- 19.08.2019 Notary fees: Recommendation to open notary fees to price competition
- 11.07.2019 Telecommunication: Competition must be trusted in granting 5G licenses
- 09.11.2018 Waste management: Recommendation for controlling the price of waste transport
Proposals and Recommendations
2018: Recommendation for controlling the price of waste transport
The Competition Authority sent a recommendation to local governments to ensure transparency in retroactive changing of the prices offered on the procurement of waste transportation. The recommendation relates to a practice where the actual transportation rate does not arise during the procurement, but after the conclusion of the procurement contract if the carrier submits a price increase request to the local government.
Local governments should not allow price increase ex post facto unless the conditions for applying for them were unequivocally and comprehensively foreseen for the participants in the procurement. The Authority investigated how the carriers selected as a result of the waste transport contracts organized by the local authorities have applied for price increases during the procurement period and on what basis such requests have been granted. The Authority found that in recent years price increases have spread throughout Estonia during the procurement period. This practice will pave the way for tenderers who deliberately do not show all their foreseeable costs in public procurement, but will submit them to the local government as a separate application after winning the procurement. In fact, it is not even a viable option for companies competing at the procurement to offer a realistic price if significant business risks can be mitigated once the procurement has been won by submitting a price increase request.
Consequently, the competition loses its meaning. The damage is on the one hand in the rise in prices for the consumer and, on the other hand, to the elimination of competitors who did not prove to be the winner due to the higher price. The procurement documents and the waste management rules must describe as precisely as possible what costs are manageable by the operator and which are not. The local government does not need to lightly release the company that won the procurement from its business risk. The rise in the consumer price index and wage costs over three to five years should not surprise any entrepreneur. It is known to the Authority that in recent years there has been considerable fluctuation in the cost of waste disposal. This does not mean that the local government should comply with the requests of the carrier in all such cases. The cost increases and the lack of more affordable alternatives must be demonstrated by the carrier who applies for the price increase.
2019: Recommendation of opening notary fees to price competition
The Competition Authority recommends setting notary fees not as fixed rates but as an upper threshold (limit prices), notaries then being able to use price lists below that limit and if necessary then to agree more favourable prices with a client. With this the consumer gets the opportunity to choose between notaries offering the same operations for different prices. As a result of the change, competition will drive the prices lower in certifying high-price real estate transactions and other similar operations, the notary fee rates of which currently exceed the cost-based level. Additionally, the price competition will ensure a better transparency upon choosing a notary.
Notary fees are set out in the law, but the revenue from those fees is not going into the public revenue, instead it goes into covering the costs of notaries and into their profits. According to an analysis, the average Estonian notary earns three times, the notary with the highest income even fifteen times the salary of a state judge. The only reason why notaries are able to earn that much is because the state has no way to verify the cost basis of the notary fees. This would not be possible in free market conditions. With price competition, the client would get the opportunity to receive price quotes from different notaries. Currently, notaries earn large income from certifying large real estate transactions but they are not allowed to take notary fees below the rates set in the law.
The setting of limit prices will not deteriorate the access to notary operations in any way. No price competition will occur in the field of socially affordable operations and those will continue to be performed at the upper limit price. In its analysis sent to the Ministry of Justice and the Chamber of Notaries, the Competition Authority presented the reasons why the amendment would not damage the sustainability or independence of the activities of notaries, the quality of their operations, nor accessibility for people with lower income.
2016: Proposal to simplify the swapping of pension funds
The Competition Authority submitted a proposition to the Ministry of Finance to alleviate the time limits of swapping the units of pension funds. The Authority had already made similar proposals in 2010 and 2013.
According to the proposal, a shareholder could have the option of swapping their pension fund more frequently than before, for example once a month. Since 2011, it has been possible to swap one´s pension fund three times per year. After that, the share of people swapping their pension fund has increased significantly. In September 2016 the Minister of Finance presented the new draft Investment Funds Act, which should increase competition between fund managers. According to the proposals, various requirements would be made more flexible, such as reducing the repurchase costs for units. According to the Competition Authority, in such situations there are grounds to ease the time limits for swapping funds even further.
According to the Authority, it is complicated for a new service provider to enter the market in a situation where they are effectively able to compete for existing shareholders only a few times per year. While limiting the frequency of swapping has been justified with the need to prevent short-term investments being made by fund managers, it is a clumsy and non-transparent measure that does not explicitly require the pension funds to change their investment policy. To the Authority´s knowledge, no such regulatory restriction has been implemented in any of the other economic sectors.
