1. General notes.

As is shown in the White Paper on the preparation of the associated countries of Central and Eastern Europe for integration into the internal market of the European Union, competition protection is one of the basic elements and a corner-stone of this market. Without "building of a system ensuring non-distortion of the competition in the internal market, the latter could not function" (Art. 3g of the Treaty). Therefore, the adoption of legislation in the field of protection of competition and its effective application is considered as a necessary condition for EU membership.

Articles 37 and 85-94 of the Treaty refer to the principles on which the specific competition rules are based. With the signing of the protocol of accession of Bulgaria to the EU and its publication together with the Treaty, these principles automatically will become part of our national legislation - Art. 5, par. 4 of the Constitution, and together with them the whole legal system of the European Community. The EA in fact repeats part of the principles of the Treaty connected with the protection of competition thereby declaring the respective actions incompatible with the EA.

Article 64, par. 3 of the EA provides that within three years of its entry into force, the Association Council should adopt the necessary rules for the implementation of the said principles for the protection of competition. Since it is foreseen that the respective provisions of the Treaty are taken as a basis, it is obvious that in practice our internal legislation will come to the gradual icorporation of the criteria of the relevant EC legislation subject to adaptations imposed by our national specificity. Certainly, adhering to them will not render us liable to the control of the bodies of the EU (the Commission and the Court of Justice), but both the "appropriate measures" (Art. 64, par. 6) as well as postponing Bulgaria’s admission will be used in cases of possible derogation.

In fact, in the field of protection of competition the ACCEE are facing the problem how best to modify and amend their legislation, so that by the time of accession they not only have norms similar to those of the EC, but also the appropriate institutions for enforcement prior to accession.

A number of interesting questions and differences from the requirements existing for the EU member states emerge at this point. EC competition legislation as a whole does not obligate the member states to have internal substantive or procedural legislation which should be identical or even similar to EC legislation. As discussed in further detail below, EC legislation takes over and regulates exclusively a certain category of social relations, connected with the protection of competition (mainly through the so-called rule de minimis and the criterion "influence over the trade among member states"). With respect to this category only EC legislation applies. The issues related to it are considered by the Commission and the Court of Justice. The internal bodies of the states (respective commissions for the protection of competition or other similar bodies, and the courts) have no power with regard to this type of relations and they cannot be the subject of regulation by the internal legislation of the individual member states, or, even if they are, due to the principles of direct effect and priority of the norms of Community legislation in each member state, the internal legislation may only have subsidiary significance. With respect to the other aspects of protection of competition exclusively the internal legislation of the respective member state applies and the internal bodies of that state have exclusive power. What is the contents of this legislation, whether is it in accordance with EC legislation and how it is applied - these questions are not of interest to the EU (on the other hand, EC legislation has direct effect in the member states and therefore it is possible to refer to it in the national courts and this is a permanent process of automatic approximation of the norms of the individual member states). The Community is interested that the meber states recognise the priority of Community legislation and the exclusive powers of its bodies in a certain category of social relations in the field of protection of competition.

Nevertheless, some member states have approximated their national legislation systems in the field of protection of competition to that of the EC, because in this way they facilitate everybody: the economic operators, the regulating bodies, the courts and the citizens since they all abide by or enforce euqal rules on both levels - the Community and the national. It is obvious that even from this point of view it would be useful for the associated states to harmonise their internal legislation with that of the EC.

However, as it is indicated in the White Paper of the EU this not a question which the EU left to the discretion of the individual associated countries, since with respect to them EC legislation will not apply before full integration. To the contrary, the EU sets an explicit condition for these states to develop their internal legislation in such a way that it is harmonised both as substantive and as procedural legislation with that of the EC. Moreover, a condition is stipulated to ensure its application through appropriate bodies. As it is shown in the White Paper of the EU, the EU will not insist for complete identity of the internal legislation with EC legislation, not even for the same degree of strictness as it exists in EC legislation taking into consideration that for a certain period the associated states (for Bulgaria it is five years with a possibility of continuation for another five-year period) are considered according to the EA as areas identical to the areas in the Community envisaged in Art. 92, par 3, (a) of the Treaty (i.e. areas in which the rendering of state aids can be assumed as compatible with the principles of the protection of competition set in the Treaty, since in these states the living standard is abnormally low and there is serious unemployment). The text of the EA permits the Bulgarian state to implement schemes of direct and indirect aids to the state enterprises but at a given moment within the three year period envisaged in Art. 64, par. 6 of the EA a decision should be taken about transferring those actions under the control of an appropriate independent body, about the time of the transfer as well as about such a level and nature of the aids that it will not provoke opposite measures on behalf of the EC Commission.

