PCM/CLW/A/001/11 Committee on Procurement Meeting No. …hkgbca.coolpage.biz/download_files/cic/11082011.pdfagreed by Com-PCM at Meeting 002/11 held on 13 May 2011. (See Annex A) 2.5

PCM/CLW/A/001/11

i

Construction Industry Council

Committee on Procurement

Meeting No. 001/011 Task Force on Competition Law

To : Andrew SIMPSON (ASN) Chairman Ming-wai LAU (MWL) Co-opted Member of the Committee on

Procurement Calvin CHOY (CCY) Hong Kong Construction Sub-contractors

Association Derek ZEN (DZ) Hong Kong Construction Association Elaine CHOW (ECW) MTR Corporation Limited Ricky LI (RLI) Development Bureau Simon Tung-keung

KWOK (TKK) Hong Kong General Building Contractors

Association Alice TO (AT) Pinsent Masons Spencer KWAN (SKN) Hong Kong Institute of Surveyors Bill Hung-biu YEUNG (HBY) Hong Kong Housing Authority Sunny YEUNG (SYG) K.Wah International Holdings Limited Cc : Christopher TO (CT) Executive Director Shuk-ming KWOK (SMK) Assistant Manager (Council Services) 3 Priscilla NG (PN) Assistant Officer From : Alex LEUNG (AL) Senior Manager (Council Services) 1 Date : 22 July 2011

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PCM/CLW/A/001/11

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AGENDA

Meeting No. 001/11 of Task Force on Competition Law (CLW) will be held on Monday, 1 August 2011 at 2:00pm at Meeting Room No.1, CIC Headquarters, 15/F, Allied Kajima Building, 138 Gloucester Road, Wanchai, Hong Kong.

Action

1.1 Welcome Note from the Chairman of the Task Force

ASN

1.2 Confirmation of the Terms of Reference and Membership List of the Task Force Paper PCM/CLW/P/001/11

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1.3 Background and Overview of the Competition Bill

Paper CIC/PCM/P/015/10

ASN

1.4 Deliberations on the Way Forward

All

1.5 Year Plan 2011

Paper PCM/CLW/P/002/11

All

1.6 Any Other Business

All

1.7 Date of Next Meeting All to note

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PCM/CLW/P/001/11 (for discussion)

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Task Force on Competition Law

Terms of Reference and Membership List

1. Purpose 1.1 This paper is to seek Member’s endorsement on the Terms of Reference

and Membership List for the Task Force on Competition Law (TF-CLW).

2. Background 2.1 At Meeting No. 008/10 of Committee on Administration and Finance,

Members agreed a number of actions to be taken in response to the Competition Bill including the establishment of a Task Force.

2.2 Subsequently, at Council Meeting on 5 November 2010, Members opined

that the Committee on Procurement (Com-PCM) could commence to assess the possible impact of the Competition Bill to the Industry and recommend the required measures for consideration.

2.3 At Meeting 001/11 of the Com-PCM held on 29 March 2011, it was further

agreed that a Task Force on Competition Law (TF-CLW) shall be established.

2.4 The proposed Terms of Reference and Membership was reviewed and

agreed by Com-PCM at Meeting 002/11 held on 13 May 2011. (See Annex A)

2.5 Invitation had been made by the CIC Secretariat to Members of the

Com-PCM and relevant industry organisations asking their intention to participate in and/or nomination to join the Task Force. The Membership Composition is prepared at Annex B for reference.

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PCM/CLW/P/001/11 (for discussion)

2

3. Analysis and Justification 3.1 The impact of Competition Bill is a key concern of the construction

industry, particularly for small and medium-sized contractors. Identification and assessment on the implication of the implementation of Competition Law, deliberation on the representation of construction industry in the future independent statutory body established under the Competition Law, the Competition Commission, as well as the possible development of guidelines for the compliance of Competition Law to avoid possible pitfalls, would be useful to the industry.

3.2 The Committee agreed that in view of the concern on and specialty of the

matter, the formation of a Task Force to take up the mission on assessing the impact of the Competition Bill and providing the industry with information regard in the Competition Law would deem to be appropriate.

