Annual Activity Report

Transcription

1 European Commission 2011 Annual Activity Report DG Competition

2 Table of Contents PART 1. POLICY ACHIEVEMENTS INTRODUCTION To protect competition on the market as a means to enhance consumer welfare in the EU To foster a competition culture To support growth, jobs and competitiveness SPECIFIC OBJECTIVES OF THE 2011 MANAGEMENT PLAN Control of State aid Merger control Cartels, anti-trust and liberalisation Policy coordination, European Competition Network (ECN) and international cooperation 14 PART 2. MANAGEMENT AND INTERNAL CONTROL SYSTEMS INTRODUCTION TO DG COMPETITION Structure of DG Competition Risks Working arrangements with the Commissioner Financial circuits Description of internal control systems THE FUNCTIONING OF THE ENTIRE INTERNAL CONTROL SYSTEM Compliance with the requirements of the control standards Effectiveness of implementation of the prioritised control standards Conclusion on the functioning of the entire internal control system INFORMATION TO THE COMMISSIONER PART 3. BUILDING BLOCKS TOWARDS THE DECLARATION OF ASSURANCE BUILDING BLOCKS TOWARDS REASONABLE ASSURANCE Building block 1: Assessment by management Building block 2: Results from audits during the reporting year Building block 3: Follow-up of previous years' reservations and action plans for audits from previous years Building block 4: Assurance received from other Authorising Officers in cases of crossed sub-delegation Completeness and reliability of the information reported in the building blocks RESERVATIONS comp_aar_2011_final Page 2 of 32

3 3.3 OVERALL CONCLUSIONS ON THE COMBINED IMPACT OF THE RESERVATIONS ON THE DECLARATION AS A WHOLE PART 4. DECLARATION OF ASSURANCE comp_aar_2011_final Page 3 of 32

4 1.1 Introduction PART 1. POLICY ACHIEVEMENTS The general objectives of DG Competition as set out in the 2011 Management Plan are i) to protect competition on the market as a means to enhance consumer welfare, ii) to foster a competition culture; and iii) to support growth, jobs and competitiveness of the EU economy. These general objectives are in line with the Europe 2020 Strategy, and in particular with its three mutually reinforcing priorities: smart growth, sustainable growth and inclusive growth. By pursuing these general objectives, competition policy will help the EU deliver on the flagship initiatives set out in the Europe 2020 Strategy, in particular the initiatives on "the Innovation Union", "the Digital Agenda", "the Resource Efficient Europe", "the Industrial Policy for the Globalisation Era" and "the Agenda for New Skills and Jobs". It is important to note that the financial and economic crisis does not weaken these general objectives. Historical evidence suggests that the causal link between effective competition and economic growth is particularly important in times of crisis. A weakening of the competition framework may prolong the economic downturn by several years. DG Competition prioritises its actions in order to best improve the functioning of markets. Therefore, making markets work better requires, in the first place, a careful selection of sectors which are the most important for the competitiveness of the EU economy and the functioning of which has the greatest - direct or indirect - effect on consumers. This increased focus on key sectors such as ICT, energy, transport, pharmaceuticals and financial services, exploits best the contribution of competition policy to achieving the EU's overall objectives. The achievements presented in this Report were accomplished with a staff of For a more detailed account of activities in the field of EU competition policy in 2011 reference is also made to the Annual Competition Report To protect competition on the market as a means to enhance consumer welfare in the EU A key objective of EU competition policy is to ensure that competition on the market is protected from distortive State aid, from mergers that significantly impede effective competition, from anti-competitive agreements and from exclusionary and exploitative conduct by one or more dominant undertakings. Undistorted competition on the market is an instrument which enhances consumer welfare by keeping price low and quality high. Competition drives both static and dynamic efficiency, the latter in particular in the form of innovation Establishment Plan posts and 158 estimated external personnel. 2 See the Annual Competition Report for 2011 that is expected to be adopted during the second quarter of As in previous years that Report will be divided into two parts: Part I (in the form of a Communication adopted by the Commission) and Part II (a more extensive document, presented in the form of a Commission staff working comp_aar_2011_final document). Page 4 of 32

5 By distorting incentives in the markets, State aid is in general harmful. For example, State aid granted to remedy a serious disturbance in the economy of a Member State resulting from the global financial crisis could delay the necessary restructuring of certain firms or give undue advantages to some firms over others. By distorting trade and competition such State aid would not only harm consumers but also the overall public interest in a properly functioning Internal Market. The more harmful anti-competitive practices are, the greater the need there is for competition policy to intervene. For example, cartels are clearly very harmful distortions of competition and therefore DG Competition continues to give high priority to the effective detection and deterrence of cartels. Similarly, DG Competition also continues to target abuses of a dominant position and anti-competitive mergers by enforcement action. Furthermore, by keeping markets open, EU competition policy ensures that European consumers benefit from globalisation. At the same time, by targeting international cartels, mergers and abusive practices of firms of any nationality which harm European consumers, EU competition policy helps to protect European consumers against the potentially harmful aspects of globalisation To foster a competition culture Knowledge of the benefits of competition is vital: it is essential for citizens to exploit their opportunities as consumers, for businesses to compete on the merits and for policy makers to bring initiatives that support smart, sustainable and inclusive growth. DG Competition therefore fosters a competition culture: one in which consumers make informed choices between products and services offered, in which businesses refrain from anti-competitive agreements or behaviour and in which policy makers realise how competition can contribute to addressing wider economic problems. Such competition culture directly contributes to making markets work better for the benefit of consumers and business. In times of economic slowdown, it is particularly important that policy makers appreciate the benefits of competition for growth and the harm from a relaxation of competition rules. Surveys indicate a high and growing positive reception of competition among European citizens 3. Similarly, DG Competition's stakeholders (companies, law firms, economic consultancies, consumer and business organisations, national competition authorities and Ministries) predominantly perceive DG Competition's activities to have beneficial effects To support growth, jobs and competitiveness Competition enforcement and advocacy initiatives ensure that private and public restrictions do not hold back competition to the detriment of the achievement of the internal market and of the competitiveness of the EU economy, especially in key sectors for the Internal Market and the EU 2020 strategy. For example, competition in financial services, in the IT sector and in network industries in general, influences costs and hence the competitiveness of many providers of products and services. Moreover, better functioning financial markets are necessary to reach the goals of offering a more efficient and safer access to finance and insurance for businesses. Similarly, a fully competitive internal European energy market is vital for the EU to increase productivity in the future Flash Eurobarometer, November 2009, comp_aar_2011_final summary en.pdf Page 5 of 32

