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Report on Developments and Enforcement of Competition Policy and
 Laws in the Western Hemisphere

Submitted by the OAS Trade Unit to the FTAA Working Group on Competition Policies

Venezuela: Report on the Application of Internal Laws and Standards of Competition Policy (1993-1996)

B. Mergers and concentrations

1. Summary

See annex attached to this report as Table 2.

2. Significant Cases

Resolution No. SPPLC/0036-94 of 29 November, 1993 and 10 August, 1994. Case: Economic concentration in the Venezuelan market for paints. Parties: Pinco Pittsburgh and Corimon S.A.C.A.

Decision: In its first decision, the Superintendency concluded that if the proposed merger went ahead, the effect would be to restrict free competition in this market. Six months later, the situation was found to have altered, with the imminent bankruptcy of the company that was target of the acquisition (Pinco Pittsburgh). At that time, it was determined that all the exceptional legal circumstances relating to imminent bankruptcy existed, and that if the merger were to proceed, any consequent damage to free market conditions would be substantially less than would be caused by the collapse of the company in question.

Decision SPPLC/0022-94. April 11, 1994. Case: Operation of economic concentration in the relevant markets for ketchup, baby food, pasta sauce, tomato sauce, and spices. Parties: Alimentos Heinz C.A. and Yukery-Venezolana de Alimentos C.A.

Decision: Article 11. Consummation of this operation would have restrictive effects on free competition in the relevant ketchup, tomato sauce, and baby food markets.

On January 20, 1994, representatives of the companies Alimentos Heinz C.A. and Yukery Venezolana de Alimentos C.A. submitted a petition to the Superintendency to assess the proposed merger between the two companies. In this case, the Superintendency conducted an analysis of the five markets affected by this merger: preserves, ketchup, pasta sauce, tomato paste and condiments. The initial results of this assessment showed that in the markets for pasta sauce, tomato paste and condiments, the proposed purchase would have no significant impact on market concentration. It also found that the dynamics of competition and the barriers to market entry were such that in those markers the operation would have no restrictive effect on competition.

The situation was found to be different with respect to the markets for baby foods and tomato ketchup, where it was determined that the proposed merger would give the companies control over 85% and 71% of the respective markets. An in-depth analysis of the effects on competition in these markets was therefore undertaken.

With respect to preserves, the Superintendency defined the product market as that for strained baby foods, on the basis of studies of consumer habits submitted by the companies, and on other evidence relating to consumer habits and traits. Account was taken of certain specific characteristics of the product, the ways in which it was used and the fact that there few close substitutes available. The relevant geographic market was determined to be the domestic one, given the high brand recognition factor for the product in question within that market, and the large market share of the leading companies, which indicated the existence of high barriers to the entry of imported baby foods in the event prices for the domestic products should be raised. In effect, given the price differentials between the domestic and imported products, the baby food manufacturing companies are able to base their plans and strategies exclusively on the three local brands, while ignoring imported brands. Finally, it was noted that the dominant market image of the brand and the impact of its advertising constituted high barriers to entry.

With respect to ketchup, the Superintendency defined the market as that for ketchup-type tomato sauce. This conclusion was based primarily on the fact that this kind of tomato sauce is used not only as an accompaniment for pasta, but also in many other ways that enhance its value to the consumer, and at the same time reduce the possibility of substitution by other products of more restricted use. It was supported by the results of a study of Ketchup Habits and Attitudes supplied by the companies. The design and execution of commercial strategies by the companies involved was another important factor that was taken into account by the Superintendency.

As with baby food products, the Superintendency determined that the geographic market for ketchup was the domestic one, on the basis of three main arguments: first, prices for domestic products are substantially lower than those for imported products; second, Venezuelan imports of tomato sauce between 1990 and 1993 represented only 2% of domestic consumption; and third, exports examined during the same period accounted for less than 5% of the market. For all these reasons, it was considered that there is no competition between domestic and foreign products.

The Superintendency concluded that the market power that Heinz would gain through the proposed merger would not be effectively offset by the entry of new producers in the tomato sauce market. This argument was substantiated by the fact that the new brands that had appeared in recent years had failed to gain more than 4% in market share for these products. Finally, the companies claimed that the merger would produce benefits in the areas of marketing, distribution and administration, but they failed to demonstrate how these benefits would be achieved, nor to what extent the proposed merger would facilitate them.