3.3 The Task Force is tasked to come up with recommendations on the way

forward for the Committee’s consideration. The Task Force may ultimately develop guidelines with regard to the Competition Law. Comments and suggestions for relevant industry stakeholders are also necessary for the development of practicable guidelines.

4. Advise Sought 4.1 Members are requested to endorse the Terms of Reference and the

Membership List of the Task Force.

CIC Secretariat July 2011

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PCM/CLW/P/001/11 Annex A

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Terms of Reference

Objective To assess the impact of the Competition Bill on the construction industry of Hong Kong and to provide the industry with information regarding competition law compliance. Terms of Reference 1. To monitor the development of the Hong Kong Competition Bill; 2. To identify and assess the implications of application of competition law,

for the full spectrum of stakeholders in the local construction industry (e.g. employers, consultants, main contractors, subcontractors, suppliers of equipment/materials, etc.);

3. To understand the interests and concerns of small and medium-sized

contractors; 4. To consider the representation of the construction industry in the

independent statutory body, the Competition Commission; 5. To deliberate and consider the appropriateness of drafting guidance notes

with regard to the competition law; 6. To undertake the drafting of guidance notes, if agreed to be issued, and to

formulate a plan for their promulgation; 7. To coordinate and organise discussion forums, technical talks, seminars

and events for the industry on the concerned areas.

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PCM/CLW/P/001/11 Annex B

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Membership List

Chairman of the Task Force: Dr Andrew SIMPSON, HKPolyU

Members - Co-opted Member of the Committee on Procurement (Mr. Ming-wai LAU) - Development Bureau (Mr Ricky LI) - Hong Kong Construction Association (Mr Derek ZEN) - Hong Kong Construction Sub-contractors Association (Mr Calvin CHOY) - Hong Kong General Building Contractors Association (Mr Simon

Tung-keung KWOK) - MTR Corporation Limited (Ms Elaine CHOW)

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CIC/PCM/P/015/10 (for discussion)

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Competition Bill

1. Purpose 1.1 This paper briefly summarises the background of the Competition Bill

and seek Members’ view of the proposed actions by the Committee.

2. Background 2.1 At the Meeting No. 008/10 of Committee on Administration and

Finance, Members agreed a number of actions to be taken in response to the Competition Bill including the establishment of a Task Force and organisation of technical talks:

“ (1) Apart from the implication to CIC, a Task Force on

Competition Law should be established, perhaps under the Committee on Procurement, to make recommendations to CIC (with the necessary assistance of external legal advisors) on the appropriate course of follow-up actions to be taken by CIC to assess its impact on the construction industry. The Task Force will also prepare a set of guidelines for the compliance of the Competition Law in the construction industry. Reference can be made to the UK Construction Industry Competition Law Code of Conduct which has been widely adopted by the construction professionals in UK.

(2) Seminars and Talks on the Competition Law and its

effects on the construction industry should be held in due course to solicit the views of construction professionals and firms. CIC should collect their views and express such views to the relevant Government authorities.

”

2.2 Since the Law would still be evolving, Members considered the above

suggestions could be pursued at a later stage. 2.3 At the Council Meeting on 5 November 2010, Members opined that the

Committee on Procurement could commence to assess the possible

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impacts of the Competition Bill to the Industry and recommend the required measures for consideration.

3. Competition Bill 3.1 The Government started to review the competition policy in Hong Kong

since 1993. In 2006, the Competition Policy Review Committee recommended to the Competition Policy Advisory Group that a new law with a clearly defined scope should be introduced in Hong Kong to tackle anti-competitive conduct across all sectors.

3.2 Two rounds of public consultation were conducted in 2006 and 2008

and revealed that an overwhelming majority expressed general support for the law but the business sector had concerns on its effect. LegCo Panel was consulted 7 times between 2006 and 2010 (See Annex A for background brief).

