The Competition Ordinance, which serves to safeguard and enhance a competitive environment for consumers and businesses in Hong Kong by prohibiting anti-competitive conduct by businesses, was enacted in 2012 and came into full effect on December 14, 2015.
The Ordinance prohibits three categories of conduct which has the object or effect of preventing, restricting or distorting competition in Hong Kong:
- The First Conduct Rule prohibits anti-competitive agreements and concerted practices by businesses, including horizontal agreements between competitors (such as cartels) and vertical agreements (such as resale price maintenance in a distribution agreement).
- The Second Conduct Rule prohibits businesses with a ‘substantial degree of market power’ from abusing that power by acting anti-competitively. Examples of potentially abusive conduct include predatory pricing, refusal to deal and exclusivity arrangements.
- The Merger Rule prohibits mergers which have or are likely to have the effect of substantially lessening competition in Hong Kong. Unlike merger control regimes in other jurisdictions, the Merger Rule applies only to mergers involving a telecommunications carrier license.
The First and Second Conduct Rules are particularly relevant to the construction industry in Hong Kong which has traditionally been localised and concentrated. This article sets out 10 points to note for employers and contractors in the construction industry.
01 | Collective negotiations
The Ordinance prohibits undertakings (the tenderers in this case) from engaging in a concerted practice if the practice has the object or effect of harming competition in Hong Kong. Exceptions can be made where the practice can be shown to entail economic efficiencies and enhance overall economic efficiency, result in significant cost savings and synergies and/or economies of scale or scope, or improvements in quality.
Collective negotiations raise significant risks as they give rise to the opportunity to exchange competitively sensitive information at meetings or discussions between tenderers (particularly at trade association meetings). In some instances, collective action by the tenderers and/or the association may also amount to a group boycott where there is an agreement or concerted practice not to do business with the tender offeror, or only to do business on the basis of unreasonable terms.
02 | Sharing of historic pricing information
The exchange of information is prohibited if it has the object or effect of harming competition, unless it can be shown that the exchange enhances overall economic efficiency and entails pro-competitive benefits. Conduct may be taken as having an anti-competitive object or effect if it reduces or may reduce uncertainty regarding one or more parameters of competition in the market, such as price, components of price, costs, output, bid terms and conditions, information regarding customer preferences, new products, and strategic or investment plans.
In general, the following information can be exchanged without risk:
- historical, aggregated and anonymized data
- information relating to health, safety and security
- general market research or broad industry trends
- information which relate to technical or operational aspects, productivity or performance levels
- service quality measures.
There is no pre-determined threshold as to when data becomes old enough so as to amount to ‘historical’ data; this will depend on the specific characteristics of the market in question. The exchange of information (after a contract has been awarded/ announced/completed) may raise some risks if they reveal terms and conditions of a past, non-public tender, particularly in a concentrated market where contractors are recurrent players and may influence the parties’ market conduct for similar future contracts.
For government and MTR projects, the gathering of publicly available information, (i.e. information that is equally accessible to all competitors and customers) from parties that are not competitors, or from public sources (such as independent third parties or government sources) will be unlikely to result in a contravention of the Ordinance.
Contractors should be aware that job references and past tender scores (which are commonly adopted for government tenders) would be treated in the same way as pricing information for the purposes of exchange of information.
03 | Coordinated activities among entities within the same group
The First Conduct Rule does not apply to conduct involving two or more entities if they form part of a ‘single undertaking’. Whether the relevant entities constitute a single economic unit is assessed based on the facts.
A parent and a subsidiary will form a single undertaking if the subsidiary (although a separate legal entity) does not enjoy economic independence and does not freely determine its own conduct or strategy on the market. If the subsidiary is wholly-owned, it is straightforward to establish a single undertaking.
For joint ventures, whether it forms a single undertaking with one of its parent companies will depend on whether and which shareholder has the ability to give instructions to control its market conduct. The relevant factors are who holds the majority of voting rights and who has management control rights, including board representation and approval of matters essential to the joint venture’s commercial operations (i.e. mainly with respect to any decisions approving (a) the adoption of business plans; (b) the adoption of the annual budget; (c) the appointment of senior management; and (d) operational expenditure and capital expenditure). If there is only one shareholder with the ability to exercise all of these rights, then there is a single undertaking. If control is shared, then the joint venture is seen as a separate undertaking.
Consequently, if it can be shown that a holding company exercises control over its subsidiaries, the subsidiaries will not be considered as separate undertakings and any coordination between them will not be subject to the First Conduct Rule.
Notwithstanding the above, as a matter of good practice and to comply with the terms of a tender, certain entities forming part of the same conglomerate, particularly in a public procurement context should, as a matter of prudence, be disclosed to tender offerors.
04 | Formation of JVs among contractors
Joint bidding is a common practice and is considered legitimate under competition law where tenderers/ bidders pool their resources to bid for projects or work they would be unable to perform individually. Aside from a lack of resources, there are many other commercial reasons that will be considered legitimate (for example portfolio diversification, reliance of a party’s particular expertise, etc.).
Where parties decide to form a bidding consortium, they would need to ensure that any competitively sensitive information shared is strictly confined to the scope of and does not extend to persons outside of the joint venture such that it is not used as a vehicle for exchanging competitively sensitive information.
