Methodology for Evaluating Economy-Wide Concentration
In December 2013 the Knesset (the Israeli Parliament) enacted the Law for Promotion of Competition and Reduction of Concentration, 5774-2013 (hereinafter: "the Law" or "the Concentration Law"). The Law attempts to deal, for the first time in the Israeli economy, with the concentration phenomenon in the market and provides creative, innovative and ground breaking solutions regarding the economy-wide concentration phenomenon.
In the past few decades, the Israeli economy has been changing from an economy that is controlled and managed by the state, to a market economy in which the state's part is reduced to essential holdings and supervision and regulation of private entities operating within the economy. This has been a prolonged and gradual process, with ups and downs, but with a clear and unambiguous direction. In order to ensure the success of this long process of development of the Israeli economy into an open, advanced and modern free economy, the issue of economy-wide concentration has to be addressed. A high level of concentration of the economy leads to market distortions and failures, which undermine economic growth and the ability of the laws of free economy to advance efficiency and consumer welfare.
When dealing with economy-wide concentration, we are not dealing with the familiar worlds of competition and antitrust. The conclusions regarding the existence of economy-wide concentration is reached by observation of the entire economy and its various industries through a panoramic view. This is why the Concentration Law is so innovative.
The Concentration Law is the result of the recommendations submitted in March 2012 by the Government Committee for the Promotion of Competitiveness in the Israeli Economy, chaired by Mr. Haim Shani. The committee was of the opinion that the Israeli economy is characterized by high supra-industry concentration in comparison to other markets around the world, and aimed to increase competition and reduce economy-wide concentration by simplifying the structure of business groups and decentralizing control in the economy. The legislator has adopted the recommendations of the committee, to act with that aim in three different areas: first, the subject of this document, to regulate the allocation of state assets; second, to restructure "pyramid" structured business groups; and third, to restrict cross holdings between substantial financial bodies and substantial real (i.e. non-financial) corporations.
The goal of regulating the allocation of state assets in the Concentration Law is twofold: to reduce economy-wide concentration and to prevent the undermining of industry competition. This document deals with economy-wide concentration, in regard to which the regulator is required by the Concentration Law to consider economy-wide concentration considerations, in consultation with the Committee for the Reduction of Concentration (hereinafter: "the Committee"), when allocating rights in essential infrastructures to a corporation identified by the committee as a concentrated entity, provided that consumer welfare is not significantly undermined.
The Concentration Law does not lay a methodological basis for the identification and measurement of economy-wide concentration, nor does it offer practical tools for evaluating the effects of allocating essential infrastructures to concentrated entities on economy-wide concentration. Since this is a new area of regulatory action, previously scarcely mentioned also in academic writing, no structured theories exist which may be relied upon.
The Committee for the Reduction of Concentration was established under the Concentration Law in December 2014. In the beginning, considering the preliminary nature of the subject, the Committee regarded it prudent to limit itself to establishing general principles for evaluating economy-wide concentration. Now, after two years of activity, and the accumulation of opinions regarding various allocations, it seems the time has come to establish a more encompassing methodology.
This document is intended to serve as a guideline for the judgment of the Committee when called to consult the regulator regarding the allocation of rights, in order to secure two main goals: first, to make correct decisions with regards to the aim and spirit of the Law – to reduce economy-wide concentration and its negative market effects, while allowing the allocation of rights to concentrated entities when such allocation may benefit the industry and the economy; and second, to increase certainty and transparency regarding the considerations of the Committee, as required by the principles of administrative law. These goals shall of course serve the Committee, but are also expected to benefit the regulators when considering economy-wide concentration as required by the Law, as well as business companies in planning their business conduct.
As the Law is greatly innovative, great precaution is required also in its application. An uninhibited and uncontrolled use of economy-wide concentration considerations in order to prevent entities from obtaining rights and licenses or purchasing state assets, even when such entities are considered concentrated entities, may be a double-edged sword and hinder market growth and development. Nevertheless, we must remember that the benefits of allocating rights to a concentrated entity may be visible in the short-term and accurately measured, while future damages due to increasing economy-wide concentration may be visible only in the long-term and far more obscured. This document aims to offer tools to deal with this difficulty, in order to assist policy makers in making proper use of economy-wide concentration considerations when allocating state assets.