3.3 The Competition Bill was gazetted on 2 July 2010 and introduced to the

Legislative Council on 14 July 2010. 3.4 The objectives of the Competition Bill is ‘to prohibit conduct that

prevents, restricts or distorts competition in Hong Kong; to prohibit mergers that substantially lessen competition in Hong Kong by the merger rule; to establish a Competition Commission and a Competition Tribunal; and to provide for incidental and connected matters.’

3.5 The Bill contains 21 parts and 9 schedules. Members could refer to

Annexes A and B for more details. The Bill can be found at: http://www.legco.gov.hk/yr09-10/english/bills/b201007022.pdf 4. Advice Sought 4.1 Members are invited to take note of the Competition Bill and discuss the

possible follow up actions by this Committee. CIC Secretariat November 2010

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http://www.legco.gov.hk/yr09-10/english/bills/b201007022.pdf


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References

1. LegCo Paper No. CB(1)320/10-11(02) –Administration's information paper on overview of major components of the Competition Bill

2. LegCo Paper No. CB(1)320/10-11(05) - Paper on Competition Bill prepared by the Legislative Council Secretariat (background brief)

3. CIC Com-ANF Paper no. CIC/ANF/P/107/10 on Competition Bill

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http://www.legco.gov.hk/yr09-10/english/bc/bc12/papers/bc121109cb1-320-2-e.pdf

http://www.legco.gov.hk/yr09-10/english/bc/bc12/papers/bc121109cb1-320-5-e.pdf

立法會 Legislative Council

LC Paper No. CB(1)320/10-11(05) Ref. : CB1/BC/12/09

Bills Committee on Competition Bill

Background Brief Purpose This paper sets out the background of the Competition Bill and provides a summary of views and concerns expressed by Members on the development of competition policy in Hong Kong. Background Review on competition policy in Hong Kong 2. Between 1993 and 1996, the Government commissioned the Consumer Council (CC) to undertake a series of studies on competition in Hong Kong1. In its final report, CC recommended the adoption of a comprehensive competition policy and enactment of a general competition law in Hong Kong. In December 1997, the Government established the Competition Policy Advisory Group (COMPAG) 2 to review competition-related matters. In May 1998, COMPAG promulgated a Statement on Competition Policy, articulating the objective of the Government's competition policy as being "to enhance economic efficiency and free flow of trade, thereby also benefiting consumer welfare". The Statement also indicated that "the Government will take action only when market imperfections or distortions limit market accessibility or market contestability, and impair economic efficiency or free trade, to the detriment of the overall interest of Hong Kong".

1 CC completed six sectoral studies on the banking, supermarkets, gas supply, broadcasting,

telecommunications and private residential property markets. 2 COMPAG was established under the chairmanship of the Financial Secretary to provide a high-level

and dedicated forum to review competition-related issues which had substantial policy or systemic implications, and examine the extent to which more competition should be introduced in the public and private sectors.

CIC/PCM/P/015/10 Annex A

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3. In 2000 and 2001, legislation was enacted to specifically prohibit certain types of anti-competitive conduct and the abuse of a dominant position in the telecommunications and the broadcasting markets respectively. Apart from these two pieces of legislation, there are no statutory procedures that the Government can take to reign in businesses that are engaged in restrictive practices in other sectors of the economy. 4. In September 2003, the COMPAG published guidelines aimed at advising businesses as to the types of practice that might constitute anti-competitive conduct. However, this approach of voluntary compliance by the business community with administrative guidelines has not been very effective in addressing continued public concerns about possible cases of anti-competitive conduct in Hong Kong. To ensure the competition policy would keep pace with time and continue both to serve the public interest and to facilitate a business-friendly environment, COMPAG appointed a Competition Policy Review Committee (CPRC) in June 2005 to, inter alia, make recommendations on the future direction for competition policy in Hong Kong. In June 2006, CPRC submitted its report to COMPAG, recommending that a new law with a clearly defined scope be introduced in Hong Kong to tackle anti-competitive conduct across all sectors. Public consultations on competition policy in Hong Kong 5. On 6 November 2006, the Government published the document "Promoting Competition – Maintaining our Economic Drive" for a three-month public consultation to gauge views on the need for Hong Kong to introduce a cross-sector competition law. The result of the consultation revealed that the majority of respondents supported the introduction of a cross-sector competition law in Hong Kong and there was a high level of support for a stronger regulatory environment for competition. Nonetheless, there were some concerns in the business sector, in particular from the small and medium-sized enterprises (SMEs), about the possible adverse effect that the new law might have on business operations. 6. To allay the concerns of the business sector, the Administration issued on 6 May 2008 a further public consultation paper entitled "Detailed Proposals for a Competition Law" for a three-month consultation. A report on views collected during the public consultation was released by the Administration on 30 September 2008. According to the consultation findings, there was still broad support in the community for the introduction of a competition law. However, respondents raised concerns regarding certain specific proposals. While the Government originally indicated its intention to introduce the Competition Bill into the Legislative Council (LegCo) in the 2008-2009 legislative session, it subsequently announced on 30 March 2009 that in the light of the feedback received from the public consultation, more time was required to work out details of the Bill.