The Authority holds the position that free enterprise should only be restricted in the case of clear and analytically sound discretion. Enhancing free competition by easing time limits of swapping of pension funds creates better prerequisites for price competition, including reduction of service fees.
2010: Proposal for amendment of the Funded Pensions Act
On 21.07.2010 the Competition Authority submitted to the Ministry of Finance the amendment proposals of the draft for the amendment of the Funded Pensions Act and related acts. The Authority had already before repeatedly stressed the need to make the regulation of a mandatory funded pension more flexible for the consumers and more efficient from the standpoint of competition between trustees. On July 2, 2010 the Ministry of Finance submitted the draft for amendment of the Funded Pensions Act and related acts to the ministries for approval. Pursuant to the Funded Pensions Act valid at that moment the units of a pension fund could be changed only once a year. In the opinion of the Competition Authority this was a serious restriction of the freedom of choice of the consumers and thus also of the competition between the trustees and the entry of new service providers to the market was difficult.
Pursuant to the draft submitted by the Ministry of Finance the consumers would have had the possibility to change the existing units of a mandatory pension fund three times a year and channel new payments to another fund in three business days. The Competition Authority has the opinion that even the possibility to change a mandatory pension funds three times in a year still restricts the freedom of choice of the consumers and efficient competition. It would be difficult for new service providers to enter the market in a situation where it is possible only three times a year to compete efficiently for the clients. The restriction of the change of pension funds has been mainly explained by the fact that permission of more frequent change would incline the investment policy of trustees to orientate towards an undesirably short-term benefit and would send the wrong signal to the unit owner, whose knowledge of investment is probably not too high. On the other hand, 26 restrictions may cause a decrease of competition and welfare of consumers through an increase of the price level and/or a deterioration of quality. In this case the restriction of the change of pension funds did not directly oblige the pension funds to develop their investment policy in a certain direction.
Therefore it should have been considered if it would be possible and practical to regulate the investment policy of trustees with other, more suitable means. It is doubtful if the restriction of the freedom of choice would improve the investment decisions of the consumers. In the opinion of the Competition Authority a system should be created, where a unit owner would have a right to change his units against the units of another pension fund in a reasonably short period of time and without any restrictions. The establishment of such a system should in turn have a positive effect on the activities of trustees and make their competition more efficient. Therefore the Competition Authority is supporting the cancellation of the restrictions applied against the change of pension funds in the largest extent possible and submitted a proposal to the Ministry of Finance to enable a unit owner to change the pension fund after 30 days from the submission of the relevant application. The Competition Authority also found that the draft should make remuneration of trustees more transparent, specifying in the Funded Pensions Act the specific requirements for the disclosure of service charges.
In the situation of the former regulation it was often difficult for the consumers to understand how much they had actually paid service charges to the trustee. On January 10, 2011 the Riigikogu adopted the Act on Amendment of the Funded Pensions Act and Related Acts, supplementing the requirements set to the trustees and amending the procedure of reporting and disclosure related to pension funds with the objective to make activities of the funds more transparent and better understandable for the owner of the unit of the pension fund. The rules of change of mandatory pension funds became more flexible and the change of funds once a year was replaced by the possibility to change the funds three times in a year.
2013: The analysis of the Competitive Situation in the Oil Shale Sector
The Competition Authority has analyzed the procedure of allocation of oil shale resources and possible future developments with this regard. According to the current procedure, preference is given to the companies already active on the market and any newcomers have no access to oil shale resources. The Competition Authority finds that with efficient allocation of resources the country could be earning significantly more.
Today the total amount of oil shale that is allowed to be extracted during a year is distributed between four mining companies, and the largest part of the extraction permits belongs to Eesti Energia group. Current Earth Deposits Act gives a clear preference to the companies that already possess mining permits. The Competition Authority finds that currently valid preferences should be abandoned and the new permits shall be issued in the future on the basis of a transparent auction procedure. “It is impossible to change the situation in the near future, since an option to issue new permits will present itself in 2020, at the earliest. Now, however, is the right time to start addressing this issue”, says Märt Ots, the Director General of the Competition Authority, while commenting on the results of the analysis.
