The Important Role of Competition Authorities in Promoting Competitive Neutrality

By: Jordi Calvet Bademunt & Sophie Flaherty (OECD On The Level)

“Competitive neutrality” is defined by the OECD as a principle whereby all enterprises are ‘provided a level playing field with respect to a state’s (including central, regional, federal, provincial, county, or municipal levels of the state) ownership, regulation or activity in the market’. A level playing field will allow the most efficient firms with the best products to enter the market and expand, while pushing inefficient firms to exit. Competition is encouraged, meaning that resources are optimised, productivity increases and consumers enjoy the benefits of lower prices, more choice, better quality products and services, and more innovation.

Competition distortions

State intervention can distort the level playing field in a number of ways, disrupting market dynamics and softening competition by favouring some market players over others.  Examples include:

• Exemptions to competition law for specific firms or sectors may significantly undermine competitive neutrality. To ensure competitive neutrality, competition law should apply and be enforced in a non-discriminatory manner to all enterprises, unless overriding public policy objectives require otherwise. In addition, existing exemptions should be regularly re-assessed to see whether they are still justified and proportionate.
• Regulatory frameworks may also treat some market players (including public, private, domestic, and foreign enterprises) differently to others, either because they are not applicable to all competitors or because they provide for selective exemptions for certain requirements. Competitive neutrality requires that all enterprises competing in a market are subject to the same regulatory requirements, irrespective of their ownership, nationality or legal form.
• Public procurement. Legislation and tender terms may establish requirements or processes that favour specific types of companies, like state-owned enterprises (SOEs) or domestic businesses, over others. Where measures are adopted to support certain companies (such as small and medium enterprises) on public-policy grounds, they should be carefully considered in terms of their effectiveness and their likely impact on competition.
• Public support measures are financial advantages provided by the state to enterprises, which may selectively favour certain firms, giving them a competitive advantage in the market over competitors. To preserve competitive neutrality, competition impacts should be considered in the design and granting of public support measures.
• Rules determining the grant of exclusive and special rights, specifically for the provision of public services may give some enterprises undue advantages over others and in turn distort competition. Competitive neutrality can be protected by selecting public service operators through an open, fair and transparent bidding process; adopting fair and transparent public service compensation standards; and clearly defining any exclusive right and limiting it to the fulfilment of the public service obligation…

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