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Members' views and concerns 7. Members have been monitoring the development of competition policy in Hong Kong through raising questions and conducting motion debates at Council meetings in previous years, covering areas such as promotion of fair competition, enactment of a fair competition law, exemptions and exclusion under the proposed competition law, types of anti-competitive conduct to be covered in the competition law, promoting competition in the auto-fuel market and subjecting those public organizations with a profit-making objective to the regulation of competition law. 8. CPRC and the Administration briefed the former Panel on Economic Services3 (ES Panel) on 19 July 2006 on major findings and recommendations in CPRC's review report, including the structure and powers of the Competition Commission (the Commission) and Competition Tribunal (the Tribunal). Concern was raised on the types of conduct to be regulated, such as bundling of services across sectors. Panel members noted the Administration's view that the scope of exemptions under the competition law should not be too wide, and CPRC's opinion that civil sanctions, which might include heavy fines and disqualification from being a company director, should have sufficiently powerful deterrent effect. There was a suggestion to link the level of fines to the annual business turnover of the companies found in breach of the competition legislation. 9. Panel members were briefed on the public consultation on competition policy and its outcome on 21 December 2006 and 26 March 2007. While some members indicated full support for introducing a cross-sector competition law in Hong Kong, other members were concerned that SMEs might easily fall foul of the new legislation. The Panel called on the Administration to ensure that the new law would balance the interests of relevant stakeholders and would not impede Hong Kong's status as a free market. 10. On 6 May 2008, the Administration briefed the Panel on Economic Development (EDEV Panel) on the detailed proposals of the Competition Bill. On the proposal that the Competition Commission would not pursue an agreement if the aggregate market share of the parties to the agreement did not exceed a certain level (i.e. the "de minimis" approach) except where "hard core" conduct was involved, Panel members raised concern that in the absence of a clear definition of "hard core" anti-competitive conduct, the safeguard for SMEs under this proposal was rather limited. There was concern as to how the new law could tackle the problem of abusing substantial market power by large companies as they could easily escape from the market share test, if any, through manipulating their shareholdings. Some members suggested that exemptions and exclusions should be approved by LegCo.

3 The Panel on Economic Services was renamed as the Panel on Economic Development with effect from

the 2007-2008 session.


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11. The Administration reported to the EDEV Panel on 16 December 2008 the consultation findings on the "Detailed Proposals for a Competition Law". Some Panel members considered that the clarity of the proposed legislation should be improved and there should be clear guidelines to dispel uncertainties in the business sector. Some members queried why a clear majority support would be required for the inclusion of merger provisions4, as the absence of such might undermine the objective of the law in promoting sustainable competition. Panel members also raised concerns on the provision for private action against anti-competitive conduct, the need to impose criminal penalty to enhance the deterrent effect of the competition law, and the type of statutory bodies that would be subject to the application of the law or otherwise. 12. At the EDEV Panel meeting on 30 March 2009, some members expressed concern about the Administration's proposal to change the original civil administration model to a judicial model for the enforcement of the Bill, the need to recruit competition economists to assist in the enforcement of the Bill and the need to review all non-government public bodies, be they statutory or otherwise, to assess whether they should be subject to application of the Bill. The Bill 13. The Competition Bill was gazetted on 2 July 2010 and introduced into LegCo on 14 July 2010. The objects of the Bill are to prohibit conduct that prevents, restricts or distorts competition in Hong Kong; to prohibit mergers that substantially lessen competition in Hong Kong by the merger rule5; to establish an independent Competition Commission to investigate and bring proceedings before the Competition Tribunal; and to provide for incidental and connected matters. Specifically, the Bill contains the following key elements in 12 parts and 9 schedules:

(a) Part 1 - Preliminary - provides for the application of the Ordinance to statutory bodies, to specified persons and to person engaged in specified activities;

(b) Part 2 - Conduct rules - sets out the conduct rules applicable to

agreements, decisions and concerted practices, and the abuse of a substantial degree of market power in a market and the territorial applications of the conduct rules, as well as establishes a framework

4 According to the information provided by the Administration (CB(1)494/08-09(01)), among those who

touched on merger regulation in the public consultation exercise, 21 preferred option A (i.e. to include in the competition law "user-friendly" merger provisions similar to those found in the Telecommunications Ordinance, two chose option B (i.e. to include such provisions in the law but to delay their coming into effect pending a review of the effect of the implementation of the law) and 13 selected option C (i.e. not to include merger provisions in the law initially, but to reconsider the need for them only after a review of the effect of the implementation of the law).

5 The merger rule only applies to carrier licences under the Telecommunications Ordinance (Cap. 106).


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for exemptions and exclusions from the application of the conduct rules;

(c) Part 3 - Complaints and investigations - sets out the powers and

procedures of the Commission in relation to the investigation of alleged contravention of the competition rules and creates offences in relation to investigations;

(d) Part 4 - Enforcement powers of Commission - authorizes the

Commission to accept, vary, substitute and release commitments with persons and to issue infringement notice to persons in exchange for the Commission ceasing its investigation and/or not to institute or continue with proceedings against the persons; and provides a leniency procedure with regard to contraventions of the conduct rules;

(e) Part 5 - Review by Tribunal - sets out the conditions for review of

the determinations of the Commission by the Tribunal and the operation of the review mechanism;

(f) Part 6 - Enforcement before Tribunal - sets out the remedies which

the Tribunal can grant in respect of breach of the competition rules; (g) Part 7 - Private actions - provides for the private enforcement of the

conduct rules and sets out the related procedures; (h) Part 8 - Disclosure of Information - requires the Commission to

establish and maintain safeguards to prevent the unauthorized disclosure of confidential information in its possession; imposes a duty on ‘specified persons’ not to unlawfully disclose confidential information; and sets out how confidential information may be lawfully disclosed;

(i) Part 9 - Competition Commission – establishes the Commission

and sets out its functions and powers and its status in relation to the Government; and provides personal immunity from civil liability for acts done or omitted to be done in good faith by members of the Commission and others in the performance of functions under the Bill;

(j) Part 10 - Competition Tribunal – establishes the Tribunal as a

superior court of record, and sets out its jurisdiction and powers; makes provisions for the procedures of the Tribunal and appeal against decisions of the Tribunal; provides for the appointment of the President and Deputy President of the Tribunal and the making available of a Registrar and other staff to the Tribunal; and authorizes the Chief Judge of the High Court to make rules of the Tribunal;


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(k) Part 11 - Concurrent jurisdiction relating to telecommunications

and broadcasting - provides that the Telecommunications Authority (TA) and Broadcasting Authority (BA)6 may exercise the powers of the Commission with respect to telecommunications licensees and broadcasting licensees respectively, and requires the TA, BA and the Commission to sign an Memorandum of Understanding (MOU) to coordinate the performance of their concurrent functions;

(l) Part 12 - Miscellaneous - provides for miscellaneous provisions;

empowers the Commission to charge fees and the Chief Executive to prescribe such fees; provides personal immunity from civil liability for acts done or omitted to be done in good faith by public officers in the performance of functions under the Bill; sets out the details on service of documents on the Commission and others for the purpose of the Ordinance; prohibits provision of certain indemnities to officers, agents or employees; protects employees from abuse and punishment by their employers for assisting the Commission in the performance of its functions or giving evidence; provides for offences for obstruction of performance of functions under the Bill; and provides for offence committed by a body corporate or partner in a partnership; and