The methodology is based on the reasoning specified in the draft of the recommendations of the Committee for the Promotion of Competitiveness in the Israeli Economy (hereinafter: "the Interim Report"), the explanatory notes of the Law, the decisions of the Committee received so far and relevant academic writings. It goes without saying that over time, as the Committee (or case law) gain more experience, and as further academic writings become available, the suggested methodology may be further updated and developed. Thus, for example, the Research Division of the Bank of Israel is conducting a study, with the aim of developing a model for evaluating the influence of firms and business groups on concentration in the Israeli economy and creating an index for such concentration. When the results of this study are published, they may affect the methodologies discussed in this document.
The document's roadmap is as follows: first, we shall examine the term "economy-wide concentration". We shall see that it relates to the acquisition of bargaining power towards policy makers, and examine the problems involved with such bargaining power (Chapter B). We shall continue by presenting parameters for measuring the bargaining power of concentrated entities (Chapter C), as well as guidelines for evaluating the effect of allocating an essential infrastructure to a concentrated entity on the scope of economy-wide concentration, and identifying allocations which may be justifiably prevented (Chapter D). Finally, we shall examine ways in which consumer welfare may be negatively impacted as a result of preventing allocation to a concentrated entity (Chapter E), and present the balance that the Committee will make, between the concern of increasing economy-wide concentration and the possibility of undermining consumer welfare due to the prevention of an allocation (Chapter F).
All emphases in quoted texts were added by the authors of this document.
2. What is Economy-Wide Concentration?
Economy-wide concentration is a phenomenon where many substantial assets are held by a small number of players. This is how it is described on p. 1084 of the Explanatory Notes:
"The Israeli economy is characterized by excess supra-industry concentration in comparison to other markets around the world. This concentration is manifested, among other things, in the small number of business persons who control a large portion of real and financial assets in the market".
The economy-wide concentration considerations which are the subject of this methodology are different than the considerations of industry specific competition usually examined under the laws of competition and antitrust, in two aspects: (1) the source of the ability to assert harmful influence, that is not derived from market power as defined in the world of antitrust, but from the bargaining power of a player towards decision makers; (2) the type of possible harmful influence, which harms the general public interest rather than the competition alone. As we shall see, when considerations that are not related to market specific competition are involved in one or both of these aspects, the potential damage of the allocation will be considered under the economy-wide concentration considerations.
More specifically, the allocation of rights in essential infrastructures to concentrated entities may give rise to various concerns: it may harm competition in the market in which such allocation takes place, if the allocation gives the concentrated entity market power in the market or creates conditions for collusion between players. Generally, since this concern falls within the area of market competition, it should be discussed as part of the consultation with the General Director of the Antitrust Authority regarding industry-specific competition considerations in allocating rights. Another concern is that competition may be restricted due to multi-market contact. Multi-market contact occurs when players meet in a number of active areas and these meetings may influence the patterns of competitive behavior in these markets: they may incentivize players not to engage in intensive competition in market A – or to completely refrain from entering the field – for fear of severe repercussions in market B. However, since this is also related to competitive effects of players in the markets in which they operate, the Committee believes that this issue should be examined, if found relevant, as part of an industry-specific competition examination.
Contrary to the above concerns, the central concern regarding economy-wide concentration is the assertion of bargaining power towards decision makers, both on the regulatory level (professional regulators) and on the political level (Knesset and government members). For the sake of convenience, both shall be referred to in this document as "policy makers".
