Competition in Sweden 2006
Summary of the report 2006:4
Content
Summary of conclusions and assessments.................................................................4
General conclusions .........................................................................................................4
Competition promotes productivity and growth ...........................................4
High concentration levels and high entry barriers are limiting competition.........................................................................................5
Consumer mobility an important competitive factor ....................................6
Intellectual property rights and competition ..................................................7
Pros and cons of information exchange ...........................................................7
Regulatory reform and liberalisation .............................................................10
Exposing public financed services to competition .......................................11
Industry‐specific conclusions .......................................................................................13
Construction and civil engineering.................................................................13
The convenience goods trade ..........................................................................14
Energy ............................................................................................................15
Electronic communications ..............................................................................17
Retail banking ....................................................................................................19
Care of the elderly .............................................................................................20
Assessments ....................................................................................................................21
General assessments .........................................................................................21
Industry‐specific assessments..........................................................................24
4 Summary of conclusions and assessments
The mission of the Swedish Competition Authority has been to provide a report that gives a
broad picture of competition in Sweden, focusing in particular on areas of economic
importance to consumers.
The report examines the problems regarding competition that in the Competition
Authority’s view require special analysis in the quest for greater market efficiency and
consumer benefit. In previous reports, the Competition Authority has put forward proposals
aimed at enhancing efficiency from a socio-economic point of view, e.g. in its report,
Competition in Sweden 2005.
Below, we present both the general and the industry-specific conclusions drawn in the
report, and end by setting out our assessments and recommendations for boosting both
competition and consumer benefit.
General conclusions
Competition promotes productivity and growth
Any assessment of Sweden’s economic development is dependent on the criteria applied, on
the period studied and on the countries compared. Economic growth in Sweden as compared
with that of other countries has varied considerably between periods. During the 1960s,
growth was high in many parts of the world, including Sweden, where conditions for growth
were particularly favourable. During the period 2001-2005, too, the growth rate was
relatively high in Sweden, at least compared with the EU15.
Expressed simply, there are two ways of promoting economic growth in a country: by
working more hours or by producing more per hour worked. By European standards,
productivity growth in Sweden has been high in recent years. If the two principal
components determining economic growth – changes in total worktime input and growth in
productivity – are studied separately, we find that the high rate of Swedish growth in recent
years is largely explained by greater productivity.
Weak competition in certain specific industries is militating against improvements in
productivity and thus against economic growth as well. By comparison with other
industries, for instance, the construction and civil engineering industry shows little growth
in productivity, due amongst other factors to limited import competition.
It is estimated that public purchasing accounts for about a third of the public sector’s costs.
To encourage competition, the procurement process must be conducted in an appropriate
manner. The Public Procurement Act, therefore, is an essential part of the competition
policy framework. One problem of note is that there are no effective sanctions for dealing
with infringements of the rules, for instance in cases involving unlawful direct procurement.
It is also important to ensure that publicly owned actors do not unlawfully compete with
5 private enterprise, e.g. by subsidising activities out of tax revenues or operating in ways that
are incompatible with the principles established in the Local Government Act.
Since the late 1990s, the inflation rate in Sweden has been lower than the EU average. One
probable explanation for this is that in the long run implementation of the EU’s internal
market causes price levels in the various member states to converge, and as the Swedish
price level is higher than the EU average, inflation in Sweden is likely to be lower in the
long term.
Overall, the present report shows that economic development in Sweden has been relatively
favourable in recent years. As competitive pressure in an economy affects prices,
productivity and economic growth alike, it is clear that efficient competition is an important
part of a country’s economic policy.
High concentration levels and high entry barriers are limiting
competition
Open, competitive markets promote market efficiency by improving resource allocation in
the economy. But competition also causes business leaders to take steps to boost costeffectiveness in their companies. Such effects are generally called static efficiency gains.
Open and efficient markets also generate dynamic efficiency gains in the form of
innovations, and it is often new companies that are active in developing products. Obstacles
to market entry, therefore, may have a disastrous effect on productivity growth in a
economy.
The report shows that many parts of the Swedish business sector are characterised by high
levels of concentration and oligopolistic competition. In several industries, the four largest
companies or chains account for at least 80 per cent of total domestic sales while at the same
time imports are limited. High concentration often – but not always – co-varies with high
prices and profits, which is a sign of inadequate competition, at least in the long term. This
need not be the case, however, in the short term.
A high level of market concentration facilitates anti-competitive horizontal agreements. The
larger a market share a company possesses, the less interested it is in deviating from a price
agreement, as it would then be more likely to ‘harm itself’ through the price cut.
Conversely, the ‘harm’ to the company is less the smaller the company’s market share. A
cartel can only operate if the companies involved are able to monitor (and in various ways
punish) one another to ensure that the agreement is complied with. As it is easier to detect
price cuts in a market comprising only a small number of companies, there is much to
suggest that anti-competitive agreements can be sustained for long periods there.
As noted in the report, the construction and civil engineering industry displays a number of
the special characteristics that heighten the risk of unlawful anti-competitive agreements
(cartels) developing and persisting over time. Oligopolies are one factor. Another is the
prevalence of competitive bidding, which makes horizontal agreements easier. Legal
proceedings have been instituted against a number of suspected cartels in various courts.
6 One example concerns what is termed the ‘asphalt cartel’, the plaintiff in the most farreaching competition case yet seen in Sweden.
In principle, entry barriers are present in all industries, although these may be of greater or
lesser significance. There are different kinds of entry barriers. In industries where a high
level of technical expertise is required, new companies often need an extensive ‘learning
period’, which means established companies are placed in a more favourable position. Even
in industries where no great technical expertise is required, it may take time to establish the
supply and distribution network of contacts that a company needs if it is to compete. In
some markets, extensive mechanical investments may be required before a company can
begin operating and competing. If these machines depreciate rapidly and later perhaps
become completely worthless in the second-hand market, the company’s prospects for
market entry are reduced. In some industries, extensive marketing is essential if a company
wants to enter and compete. Marketing costs are partially ‘sunk costs’. They do not yield
any financial returns when production ceases. In cases where these costs are high, the
incentive for business startups is reduced. One industry in which the marketing costs are
fairly substantial relative to sales is ice-cream manufacture.
The costs of market exit also affect entry incentives. These may involve redundancy
payments to staff or costs for remedying or preventing negative environmental impact.
Industries with significant exit costs include electricity, gas and district heating supply and
the petroleum industry. Significant costs for market exit definitely have a constraining effect
on startups.
The report notes that there are numerous industries in which few companies are capable of
competing at national level. Often, significant entry or exit costs are a distinguishing feature
of such industries. Examples here, besides the construction and civil engineering industry,
include sugar manufacture and the manufacture of cement.
Consumer mobility an important competitive factor
No market can work well without active consumers. It is important to ensure that consumers
have enough information about the properties and prices of the various products. Wellinformed consumers are better placed to influence production and improve the workings of
the market.
Collecting the information needed to compare prices and terms between companies can be
both time-consuming and expensive. The rapid technical advances that have taken place in
the IT and Internet sectors, however, have significantly improved consumers’ chances of
making relevant price and quality comparisons, and can thus be expected to promote greater
competition in markets.
Nor should it be difficult or expensive to switch supplier. Switching costs are to be found in
virtually all industries, although these may be of greater or lesser significance. When such
costs are substantial, there is little incentive to switch supplier. Switching costs may also
make market entry more difficult and thus limit competition.
7 Markets that are characterised by a lack of consumer mobility include the electricity market
and the market for retail banking. Measures that make consumers more price-sensitive need
to be introduced in both these markets. Proposals for such measures are outlined bellow.
Intellectual property rights and competition
The importance of intellectual property rights has grown in recent years. Swedish
competition law cannot intervene in these rights per se, but only consider how they are
exercised. Conflicts focusing on how broadly defined an intellectual property right should
be as against what is permissible under the competition rules are expected to increase in the
future.