6 world of relatively high energy prices. By opening markets and keeping them open, competition policy contributes to improved economic efficiency and thereby to increased productivity and economic growth. Protecting the competitive process enables an efficient allocation of resources (including the entry of efficient and innovative firms and the exit of inefficient ones) and stimulates technological development and innovation, which, in turn, bring about higher productivity and faster economic growth. Monopolies and tight oligopolies are less conducive to innovation than relatively un-concentrated market. Competition policy helps generate the pressures needed to move the technological frontier. In fact, competition policy, alongside other microeconomic policies, is one of the policies most directly relevant to "total factor productivity", i.e. the part of productivity growth that cannot be assigned to factors such as capital deepening and improved labour quality. Total factory productivity is therefore important and it should be noted that it stagnated in the EU over recent years and the difference in total factor productivity has been recognised as the main source of the productivity gap between the EU and the US. However, while being direct, the causal link between competition policy and the economic growth is not exclusive, since the latter is dependent on a number of factors outside the control of competition policy. The same is true for the contribution that competition policy brings to achieving several EU headline targets, including the ones according to which 75% of the working age population should be employed and 3% of the EU's GDP should be invested in R&D. By promoting a pro-competitive regulatory framework at EU and national level, competition policy contributes to the better regulation agenda of the Commission and makes Europe a more attractive place to invest. By breaking up cartels and prohibiting abuses of a dominant position in markets for intermediary products or services, competition policy lowers the input costs of businesses, thereby making them more competitive. At the same time, the State aid framework helps Member States spend better targeted aid by allowing "good aid", i.e. sustainable aid addressing market failures and equity objectives in the interest of growth and jobs, such as regional investment aid, aid for research and development and innovation, training, environmental protection, risk capital or aid to small and medium-sized enterprises and prohibiting "bad aid", i.e. unnecessary and/or disproportionate aid. In the context of the financial and economic crisis, State aid control policy contributes to a coordinated reaction to threats that have emerged because of the crisis and prevents subsidy races between Member States. It also contributes to the necessary restructuring in the financial sector and to the phasing out of dependence on State support in the context of an overall coordinated exit strategy. 1.2 Specific objectives of the 2011 Management Plan The Management Plan of DG Competition for 2011 encompasses a number of specific objectives falling within the following areas: i) control of State aid; ii) merger control; iii) cartels, anti-trust and liberalization; iv) policy coordination, European Competition Network and international cooperation as well as v) administrative support Control of State aid The objectives of DG Competition's control of State aid activity are to limit overall levels of State aid, ensure that where aid is granted, it does not restrict competition but comp_aar_2011_final Page 6 of 32

7 addresses market failures to the benefit of society as a whole and effectively prevent and recover incompatible State aid. These objectives have not been cast aside in the context of the financial and economic crisis. To the contrary, they have been the driving principles of the Commission's State aid policy which has played an important role in helping to maintain the stability of the financial system as a whole and to facilitate adequate financing for the real economy, in particular SMEs while at the same time guaranteeing a level playing field between financial institutions and between banking communities in different Member States and securing the return to viability of banks that have been rescued. Effectively, State aid control provides the framework for managing bank restructuring and resolution as well as for setting harmonised conditions for access to national guarantees. The October 2011 ECOFIN Council concluded that the EU State Aid framework should continue as the sole EU-level coordination tool and that, at least for the short/medium term, no further frameworks are required. In 2011, DG Competition continued to effectively implement the framework for the provision of public guarantees, recapitalisation measures and impaired asset relief by Member States. As regards the Temporary Framework for State aid to support the access to finance of companies in the real economy, in view of the slowly starting economic recovery, a limited prolongation under stricter conditions, until the end of 2011, was considered appropriate. Between 1 October 2008 and 1 October 2011 the Commission took approximately 290 decisions on State aid measures to the financial sector aiming to remedy a serious disturbance in Member States' economies. These decisions authorised, amended or prolonged 41 schemes and addressed with individual decisions the situation of more than 55 financial institutions. The Commission approved aid to the financial sector for an overall amount of EUR 4.5 thousand billion of which the bulk was approved as guarantees. Not all of the aid approved was actually and effectively used by Member States. The overall amount of aid used in the period stands at EUR billion (13.1% of EU GDP). Guarantees and liquidity measures account for EUR billion or roughly 9.8% of EU GDP. The remainder of the aid used refers to recapitalisation and impaired assets measures which amount to EUR 409 billion (3.3% of EU GDP). Slightly over 72% of the aid used has been granted through schemes while the remainder was provided on ad hoc basis. In particular, in 2011 the Commission confirmed its approach to failing banks in a number of important decisions. Institutions which have no realistic prospect of returning to viability must exit the market and cannot be artificially kept alive by repeated state support (e.g. the Anglo Irish Bank). On the other hand, there are banks which relied heavily on State aid but parts of their activities have a realistic prospect to return to viability. Those institutions can be allowed to stay on the market provided that they considerably reduce their size and substantially change their business model to focus only on these viable activities (e.g. the restructuring of German Hypo Real Estate). Such deep restructuring tackling the root of past failure and avoiding that aid is used to undercut competitors ensure that distortions of competition created by the massive state support is minimised. Where aid is granted, DG Competition seeks to ensure that it addresses market failures or equity objectives that have a beneficial impact on competitiveness, employment and growth, and thus on the welfare of society as a whole. Accordingly, DG Competition aims at ensuring that the aid is targeted at horizontal objectives of Community interest, such as cohesion, employment, environmental protection, promotion of research and figures contain the budget approved for the recapitalisation of Northern Rock in comp_aar_2011_final Page 7 of 32