For all of these reasons, the Superintendency concluded that if the proposed merger between Alimentos Heinz de Venezuela C.A. and Yukery Venezolana de Alimentos C.A. were to proceed, the effect wold be to restrict free competition in the markets for strained baby foods and for ketchup-type tomato sauce.

Decision SPPLC/0014-94. February 17, 1994. Case: Request for authorization for an exclusive distribution agreement of Alpina brand "arequipes" in Venezuela. Parties: Plumrose Latinoamericana, C.A. and Alpina Productos Alimenticios, C.A.

Decision: Article 18 of the Law to Promote and Protect Free Competition and articles 9, 10, 11 of Regulation 1. Authorization was granted for the exclusive distribution agreement between Plumrose Latinoamericana, C.A. and Alpina Productos Alimenticios, C.A. for a period of one year from the date of the agreement.

In February 1994, the Superintendency acted on a request for approval of an exclusive distribution and purchase agreement between Plumrose Latinoamericana C.A. and Alpina Productos Alimenticios C.A. The agreement covered the distribution of Alpina brand "arequipes" throughout Venezuela.

Once the relevant market had been identified and considering that the efficiencies resulting from the operation would exceed the restrictive effects on competition that are characteristic of exclusive distribution agreements, the Superintendency agreed to authorize the agreement in accordance with article 18 of the Law to Promote and Protect Free Competition and articles 9, 10, and 11 of Regulation 1.

Although the agreement limits competition between different brands, the terms of the agreement do not obstruct the entry of new competitors in distribution and production of other brands of the product or another product that may be considered within the relevant market. The authorization hinged on the fact that the contract contains only the provisions that are needed to make the condition of exclusivity efficient. Moreover, in accordance with the agreement, any points that could have restrictive effects on competition and are not essential to those areas of efficiency that the contract is intended to cover, must be submitted for consideration. Hence, the parties are obligated to apply to the Superintendency if they wish to renew the agreement in order to determine whether it is continuing to provide consumers with the same efficiencies as it does now.

Special report on the operation of economic concentration. March 18, 1996. Case: Evaluation of an operation of economic concentration in the Portland cement market in the North Coast region. Parties: Holdings Cementos Caribe, C.A. (HOCECA) and Consolidada de Cementos C.A. (CONCECA)

Decision: Article 11. The operation of economic concentration between CONCECA and CECA does not entail the creation or strengthening of market dominance or raise any barriers to entry or have any other restrictive effect on competition in the Portland cement market in the North Coast region.

In March 1995, an integration agreement was entered into between Holding Cementos Caribe C.A. HOCECA and Consolidada de Cementos C.A. CONCECA, whereby HOCECA acquired 50% of the capital stock of CONCECA, contributing as part of the payment the entire capital stock of Cementos Caribe CECA.

The CECA and CONCECA cement companies are part of two holding companies that amalgamate different firms that are involved in many areas of the construction business. The products and services affected by the operation include the extraction and marketing of gypsum, preparation, distribution, and marketing of cement, preparation of concrete and reinforced concrete.

Portland cement was the relevant market affected by the operation in terms of product and in terms of geographical area, only the North Coast region was affected, although a number of different markets in Venezuela were identified.

The economic analysis found that the relative size of the entity would grow considerably as a result of the economic concentration operation, and this is reflected in the increase in the rate of concentration. It was concluded that there are major barriers to entry into the relevant market analyzed which provide for the market's current structure to remain constant over time. The most significant barriers to entry identified were capital requirements, the nature of investment, and the existence of idle capacity as a mechanism used by the companies in the market to deter potential entrants.

Another element present in this market was the dynamic of competition which is characterized by a considerable incentive to engage in collusion, and by cooperative efforts in different dimensions of competition, mainly areas served and prices.

Considering all of these elements together, it was found that the concentration operation studied would result in the creation of a rival of greater relative size in this relevant market. Against the dominance of companies with relatively high market shares, the unit emanating from the operation becomes a more effective option for countering efforts to exercise market power by the large firms currently established in the market. It was concluded therefore that the operation of economic concentration between CONCECA and CECA would not bring with it the creation or strengthening of dominant position or raise barriers to entry or produce any other restrictive effect on competition in the Portland cement market in the North Coast region.