Examination of legal cases in this field gives an indication of when mandatory licensing
may be required. One important case likely to clarify the situation as regards enforcement is
the one brought by the European Commission against Microsoft, who refused to license the
interface information needed by other software manufacturers wishing to make their
operative systems inter-operational with Microsoft’s products. The final outcome of this
case will shed light on the question of where intellectual property rights and competition law
may be said to intersect.
In each individual case, a static view of competition must be weighed against dynamic
efficiency as a more long-term interest. The protection provided by intellectual property
rights is one of the factors that enables dynamic competition. However, empirical studies
show that the liberalisation of product markets is a more effective way of promoting
innovation than strengthening patent protection. This suggests that further liberalisation and
regulatory reform of certain markets is the best way forward.
Given the findings of this report, there is reason to consider cases where intellectual
property rights are used as a means of reducing competition rather than of protecting
welfare-enhancing investments. Here is an important task both for the authorities charged
with safeguarding competition and for those charged with supervising and enforcing the law
on intellectual property rights. It is also important to ensure that the protective systems in
this field do not per se, through their scale and scope, harm consumer interests.
Pros and cons of information exchange
Information exchange with adverse effects
As noted in the report, cartels are to the detriment of both consumers and market efficiency.
The welfare loss involved is a lower level of production and consumption than is desirable
from a socio-economic point of view. Also, losses in dynamic efficiency may arise since
companies have less incentive to develop their products than would be the case in a
competitive situation. In addition, cartel collusion may help inefficient companies remain in
the market for longer than would otherwise have been the case.
8 Exchanges of information are essential to the long-term survival of a cartel. When only a
small number of companies are involved, and the products offered are similar in kind, it is
easier for the companies to agree on prices or on how much each of them is to produce.
When there are a large number of companies and it is difficult for them to coordinate their
activities, a joint organisation may reduce their intercommunication costs and thereby solve
the coordination problem.
Exchanges of information have occurred in a number of specific cartels studied by
Levenstein and Suslov. Much of the companies’ direct communication was informal and
comprised telephone conversations, correspondence via letters and fax messages, and
conversations at meetings. There was also communication of a more systematic kind,
involving regular gathering of information that was then processed and distributed among
the cartel members. To a certain extent, the frequency and volume of the information
gathered depended on which industry the cartel was operating in. In the cases studied,
information was gathered on a monthly basis, and follow-ups and discussions took place
several times a year.
Of the cartels studied by Levenstein and Suslov, one trade organisation was involved in a
third of the cases. In a quarter of the cartels, the trade organisations played an active part,
and in a fifth they acted as a cover for the cartel meetings. In the case of Zinc Phosphate
(2001), a trade organisation gathered company-specific information by the month and then
distributed it perfectly legally to its members in aggregated form. When the members
subsequently met, they gave one another details of individual sales volumes that could then
be confirmed via the aggregated information.
According to the economic research literature, exchanges of company-specific information
are viewed more seriously from a competition viewpoint than exchanges of aggregated
information. This is because company-specific information can facilitate the formation of
unlawful cartels as it helps participants to monitor one another in order to ensure compliance
with the cartel agreement. But aggregated information, too, when combined with companyspecific information, can help companies collaborate with one another. The conclusion to be
drawn from this is that only information that clearly paves the way for anti-competitive
agreements while at the same time being unlikely to generate efficiency gains should be
subject to restriction.
Information exchange, however, may have harmful economic effects even when it does not
occur within a cartel. For instance, there are strong arguments in support of the belief that
competition is limited in oligopolistic markets when companies manufacture similar
products and cost conditions are very similar. In such cases, the companies are deeply
dependent on one another and take this into consideration in their decision-making. One or
more companies may, for instance, give advance notification of price rises or of reduced
production at a certain point in time, and such an announcement may be regarded as a signal
that an agreement is being sought. This takes the form of tacit collusion, and the aim is to
thereby achieve higher profits than would otherwise be the case were the companies to
compete with one another. Examples of industries where such practices occur include the
fuel market (petrol and diesel prices) and the market for electrical power production.
9 Information exchange with positive effects
When information are not used to keep a cartel together, exchanges of information may
have positive effects for both companies and consumers. Companies may benefit from
information about market conditions, demand, capacity levels in a given industry and
competitors’ investment levels. This information can help them reach efficient production
and investment decisions. When technological knowledge and information is disseminated,
additional companies are given the opportunity to operate in the market, which in turn may
boost supply and reduce prices; in addition, consumers may then have a more varied range
of products at their disposal. For consumers, information exchange can also lead to greater
market transparency. When the information is generally accessible, consumers benefit
through gaining added insight into both prices and product availability. Their search costs
are reduced and consumption decisions become easier. Economic theory holds that the more
information that consumers possess about market conditions, the greater the prospect of
efficient competition.
Information exchange and case-law
The research literature has focused on the question of whether there are situations in which
information exchange between companies may in itself constitute an infringement of current
legislation. As shown above, a link may be established between exchanges of information
and anti-competitive cartels, but as information exchange can also have favourable effects,
not all forms of it should be prohibited.
The impact of information exchange depends on the specific conditions prevailing in a
market. It is impossible, therefore, by the application of a few simple rules, to separate
information that is neutral or even beneficial from that which is harmful to competition, e.g.
that which promotes the development of anti-competitive collaboration. The European
Commission has noted that in certain situations information exchange may be beneficial,
and has therefore sought to clarify which kinds of exchange are compatible with EC
competition law (Article 81). The Commission has objected on a number of occasions to
agreements concerning information exchange that it considered anti-competitive. These
decisions give us some idea of what applies under case-law.
Companies must have agreed to exchange information. Thus it is not enough for them
simply to have the opportunity to acquire information about the activities of other
companies, e.g. via the media or information from consumers. Also, the structure of the
market in which the exchange takes place, and the type of information exchanged, should be
taken into account when potential infringements are investigated. As long as the information
is of a general nature and provides a picture of the aggregated sales in a market, it is not
considered incompatible with competition law. If the information is company-specific,
however, and such that it appreciably reduces competition and would normally be regarded
as confidential, it would contravene both the EC Treaty (Article 81) and the Swedish
Competition Act (Section 6).
10 Regulatory reform and liberalisation
Increasingly rapid technological development, new demand patterns and greater
internationalisation have significantly altered market conditions in those Swedish network
industries that were once regarded as natural monopolies. The trend in these industries’
infrastructure has been towards a steadily declining element of natural monopoly. This in
turn means that established companies (former monopolies) are now more likely to meet
competition, either at the production stage or the distribution stage or at both.
Over the past 20 years, important changes have taken place in the EU, although to a varying
extent in different network industries and between member states. The UK and the Nordic
countries have generally been at the forefront of developments in the EU as a whole. In
Sweden’s case, the old state railway company was split in 1988 into a track provider (the
National Rail Administration) and a railway operator (SJ), which meant that roles and
responsibilities in the rail sector were made more explicit. Important reforms in the Swedish
market in the 1990s were the liberalisation of the domestic aviation industry in 1992, of the
postal market in 1993 and 1994 respectively, and of the telecommunications market in 1993.
In 1996, new rules came into force in the electricity market, as a result of which electricity
production and trading were opened up to competition. The various regulations have since
been gradually revised, although to different extents.
In the electronic communications field, developments have been dramatic as a result of
rapid technological advance, which has led to significant reductions in price. New
companies have been able to establish their own networks, i.e. to duplicate parts of the
infrastructure and develop new products. Changes have also taken place in the energy field,
not least through the introduction of the EU’s emissions trading system. But technological
advance in this area cannot match developments in the electronic communications field. As
in the case of the electricity market, the natural gas market is facing reforms aimed at
boosting competition and giving consumers a wider range of suppliers to choose from.
Reforms have also been introduced to varying degrees in other network industries, such as
air transport, the postal market and the rail sector, with a view to developing a larger and
more varied supply and lower prices, better services and greater accessibility.
