Diluting the competition bill does Hong Kong no favours

PUBLISHED : Wednesday, 11 April, 2012, 12:00am
UPDATED : Wednesday, 11 April, 2012, 12:00am


Last week, the Hong Kong government bowed to the city's business lobbies and made yet another couple of tweaks to its long-stalled competition bill.

Officials hope the latest changes will dilute resistance to the proposed law, allowing them to push it through the Legislative Council before July.

On the face of it, last week's modifications look fairly innocuous. The government raised the threshold that will let small businesses get away with so-called minor infringements of the new law.

From now on companies with less than HK$40 million in turnover will be exempt from penalties, up from HK$11 million in earlier drafts of the bill. Where more than one company is involved, the combined turnover threshold rises to HK$200 million.

The idea is that these concessions to business groups are a small price to pay for finally getting the bill passed into law.

Yet the cumulative effect of these and earlier compromises amounts to a major watering down of official policy, and reflects the government's ambivalence to the whole concept of a competition law.

That's a shame because Hong Kong badly needs an effective competition policy.

In other developed economies, agreements among businesses to carve up markets, fix prices and exclude newcomers are strictly prohibited. In Hong Kong, they are standard practice. Monopolies, cliques and cartels abound.

Sectors from the property market to the supply of utilities and the sale of basic consumer goods have been stitched up by tightly knit cartels which conspire to suppress competition and jack up prices.

Only in the telecommunications and broadcasting markets are consumers protected by law. The result is some of the cheapest and most efficient telecoms services in the world.

The cost of this carve-up is impossible to quantify. But comparisons with other markets suggests that bid-rigging on government contracts alone costs the city hundreds of millions of Hong Kong dollars every year.

But the true cost to the economy is far, far higher. It's not simply that consumers are being ripped off left, right and centre. The real problem is that by conspiring to keep prices high, many businesses operating in Hong Kong are able to sit back and collect the rent that flows from their privileged position.

That removes their incentive to innovate, and without innovation there is no genuine wealth creation. Rent-collecting doesn't create wealth, it merely redistributes it, often from the less well off to the grossly wealthy.

The new competition law was intended to solve the problem by encouraging enterprise and fostering innovation.

But the bill has faced staunch opposition from Hong Kong's entrenched business interests, who see the proposed law as a threat to their easy livelihood.

Some of the most effective resistance has been mounted by the representatives of the city's small companies, who have argued that competition is already intense in the sector, and that compliance with the new rules would harm business.

Both arguments are misleading. Anti-competitive practices are just as common in markets dominated by large numbers of small companies as they are in sectors controlled by a handful of giant incumbents.

There are hundreds of small flower-sellers in Hong Kong, but that doesn't stop them ganging up to fix their prices. The same goes for driving instructors.

Nor is it true that subjecting small companies to competition rules will harm business. It may well harm individual businesses; those that are unable to compete in a free market. But dismantling anti-competitive barriers will spur innovation and enterprise, which is good for business as a whole, and great for customers.

On the other hand, the government's notion of setting a turnover hurdle, below which companies will be exempt from complying with the new rules, is clearly damaging. It will simply deter businesspeople from growing their companies.

Worse, the government's craven agreement to dilute the competition bill was unnecessary.

If officials had only made the effort to broadcast the benefits of a competition law to consumers, they could surely have rallied enough popular support to overcome Legislative Council opposition from entrenched business interests.

By watering down the bill, the government has done no favours either to Hong Kong's people or its economy.