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Chapter 5: promoting competition to strengthen economic growth.

Prices for many goods and services are higher than in other countries, reflecting generally weak competitive pressures. The government has recently introduced several reforms to strengthen the competition policy framework. Nevertheless, to reap the full behests of competitive markets, past reforms should be complemented with a number of further measures. The powers of the Competition Authority can still be enhanced. Its effective degree of independence, substantially improved in the recent reform, and its accountability should be monitored in order to assess whether further measures in this direction are needed. In the retail sector competition-restricting regulations still protect existing companies against new entry and inhibit the diffusion of new business models and technologies. The reform efforts in the network sectors remain patchy. In the energy and telecommunication sectors the main issues are the dominant positions of the incumbents and the failure of network sector regulators to introduce a level playing field in order to allow new entry and expansion of competitors. In other sectors, such as postal services and rail transport, major steps towards liberalisation are still to come. Overall, sectoral regulators will need more independence and powers in order to tackle uncompetitive behaviour of the incumbents, while better communication between the regulatory authorities is necessary. These steps should help to secure the necessary basis for bringing productivity growth in line with best performance.

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The Belgian government is putting a greater emphasis on competition as a productivity enhancing tool and has implemented a number of reforms in this area. The government is now promoting competition with the objective of increasing consumer welfare, preserving purchasing power and encouraging entrepreneurship through facilitating new entry (Strategie de Lisbonne, 2008, Accord du Gouvernement, Plan de Relance). However, there remains substantial scope to increase competitive pressures in order to boost potential growth of the economy and benefit consumers. The authorities have identified retail trade, food, energy and telecommunication as priority sectors in this respect. The retail sector regulation is more pervasive than in most OECD countries, protecting existing shops from competitive pressures as the entry of innovative business models and the diffusion of new technologies are inhibited. At the same time, the liberalisation of network sectors has been slower than elsewhere in the OECD while concentration is high and the effective functioning of regulators has proven difficult to achieve. As a result, prices are often higher than in other countries pointing to the need for reducing the barriers to entry and assuring a more level playing field. The chapter starts with a general review of the competition framework. Then, the inherently competitive retail trade sector is analysed. Subsequently, the difficulties of introducing competition in the incumbent-dominated network sectors are considered. The chapter concludes with a set of policy recommendations.

More competition to benefit productivity, employment and consumer welfare

Over the past ten years, productivity and employment growth have remained somewhat slower relative to many other OECD countries (Table 1.6). At the same time progress in opening markets to competition has not been as fast as in the leading countries and the amount of restrictions to competition remains above the OECD best practice (Figure 5.1, Panel A; and Wolfl et al., 2009). A growing body of empirical literature points to the existence of a positive link between competition and productivity growth on the one hand (Nicoletti and Scarpetta, 2003; Conway et al., 2006) and between competition and employment on the other hand (Bassanini and Dural, 2006), suggesting that insufficient competition policy enforcement may have lowered economic growth in Belgium. Furthermore, it appears that the Belgian consumer may be paying a high price for the lack of well-functioning, competitive markets (Figure 5.2). (1) The final prices of many retail goods appear somewhat higher than the euro area average while prices in network sectors also tend to be on the high side, motivating the review of competition-inhibiting regulation in Belgium.

The Competition Authority needs further strengthening

The competition policy framework has notably improved over the past several years as legislation was adapted to EU standards (Box 5.1). The merger review threshold was raised, freeing up resources to deal with the cases of price fixing and abuse of dominant position. The reform also included changes in the institutional structure of the competition bodies. The Competition Authority is a so-called dual authority, consisting of the Directorate General of the Ministry of Economy (the investigative body) and the Competition Council (the administrative tribunal). The latter includes the Council (a court) and the College of Competition Prosecutors (the investigative and prosecuting body). Further reforms included putting in place a leniency programme and putting an end to the immunity from fines granted to associations of undertakings and professionals under the previous law. The reforms have started to yield visible results: cartel infringements have been found, the leniency programme has begun to work and cartel participants have been fined. Nevertheless, as the improvements to the framework are rather recent, it will take some time for the full effect on competition to be felt, however there still seems room for refining of the setup.

[FIGURE 5.1 OMITTED]

Although the independence of the Competition Authority has been strengthened (it is now financed through a separate line in the government's budget), the investigative part of the Authority continues to be a Directorate General inside the Ministry of Economy. The Directorate's resources remain largely determined by the federal government and a number of supporting costs (location, information and communication technology, etc.) are provided by the Ministry outside the budget line. Thus, the Competition Authority applies the centralised hiring procedures of the civil service and it remains physically located in the Ministry's building. Furthermore, the large backlog of old cases has led to problems in meeting legal deadlines and has forced the College of Prosecutors to prioritise cases. This has been done based on criteria, the origin of which have not been made sufficiently clear to the wider public, and may lead to accusations that political priorities affect the ranking of cases. Therefore, the situation should be monitored, in particular regarding the authority's degree of independence and accountability. If necessary, a potential improvement would entail giving the authority a status of a fully independent agency with a complete budget decided by the parliament and granted full freedom in hiring. In terms of improving the authority's perceived independence, physically moving out of the Ministry building and enhancing the transparency of the selection of the prioritisation criteria may be considered. Despite the reinforcements made in the past years, there are still signs the Competition Authority may be in need of additional resources. The current staffing may be reconsidered as it appears on the low side when compared with other small economies such as the Netherlands and the Nordic countries (Hoj, 2007), and it has not proved sufficient for dealing with the large amount of old cases and court appeals against its decisions and for assuming a more proactive role.

[FIGURE 5.2 OMITTED]
Box 5.1. The new competition and law enforcement framework

The competition framework was reformed in 2006 after the Court of
Audit (Cour des Comptes) had found that the previous setup produced
little enforcement and that procedures took too long. The
competition authorities were tied down in mandatory merger reviews
with few resources for other competition matters. Out of nearly 200
matters between 1993 and 2005, barely a third resulted in a
decision, and only one resulted in a fine. Most investigations were
taking more than 2 years to complete, excluding cases that expired
instead of having a formal closure decision. In matters other than
interim measures and mergers from 1997-2001, the Council reached
only one decision per year and the average time for cartel
infringement proceedings was over six years. The Court of Audit
found that the principle reasons for this state of affairs were, in
addition to the resource requirements of the mandatory merger
reviews, poor organisation and the lack of support for a coherent
policy of protecting competition to promote economic efficiency.
The new competition law tracks the EU legislation based on the
prohibition of anti competitive restrictive agreements and abuses
of dominant positions and gives a legal basis for leniency. In
addition, the latest EU substantive standard for mergers, which is
based on the concept of a "substantial impediment to effective
competition", rather than solely a "dominance" test, is
incorporated in the law. The reform did not introduce changes to
the fines which can be imposed by the Authority, which can be as
high as 10% of annual turnover. Staff at the Competition Authority
is about 70 person years, which is the same as Switzerland, but
less than in the Netherlands and the Nordic Countries.

The 2006 reforms also modified the institutional structure. The
Belgian Competition Authority is not a single integrated agency but
a so-called "dual authority". It has two principal parts, the
Competition Council and the Directorate General for Competition.
The Council includes the general assembly of the Council (in a
narrow sense), which is the decision making body for competition
enforcement. The law authorises six full time and six part-time
members (councillors), who are appointed by the government for
six-year, renewable terms. The College of Competition Prosecutors
(with a statutory maximum of ten members) is attached to the
Council. The competition prosecutors initiate and direct
investigations and present enforcement matters to the Council and
rely upon the staff of the Directorate General for Competition for
investigative and other support. There is therefore institutional
separation between the investigation, prosecution and decision
making powers within the authority. Unlike in some other countries,
the Competition Authority is not responsible for consumer
protection, which is the responsibility of the Directorate General
for Market Regulation under the same ministry. There is also an
advisory Commission for Competition in the Central Council for the
Economy.