When former monopoly markets are liberalised, both sector-specific regulation and the way
policies are formulated are important factors in seeking to avoid potential problems
regarding competition and to ensure that consumers regard the reforms as successful. A
number of problems can arise when markets are opened up to competition and these risk
giving the impression that the reforms have failed, although they may in fact have enhanced
market efficiency in various respects. Choice of regime is influenced by such factors as
prevailing levels of demand and institutional conditions.
Recipe for successful liberalisation processes
While there may not be an ideal recipe for opening up markets to competition, certain
recommendations can be made that encourage competition in both the short and long term.
A policy that involves supporting certain actors at the expense of others risks pushing
matters in the wrong direction instead of promoting efficient competition. Nor does
11 competition thrive on entry restrictions of whatever kind, e.g. temporary monopolies or
oligopolies, or a ban on foreign businesses entering the a market.
If a market is to work efficiently, official policies must eliminate obstacles to entry and
provide consumers with adequate information so that they can make active choices. Wellinformed consumers have a greater chance of influencing production and improving the way
the market operates. Nor should it be too difficult for consumers to switch suppliers, which
means steps must be taken to reduce switching costs.
Established companies with a strong market position should not be totally reined in, as this
might lead to inefficiency in resource usage and to less competition, and would thus fail to
benefit consumers. However, such companies should be prevented from setting prices on
products or product groups that do not cover the incremental costs. Also, opportunities for
dominant companies to transfer costs from competitive activities to monopoly activities
should be restricted. This calls for effective supervision on the part of both competition
authorities and sectoral authorities. Mechanisms for settling disputes quickly and effectively
are also crucial to market efficiency and to the task of preventing established companies
from acquiring unlawful advantages vis-à-vis their rivals.
As long as the state remains an owner (wholly or in part) while at the same time exercising
supervisory authority, there is a risk of goal conflicts, which ultimately could hamper
market efficiency and harm consumers. One way of solving this problem is to introduce
privatisation. Such a move should be preceded by a thorough analysis of what measures
may be required if potential competition problems are to be avoided.
To facilitate market entry, rules are needed that give companies access to the kind of
infrastructure that cannot be duplicated, at least initially. Before entry regulations aimed at
promoting sustainable competition can be drawn up, extensive information will need to be
gathered on various aspects and conditions. A price regulation where the price tag is
‘wrong’ could result in scarce resources being used inefficiently. Special regulations that are
not carefully through might also give companies the wrong incentive as regards investments
and the development of new products. In other words, ill-considered regulations might lead
to dynamic efficiency losses.
In sum, we find that the path from (unregulated) monopoly to competition is seldom a
straight one. Various kinds of follow-up and evaluation will be required to ensure that
regulations are suitably corrected and updated along the way. It is vital, therefore, to
establish from the start what type of information companies in the market will be required to
and how often this should be done.
Exposing public financed services to competition
The report of the Long-Term Planning Commission (SOU 2004:19) emphasised the
importance of operating public services efficiently so that in future they may be financed
wholly or partially out of tax revenues. As competition creates the kind of impetus that
promotes efficiency, it must be introduced more widely into publicly financed activities.
12 In a number of cases, opening up public activities to competition has resulted in cost savings
to the public exchequer and improved quality to the consumer. In municipalities with
competitive operations, efficiency has improved in municipal production as well. As health
and social care together account for a significant share of overall municipal costs, the
possibility of also exposing these sectors to competition should be explored.
Methods for opening up to competition:
In Sweden, there are two principal types of competitive approach to publicly financed
services: the tendering or contracting model and the customer choice or freedom of choice
model.
The contracting model involves purchasing public activities via a tendering process. This
model promotes price competition, which means the lowest cost for a given quality level
can be achieved. By letting factors other than price decide which bid wins, the client can
also force bidders to compete on quality. As the consumer is not in a position to choose the
provider, this model does not create any direct incentive for producers to adapt to the
requirements of individual consumers. In principle, consumer preferences have to be
channelled through the client (municipality) and serve as a basis for the next purchase. In
light of this, clients must be well informed about the competition activity in question, must
clearly specify what service they require and must follow up and evaluate service provision.
Under the freedom of choice model, consumers choose the service provider themselves.
Providers are authorised to undertake the activity concerned via a procurement process or
via certification (authorisation). Providers are remunerated to the extent they are used by
consumers, which means they compete on quality in order to attract as many consumers as
possible. The freedom of choice model gives providers greater incentive to react to
consumer signals and adapt services to consumer requirements, i.e. to ensure the greatest
possible consumer benefit.
Recipe for success when opening up to competition:
Whichever method is used in exposing activities to competition, the process cannot be
successful without a high level of purchasing skill and good follow-up. A number of studies
show that purchasers often lack the requisite competence. The information provided to
bidders may be deficient, for instance, or invitations to tender may contain formal errors. In
other cases, municipalities have no long-term plan for competitive exposure, which may for
instance create uncertainty and lead to a situation in which there are fewer providers in the
market. One of the most serious shortcomings, however, is the frequent absence of both
essential follow-up and evaluation of the activities concerned. Also, purchasers usually lack
the means to impose sanctions should providers fail to meet their terms of contract
satisfactorily.
Skilled purchasing presupposes familiarity with the activity concerned and with the way the
market works. The municipality, therefore, may be justified in keeping and managing part of
the operation itself. To avoid competitive distortion – which may cause external actors to
lose interest in participating – a level playing field for market actors is essential. Activities
that municipalities manage themselves, for instance, should be turned into profit centres and
be made to bear all their own relevant costs.
13 Industry-specific conclusions
This report shows that competition has increased in some of the areas under review,
including the convenience goods trade and the market for electronic communication. Other
markets, such as the construction and civil engineering industry, have not developed as
favourably. The following is a brief description of trends regarding competition in the
industries studied in the report.
Construction and civil engineering
The construction and civil engineering industry is under little pressure to transform itself,
due to such factors as a rigid market structure incorporating a few large companies and
numerous very small ones. This has led to weak growth in productivity, with a handful of
companies competing for the most important construction projects. The structure of the
market, together with the presence of significant entry and exit barriers for large
construction companies, creates the potential for anti-competitive collaboration, i.e. cartels.
Also, the construction sector has traditionally liaised in its trade organisations on the
standardisation of products, processes and so forth. A number of suspected cartels in this
sector are currently facing or are due to face legal proceedings.
Concentrated land ownership and flawed planning processes are restricting
competition
Municipalities often apply informal principles when distributing land for development.
There is seldom a municipal land transfer policy, and in the few cases where such are
available there is often no documentation or written explanation for the choice of developer
(the person who is responsible for the construction project and who pays for it). To a great
extent, transfers of municipal land are the responsibility of individual officials. As a result,
ownership of commercially interesting sites in the municipalities is often concentrated,
which limits competition. Even in cases where several companies might have been capable
of undertaking a construction project, often only one has access to land.
The Competition Authority’s report on the subject from the autumn of 2006 shows that
almost 85 per cent of the properties covered by the empirical study necessitated a change in
the local plan at some point during the five year period prior to the commencement of
building work. A majority of these changes took place during the final two years.
One conclusion to be drawn from this is that planning preparedness at municipal level is
often flawed. Also, planning proposals are not infrequently initiated by major construction
companies. In practice, therefore, inadequate resources and capacity in the municipalities
often means that it is the major companies who are given the task of physically planning
development land. This can discourage both small construction companies and companies
that are not established in Sweden from entering the market.
14 The convenience goods trade
Competition in the convenience goods trade has been growing for a number of years. Since
the mid-1990s, convenience goods in Sweden have become relatively cheaper. In the case of
food and non-alcoholic beverages, the decline in relation to the Consumer Price Index (CPI)
has been almost 10 per cent. Swedish prices for convenience goods are still higher than the
EU average, but the current trend suggests that the gap is closing. To some extent, the price
growth rate in Sweden is a result of the structural transition to fewer and larger shops, the
increased volume of the convenience goods chains’ own labels (private brands), and greater
competition in the form of new, low-price actors.