(m) 9 Schedules Schedule 1 – provides the general exclusions from the conduct rules; Schedule 2 – sets out the procedural requirements relating to

acceptance, variation, withdrawal and release of commitments; Schedule 3 – sets out the orders that may be made by the Tribunal in

relation to contraventions of the competition rule; Schedule 4 – sets out the provisions that may be contained in orders

made by the Tribunal in relation to anticipated mergers and mergers; Schedule 5 – contains constitutional, administrative and financial

provisions relating to the Commission; Schedule 6 – lists matters that may be included in the MOU to be

signed by the Commission, TA and BA in relation to the exercise of their concurrent functions;

Schedule 7 – sets out the merger rule which is confined to carrier

6 Under the Communications Authority (CA) Bill which is being scrutinized by LegCo, the functions of

the BA and the TA will be transferred to the CA.


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licences under the Telecommunications Ordinance; details on investigation into a merger; and provides exclusions and exemptions from the merger rule; and provides for decisions to be made by the Commission in relation to mergers and anticipated mergers;

Schedule 8 – makes consequential and related amendments to other

enactments; and Schedule 9 – contains transitional and saving provisions.

Views and concerns of the Panel on the Bill 14. During the EDEV Panel discussion on 28 June 2010, the Administration briefed members on the key elements of the Competition Bill, including the scope of the new legislation, general prohibitions, institutional framework, enforcement by the Commission, remedies for contravention of a competition rule, rights of private actions, exemptions and exclusions etc. Members were very concerned about how the Administration would determine which statutory bodies should be subject to the application of the Bill and the mechanism by which the list could be reviewed. Some members also called on the Administration to publicize the criteria for appointing members to the Commission, to ensure the Bill would not create additional compliance burden for SMEs, and to extend the merger rule to more sectors. Latest development 15. At the House Committee meeting on 8 October 2010, a Bills Committee was formed to scrutinize the Bill. Relevant papers 16. A list of relevant papers with their hyperlinks can be found at: http://www.legco.gov.hk/database/english/data_es/es-competition-policy.htm Council Business Division 1 Legislative Council Secretariat 5 November 2010


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For discussion

Bills Committee on Competition Bill

Overview of Major Components of the Competition Bill

Purpose This paper briefs Members on the major components of the Competition Bill (the Bill) to facilitate their scrutiny of the Bill. Major components of the Bill 2. The Bill has the following major components -

(A) Institutional arrangement Judicial enforcement model 3. Part 9 and Schedule 5 (Competition Commission), and Part 10 (Competition Tribunal) of the Bill provide for a judicial enforcement model through the establishment of the Competition Commission (the Commission) and the Competition Tribunal (the Tribunal). 4. Our policy objective is to establish a credible and impartial institutional framework which allows for effective and efficient enforcement of the competition law. The judicial enforcement model which we have adopted in the Bill through the creation of the Commission and the Tribunal has the advantages of separating the powers of investigation, prosecution and adjudication of alleged breaches of competition rules among different authorities, thereby enhancing fairness and addressing concerns over concentration of too much power in one body. Moreover, to ensure that there is effective deterrence of anti-competitive conduct, we consider that the Tribunal should be able to

CB(1)320/10-11(02)