The problem of the application of the new legislation in the field of protection of competition in an associated state such as Bulgaria has a specific aspect. In order to approximate the criteria envisaged in the EA, it will be necessary to set up an appropriate national body which will be active until the moment of integration in substitute of the EC Commission. After that the enforcement of EC legislation will be taken up by the EC Commission. The national body from that moment on will have to deal only with the national legislation, covering social relations in the field of protection of competition which are not included in EC legislation, i.e. on the one hand it will be necessary to set up a body with powerful authority and on the other this authority will be trimmed at the moment of accession. In order to avoid the obvious problems of setting up a big structure with serious authority but with a limited period of activity, the White Paper shows as a possible solution the strict definition of the powers of the national body in the field of competition so that the powers which will be handed over to the Commission at the moment of accession are taken up by a lighter, ad hoc structure. However, this problem seems difficult to solve in practice.

Another alternative which is proposed in the White Paper of the EU is that the associated states voluntarily hand over the competencies of the regulation of these relations to the Commission now, as it would take them up later in any case. This alternative does not seem possible from a practical point of view. Given our insufficient level of preparation, it will be difficult to imagine - from the economic, legislative, and psychological point of view - how in practice the EC Commission would regulate our internal legal relations connected with the protection of competition. Also, as said earlier, in the field of protection of competition the Commission deals only with actions and agreements which cover minimum criteria, and this would leave out a great deal of the relations in this field in Bulgaria.

Therefore, a solution should be found in the direction of empowering the Commission for the Protection of Competition. The question will be dealt with in the section "Conclusions and Recommendations" below.

Certainly the incorporation of EC legislation will have to progress in a way that corresponds to the scale of our market. To the extent that EC legislation regulates legal relations arising between foreign subjects or between local and foreign subjects (for instance negotiation of prices between non-European companies to import goods to the internal market or merger between European and non-European companies if the result would lead to a monopolising the internal market) and our amended legislation before the integration could also include such regulations so that at the time of integration Bulgaria would suffer minimum of disturbance - a subject of regulation up to the moment of integration can be not only purely internal legal relations and subjects but also international or foreign.

The scope of application of the principles and norms of EC legislation for the protection of competition is contained in the Treaty and in other ensuing acts. Generally they can be classified in the following manner:

a) according to the type of activity:

- cartels - Art. 85;
- monopolies - Art. 86;
- state assistance - Art. 92-94;
- state monopolies and special sectors - Art. 37 and 90.

b) according to the territorial range and the turnover:

- for the former two - the criterion "effect on trade between member states" and a certain world turnover and turnover within the Community;
- for the latter two - all undertakings less the specially excluded because of their aims and character of activities or by special advice.

2. Cartels.

Article 85, par 1 of the Treaty declares prohibited and correspondingly void all agreements between undertakings, decisions of associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion competition within the common market. It is followed by an enumeration of specific activities which are considered falling into the above hypothesis like:

- direct or indirect fixing of purchase or sale price or other trading conditions;
- limitation or control of production, markets, technical development or investment;
- sharing of markets or supply sources;
- application of dissimilar conditions to similar transactions with different persons, thus placing them in an unfavourable position from the point of view of competition;
- concluding agreements depending on acceptance by the opposite party of additional conditions which, by their character or by tradition, are not related to the subject matter of the agreement.

Paragraph 3 of the same Article, however, makes it possible to not apply the above provisions to individual agreements, decisions or concerted practices, or separate categories of each of the three. This task as well as the detailed regulation, from a substantive and procedural point of view of the application of the norms of Art. 85, are assigned to the EC Commission. Specific powers are also assigned to the Court of Justice. It is important to note that the Commission and the Court of Justice have separate powers which exclude those of the internal bodies of the member states. The Commission has the authority to determine the exceptions of Art. 85, par. 1 by various criteria.

The national bodies can undertake actions on a given agreement on the basis of the internal legislation, even if the agreement is to be considered by the Commission. But the national decision cannot contradict that of the Commission. If the decision of the Commission is approved first, it becomes mandatory for the national bodies, and if it comes after and contradicts the national decision, the national bodies should take appropriate measures to modify or repeal their decision and to apply that of the Commission.

In exercise of its powers for regulating the questions of the protection of competition, the Commission has issued a number of documents, the more important of which will be considered below.

Regulation 17/62 introduced the obligation to inform the Commission about agreements, decisions and concerted practices for which the parties wish to apply Art. 85, par.3. The representatives of the Commission may request the right to immediate access to the account books as well as extracts and copies therefrom, explanations as well as access to all premises and transport vehicles of each undertaking. Upon failure to comply with these obligations the Commission has the right to impose fines (up to 10 % of the turnover of the respective undertaking). According to Regulation 17/62, the information regime embraces all agreements, decisions and co-ordinated actions except certain cases listed in the regulation:

- when the contracting parties are nationals of the same state and the agreement does not provide for import or export between member states;

- when the agreement is bilateral and is confined only to the right of one of the parties to determine prices or conditions for resale of the goods;

- when restrictions are imposed on exercising the rights of the assigness or user of industrial property rights;

- when the agreement has the single purpose of development or equal application of standards or types, joint research and development or specialisation in the manufacture of products, and the products of specialisation do not exceed 15 % of the turnover in the internal market of identical items or the total turnover of the participating undertakings does not exceed 200 million ECU.