The concern of power and influence allowed by holdings in concentrated entities towards the state was at the basis of the considerations of the Committee for the Promotion of Competitiveness in the Israeli Economy. Page 215 of the Committee's Interim Report specifies:
"The concentration of ownership in essential infrastructures may have far reaching long term implications on public welfare. Thus, for example, the fact that few private entities hold a substantial part of an essential infrastructure may, under certain conditions, provide such entities with excessive bargaining power and influence towards the state, not necessarily in regard to the allocation of the rights, but after such allocation. Such a substantial holding may be used as leverage to acquire greater power in other markets, including non-economic power".
Such bargaining power refers to the ability to influence policy makers, so that various decisions related to the area in which a player operates are made to the benefit of such a player, at the expense of public interest. Public interest may be undermined in different ways. Thus, for example, a player operating in the area of infrastructures may act to promote more lenient environmental legislation or planning and construction legislation with a negative impact on the welfare of local residents. Another player may obtain excessive tax benefits, affecting the state's tax revenues. In such situations, even if all the players in an industry benefit, public interest may not.
In other cases, a player with bargaining power may act to introduce regulation that benefits him over other players in an industry, for example, by establishing standards that give an advantage to its products or obtaining special grants from the state. Regulation that provides advantages to a single player over other players, regardless of economic efficiency, undermines the industry's competitive dynamics and violates the principles of equality and fairness.
Such bargaining power may be the result of various scenarios, in which the process of decision making by policy makers is influenced: thus, bargaining power may be the result of "regulatory capture" in the interface between a player and a policy maker; in other cases the bargaining power may be the result of holdings in an essential infrastructure by a player, where the very fear of its cessation or interference with its operation exerts pressure on decision makers ; bargaining power may also be obtained when a player is perceived by a policy maker as "too big" or "too important to fail", due to its macro-economic influence; and bargaining power may be the result of substantial holdings in the media industry and the ability to influence public opinion, which in turn influences policy makers.
The theory of regulatory capture refers to a situation where the decisions of policy makers are biased to the benefit of its "captor". This bias may be at the expense of the interests of other players in the industry or the interests of the public at large. It should be emphasized that this is not necessarily a scenario of corruption, and such bias may also be unconscious. The closer a certain player is to a policy maker, the more biased such policy maker may be when making decisions, giving more weight to the interests of such player and less to the interests of other firms and the public.
Bias may be the result, among other things, of information gaps between policy makers and players operating in the market, causing decisions to be based on partial or deliberate information provided by players with access to the policy makers. Frequent meetings between policy makers and players may also lead policy makers to accept the views of such players regarding the industry, and to mistake the interests of such players as the interests of the public.
This bias may be even greater since the public is often unaware of the actions considered by policy makers, and therefore cannot express any objection. To this, one should add the fact that it is harder for the public, and less worthwhile, to get organize and make its voice heard, among other reasons since the cost is carried by few individuals and the benefits are gained by many, while benefits for the firms are gained by them alone, and therefore more beneficial for them.
Bargaining power may also be the result of holdings in an essential infrastructure. The very fear of the cessation or interference with the operation of an infrastructure that is essential to the regular operation of the economy, exerts pressure on decision makers to comply with the demands of the holders of such infrastructure. This fear is often called "switching off", referring to the image of turning off a switch in a power station. It is not necessary for such a threat to be realized in the future, or if it has been realized in the past. Sometimes, the opposite is true: the fact that the existence of the threat alone is enough to exert pressure and achieve the required goals, shows how powerful this threat can be. Essential infrastructures are described on page 214 of the Interim Report as follows:
""An essential infrastructure" is a fundamental infrastructure with public characteristics, relevant to the entire public or to a large portion thereof, whose regular operation is essential for the public in Israel. These are infrastructures that are used to provide the public with the essential services required to maintain ordinary life. In some cases, these are consumable or limited resources. For most of the services, specified in Supplement 5.1 of this document, the government found that public interest justifies regulation, to protect public interests, among which are regular supply and service quality".
The theory of a player who is too big to fail is usually used in reference to the stability of the financial system. The concern is that a financial firm may, due to its size and the interactions between its activities and other industries in the market, distort the process of decision making by the regulatory system, because of the systemic risk posed by its fall or weakness to the financial system as a whole. In this case, the policy maker is motivated to assist the firm not because of a desire to save the firm, but in order to prevent the negative impact of its collapse on the market.