The current state development plan for use of oil shale sets the general direction for preferences to be given to electricity generated from oil shale, although today's high oil prices make production of shale oil more profitable. Thus, competitiveness of the electricity generation in the future will be decreased. In order to ensure competitiveness of the oil shale energy sector, clear legislative policies should be adopted and oil shale resources should be allocated accordingly.
2019: Opinion about granting 5G frequency licenses
The Competition Authority formed an opinion about the competition of frequency licenses in the frequency band of 3,410-3,800 MHz, as a result of which, the undertakings acquiring the licenses will start building a so-called 5G network for communications services.
The Competition Authority finds that the frequency band should not be divided into three or four parts, and sees instead an opportunity to put the frequency licenses on auction as smaller blocks of frequencies. Frequency licenses for 3,410-3,800 MHz band in 5 or 10 MHz blocks have been auctioned in several other European Union countries. This situation would stimulate competition not only between the three major mobile communications operators but would also provide players with new business model with an opportunity to develop a 5G network in Estonia. The estimated application range of the 5G technology is much wider and more varied than merely higher data communication speeds.
The development of the offered communications services will depend on the manner of building the 5G networks. One choice, highly likely to be followed by the owners of nationwide mobile communications networks, is to establish the 5G network on top of the existing network and as an addition to it. Another, differing developmental direction is to establish the new network for 5G services as a stand-alone network, with respect to the choices stemming from the new standard. In the latter case, the owners of the 4G network will have no technological advantage. Business models with a future outlook are the competitive ones.
Pursuant to the European Commission’s guidelines, the frequency band should be divided into sufficiently large blocks, preferably with the bandwidth of 80-100 MHz. The Competition Authority estimates that the efficient use of the frequency range is not hindered by the blocks sold at auction for being significantly smaller than the total frequency range that a communications company will acquire in the end. Relevant criteria can be deployed at the auction in order to ensure equal opportunities for all participants, while also preventing fragmentation and inefficient use of the frequency range.
Märt Ots, the Director General of the Competition Authority, finds that the government should be consistent in trusting the market: “Communications undertakings have been granted the freedom of independent network planning in their frequency bands and a development obligation has not been deemed necessary in the competitive situation, so hope in those matters is being vested in competition, which is presumed to ensure the entire country’s coverage with mobile communication networks. It should similarly be presumed that the competition for 5G licenses will ensure an efficient use of the frequency range because the provider with the best business model will win.” The government does not have to foresee the exact final use of the frequencies being issued. “Every enterprise knows best its plans and needs and is able to estimate the risks entailed in buying the frequency licenses. The balance of supply and demand should determine whether an enterprise buys one, four or twelve 10 MHz blocks,” noted Ots.
Before publishing its opinion, the Competition Authority sent its draft to the Estonian Association of Information Technology and Telecommunications, to the Ministry of Economic Affairs and Communications, and to OÜ Levikom, the applicant. The feedback received did not indicate any significant hindrances to auctioning the aforementioned frequency range in Estonia as small blocks. The Competition Authority recommended that the Ministry consider this solution also when preparing the planned spectrum auction of the 700 MHz frequency range.
2015: New restrictions on establishment of pharmacies significantly harm free competition
The Estonian Competition Authority made a proposal for revision of the pharmacist-owner requirement and the prohibition of connection with wholesale sellers to medicinal products, and for annulment of the restrictions, for which there is no necessity. The benefits for the public resulting from such restrictions have not been substantially analyzed.
Following the decisions of the Supreme Court of 9 December 2013 and 22 December 2014, by which the restrictions on establishment of pharmacies were declared as contrary to the Constitution, a combination of two new restrictions was added to the Medicinal Products Act, according to which the majority owners of pharmacies can only be pharmacists, and the companies related to wholesale sale of medicinal products cannot establish pharmacies. As a result of the mutual joint impact of the two new restrictions, free competition is hindered.
The pharmacist-owner requirement constitutes a big change in the pharmacies’ market, as a result of which during approximately five years the majority of pharmacies will have to be transferred by force to pharmacists, or will have to be closed. However, according to the Estonian Competition Authority, not a single analysis was referred to, that would demonstrate that the service provided by pharmacies not belonging to pharmacists is of poor quality. Starting from 20 March 2015, when only pharmacists will be allowed to open new pharmacies, opening of new pharmacies has almost stopped.