Merger review procedures require advance notification and approval
for transactions that involve a total turnover in Belgium of over
EUR 100 million (and at least two of the undertakings concerned
have turnover in Belgium exceeding EUR 40 million). These
thresholds are more than twice the limits in the pre-reform
procedures, inducing a substantial reduction in merger reviews. The
competition authority is not fully independent in this area as the
government can override a Council decision rejecting a merger
allowing it to go forward "for reasons of general interest which
outweigh the risk of competition." It may also overrun any
conditions imposed on the merger by the Competition Council. In
particular, the Council of Ministers may consider matters of
national security, international competitiveness, employment and
consumer interests. This provision has not been used to date. The
leniency programme was updated in October 2007 to make it
consistent with now standard European practices, so a cartel member
may be fully or partly exempted from sanctions for bringing the
cartel to the attention of the enforcement authority, bringing in
evidence the authority did not have, or admitting participation.

In the first full year under the new competition regime (2007), the
Council reached three cartel infringements decisions and considered
six applications for leniency. In the second year, the number of
decisions on cartel infringements rose to five and six applications
for leniency were considered. The first cartel fine (of slightly
below EUR 500 000) ever imposed under Belgian law was in early 2008
in a case that started with a leniency application. The relatively
small fine reflects that the cartel ended in 2002 and the smallness
of the market. A recent decision illustrates the importance of the
recent changes to the statute. In July 2008, the Council ruled
against a trade association "ethical" rule setting minimum fees
(for interior designers), but could not impose a fine because the
law in effect during the period of the violation, from 2002 to
2005, did not authorise fines against an association. Other small
fines have been issued to trade associations to signal that
co-ordination dampening price competition will no longer be
acceptable.

The Competition Council may end up with important functions in
regulatory matters. As is usual elsewhere, it already acts in
co-operation with sector regulators. Under the competition law, the
Competition Council may also be empowered to decide appeals from
decisions of sectoral regulators. This function will depend upon
enactment of corresponding authorizations in the sector regulatory
laws. The Directorate General has engaged in policy advocacy by
issuing reports or opinions on taxicab regulation, real estate and
interlocking directorates.


There is a need for strong signalling of the Competition Authority's determination to enforce competition law. The fines imposed up to date have not been particularly high. However, in the future the Competition Authority will inevitably be dealing with larger cases in crucial sectors and the use of high fines will be desirable in order to signal the tough stance against infringements and to deter future uncompetitive practices. High fines will also increase the incentives to apply for leniency thereby facilitating the policing of cartels. Deterrence would be enhanced by introducing criminal sanctions such as prison sentences for hard-core cartel infringements. To enhance the Authority's effectiveness, clear and efficient communication procedures (in particular regarding confidential information) between the Authority and the sectoral regulators are essential. Finally, plans to establish the Council as the sole institution for appeal against sectoral regulator decisions are commendable. This is the case in many OECD countries, as the Council is well placed to rule on competition cases in the network sectors. If this is to increase the speed with which cases are settled it may imply the Council will need additional resources.

The notable progress in the reform of the Competition Authority does not appear to be coupled with comparable developments in the regulation of the network sectors (see the sections below). In order to fulfil the government's goal of stimulating economic activity and improving consumer welfare through the strengthening of competition in Belgian markets, a determined approach to competition policy needs to be implemented and enforced at all levels of regulation (SPF Economie, 2008). The government has recently created a price observatory which will aim at increasing the price transparency in the market, but care should be taken in order not to further complicate the regulatory structure and to minimise the risk of this authority becoming a price setter.

Competition in retail distribution is burdened by heavy regulation

The retail sector in Belgium is characterised by a relatively large number of small shops (Figure 5.3), a structure that may have a number of advantages in terms of accessibility. However, at the same time, the employment share of the sector is below the average of the OECD countries (Figure 5.4, Panel A) pointing to a relatively large scope for jobs creation. Moreover, productivity in the sector has been growing slower than in most OECD countries (Figure 5.4, Panel B and Biatour and Kegels, 2008). (2) Finally, the price levels of many of the goods associated with retail distribution are notably higher than in other euro area countries (Figure 5.2). At the same time, the sector is much more regulated than in most other OECD countries, especially in the areas of protection of existing firms, specific regulation of large outlets and shop opening hours (Figure 5.1, Panel B). This regulation shields existing shops from competitive pressures which in many cases leads to the protection of local monopolies (Hoj et al., 1995, provides evidence on the relation between regulation, prices and size of shops). Therefore, deregulation of retail distribution can be expected to boost productivity. This conclusion is backed by the results of OECD simulations, which show that Belgium is among the countries with the highest potential gains from the liberalisation of the retail sector (Box 5.2). Hence, as retail trade is an inherently competitive sector, scaling back the regulation should benefit consumer welfare. A number of studies have shown that lowering entry barriers can increase the efficiency of retail trade leading both to lower prices (Pilat, 1997, Haffner and van Bergeijk, 1997) and higher employment (Bertrand and Kramarz, 2002; CPB, 1995; Creusen et al., 2006). The scope for the increase in employment in the sector should not be overlooked in the Belgian context, given the fact that these are likely to be jobs for low skilled workers and for flexible part-time workers, such as females returning to the labour market.

[FIGURE 5.3 OMITTED]

Box 5.3 provides a detailed overview of the main restrictions to competition in the Belgian retail sector, which generally protect existing shops, in particular those of smaller size, from the entry of new innovative business models. The prohibition of sales below costs prevents retailers from easily selling unwanted stocks, increasing the risk for new entrants. The ban on announcements of price reductions before sales periods ("the black-out period") reduces consumers access to information on prices, while the prohibition of tied sales (better known in Belgium as "joint-sales") inhibits the diffusion of innovative products or new technology (in April 2009 the European Court of Justice declared this law as incompatible with European legislation). The government is currently working on the modification of most of the above regulation. The changes proposed so far do not appear substantial. As the Competition Authority should deal with the abuse of dominant position, the restrictions on prices and assortment should be scrapped altogether. In order to improve consumer welfare, providing consumers with the possibility of shopping outside standard hours and the retailers with flexibility to better meet consumer demand, the shop opening hour regulation, which is among the more restrictive in the OECD, should be abandoned. Finally, zoning regulation for large outlets, which was reformed in 2005 resulting in a faster decision making process, should be restricted to issues of urban planning, transport and safety (in line with the recent recommendation from the Ministry of Economy, SPF Economie, 2008). This would allow market forces, rather than a nation-wide committee with a strong representation of existing retailers or the local municipality, to decide on the consumers' benefits arising from a new retail outlet.

[FIGURE 5.4 OMITTED]
Box 5.2. Anti-competitive regulation and labour productivity OECD
simulations

OECD calculations report that aligning sectoral regulation (in
retail trade, electricity and gas and professional services) with
international best practice would boost labour productivity in the
entire economy by nearly 16% over the next decade. Reforms in the
retail sector only, could raise productivity by almost 12% if
regulation was brought in line with OECD best practice. Similarly,
for reforms in the energy sector, productivity is calculated to
increase by 3.5%, which is well above the average of the countries
analysed (Table 5.1).

Box 5.3. Examples of competition restricting regulation in retail
distribution

Price and transparency control

* Sales below costs are prohibited outside the sales season or
liquidation of the outlet and the sale season is limited to two
periods of one month each year.