Private brands mean lower consumer prices
A number of studies show that the increased share of private brands on retail shelves has
reduced consumer prices. Transport costs (expressed as both money and time) explain why
consumers normally visit only one shop when buying convenience goods. As a result, shops
are able raise prices on certain goods, such as supplier brands, in order to increase the price
gap between private brands and supplier brands. Similarly, retailers may stock only a small
range in certain product categories in order to make more room on the shelves for private
brands. Given the higher profit margins for private brands, such a strategy is lucrative.
Efficient competition at the retailer level should mean that such a development only
continues for as long as consumers allow it. Should they decide that the range is too
uniform, they tend to refocus on shops with a wider variety of products. Thus it is possible
to use a wide range of products of different brands as a competitive device. Bergendahls
represents one example in this respect: the company has adopted diversity as its marketing
profile instead of emphasising private brands. The Lidl range, on the other hand, largely
comprises private brands. This means that consumers have a wider range of choice between
different chains and concepts.
High concentration levels and high entry barriers, due to such factors as the restrictive
application of the Planning and Building Act, risk leading to a situation in which consumer
demand is not fully reflected in the market.
Regional price gaps are narrowing
The price statistics examined by the Competition Authority suggest that regional differences
in the prices of convenience goods have lessened since the agency’s 2002 investigation.
This applies not least to the Stockholm region, where the price level has relatively declined.
One possible explanation for this is a decision by Stockholm’s political leadership in its
budget for 2003 that paved the way for the construction of new, low-price shops in the city’s
convenience goods sector. This was followed by an active campaign to attract additional
actors into the convenience goods market for the purpose of strengthening competition and
bringing down prices. As a result, there is now a greater variety of convenience goods
outlets in the Stockholm area. As the Competition Authority has argued on a number of
occasion, competition-minded application of the Planning and Building Act promotes
competitive market growth, which in the final analysis means lower prices and greater
freedom of choice for consumers.
15 Energy
New investments in production and networks required
The market for the production of electrical power is concentrated, with few actors, and there
are high entry barriers to deter new competitive production. At present, no new nuclear
power and in practice no new hydroelectric power can be introduced in Sweden. This means
for instance that the high profits being generated in the electricity market cannot as in other
markets be invested in new production plants, which would have a dampening effect on
prices. The electricity market, therefore, cannot be described as an efficient market. In the
Competition Authority’s view, the restrictions currently hindering new investments in
electricity production are the single most important barrier to competition in that market.
Growth in the natural gas market could also help bring a larger number of actors into the
energy markets. However, efficient competition in the natural gas market, and between that
and other energy markets, will necessitate network expansion and the competitive presence
of more suppliers.
A joint Nordic market reduces the effects of concentration in the Swedish market. The
existence of bottlenecks in transmission systems means that the Nordic market still cannot
be regarded as fully integrated. Better links within the Nordic region and with the rest of
Europe, therefore, are essential if the market for the production of electrical power is to
work efficiently. An increasingly internationalised market means a wider range and better
competition but also a levelling of prices in what used to be national markets.
Greater customer flexibility is important
Regulations governing changes of supplier, metering etc, need to be harmonised in order to
create a joint Nordic end-customer market. An efficient end-customer market presupposes
technological solutions and contractual forms that promote greater flexibility among
customers. More frequent electricity metering would make it possible to introduce new
contractual forms whereby electricity customers could respond to price differences on the
power exchange or be offered fixed prices for various periods and adapt their consumption
accordingly. This would yield benefits from both an efficiency and a competitive viewpoint.
Monthly metering is a step in the right direction, but greater frequency would generate
further benefits. Electricity customers would then be able to clearly communicate that
higher prices mean lower sales, and this would strengthen the consumer’s position in the
market. Prices are often high during consumption peaks when the electricity network is
under severe pressure. More flexible demand on the part of customers, therefore, would also
benefit the balance between output and input, ensure that the network is used more
efficiently and thereby reduce the need to expand network capacity.
Joint ownerships reduces confidence in market workings
Collaboration over nuclear power and hydroelectric power in the Swedish electricity market
means there is a considerable risk of sensitive information being exchanged. It also reduces
competition between companies and significantly reduces confidence in the workings of the
market, both among other market actors and among customers. Extensive joint ownership
16 further means that there is a danger the three leading power producers can influence supply
in Swedish and thus the price level both in Sweden and throughout the Nordic market.
There are a number of alternative solutions that might be considered with a view to creating
a more vigorous nuclear power market without the built-in risk of actors being given insight
into the production conditions and strategies of competitors. A first alternative would be to
totally dissolve joint ownership in the nuclear power production sector. Instead, the three
principal owners could divide the country’s existing reactors between them and pursue their
activities in three separate nuclear power companies.
Another alternative would be to alter the terms of joint ownership so that the three partowners are made more independent both vis-à-vis the owners and vis-à-vis their other areas
of operation. The present part-owners would continue to own the nuclear power companies,
but these would be run separately from and independently of parent company activities. The
part-owners would no longer have control of the production segment corresponding to their
share of ownership. Instead, the nuclear power facilities would have their own balance
obligations vis-à-vis Svenska Kraftnät and sell independently on Nord Pool. The owners of
these ‘new’ nuclear power companies would thus no longer be in a position to co-plan
nuclear power production with other kinds of production. Instead, the independent
management of each company would produce and sell electricity on Nord Pool, the primary
aim being to optimise operations and profits solely on the basis of the company’s
competitive situation.
In combination with either of the alternatives outlined above, the state could use its share of
Vattenfall to open the door to new owners of nuclear power companies outside the current
circle of electricity producers. By way of comparison, it is worth noting that a large share of
Finland’s power production is owned by the country’s electricity-intensive industries. New
part-owners in the Swedish nuclear power industry could help reduce the risk of
inappropriate exchanges of information and collaboration among other part-owners in the
power production field. This in turn would boost confidence in price formation on Nord
Pool.
The state could also consider the possibility of dividing Vattenfall’s power-producing units
into a number of companies, each with their own responsibility for results, e.g. one for
hydro-based power production and one or more for other production technologies. This
would greatly enhance competition in the Swedish and Nordic electricity markets. Similar
proposals with the same aim have been put forward in Finland concerning the hydroelectric
power owned by Fortum, a company in which the Finnish state has a majority stake.
The Swedish Government stated in its budget for 2007 that it is aware of the problems that
stem from joint ownership and plans to institute an inquiry. As the owner of the largest
partner in the Swedish nuclear power industry, Vattenfall, central government is in a
position to take active steps to break up collaboration in the energy field. At interviews in
the autumn of 2006, government representatives revealed that the question of whether
Vattenfall’s vertical integration could distort the market was also being discussed.
Proposals, therefore, may focus on breaking down Vattenfall into a number of state-owned
companies that will not be part of the same group. At the end of November 2006, a report
was presented to the Government outlining what is required to move the electricity
wholesale market towards a situation in which there is one market for ‘base load’ and
17 another for ‘peak power’. Moreover, the report outlines possible ways of breaking up joint
ownership in the Swedish nuclear power sector in order to boost competition. As a step in
this direction, it discusses the possibility of establishing an additional state-owned nuclear
power company or selling parts of Vattenfall’s production capacity to Swedish industry or
to other independent actors. The report also proposed that Vattenfall’s Swedish
hydroelectric power facilities be entrusted to a new company that is either kept in state
hands or is sold in the same way as for nuclear power. The Competition Authority shares the
view outlined in the report that such measures would improve competition in the Swedish
and Nordic electricity market.