CIC/PCM/P/015/10 Annex B

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apply a full range of remedies, including pecuniary penalties under the Bill. Given the significant power which will be provided to the adjudicative body, a judicial model is considered to be more appropriate. Competition Commission 5. Part 9 of the Bill establishes the Commission as an independent statutory body tasked with the functions to investigate into competition-related complaints, and to bring public enforcement action before the Tribunal in respect of anti-competitive conduct either on receipt of complaints, on its own initiative, or on referral from the Government or a court. The Commission also performs other roles in granting exemptions from the application of the law to enhance legal certainty of the law, promoting public understanding of the Bill and the value of competition through public education work, as well as advising the Government on competition matters. 6. Schedule 5 of the Bill sets out the constitutional, administrative and financial provisions relating to the Commission. In terms of governance, the Bill provides that the Commission is not a servant or agent of the Government to ensure independence and credibility of its work. Similar to appointments of other independent regulatory authorities, the Chief Executive (CE) shall appoint members to the Commission, including the Chairperson. As competition law is a multi-disciplinary subject, in considering appointments to the Commission the CE needs to be able to select persons with expertise or experience in a diversity of sectors and background including industry, commerce, economics, law, small and medium enterprises (SMEs) or public policy. A good mix of expertise is essential to the Commission’s effective discharge of its statutory duties. Through the appointment of members with business background, the Commission will be able to give due regard to the special needs and circumstances of SMEs when deciding whether it should start an investigation and in the exercise of its enforcement power. The Bill provides that the Commission is to consist of not less than five members to ensure that there could be one representative from each of the above areas of expertise. Members of the Commission are entitled to such terms (including remuneration and allowances) as the CE may determine.


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7. Drawing reference from overseas jurisdictions, we propose the executive arm of the Commission to be headed by a Chief Executive Officer (CEO) appointed by the Commission on such terms as the Commission may determine with the approval of the CE. The CEO will lead a team of professional and executive staff including experts with legal, accounting and economics background. We expect that the CEO will work on a full-time basis to manage the administrative affairs of the Commission and to perform any functions that may be assigned or delegated to the CEO by the Commission as provided in Schedule 5 of the Bill. 8. The Commission will mainly be funded by the Government. To avoid abuse of the Commission’s services, the Commission may also receive incomes from other sources such as services for fees e.g. applications for the Commission’s decisions on exclusion (also see paragraph 22). However, the pecuniary penalties from issue of infringement notices (also see paragraphs 34 to 36) will go directly into the General Revenue to ensure the Commission’s impartiality in discharging its investigative powers. Such fees will be prescribed by the CE by way of regulations which may provide for the payment of different fees by different persons or different classes or descriptions of persons so as to cater for those who are financially deprived. The Commission will be held accountable to the public, subject to regulation under the Prevention of Bribery Ordinance, the Ombudsman Ordinance and value-for-money audit by the Director of Audit. It also has to keep proper accounts and submit estimates to the Chief Executive every financial year. An Annual Report and audited accounts are to be tabled at the LegCo after the end of each financial year. To ensure transparency and good governance over the Commission’s work, the Bill also contains provisions on the conduct of meetings, scope of delegation and powers to make house rules of the Commission, including those concerning conflict of interest. Competition Tribunal 9. Part 10 of the Bill provides for the establishment of the Tribunal. The Tribunal will be set up within the Judiciary as a superior court of record to hear and adjudicate on competition cases brought by the


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Commission, private actions as well as reviews of determination of the Commission(1). The Tribunal will be empowered to apply a full range of remedies. Decisions of the Tribunal are, subject to leave of the Court of Appeal (CA), reviewable in appeals to the CA. 10. Given that competition law is a new and difficult area of law and has to be applied in the circumstances of Hong Kong, we consider that it is best dealt with by a specialized Tribunal to allow this dedicated adjudicative body to accumulate experience and expertise in this specific area of law. This specialized Tribunal will be set up within the Judiciary at the level of a superior court of record to task this onerous and difficult responsibility to judicial officers of considerable experiences in dealing with complex commercial cases. 11. As for the constitution, every judge of the Court of First Instance (CFI) will, by virtue of his or her appointment as CFI Judge, be a member of the Tribunal. The CE will, on the recommendations of the Judicial Officers Recommendation Commission, appoint two of the members of the Tribunal to be the President and Deputy President of the Tribunal respectively for a term of at least three years, but not more than five years. The President and the Deputy President are eligible for re-appointment. In respect of practices and procedures of the Tribunal, the President may appoint one or more members of the Tribunal to hear and determine an application made to the Tribunal. The Tribunal may appoint specialized experts to act as assessors to assist in proceedings and tap relevant expertise. The policy intention is that the Tribunal is to conduct its proceedings with as much informality as is consistent with attaining justice to enable it to handle cases in a timely manner and at comparatively lower cost to all parties involved. It may also decide its (1) Determinations of the Commission which are reviewable by the Tribunal are decisions made by

the Commission in respect of :