This type of fear is described on page 1091 of the Explanatory Noteswithin a wider context, beyond its impact on the stability of the financial system:
"In the context of allocation of assets and rights, the issue of concentration has an additional aspect related to bodies whose activity is responsible for a large portion of the GDP in Israel. The concern is that an excessive growth of such bodies due to the allocation of additional assets and rights by the state, may turn them into bodies that are "too big to fail". In other words, a situation may arise, in which such bodies, once allocated additional state assets, can distort the process of decision making in the regulatory and financial systems because of the systemic risk their failure poses to the economy".
Similarly, there may be bodies that are "too important to fail", in the sense that any failure in their operations may have repercussions on the macro-economic level. Thus, for example, a company that is situated at a central intersection influencing important downstream markets.
Pressure may also be exerted over policy makers through holdings in the media. Such holdings have been identified by the legislator as impactful regarding economy-wide concentration. See, for example, page 1091 of the Explanatory Notes:
"Control of a daily national newspaper is equal in its public importance to holdings in an essential infrastructure. The allocation of rights in an essential infrastructure to such an entity is therefore a source of concern regarding economy-wide concentration".
And indeed, studies in political economy find a correlation between what is reported in the media and what is discussed by decision makers. These studies suggest that news media is the main source of public information regarding state decisions, as the public is less informed regarding political processes and state decisions. Being the main supplier of information to the public regarding the actions of the government, the media can also greatly influence public agenda by choosing what to report – and what not to report – and by the way it presents certain issues.
At the same time, similar to the model of a "captured regulator", academic literature also describes a situation of a "captured media", which promotes regulations that benefit certain groups at the expense of others, by manipulating the news it is reporting. The media may be captivated by the government or by interest groups wishing to influence public opinion. The literature also provides support for the fact that the owners of media bodies influence the news content of the bodies they own, in a way that serves their interests. The economic model of media bodies whose main source of income is advertisement, may give power to large advertisers, due to fear of harming the advertising budget, which is essential for such media bodies. Taken together, the power of media bodies, their owners and funders (media and advertisement bodies) to influence decision makers is apparent.
After identifying economy-wide concentration as the bargaining power applied towards policy makers, we shall now review the tools available to measure and evaluate the level of concentration of a relevant concentrated entity, and the effect that a specific allocation of an essential infrastructure may have on such concentration.
3. Parameters for measuring the bargaining power of a concentrated entity
The legislator has recognized that measuring economy-wide concentration requires a complex assessment, influenced by parameters which change between different allocations, according to the nature of the involved players and the relevant areas of activity:
"This consideration shall be examined in relation to the related areas of activity and their relation, since these considerations may be different for each area, among other things, depending on the structure of the area, the identity of the players operating within the area, its public and economic significance and importance, and the relation to other areas". (p. 1092 of the Explanatory Notes)
The legislator has accepted a number of indicators to identify business groups whose type of holdings and their scope may allow them to exert bargaining power, and are therefore included in the list of concentrated entities according to the Law:
"The conditions specified above are as aforesaid the minimum requirements to determine that an entity is a "concentrated entity", for the purpose of the provisions suggested in Section B. […] this is the case when a holder of rights is a financial body or a substantial real corporation in the economy, and also when an entity holds more than half of the activity in an essential infrastructure area, even if at the time such entity is not a financial body or a substantial real corporation". (p. 1089 of the Explanation)
In order to suggest additional variables to measure the bargaining power of such entities, we shall turn to academic writings regarding the aforementioned scenarios that may lead to bargaining power towards policy makers: regulatory capture, bargaining power as a result of holdings in essential infrastructures, bodies that are too big or important to fail and holdings in influential media.