This type of regulation limits retailers' flexibility and reduces
their ability to get rid of unwanted stock, thereby constituting an
implicit deterrent to entry and reducing consumer welfare.
Moreover, the definitions of costs and minimum margins are
cumbersome and the verification problematic, especially for
start-ups with no history of costs.

* Announcements of price reductions within 6 weeks before the sales
period are prohibited ("the black-out period"). It is also
prohibited to announce reductions which are to take place during
these 6 weeks.

The black-out period legislation reduces price transparency and
impedes the consumers' access to a full set of price information
for their choice.

* Tied sales of products are prohibited.

This regulation aims at disallowing the cross-subsidising of
products (or products and services), to enhance transparency. It
protects smaller retailers who may have less scope to offer
products tied together and has notably increased the complexity of
retail regulation. Many exceptions have been granted, for example
for the sale of an ensemble (e.g. frames with lenses) or for the
sale of a product together with its packing. As the notion of an
ensemble is unclear a priori, the law increases uncertainty for new
products and hampers the diffusion of new technology.

Regulation of opening hours

* Shops may be open on weekdays between 5 h and 20 h, on Fridays
(and days preceding holidays) till 21 h. They have to be closed for
one period of 24 hours a week (by default Sundays, though any day
of the week can be chosen as long as it is kept the same for at
least six months.) The law allows for an additional opening during
6 Sundays a year.

* Exemptions include: small shops linked to gas stations, night
shops (under 150 [m.sup.2], selling groceries and hygienic
materials may be open 18 h-7 h) and shops in designated tourist
areas.

* The law foresees fines, shop closure and prison penalties for
infringement and is enforced by state officials.

Restrictions on shop opening hours protect existing retailers, in
particular small night shops, against new innovative business
models. Such regulation also limits the retailers' ability to
adjust to changes in consumer demand and hurts consumer welfare by
reducing the ability to choose when to do shopping. In Belgium,
such regulation is aimed at enhancing workers' welfare despite its
potential employment-reducing effects.

Regulation of large outlets

* The location decision is based on the evaluation of four types of
possible effects: i) spatial effect (urban planning, access and
road safety); ii) on consumer interests (product range and prices);
iii) on employment (gross and in existing commerce); and iv) on the
balance between small, medium and large commerce.

* Decisions for shops between 400-1 000 [m.sup.2] of surface are
taken by the municipality, while for shops above 1 000 [m.sup.2]
the National Economic and Social Committee for Retail has to be
consulted. In case of surfaces above 2 000 [m.sup.2] the
neighbouring municipalities have to be consulted.

* The Economic and Social Committee is composed of representatives
of ministries, regions, consumer associations, labour
organisations, independent retailers and SME's and integrated
commerce.

* The decision must be made and communicated within a maximum of 75
days and can be appealed against to the Inter-ministerial Committee
for Retail (Comite Interministeriel pour la Distribution). Silence
is consent.

Zoning regulation may be desirable due to issues of urban planning,
traffic congestion and security, but is often used to protect
existing retailers against new entrants. As emphasised in OECD
(2008), the evaluation of consumer interests should be left to the
consumers themselves, who will ultimately decide whether the new
business serves them better than the existing ones through their
shopping choices.

Other regulation

* Further strict regulations concern advertising, specific retail
sectors (e.g. pharmaceuticals) and sales at the home of the
customer.


Regulators in network industries are faced with dominant positions of incumbents

The liberalisation in the network sectors remains limited. The degree of opening is patchy and the diversity of regulatory structures complicates regulation (Box 5.4). There exists no uniform definition of regulatory bodies. The role of network sector regulation and the lack of coordination between the sectoral regulators and the Competition Authority have been identified as the most serious issues of the design of the Belgian system (SPF Economie, 2008). Another important issue concerns the unusually wide scope of universal services which poses a barrier to entry and the expansion of competitors, while benefiting the incumbents due to problematic schemes for financing. The universal service obligations (USOs) are summarised in Box 5.5 and their effect on competition is discussed below.
Box 5.4. Regulation of network sectors

The regulation of network sectors in Belgium differs substantially
across the individual sectors. In general, the Competition
Authority deals with the cases of the abuse of dominant position
and cartel pricing in competitive sectors and the competitive
segments of the network sectors. Non-discriminatory third party
access to monopoly segments is the competence of sectoral
regulators which have various structures and varying degrees of
independence from the executive and different sources of financing.
The network sector regulators are usually also in charge of issuing
market entry licenses, assuring universal services and having some
advisory tasks as regards sector strategies.

The energy sectors (electricity and gas) are regulated by a single
federal authority, the Commission for Electricity and Gas
Regulation (known by its French and Flemish abbreviation CREG), and
three regional authorities. The federal regulatory tasks concern
mainly the approval of transmission and distribution tariffs (in
both gas and electricity) and advising the government in the other
segments of the markets. In the electricity market, its regulatory
powers are limited to transmission and distribution networks above
a certain threshold (70 kV).

The federal authority's independence seems in line with OEGD best
practice: CREG has its own budget which is funded through a
surcharge on customer utility bills securing it from potential
political intervention, although the management remains nominated
by the government. On the other hand, regional regulators are
responsible for appointing distribution network operators in gas
and distribution grid operators in electricity, issuing retail
supply licenses, ensuring the implementation of universal service
obligations and advising the regional governments. The independence
of the regional regulatory authorities from the sub-national levels
of government does not seem as well assured as in the case of the
federal regulator.

In principle, sub-national level regulators may be better prepared
to deal with regional regulatory tasks as they may be better
prepared to deal with issues of local distribution and supply as
well as consumer needs due to their local knowledge and relative
proximity to the final market. However such a structure may cause
problems of regulatory powers (overlap of powers, lack of
regulatory coverage of certain segments, lack of economies of
scale) and coordination (both of the objectives and of enforcement
decisions). This structure may lead to lengthy communication
procedures and increase bureaucracy. Three regulatory environments
are an additional entry cost for competitors and this structure has
been frequently criticised (IEA, 2006). One of the effects of the
set-up was the different progress in the legal opening of the
electricity market for consumer choice, which was functional in
Flanders in 2003, while taking until 2007 in Wallonia and the
Brussels-Capital region.

The telecommunication and postal sectors are regulated by the
Belgian Institute for Postal Services and Telecommunication (BIPT).
The regulator's independence was strengthened in 2003, formerly
being part of the Ministry which executed ownership powers in the
incumbent. Financing is assured mainly through licensing fees.
Despite the improvement, some controversies about the issue of
independence remain: the members of the Council (decision making
body), including the head, are nominated and can be dismissed on
the proposal of the executive. There remains some uncertainty about
the possibility of the government to overturn BIPT decisions and
about the political influence on the regulators priorities
(Platform, 2007). Contrary to the energy markets, the regulatory
tasks are concentrated in a federal body; however there seems to be
pressure from the language-Community level regulators (who have
competencies over broadcasting content) to gain regulatory powers
over infrastructure common to broadcasting and telecommunication
(e.g. Internet). In 2006, these resulted in a cooperation agreement
which laid down the procedures for resolving disputes of joint
competencies, causing some concern due to the increased scope for
bureaucratic consultation and leaving decision power over
unresolved issues at the ministerial level, thereby somewhat
weakening the regulator. In November 2008, the federal government
proposed measures to strengthen the regulator: the procedure for
imposing a fine is to become easier, and fines may become higher.
BIPT is to acquire more powers for intervention in the market. In
the cases that occur, its defence before the Court of Appeal is to
become less elaborate.