Another basic exception is introduced by the Commission with the so called rule de minimis. It is accepted that a certain category of agreements or decisions are insignificant from the point of view of the entire internal market and it is not necessary to refer them to the Commission. The threshold has been changed several times and, presently, any agreement between economic agents with a total annual income below 200 million ECU and which comprises less than 5 % of the market, is automatically excluded from the requirements for notification.

Two other Regulations: 1983/83 concerning the exclusive distributor and 1984/83 concerning the exclusive supplier introduce mutual exceptions for both categories.

Rule 1983/83 envisages that Art. 85, par. 1 will not apply with respect to bilateral agreements whereby one party undertakes to supply certain goods to the other for resale in a certain part of the common market (or throughout the common market). The following obligations may be imposed on the exclusive distributor:

- not to manufacture or distribute goods which are in competition with the goods subject to the agreement;
- to obtain goods subject to the agreement only from the supplier;
- not to seek customers, not to set up branches and not to maintain a distribution depot outside the territory fixed in the agreement;

In addition, the exclusive distributor may take up some of the following obligations:

- to purchase the whole range of goods;
- to sell the goods as marked and packaged by the supplier;
- to make promotion, etc.

Any other restrictions would make the agreement invalid.

At the same time Regulation 1983/83 singles out a category of agreements in which the above exception does not apply:

- when the manufacturer of goods which are identical in their characteristics, price and intended use are considered by the consumer as equivalent conclude a reciprocal or non-reciprocal distribution agreement (except if one of them has an annual turnover under 100 million ECU).
- when the consumers are in a position to acquire the goods subject of the agreement only from the exclusive distributor and have no alternative source of supply outside the agreed territory;
- when one of the two parties makes it difficult for intermediaries or consumers to obtain the goods subject of the agreement from other traders and, particularly, if one of them exercises its right to industrial property or other rights in such a way as not to allow traders or consumers to obtain from the outside or to sell inside the agreed territory the goods subject to the agreement.

Similarly, Regulation 1984/83 settles the matter of the exclusive puschase agreements and it contains specific sections whereby such agreements for supply of beer and petrol for further retail are accepted as compatible in principle.

An illustration of the above regulations can be found in Decision 85/562/EEC of the Commission concerning agreements for exclusive distribution of gin and whisky. It considers 21 such agreements which are referred to the Commission by the parties with a view to the requirements of their exclusion from the application of Art. 85, par.1. In 17 of the agreements, exclusive distributors of a given drink are traders who are also producers of alcoholic drinks, but different from those which are subject to the agreement for exclusive distribution (e.g. several brands of whisky of the British producer "White Horse" are distributed in Ireland by "Gilbeys Ireland", who are producers of gin but not of whisky). The Commission has accepted that in this case Regulation 1983/83 is valid as gin and whisky are not merchandise "which are identical or in their characteristics, price and intended use are considered by the consumer as equivalent", and the agreements for distribution are valid. In the remaining 4 agreements, however, the exclusive distributor is at the same time producer of the same beverage and it cannot fall into the hypothesis of Regulation 1983/83. The Commission has, however, decided that it can grant individual exceptions on the grounds of Art. 83, par. 3 of the Treaty since, after the examination of the four cases, the Commission has ruled that they would contribute to the distribution of the drinks in question irrespective that it is distribution of competing drinks. According to the Commission, the relevant producers can concentrate their efforts on one distributor who knows the economic and legal reality in the country. Also, producers may receive quickly and easily products produced in other countries. The small total size of the total market shares does not make the "elimination of competition" possible.

The above decision is just one of the many decisions of the Commission in connection with the protection of competition. It was only considered with the purpose of an example aimed at pointing out the scope and the depth of regulation of these questions by the Commission and substantiating the conclusions and recommendations that follow.

In a Notice of the Commission concerning the commercial agency some questions regarding the protection of competition in commercial agency contracts are considered. The Notice of the Commission is not a normative act and does not create legal rights and obligations; it just interprets Art. 85 of the Treaty, but still it expresses a position which the Commission would likely assume in an actual dispute. In the Notice, a commercial agent is defined as a person who either does not carry out any other trade activity apart from the negotiation or conclusion of transactions on behalf of the principal, or the activity carried out is limited in scope or significance (i.e. there exists the so called "integration" between the principal and agent). According to the Commission, if the agent's activity in connection with the princopal constitutes at least one third of his overall activity, it would be accepted that there is integration, but for agents which are themselves major companies this threshold could be even lower.

The Notice expresses the position that the obligation of the commercial agent not to trade with competing goods does not violate Art. 86, par.1 of the Treaty. The primcipal's obligation not to hire other other commercial agents in the contract territory in the same manner does not contradict Art. 85, par.1. At the same time, it is mentioned that the agency contract should not necessarily exclude the possibility of negotiating or concluding agreements with third parties outside the outside the contract territory, but this should take place without active soliciting by him of such contacts, negotiations or agreements. There is no integration when the agent carries out activity with competing goods.

