proposed an alternative for a correct evaluation of the degree of competition on such markets, namely the use of the relative profits indicator (the comparison of the profits obtained by the most efficient undertakings with the profits of the least efficient undertakings).

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2012The turnover per sector employee average

The turnover per employee index represents an average productivity index within a given sector. This index differs according to industry characteristics and also does not take into account profitability or subsidies, but its advantages are that it’s easy to calculate (it uses public data), while also offering a representation of the activity dynamic within an economic sector.

The degree of differentiation among products in the sector

The degree of differentiation between products on the market can be gauged according to two criteria: differ-entiation through characteristics (horizontal) and differentiation through quality (vertical). Although the dif-ferences between the two criteria are not always immediately apparent, differentiation through quality is deter-mined by the consumers’ unanimous perception, while differentiation through characteristics is the result of the existence of distinct and subjective preferences among the consumers of a certain product.

The degree of differentiation among products or services is an important aspect within the analysis of competi-tion on a given market, bearing in mind the fact that:

a) quality and/or characteristics differences among products generates extra competition between undertakings, beyond competition through pricing;

b) undertakings that produce superior quality goods are more difficult to discipline by their rivals, since the commercial liabilities they stand to incur in a price war are relatively low, which makes it less likely for a cartel to emerge;

c) an undertaking with the advantage of quality should benefit from a larger market quotient within a cartel, in order to compensate for the benefits that it might obtain from deviating from the agreement perfected with its competitors. On the other hand, this would affect the motivation of lower quality goods/services providers to take part in the agreement. Basically, cartels cannot suppress quality competition, which makes it difficult to eliminate price competition.

d) horizontal differentiation leads to a decrease in demand elasticity by price, for a market seen on the whole3, which makes potential retributions for deviances from a prospective cartel policy be more difficult to apply. As such, the damage that can be caused by a price war between a cartel and deviating undertakings is limited.

An interesting result of the above appraisals is determining the impact that innovation has on the possibility of the emergence of cartels. Since the innovation process increases cost and/or quality asymmetries, the emer-gence of anti-competition agreements is less likely on more innovative markets.

Measure of scale economies

Scale economy4 is an economic concept which provides information regarding the optimal size of an undertak-ing within a certain industry. This concept is based on the idea according to which each industry is characterized by a certain technology, meaning the (limited) ability to convert primary materials into finite products. The pro-

3 The structure of these markets is defined in macroeconomic theory as “monopoly competition”. Since products lack homogeneity on these markets, undertakings have a certain market power level, even in spite of the existence of a large number of undertakings.4 Scale economies v Scale incomeAlthough their meaning is similar, the two economic concepts are different.A given technology displays scale (dis)economies when the average production costs increase/decrease at the same rate with an increase of production volumes. At the same time, there exists the so-called minimally efficient production capacity, i.e. a specific production volume for which average costs reach the lowest possible value.A given technology displays the property of decreasing/increasing revenue when an increase by x% in production factor levels results in a production volume increase which is lower/higher than x%.



duction technology is not material by nature, but it is derived from the inherent technologic constraints of any production process. At the same time, given the theoretical nature of the concept, one can speak of production technologies even in the service sector.

Each technology has a production capacity which represents the efficient production volume, i.e. that specific rate at which average production costs are minimized.

Figure 2. The production volume (capacity) at which the production capacity of a given industrial sector is mini-mized

For competition policies, it is relevant that, in some industries, the efficient production volume is obtained at low values of production capacity, while other industries operate conversely and yield the efficient production volume at elevated production capacity.

An industry in which the efficient production volume is high when compared to total demand figures will natu-rally display a limited number of active undertakings at any given time.

Box 2. The effect of scale economy on the cable operator sector

The significant aspect in this context is the evolution of the TV program rebroadcast market. Although numerous small/

medium scale players operated on the market at first, their number subsequently decreased, once the undertakings

with significant market quotients increased in size. This pattern of evolution was mainly caused by the scale economy

property of the technology in this industry, which determined a decrease in average costs per unit, as the number of

subscribers increased.

This is why most small-scale undertakings could not survive the competition pressure generated by the larger

undertakings, which were able to tap into the effects of scale economy, namely those of the network effect

11www.competition.ro

2012The concentration ratio (CR)

CR represents the sum total of market quotas for the biggest n players on the market. It usually includes a limited number of undertakings, in order to highlight the potential oligopoly nature of the market (a small number of un-dertakings controlling a significant portion of the market).

Its value ranges from 0 (perfect competition) to 1. The concentration ratio is calculated according to the

1

K

K ii

CR s=

=∑

formula, in which Si is the market quotient of undertaking i, arranged in reverse market quotient order.

2.2. Market indices

The evolution of profitability ratios (Return on equity - ROE & Return on Assets - ROA)

The profitability of an undertaking depends on numerous factors. However, by following the way in which profitabil-ity indices evolve in time can provide information regarding an undertaking’s market power. For instance, if increas-es in profitability are reported under similar market conditions to those previously recorded, or even in the pres-ence of deterring factors, we can associate these increases with a potential market power of that given undertaking.

Market power in its turn can be a consequence of the market’s structure or a consequence of certain anti-compe-tition practices.

The occurrence of petitions from consumers to the National Authority for Consumer protection (ANPC)

Complaints (petitions) drafted by consumers provide clues on the quality of services or goods in a given econom-ic sector. Starting from the assumption that a competitive environment stimulates innovation and the increase of service quality, we may use the occurrence of client petitions as an (indirect) measure to the intensity of com-petition in a given sector. Besides, the existence of a large number of disgruntled consumers may also signal the manifestation of the goods suppliers’ / service providers’ market power.

Using this index obviously comes with its own limitations, which are mostly related to the fact that it does not re-flect the outcomes of petitions. However, the increased occurrence of petitions in a given sector indicate a state of consumer dissatisfaction and this can be corroborated with other indices, in order to outline a representation of the state of competition. Besides, the index also provides a representation of an important aspect of competition among undertakings: competing through quality.

Barriers to entry

The difficulties that undertakings face when entering new markets can be determined by the existence of barri-ers to entering the market. These can be:

- Regulation restrictions – legal demands targeting market activity (permits, licenses, etc.)

- Structural restrictions – restrictions that stem from the characteristics of the market (initial investments, advertising costs, etc.)



From the competition regulations perspective, the first category of restrictions certainly has the potential to affect competition levels and represents a concern for the competition authority.

This is an alternative definition for barriers to entry, according to American economist George Stigler:

“... a cost of producing which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry.”

The evolution of the product’s price

On most markets, the evolution of the product’s sale price contains information regarding the forces which act on that market. Any anomaly, expressed as a structural breach within the price data set, an accelerated price in-crease, which outweighs the inflation increase rate, may represent a departure point for a detailed analysis of the causes which determined the change in price.

Other specific indicators

- The difference of interest between loans and deposits (for the banking sector);

- The fees and commissions income / interest income ratio (for the banking sector);

- The penetration rates for various technologies (for the audiovisual program rebroadcast market);


2012

3. Competition in key sectors

3.1. Electricity sector

The electricity sector is regulated by Law on electricity and natural gas no.123/2012 transposing Directive EC/2009/72 of the European Parliament and of the Council concerning the common rules of the internal market of electricity.

The main types of the activities forming the electricity sector are the following:

(1) t he production of electricity in power plants, including cogeneration power plants (the production);

(2) the transport of electricity on high-voltage lines from energy production capacities up to distribution installations or to consumer’s facilities connected directly to the electrical transport networks (the transport);

(3) the transport of electricity through lines of average and low voltage up to final consumers (the distri-bution);

(4) the sale and purchase of electricity on wholesale markets (the trading) and

(5) the sale of electricity to final consumers (the supply).



In addition to the main activities, in this sector a number of other secondary activities are carried out, such as system services, the marketing of green certificates, of greenhouse gases emission certificates, maintenance ser-vices, etc.

The main activities listed above and the administration of the centralized electricity markets is conducted on the basis of a license granted by the National Regulatory Authority in the field of Energy (A.N.R.E.).

The production activities and the trading of electricity are conducted within a competitive regime. The transport-ing activities of the electricity through electrical networks of high, medium and low voltage constitute natural monopolies and are carried out within a regulated regime.

The energy mix in Romania

At the national level, there is a diverse range of sources for the production of electricity (hydro, nuclear, coal, fuel oil, natural gas, wind, biomass, solar sources etc.), which contributes significantly to increasing the safety in the pow-er supply. The most notable existing resources are the coal and the water (the hydro source), while the natural gas has a low weight.

From the data provided by the national carrier operator, it appears that the total installed power of electric power stations of the National Energy System (S.E.N.) was in 2011 of 21.405 MW, out of which 30 % in hydroelectric power stations, 7% in nuclear power stations and 59% in 4 in wind and biomass plants. The share of the energy produced from renewable sources (particularly, the wind) recorded significant increases in the last period.

The structure of the energy mix in Romania is quite balanced, but, as a rule, the electricity producers have in port-folio technologies that mainly use a single source of fuel, which exposes them to risks requiring a management which prevents the optimal operation of the power plants.

The competition between the companies operating in the Romanian energy sector is manifesting at the national level, both as a result of the differences in the regulation and in the operating rules on the market, and of the pres-ent level of interconnection capacities between our country and the neighboring countries.

In order to enforce the competition legislation, the Competition Council defines relevant markets in the electric-ity sector starting from the categories of the activities carried out in this sector, each of which being able to repre-sent a distinct relevant market5. Thus, the main relevant markets in the electricity sector can be considered the following:

The market of electricity production and trade;

The electricity supply market;

The market of electricity transport;

The electricity distribution market.

The production of electricity

5 It should be noted that this division is only a starting point in defining the relevant markets in the cases investigated by the Competi-tion Council and that, depending on the circumstances specific to each case, a different definition of the relevant market can be reached. The manner the Competition Council uses the concepts of the relevant product market and of the relevant geographic market in the appli-cation of competition legislation is detailed by the Instructions of the Competition Council concerning the definition of the relevant market, published in the Official Gazette of Romania, Part I, no.553 of 5 August 2010.


2012The market of electricity production and trade mainly includes the production of electricity in power plants for the purpose of marketing it through other economic operators on the wholesale market. The quantity of the energy imported through physical interconnections is also contained by the market of production and sale of electric-ity6.

On this market, the electricity producers and the companies that make imports represent the supply-side and the other participants on the market (electricity suppliers, distribution and transport operators, industrial consumer, etc.) acquiring the electricity from the wholesale market represent the demand.

Taking into account the interaction between the supply and the demand, defining the relevant product market may involve a segmentation of the market of production and sale of electricity. Thus, the transactions with electric-ity can be made both in the competitive and in the regulated regime (in accordance with the provisions of A.N.R.E.), the two categories of transactions constituting two distinct market segments, whose size depends on the degree of liberalization of the electricity market.

According to the data presented by the regulatory authority, currently, around 170 companies hold the license for the production of electricity on the Romanian electricity market. Out of them, only a part is effectively pursuing the activity for which they have obtained license, the rest of the companies representing potential competitors.

The majority of the national consumption is ensured by power plants belonging to majority State owned compa-nies. In respect to this situation, over time, an issue has been raised concerning their belonging to the same group and regarding the existence of a “monopoly” on the Romania market of production and sale of electricity.

On this matter, the Competition Council appreciates that the Romanian producers of electricity, where the State is a direct major shareholder, are not part of the same group to the extent that they are able to make independent decisions in relation to the others. At the same time, if the enterprises where the State is the major shareholder hold branches in their portfolio, these branches are part of the State-owned enterprise group, and the undertak-ing concerned is the parent company for the respective branches.

Graph no. 2. Evolution of the concentration of the market of production and sale of electricity

SOURCE: Data processed by the Competition Council

6 However, the amount of electricity imported annually in the period 2008-2011 is insignificant and cannot thus exert a significant compe-titive pressure on the electricity manufacturers holding production sources on the Romanian territory.



Following the competitive assessment of the market in terms of the production and sale of electricity was con-cluded that there is an increase of the market concentration, as it was measured through HHI in 2010 compared to 2009, and a significant decrease in 2011 compared with the previous year. However, CR5 and CR10 indicators maintained at relatively constant values.

The market concentration increased significantly during early 2012, as a result of the establishment of S.C. Com-plexul Energetic Oltenia S.A. However, the analysis carried out by the Competition Council when S.C. Complexul Energetic Oltenia S.A was established revealed that this increase of the market concentration was to be countered by the imminent entry into the market of the new generation capacity belonging to S.C. OMV Petrom S.A., as well as of certain production capacities based on renewable sources.

The concentration of the Romanian market of production and sale of electricity records a medium lev-el compared with other EU Member States. For example, while in Romania the value of the CR1indicator is about 30, in countries such as Portugal, Denmark, Sweden and Hungary, it has values between 40 and 50, and in countries such as Belgium, the Czech Republic, France, Greece, the CR1 is between 70 and 907

.

The supply of electricity

The electricity supply market includes the trade of electricity performed by undertakings not owning produc-tion capacities.

The supply involves buying electricity from companies operating on the wholesale market and selling it to other holders of licenses and/or to the final consumers.

The electricity supply market is segmented according to the category of customers: companies reselling electric-ity and the consumers of electricity.

The customers purchasing electricity for the purpose of resealing it are active in the trading segment, and those purchasing electricity for the purpose of consumption are active on the final consumers supply segment.

The electricity supply to final consumers can be achieved both in competitive and regulated regimes.

According to the data presented by A.N.R.E. currently, around 180 companies holding electricity supply licenses are active on the Romanian electricity market. However, almost half of the companies holding supply licenses are activating as suppliers/traders on the electricity supply market, the other companies representing potential competitors.

7 Source: Eurostat.


2012Graph no. 3. Evolution of the concentration of the electricity supply market


The analysis of the evolution of the concentration on the electricity supply market reveals a trend of decrease in the last three years, both of the HHI and of the combined market shares of the first 5 competitors. At the same time, one can notice a low level of concentration of this market.

Graph no.4. Evolution of the concentration of the electricity supply market to final consumersi




In the past 3 years, the segment of supply to final consumers registered fluctuations of its concentration degree, as it was measured by HHI, but its level reflects a low degree of market concentration. At the same time, CR5 and the concentration indicators CR10 registered a slight decrease, indicating an erosion of the share of the main market participants.

The distribution of electricity

The electricity distribution market includes the transport of electricity through the networks of low and medi-um voltage (cables with nominal line voltage up to 110 kV inclusive). In the case of the electricity distribution, the relevant geographical market is represented by the geographical area in which a distributor operates according to the license granted by A.N.R.E.

In Romania, 8 distribution areas are regulated, corresponding to the eight areas of natural monopoly, for which concession contracts were entrusted. Among the companies that operate the distribution networks is no compe-tition, their activity being performed within a regulated regime.

The tariff charged by the distribution network operator is set by A.N.R.E. based on three levels of tension, for each of the 8 zones, the highest rates being set for the consumers connected to the low voltage network.

The transport of electricity

The electricity transport market includes the transport of electricity through high-voltage electric networks (cables with nominal line voltage of 110 kV). The relevant geographic market in the transport of electricity is the territory of Romania, since the transportation network is covering the entire national territory.

There is only one electricity carrier in Romania, and its activity is conducted within the regulated regime. The freight tariff charged by the network operator is set by the A.N.R.E. and has two components, namely the tariff for introducing the electricity into the grid (TG) and the tariff for extracting the electricity from the network (TL). At the national level, the existing transport network is divided into 6 areas of injection and 8 zones of extraction, for each of these geographical areas the regulatory authority establishing differentiated tariffs.

From the competitive perspective, such a differentiated regulation is admissible to the extent that it aims to opti-mize the functioning of the transport network, by encouraging investments in new production capacity or, where appropriate, the electricity consumption in predetermined areas.

* *

The impossibility of storing the electricity and the need to ensure the balance between the consumption and the production of electricity requires ancillary activities necessary for the safe operation of the National Energy System (S.E.N.).

Based on these activities, the following markets can be identified:

The technological services market – the market that provides S.E.N with production capacities.

The balancing market – the market where the electricity is traded in order to compensate for the devia-tions from the scheduled values of the production and consumption.