The energy sector: strong incumbents and high implicit barriers to entry

Electricity

The liberalisation of the energy market essentially began in April 1999 with the transposition of the first EU electricity and gas directives. The second EU directives were transposed in June 2005 while the electricity market for households was fully legally opened on 1st June 2003 in Flanders. Wallonia and Brussels-Capital followed on 1st January 2007 when supplier choice was granted to all consumers. Despite the liberalisation, electricity prices remained well above those in OECD countries with the most competitive electricity markets (Figure 5.5). Moreover, energy prices have been found to contribute strongly to the large positive inflation differential between Belgium and the euro area in late 2008. (3)

Historically, all segments of the electricity market have been concentrated in the hands of Suez and Gaz de France. Following their merger, the companies agreed with the European Commission to reduce their involvement in certain segments (Box 5.6). However, most of the segments of the market are set to remain highly concentrated in the hands of the merged company GDF-Suez. As now only legal separation of the transmission operator and accounting separation of other segments are required, the government's efforts to strengthen separation, including a favourable stance towards the introduction of ownership separation of transmission network operators are commendable. Notably, the government has taken steps to encourage auctioning off some of the incumbent's spare capacity which are yielding results (for example in late 2008 the incumbent agreed to sell 10% of Belgian production capacity) and efforts to introduce new players should therefore be continued. Nonetheless, a number of additional barriers to entry should be removed in order to encourage new competitors as the sector remains burdened by more competition-restricting regulation than international best practice (Figure 5.6, Panel A). The wholesale exchange pool, established in 2006, has failed to play a significant role (in 2008, only about 13% of daily electricity consumption was traded on the day-ahead market (4)), despite that such a measure has proven beneficial for competition in a number of OECD countries. The lack of liquidity and high prices on the wholesale market have deterred entry in the supply market and therefore further efforts to increase interconnection capacity is desirable to enhance competition. Moreover, although the retail electricity prices are not regulated, most suppliers choose to use a variation of a cost indexation formula calculated by the federal regulator (CREG), which was used historically to determine the regulated price before the markets were liberalised. The publication of the components by CREG should be ceased, as they bring little value added while posing the risk of the regulator acting as a price coordinator on the retail market. As this formula is based, among others, on the Zeebrugge hub spot gas price and available nuclear plant capacity, both of which can be strongly influenced by the incumbent companies, increased vertical separation in the market should ensure this is not the case. The transmission and distribution tariffs are accompanied by high uncertainty, undermining potential new business models of new entrants. Switching to multi-annual tariffs for transmission (in 2008) and distribution (in 2009) are significant steps towards a more stable environment, however the legal uncertainty related to the details of the introduction of such legislation has, so far, undermined its effect. Another example of the uncertainty surrounding tariffs was when the lowering of tariffs by CREG led to an appeal against its decisions and its subsequent annulment in 2008. This resulted in a number of suggestions that the regulator needs additional tariff-setting powers in the distribution segments (NBB, 2008).

[FIGURE 5.5 OMITTED]

[FIGURE 5.6 OMITTED]
Box 5.5. Universal services in energy, telecoms and post

Universal service obligations (USOs) are intended to assure the
universal access to a designated service at a specified quality and
an affordable price. In practice however, they may serve as a
barrier to deter new entrants, securing of an incumbent's position
or a subsidy for the latter. In general each World Trade
Organisation member has the fight to set the desired scope of USO.
The specific rules for EU member states are set out in the
Universal Service Directive (for telecoms) and in the Postal
Directive. In general USO's, if constituting a cost to the
supplier, must be compensated for with profits made in other
markets. They can be financed directly from the government budget
(through the acquisition of a service), from a fund to which market
participants contribute (e.g. pay or play fund) or through a
designated segment of the market (e.g. through the reserved area in
postal services, through distribution tariffs in distribution).

In Belgium, no uniform approach to universal services exists. While
provisions for auctioning off some of the services to the provider
with best offers exist, other services are imposed on all
operators. The scope of universal service tends to be unusually
broad in all sectors while differing across regions (Table 5.2).

Box 5.6. The Gaz de France-Suez merger and concentration on the
Belgian energy market

The merger between Gaz de France (GDF) and Suez was announced in
February 2006 and due to its large-scale characteristics was
subject to the EU regulation regarding limits on concentration. The
Commission authorised the deal in November 2006, amid concerns
regarding the large role of the new company in specific markets.
Before the deal, the two companies had strong positions in the
Belgian energy markets, thus the merger posed problems of further
increasing the concentration of the already highly concentrated
energy sector. In order to receive the approval of the merger by
the European Commission the companies made a number of commitments
regarding the Belgian markets (Table 5.3).


[FIGURE 5.6 OMITTED]

Another potentially important deterrent to entry is the complicated regulatory structure (Box 5.4) which effectively divides Belgium into three separate energy markets, thereby increasing entrants' (fixed) costs. The federal regulator seems sufficiently independent and equipped to regulate the areas within its competence. In April 2008, the government increased the investigative powers of its officials and thus improved the toolset of the federal regulator. However, the set-up of the regional regulators does not seem as well developed. Firstly, their independence does not seem as well secured, as they are financed directly by regional government budgets, while the senior staff is appointed by the regional government, and their objectives are not necessarily in line with each other nor with those of the federal body. Secondly, although regional regulators in downstream segments may, in principle, be better equipped to fulfil their tasks, being closer to the final consumer, such a structure risks unnecessary bureaucratic delays in communication and the loss of economies of scale, in particular in the Belgian context where divided regulators are dealing with a very concentrated market. In addition, there is a risk that regional regulators may be more prone to regulatory capture, in particular given their weak independence from the governments and the strong involvement of municipalities in distribution networks. (5) Therefore the regulatory structure should be revisited and the regulatory tasks should be concentrated in one authority. As a second best, strong independence and sufficient powers of the regional regulators need to be secured, while the current voluntary dialogue forum should be replaced by a binding co-operation and co-ordination framework between regulators of all levels is necessary and to align their priorities. Finally, universal service obligations appear overly broad and may deter entry due to a higher cost of adapting to the regional specificities (Box 5.5). In order for them not to constitute a barrier to new competitors, regional authorities wishing to conduct additional social policy based on energy provision, should purchase energy within their own budget or use transfer policies instead of the regulated tariffs.

Gas

Gas is imported mainly through the Zeebrugge hub and LNG terminal. Roughly one half of the households use gas for heating and cooking and the role of gas in the generation of electricity, is set to increase significantly over the coming two decades (IEA, 2006). A number of issues concerning the gas sector are also common to the electricity sector, and thus have already been discussed in the previous section. The sector was liberalised in a similar time frame as the electricity sector. Gas prices were generally near the EU average until 2007, but as in electricity the subsequent fall was due to a regulatory lowering of tariffs, which were annulled in 2008 (Figure 5.5).

The main regulatory problems in the gas market concern high implicit barriers to new entry and the resulting strong position of the incumbent, while explicit entry barriers are low (Figure 5.6, Panel B). The gas market is highly concentrated (GDF and Suez) and the commitments accompanying the merger of the two companies are unlikely to improve the situation (Box 5.6). As a result, the transmission network capacity has been, to a large extent, unavailable to new entrants as it was contracted out for very long time periods. Measures to resolve this situation have been imposed by the Commission in late 2007 (EC, 2007a and 2007b) however it will take time to evaluate whether they are sufficient. Moreover, installing a well functioning wholesale pool for natural gas, which has proved to benefit competition in a number of OECD countries, is recommended. (6) Given the strong position of GDF-Suez in various segments of both the gas and electricity markets, regulatory efforts should be increased to ensure that the legal interdiction of cross-subsidisation within the same company, both between the different segments of the gas market as well as between gas and electricity products, is respected. As in electricity, the law currently requires legal separation of the transmission and distribution segments and accounts separation of the other segments. The introduction of mandatory vertical ownership separation between different segments or of strengthening the existing formal separation, in line with the government's proposals, would be a desirable step. In this light, the government should continue its efforts to make sure that the main market players do not have a blocking minority participation in the ownership structure of the Zeebrugge hub and the LNG terminal. This should be done with the goal of assuring non-discriminatory third party access to the terminals and to transmission capacity from the terminals, which has proven a serious problem in the past. The Ministry of Energy is currently working on this issue, as part of the new Code of Conduct on third party access to the gas network.