The following activities or sectors are excluded from the scope of the application of Art. 85, par.1 of the Treaty with a number of other regulations:

Regulation 26/62 declared non-application of the norms banning cartels in agriculture.
Regulation 2349/84 excludes patent licensing.
Regulation 123/85 - distribution of motor vehicles.
Regulation 556/89 - licensing of know-how.
Regulation 4087/88 - franchising.
Regulation 1534/91 - the insurance sector.
Regulation 141/62 - transport.
Regulation 479/92 - maritime navigation.

The computer reservation systems for air transport services are excluded by Regulation 83/91. In the area of air transport, there are also a number of other documents.

For Bulgaria, in this area there are only the three valid texts of Chapter Three of the Law on Protection of Competition which, though in tune with EC legislation, are generally limited to the proclamation of the principles of the protection of competition:

- Art. 8 on the ban of agreements and decisions (par. 1) and of restrictive contractual terms (par.2);
- Art. 10 on ban of agency, distribution or commision merchant's activities by one person of goods of competitors when it leads to restriction of competition or to a dominant position;
- Art. 9 on admission of agreements for application of general terms after permission of the Commission for the Protection of Competition.

It is obvious that without the development of a considerably more detailed secondary legislation these principles find small application in the economy and cannot produce a noticeable economic effect.

3. Monopolies.

The questions of the emergence and the malpractices of the monopolistic state are not regulated so extensively as the cartels considered in Section 2. The ban on abuse of a dominant position, to the extent it affects trade between the member states, is contained in Art. 86 of the Treaty which, in addition, lists four categories of actions which are declared incompatible with the common market:

- direct or indirect imposition of unfair purchase or selling prices or other unfair trading conditions;
- limitation of production, markets or technical development to the prejudice of consumers;
- application of dissimilar conditions to equivalent transactions with other parties, thereby placing them at a competitive disadvantage;
- making the conclusion of agreements subject to acceptance of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

Regulation 4064/89 regulates in detail the questions of "concentrations". According to this regulation, a "concentration" exists when two independent undertakings merge, as well as when one or more persons already in control of an undertaking, acquire control over another undertaking. It explicitly points out that cases of contractual co-operation which are subject to Regulation 17/62 are not concentrations.

In order to fall within the scope of Regulation 4064/89 the "concentrations" must meet the following minimum criteria:

- the total world turnover of all undertakings concerned exceeds 5 billion ECU; and
- the total turnover in the Community of each of at least two undertakings exceeds 250 billion ECU.

A concentration will not be subject to Regulation 4064/89 if over two-thirds of the turnover of the undertaking in question in the Community is realised in one member state.

Regulation 4064/89 foresees a procedure for the notification of the Commission on behalf of the undertakings within seven days after concluding an agreement, declaration of a public bid or acquisition of a controlling interest. The concentration shall not be put into effect for the three weeks of the notification and the period can be extended by the Commission. The Commission can make one of the three rulings:

- to declare by a decision that the concentration does not come into the scope of the Regulation and to close the case;
- to open a case;
- to refer the question to the competent authorities of the member states.

If, as a result of the consideration of the case, the Commission establishes that the concentration does not establish or enhance a monopoly, it declares the concentration compatible with the common market. In this case the Commission may give also recommendations.

If, on the other hand, the Commission establishes that a monopoly has emerged or has been enhanced it declares the concentration incompatible with the common market. In this case if the concentration is already accomplished, the Commission may rule that the undertakings or the assets be divided or the joint control be ceased.

The questions are regulated in a specific way in the Treaty establishing the European Coal and Steel Community. According to Art. 66 of the treaty for any transaction which leads to a concentration between undertakings of which at least one engages in trade or production of coal or steel, irrespective whether the concentration is realised through a merger, acquisition of shares or of parts of undertakings, lending, contracting or any means of control, a prior permission from the Commission is required.

This provision, which applies even today with respect to the undertakings in question, is considerably stricter than the corresponding provision of the Treaty. The explanation is that the treaty establishing the Coal and Steel Community, concluded in 1951 has endeavoured to satisfy the public opinion in Western Germany and France, as well as the allies, which have been striving to break the powerful German concerns in the area of coal and steel. With the passing of time the Commission has gradually adopted a rather free interpretation of the provision and today the policy in this sector regarding concentration is in accordance with the policy regarding the sectors included in the Treaty though formal differences still exist.

In this area only the four texts of Chapter Two of the Law on the Protection of Competition are in force in Bulgaria:

- Art. 7 concerning the prohibition on abuse of a dominant position;
- Art. 5 banning acquisitions and art. 4 on the establishment of a state monopoly;
- Art. 6 on mandatory notification of the Commission for the Protection of Competition;
- Art. 3 defining a dominant position.

The conclusion in Section 2 above is applicable here as well.

4. State Aids

State aids are considered in Art. 92-94 of the Treaty. Art. 92 in principle bans aids granted by the state save in cases provided for in the treaty itself. In paragraph 2 three cases of aids granted by the state are listed which are accepted as admissible by definition:

- having a social character, granted to individual consumers, provided the aids are granted without discrimination related to the origin of the products concerned;

- to make good damages caused by natural disasters or exceptional circumstances;

- to certain areas of the FRG affected by the division of Germany.