2012At the same time, the measures promoted at the European Union level in order to reduce the greenhouse emis-sions led to the development of new markets, as follows:

The green certificates market - the market where the producers of electricity from renewable energy sources and the suppliers trade green certificates;

The market of carbon dioxide emissions certificates – the market where the companies which recorded a deficit/excess of emission certificates in relation to the reporting obligations can buy/sell the certificates.

Graph no.5. Number of petitions concerning the electricity supply services submitted to the National Authority for Consumers’ Protection

SOURCE: The National Authority for Consumers’ Protection

The petitions concerning the electricity supply services that were submitted the National Authority for Consum-ers’ Protection are not presented in relation to the causes that generated consumer complaints and do not reflect the extent to which these complaints are justified. However, the evolution in time of the number of petitions and the share of the petitions relating to an economic sector in the total petitions recorded are relevant for assessing the indicators of the competitive environment in this sector.

Market entry barriers

The barriers to entry in the electricity sector can be structural, legal and administrative.

In general, the electricity sector is characterized by a high level of barriers to entry, due to the very high cost relat-ed to the initial investments, to the duration of the implementation and amortization of the investment projects.

However, the architecture of the Romanian electricity production sector can be assessed as being quite permis-sive for the new businesses wanting to enter the market. In this sense, the following are being envisaged: the mod-erate degree of the market concentration, the mono-fuel structure of the main producers or the existence of the obsolete capacities, the latter having a fairly limited effect.

The main barriers invoked by the market participants are the legislative instability, the lack of predictability re-garding the evolution of the Romanian electricity market, as well as the existence of the long-term, non-transpar-



ent and discriminatory acquisition contracts. Currently, the number of the long term purchasing contracts has significantly reduced and it is likely that in the future they may no longer draw a significant barrier.

The relatively low liquidity on certain market segments are another barrier to entry, as they are generated by the long-term contracts signed as well as by the non-transparent transactions made by market participants.

In comparison with other countries, certain market segments, especially those that are deploying new tech-nologies (wind, micro-hydro) reveal an affluence of newly entered companies, in parallel with a decrease of the investments made in the other segments (with production sources of oil, coal mines, and nuclear).

Box no. 3

Actions of the Competition Council in the electricity sector:• Investigation on the long-term contracts concluded by S.C. Hidroelectrica S.A. with its clients;

• Investigation on the possible abuse of dominant position of S.C. CEZ Distribution S.A. on the electricity

distribution market;

• Sector inquiry on the market functioning mechanisms of the Romanian electricity sector;

• The analysis on the restructuring of the electricity production sector proposed by the Ministry of Economy,

Commerce and Business Environment, i.e. the authorisation of the establishment of S.C. Complex Energetic

Oltenia S.A. and of S.C. Complex Energetic Hunedoara S.A.

Conclusions on the electricity sector

• The concentration of the Romanian electricity market has a medium level compared with the other Member States of the European Union.

• The amount of the electricity imported/exported annually is insignificant, meaning that, from the geo-graphical perspective, the electricity market would continue to be defined at a national level. This is due to the limited interconnection facilities, which generate a certain level of market power for the ac-tive enterprises.

• The diversified range of electricity sources provides Romania with a high degree of safety in the power supply.

• The structure of the electricity production sector, based on mono-source manufacturers, is atypical compared with other countries of the European Union.

• The size of the competitive segment is reduced compared with the degree of the legal liberalization attained in Romania.

• The regulation of the transport tariff affects the competition on various segments of the electricity sec-tor.

• The energy trading in a non-transparent mode affects the establishment of reference prices.


20123.2. Rail freight sector

Overview

The most important companies operating on the rail freight market and their market shares

Established on October 1, 1998 by reorganizing and dividing SNCFR, National Railway Company C.F.R. S.A. (Com-pania Naţională de Căi Ferate C.F.R. SA) is a joint stock company developing national public interest activities in order to ensure rail freight transport and to meet the specific tasks according to the country’s defense needs.

National Railway Company C.F.R. SA operates a rail network of 10.776 km railway with a length of 20.210 kilo-meters. The company’s activity is organized like a central structure with specialty directions and with 8 regional railway branches composed of territorial criteria. C.N.C.F.”C.F.R.”-SA has also 8 subsidiaries with the status of com-panies. A series of traffic subunits, lines and instalations are subordinated to C.R.E.I.R. CF and they develop their activity on a number of 131 circulation sections.

The railway network currently managed by C.F.R. SA has the following general characteristics:

The railway route length: 10.818 km, of which:– Electrified length: 4.002 km– Non-electrified length: 6.816 km– Double line length: 2.909 km– Simple line length: 7.771km

The total length of lines: 20.210 km, of which:– 17.691 km of public infrastructure managed by C.F.R.– 2.519 km of private infrastructure held by C.F.R.



CNCF C.F.R. SA customers’ portfolio is represented by:S.N.T.F. C.F.R. Marfa SA, C.F.R. Calatori SA, OTF Marfa,OTF Calatori.

The evolution of rail freight transport market during 2001-2012

On Romanian freight transport market, besides the state-owned company C.F.R. Marfa, there are also 24 private companies.

The rail freight companies having a market share greater than 1%:SNTFM “CFR Marfa” - 49.90%;Grup Feroviar Roman - 25.15%;Servtrans Invest - 5.67%;Cargo Trans Vagon - 5.05%;Unifertrans - 4.08%;DB Schenker Rail Romania - 3.65%;Transferoviar Grup - 2.48%;Vest Trans Rail - 1.73%;Rail Cargo România- 1.08%

According to the data published by AFER (Romanian Rail Freight Authority) at the end of April 2012, a number of 24 rail freight companies have been activating in rail freight sector, as follows:

Table no 4. Rail transport licenses

New transport licenses issued during

01.11.2011 – 30.04.2012Active licenses at

30.04.2012

Total, of which : 2 24

- licenses for rail freight transport

2 17

- licenses for rail passenger transport

0 4

- licenses for rail freight and passenger transport

0 3

Source: AFER

The rail freight market opportunities

S.N.T.F C.F.R. Marfă S.A. was established on October 1, 1998 by dividing SNCFR. This company develops national public interest activities in order to ensure rail freight transport and to meet the specific tasks according to the country’s defense needs. The main activity of this company consists in rail freight transport within the local and international traffic with full wagons and intermodal transport units which are all accessory rail freight services.

The company’s activity area is represented by the entire Romanian railway network having a territorial organiza-tion. The company is organized in 4 branches: Muntenia-Dobrogea, Banat-Oltenia, Transilvania and Moldova, 89 management stations, 8 depots operating locomotives and 12 wagons revisions.


2012The locomotive fleet inventory of S.N.T.F. C.F.R. Marfă S.A. is composed of 907 locomotives whose average age be-ing of 33, 4 years. At the level of the year 2011, the locomotive operating fleet had 384 locomotives, of which: 172 electric locomotives, 124 Diesel-electric locomotives and 88 Diesel – hydraulic locomotives. The wagons fleet con-cerns 39281 wagons whose average age being of 30 years. The wagons operating fleet rises up to a total of 22 000 wagons.

In the context of market liberalization corresponding to 2001, an important number of private rail freight opera-tors have appeared. The market share of C.F.R. Marfă for the first semester of 2011 represents 12, 1% compared with the other modes of transport and also 49% of the rail freight market for cargo traffic.

Rail freight indicators

There is a presentation beneath concerning the evolution of the rail freight and road transport, divided into quar-ters for the year 2010 and the situation for the first three quarters of 2011.

The above utilized indicators are:

-the shipped cargo volumes expressed by their weight in tonnes;

-the cargo traffic expressed in „tonne-kilometres”; This indicator is determined depending on the weight of trans-ported goods and on the rail distances.

Table no 5. Carried goods in Romania

Year-way of transport

The shipped cargo volumes – thousand of tonnes The cargo traffic – thousand of tonne-km

Ist quarter IInd quarter

IIIrd quarter

IVth quarter Ist quarter IInd quarter IIIrd quarter IVth quarter

2010 (CF8) 12022 12328 13881 14701 3285 2712 2955 3423

2011(CF) 13267 15504 16088 - 2948 3496 3581 -

2011 (road8) 28636 46257 53504 46154 5379 6753 6924 6827

2011 (road) 32686 47799 57624 6504 6597 6891

Source: INS

As could8 be9 seen, there has been an increase of rail freight market both in terms of the shipped cargo volumes and of the cargo traffic. Meanwhile, there is a substancial difference between the rail freight and the road transport during the indicated reference period (fostering road transport).

In the last few years, C.F.R. Marfă lost ground in front of private companies activating in this sector. In 2000, the state-owned railway company held a market share of 100%, but five years later this market share had fallen up to 79, 9%. The market share held by C.F.R. Marfă at the end of the last year was about 50%.

The main competitors of S.N.T.F. C.F.R. Marfă are: Grup Feroviar Roman (GFR), Servtrans Invest, Cargo Trans Vagon, Unifertrans, DB Schenker Rail Romania, Transferoviar Grup.

8 CF- railway9 This indicator includes county, intercounty and international road transport



Indicators of the market concentration degree

The rail freight market is dominated by S.N.T.F. C.F.R. Marfă, reflected in the HHI value, but there is a downward trend in the rate of C.F.R. Marfă favoring private operators.

Chart no 6. The evolution of rail freight market concentration

Source: AFER

The concentration rates on rail freight market reflect the significant market share of C.F.R. Marfa. The HHI values greater than those corresponding to the year 2000 calculated for the period between 2009-2011, indicate a high concentration degree on this market. This indicator should be seen in conjunction with the other characteristics of rail freight market (the market access conditions, the number of competitors and the pressure they could exer-cise, the potential competition).

The evolution of rail freight market

In 2008, C.F.R. Marfă lost 10% of the shipped cargo volume recorded in 2007 and also 12,5% of cargo traffic because of the economic and financial crisis triggered at the beginning of the IVth quarter of 2008. In 2009, the global financial crisis reduced the performance of C.F.R. Marfă by 40% with negative implications for the future income. In 2010, C.F.R. Marfă records an increase of 4% for the shipped cargo and of 7% for cargo traffic. The upwards trend is maintained during 2011.

Between 2010 and 2011, as a consequence of applying restructuring and reorganizing programs which included also measures to reduce employment through redundancies, labor productivity registered a growth of 48,8% in 2010 compared with 2009 and of 21% in the first 10 months of the year 2011.

Barriers to entry on rail freight market

Rail freight transport could be carried out by Romanian or foreign OTF that have:• Rail transport licence;• Safety certificate;


2012• Acces agreement concluded with the infrastructure manager;• Trails allocated for rail transport.

The rail transport licence could be obtained by the economic operators, Romanian legal entities that proved the fact that they are able to meet cumulative requirements: respectability, financial standing and the guarantee of civil responsibilities.

Rail transport licenses granted by OLFR (Organismul de Licenţe Feroviare Roman/ the Romanian Railway Licens-ing Body) are also valid in other European Union Member States for equivalent rail freight transport services. At its turn, OLFR recognizes as valid on Romanian railways the rail transport licenses granted by the relevant author-ity in another EU Member State.

The safety certificate is a document stating that a rail freight operator, holding a rail transport license, may carry out a certain type of rail freight service on traffic sections of Romanian railways. The authority responsible for granting safety certification is ASFR (Autoritatea de Siguranţă Feroviară Română/ Romanian Railway Safety Au-thority), an independent body operating within AFER (Autoritatea Feroviară Română/ Romanian Railway Au-thority).

In order to have access to the railway infrastructure managed by C.F.R., OTF must conclude an infrastructure ac-cess contract with C.F.R. The acces contract establishes the rights and obligations of C.F.R. and OTF concerning the infrastructure capacities allocation and utilization. The validity of the access contract usually corresponds to train timetable and it has a standard structure applicable to all OTF for the respective train timetable.

An important element from the perspective of rail freight operators’ access on that market is the utilization rate of rail infrastructure (TUI).

TUI calculation method is based on the following elements: a) Train distance;b) Train gross tonnage;c) Type of traffic: freight or passengers;d) Trail traffic;e) The class of traffic section and the equipment with electrification systems in order to ensure the trac-

tion current.

TUI is calculated and applied for each train in traffic, based on the above elements.

Nowadays there is a new information operating system (CALIPSO) that calculates the utilization rate of rail infra-structure (TUI) for each train of each OTF, considering trains tonnage and consequently the effectively traffic car-ried out. The situation concerning all trains in traffic is monthly sent to each OTFin order to be checked. After its approval or after the operation of any corrections, the bills concerning the utilization rate are issued. This process is daily assisted and checked and it is authorized for issuing payment obligations related to the infrastructure ac-cess.



The comparative structure of the utilisation rate in EU countries

Chart no 7. Access charges for typical freight train of 2000 tonnes (euro/train km)

Source: European Commission – The third Rail Market Monitoring Report

For Romania, it was necessary to analyze the actual system, with charges on train-km according to the line cat-egory and the train gross tonnage. Since 1st August 2009, Romanian average utilization rate of rail infrastructure has been of 14, 36 lei train/km.

From the 25 EU railway networks analyzed, the following isuues should be remarked:l 11 networks of the countries surveyed do not distinguish between the different lines categories. The other

14th (including C.F.R.) have between 3 and 12 categories based on speed or area mode/ suburban traffic, etc.; l 21 networks have a system consisting of a single part although they could involve up to three variables in the

calculation of the utilization rate (TUI);l 3 networks (Austria, Denmark and the Netherlands) do not distinguish between the type of traffic (freight/

passengers);l only 5 networks establish their systems according to the time of the day when the train is in traffic; l only 2 systems (Finland and Norway) calculate their TUI exclusively on gross tonne-km;l 12 networks (including C.F.R. SA) calculate their TUI both on train-km tonne and on gross tonne-km.

A large majority of these systems use the indicator train-km for the electrification networks but at least two sys-tems calculate the charges on tonne-km.

The evolution of the situation concerning C.F.R. Marfă staff

The staff of C.F.R. Marfă has experienced the following evolution from 1998 to present:

Table no 6. The evolution of C.F.R. Marfă staff

YEAR 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Existing staff

at 31 dec.30443 28679 29081 27095 26572 20819 19552 19318 18877 18565 17985 15992 10813 8297

Source: C.F.R. Marfă


2012As could be seen from the data presented bellow, C.F.R. Marfă recorded a major staff restructuring in the last few years. The company market share registered a decrease of 49, 90% and the number of employees decreased by 70%.

Rail freight transport – Regularity in cargo traffic and commercial speed

Due to insufficient allocations from the state budget concerning the need to repair rail infrastructure elements, the technical parameters of public rail infrastructure have suffered a continuous degradation. This degradation determined a gradual reduction of the maximum traffic speed on the current and direct lines within the stations and also that of lines length with the corresponding maximum traffic speed.

Regular freight train traffic for 2011:-trains in traffic = 158.639 trains (435 trains/day) -regular guidance = 87, 17 %, -regularity in traffic = 82, 45 %, -delay per 100 train*km = 17, 17 minutes per 100 train*km, -commercial speed = 20, 78 km/h.

The commercial speed recorded a decrease of 0, 4 km/h at the rail freight transport compared with 2010.

Traffic safety

According to AFER, there were a total of 39 railway accidents on the public rail infrastructure in the last five years. From those incidents, a number of 10 railway accidents are related to C.N.C.F. C.F.R. SA.

The Railway Supervision Council notes that there is a significant risk of harming the competitive environment, due to the fact that C.F.R. Marfa, as a competitor to other rail freight operators, owns and manages infrastructures of related services to rail freight (locomotives depots, terminals trans, bascule bridges, locomotive operating sec-tors).

In order to prevent competition distortion between rail freight operators and to avoid problems linked to services infrastructure artificial saturation, it is obviously to stay away from creating situations of potential conflict of inter-est between rail services suppliers and rail freight operators.

The action to ensure non-discriminatory access to infrastructure services, including: 1) the services rendered within the depots actually held by C.F.R. Marfă; 2) the freight terminals, does represent an essential requirement for the good development of rail freight transport.

Conclusions

Romania has an important number of private operators managing rail freight transport and, since 2001 the C.F.R. Marfa’s market share has registered a decrease from 100% in 2001 up to 49, 90% in 2011.

This evolution of rail freight transport indicates that private operators do exercise a significant competitive pres-sure on the former monopolist and the customers of those services have the opportunity to choose the carrier that provides the best relation quality-price.