The performance of the telecommunication sector over the past decade has been disappointing

Productivity growth in the telecommunication sector was well below that in most other OECD countries (Table 1.6) and consumers were often forced to pay higher prices than in neighbouring countries and the introduction of new technologies was lagging. Although explicit barriers to entry do not seem to be a problem in most segments of the market (Figure 5.6, Panel C), one of the most visible issues is the high concentration of the sector.

Fixed telephony

Following the liberalisation of telecommunications on 1st January 1998, new entrants have not been able to gain a strong position in some of the key segments of the market, which remained concentrated in the hands of the majority state-owned incumbent Belgacom. Belgian broadband offers remain on the expensive side in comparison to other OECD countries (Figure 5.7). Moreover, a particular feature of the Belgian broadband is that practically all offers have monthly download quotas (bit-caps) which tend to be lower than in other countries. This further raises the price of Internet usage as exceeding the quota entails an additional cost. (7) Furthermore, the Belgian consumer does not have access to top technology (e.g. fibre-to-the-home) and the advertised speeds remain well below the fastest offers in leading OECD countries (Figure 5.8). As a result, broadband penetration, among the highest in the OECD in 2002, has since been growing slowly and is lower than in many countries (though still above average). Finally, the Belgian consumer pays an excessive price for triple-play offers (broadband, TV and telephone) while the offers are of inferior quality (Table 5.4 shows a comparison with France, where the regulator has been particularly active in the telecom market).

Broadband is provided mainly through DSL lines and to a smaller, but still internationally high, extent via cable. Local loop unbundling (LLU) of cable networks is technically infeasible and due to the high concentration in the cable sector, this technology has failed to put sufficient competitive pressure on the incumbent's DSL offer. In DSL itself, the main alternatives to the incumbent's offer are provided via bitstream (renting capacity from the incumbent and reselling it) which is incapable of challenging the incumbent's position as it does not allow for sufficient differentiation of products (e.g. providing television over Internet). Overall, the level of local loop unbundling of DSL lines is very low when compared with OECD countries with a liberalised market, despite a comparable regulated price of provision. (8) Until 2007 this was largely a consequence of high (regulated) prices of unbundling, which have since been lowered to internationally low levels (EC, 2008a). Nevertheless the latter development has failed to benefit the final consumer. Part of the explanation is historical and the effects of lower tariffs should eventually be felt. However, many costs related to unbundling remain high (e.g. collocation, installation and de-installation) increasing the cost of entry. Secondly, for a number of years, the incumbent has failed to comply with requirements concerning the riming and quality of provisioning and servicing of lines, and the regulator has failed to enforce these obligations. (9) Furthermore, the incumbent has appealed against almost all of BIPT's decisions and cases get held up in the Court of Appeal or in some cases at the Competition Council for a relatively long time given the dynamic nature of the sector. In the end BIPT's decisions were often annulled on formal grounds, increasing uncertainty for new entrance (Platform, 2007). Such developments create an implicit barrier for new entrants, who face high uncertainty regarding the quality of services provided by the incumbent, and therefore potential problems with assuring a high quality of the end product.

[FIGURE 5.8 OMITTED]

The regulatory and legal framework was earlier criticised for lacking a consistent and systematic approach and giving the impression of improvisation (Dehousse and Zgajewski, 2003). The regulator's powers still seem somewhat weaker when compared with the OECD best practice. Firstly, what is rather unusual, dispute settlement is outside its competencies and is carried out by the Competition Council. Second, the regulator appears to have fewer tools available to enforce its decisions than for example regulators in Finland, Sweden and Spain (ECTA, 2008). BIPT is unable to impose periodic penalties to ensure compliance, to suspend an introduction of an offer until the ex ante obligations are fulfilled and is tied up by a strict confidentiality law. (10) Moreover, although BIPT's independence was improved in 2003, there are indications it may still need strengthening in particular given the controlling share of the state in the incumbent (Box 5.4). As a consequence, Belgacom is a significant contributor to the federal budget, which leads to a potential conflict of interest: the state is a regulator in charge of promoting competition and the state benefits from the incumbent's profits. Therefore, the privatisation of Belgacom would further clarify the incentives to empower the sectoral regulator. In the past years, a number of sources have accused the regulator of being under political influence (Platform, 2007, ECTA, 2008, Test-Achats, 2007, 2008) and of neglecting the enforcement of local loop unbundling (Platform, 2007). Each of these issues should be reviewed and addressed, so that the regulator can take an active part in promoting competition on the telecom market in order to bring telecommunication productivity growth more in line with other OECD countries and to allow consumers to benefit from lower prices and better offers. This should be done primarily through a tough stance on the incumbent's violations, including a determined use of fines in order to lower implicit entry costs and encourage LLU. Furthermore, any pressures to dilute the regulatory powers, for example due to the overlaps of competencies with the Community-level broadcast content regulators, should be strongly resisted. Notably, the government is preparing a reform which should improve the powers of the regulator (Box 5.4).

Another important issue is the imposition of social tariffs on all the operators in fixed line telephony and their funding (Box 5.5). The implementation of the social tariffs has raised numerous problems, including the problems of competitors' access to the database which would allow the verification of eligibility (Platform, 2007) which now seems to have been solved. Moreover the compensation mechanism seems not to be in line with the EU's Universal Service Directive as there are no legal instruments to establish whether provision of social tariffs constitutes an unfair burden. Due to the larger share of those benefiting from social tariffs among Belgacom's clients, the fund risks being an effective subsidy to the incumbent. If the government is determined to pursue the social tariff element of universal service, it should consider periodically auctioning off the service in a competitive bid, or at the least obliging the regulator to conduct investigations whether this service constitutes an unfair burden, equipping it with the necessary legal tools. Last but not least, there could be concerns for the future development of competition in the market if Belgacom upgrades its network using VDSL, since this technology increases the cost of unbundling for new entrants. Therefore the regulator needs to examine how to ensure competition with this technology (steps in this direction would include assuring access to passive infrastructure and backhaul facilities). It is also desirable to encourage the development of fibre-to-the-home (FTTH) technology.

Mobile telephony

Mobile call charges in Belgium tend to be on the expensive side: low-usage charges appear close to the OECD average, despite an internationally high number of virtual operators (MVNO's) and resellers targeting this market, while high-usage prices are among the most expensive (Figure 5.9). Mobile phone penetration is among the lowest in the EU, showing little signs of catching up. The market is divided between three network operators, including the dominant player Proximus, which is owned by the fixed telephony incumbent, Belgacom. (11) The numerous resellers and MVNO's (above 25), contrary to other countries, have failed to gain a significant market share and to bring down the price of mobile calls (the combined market share remained below 1% by 2008, EC, 2008a). Mobile termination charges, despite being lowered in 2008, remain well above those in competitive markets like the United Kingdom, Sweden and Finland. Moreover, in 2008 the College of Competition Prosecutors has found evidence of the abuse of dominant position by Belgacom Mobile (in the period 2002-2005) and the case is currently pending before the Council (the complaint was filed in 2005). The incumbent's appeals against the lowering of termination charges lead to lengthy legal procedures in the Court of Appeal and significantly increase uncertainty for resellers.