Paragraph 3 lists the cases of state aids which can be considered compatible with the common market. The most important case which directly affects Bulgaria is under (a): "aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment." Bulgaria is considered in the EA precisely such an area during a five-year period following the date of its entry into force.

Art. 93 empowers the Commission to keep under constant review all aid schemes in the member states, to require the member states to abolish certain aids within a period of time determined by the Commission (usually two months), and if the state refuses to do so, to refer the matter to the Court of Justice. On its behalf the European Council has the authority to declare unanimously a certain aid as acceptable.

In the texts of the treaties (of Rome and for establishing the Coal and Steel Community) or later in other documents are listed some of the sectors with particular regulations regarding the state aids:

- agriculture;
- fisheries;
- transport;
- ship-building;
- textile and synthetic fibres;
- auto and aviation industry;
- steel production;
- coal production.

Despite the fact that Art. 94 empowers the European Council to adopt regulations for the application of the two foregoing texts with qualified majority, in practice this has not proved successful. Consequently, EC legislation in the field of state aids, unlike that on cartels and monopolies, was developed not on the basis of rules and block exceptions, but through the practice of the Commission, laid down in individual decisions, as well as on the basis of Communications or Notices. For instance, in 1983 the Commission informed the member states that it will use all measures at its disposal in order to ensure the safeguarding of the agreed obligations of the member states - it will reuire the withdrawal of aids granted without prior information of the Commission (in 1989 Renault and Rover were obliged to give back aid granted by the state) or it will refuse the reimbursement of sums from the relevant funds of the abuser states.

In these notices the Commission has taken stands on the basic type of aids:

- export aid, concerning trade within the common market - the Commission has declared that such aid will not be allowed under any circumstances;

- general aid schemes - in principle the Commission is against such schemes because they are not connected with the activity of individual sectors or regions and do not appear in the listing of Art. 92, par 3. Nevertheless the Commission has expressed readiness to permit such aid if it is informed of the main programmemes and the concrete projects included;

- sectoral aid - the criteria for acceptability of sectoral aids include selectivity (aid only for the sectors, which in the long term will prove to be recovering), progressive reduction of the aid, transparency, least possible effect on competition and necessity to reduce the social and economic price of adaptation;

- regional aids - with a Notice the Commission has formed in practice four groups of regions each of which has a maximum size of the aid according to the total sum of investment in the region and the newly created jobs. The criteria include transparency, application of measures to a certain region, indication of the influence on individual sectors (with a view of not turning the regional aid into a sector aid).

There exist no exact definition of the term "state aids." Art. 92, par.1 says "aid...in any form whatsoever which distorts or threatens to distort competition". The text is interpreted rather broadly and is accepted to include also aid granted by a public undertaking. For instance, if the national electric company extends more more favourable treatment to some undertakings or sectors this could also be considered a state aid.

The only general exception of the principle of prohibition of the aid is for where the aid is so insignificant that it cannot influence substantially trade among member states. It is accepted that aid of up to 50 000 ECU for one undertaking from all sources for a period of three years is the limit over which the mechanism of prohibition of the state aids of the Treaty applies. The sectors of special treatment have different regulations.

Also of interest are the regulations developed by the Commission regarding the admissible measures for saving and remedying of undertakings which are contained in a Notice of the Commission of 22 July 1994. In this Notice it is pointed out that there exist circumstances whereby the state aid is justified to save undertakings in difficult position and to help their restructuring.

The aid for restructuring can take different forms - injection of capital, writing off a debt, subsidising interest payment, exemption from tax payment or social security payment, credit guarantees. The saving, however, should be limited to crediting at market interest rates or credit guarantees. The source of the aid can be the government or a government body at any level, even local as well as a public undertaking.

The basic criterion developed by the Commission referring to injection of new capital is the so called "principle of the private investor", i.e. when a rational private investor, acting in the conditions of market economy would finance an undertaking, the granting of funds will not be considered an aid.

When the funds are granted directly or under a guarantee there exist the presumption, however, that this is a state aid and these operations must be reported to the Commissions in accordance with Art.93, par. 3 of the Treaty.

Of particular interest is the question of state aids from the point of view of the provision of Art.. 64, par.4 (a) of the EA. According to this provision, in the first five years following the date of entry into force of the EA Bulgaria will be considered a region identical with the regions of the Community described in Art. 92, par.3 (a) of the Treaty. The possibility to prolong this regime of treatment for another five years is envisaged. We should note in the first place that Art. 92, par.3 includes a listing of all types of state aids which can be considered compatible with the common market, but are not automatically accepted as compatible with the common market. Therefore the inclusion of Bulgaria into this category of regions means that aids granted by the state for saving or restructuring of undertaking or sectors will be considered on the basis of this provision but in no case will it mean that any aid is automatically acceptable. The question is discussed in detail in

Section 6.

EC legislation also includes provisions for granting of aids at an eased regime of approval to small and medium-size undertakings which include undertakings with less than 250 employees, annual turnover under 20 million ECU, balance sheet value not exceeding 10 million ECU and such having no more than 25% of the capital being property of a company which do not fall under this definition, with some exceptions.