The amendment to the Medicinal Products Act that entered into force on 1 July 2014 prohibits connection of wholesale sellers to general pharmacies. At the same time, this restriction obviously did not have a positive impact on competition. Approximately 80% of pharmacies in the Estonian pharmacies’ market are related to one of four chains of pharmacies through either ownership or cooperation agreement. The competitive situation is first and foremost maintained between these four chains integrated vertically as a whole, and not separately in the wholesale sale and retail sale markets. The chains of pharmacies already operating in the market are the ones that are first and foremost interested in and have the possibilities of expansion in the market, and from the position of competition is it also important that they have freedom to give efforts with the goal of increasing their market shares. However, with the restrictions added to the Medicinal Products Act such possibility was eliminated.
2014: proposal to establish transparent criteria for the distribution of medical treatment funding
The Estonian Competition Authority made a proposal to the Ministry of Social Affairs to initiate the draft to amend the Health Insurance Act in order to add clear and transparent criteria for the distribution of treatment funding between health care institutions to the Act.
The proposal of the Estonian Competition Authority particularly relates to such speciality services that are provided outside of the hospitals listed in the Hospital Network Development Plan (HNDP), for example, services offered by an eye specialist, rehabilitation, psychiatry, etc. The HNDP includes mostly hospitals owned by local government or state and these have been automatically included in the funding list of the Health Insurance Fund.
The Health Insurance Fund currently prefers funding the health care services of the HNDP hospitals, therefore leaving other health care providers at a disadvantage.
Preferring solely the HNDP hospitals represents a market distortion, which would be excluded in a normal competitive situation. This may lead to situations where the more expensive and/or of lower quality service offered by the HNDP hospital is preferred over the others in distributing treatment funding. According to the Authority, possible counter arguments against free competition should be considered on a case-by-case basis and the HNDP hospital preference should not be automatic in the process of treatment funding. Currently, such a consideration is not carried out.
At the moment, there is no transparent and unambiguous regulation in current legislation, which could serve as the basis for deciding the distribution of funding between the HNDP hospitals and the rest of the health care providers. Therefore, the Estonian Competition Authority made a proposal to the Ministry of Social Affairs to add clear and transparent criteria to the Act. Only in the case of the fulfilment of these criteria, the Health Insurance Fund could have the right to prefer the HNDP hospitals in certain specialties without any restrictions to funding. In case of health care services that do not meet the criteria, all health care providers should have a chance to compete on equal terms.
2016: Proposal to open the coach service market to free competition
In 2016, the Competition Authority proposed to open up the long-distance bus transport market to free competition and to cancel the restrictions on granting line permits provided by the Public Transport Act wherever there is no reasoned need for such limitations. Historically, the routine of granting line permits for long-distance bus routes in Estonia has in one way or another restricted free competition. In many cases, it is not clear what is the purpose of restricting competition, or whether the restriction contributes to the achievement of the goals established. The restrictions, established by the Public Transport Act, on granting line permits are described ambiguously, and they are defined in more detail (including the choice between an open or a closed market) in the consideration principles prepared and established by the Road Administration Based on the consideration principles, the line permit application must be assessed separately in case the frequency of departures exceeds reasonable intervals.
The Competition Authority believes that the reasonable intervals are optimally defined by the relationship between supply and demand. Furthermore, the meaning of this criterion is not clear in a situation where the carriers are able to freely use extra buses whenever necessary. For example, on Tallinn-Tartu and Tartu-Tallinn routes it is common that two buses of the same carrier depart simultaneously under the same line permit during peak hours. Another questionable criterion is the number of stops on the route. This has created a situation where line carriers add as many stops as possible to their routes in order to get a line permit. In doing so, they may not be guided by the interests of passengers, choosing relatively little-used locations on the way instead.
For the justification of refusal to issue line permits, there are no compelling reasons that would be based on the protection of public interest. Long-distance bus routes are operated by private companies under market conditions, and the state should not restrict the opening of new routes. It would be reasonable for the state to establish uniform requirements for all carriers, rather than require the new carriers to always offer better or at least equivalent conditions. The current arrangement puts the existing and new carriers in an unfair competitive situation, favouring the carriers, which are already operating on the market. Both existing and new carriers must be able to enter the market and operate under the same conditions. On the major long-distance routes, the carriers enjoy very high market shares and minimum competition, for example, on Tallinn-Tartu and Tallinn-Narva routes the market share of one carrier exceeds 70%. Enabling free competition would result in equal treatment of haulers, as well as in lower ticket prices for the consumers. The Competition Authority has made similar proposals in 2010 and 2012.