[FIGURE 5.9 OMITTED]

The regulator should focus on lowering mobile termination rates to meet the levels in the most competitive markets. In order to assure that the business models of the resellers are not undermined by uncertainty related to the incumbent challenging the regulator's decisions, the court cases should be speeded up in order to assure that they better match the dynamic nature of the sector. This should be achieved through appointing the Competition Council as the institution of appeal against all decision of the regulator, which may possibly require increasing the Council's resources. In order for the reduction of mobile termination rates to benefit the final consumer, sufficient competitive pressure on retail and wholesale prices must be assured. A desirable step in this direction, already under consideration by the government is the introduction of the fourth network license. To facilitate the expansion of resellers and the potential new operator, the long length of service contracts should be reduced by limiting their maximum duration. The process for number portability should be streamlined to reduce the time taken to port a number. As for the social tariffs, the benefits of the extension to mobile phones are disputable (EC, 2006). As in fixed telephony, if the government considers social tariffs desirable, it should consider periodically auctioning off the service in a competitive bid and pay for it directly from the budget.

Liberalisation in postal services and rail transport in lagging

The liberalisation of both the rail transport and postal services market is proceeding slowly, in line with the requirements of the European Commission. The latter stipulates the eventual full opening of both markets to competition: rail transport by January 2010 and postal services by January 2011. In the postal services sector, while competition seems to be well in place in the courier services, it is practically non-existent in the addressed letter segment (van der Lijn et al., 2008). As a consequence, despite the favourable characteristics of a relatively evenly spread, dense population, Belgian consumers suffer from higher prices, in particular for letters, and from a poorer quality of services that in most neighbour countries (Deutsche Post, 2008 and EC, 2008b). The sectoral regulator has, according to some sources, been perceived as inactive in the field of postal services (Baeke, 2008). Indeed the quality criteria agreed with the State have not been met by the incumbent, but no sanctions were issued. Although the situation is expected to improve as new sorting centres have been put in place, sanctions for the violation of preset quality standards should be significant and automatic, leading to stronger incentives to improve the quality of services. Moreover, new entry may be deterred by a number of additional Belgium-specific regulations. These include a VAT exemption on certain services provided by the incumbent and a particularly broad range of universal service obligations (Box 5.5). The former distorts the market, biasing the incumbent towards servicing the residential market and the competitors towards the business market while the broadness of USO's leads to a high cost of provision. (12) This may result in the subsidisation of the incumbent who, even in a fully liberalised market, will remain the only player with sufficient infrastructure to provide the broad USO's. Thus it would be desirable that each of the services currently included in the USO bundle, if deemed indispensable by the government, to be separately auctioned off according to best offer. Until then, the pricing should fully take into account the benefits of brand display.

As concerns rail transport, virtually no steps have been taken towards opening the passenger transport market to competition. The freight market is legally open for international connections since January 2006 and one year later for national connections, but remains strongly dominated by the state-owned incumbent. The publicly owned incumbent consists of the monopolist passenger transport service provider, the dominant freight service provider and the infrastructure operator. The passenger and freight segments have separate accounts while the infrastructure operator is required to be legally separated from the service providers. However, this separation is incomplete due to overlaps in terms of high level personnel. The sectoral regulator, which remains an agency within the Ministry of Transport, is in need of strengthening and more independence in order to assure non-discriminatory third party access to tracks, slots and marshalling facilities. Moreover at the moment, passenger connections are negotiated between the infrastructure operator, the monopoly service provider and the state which has a monopsonistic position. Once the market is liberalised lower levels of governments should be empowered to purchase desired services (as for example in Germany) to introduce a more market-based provision of services. Strengthening the regulator, finalising the legal separation and changes in the service acquisition framework are recommended along with the swift full opening up to competition. Finally, successful introduction of competition in the rail sector would also be facilitated by a uniform, market-oriented approach to universal service across the network sectors in order to guarantee a level playing field and to avoid entry barriers to new competitors.

Conclusion

Recent reforms of competition policy enforcement and the favourable stance of the government towards more competition constitute undeniable progress towards more competitive domestic markets. However, this may not suffice to bring productivity in certain sectors, such as retail distribution, telecommunication and energy, in line with that of the leading OECD countries. In order to reap the full benefits of liberalisation in terms of higher productivity and employment growth as well as competitive prices, further steps need to be taken. Overall, the system of regulation as a whole may need reconsideration in order to be aimed at a clearly defined, efficient role of each regulatory authority and at securing effective cooperation between the authorities. A number of additional policy measures which should be taken in order to assure that Belgian consumers benefit from competition on the market are summarised in Box 5.7.
Box 5.7. Policy recommendations to enhance competition

The Competition Authority needs further strengthening

* The effective independence and the accountability of the
Competition Authority should be monitored, in order to assess
whether further strengthening in these areas is necessary.
Resources may need to be reviewed and eventually increased to
levels observed in other small economies with a proactive
competition enforcement stance.

* In order to avoid foregoing or postponing important cases and to
allow the Competition Authority to adopt a more proactive role in
analysing the market, its resources should be increased. The
Competition Council should be established as the institution of
appeal against all the decisions of the sectoral regulators.

* In order to improve deterrence, the law should provide for
criminal sanctions for hard-core cartel infringements. High fines
should not be avoided as they deter anticompetitive practices and
increase the attractiveness of applying for leniency.
Confidentiality rules should be reviewed and possibly loosened with
a goal of facilitating the cooperation of the Authority with
network sector regulators.

Competition-burdening regulation in retail distribution should be
abolished

* In order to benefit from the competitive nature of the retail
sector, with the goal of creating employment, improving purchasing
power and bringing productivity in line with other OECD countries,
the competition inhibiting regulation should be scrapped (e.g.
restrictions on sales below cost, opening hours and tied sales,
black-out periods). Zoning laws for large outlets should be
restricted to evaluating spatial effects (urban planning, access,
safety) in order to assure they do not protect existing retailers
against new competition.

Sectoral regulation needs to focus on implicit barriers to new
entry

* To improve the effectiveness of regulatory action in the energy
sectors, the complicated regulatory structure should be
reconsidered. Reforming the setup to establish a single,
independent nationwide regulator with competencies including the
areas of distribution and supply of gas and electricity in order to
deal with the local monopolies, should reduce the bureaucratic
procedures and the burdens for new entrants. Alternatively the
binding co-operation procedures between the regulatory bodies
should be introduced in order to align the objectives of regional
regulators, increase the efficiency of communication procedures.
Independence of the regional regulators from the governments should
be assured.

* In order to facilitate new entry, ownership separation between
different segments of the electricity and gas markets should be
considered. For the same reason, regulatory efforts should be
strengthen to ensure that the ban on cross-subsidisation between
electricity and gas markets is enforced.

* New entry should be promoted by improving the role of the
wholesale exchange and reconsidering the universal service
obligations (USOs) and their variation across regions. If
sub-federal governments wish to implement additional social
policies they should finance it from their own budget rather than
through distribution tariffs.

* In the electricity sector further efforts should be made to
increase interconnection capacity, encourage new entry and continue
auctioning off of the incumbent's production capacity.

* An anonymous wholesale pool for gas should be developed in order
to facilitate new entry. Assuring strong vertical separation,
between the Zeebrugge gas hub and the LNG terminal on the one hand,
and the dominant players in the energy market on the other is
strongly advised in order to assure third party access. The
effectiveness of recent measures to reduce long contract lengths in
the gas wholesale market should be evaluated and if necessary new
measures should be adopted.

The telecommunication regulator needs to toughen its stance against
incumbent's violations

* The regulator should be given the ability to introduce periodic
penalties and to block the introduction of offers if ex ante
conditions are not fulfilled. Furthermore, the regulators
independence may need explicit strengthening while the government
should proceed with the privatization of the incumbent.