The emissions trading system is inefficient
Emissions rights have become more costly than expected. This in turn has led to higher
electricity prices and prompted a discussion both on how the system is designed and on the
effects it is having. Economic incentives of this kind usually mean that environmental
quality goals and competition come together. However, the system is flawed and does not
appear to be achieving its stated purpose of limiting carbon dioxide emissions. In particular,
the overall efficiency of the system is limited by the fact that it is exclusively European in
character, whereas the problem to be solved is a global one. If production is moved to
countries lacking regulatory systems for carbon dioxide emissions, the global effects may
even be negative. Also, the present trading system is far too limited in scope as it does not
include areas that generate substantial emissions, such as the transport sector.
The principle whereby free emission rights are granted on the basis of historical emission
levels is fundamentally flawed, as companies may feel motivated to increase their emissions
in order to receive a higher quota. The present system of free allocations to existing facilities
means that wealth is being gratuitously redistributed from taxpayer to capital owner – from
end user to electrical power producer. Furthermore, the free distribution of emission rights
to new facilities may be regarded as a form of investment grant that affects investment
decisions in the economy. Investments of a more detrimental nature in environmental terms
or of a less profitable nature in economic terms may thereby be encouraged at the expense
of investments that are more environmentally friendly or economically profitable. In other
words efficiency is adversely affected from a socio-economic point of view.
Representatives of the electrical power industry sometimes argue that high profits are a
prerequisite of investment, but in the present context it would be more correct to say that
high, stable prices are the crucial precondition. Regardless of how the electricity market is
organised, power prices must eventually be adapted to the long-term marginal costs of new
production, which, given present policy in the field, is likely to mean prices that reflect the
cost of renewable energy generation. There is no reason to oppose such a development if a
political majority supports it, but such reforms should not be designed in such a way that
they favour producers at the expense of consumers.
Electronic communications
In the electronic communications field, rapid technological development and greater
competition has led to substantial price cuts for both companies and consumers. Reduced
18 costs have enabled companies to establish their own networks and develop new products to
a greater extent. Parties that were not previously active in the telephony and televisions
fields are now increasingly competing with established operators. The rapid development of
ADSL and Internetaccess via cable modem has enabled actors to deliver a wide range of
services via different kinds of infrastructure. The transition from public switched telephone
networks (PSTN) to package-based (IP) networks is having an impact on both users and
operators.
In the mobile telecommunication market, competition has increased in recent years. A
number of different customer groups may now be perceived, with differing preferences in
terms of service content and prices. Mobile operators are meeting the heterogeneous
interests of these groups by such means as price differentiation. They market many different
types of subscriptions at a variety of prices, and the range of choice has widened
considerably. Mobile phone performance, too, has improved significantly in recent years,
for instance as regards sound quality and battery time.
Regulation and supervision
Large parts of the electronic communications market are covered by ex ante regulations
under the Electronic Communications Act. This law is based on a number of EU directives.
A fundamental regulatory principle is that the electronic communications market must
evolve in such a way as to ensure that the general competition rules are an adequate
instrument for securing competitive efficiency. Thus, as competition increases, the aim is
for general competition law to apply, instead of the special legislation currently in place.
Competition in the market and the investments planned by operators, however, do not
proceed independently of current regulations, for instance those governing access to
infrastructure.
Under the Electronic Communications Act, the territorial scope of relevant markets and
assessments of an actor’s power in the market shall be based on the principles of
competition law. Competition principles and analyses, on which the new regulatory system
is based, are much harder to apply ex ante (in advance) than ex post (retroactively), and
there is no guarantee that a coherent set of regulations will lead to coherent and consistent
assessments. There is also a risk that in seeking to combat abuses of market power, the
regulatory authorities may impose too many and too intrusive obligations on network
owners and operators, which would lead to substantial supervisory and administrative costs.
Another risk in connection with (excessively) intrusive, sector-specific regulation is that this
may reduce the incentive for firms to establish their own networks and develop new
products. In other words, it may lead to dynamic efficiency losses. Such a development
would be to the detriment of long-term, sustainable competition in markets.
The European Commission has underlined the importance of establishing competing
networks as a means of developing sustainable competition. This view is shared by the
Competition Authority. In contrast to service-based competition in the same networks,
infrastructure-based competition creates competitive pressure throughout the value chain
and gives companies maximal freedom to develop and compete by means of differentiated
products. Also, the need for regulatory interventions diminishes, i.e. supervisory costs are
reduced. These socio-economic costs have proved substantial, not least because of appeals
19 against decisions. From a socio-economic viewpoint, therefore, measures to promote
competition between networks in the electronic communications field are desirable.
There is a relationship between market structure and the degree of regulation. Obligations
imposed on an infrastructure owner influence the choices made by competitors between
investment in infrastructure of their own and the purchase of value-added products, and this
in turn affects market structure. To ensure that the planned transition from sector-specific
regulation to general competition law is successful, such obligations should be of limited
duration, or a system of dynamic prices rising over time should be introduced. Otherwise,
the transition to sustainable competition in the electronic communications field will not be
credible.
Retail banking
Market concentration has diminished in a number of submarkets for banking services that
target consumers. However, the major commercial banks still account for 70-80 per cent of
the market, which is a high level of concentration by international standards as well. Greater
competition is essential if the pressure on this industry to restructure is to increase. This in
turn would encourage actors to be innovative and could lead to a larger and more varied
range of services.
Non-discriminatory access to infrastructure is vital.
Of particular importance both for market growth and for new entries are actors’ terms of
access to general payment systems in the banking sector. These terms and conditions must
not place newcomers at a disadvantage and thereby impede progress towards better
competition. This may necessitate changes in the regulations governing the banking sector.
It may also mean separating out the commercial management of the general payment system
and thereby freeing the actors concerned from the potential conflicts of interest that can
arise when the owners of a system are often its largest customers.
Limited consumer mobility inhibits competition
One factor that has a significant effect on competitive conditions in the market is limited
consumer mobility. There are switching costs of various kinds in place that cause consumers
to have doubts about changing banks or to avail themselves of the services of different
banks simultaneously. Such costs include complicated fee-charging systems that make it
difficult for consumers to compare the various banks’ services. Also, moving a transaction
account to another bank is a relatively daunting task in administrative terms, which reduces
consumer willingness to change. Another factor contributing to reduced mobility among
consumers is the capital gains tax levied on the sale of shares in securities funds, individual
shares or other holdings.
20 Care of the elderly
There are no direct rules forbidding companies to enter the elderly care sector. As few users
can afford to defray the whole cost of the care and treatment needs themselves, they are
generally reliant on tax-financed elderly care services, for which the municipalities are
ultimately responsible. This means that the companies operating in elderly care sector are to
a great extent dependent on public financing. Private actors wishing to establish themselves
in the market almost always have to negotiate provider agreements with the municipality
concerned. The method used to open up elderly care services to competition is therefore
crucial to newcomers’ chances of gaining a foothold in the market.
As this report shows, there are both advantages and disadvantages to the
contracting/tendering model and the freedom of choice model. As elsewhere, it is true of the
elderly care sector that there is no single, clear-cut way of opening up to competition.
Freedom of choice for greater diversity – but consider the circumstances in each
individual case
There is a widespread feeling in the Swedish community that the elderly should be allowed
to freely choose their own care provider. Quality studies show that as a rule, perceived
quality is not dependent on whether care provision is public or private. Rather, it is due to
other factors, such as the way users are treated and the extent to which they can influence
the content of the help provided. Continuity is another highly valued aspect. The fact that
the freedom of choice model both promotes continuity and strengthens the user’s chances of
influencing content suggests that the application of this model should be encouraged. Also,
the freedom of choice model means that providers are not guaranteed any production. Thus
they are strongly motivated to maintain good quality in their service provision and to
respond to user preferences, which may prove essential if they are to meet increasingly
differentiated needs and wants, for instance as ethnic, cultural and religious diversity grows.
If the intentions underlying the freedom of choice model are to be realised, however, users
or a relative must take an active decision on the choice of provider. This presupposes that
the person concerned possesses reliable information about the market’s providers and can
switch to another provider if dissatisfied. In the sheltered housing sector, this may be more
problematical than in the home-help service. A user in sheltered housing wishing to change
provider, for instance, would have to move from one place of accommodation to another.