3.3. Telecommunications sector

3.3.1. Market of audio-visual program retransmission services

Summary

The audio-visual program retransmission services can be provided by using multiple technology platforms, namely:

1. electronic communications networks using DTH digital platform (by satellite, in a “direct-to-home” system),

2. electronic communications networks using the coaxial cable / HFC10;

3. using IP - IPTV or WEBTV platforms- involving a certain quality of service for broadband Internet access (con-nection stability and a certain minimum band width);

4. terrestrial radio electric systems.

In general, a product / service is included in a relevant market in terms of price, utility and features if it has a suf-ficient degree of substitutability with products / services that are on that market, regardless of the technology incorporated in that product / service (principle of technological service neutrality). Recent developments re-corded on this market indicate that audio-visual program retransmission services provided by electronic com-munications networks using DTH digital platform (by satellite) substitute the audio-visual program retransmis-sion services provided by electronic communications networks using coaxial cable / HFC.

10 Hybrid Fiber-coax solution;


2012The price, number and variety of TV programs on the market of audio-visual program retransmission services are the main criteria taken into account when purchasing TV program retransmission services and also are the main criteria considered by consumers when choosing the service provider, in terms of service availability. A third selection criterion in order of importance is the programs offer and the existence of premium type chan-nels, which in some cases are offered exclusively by some networks (i.e. sport or movie channels). Transmission quality and additional facilities offered (i.e. the possibility of programming the favourite shows offered by HFC/ DTH digital platforms) are also criteria used by consumers to choose the provider, but the importance of these criteria is relatively low.

Decision to switch the provider depends mainly on the content of TV programs offered. Thus, the services pro-vided by using these platforms can be considered substitutable from the consumer viewpoint if we analyse (i) the general characteristics of the service, respectively TV programs offer (ii) charged prices in relation to the end consumer (iii) consumers’ access to these services.

Also, the analysis of the main market indicators corresponding to audio-visual program retransmission ser-vices found that the commercial offers of distributors of audio-visual program services via DTH satellite communications systems and of distributors via cable networks are comparable in terms of functionality and price on retail market. Thus, there are the conditions to determine a single relevant market for audio-visual program retransmission services based on subscription offered through cable networks and DTH sat-ellite communications systems.

But the strongest argument for this is given by the existence of price constraints as a result of demand and supply substitutability reflected by continue price decrease, in the condition of increasing quality of service and its dif-ferentiation degree.

We underline that ANCOM included in the same relevant market the audio-visual program retransmission ser-vices, regardless of the technology used to provide those services. However, the experience of competition au-thorities 11 in definition of market of audio-visual program retransmission services segmented or not, depending on the technology / used support showed the following conclusions:

– The European Commission’s approach depends on the particularities of respective cases; the definition of product / service relevant market is either open or is considered a single market of these services re-gardless of the way of retransmission. In this respect, in its relatively recent cases12, the European Com-mission has shown that identifying the relevant market in audio-visual program retransmission tends towards a definition that does not distinguish between different technical supports and platforms used to provide this service.

– The Competition Council’s approach - since 2005 (the year when the retransmission of audio-visu-al programs by DTH digital platform for satellite electronic communications has started to be used in commercial scope) the competition authority has mentioned in its decision that TV program retrans-mission service through this technology is a future substitute for TV programs cable retransmission ser-vices, considering that in the future the relevant service market definition should not take into account the technology used for providing this service.

The competition authorities of United States13 have considered the market of audio-visual programs retransmis-sion services (in the sense of dissemination / distribution to the end user) regardless of the technology used, as the relevant market of product / service.

11 . Inclusive Anti-trust Division of US Department of Justice, European Commission and Competition Council12 Inclusive Anti-trust Division of US Department of Justice, European Commission and Competition Council13 Inclusive Anti-trust Division of US Department of Justice, European Commission and Competition Council



IPTV involves the using of IP protocol for transmission, allowing the provision of audio-visual program services along with Internet access, data transmission and telephony. In Romania, the service offered based on IPTV was launched in late 2005 by an alternative operator using its own network. The service is in development and it is a little used, the coverage area is currently limited. In this respect, ANCOM says that: “The use of audio-visual program retransmission services through IPTV network is very limited, given the exclusive character - high price and limited availability (...) IPTV services are not currently considered viable alternatives for receiving audio-visual programs by end users”.

The development of new generation networks will have as effect the development of broadband and television on IP platform (IPTV). Increase of broadband will lead to the orientation of users from cable or satellite television to IPTV services.

As concerns the main competitors on the market, there are not significant differences between their business models, especially in terms of type and number of channels promoted, offering manner and possible packaging with other services. However, sales and invoice receipt networks are relatively similar.

As a rule, existing undertakings on the market have one or more channels to inform their clients and / or sports channels. The majority of them has a Call Centre or has externalized the customer interface activities to ensure an efficient support and quickly information to solve the issues.

Together with the accelerated development of DTH services, barriers to entry have been even more reduced or even eliminated given network topology and the level of investment required for network expansion (caused by subscription equipment and equipment for access to communications satellites).

These aspects are completed with the lack of significant administrative barriers, there being necessary license for operator status from ANCOM and the National Audio-visual Council (CNA)14. Trademarks, technology licenses and / or know-how may be relevant when products and / or industrial / intellectual property rights give access to operator to certain technologies, essential data and information for product development or for lowering the cost of these products. Protected information gives the operator an advantage over other players on the relevant markets that do not hold such intellectual property rights and are bound to respect it.

However, there are barriers to entry related to the specific of this sector, which is represented primarily by economies of scale, scope and density achieved by operators already on the market. The average cost per sub-scriber for audio-visual program retransmission services decreases together with the increasing of total number of subscribers and density of subscribers in a given area determines the efficiency and feasibility of service pro-vided through TV cable platform. In addition, as concerns HFC coaxial cable networks, the structural barriers to entry are amplified by the heterogeneity of access policies on properties of local authorities and by the existence of legal barriers (the obligations “must carry” is the duty of services distributors).

The Competition Council currently carries out an investigation (a possible abuse of dominant position) on the market of audio-visual program retransmission services. Consequently, it is possible that analysis of data and in-formation gathered by the Competition Council to reflect the need to redefine the relevant market in terms of both product market and geographic market.

Market evolution

According to public available data and analysing the chart below, TV program retransmission market is currently in a phase of high degree penetration; the economic crisis have led to a cessation of growth and even a slight decrease in the number of subscribers and total revenues obtained by operators. In such a situation, it is likely to intensify the competition by quality and diversification of service (signal quality, number of posts etc.).

14 Inclusive Anti-trust Division of US Department of Justice, European Commission and Competition Council


2012Intensification of price competition is less likely due to oligopolistic market and relatively low elasticity of price demand. Low elasticity contributed to the mitigation of the decrease in revenues of market operators in conditions of severe economic recession in 2009 and 2010.

Graph no. 8. Evolution of market of TV program retransmission in the period 2007-2011

Source: ANCOM (total revenues for 2011 are estimated).

Graph no. 9. Evolution of providers’ number of audio-visual program retransmission services in the period 30.06.2009-31.12.2011

Source: ANCOM



Graph no. 10. Dynamic of subscriber’s number and evolution of penetration rate at the level of houses

Source: ANCOM

Graph no. 11. The subscribers’ structure depending on the support used, respectively on the residence

â

Source: ANCOM


2012The existence of economies of density for TV cable platform is related to the relatively low penetration in rural areas, unlike DTH technology for which there is not this kind of economic constraints.

Evolution of concentration degree

Graph no. 12. Evolution of concentration degree of audio-visual program retransmission services in the period 2009-2011

Source: ANCOM (market shares were calculated based on the subscribers number).

Although the total number of operators in the market is still high, market concentration degree is maintained to a very high level as the first three operators on the market, namely RCS & RDS, Romtelecom and UPC have a cumu-lated market share of over 90% at national level.

Graph no. 13. Incidence of petitions at ANPC

Source: ANPC



There is a relatively high incidence of consumer’s petitions on the cable TV market (CATV) although the num-ber decreased in 2011 in comparison with the previous year. According to the ANPC activity report in 2010, it appears that the cable television services (CATV) were on the 4th place among the most complained con-sumer markets.

Conclusions

An important aspect influencing long-term competition degree in the sector is the relatively high impact of tech-nological innovation, and including this service in a service packages (multiply type). DTH technology implemen-tation has been a disruptive innovation, leading to mitigation of effect of economies of density and to an exten-sion of the relevant geographic markets. However, this effect is counteracted by the effect of economies of scope, a phenomenon that is accentuated by selling the multiplayer services package. Also, increasing the penetration of IP technology platforms is likely to change the market structure.

It is also expected that the transition from analogue terrestrial TV to digital terrestrial TV and implementation of multimedia services at national level to lead to increased competition and innovation. Television programs pro-vision based on digital terrestrial system will represent a qualitative step forward as regards the level of television program services received by the population through radio frequencies.

Moreover, migration to IP technology and newly acquired licenses by mobile operators will allow the pro-viding of mobile broadband services, including television service. In this regard, we have to highlight the increased penetration rate of mobile broadband electronic communications services which indicates the increased consumer’s interest in such services in the condition of increasing the terminal availability and variety addressed to end user (smartphones). The terminals are more and more performing. These techno-logical developments will cause changes in the consumption of TV services and in the content of programs provided and viewed by customers. The consumers could choose where, when and program content to be watched.

3.3.2. The impact of frequencies auction in the telecommunications sector

Preceding reasons

Mobile communications industry is very important for consumers - who should benefit from the best services at the lowest possible prices - as well as for other economic sectors for which electronic communications are an es-sential input. In this regard, the Competition Council’s approach is that the granting of rights to use radio spectrum should not be based primarily on financial reasons - collection of license fees to the state budget – but especially the development of whole communications industry during licenses validity.

Radio electric spectrum is an essential infrastructure for mobile electronic communications activities and fixed electronic communications activities where to building an infrastructure using other “wired” technologies (i.e. optical fibre, coaxial cable or cable consisting of twisted copper wire) is either impossible or inefficient. Frequencies spectrum is an essential infrastructure for mobile electronic communications activities. This is a limited resource and is the most important barrier both in terms of market entry of new firms providing mobile electronic communications services and in terms of their development on this market.

Consequently, frequencies spectrum management should lead to the creation of conditions for entry of new providers of fixed and mobile electronic communications services on the market and, implicitly, to increased competition on this market.


2012As consistently underlined15, the Competition Council considers that the management of radio frequencies spec-trum should be based on the following general principles:

1. Avoidance of acquisition or concentration of frequencies bands by an undertaking (operator) or by a group of undertakings16 which have as purpose or effect either the elimination of the possibility to entry on the market of new competing operators or the possibility of developing the existing operators (avoi-dance of “frequencies spectrum hoarding”);

2. objective necessity, technically justified17, to obtain the frequency bands for providing of new electronic communications networks and services - including broadband – of better quality and lower tariffs for end users.

3. technological and service neutrality principle - using radio frequency bands should not be restricted from providing a particular type of network or service by a particular technology, considering that it is suitable for providing multiple types of networks and electronic communications services, including broadband, by using efficient technologies.

Therefore, from the perspective of the national competition authority, it is important that the National Authority for Communications Management and Regulation (hereinafter ANCOM), as the national regulatory authority responsible for frequencies spectrum management, to take into account that the radio spectrum resources should be adminis-tered effectively by reducing, in a possible extent, barriers to access on mobile electronic communications market.

Actions taken, respectively proposed by the Competition Council to granting the rights of using 800 MHz, 900 MHz, 1800 MHz and 2600 MHz radio frequencies to ANCOM

ANCOM requested the Competition Council to give advice on normative acts regulating the competitive selec-tion procedure for granting rights of using 800 MHz, 900 MHz, 1800 MHz and 2600 MHz radio frequencies (here-inafter auction) – concretely, the draft government decree regulating the delivery of new frequency spectra, the minimum tax to be paid by the auction winners and payment manner - as well as points of view on the admin-istrative measures proposed to be taken in view when regulating certain aspects of selection procedure men-tioned above (i.e. the extend of prohibiting the participation 18 in the auction, independently, of persons belonging to the same group of undertakings).

In addition, mobile operators19 have asked the intervention of the national competition authority regarding cer-tain provisions contained in the proposed documentation of ANCOM, likely, in their opinion, to have an anticom-petitive impact.

Taking into account:

1. the current context of market and importance of the auction, evaluated from the perspective of: (i) outstand-ing economic value of spectrum resources subject to auction and (ii) long-term impact of this competitive procedure on the electronic communications services market in Romania;

15 Recommendations for the adoption by the Ministry of Communications and Information Technology and the National Communications Authority of measures to facilitate the development of the market of providing the electronic communications networks and services (including broadband) and of competition on this market. The document was sent by the Competition Council by its letter no. RG/5902/07.11.2008 both to Ministry of Communications and Information Technology and the National Communications Authority and was published entirely on the Competition Council’s website.16 Operators group in the meaning of competition legislation 17 Limitation due to freqvency band width18 It should be noted that, although a point of view on this matter was not explicitly formulated, the Competition Council found that apply-ing the restrictions regarding the maximum amount of spectrum that can be held by a winner must be applicable for the whole group, for the reasons given above.19 For exemple, Vodafone Romania SA (Vodafone), Orange Romania SA (Orange), RCS & RDS SA (RCS) and Cosmote RMT SA.



2. the necessity to prevent negative consequences on the competitive environment of electronic communica-tions services market following the implementation of certain provisions 20 of specifications required by the contracting authority and the possibility of taking measures to facilitate market development and competi-tion;

The Competition Council considered its ex-officio intervention to be necessary and appropriate into the legal framework governing the auction, including the recommendations drawn up to change/complete few specifica-tions.

The actions undertaken by the Competition Council with regard to the tender were focused on the following ob-jectives:

1. offer operators the possibility to acquire the necessary spectrum resources for the entry / expansion of the market so to insure the effective competition on the market, simultaneously with their ability to avoid spectrum hoarding - in this regard, the Competition Council evaluated the restrictions imposed by ANCOM on the participants in tender (namely, the prohibition of persons belonging to the same group of companies to participate in auction with individual offers) as well as the maximum quantities of blocks of frequencies in the favourable bands which can be obtained by a bidder or that may be subsequently held by a group of companies;

2. insure potential competitors may enter the market so to increase degree of competition at the level of in-frastructures (i.e. introduction and regulation of national roaming) and service level (by introducing and regulating MVNO access networks of mobile operators that have a national coverage more territory 30%);

3. measures imposed by ANCOM do not allow the exchange of strategic information between operators in the tender (in this case, the procedure of allocation of localities, that have not been covered by the mobile communication networks until the date of auction, to the operators that will gain blocks in the bands of 800 MHz or 900 MHz);

4. administrative measures on minimum license fee or payment terms: (i) not to be discriminatory, (ii) not to raise significant barriers at entry / development market likely to discourage potential new entrants in terms of participation in the competitive selection procedure concerned;

5. transitional measures imposed by ANCOM for temporary licenses should be proportionate with the aim pursued (resize of the frequency scaling blocks in the 900 MHz band which have made the object of the temporary licenses).

Out of the many actions undertaken by the Competition Council, its action deserves due consideration regarding the role of advocacy assumed to regulate the auction, whereas the Competition Council sent its observations at several ANCOM documents, i.e. “Specification to organize the competitive selection procedure for granting rights of use of radio frequencies in the bands 800 MHz, 900 MHz, 1800 MHz and 2600 MHz (specifications)” and draft “Deci-sion on the organization of the selection procedure for granting rights of use of radio frequencies (Decision)”.

Thus, after analysing the requirement of coverage provided for in section 3.3.1.1. letter i). of the Specifications, the allocation procedure of localities that were not yet covered by mobile network communication, to the operators that would gain blocks in the 800 MHz or 900 MHz, suggested an agreement between bidders on the distribution of these localities, each having an obligation to cover an equal number with the number of units earned multi-plied by the number 107.

20 For example, the provisions of pct. 3.3.1.1. lett e) of the Draft Specification for organizing the competitive selection procedure for granting rights of using 800 MHz, 900 MHz, 1800 MHz and 2600 MHz radio frequencies.