* In fixed telephony the regulator should increase efforts to
encourage local loop unbundling (LLU) through strengthening its
stance on the incumbents violations in the areas of deadlines for
LLU provision, service level agreements, collocation and the
quality of services provided. Fines for the incumbent's violations
should be used more widely and preferably be automatic. The
regulator should strongly promote competition in new generation
networks.

* In order to avoid inefficient complication of the regulatory
structure and the dilution of powers, any pressure from
Community-level broadcasting regulators to gain power to regulate
transmission infrastructure should be strongly opposed.

* In mobile telephony the regulator should increase efforts to
lower the mobile termination charges and to decrease the
uncertainty surrounding its decisions through a better preparation
to defend them in court.

* The fourth network operator should be introduced as soon as
possible. Maximum contract duration should be reduced in order to
increase flexibility and facilitate entry. USOs should be funded
from the government budget via competitive tendering.

Faster opening up of the other network sectors is essential

* Competition should be introduced in all segments of postal
services. Efforts to decrease entry barriers should be increased:
the scope of USOs should be reconsidered and the clause on
additional fund for USO financing should be eliminated. Again USO's
(each service individually) should be financed directly from the
budget through competitive tenders.

* Faster opening up of the rail transport sector should be
accompanied with strengthening the independence and powers of the
regulator.


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***

Notes

(1.) The figures presented do not take account of differences in VAT tax rates across countries. However, although the Belgian standard VAT rate is higher than in many euro area countries, the differences are of a small order of magnitude (on average 1.6 percentage point higher) and would not change the conclusion. Furthermore the Belgian VAT tax is characterised by a large number of reductions and exemptions (Chapter 4).

(2.) Although labour productivity growth in the Belgian distribution sector (which consists of wholesale and retail trade and repair shops) has been slow in the past decades, there are findings that the actual level of productivity in Belgian distribution is among the highest in the OECD (Inklaar and Timmer, 2008). The main reason for the low productivity growth is the low growth rate of total factor productivity. The high productivity levels are due to very high capital intensity (both information and communication technology capital and other types of capital). This may seem somewhat in contrast with the fact that the Belgian retail sector is characterised by a large amount of small shops. Partial explanations for this phenomenon may include the wide definition of the sector, encompassing far more than just retail trade and the relatively restricted opening hours (due to opening hour regulation and working hour regulation).

(3.) The favourable development in 2007 has been due to a transmission and distribution tariff decrease imposed by the federal regulator, which was later annulled by the court on the grounds of the regulator exceeding its competencies. The decreases of electricity (and gas) prices in 2007 relative to other countries have been reversed as a result of the tariff increase ranging from below 10% in Wallonia (where they remain the highest) to almost 50% in Flanders (where they still remain the lowest). This caused final energy prices to increase sharply. The 22% inflation (year-on-year) of Belgian energy prices in September 2008, is estimated to have been only 13% if not for the change in distribution tariffs, and below 8% (in line with Euro area average) if additionally capacity was kept at 2007 levels. Of the 1.8 percentage point differential in headline inflation between Belgium and the euro area (September 2008) 1.2 percentage points can be explained by gas and electricity price increases (NBB, 2008).

(4.) Monthly variation can be considerable, e.g. in May 2008 the traded volumes reached a third of Belgian demand.

(5.) The municipalities have a legal monopoly in electricity distribution, and nearly all of them transferred the distribution to inter-municipal companies (intercommunales). The income from the energy-related activities constitutes an important figure in the municipal budgets reaching 10% of the revenues.

(6.) Although APX Zee (a within-day and day-ahead gas trading platform) already exists, its role is negligible with a total of 33 transactions done in the whole of 2008, of which 11 since February.

(7.) Caps generally prevail in countries where geography limits the connection to the rest of the world (e.g. located on islands) and in principle Belgium's location does not explain the prevalence of caps. In 2008 only four OECD countries had 100% of offers with caps (Australia, New Zealand, Canada and Belgium) while Iceland and Ireland had a domination of offers with caps (OECD broadband portal). The average level of caps in Belgium was the second lowest in the OECD, of a range comparable with only New Zealand (on average 20 GB in 2008, but being as low as 250 MB in the low-end offers). Belgian bit-caps are reached relatively fast, compared to the advertised maximum download speed and may impose a higher de facto charge for high users. In mid-2008 one challenging provider started offering uncapped downloads, but has since been followed by only one competitor (in December 2008).

(8.) By January 2008, out of over 1.6 million DSL lines, less than 40 000, that is 2.5% of the total, were fully unbundled. In contrast, 18% of lines are unbundled on average in the EU 27, 31% in Germany, 23% in France and 10% in the Netherlands. Shared access lines constitute slightly above 1% of total lines in Belgium.

(9.) The regulator generally has refrained from fining Belgacom. As regards local loop unbundling, by July 2006 BIPT registered numerous complaints from the alternative operators about Belgacom not meeting legal deadlines for line installation and service works. Instead of adopting a tough stance on the violations BIPT effectively doubled legal time limits for Belgacom. This decision had an adverse impact on consumer welfare instead of forcing the incumbent to devote additional resources to LLU and servicing. The penalties for exceeding the maximum timeline were revised, detaching them from the monthly rental fee, however they have been capped at relatively low levels. Since then the timing schedules are to be reduced gradually, however despite recent improvements, Belgacom still seems to have problems fulfilling them, but uses inevitable deviations from the forecasts on LLU which the competitors are obliged to provide in order to avoid fines. Similarly, Belgacom's competitors give details on the problems BIPT has experienced in forcing Belgacom to include ADSL2+ in to its reference offer for bit stream (despite persistent refusal to fulfil BIPT's request no fine was issued). Only recently (July 2008) a EUR 3 million was issued for failing to comply with BIPT's decision on mobile phone charges.

(10.) For example, the decision whether data passed on to BIPT is confidential or not is left to its author. No motivation must be given, and the regulator cannot challenge this decision, thus the use of obtained data may be limited.

(11.) The three market players are Proximus (owned by Belgian fixed-line incumbent Belgacom) with 45-49% of the market according to different estimates, Mobistar (owned by the French incumbent France Telecom) with 31-34% of the market and BASE (owned by the Dutch incumbent KPN) with the remaining share of around 20%.

(12.) The lack of VAT on postal services provided by La Poste in the area subject to USO gives an advantage to the incumbent towards customers unable to reclaim their VAT (mainly households) and a disadvantage towards other customers. Households, pay the nominal price on which the incumbent does not pay VAT. Business customers also pay the nominal price but they can reclaim the VAT from the competitors' price while not from the incumbent's price. Moreover, as the incumbent uses inputs subject to VAT, it cannot reclaim the tax when offering a service not subject to value added taxation.
Table 5.1. The simulated effect of liberalisation on labour
productivity in the future

Simulated percentage increase in productivity over 10 years

                              Sectors simulated

                   All sectors          Electricity and gas

                                 Degree of reform

              To 2007      To EU      To 2007      To EU
               best        75th        best         75th
              practice   percentile   practice   percentile

Belgium         15.8        15.6        3.5         3.5
Netherlands      8.3         7.4        3.2         2.8
France          10.3        10.0        1.4         1.3
Denmark          8.0         7.3        2.6         2.3
Italy           14.1        13.7        2.6         2.5
Canada          14.4        14.1        5.6         5.5
Finland          6.8         6.0        2.1         1.8
Portugal        12.2        11.8        3.8         3.6
Spain           13.9        13.8        4.5         4.5
Total           11.4        10.9        2.6         2.6

                 Sectors simulated

                      Retail

                  Degree of reform

              To 2007      To EU
               best        75th
              practice   percentile

Belgium        11.9        11.7
Netherlands     4.8         4.3
France          7.4         7.2
Denmark         5.4         5.1
Italy           4.9         4.8
Canada          7.8         7.6
Finland         4.2         3.9
Portugal        7.2         6.9
Spain          10.9        10.8
Total           6.9         6.4

Source: OECD (2008), Regulatory Review of Italy.