Freedom of choice for users may also be restricted by the fact that queues are more common
in the sheltered housing sector.
Moreover, there may be little opportunity for more than one producer to operate in the
market in sparsely populated areas. In such circumstances, the advantages of the freedom of
choice model may be limited and the contracting model may be a more appropriate way of
opening up to competition.
When the contracting model is applied, intensive competition develops at the bidding stage,
after which competitive pressure eases. Thus there is a potential risk that the provider may
allow quality to deteriorate in order to reduce operating costs. Thus, when the contracting
21 model is used, it is particularly important to ensure that the activity is followed up and
evaluated.
Assessments
Based on the contents of this report, the Competition Authority offers the following
assessments and recommendations for enhancing competition and consumer benefit.
General assessments
A competition policy strategy for increased welfare. The Swedish economy is facing new
challenges in a global market. To meet these challenges, policies must generate dynamism
and efficiency. This is only possible if markets are exposed to competition, as such a course
promotes economic restructuring. The Swedish economy is experiencing competion
problems in several sectors. The aim should be to achieve both the greatest possible
consumer benefit and efficient markets. Therefore, firstly, entry barriers for both domestic
and foreign companies must be eliminated. Secondly, consumers must be provided with the
information they need to make active choices, and these must not be associated with
excessive switching costs. Thirdly, the liberalisation and regulatory reform processes in
markets should continue. The recipes for successful liberalisation presented in the report are
valid not only for the traditional network industries but also for the government monopolies
discussed in the Competition Authority report Competition in Sweden 2005, i.e. including
the monopoly of pharmaceutical retail. All in all, this will broaden the competitive section
of the Swedish economy. The Government should tackle these problem areas in a concerted
way and develop a competition policy strategy for greater welfare.
Learn from past experience when introducing further liberalisation and regulatory
reform. As the Government proceeds in its efforts to reform markets, it must draw on
lessons learned in the past so as to avoid unnecessary mistakes and keep down supervisory
costs. The chances of developing efficient regulations and effective supervision are
improved if the experience gained in a particular industry, in Sweden or abroad, is turned to
account as far as possible.
Consumer interests should be kept in mind when selling state-owned companies.
According to the Government’s Budget Bill for 2007, state-owned companies worth the
equivalent of SEK 50 billion per annum are to be sold during the period 2007-2009. There is
a danger that conflicts of interest may arise when central government both owns companies
and is responsible for their supervision, and this may hamper market efficiency. Sales of
state-owned companies should be preceded by a thorough analysis of the various measures
involved in order to avoid potential competitive problems. In cases where the state actor is
dominant in the market, as a result of vertical integration or some other factor, structural
separation may be considered so that the sale of a state-owned company generates more than
one new privately-owned company to the market.
Once a company has been listed, the chances of introducing structural separation (and
separation of ownership) are reduced. Also, technological advance and the presence of
22 competing networks may reduce the need for such a move. This is the case, for instance, in
the electronic communications field. However, if there is still strong justification for
structural separation, e.g. to reduce the risk of competitors being discriminated, a solution of
the type introduced in the UK may be preferable in this field. There, the network activities
and the other activities of British Telecom (BT) have been structurally separated through the
establishment of Openreach, which is formally owned by BT but operates completely
independently.
Improve accuracy when reviewing mergers by revising current turnover thresholds. Of the
200 mergers reported to the Competition Authority during the period 2003-2005, about 97
per cent were approved in the phase one. In other words, the agency was quickly able to
establish that the proposed mergers did not present a problem from a competitive viewpoint.
The reporting and review of such mergers entail administrative costs to the both companies
and the state, as well as an unnecessary delay in the completion of the transaction. Also,
under the present rules there is a risk that anti-competitive mergers escape review altogether,
as the threshold level for such reviews – SEK 4 billion in company turnover worldwide – is
high by Swedish standards. To make it easier to detect anti-competitive mergers, and also to
reduce the number of ‘unnecessary’ reports by 40 per cent, the Competition Authority
proposes that the qualification threshold for parties’ overall turnover be changed to more
than SEK 1 million in Sweden and that the threshold for parties’ individual sales be changed
to more than SEK 200 million in Sweden for at least two relevant companies. This proposal
is an important step in the overall effort to lighten the regulatory burden on businesses in
Sweden.
Demand that public actors report business activities in competitive markets separately.
One of the causes of competition distortions between public and private actors is the
tendency of public authorities to subsidise their contract services out of public money. This
has led to complaints that public actors are guilty of underpricing (predatory pricing).
Neither current regulations such as the Competition Act nor voluntary solutions have proved
adequate in solving the problem. When considering cases of alleged predatory pricing, it is
important to establish the connection between pricing and the costs of the activity
concerned. This can present problems, especially if the activity is undertaken in connection
with the authority’s other appropriation-funded activities and is not reported separately in
terms of costs and income. To improve transparency and make it easier to detect subsidies
paid out of public funds, results should also be published in the various operations’ annual
reports. Besides the introduction of separate reporting, a set of regulations that prohibit the
subsidising of public actors in competitive markets is also needed.
Public procurement supervision and sanctions should be reviewed. The overall aim of the
rules governing public procurement is to establish competitive neutrality (nondiscrimination) between public and private actors competing for public contracts relating to
the purchase of goods and services. The absence of a level playing field means competition
becomes distorted, to the detriment of both the public good and the consumer. One problem
of note is that there are no opportunities for imposing sanctions in the procurement field that
could be used as a basis for instituting legal proceedings in cases where the procurement
rules have been seriously violated, such as ones involving unlawful direct purchasing.
Giving the authorities responsible for procurement supervision the right to sue for market
damage fines in response to such violations would strengthen actors’ willingness to comply
with the rules.
23 Take steps to ensure that public authorities and municipal actors comply with established
guidelines and laws relating to business activities in competitive markets. In some cases,
public actors undertake activities at municipal level without due regard to the legal
principles embodied in the Local Government Act. The Competition Authority has argued
that if central government authorities and municipal actors (companies and departments)
were to abide by the Government’s administrative policy action programme and by the
Local Government Act, there would be much fewer competition problems to deal with.
Companies, however, have found it difficult to persuade courts to review the question of
whether municipal business activities are compatible with the Competition Act. In light of
this, the Competition Authority considers that a government inquiry should be appointed to
review current regulations. Its twin tasks should be to make clear under what circumstances
public authorities may purse competitive business activities and to make it easier for
companies to bring cases to court when they suspect a municipal activity may contravene
the above law. In addition, a further provision should be added requiring municipalities to
abide by the court verdict. A verdict relating to the rules on municipal competence, for
instance, should be accompanied by the threat of a fine.
Intellectual property rights may sometimes by used to limit competition. Intellectual
property rights have increased in importance in recent years. Companies have experienced a
growing need to protect their investments, not least as a result of rapid technological
advance in the electronic communications and IT fields. The profits made by the owners of
intellectual property rights represent due reward for actors who develop or invent goods and
services. In other words, actors compete for the market rather than in the market. When
intellectual property rights are eroded, profits fall and there is less incentive to innovate. In
some cases, however, the use of intellectual property rights can result in welfare loss by
inhibiting competition. The present report outlines a number of cases in which intellectual
property rights have been used in such a way as to conflict with competition rules.
Competition law cannot intervene in intellectual property rights per se, but the way in which
these are exercised may come under its jurisdiction and may conflict with it. In light of
developments in this area, greater attention needs to be paid to conflicts that arise where
competition and intellectual property rights intersect.
Certain kinds of information exchange between companies restrict competition. In the
Competition Authority’s view, exchanges of information that make it significantly easier for
companies to coordinate their activities or monitor one another, while at the same time
generating few gains in efficiency, should be limited. If, however, such market information
is made generally available and also includes some form of obligation towards the
consumers, this may result in efficiency gains that offset the adverse effects. As long as the
information is of a general nature and only conveys, say, a picture of aggregate sales in a
market, it is not considered incompatible with competition law. If, however, it is companyspecific and such that it has an appreciable anti-competitive effect and would normally be
considered confidential, exchanges violate both Article 81 of the EC Treaty and Section 6 of
the Swedish Competition Act.