2012The competitive issue raised by a mobile operator in this case consists in encouraging the coordination of winning bidders on extending their networks in the uncovered areas. Competitors would thus been compelled by regula-tory effect to convey the expansion plans and reach an agreement on the division of areas covered. This type of coordination involves exchange of sensitive information, such as the network expansion plans, which could distort competition in the mobile electronic communications networks. Thus, to avoid prejudice of Article 9 par. (1) of the Competition Law, the Competition Council proposed to replace the allocation mechanism of localities uncovered in terms of mobile electronic communications services, with the following mechanism: after completion of auction, each winning company will present only before ANCOM, individually and not informing the other participants, the options covering a number of localities proportionally with the number of frequency blocks under 1GHz. In case there are overlaps of options or there are no overlaps for certain localities, ANCOM may proceed to lottery.

From the perspective of the Competition Council, this solution is feasible and balanced. Thus, on one hand, the interest of ANCOM to address the coverage with mobile communication of population and to keep the costs in-curred by the respective mobile operators (for localities uncovered) at a reasonable level, and on the other hand, the exchange of strategic information between winning operators and their coordination with regard to the ex-tension of networks in areas uncovered and, thus, the assumptions for an anticompetitive agreement between the winning bidders are removed.

Another problem consisted in the applicable restrictions in case of temporary block of the 900 MHz band, due to the size of that spectrum block (paired 5 MHz blocks). Restrictions in question were likely to lead, on one hand, to the hoarding of a paired sub-block of 2, 5 MHz by the operator who wins the third pair of 5 MHz block in the 900 MHz band and, on the other hand, to artificially increase in the costs of the mobile operator that loses the bid for that frequency block.

According to mobile operators, the format proposed by ANCOM may result in a distortion of competition in mo-bile electronic communications market in Romania through: (i) inefficient use of spectrum through hoarding a sub-block pair of 2, 5 MHz by the operator who wins the third pair of 5 MHz block in the 900 MHz band, coupled with encouraging a greater market concentration and a smaller number of operators, (ii) the possibility of unnec-essary costs incurred by operators that lose bid for that block frequency, which will eventually be reflected in the prices paid by the end users.

Having the above in view, the Competition Council recommended ANCOM to resize the temporary blocks by reducing the size of temporary licensed blocks of 2 x 5 MHz to 2 x 2.5 MHz, feasibly with a joint obligation to purchase a minimum of 2 blocks of 2x 2.5 MHz. In this case, companies Vodafone and Orange had, each of them, the opportunity of acquiring the temporary license for the current size spectrum they are using. Also, RCS & RDS (or a new entrant) will be allowed to purchase at least 5 MHz in the 900 MHz band. In addition, the proposed measure was not in the detriment of the company Cosmote RMT SA, which may continue to offer for the acquisition of temporary licenses. The fact that Orange and Vodafone may avoid costs that would be in-cumbent for winning a smaller amount of spectrum than currently hold should not be interpreted as a favour granted by ANCOM.

A very important aspect addressed through the Competition Council’s action was represented by the total maxi-mum quantity limits for radio frequency in favourable bands (900 MHz, 800 MHz, 1800 MHz respectively) con-sidered of important economic value.

According to the draft decision, the user rights a bidder will gain following the selection procedure were limited at a total of 3 blocks of 2 x 5 MHz in the 900 MHz and 800 MHz, not exceeding a total of 2 x 20 MHz in the bands below 1 GHz.

ANCOM proposed limits were based on the substitutability of the frequency bands of 800 MHz and re-spectively 900 MHz. Thus, ANCOM found that the 800 MHz band had the same economic value with



the 900 MHz (being similar in terms of characteristics of propagation) and thus, it has the same level of attractiveness (in particular, the provision of services would start in 2014, while ANCOM estimated to have sufficient time to adjust to the new technologies, namely LTE). Therefore, ANCOM argues that the substi-tutability of the two bands is high enough and that the degree of substitutability will increase in a foresee-able horizon.

However, it should be noted that, unlike LTE (expected to be used in the 800 MHz band), the current technolo-gies deployed in the 900 MHz band (including 1800 MHz) are mature and widely used by both mobile opera-tors and by final users (in terms of availability and prices of terminals). Thus, from the point of view of a network operator, 800 Mhz frequency band has a disadvantage compared with the 900 MHz frequency, in terms of usefulness, especially regarding the existence of terminals operating in this bandwidth at competitive prices. Therefore, the Competition Council found that the short and medium frequency bands of 800 MHz, 900 MHz respectively are not fully substitutable one with another. Thus, although there are similarities in terms of propa-gation, one cannot appreciate that at least on short and medium term, the frequencies of the two bands have the same economic value.

In terms originally proposed in the Decision, up to 3 competitors were possible to remain in 900 MHz band. Thus, the licensees in the 900 MHz band would have commercial advantages over the holder of a license in the 800 MHz band, on short and medium term; even so, the advantage would be increased as the licensees keep their user rights in 900 MHz band, following the auction.

Also, in a similar way with the advantages of the 900 MHz band mentioned above, the lack of restrictions regard-ing the maximum amount of spectrum that can be purchased in the 1800 MHz band could lead to a situation where blocks frequencies in this band may be purchased by 1, 2 or 3 mobile operators, which would not lead to increased competitive pressure on the market for mobile electronic communication services.

In correlation with the mentions made above, in the context in which no other spectrum resources remain avail-able following the auction, it may be inferred that new entries cannot take place, only if frequency blocks are as-signed.

Thus, taking into account the 15 years period provided for the rights to use radio frequencies granted following the selection procedure, the potential for new entries on the market (with reference to the operators that can develop their own access networks) is significantly reduced, as well as the possibility of further development of networks by operators who have purchased insufficient frequency blocks. Competition Council recommended ANCOM to reconsider the limits of the amount of spectrum that can be owned by a business group in the 800 MHz, 900 MHz and, possibly, 1800 MHz. Thus, in terms of maximum range which can be purchased by a group of companies in each of the bands below 1 GHz, the Competition Council has supported changing the maximum limit of amount of spectrum in each band from 15 MHz duplex to 10 duplex MHz licenses for 15 years (in this case, 2 pair of 5 MHz blocks), while maintaining the maximum (in this case, 20 MHz duplex) of the amount of spectrum that can be acquired by a group of companies in bands below 1 GHz (800 MHz or 900 MHz). Such limitation was focused on increased competition for each of the frequency bands and avoidance of possible agreements between tender-ers on frequency blocks bided. In this regard, as noted in the “Study of the 900 MHz band - Evaluation remedies”, where access to the 900 MHz band is extended to 4 operators instead of 3 operators, competition is increased resulting in a higher value of consumer surplus. The consumer surplus is the result of reducing the producer’s surplus and of decrease in inefficiency.

In terms of stimulating new entries to increase competition between mobile operators at the level of infrastruc-tures, an issue that has aroused great interest from the Competition Council was represented by the national roaming obligations set out in section 3.3.3.1. of the Specifications. According to the project specifications, a licens-ee of Class A, C, E, F or G will be entitled to enter a national roaming agreement with any holder of a license in order to use radio frequencies for the provision of public electronic communications and mobile electronic communi-


2012cations services where radio coverage of the applicant’s access network reached 30% of the population. Usually, ANCOM offered the new entrants the possibility to conclude agreements of access to the competitors’ network so to facilitate network coverage for new entrants, only if they invest in their own infrastructure in order to achieve the coverage of 30% of the population.

With regard to this aspect, it should be noted that prior national roaming agreements may have a restrictive effect on competition for the following reasons:

1. reduced incentive of mobile operators to invest in their own infrastructure;

2. increased risk of exchange of strategic information between parties to the agreement, which would lead, by its nature, to the coordination of the competitive behaviour. National roaming agreements presume, by their very nature, the exchange of information between the parties concerned. In case parties hold symmetric/similar market shares, the risk of coordination of competitive behaviour of the operators concerned increases. In case of new entrants, the existence of an interest on their part or on the part of the host operators for possible coordination of competitive behaviour in retail markets can-not be argued. Nevertheless, if the benefits for consumers (data network coverage, service quality and transmission speed) do not justify the need to conclude the national roaming agreements, the respec-tive agreements may not be exempted under Article101 par. (3) of the Treaty on the Functioning of the European Union.

However, in specific circumstances of the market and given the benefits created for consumers (data network coverage, service quality and transmission speed), few exemptions (during 4-6 years) under the provisions of Ar-ticle101 par. (3) of the Treaty on the functioning of the European Union were granted in EU case law.

Thus, to encourage potential operators to enter the Romanian mobile electronic communications and to stim-ulate competition for the infrastructure development between mobile operators, the Competition Council pro-posed ANCOM to amend the national roaming obligations that would give new entered licensees the right of access to the existing mobile operator networks, without to condition this right on achieving a certain degree of coverage of population or territory regarding the networks they develop or possibly on the acceptance of a lower coverage degree - for example 20%. This right must be reasonably limited in time, to allow the develop-ment of the network for the new entrant. The Competition Council’s recommendation regarding the national roaming obligation was based on the following characteristics of the Romanian market: (i) the entry on the market requires a high level of investment required to develop the network infrastructure and obtain the spec-trum resources, (ii) most of the mobile operators’ incomes in Romania come from mobile telephony and SMS - mature markets saturated - and in the current economic climate, this would be kept on short and medium term, (iii) mobile operators holding both 2G and 3G networks with a high degree of coverage of territory and population (being present mainly in the areas of density) and strong brands are present on the market, which are individually susceptible to constitute structural barriers both for entry and for expansion of the market. The above considerations show significant difficulties for companies that intend to enter the market and face competitive pressure at the level of infrastructure. These difficulties can be tackled on limited term by giving new entrants the possibility of access to the existing operators’ networks through national roaming agree-ments, in order to provide competing services. Although the Competition Council recommended to grant the rights national roaming exclusively in the benefit of the new entrants, a new entrant cannot make available an offer of mobile electronic communication services unless after obtaining resources from numbering, i.e. after negotiation and implementation of a national roaming agreement (which requires at least five months of de-lay – cumulative term for negotiation and putting into practice of the roaming agreement). Thus, the impact of new entries on the market is reduced objectively and irrespective of the operator. In these circumstances, the maintenance of the 30% threshold with the exclusion of the main areas of density from the national roaming obligation in the benefit of new entrants does not encourage the new entries, being capable to exercise direct and immediate competitive pressures on incumbents.



From the perspective of the Competition Council, enabling MVNOs to enter the electronic communica-tion market in Romania can lead, overall, to streamline the market, with increased competition in the mobile services and SMS services market and, particularly, in developing electronic communications services for broadband innovation. Thus, taken account of the development of competition in the mobile communica-tion market including the service level, the Competition Council assessed as beneficial the introduction by ANCOM in the Specifications of provisions which will facilitate the entry of mobile virtual network opera-tors (MVNO) and stimulate the interest of license holders (MNO) to provide MVNO access to their networks. With the exemption of proposals for limiting the amount of spectrum in the 1800 MHz band, namely those on national roaming, ANCOM amended the provisions of the tender documents, according to the recommendations of the Competition Council.

Assessment of auction results

According to data published, in the auction for the spectrum organized by ANCOM have participated 5 operators (namely, Vodafone Romania SA, Orange Romania SA, Cosmote RMT SA, RCS & RDS SA and 2K Telecom SA). Fol-lowing the auction, 5 operators have conferred themselves 485 MHz in bands of 800 MHz, 900 MHz, 1800 MHz and 2600 MHz out of 575 MHz. Thus, there remained one block not allocated (2x5 MHz) in the band of 800 MHz and 8 blocks (2x40 MHz) in the band of 2600 MHz.

We have to highlight the following positive results of the auction:

1. In total, the quantity of spectrum available for mobile communications increased by 77%; Each of the 4 MNO existing on the market has the spectrum necessary resources to develop new, innovative services of mobile broadband electronic communications, including by the introduction of 4G technology;

2. Following the auction, the distribution of 900 MHz band has become more efficient, facilitating the pres-ence of four operators;

3. Three out of winner operators, namely Cosmote Romanian Mobile Telecommunications, RCS & RDS and 2K Telecom have committed to take in MVNO;

4. Following the auction, 676 villages currently not served by mobile broadband communication networks will benefit, with priority, from HSPA, HSPA + or LTE network coverage; the allocation procedure will re-spect the mechanism recommended by the Competition Council.

Also, the operators whose coverage with own radio access network reach 30% of the population can benefit from national roaming for a period of at least three years. We mention that at least as concerns the networks of Orange, Vodafone and Cosmote mobile operators, they already have a large coverage and to meet the coverage obliga-tions included in the Specification, it does not require similar investment a new provider of electronic communi-cations services should make.

Given the fact that the national roaming right provided by the final form of the Specification (based on which auc-tion was held) is not granted exclusively to new entrants, or at least from the perspective of new technologies implementation (i.e. LTE) that supposes special investment efforts in current market conditions, it results that the respective rule cannot have the efficiency expected by ANCOM in terms of stimulating new entries or develop-ment of new technologies on the market.

Moreover, in the conditions in which ANCOM has given the right of national roaming to all mobile operators, re-gardless of the moment of entry on the market (in this case, existing operators, respectively new entrants), it re-sults that existing operators have an advantage against new entrants which comes from the meeting from start of the threshold condition which condition the right to request (and receive) the concluding of agreements on


2012national roaming, unlike new entrants that must achieve, after action, the minimum threshold of coverage of 30 % laid down in the Specification. The advantage of existing operators is even more stressed as the level of invest-ment necessary to achieve population/territory coverage obligation with mobile electronic communications ser-vices provided by its network is lower.

Therefore, even if the respective obligation would not create significant market distortions, such as to attract the intervention of the Competition Council according to Article 9 of the Competition Law, the obligation on national roaming cannot have the efficiency expected by ANCOM as concerns the stimulation of competition on the market.



3.4. Competition in the food retail sector

The Competition Council has continued to monitor the food retail sector, particularly as concerns:

- the impact of the legislative recommendations outlined in the last period;

- proposals of players in the field to change the legislative framework;

- competitive pressures of imported products over the Romanian products.

Apart from some production markets, the food retail activity is subject to stronger competitive pressures due to the existence of a significant number of competitors. The market is characterized by the expansion of discount stores chains, announcements on outputs and inputs of some major players in the market as well as changes on leadership on the segment.

The food retail market was as dynamic in 2011 as in the previous years. The opening of new stores and acqui-sitions operations were under the Competition Council’s analysis in order to prevent potential anti-competitive effects on the market. In 2011, there were opened 93 new hypermarkets, supermarkets and discounters. As ex-pected, the players focused on the expansion in smaller cities after having ensured their presence in cities with higher density of consumers. The year 2012 seems to have the same trend.

While the traditional trade decreases, new important players enter on the modern retail segment, this making the competition more dynamic on the commercial segment and have beneficial effects for end consumers.


2012The recommendations outlined in the legislative field by the Competition Council on the food retail market. Impact and proposals.

The opportunity of additional regulation of commercial relations

One of the objectives of competition policy is to correct through legal framework the possible deficiencies of mar-ket. However, state intervention should not impede free manifestation, decision making and behaviour of private companies as essential factor of value production for the consumer’s benefit. The effects of overregulation have negative impact on final prices and on consumers. Therefore, the objectives of the initiators will not be achieved.

The Competition Council considers that the imposition by legislation of some conditions invoking legitimate rea-sons related to ensuring a balanced competitive environment, exceeding the competition law, may lead to unjus-tified protection for existing undertakings contrary to principles of market economy and free competition.

During 2011, there were initiated several legislative changes with impact on retail sector by non-specialized stores. The Competition Council intervened on these initiatives through recommendations and points of view.

The majority of Competition Council’s recommendations in this area were taken into consideration, meaning that some legislative initiatives were rejected. The main aspects analysed by authority and reasons for which it did not support these initiatives are briefly presented further.

In addition, the previous recommendations of the Competition Council that were not taken into consideration re-main under discussion, respectively recommendation to eliminate the sales at loss and the maximum payment deadlines in trade relations.

a) The prohibition of sales at loss. The prohibition of discount sales.

The Competition Council recommended the elimination of the acquisition cost definition from Law no. 321/2009 - Code of Good Practice - as sales at a loss principle has anti-competitive character leading to the imposition of a minimum reselling price. The effects on consumer’s welfare are negative.

In some cases, due to superior bargaining power, traders push to obtain lower purchasing price or financial advan-tages. Under normal conditions of effective competition in the downstream, these advantages are transferred to consumers.