Resolution No. SPPLC/8-96 of March 27, 1996. Case: Economic concentration resulting from the granting of a two-year licence for the use of the ?Favor? trademark. Analysis of a no-competition clause in the contract between the parties. Parties: Unilever NV of Rotterdam, Unilever Andina S.A., and S.C. Johnson & Son Inc.

Decision: The operation was found to be restrictive if the no-competition clause were retained in its present form. Prohibition of the sale of containers of 5 liters or more under the "Favor" brand.

In this case, Johnson & Johnson proposed to give Unilever Andina the right to use the Favor brand in the market for fabric softeners during a period of two years. The licensing contract would permit the purchasing company to achieve a market share of about 90% of the total value of fabric softener sales in Venezuela.

This evaluation found that the relevant market affected by the economic concentration was the Venezuelan fabric softener market. It was confirmed that the operation would produce a high degree of concentration in the relevant market. However, owing to the specific nature of the product, the operation does not produce or strengthen a dominant position in the relevant market because the high price elasticity of demand for softeners would restrain a dominant company from trying to significantly raise its prices, and limits the potential for collusion between market participants. Furthermore, given the great number of brands have appeared on the market in recent years, to be successful in timing market entry, any new entrant would need to incur considerable expense on promotion and advertizing that would not be recoverable.

In light of these factors, it was concluded that if the operation of economic concentration, in which Unilever would acquire the license to make use of the Favor brand for a period of two years, is consummated, it would not restrict free competition overly because, given the particular nature of the product, a dominant position would not be created in the relevant market.

Decision: SPPLC/0015-96. May 27, 1996. Case: Investigation to evaluate the operation of economic concentration between Cadena de Tiendas Venezolanas Cativen S.A. and Operadora Sercra C.A., Transporte de Alimentos 1551 C.A. and Bilnova Comercializadora and hence to verify the potential restrictive effects on free competition generated by the operation. In this case, the contract for the sale of the businesses contained noncompetition clauses that could jeopardize the viability of the operation from the legal standpoint. Parties: Cadena de Tiendas Venezolanas Cativen S.A. and Operadora Sercra C.A., Transporte de Alimentos 1551 C.A. and Bilnova Comercializadora.

Decision: Article 11. Restrictive if the noncompetition clause is left as it is now stands. Prohibition on sale of containers of 5 liters or more under the Favor brand name.

The Superintendency officially opened an administrative procedure to evaluate the operation of economic concentration entered into between Cadena de Tiendas Venezolanas Cativen S.A. and Operadora Sercra C.A., Transporte de Alimentos 1551 C.A. and Bilnova Comercializadora and to verify the potential restrictive effects on free competition generated by the operation, in accordance with articles 32 and 36 of the Law.

The operation occurred when Operadora Sercra C.A. and Transporte de Alimentos 1551 C.A. sold the businesses called CADA and Altran to the business known as MAXY'S belonging to Bilnova Comercializadora C.A. to the same company. Under Clause 14 of each of these sales contracts, the seller was required not to reestablish itself in the market with a similar business in such conditions as to compete with the buyer for a period of 10 years from the date of closure of the operation.

After the hearing, the Superintendency decided that the operation of economic concentration in itself did not violate the law. However, an analysis of the clauses barring competition contained in the contract for the sale of the businesses showed that these conditions would have restrictive effects on free competition in that the obligation not to compete assumed by the sellers exceeded the limits of space and time and of the product that the buyer would need to receive the full value of the assets acquired, in violation of article of 11 of the Law.

With this decision, the Superintendency set parameters on the actions by economic agents in negotiations of this kind, in which it was sought to allow the buyers of the businesses to have guarantees in the area of competition with respect to the sellers and that in itself such a purpose did not constitute a restriction on free competition.

III. Regulatory and Trade Policy Matters

A. Privatization

Under the provisions of the Privatization Law, which prohibit any such operations that would have a negative impact on free competition, the Superintendency, at the request of the Subcommittee on Decentralized Entities and Privatization of the Chamber of Deputies and the Fondo de Inversiones de Venezuela (FIV), undertook an evaluation of cases of economic concentration that had arisen from privatization processes. During 1996 the Superintendency reviewed the privatizations of the Instituto Nacional de Hipodromos [racetracks] (INH) and the bidding for sale of the 41.39% of shares in INDULAC that were held by FIV. In addition, during the latter part of the year, the Superintendency was consulted on the transfer to the private sector of subsidiaries of the aluminium company Corporacion Venezolana de Guayana (CVG).