Using these, we shall define three groups of variables to evaluate the given bargaining power of a player who is considered for rights allocation: (a) the essential areas of activity of the concentrated entity; (b) its macro-economic activity data; and (c) the nature of the relation between the concentrated entity and policy makers, which may provide it with regulatory-political influence, as follows:
1. Essential areas of activity:
It is assumed that the more an area of activity is essential, in the sense that its regular supply is necessary in the economy and any cessation or disruption of this supply will severely impact the economy and the public, then the player holding this activity has more bargaining power towards policy makers. The more dominant the competitive status of a company holding essential infrastructure is, as a result of the market structure and the scope of holdings of the company, the greater the bargaining power of such company and its employees. Furthermore, the more holdings such player has in different essential infrastructures, the greater his bargaining power.
In order to identify areas of activity which are considered essential areas, we shall first and foremost look at the list of essential infrastructures specified in the supplement to the Law. Certainly, not all the areas specified are equally essential; owning a quarry is not the same as operating a sea port, and therefore areas should be differentiated depending on how essential they are.
As a rule, the following areas are considered by the Concentration Committee as essential areas in the Israeli economy, the cessation or disruption of which shall have severe and immediate implications on individuals and the entire economy:
1. Production, transmission, distribution and supply of electricity;
2. Supply of drinking water and sewerage services;
3. Refining, storage, transmission and supply of fuel products;
4. Production, transmission and distribution of natural gas;
5. Landline telephony services (including internet).
In addition to the above, several other areas are identified as highly essential, since the economy is dependent on their proper and constant operation:
6. Mobile telephony services;
7. Transit infrastructures at the entry and exit points to and from Israel – international airports and international sea ports;
8. Public transportation services, including trains and busses, in and between metropolis cities.
The above list of essential infrastructures is in line with common approaches to this issue in Israel and abroad. The list has been adjusted to the characteristics of the Israeli economy, such as the legal limits to the right to strike in some sectors.
It should be emphasized that other essential infrastructures specified in the supplement to the Law are necessary for the regular activity of a modern economy, and a substantial holding in such infrastructures may also provide the holder with bargaining power, although less than with the infrastructures listed above. Thus, for example, a service that may not be essential in the short term, may become essential if activity is ceased for a long period of time, giving the holder bargaining power towards the government.
2. Macro-economic activity data:
In general, these parameters do not refer to the player's specific areas of activity, but to the data of its general economic activity. As indicators for assessing the macro-economic importance of a player, the following variables, among others, should be examined:
1. The size of the player: the size of a player is an important variable in assessing the influence of a player on his contribution to economic activity, as well as any negative impact, whether direct or indirect, on the market in case of an external upheaval affecting the player. In addition, the size of a player may influence the ease with which a player can gain non-economic advantages (by lobbying, for example) over other competitors. A player's size can be measured in several ways:
1. Absolute size, in terms of revenue, credit, etc.;
2. Relative size in comparison with other business groups in the market, as arises from different indices, for example its share of the total product or total export in the economy, its share and influence on the capital market, its share in the export from Israel, and other parameters comparing it with other corporations in the market.
2. Importance of activity to other industries: a player may sometimes be important, even if its size is not significant and it does not operate in areas of essential infrastructure. For example, a player who is positioned at a central intersection regarding downstream markets.
3. Employment scope: another variable used to assess the macro-economic importance of a player is the number of people he employs (whether directly or indirectly, as in service providers). In some cases, especially when referring to employment in specific geographical areas or in specific occupations, the effect of this variable may lie between macro-economic and regulatory-political influence, the latter examined in more detail below. In any case, in order to assess the number of employees determining the bargaining power of a player, several measurements of quantity or relative size (as specified above) may be used:
1. The number of employees out of the total number of employees in the industry;
2. The number of employees in a geographical area: in some cases a player who is not a large employer nationally, may still be significant in a specific area of importance (national security, politically or other), for example, when employment alternatives in that area are limited;
3. The distribution of employees by occupation: similarly, in some cases a player who is not a large employer nationally, may still be significant in occupations of economic or political importance.
