Competition law, often referred to as antitrust law, is a crucial aspect of ensuring fair market practices and preventing anti-competitive behavior in the corporate sector. Globally, such laws regulate monopolistic practices, abuse of dominant market positions, and mergers that reduce competition, thereby safeguarding consumer interests and promoting economic efficiency. Sri Lanka joined this global movement in 1987 with the enactment of the Fair Trading Commission Act (FTCA). Despite its introduction, the country’s competition law regime has struggled to achieve its objectives due to inherent structural and institutional weaknesses. This article provides an in-depth analysis of the historical evolution, current framework, challenges, and the potential reforms needed to strengthen competition law in Sri Lanka.

Historical Context and Policy Framework

Sri Lanka’s competition law was a late entrant in comparison to other nations. The country’s economic liberalization in 1977 paved the way for a more market-driven economy, with the private sector taking center stage. By 1987, the Fair Trading Commission (FTC) was established under the FTCA to regulate market competition. The FTCA’s primary objectives included preventing monopolies, overseeing mergers, and addressing anti-competitive practices.

Despite these measures, the policy framework has been characterized by its ad hoc nature. The absence of a comprehensive competition policy integrated with trade, privatization, and industrial policies has limited the effectiveness of competition law. For instance, while privatization initiatives aimed to enhance economic efficiency, they inadvertently created monopolies in sectors such as liquefied petroleum gas and flour production due to the lack of adequate regulatory mechanisms.

Key Components of Sri Lanka’s Competition Law

Monopolies

Under the FTCA, monopolies are identified based on market share thresholds, known as the “prescribed percentage test.” This test sets an arbitrary percentage, often between 40% and 50%, to determine whether a monopoly exists. While this approach simplifies the identification process, it restricts the application of the law to prescribed goods and services. As a result, monopolistic practices in non-prescribed sectors often go unregulated.

A notable example is the cable industry, where the acquisition of Kelani Cables by ACL Cables resulted in market control exceeding 70%. However, since cables were not a prescribed article under the FTCA, the FTC could not investigate the matter under monopoly provisions.

Mergers and Acquisitions

The FTCA mandates that all mergers likely to result in market dominance must be notified to the FTC at least 30 days prior to the transaction. The FTC then has 21 days to decide whether to approve the merger or initiate an investigation. However, enforcement challenges and the FTC’s lack of proactivity have limited the effectiveness of this provision.

Unlike jurisdictions such as the United States, where merger notifications are required only for transactions exceeding specific thresholds, Sri Lanka’s blanket requirement for notification imposes an unnecessary burden on the FTC without addressing significant transactions that could harm competition.

Anti-Competitive Practices

Anti-competitive practices are broadly defined under the FTCA as any behavior likely to restrict, distort, or prevent competition. Examples include price-fixing, bid rigging, predatory pricing, and abuse of dominance. However, judicial interpretations, such as in Ceylon Oxygen Ltd. v. FTC, have narrowed the scope of these provisions. The Court of Appeal ruled that practices like predatory pricing and exclusive dealings fell outside the FTC’s jurisdiction, highlighting the need for more precise definitions within the law.

Institutional Challenges and Resource Constraints

The FTC, established as a quasi-judicial body, has struggled to perform its mandate effectively due to chronic resource shortages. Since its inception, the FTC has operated with a significantly reduced workforce and inadequate financial support. This lack of capacity has resulted in delays in investigations, limited enforcement, and diminished credibility among market participants.

Furthermore, overlapping jurisdictions with sector-specific regulators, such as the Telecom Regulatory Commission and the National Transport Commission, have created confusion regarding the FTC’s authority. These institutional overlaps and ambiguities have undermined the FTC’s ability to address anti-competitive behavior effectively.

The Consumer Protection Authority Bill

The Consumer Protection Authority Bill, introduced in 2001, seeks to address some of the shortcomings of the FTCA by merging consumer protection and competition regulation under a single entity—the Consumer Protection Authority (CPA). Key features of the proposed legislation include:

• Expanded Powers: The CPA will oversee restrictive agreements, price manipulation, monopolies, and abuse of dominance while promoting effective competition and consumer welfare.
• Price Regulation: The bill empowers the CPA to regulate excessive pricing of goods and services, extending beyond the limited scope of the FTCA.
• Efficiency Studies: The CPA will conduct studies on market efficiency to inform policymaking and promote competitive practices.

However, the bill’s exemptions for public-sector entities and existing government agreements risk perpetuating market imbalances. For example, state monopolies such as the Ceylon Petroleum Corporation remain outside the purview of the proposed law, creating an uneven playing field.

Recommendations for Reform

To strengthen Sri Lanka’s competition law framework, several key reforms are necessary:

1. Comprehensive Definitions: Redefine monopolies, mergers, and anti-competitive practices to encompass a broader range of market behaviors, including horizontal and vertical restraints.
2. Eliminate Prescribed Percentage Tests: Replace arbitrary thresholds with flexible criteria based on market dynamics and competitive impact.
3. Universal Applicability: Apply competition laws uniformly across private and public sectors to ensure a level playing field.
4. Deterrent Penalties: Introduce stringent fines and criminal penalties to discourage anti-competitive conduct.
5. Enhanced Resources: Allocate sufficient funding and staff to regulatory bodies to improve enforcement capacity.
6. Proactive Enforcement: Empower the FTC and CPA to initiate investigations independently, rather than relying solely on complaints.
7. Public Interest Tests: Clarify the criteria for determining public interest to ensure consistency and fairness in regulatory decisions.
8. Cross-Border Implications: Address the growing influence of international transactions on domestic markets by incorporating provisions for cross-border competition issues.

Conclusion

Sri Lanka’s competition law regime has made significant strides since its introduction in 1987. However, systemic weaknesses, coupled with institutional inefficiencies, have limited its impact. The proposed reforms, along with the implementation of the Consumer Protection Authority Bill, provide an opportunity to modernize the legal framework and align it with global best practices.

A robust competition law regime is essential for fostering innovation, protecting consumer interests, and ensuring sustainable economic growth. By addressing existing challenges and adopting a forward-looking approach, Sri Lanka can create a competitive market environment that benefits businesses and consumers alike.