1. Industria Láctea Venezolana C.A. INDULAC bidding process

At the request of the Subcommittee on Decentralized Entities and Privatization of the Chamber of Deputies, the Superintendency prepared, within a very short period of time, a special report on the participation of prequalified companies in the bidding for INDULAC. In that study it assessed the potential effects on competition that would arise if any of the bidding companies (Groupe Lactel Inc., Nestle Venezuela S.A., Procesadora Agro Industrial Colon S.A. and Parmalat S.p A.) were to purchase and gain management control over INDULAC. On the basis of its definition of the various relevant markets, it was concluded that in the area of infant formulas the purchase of INDULAC by Nestle would have the effect of restricting free competition, by substantially increasing the degree of concentration in a market that was already characterized by a high degree of concentration, as well as by slow growth and high investment costs (sunk costs) for new entrants. It was concluded that all these factors represented significant market entry risks, and served to discourage new market participants. It was therefore recommended that the purchase contract should contain a clause requiring that the infant formula brands of INDULAC be maintained for a reasonable period of time. In the markets for milk powder, condensed milk, ultra pasteurized milk and ultra pasteurized juices, on the other hand, it was concluded that the high degree of existing excess capacity, the insignificant change in the concentration index, and the dynamism accompanying growing markets (UHT), respectively, were such that there would be no restriction on free competition if INDULAC were to be acquired by any of the companies in question.

2. Process of privatization in the aluminum sector

The involvement of the Superintendency in this matter stemmed from a request by Fondo de Inversiones de Venezuela and the Oficina de Coordinacion de Asociaciones Estrategicas de la Corporacion Venezolana de Guayana (CVG) for an evaluation of the different types of integration that could occur through the privatization of the companies in CVG's aluminum production complex.

The economic analysis is based on the evaluation of the privatization plans for the aluminum production complex from the standpoint of economic integration or concentration since these operations could lead to increased market power and therefore hamper free competition in the relevant markets involved in these groupings.

As part of the concentration plans, two types of integration or concentration - vertical and horizontal - were identified. Vertical economic integration refers to the type of operations that bring together companies active in markets with a supplier-buyer relationship, such as the case of Operadora de Bauxita, Operadora de Alumina and the carbon anode production plant with the Alcasa and Venalum refineries; and horizontal economic concentration occurs when companies involved in the operation participate in the same market such as in the case of the Alcasa and Venalum refineries.

A study of the relevant markets of the companies involved in the privatization produced the following conclusions as to the type of integration that could be adopted in the aluminum production complex.

1.- Vertical integration between the bauxite operator and the alumina refiner has no effect of restricting free competition, in any of the markets involved. This conclusion is based essentially on the existence of the international market, through which imports and exports will exert discipline on price increases and on any other attempted anti-competitive behavior. Nor does such integration create elements that could be considered to limit freedom of access to the bauxite and alumina market.
2.- Integration between bauxite/alumina producers and the aluminum smelters does not pose a threat to free competition, thanks to the existence of relevant international markets both for alumina and for aluminum, and the lack of barriers to market entry. In markets of this kind, any shortfall in demand or supply for such products can be corrected through imports, in the case of alumina producers, or through exports, in the case of aluminum refiners. Therefore, the international market will discipline any anti-competitive conduct.
3.- The vertical integration between the aluminum reduction companies and the carbon anode producer (Carbonorca) would not produce anticompetitive effects since the elements of market structure led to the conclusion that in the long run the entry of new aluminum refineries would occur under vertical integration plans.
4.- The horizontal concentration between Alcasa and Venalum does not create or strengthen a dominant position in the relevant primary aluminum market and does not lead to restrictions on entry or exit to or from the relevant market, which has an international geographical dimension.

B. Opinions on laws

Since its inception the Superintendency has been actively preparing technical reports concerning bills and proposed regulations concerning competition and efficiency. It has been mainly the pharmaceutical and agricultural sectors have been requesting works of this kind although specially regulated sectors such as electricity and telecommunications have requested technical studies over the last two years.