As aforementioned, the Research Division at the Bank of Israel is currently conducting a study aimed at developing a model for evaluating the influence of firms and business groups on market concentration, and creating an index for such concentration, based on macro-economic data in various industries and the holdings of various business groups. According to the Bank of Israel, since the study is still in its preliminary stages, there are currently no findings to assist in the development of the methodology. Nevertheless, as progress is made in this study, the Committee will examine its use as a supplement to this part of the document.
3. Nature of relationship enabling regulatory influence:
A last group of parameters for measuring the bargaining power of a concentrated entity seeks to identify the type and nature of the relationship that is liable to increase the influence of a player on policy makers, and increase the concern of "regulatory capture":
1. Frequent regulatory interface: a permanent and continuous relationship between a player and a government decision maker may lead to regulatory capture. The more frequent and continuous this relationship is, the greater the concern of creating an advantage towards such policy maker. The existence of a frequent interface may have several indicators. Thus, for example, highly regulated areas may indicate a frequent interface between policy makers and players in the market, due to the need of the policy maker to develop and enforce regulation with the supervised entities. Areas where intensive lobbying is identified may also suggest frequent interface with policy makers, and an increased concern of regulatory capture.
2. Interface with many policy makers: interface between a player and a large number of policy makers may also increase the concern of regulatory capture. The experience and knowledge acquired by the player in his work with various policy makers and regulators, may assist him in dealing with additional policy makers, as well as allow him to play one policy maker against another. In other cases, for example a certain market that is concurrently regulated by different regulators, the need to exert bargaining power on several regulators may actually inhibit the exertion of power.
3. Dependency of a policy maker on a player: in case of a dependency of a policy maker on a player, such policy maker will find it difficult to replace the player with a different supplier, especially in the short term. Such dependency may occur, for example, in complex areas where information gaps lead policy makers to rely of information provided by leading players in the market, or when the performance of a player affects the success of the policy maker.
4. Holdings in media: as previously described, control or substantial holdings in media that provide the public with news and current information, can give players power towards policy makers, due to the influence of the media on public opinion and, in turn, on decision makers.
These three groups of variables will be used by the Concentration Committee to evaluate the scope of the bargaining power of concentrated entities considered for allocation of rights, as well as the bargaining power of such entities following the allocation, in order to evaluate the expected increase in economy-wide concentration as a result of the allocation of rights to such entities. Variables that cannot be identified by available data, will only be used if there are clear indications of their existence.
4. The impact of allocating essential infrastructure to a concentrated entity on economy-wide concentration
The legislator has identified that a small number of large groups control a significant portion of essential infrastructures allocated by the state, and that these groups are extremely powerful, among other reasons, due to the rights they were allocated in public assets. For this reason, the legislator required that the allocation of rights in essential infrastructures be made with considerations of economy-wide concentration. Section 5(d) of the Law explains that the object of such consideration is –
"Preventing the expansion of operations of a concentrated entity, considering the relevant areas of operation and their interrelations".
The Explanatory Notes to the Law specify that, regarding essential infrastructures, the aim of preventing the expansion of operations is to decentralize the power of holders and increase the number of players:
"The aim of economy-wide concentration considerations is to decentralize the power of holders of essential infrastructures, so that any extension of control by a holder into another essential infrastructure is made judiciously and considering all relevant implications". [p. 1085 of the Explanatory Notes]
And also –
"The aim of the arrangements suggested in Chapter B, as also suggested by the Committee for Examining Concentration in the Economy, and adopted by the government, is to reduce the expansion of these entities into additional infrastructure areas, to prevent interrelations and influence between various industries and regulators, and to promote the increase of the number of players in the area of essential infrastructures". [p. 1089 of the Explanatory Notes]
As described above, three groups of variables will be used by the Concentration Committee to evaluate the bargaining power of concentrated entities before and after the allocation of rights. Nevertheless, in order to evaluate the increase in economy-wide concentration as a result of the allocation of rights, a static estimation of the increase in concentration as a result of the allocation is not enough. A dynamic and specific examination of the impact of the allocation on the bargaining power of the concentrated entity in relevant markets is required.