Aid with social character is also admissible.

Agriculture and the fishing industry as well as coal and steel production are under separate regulations.

5. State monopolies and special sectors.

Art. 37 of the Treaty envisages " adjustment" of the existing state monopolies of a commercial character. The adjustment includes liquidation of any discrimination in connection with the conditions under which goods are procured and marketed between nationals of the member states. What is meant here is the abolition of the existing control over the import, export, and wholesale trade. Gradually, albeit with much difficulties, some member states have accomplished the necessary adjustment of the activities of their state monopolies - Germany (alcoholic beverages), France (alcoholic beverages, tobacco and petrol) and Italy (tobacco and matches).

By decision of the Court of Justice of 1990 it has been ruled that the continuing existence of exclusive rights for import and marketing of petrol products is incompatible with the legislation of the Community. At that time the Commission noted that irrespective of the abolition of the exclusive rights the situation in the Greek petrol sector is far from satisfactory. Problems have been noted with Spain too in connection with the requirement that petrol stations should sell only national products and with Portugal which had already taken measures for the liberalisation of its petrol market.

According to the Commission, the legislation of some countries accord exclusive rights for import or distribution in the energy sector and consequently it has proposed measures to remedy the situation.

Art. 90 of the Treaty prohibits the member states from adopting norms on the activity of the so-called public undertakings, which contravene EC competition legislation. Such undertakings to which the state grants exclusive rights (e.g. water supply, central heating supply, etc.) must observe the regulations of the protection of competition as much as the application of these regulations does not impede the execution of their tasks. The Commission is given the right to implement these regulations by directives and decisions sent to the member states.

In the various sectors the situation is as follows:

a) Telecommunications. Directive 88/301 of 16 May 1988 adopted by virtue of Art. 90 of the Treaty requires the member states to ensure competition regarding the terminal equipment. Directive 90/388 requires the same regarding telecommunication services. As a whole EC legislation abolishes the exclusive rights in the area of telecommunications save for voice telephony where some transition periods are in force.

In the area of telecommunications the company is required to be established as an independent legal person (we believe that the principle refers to all or at least to most sectors for limited liability state-owned companies). In Bulgaria this is formally done but the assignment to the branch ministry (the Committee of Post and Telecommunications) of the rights of a body exercising the right of proprietor of the capital on behalf of the state (and often interfering in the operation of the respective company) actually retain the direct state management of these companies. In this case there is a conflict of interests arising from the fact that the state regulatory body in the sector is also proprietor of the capital of the main trade society (or the major companies) in the sector which leads to an additional limitation or distortion of competition in the given sector.

b) Transport. Some countries like Belgium and Germany have abolished the requirement that their state employees should only use their national airlines. There is the problem of the exclusive rights accorded to "Iberia" air company to service the national airports of Spain.

c) Post and Courier services. Since the courier offices offer services which the national post services cannot offer the Commission has taken measures to abolish restrictions over them. Some states have amended their legislation in such a manner so that these services are not included in the monopoly of the posts.

d) Gaming. The Commission is making a general review of gaming with a view of elaboratiing directives for the application of Art. 90 in this area.

e) In 1988 the Commission refused to approve provisions in a Greek law regarding insurance of state property by state banks and credits extended by state banks.

The WhitePaper of the EU identifies the following measures to be adopted by Bulgaria in order to approximate its legislation to that of the EC in connection with Art. 90 of the Treaty:

a) during the first stage:

- the rules on protection of competition should be applied to all public undertakings save for some justified exceptions;

- determination of the tasks of common interest assigned to certain undertakings, of mandatory measures for setting up of networks and of justified restrictions;

- abolition of special and exclusive rights which violate EA and implementation of the rights for the protection of competition regarding the same undertakings;

- in the sectors having networks a delimitation should be done among the various types of activities (services, production, etc.)

b) during the second stage:

- introduction of competition into the monopolistic sectors either by admission of new agents or by separation of the existing agents;

- with regard to infrastructure - to ensure right of access for all agents;

- clear definition of the exclusive rights of the monopolistic agents which are compatible with the Treaty;

- formation of a regulating system which ensures conditions for fair competition between the existing and new agents.

6. Conclusions and recommendations.

In the transitional period concerning the Republic of Bulgaria the provisions of the EA will apply. They are shown as follows:

- cartels - Art. 64, par. 1 "i";
- monopolies - Art. 64, par. 1 "ii"
- aids granted by the state - Art. 64, par. 1 "iii"
- state monopolies and special sectors - Art. 66.

The provisions of the EA are of a principle nature and their purpose is to fix in the form of agreement the determination of Bulgaria to accept from the present moment the principles of protection of competition of EC legislation, and the obligation in the next five years to introduce in its internal legislation detailed regulation corresponding to these principles and to make them operative and applicable. In paragraph 2 of the same article there is a reference to the "criteria ensuing from the application of the provisions of Art. 85, 86 and 92 of the Treaty establishing the EEC" and paragraph 3 provides for a period of three years from the date of entry into force of the agreement during which the Association Council will adopt the necessary measures for the application of the first two paragraphs.