The team from the Superintendency has taken part in the debate on a number of bills or proposed regulations including the Enabling Regulations for the Pharmacy Act, the Bank and Financial Institutions Act, By Laws of the Caracas Stock Exchange, the Medication Act, the Consumer and Borrower Protection Act, the Securities Act, the Capital Market Law Reform Act, the Mining Development Act, the Agricultural Development and Food Security Act, Executive Bill to regulate activities in the electricity sector, regulation governing marketing of fertilizers, bank merger regulations, marketing agreements with the Ministry of Agriculture and Livestock, the Agricultural Health and Food Business Autonomous Service, the Telecommunications Act, and the Regulations for Liberalization of the Hydrocarbon Byproducts Internal Market.

IV. International Activities

The Superintendency?s international activities have focused in three areas: technical cooperation and training programs, attending seminars and forums on competition, and discussions to encourage progress in commercial integration.

A. Technical cooperation and training programs

The training programs abroad for the professional staff of the Superintendency have been mainly in the United States, Spain and Canada. The first of these program was offered in the United States under a financing agreement signed with the United States Agency for International Development (USAID). The agreement which took effect in 1993 provided for training of three weeks duration for officials from the Superintendency at the offices of the Federal Trade Commission and the United States Department of Justice. Eight professionals from the Superintendency received training under this agreement. The agreement was not renewed for the 1996/1997 period. In Canada, the Bureau of Competition Policy agreed to offer one week courses to professionals from the Superintendency. Two courses have now been held, one in August 1994 and the other in October 1995, with the financing being covered fully by the Superintendency. In Spain, the Spanish Technical Cooperation Agency is providing financing that includes travel, board, and lodging for officials from the Superintendency to attend training courses offered by the Competition Defence Service and Competition Defence Board. Four officials have been trained under this arrangement, in February and November 1995.

Another arrangement covered under the training programs has been the visit by experts from other agencies to the Superintendency. The workshops of this kind that have now been held are listed in the table below:

Training courses offered by foreign specialists

October 1993 Kurt Stockman Bundeskartelamt
September 1994 Eduardo Menendez
Jose Eugenio Soriano
Competition Defence Board, Spain
October 1994 Armando Rodriguez
Eva Almirantearena
Federal Trade Commission
U.S. Department of Justice
February 1995 Kurt Stockman Bundeskartelamt
October 1995 Kenneth Kelly
Eva Almirantearena
Federal Trade Commission
U.S. Department of Justice
February 1996 Kurt Stockman Bundeskartelamt
June 1996 Craig Conrath U.S. Department of Justice
April 1997 Sybille Schlater Max Planck Institute

Technical cooperation agreements have also been signed with Chile and France although no specific activities have yet been organized. The agreement with Germany has also been extremely important, with financing being provided for an expert from the Bundeskartelamt to visit the Superintendency each year.

B. International forums

International forums have also been organized. In October 1994, the first meeting on Competition Policy was held within the framework of the G-3 with assistance from Colombian and Mexican agencies. Caracas has also hosted the First Meeting on Competition Policy in Latin America and the Caribbean, sponsored by the Permanent Secretariat of the Latin American Economic System (SELA) and UNCTAD, in October 1995, and the Second Meeting on Competition Policy in Latin America and the Caribbean, organized in collaboration with SELA and the Spanish Technical Cooperation Agency in November 1996.

The Superintendency has taken part in forums that have been organized by Latin American competition agencies such as the seminars held in conjunction with the World Bank and the OECD or by the OAS. The Superintendency has also helped to prepare works for the first two Competition Authorities held in Ibero-America. Venezuela is also participating in forums of experts convened by UNCTAD and the Superintendency is chairing the Third United Nations Conference on Restrictive Trade Practices.

C. Efforts at trade integration

Venezuela has participated in working groups that have been formed for the purpose of establishing areas of convergence between competition policy in different countries involved in trade integration initiatives. One example of this is the G-3 comprising Colombia, Mexico, and Venezuela which has made considerable progress in discussions on convergence of national competition legislation.

In the area of the Andean Pact, the Superintendency has presented to Board of the Cartagena Agreement a proposal for modification of Decision 285 of that agreement.

Since May 1996, the Superintendency has been actively involved in the works being performed by the Working Group on Competition Policy of the Free Trade Area of the Americas.

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