There are two main ways in which the expansion of a concentrated entity into essential infrastructures could allow it to exert bargaining power following the allocation. The first is related to its ability to leverage the newly acquired bargaining power following the allocation, to existing operations in other markets. When the allocation itself provides bargaining power or significantly increases bargaining power, then it benefits any entity that wins the allocation. Therefore, in this case alternative candidates for the allocation should be considered, favoring bodies holding less bargaining power. The second relates to the ability of a player with bargaining power in other markets to use its bargaining power in the market where the allocation of rights is considered. Naturally, the potential impact in this case will also be greater the more power is held by the player before the allocation.
The ability to exert bargaining power in relevant markets (whether previous markets or the market of the allocation), is dependent on the specific characteristics of such markets: for example, in a new market, where no players exists yet, being the first player may provide a significant advantage, allowing such player to occupy a substantial market share that will make it difficult for competitors to enter the market in the future. In a young market, the first players may also influence the regulation of the market, and a player with substantial bargaining power may promote regulation that benefits players in the market, at the expense of public interest. Markets that are less familiar to the public, or heavily regulated markets, may also provide opportunities for a concentrated entity to promote regulation that is beneficial to it. On the other hand, as described above, in a market that is supervised by numerous regulators, the need to exert bargaining power over many regulators will limit the influence of concentrated entities. Similarly, in highly competitive markets with many players, or in markets that are under greater public scrutiny, the ability to exert bargaining power is limited by existence of many informed entities.
In cases where the Committee finds that an allocation is likely to increase economy-wide concentration, it will examine whether the allocation provides significant benefits to consumers that may justify such increase. This issue will be examined next.
5. The concern of jeopardizing consumer welfare
Alongside considerations of economy-wide concentration, paragraph 5(e) of the Law instructs the Committee to ensure that it does not jeopardize consumer welfare:
"The instructions of this paragraph will apply notwithstanding what is stated in any other law, and provided that the exercise of authority according to them will be in a manner that will ensure that there is no significant harm to the welfare of consumers".
Therefore, in cases where the Committee finds that an allocation is expected to increase economy-wide concentration, it is required to examine whether such allocation has any significant public benefits that justify such increase in concentration in the economy. Consumer welfare shall be examined in its broader sense, and will refer not only to price levels, but also to technological advancements, innovation, increased diversity, etc.
A negative impact on consumer welfare due to the prevention of a concentrated entity from participating in the allocation of rights, may manifest in two main ways:
1. Damaging the competitive process of licensing: preventing players from participating in a competitive allocation process naturally reduces the number of participants. This may damage the competitive allocation process, and in turn jeopardize consumer welfare. The impact on the allocation process depends on the number of remaining participants, but also on the identity of the players. For this reason, eliminating a significant player who is expected to present a competitive offer, or having a small number of participants in the competitive process, means that the absence of the concentrated entity from the tender may significantly reduce competition, and the justification for objecting to its participation will be diminished. Alternatively, the more players participate in a tender for allocation, and the more experienced and efficient these players are, the less damage to the competitive process is expected, and the more justification there is to object to the participation of a concentrated entity.
2. Benefits of entry of a concentrated entity to an industry: notwithstanding the considerations related to the increase in economy-wide concentration, in some cases, the competition in a specific market or in the entire economy may benefit from the entry of a concentrated entity into a specific industry. For example, in an industry controlled by dominant players, a large new player (a concentrated entity in the economy-wide sense) may have a better chance to encourage competition in such industry. In case of allocation of rights in a market to which entry requires extensive investments and advanced technological knowledge or international experience, the benefit of powerful and experienced players may be considered, in order to develop such market, even if such players are concentrated entities.
6. Recommendation of the committee: a balance between increased economy-wide concentration and reducing consumer welfare
In accordance with the Law, the possibility to recommend refraining from allocating rights to an entity shall be reserved to cases where the Committee is convinced that such allocation will increase economy-wide concentration, while at the same time no significant consumer benefits will be gained by such allocation.