Mechanisms for resolving disputes quickly and efficiently are crucial to market efficiency
and consumer benefit. When markets are opened up to competition, rapid settlement of any
problems and conflicts that may arise is not usually in the interests of the dominant
company. Uncertainty about the outcome of what may prove to be prolonged legal
proceedings inhibits the will to invest and makes newcomers more wary of entering the
24 market. If dispute settlement mechanisms clearly state what applies, this makes it easier for
the regulator to arrive at a quick decision, which in turn means that established companies
are not given an unfair competitive advantage over newcomers.
Restrict opportunities for regulated companies to transfer costs between operations. When
regulation is introduced for companies engaging in a certain type of activity, but not for all
activities, it may be necessary to limit opportunities for the companies concerned to transfer
costs between different areas of operation. Structural separation restricts such practices. In
some areas, such as the energy sector, companies tend to engage in both price-regulated
activities and competitive activities. They can then boost profits by means of crosssubsidising. This involves transferring costs from the competitive activity to the monopoly
activity in order to justify higher (regulated) prices and revenue. Companies can be given
less incentive to transfer costs between activities if the link between price regulation and
costs is weakened, as for instance when price ceilings (caps) are imposed.
Develop methods for measuring efficiency and productivity in publicly financed activities.
An understanding of what the consequences may be of exposing care services to
competition is an essential basis for good policy decisions, facilitates governance by
principals and encourages improvements. Knowledge in this area, however, is often
deficient. One of the problems is that there are no available methods for measuring
productivity and efficiency and for evaluating the quality of services in this field. Another is
the frequent lack of relevant statistics. In 2005, the National Board of Health and Welfare
and the Swedish Association of Local Authorities and Regions, launched a joint programme
for the development of a national model incorporating indicators that make it possible to
compare quality and efficiency in the services currently provided at local and regional level.
One of the aims of this joint project was to conduct and regularly publish follow-ups on the
quality and efficiency of both health and medical care and care of the elderly. This initiative
is a promising one and resources must be set aside for the continuation of such efforts.
When publicly financed services are exposed to competition, municipalities should draw
up long-term plans for competitive activities. A number of studies show that purchasers
often do not have the requisite skills. Also, competitive activities have not on the whole
been adequately followed up. If exposure to competition is to have the desired result,
purchasers must draw up long-term plans for how the market is to be made competitive and
how this process is to be followed up and evaluated. A long-term competition plan makes
clear what the municipality has in mind, sets out clear rules and reduces uncertainty, and can
thereby help further companies to establish a place in the market. As part of such a plan,
purchaser competence in municipal organisations should be raised to a higher level, either
through training programmes or through exchanges of knowledge and experience between
municipalities.
Industry-specific assessments
Construction and civil engineering
Municipalities should as a rule use land transfer competitions when allocating
development land. To encourage internationalisation and competition in the construction
25 sector, municipal land must be allocated in a suitable manner. When municipalities sell or
grant land, they normally apply what is termed the direct transfer method. An alternative is
to use land transfer competitions, whereby land is purchased competitively via a bidding
process (auction). Such competitions make it easier for national and international actors to
enter the market. Reasons advanced in opposition to such a move include high
administrative costs to the municipalities and the fact that small construction firms may find
it difficult to participate. Direct transfers of land, however, may lead to arbitrary allocation
practices or at worst allocations that favour certain companies at the expense of others. To
avoid excluding small businesses from the market, municipalities should sell both small and
large development sites via a bidding process. When selling land, municipalities should
typically demand that construction work commence within a certain period, to avoid a
situation in which companies buy up land for the purpose of impeding market entry for
competitors.
Streamline the municipal planning process. Land access and municipal planning are
interconnected processes, as planning permission is required to develop land. The way the
Planning and Building Act is designed and applied has an important impact on competition
in the construction field. In some cases, the municipal planning process may represent an
obstacle to competition as access to planned development land is severely limited and
planning processes tend to be lengthy. Long processing periods, appeals and inadequate
planning preparedness at municipal level constitute obstacles to the establishment of new
businesses. It is difficult to determine in advance how long or complicated a municipal
planning process may be. Also, inadequate municipal resources and capacity means that in
practice it is often the major construction companies that are given the task of physically
planning development land. In order to streamline the process, the Planning and Building
Act should be supplemented by provisions enabling landowners to formally apply for
changes in the local plan. To reduce processing periods, deadlines should be introduced, the
process should be simplified, less scope should be allowed for appeals against local
planning decisions, and the planning chain should be shortened. These proposed changes in
the Act have been described in greater detail by the Competition Authority in its comments
(Ref. No. 819/2005) on the report of the Planning and Building Act Committee (SOU
2005:77).
The convenience goods trade
Giving greater consideration to the competitive impact of municipal land allocations leads
to lower prices and a broader range of convenience goods. As in the case of the
construction sector, competition in the convenience goods trade is affected by the design
and application of the Planning and Building Act. There are regional differences in the price
of convenience goods in Sweden. The way the various municipalities apply the Planning
and Building Act clearly has a profound impact on prices as well as on the range of products
and the structure of outlets. Over the past ten years, this structure has changed. There are
now fewer and larger shops, while at the same time the proportion of low-price outlets has
increased, as has the proportion of shops in external locations. Some years ago, the prices of
convenience goods were relatively high in the Stockholm region. According to price
statistics for 2006 analysed by the Competition Authority, this has now changed. Today, the
prices of convenience goods in the Greater Stockholm area are on a par with price levels in
those regions where they used to be considerably lower, e.g. western Sweden. This trend
may be said to have coincided with a more generous application of the Planning and
26 Building Act when permission has been sought for the establishment of new convenience
goods outlets. Given this development, it is fair to say that consumers have much to gain
from an application of the Act that takes account of consumer interests. A more
competition-minded application of the law leads to less market concentration, lower prices
and a wider variety of goods.
Energy
Integration of the North European electricity market should be fully implemented. A
single market reduces the effects of concentration in the Swedish market. The existence of
bottlenecks in transmission systems means that the Nordic market still cannot be regarded as
fully integrated. Better links within the Nordic region and with Europe, therefore, are
essential. An increasingly internationalised market would inter alia promote competition due
to increased supply but would also mean a levelling of prices in what used to be national
markets. Regulations, changes of supplier and metering etc, also need to be harmonised in
order to develop a joint Nordic market for end customers. An efficient end-user market
necessitates technological solutions and contractual forms that encourage greater customer
flexibility. Sweden, therefore, should introduce hourly electricity metering to pave the way
for agreements under which consumers could respond to price differences on the electricity
exchange or be offered fixed prices for various points in time and adjust their consumption
accordingly. This in turn would strengthen the position of the consumer in the market.
Encourage market entry and enhanced capacity. The market for electrical power
production is concentrated, has few actors and presents high entry barriers to newcomers. At
present, no new nuclear power and in principle no new hydroelectric power can be
introduced in Sweden. This means that the electricity market cannot be described as a fully
functioning market. Investments in new production plants would have a dampening effect
on prices. In the Competition Authority’s view, the current restrictions on new investments
in electricity represent the greatest single obstacle to competition in the power market. By
pursuing clearly defined, long-term energy policies, therefore, central government should
seek to encourage both investment in electrical power production and the establishment of
new businesses.