Obviously these texts create an obligation for Bulgaria to start the development and implementation of the appropriate legislation so that in the course of some reasonable period of time a system for the protection of competition compatible with EC legislation will start to operate. We believe, that this will be one of the major criteria for the assessment of the readiness of the individual associated states for full membership.

The rate at which Bulgaria will be adopting the respective legislation will depend not only on the factor "as early as possible ready for full membership" but on its economic needs. In any case, the EA has envisaged a limited period of three years for the Association Council to develop the necessary measures. The development of such measures, we think, will mean that Bulgaria and the EU agree on the legislative framework, the mechanism of its implementation and the periods of development of the system for the protection of competition in Bulgaria. After specifying the main provisions of such a system at the Association Council its concrete development and implementation could begin.

The reference, above, to Art. 85, 86 and 92 of the Treaty establishing the EEC identifies the priority areas in the field of the protection of competition in which the Bulgarian legislation should be approximated to that of the EC. The omission of Art. 90 indicates that for public undertakings, having monopolistic activity of common interest, a more gradual approach has been adopted. Such gradual approach can be foreseen also for the adjustment of the state monopolies but still at the end of the transitional period the conditions under which they will operate should be co-ordinated with the rules on the protection of competition.

Deviations from EC legislation will be allowed in other areas also. For instance, in the White Paper of the EU it is shown that at the very first stage the associated states should accept the basic elements of EC legislation in the area of control over mergers and acquisitions with one exception - with respect to the common interest concentrations could be admitted in the associated states in some cases during the transitional period even if this could create or increase a monpoly.

As was mentioned, according to Art. 64, par. 4 "a" of the EA at least during the initial stage Bulgaria will be considered a region identical with the regions of the Community described in art. 92, par.3 "a" of the Treaty. This opens certain possibilities for conducting a policy of state aids g during the transitional period, but it does not mean that paragraph 4 "a" automatically excludes the application of paragraph 1 (iii). To the contrary, with regard to granting of aids to undertakings in the so-called "underdeveloped regions" the Commission demands the same informing procedure by the member states as with all remaining regions. The difference is that the provisions of Art. 92, par.3 "a" allow a single reason for determination of the aid as "compatible" with the Treaty and for it to be allowed by the Commission.

In the case of Bulgaria as an associated state the sanctions provided by Art. 93 of the Treaty will not be applied during the transitional period. The EC Commission will not have the right to stop aids or to demand the return of granted funds as it has with respect to member states. Here two factors will have an effect - Art. 64, par.6, i.e. the possibility to undertake "appropriate steps", e.g. measures against our exports products produced in a sector or by an enterprise which have received aid as well as delaying our admission to the EU.

According to the White Paper of the EU, with respect of the areas regulated by Art. 37, 90, 92 of the Treaty the provisions in these texts can be incorporated into the internal legislation of the associated states gradually. Even with regard to the matter of Art. 92 it is explicitly noted that during the first stage it is possible for the associated states to deviate from the basic elements of the regulation of the EC. More specifically, it is foreseen that the national commissions for the protection of competition, or other similar bodies, are given more limited powers than those of the EC Commission - that is, to receive all information about state aids and to release reasoned opinions on the admissibility of a given state aid, but no to have regulatory powers with respect to such aids.

If we look now at our existing legislation - the Law on Protection of Competition - we can immediately note that in practice there is no protection of competition in Bulgaria both with regard to state aids and to state monopolies, and with regard to cartels and monopolies. Apart from the law, there is no other regulation in this field. The law itself does not envisage the adoption of secondary legislation for its enforcement and is limited only to proclaiming the basic principles of the protection of competition - compared to EC legislation it is the same as if EC legislation were based only on the provisions of the Treaty. This can lead to one of two things: practical unenforcability because of the general character of the provisions or the assumption of a de facto of legislative role by the Commission for the Protection of Competition itself in order to fil the gaps. The latter is inherent with the danger of instability of the regulation, lack of clarity and potentially arbitrary enforcement with respect to individual agents. These are all undesirable consequences and obviously prompt and large-scale measures are required.

Under the existing conditions the Commission for the Protection of Competition through its practice potentially might gradually introduce some regulation of the complex social relations in this area, but except for the practice of the Commission for the Protection of Competition (itself valuable and no doubt necessary in its systematic presence) no other body creates regulations in this area. This approach has some evident disadvantages:

- initially, the Commission for the Protection of Competition was set up to enforce and not to adopt legislation and its structure and organisation are not appropriate for the latter;

- its resources and personnel would not allow it in the foreseeable future to set up in Bulgaria a well-organised system for regulation of the protection of competition;

- in this type of legislation there is an inherent instability which can give rise to contradictory practices and lack of clarity as well as arbitrary enforcement;

- the practice of the Commission for the Protection of Competition is not publicised and is not well known.