Selling below costs in the form of predatory pricing practice is already regulated and prohibited by the Competi-tion Law in Romania (art. 6) and TFEU (Article 102). The dominant undertakings are addressed, which due to their position, may adversely affect the competition and finally consumers. This method is preferable to actions that may create situations of market over-regulation.

b) The regulated payment deadlines

The Law no. 321/2009 on the food products marketing (Code of Good Practices) sets the payment obligations deadlines for food products. The Competition Council considers that in a normal functional market economy, trade relations among partners should be governed by the contractual freedom principle and the commercial terms and clauses of a contract must be the result of negotiation among the parties.

By regulating the maximum payment periods, without the possibility of negotiating them by the parties involved, the risk of impeding the commercial freedom of undertakings is there.

During the debates of Law no. 321/2009, the Competition Council has warned that the proposed rules on pay-



ment periods may be considered a suppliers short-term protection. In the long-term, this could have the opposite effect than intended.

In December 2010, the Law no. 321/2009 was amended by elimination of maximum payment deadlines for cer-tain products. For the following product categories such as meat, milk, eggs, fruits, vegetables and fresh mush-rooms, the payment period covered by the legislation is of maximum 30 days.

*

One before the last number, the Competition Council has drawn the attention on the legislative provi-sions that prevented the proper functioning of the retail sector, respectively the Government Decree no. 1454/2004 for the approval of criteria for implementation of retail structures with large area and definition of selling structures typology. The provisions of GD no. 1454/2004 were analysed by the Competition Council, which recommended to the Secretariat General of Government the amendment / annulment of this nor-mative act.

GD no. 1454/2004 provides the endorsement of implementation of large area selling structures by a commission established within the county councils. Endorsement had to take into account certain criteria, including: favour-able impact on retail price levels, the impact on existing trade, the number and size of competitors, protection of existing sales structures, avoiding of mal-functioning of competitive environment etc. It was also stated that in this commission should take part a representative of undertakings in the immediate vicinity of the large area retail structure to be implanted.

The Competition Council pointed out that the imposition by legislation of conditions on implantation of com-mercial structures, invoking reasons of ensuring a balanced competition, exceeding the provisions of Competi-tion Law, can lead to unjustified protection of existing undertakings, contrary to the principles of market econo-my and free competition.

During 2012, the Competition Council has approved the abrogation of this normative for the following reasons:

The abrogation of GD no.1454/2004 was necessary having in view the requirements of the Emergency Ordinance no.49/2009 on freedom to establish the service providers and freedom to provide services in Romania and of the European Directive on services in the internal market (“the Directive”).

The authorization regimes are the most common formalities applied to service providers in member states and constitute a restriction of settlement freedom, as it was constantly admitted by the European Court of Justice (“CEJ”).21

On the other hand, the Directive sets a list of requirements that the member states cannot impose either for the access to a service activity or for providing it. Requirements in question are considered either discriminatory or restrictive and therefore cannot be maintained in national legislation. In many cases, CEJ ruled that they are in-compatible with the TFEU. Thus, the Directive requires member states to abolish from the national legislation the provisions on the application of economic tests on a case by case basis.

The economic tests, which are applied mainly in commercial sector (for example, for opening supermarkets, shopping malls etc.) require often to service providers to carry out expensive and time consuming economic studies. These requirements considerably delay the settlement of service providers in respective member state or even completely impede the establishment of newcomers.

21 Decision of January 22, 2002, Canal Satellite, Cause C-390/99


2012Based on CEJ’s jurisprudence, the economic reasons (i.e. the protection of certain types of companies, maintain-ing a certain market structures) cannot justify the restrictions of fundamental freedoms on internal market, in-cluding freedom of establishment.

Moreover, the Directive requires member states to eliminate from the national legislation the requirements that provide the intervention of competitor undertakings in adoption of the individual decisions by the competent authorities. This type of requirement is contrary to the aims of the TFEU to ensure objective and transparent procedures and can impede the entry of newcomers. The prohibition laid down in the Directive includes cases where the competitors are part of a body that is consulted on individual authorization applications of certain undertakings.

*

Also during 2011, the Competition Council intervened against the legislative proposal to oblige the undertakings to commercialize products or services accompanied by documents specifying their production cost, as follows:

- the producers were obliged to commercialize products only accompanied by documents specifying production cost;

- the sellers were obliged to inform the consumers about the final price and the production cost of the product;

- the undertakings selling products or services within the distribution chain were obliged to indicate the production cost, selling price / tariff and price per unit.

The competition authority has sent to Senate its point of view and at the end of 2011, the proposal was rejected definitively by the Chamber of Deputies.

Generally, in case a large number of undertakings exist on the market, the Competition Council considers that market forces should not be limited by regulations which would restrict in a way or other the freedom of trade re-lations among the parties. The over-regulation affects the final price and end consumers. Therefore, the objectives of the initiators, namely positive impact on population, the possibility to differentiate undertakings and conduct comparative analysis on their activities will not be achieved.

The competition authority had the following comments on this legislative proposal:

Draft legislative amendments contravene to national and European competition rules and can cause negative effects on consumers.

The Competition Council considers that displaying the production cost of a product is a form of transparency of strategic information belonging to undertakings and, implicitly, of their commercial policies.

Under these conditions, a mechanism that allows the competitors to know the commercial policy of each of them could develop. Increased transparency could lead, ultimately, to the reduction of competition that should mani-fest by charging different prices and commercial conditions. Competition could be replaced by tacit cooperation among undertakings in order to align and standardize their commercial practices and, implicitly the final prices. All these elements provoke prejudices to end consumers.

Facilitating the exchange of sensitive information among competitors, it leads to a significant reduction in un-certainty that each undertaking should have in relation to its competitor behaviour. In this way, the principle es-tablished by the TFEU according to which all undertakings should establish independently their policies to be



implemented on a particular market is infringed 22

When a system facilitating the exchange of information is used by competitors to implement a concerted behav-iour on selling prices (price fixing), such a practice is severely penalized from the perspective of national and Eu-ropean competition rules. Both the European Commission and the European courts have sanctioned a number of cartels that facilitated the exchange of sensitive information (prices, discounts, mark-ups, etc.).

Products or services trade shall be discouraged or impeded

On the other hand, the legislative proposal can artificially create barriers to entry on market or to free products and services trade. Such a condition of providing production costs cannot be implemented for imported prod-ucts. Under these conditions, the prices of the products manufactured in Romania will artificially increase.

End consumer will obtain incorrect information and higher prices

Moreover, in a supply chain that includes several undertakings, the production cost and mark-up applied by the last seller do not offer to end consumer all information on the final price setting as intends the initiator of draft legislation. A product for sale includes, in addition to production costs, the distribution, storage, marketing, promo-tion expenses, etc.

The end of 2011 brought a new legislative proposal in the retail sector, respectively the super / hypermarkets to sell indigenous products of at least 80% out of the store room and relocation of medium or large store outside the cit-ies. Currently, the legislative initiative was rejected by Senate; it is under analysis to the Chamber of Deputies and was submitted for report to the parliamentary commissions.

The main aspects underlined by the Competition Council were the following:

Relocation of stores outside cities

Reduced possibilities for consumers to choose

By relocating medium or large stores outside the cities, the consumer’s choices will be more limited and may in-clude only small stores (below 400 square meter) i.e. small neighbourhood shops, kiosks, small specialized shops.

The study ordered by the Competition Council within retail sector inquiry in Romania, conducted in 2009, points out that the attractiveness of modern trade (through super / hypermarkets, discounters) is given by various offers of products and affordable prices. In contrast, the attractiveness of traditional trade is determined by proximity, lack of congestion and being familiar with the staff.

Generally, the consumers are more satisfied with large format stores than the small ones.

In addition, almost two thirds (63.8%) of the respondents said that the store they visit most frequently to make major purchases is at a distance of 1 km or less from home. Almost a quarter of respondents (23%) said they would spend maximum 21-30 minutes to get to a supermarket / newly opened shop which would fit to them in terms of price, quality and services, and one person out of five (20.5%) would spend maximum 11-20 minutes for it.

Positioning medium or large stores outside cities would result in loss of attractiveness for certain categories of customers (over 48% according to the study ordered by the Competition Council), such as the ones living in downtown, due to the big distance or those who do not have their own means of transport.

22 See the cause C-7/95 P, John Deere, point 86.


2012Affecting the competition on retail market

Due to limited resources, the retailers will face difficulties in obtaining location for opening a new store. Large re-tailers, respectively retailers having an important position in the retail market in Romania will have greater oppor-tunities to obtain land outside the city. In addition, they have significant financial resources than small retailers. The latter ones would start to compete with large retailers having a disadvantage. In this way, the competition on the retail market will be affected and thus the end consumer too.

A retailer’s ability to compete is measured through the economies of scale, respectively the level of sales per square meter. If a retailer cannot be positioned in a location to offer economies of scale, it will not be in a position to compete effectively. However, those retailers who are already positioned in areas with high density will have a competitive advantage.

In the cities will remain the retailers with areas smaller than 400 square meters, which means that the retailers whose sales experience is based on large area shops are the most affected by the new conditions. They will face higher costs to adapt their trade policy to smaller stores format.

The undertakings that plan to enter on the Romanian market after the adoption of these regulations will have higher costs and will be disadvantaged compared to those who already have locations in the city center. The costs related to the creation of a brand image will be much higher for those who will be able to open a shop only outside city.

The obligation to sell at least 80% Romanian products

As concerns the supermarket’s and hypermarket’s obligation to sell at least 80% Romanian products, this pro-vision may constitute discrimination against other food trading structures, such as small neighborhood stores, kiosks, cash & carry format or discounter stores.

The proposed action may fall under the provisions of TFEU according to which the internal market comprises an area without internal frontiers where the free movement of goods, persons, services and capital is ensured. Fur-thermore, it prohibits the restrictions on free services providing within the EU as regards the nationals of member states who are settled in other member state than that of service’s beneficiary.

Also, the promotion of Romanian products may represent a discrimination against goods from other EU coun-tries. Similarly, quantitative restrictions of imports and all measures that could have equivalent effects are pro-hibited among member states. The member states shall ensure that there is no discrimination on the conditions under which the goods are bought and sold among their citizens.

The legislative proposal may fall under the European Directive on services in the internal market (“ the Directive”) according to which the member states shall examine whether their legal system imposes non-discriminatory requirements for access to a service activity or to its practicing (art. 15) including quantitative and territorial re-strictions, particularly in the form of limits fixed according to population or to a minimum geographical distance among providers.

Examples from other countries:

UK: Concerns about retail development were raised since early 1980. In many cases, it was assumed that a project should receive a license if it was built following the indications of the general plans. In the 1990s, studies showed that development outside cities affected the traditional commercial centers. Until the mid1990s, due to restric-tions of location, consumers migrated to suburban area to do shopping at mega-stores such as Tesco, Sainsbury’s and Asda, thus, town centers were losing from lack of consumer traffic.



From 1996, the new policy regarding the location of supermarkets was targeted to sustain and enhance the vitality and viability of cities as well as retail sector, particularly in locations where the proximity of other companies facili-tates competition by which consumers can take advantage. Another objective was to ensure the existence of a wide variety of shops, jobs, facilities and services, at which consumers have easy access through multiple means of trans-port. Regulation recommends that city centers become favorite locations for shops that attract many travelers, for leisure and commercial office development, as well as for public and retail areas. However, since some supermarkets operate as anchor for smaller centers, trade policy encourages them to be located in city centers to improve their competitiveness (store size should be correlated with the size of the city center and the radius of capture). Thus, a sequential approach is introduced, which identifies additional sites for retail development: buildings in the city center are favored, which can be converted to serve this scope, followed by centers located on the outskirts of the cities and, finally, outside city centers are considered. If there is no need for new stores to open or no capacity to continue open-ing stores in the city, there will be no obligation that such sites be identified in the city centers.

Therefore, when the developers’ proposal to set up new supermarkets outside the city is not in line with the cur-rent development plan, they will have to argue for:

a) there is a “need” for the respective sale area envisaged;

b) no other central sites are suitable to open this store, following the adjustment to the size required - se-quential approach.

Authorities should also consider:

c) possible harm on the plan of development ;

d) the likely impact on the vitality and viability of the city centers and the rural economy;

e) the range of transport means that will provide accessibility;

f) the likely effect on travel patterns and car use.

The regulation also recommended that all requests to open over 2,500 square meters retail area to be sup-ported by evidence of adoption of the sequential approach, economic impacts (e.g., effects on growth, jobs, existence of other stores), accessibility to a wide range of transportation means, likely changes in travel patterns over the catchment area and, where appropriately, any significant environmental impact. Lately, several discussions and studies took place regarding the impact of urban planning, including reference to the fact that the location of the supermarkets in the city center would lead to a significant reduction in car usage and favors price competition, conducive for a decrease in the number of urban regulations (analysis in this regard was made by the UK Competition Commission).

Norway: A report of the Ministry of Environment on the adoption of stricter regulations regarding the retail development outside the urban centers explains the negative effects of such regulations: In 1999, Norway adopted a national policy to locate the shopping centers outside the city. City centers were de-prived of incomes from retail while other services were gradually moved outside the cities. Population gradually became dependent on private cars for shopping. Other adverse effects were the increased demand for large areas of land and public transportation, hardly covered. However, certain buildings and land inside the city were inef-ficiently used, while investing in land and new buildings outside the city.

In conclusion, the Competition Council found that it is in the benefit of consumers to have access to as many different retail structures whereas competitive relationships between the two forms of trade, modern and tradi-tional, should take place unhindered, with minimized interference from the state authorities.


2012Competition pressure exerted by imported products on national products

In a free market economy, with specific market tools, the retail companies use to select the products they intend to resell based on the value for money and according to the consumers’ demand.

An issue often raised in media is the origin of goods available for sale on the shelves. Naturally, the Romanian competition authority is not particularly concerned with the provenience or “nationality” of goods, but with the existence of a high degree of competition between products, i.e. the Romanian and imported products. Only thus, the national end consumer may benefit from the lowest prices and increased quality of products, irrespective of its “nationality”.

With regard to food products selected by Competition Council and pointed out below, it was noticed that, between 2005 and 2011, most of the food products are acquired by the big retailers from the Romanian suppliers. Lately, in 2010/2011, significant changes on the analyzed categories are not recorded, since there are minor changes below 2-3%. The only category which presents a significant change in comparison with the year 2009 is the oil category, with a decrease recorded of over 10 % of purchases from the Romanian suppliers, in favors of imported products. According to the retailers’ replies, the relocation of an important supplier, i.e. Bunge, from Buzau, Romania to Hun-gary constitutes one of the reasons of decrease.

Table no 7.

Year Milk Eggs Pork PoultrySunflower

OilBread Sausages Wine

2009 84% 94% 85% 93% 87% 98% 96% 87%

2010 83% 90% 79% 89% 74% 94% 94% 87%

2011 81% 93% 80% 91% 73% 93% 93% 85%

-the percentage represents the ratio of national products in the total volume of sales

Regarding the split of imports in UE area and non – EU area, the following situation is presented:

Table no 8.

Total Imports Milk Eggs Pork PoultrySunflower


2010

% originated in EU 17% 10% 21% 11% 26% 6% 6% 11%

% originated outside EU

0 0 0 0 0 0 0 2%

2011

% originated in EU 19% 7% 20% 9% 24% 7% 7% 12%


0 0 0 0 3 0 0 3%

As noticed, almost all the products of the selected categories come from EU countries. The sole exemption is the wine category, which records imports outside EU, as well. This is argued by the fact retailers intend to cover a more extended area, whereas the consumers’ preferences grow yearly and become more sophisticated.



On contrary, on the vegetables – fruits segment, the situation is differently presented:

Table no 9.

Year Apples Pears GrapesApri-cots

Cher-ries

Toma-toes

Carrots Beans OnionPota-toes

Cabba-ge

2005 12% 1% 4% 4% 61% 20% 12% 50% 35% 58% 53%

2009 9% 1% 2% 22% 65% 23% 21% 50% 25% 55% 71%

2010 18% 3% 11% 10% 66% 30% 21% 8% 46% 44% 68%

2011 18% 4% 11% 10% 56% 27% 23% 16% 41% 47% 68%

-the percentage represents the ratio of national products in the total volume of sales

Fruits and vegetables are usually acquired from foreign suppliers. It is at least an interesting fact, taken account of the prices of fruits and vegetables which are higher than those of the basic products, such as milk, meat, sunflower oil and bread or, at most, prices may be similar, with these ones. Nevertheless, there are retailers who endeavor to acquire the products almost from the Romanian suppliers. In 2011, according to the replies received from the retail chain, the tomatoes category was affected by e-coli crisis.