8 development and innovation, risk capital and development of SMEs. This is in line with the Europe 2020 Strategy, according to which "State aid policy can... actively contribute to the Europe 2020 objectives leading to a more sustainable, productive and growth oriented economy, by promoting and supporting initiatives for more innovative, efficient and greener technologies, while facilitating access to public support for investment, risk capital and funding for research and development." The amount of state aid approved by the Commission under the State aid Broadband Guidelines reached a record of EUR 1.8 billion in 2010 (four times the amount of 2009). In 2011 the Commission authorised another EUR 1.8 billion of aid for this purpose in 15 decisions. Moreover, State aid to support expenditure in research, development and innovation has steadily increased in the last 10 years to support job creation and increase Europe's competitiveness. The European Commission's 2011 Autumn State Aid Scoreboard confirmed that Member States have continuously re-oriented public aid measures to research, innovation, environmental protection and other objectives of general interest. In particular, in 2011, the Commission cleared Member States' support for such objectives in at least 33 cases relating to environmental protection, 43 cases relating to regional development, 20 cases relating to research and development, and at least 11 cases relating to support to SMEs, while ensuring that that the measures did not distort competition to an extent contrary to the common interest 5. At the same time, the Commission continued its efforts to enforce State aid discipline by ordering the recovery of illegal and incompatible aids and ensuring the effective implementation of the recovery decisions. The purpose of recovery is to re-establish the situation that existed on the market prior to the granting of the aid in order to ensure that the level-playing field in the internal market is maintained. Over the year 2011, the Commission adopted twelve decisions ordering recovery and ensured the recovery of over EUR 500 million by the Member States. When a Member State does not comply with a recovery decision and where it has not been able to demonstrate the existence of absolute impossibility, over the past few years, the Commission has strengthened its practice to launch infringement procedures 6 in accordance with Article 108(2) TFEU 7 or Article 260(2) TFEU 8. As a result, the European Court of Justice declared four times this year that a Member State had failed to implement a recovery decision under Article 108(2) TFEU 9, and once under Article 260(2) TFEU that a Member State had failed to implement a previous judgment declaring that a recovery decision had not been fully implemented and imposed a lump sum/penalty 5 These figures relate to cases where the stated objective was the primary objective of the aid. The figure on support to SMEs also includes aid to risk capital injections in SMEs. The figures refer to decisions where the aid was found compatible with the internal market and also six decisions where the Commission found out that the State support concerned did not constitute aid in the first place. 6 Section 4, Notice from the Commission - Towards an effective implementation of Commission decisions ordering Member States to recover unlawful and incompatible State aid, OJ C 272, , p Actions under Article 108(2) are aimed at condemning a Member State for non-implementation of a State aid recovery decision. 8 Actions under Article 260(2) are infringement actions aimed at condemning a Member State for non implementation of a Court judgment, and may include the payment of fines. 9 Case C-305/09, Commission v. Italy (Fiscal incentives in favour of companies taking part in trade fairs abroad) [2011]; Case C-303/09, Commission v. Italy (aid scheme in favour of firms investing in municipalities seriously affected by natural disasters in 2002) [2011]; Case C-302/09, Commission v. Italy (Venezia e Chioggia) [2011]; Case comp_aar_2011_final C-302/09, Commission v. Italy (New Interline) [2011]. Page 8 of 32

9 payment 10. In all these cases, the Commission actively follows-up the implementation of the Decision. Finally, to ensure the effective enforcement of the State aid rules, in a context where approved or block-exempted aid represents more than 80% of the total volume of aid granted 11, the Commission decided in 2011 to increase the scope of its ex-post monitoring exercise. The exercise, launched in October, includes a significantly larger number of cases (i.e. 52 versus 30 cases in the previous exercise) covering all Member States and all main types of aid, in order to reach 33% of the aid amount granted in the EU through approved aid schemes or block exempted measures. The summary indicators on State aid (see below) confirm that non-crisis State aid is on a medium term decrease while crisis aid is not significantly increasing, a development that can be expected in view of the ongoing financial and economic crisis. At the same time, the percentage of good aid increases and the percentage of bad aid decreases while more incompatible aid is recovered and the percentage of cases closed or brought to Court within two years continues to increase. Result indicators Latest known result Target (mid-term) Overall level of non-crisis state aid granted by Member States to industry and services; expressed by percentage of GDP Overall level of crisis aid to the financial sector actually used by Member States, expressed as percentage of GDP Percentage of state aid earmarked by Member States for horizontal objectives of common interest 0.50% of GDP (2010), compared to 0.50% of GDP (2009) and 0.62% of GDP (average ) 9% of GDP in 2010 compared to 8.9% of GDP in 2009 and 5.8% of GDP in % of non-crisis aid to industry and services (2010), compared to 54% (average ) and 84% (2009) Decrease in the indicator's level Phasing out as soon as economic recovery allows Increase in the indicator's level Percentage of "bad"-type of state aid 0.07% of GDP (non-crisis aid; 2010) compared to 0.28% of GDP (average ) and 0.08% of GDP (2009). Decrease in the indicator's level Percentage of incompatible aid recovered Percentage of cases closed or brought to Court within two years 81.4% in June 2011 compared to 88.9% as of June % in June 2011 compared to 57.4% as of June 2010 Increase in the indicator's level Increase in the indicator's level Merger control In January 2011, the Commission prohibited the proposed merger between Aegean Airlines and Olympic Air, as it would have resulted in a quasi-monopoly on the Greek air 10 Case C-496/09, Commission v. Italy [2011]. 11 Report from the Commission, State Aid Scoreboard, Report on state aid granted by the EU Member comp_aar_2011_final States - Autumn 2011 Update, (SEC(2011) 1487 final). Page 9 of 32