It is important to have in mind that despite the speed or the stages of harmonisation of the Bulgarian legislation in the area of protection of competition with that of the EC and of introduction of its basic elements into the internal legislation, regulations will have to be developed. The fact that in the first stage a number of deviations are envisaged in a number of areas does not mean that it will not be necessary to introduce regulation in the first stage. This is necessary, and inasmuch as exceptions are envisaged, they also should be regulated as such. Gradually, this regulation will be approximated to the legislation of the EU.

On the basis of the above the following specific recommendations can be made:

a) As a priority, a new law for the protection of competition has to be adopted containing better provisions in this matter and stipulating the adoption of accompanying secondary legislation.

b) The Commission for the Protection of Competition should be strenghtened in terms of resources, personnel and its powers should be extended by assigning it legislative power. It is the independent body which can elaborate rules in this area. In this way, the Commission for the Protection of Competition would combine the two basic powers of the EC Commission in the field of protection of competition - development of secondary regulation and application of the rules for the protection of competition. After accession of Bulgaria to full membership of the EU The Commission for the Protection of Competition could remain as a national body. Having in mind the scale of our economy, we should not reckon that the national control in this field would be taken entirely by the EC Commission.

c) The supervisory powers of the Commission for the Protection of Competition should be increased in such a way that they should become similar to those of the EC Commission in some aspects of the protection of competition. In the area of state aids, for instance, or in other fields where it is considered useful and this is agreed upon at the Association Council, they could remain more limited.

Only provided that we can set up, on a national level, and in a short time, a powerful and independent body which could, without political control, effectively and with competence regulate, follow and interfere in the legal relations in the field of the protection of competition, will we be successful in avoiding the perturbations when these functions related to a type of undertakings or transactions is taken by the EC Commission and EC legislation is directly applied in this country.

It is very important to assess to what extent, under the present structure (eleven members who take decisions at periodical meetings), could the Commission for the Protection of Competition be much more active in regulating problems arising in this sphere. Perhaps its structure should undergo such changes that would allow its specific legal powers to be devolved to its structural units. In this case, it would be advisable to change its name to, for instance, an Agency for the Protection of Competition. The members of the commission could work as a Supervisory Board as it is with the Privatisation Agency.

d) Having in mind the transition of our economy, part of the legal powers in this field, particularly part of the legislative activities, could be assigned to the Council of Ministers. This would have a positive effect - harmonisation with the existing constitutional and legal set up and traditions, a greater authority of the acts of the Council of Ministers. At the same time, the transfer of functions in this field to the Council of Ministers would make the process slower and lead to potential collision of priorities since one body would concentrate the responsibility to fulfil two contradictory objectives. On the one hand, the Council of Ministers will be inclined to consider economic expediency at the expense of the principles of the protection of competition, and, from the other, it will have to develop legal norms for the development of these principles.

e) Development of the judiciary system in this field, for instance by establishing specialised court panels for dealing with protection of competition. The judiciary is not facing issues of being assigned new legal powers or serious organisational changes as is the Commission for the Protection of Competition.

f) The White Paper of the EU rather generously expresses readiness for providing massive technical assistance and aid for the training of experts of the Commission for the Protection of Competition and of judges in this field. It is of primary importance to identify the need of assistance in this field.

g) The psychological adjustment of the economic operators facing new protection of competition legislation will be very important. From this point of view a of particular importance will be the self-discipline of the government agencies excersing both the right of ownership of state-owned enterprises and the right of regulators. Enhancing the knowledge of at least the basics of EC legislation in this area is also very important.

h) It is very important for all further actions the protection of competition to take into consideration the following:

- Bulgaria has agreed, under the EA, to develop gradually, but in comparatively short period of time from the economic point of view, and start enforcing legislation in the field of protection of competition which should be similar to that of the EC;

- non-performance of this obligation would lead to delaying the admission of Bulgaria to the EU, notwithstanding the specific measures which could be taken by the EU by virtue of Art. 64, par.6 of the EA;

- it is obvious that many of the measures which will have to be taken will have a high price and will be unpopular politically, which should not be a reason for delay of their application;

- in practice now there is no system in the country for the protection of competition (both legislative and institutional) which should be at the same time adequate to the requirements of EA and EC legislation and be applicable from a practical point of view;

- among the fundamental problems which the regulatory and judiciary bodies and society as a whole will be facing by implementation of the legislation for the protection of competition (and practically in all fields of the economy) are the problems of the freedom of information and transparency. From the point of view of the competition protection the necessity of freedom of information and transparency will appear say with the state aids, but this problem in Bulgaria is not solved generally and not just with regard to the protection of competition. Its consideration is nor subject of the present paper.

With regard to the protection of competition, the issues of freedom of information, and transparency should be regulated in such a manner that the interests of both society and the undertakings themselves could be satisfied safeguarding at the same time the trade secrets.

i) On the basis of the above conclusions it is clear that it is necessary to start the preparation for a discussion of the questions of implementation of Art. 64, par.3. at the Association Council. The sooner an agreement on this issue is reached and parameters of action are adopted in the first stage, the sooner their implementation will start and, consequently, Bulgaria will become better prepared to start negotiations for integration with the European Union as a full member.

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