The acquisition of fruits and vegetables with predominance from imports results from deficiencies claimed by the big retailers against the Romanian suppliers: the national producers do not comply with the minimum stan-dards needed for trade. Overall, suppliers have neither the needed equipment for sorting and sizing nor the ca-pacity for stocking and packing the products accordingly.

In addition, the national production of fruits and vegetables is heavily massed only during the summer, while the supply for the remained seasons is insignificantly, which automatically leads to the development of imports. Thus, the reasoning for the above mentioned percentages lies in the correlation between quality, price and seasonality.

However, during 2010/2011, a noticeable increase in the share of local products on the shelves of major retailers is observed with regard to certain categories. This increase can be attributed either to the gradual adjustment of the technical standards of quality control imposed on national suppliers by the EU law or to a growth in consumer preferences for local products. Also, according to the data collected from the market, 2011 was a good year for the harvest of fruits and vegetables. The largest decrease is recorded at the bean category, as far as the sales of domes-tic products were only 8%, in 2010.


2012Regarding the breakdown of imports into the EU / non-EU countries, the situation is presented as following:

Table no 10.

Year Products Apples PearsGra-pes

Apri-cots

Cher-ries

Toma-toes


Cabba-ge

2010

% originated in EU

(without Romania)

70% 77% 66% 59% 34% 25% 20% 31% 41% 50% 19%


12% 20% 23% 31% 0 45% 59% 61% 13% 6% 13%

2011

% originated in EU

(without Romania)

71% 73% 65% 64% 34% 30% 29% 28% 43% 47% 18%


11% 22% 24% 26% 10% 43% 48% 56% 16% 7% 15%

As noticed, on the category vegetables/fruits, there is a different situation from that of the basic products. Veg-etables and fruits are imported from outside the European Union, on several categories, respectively tomatoes, carrots or beans. Particularly, it is observed that imports from outside EU exceed the imports from EU.

In evolution, no substantial differences are made with regard to the provenience of imports in the year 2011 com-pared with 2010. Only in case of carrots category, imports outside EU decrease in favors of EU imports.

Price evolution for food products

Analyzing the food price index of inflation at consumer level in 2011 (December 2011 compared to December 2010), Romania is situated below the European average. Reported to the states in the area, we noted that in Ro-mania the lowest increases in food prices took place. Moreover, comparing the statistics of the neighbor EU coun-tries, i.e. Bulgaria and Hungary, it can be noticed the better positioning of the Romanian consumer reported to the Hungarian or Bulgarian.

Table no 11.

12.2011/12.2010Food

Inflation food price index

UE 3,2%

Romania 0,9%

Bulgaria 4,5%

Estonia 3,4%

Cyprus 11,6%

Latvia 4,6%

Lithuania 5,5%

Hungary 4,8%

Slovenia 4,5%

Source: Eurostat



At the level of retailers’ acquisition prices, the most visible difference in price was recorded in 2011 as compared with 2010, for the category of sunflower oil. Here, an average increase of 24 percentages was recorded. Neverthe-less, categories such as eggs, pork or sausages recorded decreases in 2011 in comparison with 2010.

The prices situation for basic categories is provided below:

Table no. 12

Year Milk Eggs Pork PoultrySunflower


2010 2,48 1,84 9,53 8,28 4,02 2,29 11,66 7,84

2011 2,73 1,81 9,24 8,60 4,99 2,48 11,37 8,36

2011/2010 10,0% -1,9% -3,1% 3,9% 24,2% 8,2% -2,5% 6,7%

*average prices of retail chains expressed in Ron

For fruits and vegetables, the situation is the following:

Table no. 13

Year Apples PearsGra-pes

Apri-cots

Cher-ries

To-ma-toes


Cabbage

2010 2,48 4,16 4,94 5,15 9,27 4,00 1,69 4,34 1,87 1,80 1,27

2011 2,75 4,19 4,50 4,68 9,80 3,45 1,69 3,85 1,60 1,67 1,14

2011/2010 10,9 0,8 -8,9 -9,1 5,8 -13,8 -0,1 -11,2 -14,3 -7,3 -10,6

*average prices of retail chains expressed in Ron

Categories of vegetables/fruits have a different placement than the basic products. At these categories, decreases of average prices up to 14% were recorded in the analyzed period in 2011 compared with 2010.

Evolution of prices at food products in 2012

Statistical indicators

The inflation rate in evolution from one month to another, according to the information of the National Institute of Statistics, for the first 8 months of the current year, is presented below:

Table no. 14.

Inflation rate Jan Feb Mar Apr May Jun Jul Aug

Food products 0,3 1,2 0,6 -0,1 0 -0,1 0,1 0,7

The inflation rate in August 2012 compared with the same month of 2011, for food products, was of 3,3%.

Compared with August 2011, important price increases were recorded for the following food products: other veg-etables and canned vegetables (+23,7%), eggs (+22,1%), fruits and canned fruits (+11,0%), beans and other legumi-nous (+8,8%), meat, processed meat and canned meat (+3,1%), milk and dairy products (+2,7%), fish and canned fish (+2,3%), cacao and coffee (+2,2%), other food products (+2,1%), alcohol drinks (+1,6%), corn (+1,5%), sugar, confection-


2012ary and honey (+1,2%), bread and bakery products, oil, bacon and fat, (+1,0%).

Decreases of prices were recorded at potatoes (-32,0%) and flour (-0,3%).

In August 2012, compared with August 2011, prices of agricultural products increased with 26%. The increase split was mainly due to vegetal products, which contributed with an increase of 23.7% in the subgroup. Products of animal origin participated with only 2, 3 percentages in this increases.

Comparing August 2012 with August 2011, the prices of vegetal products increased with 30.8%. This price evolu-tion recorded for all vegetable products in August 2012, compared with the same month of 2011, was determined mainly by price increase at cabbage (first crop and summer crop) with 234,8%, beans with 123,4%, soy with 69.5%, tomatoes with 61.1%, cucumbers with 54.0%, wheat with 43.2%, sunflower with 36.7%, peach with 26.1%, potatoes with 18.8%, pepper with 17,3%, carrots with 17,1%. Decreases of prices were recorded at bell peppers with 3.3% and peach with 2.5%.

The prices at animal products increased with 9.9%. The evolution of these prices was due mainly to price increas-es at eggs with 24.8%, poultry with 20.4%, pork with 15.8%, milk with 6.6, honey with 2.4 and beef with 2%. Decreas-es of prices were recorded at mutton, with 30.3%.

In September and October 2012, based on the information from media, important increases in prices for agricul-tural products took place.

According to Eurostat, taking account of monthly fluctuations of prices at food products, recorded in September, the situation is presented as following:

Table no.15

CountrySeptember compared

with August (%)

EU 0,3

Romania 2,7

Bulgaria 2,7

Hungary 1,0

Slovakia 0,1

Slovenia 0,4

Cehia 0,2

In September, it can be observed an increase over the EU average, also in countries from the region. A similar in-crease is met in Bulgaria (2.7%). The increase in average was due to fruits (+5%) and vegetables (+10.2%) categories. According to the traders, the main cause which determined these increases was the draught taken place in the summer of 2012.

Conclusions

With regard to food products for basic consumption, most of these products were observed to be purchased from national suppliers by the big retailers. The sole category which presents a significant change is the sunflower oil cat-egory, where a decrease in the acquisition of products of over 10% is recorded, in favor of the imported products. One of the reasons of decrease is the relocation of an important supplier, i.e. Bunge, from Buzau, Romania to Hungary.



Fruits and vegetables are purchased from foreign suppliers, although imported fruits and vegetables are relative-ly more expensive or at most, similar with those originated in Romania. The acquisitions of imported fruits and vegetables, with predominance, are due to certain deficiencies claimed on national suppliers by the big retailer chains.

However, during 2010/2011, an increase in the share of local products on the shelves of major retailers on certain categories can be noticed. This increase can be attributed to the gradual adjustment of Romanian producer’s technical standards of quality control imposed by the European Union or the Romanian consumer preferences growth for domestic products. Also, according to the data from the market, 2011 was a good year for fruit and veg-etable production. The most important decrease, however, is recorded for the bean category. In 2010, sales of do-mestic products were only of 8%.

The highest price difference in 2011 compared to 2010 was recorded at the sunflower oil category. There was an average increase of 24 percentages. But there were also categories, such as eggs, pork or sausages, for which prices declined in 2011 compared to 2010. The categories of vegetables and fruits are differently displayed from the basic products. Here, in almost all cases, there were decreases in average purchase prices in the period under review, up to 14% in 2011 compared to 2010.

3.4.1. Own Brands

Own brand of products is the trademark owned by retailer and used for labeling products made by manufactur-ers for retailers. A retailer own brand products are exclusively sold in its own chain.

The phenomenon of private labels was positively influenced by internationalization, concentration and consoli-dation. Private labels have entered the national market via the major networks (i.e. hypermarkets, supermarkets and cash & carry) and more they strengthen the position on the relevant market, the more their shares increase.

Consumers accept retailers’ brands when they offer quality almost equal with that provided for the national brand; the differentiation is determined only by the price, as usually, the own brand is sold at lower price.

Introduction of own brands was based on merchants’ willingness to sell products that are at the same time cheap and useful in terms of quality. Quality products marketed under its own brand are the key, hence dealer reputa-tion guarantees with any defect causing damage to its overall image.

Referring to food products marketed under their own brands, the retailer is responsible for the quality of produc-tion as well as for sale and, therefore, food security is very important for companies, especially if consider the customer loyalty and the increased confidence in these products. These factors have led to the imposition of standards and traders reserves the right to require suppliers to be heard to comply with conditions. Through au-dits, manufacturers must prove that they have an appropriate quality management system implemented in pro-duction processes, storage and delivery.

Another reason why they created their own brands was based on economic principles. Approved manufacturer of retailer branded products to achieve its cost savings achieved by giving up a portion of expenses, especially with the promotion.

Branded products are made by producers in Romania including selected from small, falling within the standards set by the trader, but often including large firms choose to produce under retailers’ brands, even if they have them-selves national brands recognized.

There are several differences between own brands and producers’ brands, including:


2012For own brands: • exclusive promotion in trader magazines and in its stores; • shelf placement is exclusively the decision of the trader, according to its own commercial interests; • no advertising costs.

The manufacturer’s brands • complex packaging, sophisticated and attractive; • promotion is carried out with local / national coverage depending on the manufacturer / provider classical channels - media, newsletters; • position on the shelf of the products is negotiated with the retailer based on the contract; • shelf price of the products can be at most recommended by the manufacturer, taken account of costs and its commercial strategy.

The largest network of hypermarkets on the Romanian market pursues to broaden the range of products sold un-der their own brands. Although producers may obtain short-term benefits from these contracts, in time a reduc-tion of investments in the own brands can be achieved, through limiting the budgets of development, innovation and promotion. In the current crisis conjuncture, the end consumer might steer quickly to these products, espe-cially if they are considerably cheaper than the other. From the producers’ point of view, they will be determined not to invest by financial difficulties, as much as in the previous years in the advertising and marketing budgets in the detriment of lower sales of own branded products.

The most famous own brands of the super / hypermarkets and cash & carry retailers in Romania are: no. 1 (Carre-four), Winny (Cora), Aro (Metro), Type (Real), 365 (Mega Image), K-Classic (Kaufland), Clever (Billa), Profi (Profi), etc.

Sales of own brand products for the food category are approximately 3 times higher than sales of own branded products at other retailers’ portfolio.

It is also noted that in 2011, an increase of about 37% in the value of sales of own brands took place in the portfolio of the largest national food retailers.

Table no.16.

Sales of own branded products% increase 2011/2010

Own brands – food products 37

Own brands - non food products 28



On the food products, the percentages of own brands in the total of sales is presented below:

Table no.17.

CategorieOwn brand

percentage - 2010Percentage of own

brands - 2011% Difference

2011/2010

Dairy 14,36 16,51 15

Eggs 46,08 46,48 1

Poultry 29,86 33,20 11

Fish and sea fruits 9,89 9,08 -8

Vegetables 3,80 5,27 38

Fruits 3,03 3,58 18

Sunflower oil 41,79 44,31 6

Bakery 4,65 8,40 80

Sausages 9,76 13,22 35

Sugae 21,01 22,69 8

FLour 27,27 31,00 14

Wine 4,32 4,41 2

Juices and water 9,83 10,80 10

Alcoholic drinks 4,92 6,39 30

Frozen 17,37 25,37 46

Canned products 22,99 26,87 17

Sweets 12,10 13,62 13

* are taken into account only the stores which offer the own brands from the respective categories

As could be noticed, the highest increase in the sale of own branded products is recorded for the vegetables and bakery categories, these ones being increased with over 80% during one year. The lowest increases, up to 10%, are recorded for categories eggs and oil. There is also a category, i.e. fish and sea fruits, which record a decrease of sales of own branded products.

In conclusion, the own branded products category is increasing from one year to another, in almost all cases un-der assessment. The food products category records the highest sales at the own branded products, exceeding with approximative three times the category of non-food products. It can be observed in the period of reference that the big retail chains on the Romanian market diversified the range of food own branded products.


20123.5. Insurance sector

A general presentation of the sector

Insurances play a vital role in the management and risk transfer in the economic environment, providing protec-tion for both individuals as well as for companies. The strategic importance of insurances sector for the economy in general and particularly for specific sectors such as transportation and real estate, is obvious and it derives from the capacity of insurance companies to take individual risks and to handle them at an aggregate level.

In Romania, the insurance activities are supervised by the Insurance Supervisory Commission (CSA). CSA is an independent authority that is meant to protect the consumers of insurance products and to implement a stable environment for the insurance sector.

As a generic term, insurance activity concerns the process of offering, brokering, negotiating, concluding insur-ance and reinsurance contracts, collecting premiums, liquidating of damages and it involves also the decline and recovery activities as well as the investment or the capitalization of its own or of the attracted funds.

The general regulatory framework of the insurance sector is represented by:

i) Law no 136/1995 on insurance and reinsurance in Romania, with all the amends and supplements;

ii) Law no 32/2000 on the insurance activity and on insurance supervision.

Insurance services in Romania are subject to an authorization from CSA. However, insurance companies autho-rized by the relevant authorities from another EU Member State could develop their activities in Romania due to their fundamental freedoms like that of providing services or conducting a business in another state.



The most important delimitation in insurance sector is between life insurance and general insurance. This delimita-tion is justified not only by various prudential rules governing each of these two categories but mainly by their nature.

In terms of demand, both life insurances and the general ones could be, in principle, divided into many relevant markets of products corresponding to each covered risk because of the fact that the characteristics, the purpose and the premiums are different. Moreover, the covered risks are not interchangeable for the consumers (for ex-ample: the insurances against fire damages could not be considered as replacing liability insurances for vehicles, etc.). However, in terms of supply, insurance conditions for covering different classes of risks are quite similar and a large part of important insurance companies offer distinguished products related to several types of risks. For example, an insurance company offering general insurance products corresponding to certain classes of risks could easily modify its product range and provide products belonging to other classes.

Distribution of insurance products

In general, insurers use two types of distribution channels: their own sales force (insurer’s employees) and insur-ance intermediaries.

According to Law no 32/2000, independent insurance intermediaries are classified as follows: brokers, insurance agents, sub-agents and insurance subordinates.

Brokers are corporate companies negotiating policies for their customers, both individuals and business, insured or potentially insured and assisting them before and during the validity of insurance contracts in relation to damages management as appropriate. Brokers act on behalf of policyholders and consequently they are able to work with many insurers activating in the market and to provide to their customers a range of competing products. Brokers are subject to CSA’s approval and regulatory authorities prevent insurers to participating in their capital share.