10 transport market. This would have led to higher fares for four out of six million Greek and European consumers travelling on routes to and from Athens each year. Together the two carriers control more than 90% of the Greek domestic air transport market and the Commission's investigation showed no realistic prospects that a new airline of a sufficient size would enter the routes and restrain the merged entity's pricing. This was the first merger prohibition since the Ryanair/Aer Lingus case in Since the entry into force of the EU Merger regulation, in total 20 cases have been prohibited out of a total of more than mergers reviewed. Reflecting the prevailing uncertain economic situation, the years 2009 and 2010 saw with respectively 259 and 274 notifications a notable decrease in merger activity compared to the preceding years a situation that changed in 2011 with an increase to 309. A significant number of these notified mergers proved to be complex so that in 2011 the Commission adopted Phase II decisions (in-depth proceedings) in seven cases avg Notified mergers Phase II decisions In a number of cases the Commission's clearance was conditional on actions from the merging parties to correct distortive effects on competition. Examples of such conditional clearance can be found in the Western Digital/Hitachi and Intel/McAfee cases. The proposed acquisition by Western Digital of Hitachi's hard disk drive business would have led to only two remaining hard disk drive suppliers in the 3.5-inch hard disk drive markets. In order to maintain effective competition, Western Digital committed to divest essential production assets and personnel to create a new competitor in the markets of concern. Western Digital also committed not to complete the merger before the divestment business is sold to a suitable buyer. The Intel/McAfee merger in the computer chips and computer security solutions markets, which are neighbouring markets, also required a complex technical and economic analysis. The effects of this merger were not measured in terms of overlaps of products and services, but rather in terms of conglomerate effects. Security-technology companies need to access specific information from chip manufacturers to develop efficient solutions. Therefore, the Commission's concern was that McAfee's competitors might have suffered from a lack of interoperability with Intel chips. The remedies proposed by Intel ensured interoperability between the products of the merged company and those of their competitors. Overall, based on the specific benchmarking exercise developed for these reporting purposes, the observable customer benefits derived from the Commission's intervention in the form of a decision prohibiting a horizontal merger or clearing such a merger subject to remedies is estimated to be in the range of EUR 4.0 billion to EUR 5.8 billion for The approach followed to benchmark the observable customer benefits from the Commission's intervention in the form of a prohibition of a horizontal merger or a clearance of such a merger subject to remedies consisted in predicting the change in consumer surplus. The method used was to calculate the sum of the "price effect" and the "deadweight effect", both multiplied by the length of the period the market would need to self-correct the distortion of competition, i.e. by new entry or expansion of competitors. Therefore, the prevention of anticompetitive effects such as the negative impacts on innovation and choice, even though some cases are comp_aar_2011_final also largely based on non-price effects, especially effects on innovation, are not taken into account. Page 10 of 32

11 It is the medium-term target that this indicator is stable (adjusted for growth and inflation). As the merger control activity is driven by notifications, it is not possible to provide a numerical target for this indicator but the figure is, indeed, stable Cartels, anti-trust and liberalisation Cartels and other anti-competitive agreements Article 101 TFEU prohibits anti-competitive agreements in the internal market. The gravest example of an Article 101 violation is a cartel - an arrangement, generally between competing firms, designed to limit or eliminate competition between them with a view to raising prices and profits, without producing any objective countervailing benefits. Cartels are a top priority for DG Competition, as is clear from the fines imposed in 32 decisions between 2007 and 2011 which amount to approximately EUR 10.6 billion. In 2011 four cartel decisions were adopted, imposing fines in excess of EUR 0.6 billion. The decisions adopted in 2011 severely sanctioned cartels concerning household laundry powder detergents, bananas, CRT glass and refrigeration compressors. It should be pointed out that the cartel investigations in the bananas and CRT glass sectors started on the Commission's own initiative ("ex officio"), rather than on the basis of an application under the leniency programme. This does not exclude that full immunity is offered to one company, as has happened here, but shows that the Commission will continue to strengthen its ex officio investigations. Ex officio proceedings and the leniency programme complement each other and both provide for a successful cartel policy. Another instrument that has proven its effectiveness is the settlement procedure introduced in 2008, which was used for the detergents, CRT glass and refrigeration compressors cases. This brings the total number of settlement cases adopted up to five. Moreover the cases adopted during 2011 confirmed that the settlement procedure is producing concrete results in terms of time and resource savings. The proceedings in the settlement cases were swifter and more efficient than in a normal cartel case and the final decisions were adopted within approximately three years after the start of the investigations. The settlement procedure also contributes to increasing the deterrent effect of the Commission's action against cartels since it allows it to focus more quickly some of its resources on the detection and fight against other cartel cases. On the basis of the specific benchmarking exercise the observable customer benefits from cartel decisions adopted in 2011 are estimated to be in the range of EUR 1.8 billion to EUR 2.7 billion 13. In practical terms, the calculation of the predicted change in consumer surplus arising from the Commission's intervention in each product market is based on three factors: (i) the total size (by value) of the product market concerned, (ii) the likely price increase avoided and (iii) the length of time that this market would have taken to self-correct either by the arrival of a new entrant or by the expansion of existing competitors. The estimation of the avoided likely price increase is based on an ex-ante merger simulation methodology, which predicts post-merger prices using information about pre-merger market conditions, while building on assumptions about the behaviour of firms and consumers. As to the estimation of the length of the period each product market would take to self-correct, it was based on a case-by-case assessment of the likelihood of either a new entrant, expansion of existing competitors and other important characteristics of the markets. Each market was categorised into one of the three groups: "Significant", "High" and "Very High". Each of these groups was then assigned a duration period in years which was an estimation of the minimum time it would take to restore competition to its pre-merger state. 13 comp_aar_2011_final The approach followed to benchmark the observable customer benefits from stopping a cartel Page 11 of 32

