Regulatory reform and competition policy

Economic Survey of France 2009: Strengthening competition to boost efficiency and employment

 

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The following OECD assessment and recommendations summarise chapter 4 of the Economic Survey of France published on 28 April 2009.

 

Contents

 

Insufficient competition is holding back productivity growth

France enjoys one of the highest hourly productivity rates among OECD countries, but productivity growth has been relatively sluggish over the last 10 years. This disappointing performance has been particularly evident in various service sectors, not only in absolute terms but also in comparison with many other countries. There is still a lack of competition in several service sectors, and this is holding back innovation, productivity and job creation, especially for less skilled workers, and severely impairing consumers’ well being by depriving them of quality goods and services at the lowest possible prices. Considerable progress has been made over the last decade in opening up various services that were previously completely or partly sheltered from competition. Yet there remain numerous barriers to entry in several sectors, including the regulated professions, due in part to self regulation mechanisms. In the retail trade, real strides have been made, but further progress is needed in areas such as commercial zoning.

 

Competition will benefit from the Competition Council’s transformation into a single Authority with expanded powers

The Economic Modernisation Act (LME) transformed the former Competition Council into an Authority with enough extended powers and increased resources to develop an authentic competition culture. For example, merger control will be placed solely under the aegis of the Authority, with the Minister of the Economy retaining the right to overrule it on grounds of public interest other than those related to competition. The Competition Authority will also have its own investigators, as well as heightened powers over staff of the Ministry who may be made available to it to assist in investigations. The Authority will also be able to issue opinions on any competition related topic at its own initiative. The strengthening of the competition policy framework and the means given to the independent Authority raise the possibility that the good results obtained, for example, in certain telecommunications sub—markets be replicated in other sectors, including in the regulated professions that are still marked by formidable barriers to entry.

 

The Royer Raffarin laws should be repealed to allow real competition in retail trade

In the retail sector, the LME relaxed the rules governing the negotiability of terms of sales between suppliers and distributors (the Galland law), in particular by removing the prohibition on discriminatory commercial practices. In addition, although the ban on “resale below cost” was maintained, its definition was amended to make it much less binding. Moreover, the LME amended the Royer Raffarin laws by raising the floor area threshold above which any new store must obtain special authorisation and by changing the composition of the licensing commission to exclude the applicant's competitors. While these reforms represent progress, the best policy in the realm of commercial zoning would be to abolish the Royer Raffarin laws outright. To the extent that these laws have heightened concentration among large scale retailers at the national level, their repeal would seem a necessary step if the reform to the Galland law is to bear fruit in terms of increasing consumer purchasing power. Applications to open large scale retail outlets should in this case be examined and decided on the basis of criteria established in the overall zoning plans without distinction as to size.

 

Barriers to entry in several regulated professions are still too high

Resume In most OECD countries, many professions are subject to a broad range of regulations (in the form of self regulation and/or of regulation imposed by the State), and some of these have a direct impact on competition. In France, barriers to entry and restrictions on professional practice most likely exceed what is necessary to protect the consumer. A number of reports based on international comparisons show that barriers to entry are needlessly high in several regulated professions related to health and beauty treatments (physiotherapists, veterinarians, pharmacists and hairdressers), as are obstacles to competition between partially substitutable professions (conventional physicians, practitioners of alternative medicine) and more generally in services to businesses and/or individuals (accountants, architects, lawyers). Greater competition in health related sectors could potentially help reduce public outlays with equivalent service quality.

While it can be difficult to pursue reforms that would do away with long entrenched entitlements, the government has in fact taken steps to foster competition in specific sectors, especially legal services. In addition, the LME introduced the status of “independent entrepreneur” (auto entrepreneur), greatly simplifying the formalities involved in creating a micro enterprise, and this could in time favour competition, especially in various personal services. Similarly, the principles of freedom of establishment and freedom to offer services that underlie the European Union's Services Directive could make it easier for foreigners to set up operations in France. For this to be the case, however, the government will have to agree with its European partners to apply the Directive as broadly as possible so as to reduce to a minimum the sectors excluded from its scope. In several areas, these changes alone will not be enough to stimulate competition as long as regulatory barriers to entry or practice are maintained. Thus, more flexible rules (e.g. minimum geographic quotas) should be substituted for the overly strict quota mechanisms currently in force in specific legal services (notaries and bailiffs), as well as in health care (pharmacists). For other professions, entry conditions should be relaxed by reconsidering the required years of study (architects, veterinarians, hairdressers). Competition could also be strengthened by facilitating access by legal and accounting firms and pharmacies to outside sources of financing.

 

A fourth mobile telephone operator should mean lower prices, benefitting consumers

Among the major network industries, telecommunications was the first whose retail markets were opened to competition (nearly 10 years ago). While there has been relatively solid progress in the development of fixed line services (telephony and broadband Internet access), within a highly competitive market, the situation is more worrisome in mobile telephone service, primarily because of the very limited success of virtual mobile network operators (VMNOs). In this context, the advent of a fourth operator will boost competition by weakening the current situation of oligopoly. Indeed, given its initially small market share, it will have an interest in making its network more profitable by offering better terms of access to the VMNOs. In that regard, awards of new frequencies should be based inter alia on a criterion of the quality of access terms offered. More generally, the regulatory authority could intervene to relax the conditions operators impose on the VMNOs, in particular as they relate to contract length, exclusivity clauses and ownership rights.

 

Regulated retail prices for electricity, which are below any new entrant’s cost of supply, limit competition

In the energy sector, an important step for competition was struck in 2007 with the complete opening of the gas and electricity markets, in compliance with European directives. Yet the historic operators still hold dominant market shares. Among the major obstacles to real competition in the retail electricity market, the greatest is no doubt the maintenance of regulated prices which reflect the low costs of French nuclear power plants and are therefore below the supply costs of any new entrant. The government introduced a new provision in 2005 whereby customers who had previously opted for market prices were allowed to revert to administered rates (the Tartam), which have been kept below market prices. It may be quite legitimate for the government to let French society enjoy the economic benefits from the “nuclear option”, but to maintain a rate below the market price – particularly for electricity intensive industrial customers – is surely not the most efficient and equitable way of doing so. This practice could in fact skew the industrial structure towards more electricity intensive production. If there is to be real competition, the Tartam should not be renewed beyond 2010. More generally, it would be well to reconsider the scope of application of regulated retail prices, at least for the non residential sector. At the same time, it will be important to pursue efforts to integrate European energy markets by facilitating the interconnection of gas and electricity networks, so as to promote the development of liquid and efficient wholesale markets.

 

Figure 4. Regulatory barriers to competition in selected professions¹
Indicator scale of 0-6 from least to most restrictive, 2008


1. No data are available for Greece, Ireland and Slovakia.
Source: OECD, PMR database.

 

How to obtain this publication

 

The complete edition of the Economic Survey of France is available from:

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.

Additional information

For further information please contact the French Desk at the OECD Economics Department at eco.survey@oecd.org

The OECD Secretariat's report was prepared by Alain de Serres and Rafal Kierzenkowski under the supervision of Peter Jarrett. Research assistance was provided by Patrizio Sicari.

 

 

 

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