Insurance agents could be individuals or companies that are licensed by an insurer to conclude insurance poli-cies with third parties, on the insurer’s behalf, by proposing insurer’s products to the customers, as potentially insured. Insurance agents may not propose competing products of several insurers. The agents are forbidden to promote products belonging to the same class of products on behalf of several insurers. Insurance agents are sub-ject to insurer’s authorization and the latter is responsible for the agents’ activities.

The sub-agents are employed by the insurance agents constituted as companies. The sub-agents could act on insurance agents’ behalf but there is no legal connection between the insurers and the sub-agents.

Insurance subordinates or bank assurance operators are banks or non-bank financial institutions. They could only distribute insurance products that are complementary to their financial products. Insurance subordinates act under agency contracts and they are able to conduct this activity with different insurers for the same insur-ances classes.

Relevant markets in insurance industry

In the category of general insurances, at the end of 2011, the most important shares were held by23:

- the segment of insurances for vehicles which registered a decrease of 65, 11% from the total of gross sub-scribed premiums compared with the last years;

- insurances against fire damages and other natural calamities (19, 36%) which recorded a nominal increase of 21,77% compared with 2010 due to the increase of subscriptions for residential optional insurances.

23 Source: CSA’s Annual Report for 2011


2012At the end of 2011, the general insurances penetration degree in GDP, calculated as a ratio of gross subscribed premiums for general insurances and GDP, had a value of 1, 05%, registering a decrease of 18, 60% compared with 2010. The total volume of gross subscribed premiums for 2011 was 6 billion lei, recording a decrease of 13% com-pared with 2010.24

Chart no 14. The structure of the main general insurances categories depending on the gross subscribed premiums

Source: CSA

Vehicles insurance market (Casco and RCA) is liberalized and it does not present substantial barriers blocking or raising significant difficulties to its access.

The only regulatory requirement refers to the issuing of an authorization from CSA. The authorization is made on the basis of some regulatory and objectives criteria. There are no limits concerning the maximum number of operators on this market. Moreover, since January 1, 2007, any insurer or insurance intermediary authorized in any of the other member states belonging to European Economic Area (EEA), may act in Romania either directly or by the means of a subsidiary, without needing another CSA’s authorization.

Concerning customers’ bargaining power, they could easily pass from an insurer to another. Therefore, CSA Order no 113121/2006, eliminated the prior legal constraint related to the insured obligation to proceed to denouncing the initial contract in order to conclude a new policy with another insurer (such an obligation could have had as a consequence a higher degree of failure to cover the risk due to the complexity of procedures the insured would have had to follow). In addition, the validity of vehicles insurances policies is short, usually of 6 months or one year, the customers having the possibility to change rapidly the insurance supplier.

24 Source: CSA



In terms of customers’ preference, the most important issue, besides the price (represented by the premium paid), is the promptness with which the insurer responds to any claims for damages. Thus it is presumed that a reason-able consumer, dissatisfied with the performance of a particular vehicles insurance company, could easily con-clude the following policy with another insurer.

Insurances against fire damages and other natural calamities (Class VIII)

At the end of 2011, the gross subscribed premiums for compulsory and optional home insurance policies had the most important share (57%) from the total of subscribed premiums corresponding to the Class VIII.

Optional home insurance policies generated 54 % from the total of gross subscribed premiums corresponding to their class and compulsory home insurance policies represented 3% from the total of Class VIII. In 2011, the housing insur-ance coverage degree in Romania, estimated by The National Institute of Statistics at 8, 5 billion homes, was about 66%.

Life insurance

In 2011, the volume of gross subscribed premiums for life insurance represented 22% from the total of gross sub-scribed premiums on insurance market. At the end of 2011, life insurance penetration degree in GDP stood at 0, 30%. Compared with 2010, this indicator registered a decrease of 9, 09% for life insurances.

The most important share (97%) on the life insurance market is realized by two insurance classes: AI (life insurances, annuities and complementary life insurances) and AIII (life insurances and annuities related to investment funds)25.

The number of companies activating in the insurance sector

A number of 43 insurance companies developed an insurance/reinsurance activity during 2011, as follows: - 20 insurance companies conducted activities of general insurance; - 12 insurance companies conducted activities of life insurance;- 11 insurance companies conducted a composite activity (general and life insurance).

Chart no 15. The structure of insurance sector depending on the number of insurance companies conducting insurance/reinsurance activities during 2011

Source: CSA

25 CSA’ Report for 2011


2012It is noticed that on the segment of general insurance, companies as Allianz-Ţiriac and Omniasig Vienna Insur-ance maintained their subscriptions volume between 2010 and 2011. At the same time, insurance companies as Groupama and Astra succeeded in raising substantially their subscriptions volume for general insurance, during the same period of time.

Chart no 16. Companies with the biggest volumes of subscriptions for general insurances between 2009 and 2011

Source: CSA

Concentration indicators in the insurance sector

Herfindahl-Hirschman Index and concentration ratio on general insurance market, calculated for the first 5 and respectively 10 players, during 2009-2011, are presented in the following table:

Chart no 17. The evolution of concentration on general insurance market, in relation to subscribed premiums volume

Source: CSA

The values of concentration ratios for the first five and respectively ten companies in this sector show that the concentration ratio on this market registered a relative growth in the last three years.



Specifications concerning compulsory home insurance

2008 is the year of the adoption of Law no 260 concerning compulsory home insurance against earthquakes, land slips or floods. This law came into force on March 10, 200926 and it regulates the constitution of PAID (the Pole of Insurance Against Natural Disasters/Pool-ul de Asigurare Impotriva Dezastrelor Naturale) and the conclusion of compulsory home insurances. The insurers authorized by the Insurance Supervisory Commission to con-clude insurances against natural disasters could conclude PAD directly or by the means of insurance intermedi-aries acoording to the legal regulations.

According to the law, PAID takes the organization and functioning form of an insurance/reinsurance company, as a structure formed by the association of insurance companies authorized to conclude compulsory home insur-ances of PAD type. PAID has as the objective the management of compulsory home insurance activities against natural disasters, such as earthquakes, land slips or floods, under CSA’s supervision.

The compulsory home insurance covers the risk of eartquakes, land slips or floods for each building used as home.

By law, the maximum amount guaranteed is € 20.000 for houses of type A (buildings with the structural strength of armored-concrete, metal or wood, with external walls of stone, burnt brick or other materials resulting from heat and/or chemical treatment), respectively € 10.000 for houses of type B (buildings with external walls of un-burnt brick, dry land or other materials not subject to heat and/or chemical treatment).

The premiums appropriates to the amounts guaranteed above are: € 20 for houses of type A, respectively € 10 for houses of type B. These premiums could be modified by CSA’s decision.

Initially, the deadline for concluding this type of home insurance was January 15, 2011, within which those who did not conclude the compulsory home policy were to be amended by the mayors with fines arriving up to 500 lei.

Home insurance policies started to be issued on July 15, 2010, the deadline for the conclusion of such a policy being July 15, 2011.

Concerning the insurance against natural disasters, we should mention the amendment made by the Parliament in November, 2010. According to this amendment, the individuals as well as the companies that have signed be-fore an optional insurance covering all risks provided within the compulsory insurance (against damages caused by floods, earthquakes and land slips) should not be required to conclude a compulsory policy.

The incidence of consumers’ petitions adressed to ANPC in insurance sector

Both in terms of total number of customers’ petitions and in terms of their share in the total complaints, we notice a relatively low level corresponding to insurance sector.

We should mention that this indicator does not include the number of petitions/complaints addressed by the consumers to the regulator of insurance sector (CSA).

26 Published in Monitorul Oficial, Part I no 757, November 10, 2008


2012Chart no 18. The number of petitions addressed to ANPC in insurance sector

\

Source: ANPC

Box no 4. Considerations regarding the proposals for changing the legal framework stating the compulsory home insurance

Various legislative proposals for amending compulsory home insurance law were formulated in the last months. Efforts to change this law have been and continue to be to the attention of competition authority.

The act of realizing legislative amendments providing substancial changes concerning the rules governing the compulsory home insurance market, should be based on a solid foundation so that any change in regulation must foresee people’s protection and the non-disruption of market’s functioning. One of those proposals concerning law’s amendment, led to the obligation of concluding optional insurances only with insurance companies being PAID’s members. The Competition Council signaled to Romanian Government the fact that such an obligation is susceptible to lead to the distortion of the competitive environment on Romanian home insurance market. This is due to the restriction of insured persons’ freedom to choose by himself the insurer in order to conclude an optional home insurance which would reduce the competition between insurers, respectively the competition on a market supposed to allow a free competition.

Meanwhile, a legislative provision conditioning the conclusion of the two types of insurances besides the insurance companies members in Paid, would act as a barrier on the market, with potentially negative consequences on the services offered to the insured.

This conditioning could also lead to a reduction of insurers’ ability or motivation for providing the best optional insurance packages for their customers. It could also has consequences on premiums charged for optional insurances. As long as the law guarantees the insurer that any of his customers opting also for an optional home insurance is supposed to conclude even this type of insurance with the same insurer, it results that this insurer is not subject to a competitive pressure on the optional insurances market.



3.6. Banking sector

The financial crisis has profoundly affected the Romanian banking sector, with both revenue and income rates experiencing significant decreases (income before tax diminished with 37% in 2011 in comparison with 2010).

Graph no. 19. The evolution of average Return-On-Equity (ROE) and average Return-On-Assets (ROA) in the Romanian banking sector

Source: National Bank of Romania

It is obvious that the financial crisis triggered in 2008 affected the evolution of ROE which, from values between 15% and 20%, values deemed reasonable for the banking sector in normal market conditions, decreased to zero or even entered into the red, over certain periods of time.


2012One can also notice that ROA and ROE values presented above are the outcome of aggregation over the whole of the Romanian banking sector. However, big banks suffered less significant corrections of these indicators, in com-parison with small banks, which saw their profitability indicators passing into the red.

Despite these facts, the year of 2011 has not brought about significant changes to the structure of the Romanian banking sector.

In comparison with 2010, the number of foreign bank branches diminished with one unit, reaching 8 entities at 31st of December, 2011, while the number of local banks remained unchanged at 33 units, respectively.

With regard to the shareholder structure, at the end of 2011 the structure of the Romanian banking system was as fol-lows: 2 banks with partial or integral state ownership (CEC Bank și Eximbank), 4 banks with private local ownership (Banca Transilvania, Banca Comercială CARPATICA, Libra Internet Bank şi Banca Comercială Feroviară), 26 banks with foreign ownership, 8 branches of foreign banks and a licenced credit cooperative (Banca CREDITCOOP).

The shares of Emporiki Bank have been acquired by the French Group Credit Agricole and the bank changed its name to Credit Agricole Bank Romania SA.

Romanian Commercial Bank – BCR SA incorporated the activity of the Anglo-Romanian Bank branch, and the stakes owned by the state at the Import-Export Bank of Romania – Eximbank were transferred from AVAS to the Ministry of Public Finance.

VBI Beteiligungs Gmbh became majority stockowner at Volksbank Romania SA and Marfin Bank Romania be-came majority stockowner at Marfin Popular bank PCL Cyprus.

Two banks changed their names, the new titles becoming Caixa Bank (ex-La Caixa) and Libra Internet Bank (ex-Libra Bank).

The share of the first five banks was 54,6% in the aggregate level of assets, 52,8% in own capital and 59,7% in the holdings of government bonds.

The impact of financial crisis on the lending activity

Graph no. 20 The evolution of underperforming loans in the banking system during 2008-2012

Source: BNR



From the above figure we can notice an accelerated tendency of growth for the share of underperforming loans in the banks’ portfolio, as well as of their volume, as a result of the economic developments from the last two years. This fact has affected both the households and the banks’ profitability, the share of the underperforming loans reaching 16% in the total of extended loans.

Graph no. 21. The quality of loan portfolio in some countries of the European Union (underperforming loans as a share of total loans)

Source: BNR

Analyzing the quality of loan portfolio of Romanian banks in comparison with banks from other countries of the European Union, we notice a sudden decrease in quality during the period 2009-2011, by comparison with the period 2008-2011, when the Romanian banking sector was competitive, in terms of quality of loans, with other countries from the region and even from the Western Europe.

Despite the fact that the increasing share of underperforming loans affected the whole of the banking system, the share of loans with delayed repayments of more than 90 days for big banks is below the value of the same indica-tors for small and medium-sized banks.

In this context, the regulatory and supervising activity of the National Bank of Romania needs to be acknowl-edged, because it has managed to maintain the stability of the banking system in Romania, thus avoiding the ne-cessity of a financial intervention from the government in order to rescue banks, something that has happened in other member countries of the European Union.


2012Graph no. 22. Underperforming loans, by asset size

Source: BNR

The main relevant markets in banking

Almost all Romanian banks are universal banks, addressing both individual customers and corporate clients. For this reason, competition is analyzed with regard to several product categories. We also have to note that there are not regional banks, with a particular strategy followed in this sense. Large banks ‘activities cover virtually the en-tire national territory, whilst small banks focus on specific urban clusters or with a high population density.

Beyond the complexity of the banking business, the core business of credit institutions involves attracting re-sources from customers (deposits) and placing funds in the form of loans to individuals, corporations or the gov-ernment sector.

Thus the main markets in terms of services, might be structured as it follows:

consumer credit market - where consumers are represented by individuals

commercial credit market - includes several types of credit, but consumers are represented mainly by businesses, corporations or individuals authorized (PFA)

mortgage / real estate market

deposits market

current account / savings and short-term deposits market



Although this report does not analyze them, the following specific banking markets must be mentioned:

The factoring market

The financial leasing market

The Interbank Money Market

The factoring market and the financial leasing market include also some other businesses/undertakings operat-ing in these areas, such as non-bank financial institutions or institutions specialized in financial leasing.

Indicators in the banking sector 27

With regard to the shareholder structure in the Romanian banking sector are operating: 2 banks with partial or integral state ownership, 4 banks with private local ownership, 26 banks with foreign ownership, 8 branches of foreign banks and a licensed credit cooperative.

Graph no. 23. Annualized net profit / Equity sector average differentiated by ownership

Source: Annual reports of banks, own calculations.

Consumer credit market

There is a tendency for concentration within the consumer credit market. This concentration trend character-izes, moreover, all the markets identified in the banking sector. A possible explanation of this phenomenon is related to the economic and financial crisis that eliminated some of the competitors. At the same time, the evolu-tion of market shares in the banking sector is also a factor to be considered by the competition authority.

27 The data in this section are from annual reports of banks. Because some banks haven’t published data for some markets, they could not be included in calculating the indicators


2012Graph no. 24. Evolution in the consumer credit market concentration


With regard to a significant impact on the consumer credit market, the services provided by non-bank financial institutions (NBFIs) should be considered, entities which, although strongly affected by the crisis, are still impor-tant in terms of market share in this area.

Commercial credit market

Within the commercial credit market, the leading four players hold 50% market share.

Graph no. 25. The evolution of corporate credit market’s concentration




The commercial credit market recorded a rapid increase in concentration, the HHI value reaching the level of about 2000, as a result of the financial crisis that has forced many small banks to reduce their exposure and to restrict their lending activity of the corporate sector.

Market deposits

Graph no. 26. Evolution of market deposits’ concentration


There is also an increase in concentration noticed in deposits’ market, most probably due to the contraction of the workload of some of the players. But concentration level is noticeably lower than that recorded in the credit market for companies, respective in the market for consumer credit.


2012Current account / savings and short-term deposits market

Graph no. 27. Evolution of current account / savings and short-term deposits market’ concentration


Current account market has an average degree of concentration. Some small banks are not very active in this market which requires implementing costly solutions (e.g. e-banking).

Entrance barriers in the sector

The banking sector is probably the most carefully regulated sector of the economy. The Central Bank has regula-tory and prudential supervisory responsibilities. As mentioned in Section 2.2., Entry barriers are regulatory and structural types.

As compulsory legal requirements imposed by regulation of the Central Bank for the establishment of a credit institution in Romania, we would mention:

– Minimum capital level of 5 million euro.

– Licenses provided by Central Bank for the members of executive management.

– Potential shareholders of a bank must fulfill certain requirements related to quality / personal prestige (i.e. no convictions for financial crimes).

Market power in banking

For the banking sector, an alternative indicator of market power is the incidence of tax revenue and interest in-come from fees and other commissions. This indicator shows the bank’s ability to extract revenue from the mar-ket and can be used to assess market power of banks under certain conditions.