12 Not only cartels, but also other agreements between firms can give rise to competition concerns. Such agreements also hurt final consumers and intermediary users of the good or service made more expensive as a result of such an agreement. Agreements that prevent, restrict or distort competition in the ICT and media sectors and other network industries such as energy and transport affect the input costs and hence the competitiveness of various sets of services. In 2011, DG Competition has investigated whether the incumbent telecommunications operators of Spain and Portugal have agreed not to compete on each other's markets. It initiated a formal investigation on the possible restrictive agreements or practices affecting the sale of e-books in the EU and opened proceedings into the standardisation process for e-payments (payments over the internet). DG Competition also opened two own initiative investigations regarding code-share agreements as such agreements may distort competition and raise prices for customers on the routes between the city pairs involved 14. The Commission also inspected companies active in the sector of financial derivative products linked to the EURIBOR. The Europe 2020 Strategy requires the Commission to "ensure that markets provide the right environment for innovation, for example through ensuring that patents and property rights are not abused". In July 2011 a second monitoring exercise of agreements regarding patent settlements in the pharmaceutical sector was published, which showed continuing decline of settlements potentially problematic under EU antitrust rules. These settlements whereby, for example, producers of generic pharmaceutical products are paid by the incumbent to delay market entry, can give rise to antitrust scrutiny. This suggest that closer antitrust scrutiny since the sector inquiry of 2010 has created an increased awareness of the legality of such type of settlements, and this is good news for consumers who will benefit from cheaper pharmaceuticals. As regards innovative medicines, the Commission had investigated an alleged misuse of the patent system, i.e. an alleged application for unmeritorious patents, in order to exclude potential competition by a new innovative medicine of another company in the Boehringer case. In 2011 the undertakings concerned had reached an agreement to solve their dispute and addressed the Commission's competition concerns and the Commission closed this case 15. At the same time, the Commission continues investigating a number of other individual cases of possible anticompetitive practices in the pharmaceutical sector, and launched (prevented harm) consists in multiplying the assumed increased price brought about by the cartel (called the "overcharge") by the value of the affected products or markets and then by the likely duration of the cartel had it remained undetected. The estimated values for 2011 are significantly lower than those of 2010, which were in the range of EUR 5.9 billion to EUR 8.8 billion. This difference essentially owes to the fact that, under the methodology employed to benchmark the customer benefits, only the final decisions, which were taken within a specific year, are considered. In other words, the methodology does not account for on-going procedures for which the date of the final decision would be also difficult to predict. In this context, it should be noted that both the total number of the final decisions (seven formal decisions in 2010 against four in 2011) and also the total size of the affected markets have varied considerably. The fact that the magnitude of the customer benefits for 2011, based on the applied benchmarking, is lower than for 2010 does not affect the deterrence effects of DG Competition's enforcement activities which are, by far, the main source of benefits for customers. Such deterrence effects are, however, excluded from the benchmarking exercise. 14 In this case between Germany and Turkey; and between Belgium and Portugal. 15 See Press release under: 11/842&format=HTML&aged=0& comp_aar_2011_final language= EN& guilanguage=en Page 12 of 32

13 new ones in It also continues to monitor the healthcare sector 17. Abuse of dominance In view of its considerable growth potential, DG Competition's enforcement activities have continued to target the digital economy also as far as abuses of dominant position are concerned. Whilst the proceeding against Google started in 2010 is on-going, the investigation regarding access to IBM'S mainframe maintenance services prompted IBM to make commitments that were market tested and made binding on IBM by decision of 13 December In the market for telecommunications, the Commission has imposed a fine of EUR 127 million upon Telekomunikacja Polska for abuse of dominant position. As a dominant company it is under an obligation to allow remunerated access to its network and wholesale broadband services in order to ensure effective competition in downstream broadband markets, but it consistently refused to do so or made it difficult for more than four years. In the area of financial services, in 2011 DG Competition pursued its investigation regarding the prices charged by Standard & Poor's for International Securities Identification Numbers and the conditions set by Thomson Reuters regarding usage rights on Reuters Instrument Codes. In the first case, by Decision of 15 November the Commission made the commitments offered by Standard & Poor's binding upon the company. As regards the other investigation, Thomson Reuters also offered commitments to alleviate the Commission's concerns, which are being market tested. The Commission also opened two investigations concerning the Credit Default Swaps ("CDS") market whose lack of transparency became apparent during the financial crisis. In the first case, the Commission is examining whether 16 investment banks and Markit, the leading provider of financial information in the CDS market, have colluded and/or may hold and abuse a dominant position in order to control the financial information on CDS. In the second case, the Commission opened proceedings against nine of the banks and ICE Clear Europe, the leading clearing house for CDS. Here, the Commission will investigate in particular whether the preferential tariffs granted by ICE to the nine banks have the effect of locking them in the ICE system to the detriment of competitors. Energy and transport have also remained high on the enforcement agenda. Among new initiatives undertaken in 2011, DG Competition opened proceedings to investigate whether EZ a.s., the incumbent electricity producer in the Czech Republic, may have abused its dominant position by hindering the entry of competitors into the market. Unannounced inspections were also undertaken at the premises of companies active in the supply, transmission and storage of natural gas in several Member States. DG Competition is also looking into company behaviour in environment sectors such as waste collection, and the supply of water and waste water services (e.g. proceedings have been 16 For example, in April 2011 the Commission opened an ex officio investigation to assess whether a settlement agreement resolving a patent dispute between Cephalon, Inc. and Teva Pharmaceutical Industries Ltd. may have the object or effect of hindering the entry of generic Modafinil products - a medicine used for the treatment of certain types of sleeping disorders - in the EEA markets. In October 2011, the Commission opened an ex officio investigation to assess whether contractual arrangements between Johnson & Johnson and the generic branches of Novartis may have had the object or effect of hindering the entry on to the market of generic versions of Fentanyl - a strong painkiller - in The Netherlands. 17 In the healthcare sector, the Commission adopted a decision against the French Association of Pharmacists (ONP) in December 2010, sanctioning ONP for its attempts to fix minimum prices in the French clinical laboratory market as well as for restricting the development of groups of laboratories in the market (Case comp_aar_2011_final C0MP/39510). Page 13 of 32