The recommendation of the Committee shall be made with the knowledge that the attempt to balance the cost of increased economy-wide concentration with the expected benefit of allocating rights to a concentrated entity, is inherently difficult: while the damage caused by increased economy-wide concentration is usually manifested in the long term, and is hard to quantify, the benefit of allocating rights to a concentrated entity may be manifested in the short term and measured by recognized and accepted tools (such as increased income to the state from a tender, due to the entry of an efficient participant).
As with any balancing act, it must be done in accordance with the specific circumstance of each case: the greater the risk of increasing economy-wide concentration, the greater the damage to consumer welfare will have to be in order to justify the allocation of rights. And alternatively, the lower the risk of increasing economy-wide concentration, the lower the damage to consumer welfare can be in order to justify the allocation of rights.
The Explanatory Notes to the law on p. 1085 specify that in some cases the allocation should be avoided or limited, in order to prevent jeopardizing public interest:
"It should be remembered that allocating rights to private individuals is not a goal in itself, but a means of fulfilling other interests. For this reason, if the allocation of rights or assets is liable to damage the competition in a market or create an excessive concentration of rights or assets with a private entity, decision makers should avoid such allocation, postpone it, or establish limiting terms to protect the public interest".
As part of its administrative discretion, the Committee may recommend the allocation of rights to a concentrated entity, subject to limiting terms. An unconditional recommendation for or against the allocation of rights to a concentrated entity may not be in line with the Committee's commitment to the principle of proportionality. The principle of proportionality demands that any alternatives that may remove the concerns related to the allocation, and better preserve its possible benefits and the rights of the concentrated entity, be examined. Furthermore, the need to balance two different and often opposing goals – the desire to minimize economy-wide concentration on the one hand, and the desire to protect public welfare on the other – may justify a more complex solution. This is similar to how the Antitrust Authority sometimes prefers to approve a merger under limiting terms rather than object to it entirely, due to the possible benefits to the market as a result of the merger.
A solution of this kind may be to approve the participation of the concentrated entity in the allocation process, subject to some limiting conditions that minimize the risk of increased economy-wide concentration from the allocation, such as the termination of certain activities or the sale of certain assets, in order to reduce the bargaining power of the concentrated entity. In other cases, the Committee may allow a concentrated entity to participate in a tender, subject to giving preference to non-concentrated entities in the tender process. This way the potential damage to the competitive process due to preventing the concentrated entity from participating is reduced, and the concentrated entity may win the allocation only if its offer is beneficial enough to consumers, to justify the increase in economy-wide concentration.
The option to establish conditions in a specific case shall be examined, considering the purpose of the conditions and the circumstances of the allocation. In any case, such conditions shall be subject to the general considerations specified by the Antitrust Authority for selecting a remedy, including the adjustment of such remedy to the specific concerns stemming from each case, the effectiveness of supervision, the allocation of required resources, the duration of the suggested conditions and the assurance of compliance.
The purpose of this document was to present, for the first time, the methodology used by the Committee for the Reduction of Concentration in its recommendations to regulators, regarding the allocation of rights in essential infrastructures to concentrated bodies. The publication of the methodology is intended to ensure that the decisions of the Committee are in line with the Concentration Law, while increasing transparency regarding the considerations of the Committee among regulators and corporations listed on the list of concentrated entities, to which this Law applies.
The examinations of the Committee will focus on the actual concerns posed by a concentrated body with significant bargaining power, whether before or after the allocation, that may exert such power towards policy makers. Bargaining power, in this case, is used to gain advantages that are not derived from economic efficiency, while undermining public interests in the area of activity of the concentrated entity.
This methodology provides guidelines for the work of the Committee, to be used and interpreted depending on the specific circumstances of each allocation. In the words of the honorable judge Cheshin in ACD 3113/03 A. M. Parking Jerusalem (1993) Ltd. vs. the City of Jerusalem: "We must navigate our way carefully between Scylla and Charybdis". In time, the principles of analysis and decision making regarding this innovative topic may be extended and elaborated, and if necessary, adjustments of methodology may be made in the future.