In extreme cases where joint bidding would have the effect of reducing the number of potential tenderers/bidders in an already concentrated market, the conduct of joint bidding may raise some risks under the Ordinance. In a market where there are many players, the risks are limited (even if for a specific bid, there are only very few tenderers/bidders).
05 | Pre-bid agreements for subcontacting to JV partners
As explained above, joint bidding is a common practice and is considered legitimate under competition law where tenderers/bidders pool their resources to bid for projects or work they would be unable to perform individually.
If, however, instead of submitting a joint bid, each party is able to perform the project or work individually but choose to agree amongst themselves that only one of them will submit a bid (while the other submits a cover bid or does not submit a bid at all), with the understanding that the other would be sub-contracted a portion of the works if either party wins, then this conduct may amount to bid-rigging in contravention of the Ordinance.
Conversely, if upon receiving a request for proposal, the parties submit independent bids but agree that if either one wins the bid, a portion of the works would be sub-contracted to the other party, then in this scenario, competition law risks will be more limited.
In either of the above scenario, A and B should limit the sharing of competitively sensitive information, particularly with respect to their respective bid prices if A and B are to submit separate bids.
As a matter of prudence, the fact that two parties will be entering into a joint venture in response to a RFP should always be disclosed to the tender offeror. The fact that initiatives to enter into sub-contracting arrangements are driven by a customer or on their request also provides additional comfort to the legitimacy of these arrangements.
06 | Market-sounding exercises
While market-sounding exercises to gauge another competitor’s appetite for contracts will unlikely raise competition law risks, these discussions may fall foul of competition law where they pertain to specific transactions, particularly during the tendering stage or in anticipation of a tender.
Direct exchanges of planned prices or pricing strategy between competitors (including in trade association meetings) should be avoided irrespective of the context in which such exchange of information take place or the exact mode of communication and even if they are initiated or driven by the government.
In contrast, where competitively sensitive information (such as prices, components of price and costs) is collected by (or discussed with) an independent third party such as the government, an academic institution or trade association for market survey or research purposes and distributed to individual competitors in an aggregated and anonymized manner, risks of contravening the Ordinance are limited. For a trade association to qualify as an independent third party for information collection purposes, it should have its own resources and be staffed with independent personnel in order to ensure that independent members do not have ready accessibility to the competitively sensitive information collected.
07 | Pre-tender discussions between employers/ consultants and contractors
The exchange of market intelligence about industry trends or with a view to promote technical or operational efficiency, productivity, performance or service quality does not generally raise competition law risks. The fact that initiatives to enter into discussions are driven by a customer or on their request also provides additional comfort to the legitimacy of these exchanges.
08 | Discriminatory conduct by related sub-contractors
Although discriminatory conduct is not expressly addressed in the latest Guidelines published by the Competition Commission, it may be caught under the Second Conduct Rule as amounting to ‘predatory behaviour’.
In overseas legislation, the prohibition on discrimination serves two purposes:
- To ensure that a tender offeror with a substantial degree of market power cannot discriminate amongst subcontractors when doing so leads to the exclusion of competitors from the market (known as ‘foreclosure’).
- To ensure that a tender offeror with a substantial degree of market power cannot discriminate amongst subcontractors when doing so creates a competitive disadvantage between its sub-contractors.
Although it remains unclear whether discriminatory conduct will be an enforcement priority for the Competition Commission, the Ordinance provides for scope to ensure that conduct resulting in foreclosure may be challenged under the Ordinance. However contravention should be unlikely unless the contractor in question holds a substantial degree of market power and the conduct in question has the object or effect of resulting in foreclosure.
09 | Exclusive agreements with crucial consultants, subcontractors or suppliers for risk management and price competitiveness
As regards pre-bid agreements for the purpose of forming a bidding consortium, please refer to point 5 above.
According to the latest Guidelines published by the Competition Commission exclusivity agreements will not generally be considered to have the object of harming competition. Instead, the Commission will conduct an analysis of their effects or likely effects on competition in the relevant market, having regard to whether or not such agreements are common in the relevant market, as well as the scope and duration of the exclusivity.
Exclusivities of a duration of less than five years between parties which have modest market power in their respective markets do not generally raise competition law concerns.
Practices which fall short of outright exclusivity, such as right of first refusal clauses, are subject to the same assessment discussed above.
10 | Discussions with subcontractors/suppliers/ consultants regarding the lowest price amongst various quotations or an indicative budgetary/target price
The gathering of market intelligence about a competitor’s conduct from third party sources that are not competing at the same level of the supply chain does not generally give rise to competition law risks where that intelligence is gathered in the course of regular commercial negotiations, even if the information relates to pricing or business plans.
However, in rare cases, competition law risks cannot be excluded where a third party acts as an intermediary to communicate with a competitor for the purpose of circumventing the prohibition against direct information exchanges among competitors.
In its capacity as a customer, disclosures to sub-contractors/suppliers/consultants regarding pricing information will be unlikely to raise competition law risks unless the contractor is acting as an intermediary assisting the exchanges of information between its sub-contractors/ suppliers/consultants.