Table 5.2. Universal service obligations in Belgium By network sector

Sector                                   USO

Energy (electricity      * Social tariffs for low income
and gas)                   households.

                         * Free annual electricity quota for
                           all Flemish households.

                         * Arrangements for households
                           unable to pay bills.

                         * A fixed deduction for gas,
                           electricity and fuel for each
                           household. USOs are regional
                           competencies, thus the scope
                           differs across regions. The federal
                           regulator incorporates the regional
                           specificities of USOs into the
                           individual network distribution
                           tariffs.

Telecoms                 * Access to the infrastructure of
                           fixed line telephony (at an
                           affordable price).

                         * The availability of directory
                           enquiry services.

                         * Provision of public phone booths
                           over the entire national territory.

                         * Publication of universal white pages.

                         * Application of social tariffs for
                           disabled and elderly/low income
                           (fixed and mobile).

                         Since 2007, the government has
                         implemented tendering procedures in
                         order to designate the provider of
                         each of the first tour services.
                         There are no procedures for
                         tendering social tariffs as these
                         are imposed on all providers and
                         funded through a fund to which all
                         market participants contribute.
                         There are no legal tools to assess
                         that the USO provision actually
                         constitutes an unfair burden, which
                         would justify the additional
                         financing. The European Commission
                         has launched an infringement
                         procedure and has recently taken
                         Belgium to the European Court of
                         Justice.

Post                     * Daily collection and delivery,
                           sorting and transport of letters
                           and parcels within a size limit.

                         * Minimum of one access point per
                           municipality.

                         * Handling military mail.

                         * Early delivery of newspapers and
                           certain periodicals.

                         * In-house payments of pensions and
                           financial post services.

                         * Management of the State account
                           treasury.

                         * Printed election material
                           delivery at reduced rates.

                         USOs are provided by the incumbent
                         in return for proceeds from the
                         reserved segment of the market. The
                         law foresees a possibility of
                         financing USO costs from a fund
                         paid by all license holders which,
                         although not used, increases the
                         uncertainty of the legal
                         environment. The first two services
                         are rather standard in other
                         countries, while the others are
                         Belgian-specific.

Source: OECD and European European Commission (2006), "Commission
staff working document SEC(2006) 445" Impact assessment report,
annex to the report regarding the outcome of the Review of the
scope of universal service in accordance with article 15(2) of
Directive 2002/22/EC.

Table 5.3. The Belgian energy market and GDF-Suez
Concentration before and after the merger

                        Role of GDF and Suez before
Segment of the market   the merger

Production, imports     Electricity: 85% of electricity
and wholesale           production was in the hands of
                        Suez-owned Electrabel, while
                        another 8% was in the hands of SPE
                        (partly owned by GDF).

                        Gas: Suez-owned Distrigas
                        controlled over 85% of the
                        wholesale market (including control
                        of the main international hub and
                        LNG terminal in Zeebrugge) while
                        GDF held another 10.4%.

Transmission            Electricity: Suez had the blocking
                        minority in the electricity
                        transmission system operator (Elia)
                        while SPE also held a small share.

                        Gas: Suez held over 57% of shares
                        in Fluxys (the transmission system
                        operator).

Distribution            Electricity: Electrabel (owned by
                        Suez) had shares in roughly 80% of
                        the distribution system operators,
                        within the regional restrictions
                        limiting private sector
                        participation to minority shares.

                        Gas: Suez had stakes in 80% of the
                        distributors.

Supply                  GDF and Suez jointly controlled
                        over 70% of the electricity supply
                        market and about 80% of the gas
                        supply market.

                        Commitments of GDF and Suez in
Segment of the market   light of the merger

Production, imports     Full spin-off of SPE (remaining
and wholesale           share was sold to Centrica in
                        January 2009).

                        Sale of Suez's holding in Distrigas
                        (with some restrictions, was sold
                        to ENI in May 2008). Creation of
                        Fluxys International with a maximum
                        60% ownership of the GDF-Suez from
                        part of Fluxys (the transmission
                        system operator) in order for the
                        group to retain control of the
                        Zeebrugge import hub and LNG
                        terminal.

Transmission            GDF-Suez reduced its stake in Elia
                        to below a blocking minority of
                        25%, in accordance with a previous
                        commitment (December 2007).

                        Reduction of the group's stake in
                        Fluxys (was reduced to just below
                        39% in September 2008 in a
                        transaction with the municipal
                        holding Publigaz).

Distribution

Supply                  Sale of Suez's holding in Distrigas
                        (with some restrictions, was sold
                        to ENI in May 2008).

Source: International Network of Energy Regulators and
European Commission.

Table 5.4. Triple-play is significantly more expensive than in France

                    Internet
                 connection speed   Bitcap      Television
Company          (download, Mbps)    (GB)        channels

France
  Free                         28     ...              50+
  Neuf                         20     ...              50+
  Orange                       18     ...              50+
  Numericable                 100     ...              50+
Belgium
  Belgacom                      1        1             50+
  Belgacom                      4        4             50+
  Belgacom                     12       25             50+
  Telenet                       4        5             50+
  Telenet                      12       30             50+
  Telenet                      20       30             50+
  Telenet                      25      100             50+
  Numericable                 100      100             50+

                       Telephone                   Price
Company          (unlimited free calls           ([euro])
                      included)
France
  Free                  70 countries               29.99
  Neuf                  60+ countries              29.99
  Orange                National only              39.99
  Numericable            45 countries              31.90
Belgium
  Belgacom       Off peak only (1 country) (1)     47.00
  Belgacom       Off peak only (1 country) (1)     57.00
  Belgacom       Off peak only (1 country) (1)     67.00
  Telenet        Off peak only(36 countries)       40.00
  Telenet        Off peak only(36 countries)       50.00
  Telenet        Off peak only(36 countries)       60.00
  Telenet        Off peak only(36 countries)       70.00
  Numericable            42 countries (2)          59.99

(1.) Fixed EUR 5 activation fee for international calls.

(2.) Very limited promotional offer.

Source: Company websites, December 2008.

Figure 5.7. Broadband Internet is relatively expensive (1)

Price per unit of maximum download speed (2) (USD)

JPN        0.1   105.8
FRA        0.3    35.7
KOR        0.3     3.5
SWE        0.5   137.3
FIN        0.6   103.8
NZL        1     92
AUS        1.1   191.5
GRC        1.1    51.8
GBR        1.3    15.3
NLD        1.4    56
ISL        1.5    49.2
DEU        1.8    23.8
ITA        1.8    28
LUX        1.9    20.8
DNK        2      42.8
ESP        2      49.8
SVK        2.2    48.8
AUT        2.4    28
PRT        2.4    13.9
CZE        2.5    14
IRL        2.5    35.9
USA        2.6    26.7
CHE        2.7   117.1
HUN        2.8    40.8
POL        3.2    65.7
NOR        3.5    35.1
BELGIUM    4.1    28.7
CAN        4.4   127.1
TUR        4.8    39.8
MEX       13.5    84

1. October 2008, logarithmic price scale.

2. USD per 1 Mbps of maximum advertised download speed.

Source: OECD (2009), OECD Communications Outlook (forthcoming).

Note: Table made from bar graph.
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Publication:OECD Economic Surveys - Belgium
Date:Jul 1, 2009
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