14 opened as regards ARA in Austria) and inspections were carried out at the premises of industrial engine manufacturers. As regards transport, in March 2011 unannounced inspections were undertaken at the premises of Deutsche Bahn AG and some of its subsidiaries, following allegations that the Deutsche Bahn group, and in particular Deutsche Bahn Energie, the de facto sole supplier of electricity for traction trains in Germany, would be giving preferential treatment to the group's rail freight arm. Additionally, unannounced inspections were undertaken at the premises of companies active in the rail freight sector and related products industry in Baltic countries, and at the premises of companies active in the container liner shipping in several Member States. Both these inspection were carried out under the double legal basis of Articles 101 and 102. Liberalisation The Commission also has the power to intervene against Member States' regulatory measures (including legislation) which have the effect of removing the effectiveness of the competition rules of the Treaty and which infringe Article 106 of the Treaty on the Functioning of the European Union or the Competition Directive (specific for electronic communications). Article 106 also establishes the applicability of competition rules to public undertakings and those to which Member States grant special or exclusive rights, including undertakings entrusted with the operation of services of general public interest. In 2011, the Commission undertook action under this Article against i.a. Greece (lignite) and, under the Competition Directive, against France (digital TV broadcasting frequencies) Policy coordination, European Competition Network (ECN) and international cooperation The objectives that DG Competition pursues under this activity comprise i) the development of competition law and policy, ii) ensuring effective and coherent application of EU competition law by national competition authorities and courts, as well as promoting effective and coherent private enforcement of EU law, and iii) increased cooperation and convergence of competition policy at the international level. The summary indicators on policy coordination (12 legislative and non-legislative policy documents adopted from late 2009 until the end of 2011) confirm that competition law and policy steadily evolves, keeping up with market realities and contemporary legal and economic thinking. Policy coordination Competition advocacy constitutes a key activity which ensures that competition contributes to procompetitive regulatory actions at EU and national level. Competition policy supports the flagship initiatives under the EU2020 strategy. DG Competition also contributes to the adjustment programmes agreed in respect of Greece, Portugal, Ireland, Romania and, until the end of 2011, Latvia, as regards the restructuring of the financial sectors as well as the structural reforms of other sectors of the economy. DG Competition officials are full-time members of the financial teams of the Commission's delegations in the Troika in all three programme countries. DG Competition cooperates with other Commission services to improve the regulatory framework ("smart regulation in the EU"). It conducts impact assessments for its own regulatory proposals (in 2011 on the State aid to shipbuilding and the Services of General Economic Interest) and provides input to impact assessments of other services where this is appropriate. comp_aar_2011_final Page 14 of 32

15 It is important to constantly adapt competition policy to new market developments, policy developments and improved knowledge on industrial economics. Consequently, DG Competition regularly reviews the competition rules on substance and procedures, notably through Commission Regulations and "soft law" such as Guidelines, Communications and Notices. In addition to providing legal certainty and transparency for all stakeholders, these instruments play an important role in preventing and deterring restrictions of competition that harm consumers by informing firms and governments about the criteria the Commission uses in assessing anti-competitive agreements, abuses of dominant positions, mergers and State aid. Throughout the last decade these instruments have also led to a considerable reduction of regulatory burden, especially for companies lacking market power like SMES. In the last years DG Competition has undertaken ex post evaluations of some of its cases, and worked on defining indicators that would best reflect the impact of its activities. Outcomes of the customer benefits of the cartel and mergers policies have been presented above. In 2011 a major evaluation was carried out as regards the effects of temporary State aid rules adopted in the context of the financial and economic crisis, which was published in October This exercise confirmed that through these rules, State aid control ensured a consistent policy response to the financial crisis throughout the EU, and significantly contributed to limiting distortions of competition between beneficiary financial institutions within the internal market. Policy coordination - State aid The extraordinary State aid crisis rules were prolonged and made stricter in 2010 for Having regard to the sovereign debt crisis and its impact on financial institutions in the EU, after the summer of 2011, the Commission needed to prolong further the rules for 2012, with some adjustments to take account of the need to isolate the intrinsic risk of individual banks from changes in CDS spreads of sovereigns and of the market as a whole. Accordingly, the crisis rules were updated and extended on 1 December DG Competition prepared in 2011 the revision of the State aid rules applicable to services of general economic interest (the 2005 "Altmark package"). These rules are key to the proper functioning of Services of General Economic Interest ("SGEI") and therefore also to the objective of inclusive growth set out in the Europe 2020 Strategy. The new package consists of four documents, three of which were adopted by the Commission in December The last one, a new specific de minimis Regulation for SGEI is expected to be adopted by the Commission in the first quarter of The new SGEI package provides Member States with a simpler, clearer and more flexible framework for supporting the delivery of high-quality public services to citizens. Member States are largely free to define which services are of general interest. But, the Commission must ensure that public funding granted for the provision of such services does not unduly distort competition in the single market. Whereas previously only hospitals and social housing were exempted from the obligation to notify to the Commission regardless of the amount of the compensation received, the new package extends this exemption without notification threshold to all social services. The services concerned must meet social needs (i.e. health and long term care, childcare, access to/reintegration in the labour market, social housing, care and social inclusion of vulnerable groups). Conversely, the Commission will undertake greater scrutiny of other 18 comp_aar_2011_final Page 15 of 32