Table no.18. The evolution of income from interests, respectively from fees and commissions in the Romanian banking sector

- mil. euro - 2009 2010 2011

Income from fees and commissions 883.79 773.69 747.32

Net interest income 2797.127 2951.061 2626.883

Income from fees and commissions/ income from interests

0.32 0.26 0.28

* the data does not take into account the following banks: Volksbank, Piraeus Bank, Garanti Bank, ATE Bank, Emporiki Bank, Libra

Bank, RIB, Banca Feroviară


The ratio between income from fees and commissions versus income from interests saw a decline in 2010, but there is a return value of this ratio for 2011.

Another indicator that may constitute a measure of market power of the players in the banking sector is the differ-ence between credits and deposits interest rates, both in balance, as well as new registered.

The evolution of the difference between the interests of credits and those of deposits is usually influenced by developments in financial markets (e.g. cost of financing, country risk of Romania etc.), but at the same time is the result of competition’s level in the sector, expressed by the downward trend of the margin.

Graph no. 28. The difference between the interests of credits and those of deposits in RON

Source: Central Bank database; own calculations


2012Graph no. 29. The difference between the interests of credits and those of deposits in EUR

Source: Central Bank database; own calculations

As conclusions drawn from changes in interest margins ‘evolution between loans and deposits, new and in bal-ance, both in national currency and in euro, we are considering:

– At the end of 2008 there was a sharp decrease of these margins, expression of increased competition for attracting resources (deposits) at sector-wide level.

– During 2009 a return of these margins has been observed to levels close to those of 2008, for euro and ex-ceeded the 2008 level for national currency’s margins.

– The difference between the margins of loans and those of deposits, both new and in balance, denominated in national currency (lei) remain higher than the comparable values loans - deposits denominated in euro.

– In the last part of the examined period, we noticed a growing trend of the difference between the credits and deposits’ interest rates, in lei, both in balance and new, unlike the values referring to those in euro, which revealed a decreasing trend.

The incidence of consumer complaints registered at the National Authority for Consumer Protection (ANPC)

Analyzing the number of complaints made by consumers concerning the banking credit market, the year 2010 saw a substantial increase of them, as a direct result of the entrance into force of OUG no. 50/2010 on credit agree-ments for consumers, the consumer credit market being the first among the most complained consumer mar-kets. In 2011, there was a substantial decrease in the number of petitions, which led to decrease their share in the total complaints received by the ANPC, from 16.5% to 3.1%.



Graph no. 30 Number of complaints registered with the ANPC in relation to banking services (credit)

Source:ANPC

Box no. 5. Competition Council’s interventions in the banking sector

Sector inquiry on the market for banking payments.

Investigation concerning possible breaches of competition law on the banking and money market services in

Romania.

Competition Council has promoted Ordinance no. 50/2010 on credit agreements for consumers, which removed

early reimbursement fees for all categories of loans, a measure with direct impact on competition in the sector. The

same law limited the types and ensured the transparency of fees paid for granting a loan.

The impact study on the effects of post implementation OUG 50/2010 - this study coordinated by the Competition

Council assessed the effects of eliminating early reimbursement fee as regards to customer’s mobility, expressed by

the refinancing activity, and also evaluated the cost of savings for customers thru the removal of this commission.

The Romanian banking sector is regulated in accordance with the European Union framework and is supervised by the Central Bank. Through its prudential rules, the Central Bank managed to create enough stability in the Ro-manian banking system, so there would be no need for exceptional measures and state intervention in the sector during the financial crisis. Increasing concentration in the some markets of the banking sector is a key element, raising concerns about the possible evolution of competition within the sector, in the future.

OUG 50/2010 eliminated early repayment fee, measure which facilitated the refinancing and mobility of custom-ers, bringing to the consumers savings of approximately 290 million euro28 consumers.

However, indicators targeting the market power of the banks knew mixed evolutions, mainly due to volatile eco-nomic environment in the period under review.

28 The report „Romanian competitive environment - developments in key sectors” of 2011.


20123.6.1. The Market for non-cash payments – a part of the banking system

Payments methods - types and recent evolutions at EU level

The main non-cash means of payments used in the European markets, and also the Romanian market are:

⌂ payment cards - instruments of payment having attached a plastic card support, issued by financial instituti-ons, usually linked to a current account. Payment cards have a dual/double use: one regarding payments of goods or services to the merchants, using the POS („point of sale”) terminals and one allowing the withdrawal of cash using the ATM (“automated teller machine”). Depending on the type of bank account to which is atta-ched, the card can be a debit card, the holder only having availability to his own money or a credit card, the holder having access to a ceiling monetary availability agreed with the card issuer;

⌂ direct debit services - an efficient solution of automatic payments at a preset date. Direct debit can be defined as a pre-authorized debit of the payer’s account on the initiative of the beneficiary. This method is typically used for recurring payments such as utility bills.

⌂ credit transfers - is a way to transfer money from one account to another. The specifics of this instrument of payment are a buyer-seller torque characteristics that describe a debtor-creditor relationship.

⌂ e-money transactions - payments made over the internet, using electronic money ( a digital equivalent of cash, stored on an electronic device or remotely at a server).

At european level, the most used means of payments, during 2009-2011, were cards and credit transfers (chart no. 31). From the point of view of the volume of payments made using non-cash instruments, the transfer credit method is superior to the cumulate volume of transactions made using other instruments of payments, such as direct debit and credit cards. (chart no. 32).

Graph no. 31 Evolution of the transactions ‘number, using non cash instruments at EU level, during 2009-2011 (mil.)

0

5000

10000

15000

20000

25000

30000

35000

40000

2009 2010 2011

22428

2385824898

2112422020 22166

31657

34178

37155

Transferuri de credite Debite directe Carduri

Source:European Central Bank report 2011



Graph no. 32. Evolution of the transactions ‘volume, depending of payments instruments at EU level, during 2009-2011 (mld.euro)

0.0

50,000.0

100,000.0

150,000.0

200,000.0

250,000.0

2009 2010 2011

199,255.6 202,681.8213,472.1

14,494.4 16,000.8 18,080.1

1,628.8 1,782.0 1,915.3

Transferuri de credite Debite directe Carduri


However, differences in specific geographical areas within Europe are substantial. In countries like Romania - and those situated in central and Eastern Europe - an important dynamic was observed in the number of transactions made by payment cards (Chart no. 33), followed by credit transfers (Chart no. 34) and direct debit (Chart no. 35).

Graph no. 33. Dynamic of transactions’number using payments cards in 2011 compared to 2009

15.7121.8

53.720.8

19.927.0

4.9-11.4

10.614.3

6.522.2

16.615.1

31.226.1

23.118.2

16.445.8

15.751.1

8.933.4

21.47.7

21.0

-20.0 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0

BelgiaBulgaria

CehiaDanemarca

GermaniaEstoniaIrlandaGreciaSpaniaFranţaItaliaCipru

LetoniaLituania

LuxemburgUngaria

MaltaOlandaAustriaPolonia

PortugaliaRomâniaSloveniaSlovaciaFinlanda

SuediaMarea Britanie


2012Chart no. 34. Dynamic of direct debit transactions’ number in 2011 compared to 2009 (%)

1.6-9.5

9.05.7

1.1-3.5

54.0-9.1

8.24.3

5.6-3.2

21.712.1

-6.010.8

5.43.63.3

4.87.5

11.13.7

-2.619.1

5.5

-20.0 -10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0

BelgiaBulgaria

DanemarcaGermania

EstoniaIrlandaGreciaSpaniaFranţaItaliaCipru

LetoniaLituania

LuxemburgUngaria





Graph no. 35. Dynamic of transfer credit transactions’ number in 2011 compared to 2009 (%)

7.635.0

2.24.5

0.1-2.3

25.90.4

6.74.7

13.44.3

42.15.9

-5.625.2

12.65.5

23.611.9

-3.21.6

21.230.6

14.410.0

-10.0 0.0 10.0 20.0 30.0 40.0 50.0

BelgiaBulgaria

DanemarcaGermania

EstoniaIrlandaGreciaSpaniaFranţaItaliaCipru

LetoniaLituania

LuxemburgUngaria







At national level we can observe the same trend of increasing use of electronic payment instruments. On the background of obvious and rapid growth in the number of the non-cash payments, payment cards show an ag-gressive dynamic.

Organization and operation of payment card systems

Payments card system generally called POS (“point of sale”) is a method of making payments using cards directly at the merchant’s shop. Although different from the ATM system which allows cash withdrawals using cards, the two systems can be integrated into a single network, allowing operations such as paying bills, withdrawing cash, credit transfer, obtain account statements or others.

Within the network payment card (POS) there are five main entities: the owner of the payment scheme, the issu-ing bank, the acquirer bank, the card holder and the merchant. The owner of the payment card scheme repre-sents the organization that owns the trademark rights over the card involved in transactions; usually these orga-nizations are represented by associations of banks issuing payment cards.

The workflow begins with the licensing of the issuing/acquirer financial institutions by the owner of the card scheme. The issuing bank issues cards to its customers, while acquiring bank attracts merchants to enter the sys-tem by accepting card payments in commercial transactions. Once the supply-demand system is established be-tween cardholders and merchants, transactions intermediated by banks and the owners payment schemes take place. Besides the direct value of the transaction between buyer and merchant, which is the price of goods and / or services purchased, some commissions and fees must be paid between the merchant and the acquiring bank (MSC), between the acquiring bank and the issuing bank (interchange fee - IRF) and between the cardholder and his issuing bank (card issuing fee, fee per transaction, card administration fee and so on). In case of ATM transac-tions, the payment of interchange fees (IRF) is reversed, the issuing bank to the acquiring, this operation repre-senting practically a loan given by the acquiring bank to the issuing bank for the period between the actual cash disbursement and the fee collection date of the transaction, in the settlement account.

Payments systems in Romania

In Romania there are no national systems, for transactions being used mainly two major international payment card systems, Visa and MasterCard, and in a small proportion American Express.

Visa was the first international payment system cards which entered the Romanian market in the early 1990s, thru the business of acceptance. Visa card was first issued in Romania in 1995 and since then, Visa International / Europe has experienced a sustained growth in this market, especially in recent years, when the number of Visa brand cards existing in Romania reached the level of about 7 million in 2011.

MasterCard has started its activities (acceptance and issuance) in Romania in 1995, being the main competitor for Visa in terms of debit and credit cards, both in terms of number of cards on circulation and volume of transac-tions. The number of MasterCard brand cards in Romania is about 6 million.

Features of the market

Regarding the market for payment cards in Romania, two trends must be highlighted. First, to note the lack of banks which only accept cards at merchants (own / lease / operate POS payment card). This absence can be ex-plained thru the policies of the owners’ payment card schemes that can practice a pyramidal system of coopta-tion of banks, allowing only institutions that have a license to issue cards to become acquirers within the scheme.

Secondly, there is a concentration of mixed banks (which are both issuing and acquirer of payment cards). Dy-namics of their number has grown steadily in the coming years, reaching in 2011. Dynamics can be explained by


2012the emergence of new market players cards and the fact that there was a migration of some issuing banks in the category of mixed banks.

In terms of issuing banks (these do not include mixed banks, but those banks that only register card issuing ac-tivity), their number is decreasing, reaching the level of 10 in 2011. Reducing the number of issuing banks can be explained by the fact that there was a migration of issuing banks in the category of mixed banks.

In terms of market structure, debit cards are still dominating the market of payment cards, representing 84% of all payment cards used in Romania in 2011. Despite aggressive campaigns to promote credit cards, these are still used in a lesser extent .

Another specific feature is the important market share of the cash withdrawals from ATMs, about 66% of the total number of transactions, while only 34% were on POS transactions. In terms of value of the transactions, cash with-drawals from ATMs accounted for about 87% of transactions, while only 13% were POS transactions.

Interchange fees (IRF)

Relations between banks and banks’ strategies concerning card holders and merchants are influenced heavily by the international organizations, owners of payments card schemes, like Visa and MasterCard. These two orga-nizations are establishing, moreover, the interchange fee, the rules regarding the licensing and the conditions of access of the members.

According to the rules of international payment systems VISA and MasterCard concerning national trans-actions (transactions made within Romania’s territory using cards issued by a Romanian bank) specific in-terchange fees can be set, different from charges applicable at regional and interregional levels. The level of interchange fees (IRF) can be established through bilateral agreements between the two parties directly involved (issuing and acquiring banks) or multilateral agreements between banks participating in a payment card system.

In Romania, according to the rules of the two systems of cards, the level of the interchange fee, applicable in the domestic interbank card payments, is the result of a multilateral agreement between Romanian banks holding a market share of about 98% of domestic cards. These levels of interchange fees apply to both systems cards, Visa and MasterCard. Starting 2012, the interchange fee applicable to domestic transactions made with MasterCard-branded cards are set directly by MasterCard and applied to member banks.

In terms of fees charged to merchants (MSC) for POS transactions, they are negotiated with the acquiring banks, depending on the activity of the merchant (hotels, restaurants and bars, travel agencies pay the highest fees com-pared to other businesses), the expected volume of transactions with cards (large merchants pay fees compared to small merchants), the overall relationship which the merchant has with the bank, the interchange fee etc. This differential treatment is attributed to differences in costs, the risks of fraud etc. The relative importance of these factors in the payment card industry should be evaluated in terms of competition

Specific to the fee charged to merchants (POS transactions) is the concept of “blending”, meaning the charge of the same MSC independent of the type of card and / or card scheme.

It is possible that through these practices of the acquirers applying a uniform MSC to all transactions made with different payment cards of the same system cards, also to payment cards belonging to different pay-ment schemes, the merchants are prevented to make informed decisions concerning the refusal of certain types of payment cards of the same payment system or overcharging certain payments made with payment cards. Furthermore, by charging a fee identical, the incentive for competition intra and inter - brand is almost negligible.



Surcharging and non-discrimination

Surcharging is the process by which merchants charge fees from cardholders for making card payments. This may be due to the commission perceive by the acquiring bank from the merchant, in order to recover all or part of these interchange fees paid by them to the issuing bank. This model entails paying a higher price for the same good or service when using a credit card payment, than when paying with cash.

The second effect that, next to surcharging, may result in discrimination against users of payment cards is the incorporation of a fee within the products’ prices, while offering a discount for paying with cash.

On the other hand, according to the national law29, which transposes Directive 2007/64/EC of the European Par-liament and of the Council of 13 november 2007 on payment services in the internal (PSD), the payee may not require to the payer a surcharge for using a particular payment instrument. This provision is motivated by the need to encourage competition, promote efficient use of payment instruments, and also to ensure better protec-tion of consumers’ interests.

We believe that prohibiting surcharging might limit the freedom of merchants to redirect costs with fees paid to acquirers banks to cardholders.

Conclusions

In terms of competition, cooperation between undertakings can create problems when it includes communica-tions about practices, that can directly or indirectly affect market behavior of a competitor. As payment systems depend on cooperation, they can raise concerns in terms of competition.

A high level of interchange fees may negatively affect competition, by setting down a threshold over which the merchants’ costs for accepting payment cards will be considered, inflicting increased prices for goods and servic-es delivered to the final consumers; these fees established through multilateral agreement could be strengthened by other rules and practices adopted by the acquirer banks and the payment schemes, becoming able to reduce the ability of merchants to exert competitive pressure on the latter, at negotiations on the commission (MSC) for services rendered.

Taking into account the interventions and concerns expressed at EU level, concerning the activity of the two in-ternational organizations of payment, Visa and MasterCard, in particular those regarding the extent that multi-lateral interchange fees set between banks are required to enable efficient operation of payment card networks, and also the information indicating the existence at national level of the market for payment card services of a multilateral agreement fixing the interchange fee, starting 2011, the Competition Council initiated a sector inquiry on the bank payment services market.

The target group identified in order to frame the inquiry was formed of 28 banks member Visa / MasterCard, 22 undertakings with the object of activity in various fields (hypermarkets, supermarkets, travel agencies, restau-rants), Visa Europe and MasterCard organizations.

29 OUG nr. 113/2009 regarding payments services.


2012

This report has been approved in the

Plenum meeting of the Romanian Competition Council

from the 23th of October 2012

Competition Council1st Piața Presei Libere, District 1, 013701, BucharestE-mail: [email protected].: 021.318.11.98; 021.318.11.99; 021.405.44.24Fax: 021.318.49.08

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