Limit joint ownership in electrical power production. In its role as owner of the largest
company in the market, Vattenfall, central government should take the initiative in seeking
to reduce the risks and effects associated with the joint ownership of Swedish electricity
production. Collaboration and joint ownership in the nuclear and hydroelectric power sector
means there is a serious risk of sensitive information being shared, while at the same time
competition between enterprises and confidence in the workings of the market are both
reduced. In cases where joint ownership cannot be fully terminated, jointly owned
companies should instead be made more independent vis-à-vis their owners and be given
their own responsibility for sales and balance etc. Central government might also consider
the possibility of dividing Vattenfall’s power-producing units into individual companies
each with their own responsibility for results, and also consider the possibility of selling off
units or acquiring a broader circle of owners. This would significantly improve competition
in the Swedish and Nordic electricity markets.
A clearer dividing line should be drawn between competitive activities and network
monopolies in the energy sector. The present rules governing the separation of network
27 activities and other activities in integrated companies in the energy market are insufficient.
This exacerbates the lack of faith to be found among many independent retail companies,
business customers and consumers in the market’s ability to operate efficiently and in a nondiscriminatory manner. A clear-cut organisational and functional separation of network
monopolies and competitive activities is essential if cross-subsidising and inappropriate
exchanges of information are to be prevented. A clearer dividing line would also make it
easier to supervise network monopolies adequately. The principal aim should be separation
of ownership between competitive activities and network monopolies.
The EU emissions trading system is flawed and should be changed. Higher electricity
prices have prompted discussion both on the way the trading system is designed and on its
impact. The present system is flawed and does not appear to be efficiently fulfilling its aim
of reducing carbon dioxide emissions. The principle whereby rights are allocated on the
basis of historical emission levels is fundamentally wrong, one of the reasons being that it
provides companies with the incentive to increase their emissions in order to receive a larger
quota in coming years. The emphasis should be on auctioning off emission rights. The free
allocation of rights to existing facilities means that wealth is being gratuitously redistributed
from end user to power producer. Furthermore, the free allocation of emission rights to new
facilities may be regarded as a form of investment grant that affects investment decisions in
the economy. Investments of a more detrimental nature in environmental terms or of a less
profitable nature in economic terms may thereby be encouraged at the expense of
investments that are more environmentally friendly or economically profitable. In other
words, socio-economic efficiency is adversely affected. In view of the above, Sweden
should take active steps in the EU to bring about a change in the emissions trading system.
Electronic communication
The sectoral authority should adopt a dynamic approach in considering the need for ex
ante regulation in various markets. Investments in the electronic communications field are
of crucial importance to both productivity growth and economic growth. Increasingly, both
established and new operators are offering a spectrum of services such as fixed-line and
mobile telecommunication services, data communication (Internetaccess) and television.
This type of convergence – whereby several services are supplied through a single
infrastructure, for instance, or by a single operator – has implications for the delimitation of
the markets concerned and thus for the regulation of the electronic communications field as
well. Rapid technological development means that previously defined markets are in
considerable danger of becoming obsolete. This in turn may reduce operators’ incentive to
install networks and develop new products. A dynamic approach should be taken, therefore,
to the need for ex ante regulation in markets.
The railway sector
Liberalisation of the railway market should be fully implemented. Greater competition
could make rail traffic more efficient, and central government should therefore wield the
competitive instrument as far as possible, both for commercially sustainable passenger
traffic and for contracts involving unprofitable traffic. In preparation for an open market,
stable and predictable rules must be established. In its third rail package, the EU proposes
opening up the international passenger transport market by 2010, which will necessitate the
development of a new market access model for European railways. In the meantime, the
28 Swedish authorities should begin the work of transforming the domestic market. Other
actors, current and potential rivals to SJ AB, urgently need to know when SJ AB will forfeit
its sole right to the market. A level playing field between SJ AB and other actors must be
guaranteed. Rules that are predictable are essential if actors are to take proper investment
decisions, and such rules also affect newcomers’ chances of entering the market. Important
areas in need of development in both the passenger and the goods traffic sectors include
vehicle supply, access to service and maintenance facilities, terminals and other joint
functions, and methods for both capacity distribution and supervision. A further important
area is the development of mechanisms and regulations for the settlement of unavoidable
conflicts between commercial passenger and goods traffic on the one hand and publicly
procured traffic on the other. Also, sectoral responsibility for the railways should be
transferred from the infrastructure owner, the National Rail Administration, to the
supervisory authority, the Swedish Rail Agency.
Retail banking
Separate out commercial management of the payment systems’ infrastructure so as to
avoid conflicts of interest . In the Swedish payment systems, rival companies frequently
collaborate in what are termed infrastructure clubs. A prime example of this is the bank giro
system, Bankgirot (BGC), where the largest owners are also the largest customers. Joint
ownership means there is a risk that competitors gain insight into one another’s activities
over and above what is needed to operate the joint system. This may inhibit competition.
Another risk is that the largest owners may formulate terms of entry in such a way that
potential newcomers to the market are placed at a disadvantage. To eliminate these risks, it
is advisable to separate out commercial management of the systems and thus avoid potential
conflicts of interest. These issues are also being given priority in the work under way on the
new payment infrastructure in Europe, the Single Euro Payment Area (SEPA), which will
have a considerable impact on Sweden. The Competition Authority has apprised the
European Commission of its view that a separation process is needed for the purpose of
limiting potential conflicts of interest in the SEPA as well.
Introduce effective rules concerning access to payment infrastructure. A feature of the
payment systems in the Swedish banking sector is the presence of substantial network
effects. This means that the benefit deriving from access to a certain system increases as
more people gain access to it. A number of other network sectors have special rules
governing access, not least the electronic communications field. The Competition Authority
recommends that the special regulations introduced for individual sectors be phased out and
that supervision largely be exercised with reference to general competition law. In the short
term, however, the regulations on access to payment infrastructure need to be strengthened.
The Swedish Exchange and Clearing Operations Act does not include any rules prohibiting
practices such as volume discounts as used by actors like BGC and Dataclearingen. While
the law does promote neutrality in prescribing that all cases be treated equally, this is not
enough to secure terms of entry that encourage moves towards greater competition. Clearer
rules are need to ensure that such terms are objective, proportional and non-discriminatory.
The Government, therefore, should actively seek to ensure that the EU’s new payment
directive incorporates provisions to this effect.
It should be easier for consumers to switch banks. As the Competition Authority has noted
in a number of reports, costs for consumers wishing to switch banks are high in Sweden.
29 This is partly because it is often difficult to compare alternatives in the market and partly
because consumers feel such changes present practical difficulties. To make it easier for
consumers to switch banks, consumer information should be improved, obstacles should be
eliminated and the regulations should be overhauled. The Government should adopt a
concerted approach to these issues, by for instance strengthening the support available to the
public via the Swedish Consumers Banking & Finance Bureau and by taking steps to reduce
the administrative work required of consumers wishing to change banks. It should be at least
as easy for a consumer to switch banks as for a legal entity to do so. One tax rule that
increases consumers’ switching costs is the levying of capital gains tax in connection with a
change of equity fund or of an individual shareholding. The introduction of special
investment accounts should be considered, encompassing all types of financial investments
and allowing for changes of equity funds or shares, for instance, without capital gains tax
becoming due until such time as withdrawals are made from the account. These accounts
should be personalised, which would allow holdings to be transferred tax-free between
banks or finance institutions, in order to encourage customer mobility and thus help improve
competition to the benefit of consumers.
Care of the elderly
When care of the elderly is opened up to competition, user demand should be taken into
account . The aim of the freedom of choice model is for users to be able to switch provider
should they be dissatisfied. This promotes competition and gives providers an economic
incentive to adapt their activities to user preferences. Studies show that Swedish public
opinion is largely in favour of the elderly being allowed to freely choose their own care
provider. Application of the freedom of choice model, therefore, should be encouraged.
However, in some circumstances total freedom of choice may not be possible. The
contracting model creates competition in a bidding process and gives municipalities the
opportunity to achieve cost-effective service production. Once the contract has been
awarded, however, competitive pressure weakens, which means there is a potential risk that
providers may lower their standard in order to reduce the costs of their activities. This
means it is vital that the procured service be clearly specified and followed up.