16 SGEIs for which the compensation amount exceeds EUR 15 million a year. DG Competition also prepared revised rules for assessing state aid for shipbuilding to take account of the more specialised nature of today's shipbuilding industry. The new framework prolongs and streamlines the rules on aid for innovation in shipbuilding, which are unique in EU state aid law, and extends the scope of these rules to new specialised market segments. In 2011 the Commission started to review some key legal instruments of State aid control with a view to ensuring that they will best support the Europe 2020 strategy for smart, sustainable and inclusive growth. It has started a review concerning aid for research and development and innovation which has provided first input for the revision of the rules, scheduled for Similarly, for the review of the Broadband Guidelines and the Cinema Communication, DG Competition has conducted stakeholder consultations. In view of its upcoming expiry, DG Competition has also started the revision of the Communication on short term export credit insurance by conducting a consultation of Member States and stakeholders and commissioning a study. DG Competition also launched a study concerning the financing of ports. DG Competition has started the revision of the regional aid guidelines and is in the process of consulting Member States and stakeholders. An ex post evaluation of the regional aid guidelines (case studies) was also launched in Policy coordination - antitrust and mergers In 2011 competition policy focussed on procedural rules, and a package of measures was adopted in October 2011 aimed at increasing interaction with the parties in antitrust proceedings and strengthening the mechanisms for safeguarding parties' rights. These measures will increase the transparency and fairness of competition proceedings. The package consists of three measures: Firstly, a Notice on Best Practices in antitrust proceedings was adopted, which builds on the draft Best Practices of 2010 following a public consultation and ensures in particular that parties are better informed of the state of play throughout proceedings. Secondly, the Terms of Reference of the Hearing Officer were revised, strengthening the role of the Hearing Officer as the guardian of procedural rights, and giving him/her key new functions in the investigative phase. Lastly, the Staff Working Paper for the submission of economic evidence in antitrust and merger cases, which seeks to streamline the submission and assessment of economic evidence, was made final and published. In 2012 DG Competition will gain experience with the implementation of the new measures, which aim not just to benefit stakeholders in their interaction with the Commission in competition procedures, but also to enhance the Commission's understanding of possible defences of parties at an early stage. Regarding mergers, after the adoption in 2011 of the Best Practices on cooperation between national competition authorities (NCAs) on Merger Review, in 2012 DG Competition will continue, within the framework of the Merger Working Group, to work with the national authorities to further strengthen cooperation and convergence in merger control throughout the EU. ECN - Effective and coherent public and private enforcement in the EU This activity also comprises DG Competition's contribution to the effective and coherent application of European competition law in the EU, via the European Competition Network and through cooperation with national courts. Effective and coherent enforcement action by the Member States' competition authorities and courts has an important role to play in achieving the general objectives of increased consumer welfare and improved competitiveness. Member States submitted 88 decisions to the Network and the comp_aar_2011_final Page 16 of 32

17 Commission submitted observations in national court procedures in several cases. In 2011 DG Competition continued to establish more coherence and coordination among itself and NCAs with regard to Antitrust and between NCAs with regard to merger control. A DG Competition Paper on the quantification of harm in antitrust damages actions was submitted to public consultation in 2011 and will be published in Also, a public consultation on common legal principles and concrete issues regarding collective redress was carried out. It is the intention to formulate future EU legislation in this area upon its findings. International cooperation Furthermore, DG Competition continued to promote international convergence of competition policy both in bilateral and multilateral settings (eg. OECD) and by including competition and State aid clauses in Free Trade Agreements ensuring a level playing field for European and foreign companies. At the bilateral level, DG Competition invested in 2011 in further strengthening cooperation with competition authorities in a wide range of third countries, focusing its efforts on the EU's main trading partners (both traditional trading partners and major emerging economies). DG Competition engaged for example in fruitful discussions with the US federal competition authorities to further improve cooperation in the area of unilateral conduct and mergers. This resulted already in the adoption of a revised Best Practices on EU-US Cooperation in Merger Investigations in November A second example is the conclusion of a Memorandum of Understanding with FAS, the Russian competition authority, in March In 2012, the DG will continue its dialogue on Unilateral Conduct with the US agencies, as well as its negotiations with the competition authorities of Switzerland and Canada on a far-reaching cooperation agreement in the area of antitrust and mergers. It will also further intensify its cooperation with recently established competition authorities in the major emerging economies, and more particular in China and India. In the specific context of enlargement, significant progress was made in 2011 with the provisional closure of the competition chapter for Croatia. DG Competition organised a successful International Cartels Workshop for ICN (International Competition Network), in which agencies and non-governmental advisors of some 70 different jurisdictions participated to explore means to coordinate investigations and evidence gathering and to improve the leniency and settlement tools in order to make the fight against cartels more effective and efficient. comp_aar_2011_final Page 17 of 32

18 PART 2. MANAGEMENT AND INTERNAL CONTROL SYSTEMS 2.1 Introduction to DG Competition Structure of DG Competition The principal activities of the DG are: Control of State aid, Merger control, Cartels, anti-trust and liberalization, Advocacy and coordination/co-operation functions (e.g. ECN). These activities are carried out by nine directorates. Seven of the nine Directorates are dedicated to enforcement. In line with the need to define sectoral priorities, the core operational activities are grouped into five sectoral departments. These are directorates B to F and each of them deals with antitrust, State aid and merger cases. Directorate G is focused on one priority task which is cartelfighting. Directorate H is dedicated to nonsector specific State aid enforcement. Directorate A is the horizontal directorate dealing with competition policy and strategy. Horizontal Directorate R is in charge of human and financial resources, document management, data protection, ethics, security, business continuity and IT. Management constantly supervises the good functioning of the organisation and ensures that it delivers high quality outcomes in a timely manner. This sector-focused organisation helps spread best practices across instruments and establishes closer links between competition policy and other EU sectoral policies. It also allows DG Competition to apply a flexible project-based management of resources, which is of particular importance where resources have to be swiftly re-deployed when staff needs to be pooled to work on a high priority project. This internal organisation enabled DG Competition to successfully deal with the demands placed on it by the economic and financial crisis, principally by enlarging the units responsible for rescue and restructuring in the financial sector. In 2011, this structure remained unchanged. In 2011, the acting Deputy Director General for Antitrust and Mergers, Mr Madero Villarejo, was appointed Deputy Director General for Antitrust (15 May 2011) and a new Deputy Director General for Mergers was appointed, Mr Langeheine (1 June 2011) Risks DG Competition is not a large spending DG and financial management does not represent a critical challenge for operations. No major event potentially harming the financial interest of the European Union could be reported in A recovery order not related to fines is still pending. The Commission is therefore pursuing available avenues in order to ensure the recovery of its claim. The recovery procedure is managed in accordance with Commission procedures Working arrangements with the Commissioner The Commissioner and the Director-General meet face-to-face on a regular basis to discuss general policy and organisational questions, while case teams and horizontal teams will meet as needed with Commissioner and Cabinet to ensure smooth progress towards key objectives and decisions. comp_aar_2011_final Page 18 of 32

19 The Commissioner, the Director-General, Directorate R and IAC met on 18 March to specifically discuss the budget and financial expenditure, human resources, security, ethics, business continuity, IT and audit (See also Section 2.3. on the Information to the Commissioner) Financial circuits General description To optimise the use of its human resources and manage its budget in the most efficient manner, DG Competition has defined three different financial circuits: 1) a centralised circuit for the global envelope, 2) a partially decentralised circuit for fines and 3) a decentralised circuit with counterweight for grants. The principles concerning the segregation of duties are applied as follows: the ex-ante verification is a separated duty from the initiation. Officials in charge of verification are distinct from initiators, and they cannot be subordinated to them. Moreover, operational initiation and verification are separated from financial initiation and verification. In all three financial circuits, the role of the operational units/directorates is important, in particular with respect to operational initiation and verification. A close and constant liaison and consultation with members of the financial team of Unit R2 (Resources, Ethics and Security) is however essential throughout the expenditure life cycle. These arrangements allow for a more responsive organisation without jeopardising the effectiveness of internal controls. Centralised circuit for the global envelope The Director of Directorate R (Registry and Resources), the Head of Unit R2 and one official of Unit R2 are authorising officers by subdelegation. Operational directorates are responsible for the operational initiation and verification and for the quality control of the operations they undertake. The financial initiation and verification functions are executed by members of the financial team in Unit R2. This system applies to most financial operations, including transactions made in the framework of budget lines received from DG Communication and DG Mobility and Transport by cross sub-delegation. IT expenditures are authorised by the Head of the IT Unit R3 (cf. decentralised circuit). Missions are approved by DG Competition Directors for staff in their Directorate. In line with the principles of the Commission Reform, centralised financial circuits facilitate a more efficient sharing of responsibilities between the operational directorates and the Resources Directorate, without de-responsibilising directors. Partially decentralised circuit for fines The issuing of recovery orders related to fines falls under the responsibility of each Market and Cases Director (Directorates B, C, D, E, F and G) where the fine originates, although the actual recovery is centralised at the level of the Commission in DG Budget. The operational initiation and ex-ante verification functions, as well as the financial initiation, are executed within the service of the operational Directorate. A member of the financial team of Unit R2 assumes the financial verification. comp_aar_2011_final Page 19 of 32

20 Decentralised circuit with counterweight for grants The management of the "Training of judges" grant programme (cross- subdelegation from DG Justice) and the IT budget (global envelope and cross- subdelegation from DG Informatics) is decentralised respectively to Unit A1 (Private Enforcement) and Unit R3 (IT) for the operational initiation, verification and authorisation procedures, whereas members of the financial team of Unit R2 assume the financial initiation and ex-ante verification for each operation. Documentation and support Information and documentation on financial procedures is available on the Intranet of DG Competition to all officers who might intervene in the financial circuit, either as operational or financial initiator, or as operational or financial verifying agent. The financial circuits are well documented and checklists for financial operations are used. The checklists are separated for financial and operational initiation and verification, which produces clear benefits in terms of control of transactions from the operational units. The FINCOR (financial correspondents' network) meets at regular instances to discuss planning, monitor implementation, as well as exchange information and best practices. Internal Advisory Committee for Procurements and Contracts (ACPC) DG Competition internal ACPC gives its opinion on the selection and evaluation procedure of proposed contracts to ensure that they comply with the Financial Regulation and Community Directives. Each file with a contract value exceeding EUR is checked by the Committee. The responsible Directorate submits the complete file to the Head of Unit R2 for further distribution to the in-house ACPC. In 2011, the ACPC reviewed 2 calls for tender. In 2011, the rules and procedures of the ACPC were updated to better take into account the matrix structure of DG Competition. This led to the strengthening of sectorial presence in the ACPC, where the Head of Unit R2 and the Internal Audit Capacity act as observers Description of internal control systems Besides the control performed on budget implementation (see section 3.1.1), ex-ante controls for non-financial operations are integrated into the working arrangements and decision making procedures set out in the internal manuals of procedures. Supervision is a structured and integral part of DG Competition core business activities. In addition Unit 04 (Strategy & Delivery, 10 officials) serves as the Internal Control Coordinator (ICC) within the DG. For ex ante controls it is in addition responsible for the strategic planning and programming, impact assessment, risk assessment and risk management under the responsibility of the Director-General. Ex-post controls for operational activities are assured through Internal Audit Capability (IAC) audits and Unit 04 (Strategy & Delivery) bearing in mind that Commission decisions in competition are subject to judicial review for process and substance and that systematic audit follow-up and self-assessment of the performance of the service are ongoing task for DG Competition management and staff. The IAC (4 officials) assesses the implementation of internal control standards selected as part of its annual audit work and as approved by the Director General. The Strategy & Delivery Unit's activities relevant for ex-post controls include: the follow-up to audits from IAC, IAS or the European Court of Auditors. The ICC coordinates with auditees on the answers to be provided to auditors' observations and comp_aar_2011_final Page 20 of 32