(i) exemptions or exclusions for agreement(s), conduct(s) or merger(s); (ii) rescission of a decision regarding exemptions or exclusions for agreement(s), conduct(s) or

merger(s); (iii) variation of a commitment made by undertaking(s) to take or refrain from taking certain

action to address the Commission’s concerns about a possible contravention of a competition rule;

(iv) release of undertaking(s) from a commitment to take or refrain from taking certain action to address the Commission’s concerns about a possible contravention of a competition rule; and

(v) termination of a leniency agreement.


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own procedures and may, so far as it thinks fit, follow the practice and procedure of the CFI in the exercise of its civil jurisdiction. 12. The Tribunal is to be supported by the Judiciary with additional resources to meet the establishment and training needs. The Bill provides that every Registrar, senior deputy registrar, deputy registrar and any other officer such as Bailiff of the High Court, by virtue of that appointment, holds the corresponding office or position in the Tribunal. To start off the Tribunal, at least one CFI judge, one Deputy Registrar of the High Court and some support staff to the Judge and registry staff would need to be added to the establishment of the Judiciary. Concurrent jurisdiction 13. To reconcile the new law with the existing competition regulatory framework in the broadcasting and telecommunications sectors, the Bill provides that the Broadcasting Authority (BA) and the Telecommunications Authority (TA) will have concurrent jurisdiction with the Commission in respect of the investigation and bringing of enforcement proceedings of competition cases in the broadcasting and telecommunications sectors, while their existing adjudicative function will be transferred to the Tribunal. 14. The proposed concurrent jurisdiction mechanism is intended to retain the specialist knowledge of the TA and BA in competition regulation and for them to initially share some of the Commission’s workload to promote efficiency. In the longer term, we do not preclude the possibility of having one regulator for all competition matters. To ensure co-ordination and clarity in the exercise of the concurrent jurisdiction, the Bill provides that the Commission, the BA and the TA will enter into a Memorandum of Understanding (MOU) which will be published. Schedule 6 of the Bill specifies some of the matters that may be provided for in the MOU.


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(B) Major prohibitions, exclusion and exemption

Major prohibitions 15. The scope of the Bill is to prohibit and deter ‘undertakings’ in all sectors from adopting abusive or other anti-competitive practices which have the object or effect of preventing, restricting or distorting competition in Hong Kong. Part 2 of the Bill provides for general prohibitions in two major areas of anti-competitive conduct, namely agreements, decisions or concerted practices (the first conduct rule) and the abuse of a substantial degree of market power in a market (the second conduct rule). In addition to the conduct rules, Schedule 7 of the Bill provides for regulation of mergers or acquisitions which have, or are likely to have the effect of substantially lessening competition in Hong Kong (the merger rule), but the merger control is confined to carrier licenses granted by the TA. These three prohibitions are collectively known as the ‘competition rules’ in the Bill, which will also apply to anti-competitive conduct and mergers engaged or carried out in places outside Hong Kong as long as the conduct and mergers concerned are harmful to, or have the potential to harm, competition in Hong Kong.

16. An ‘undertaking’ is defined as any entity, regardless of its legal status or the way in which it is financed, engaged in economic activity and includes a natural person engaged in economic activity. This is also a definition held by the European Court of Justice. Each conduct of an entity has to be considered on its own merits, to decide whether it amounts to an ‘economic activity’ and thus falls within the scope of the Bill. Pursuant to European Union competition law jurisprudence, entities engaging in activities which amount to “tasks in the public interest which form the essential functions of the state” are generally not considered as undertakings. In other words, a function or activity which is an expected or necessary part of the Government is not an economic activity. However, the term “economic activity” is not defined in the competition law of any of the major jurisdictions. Case laws in Europe have developed some guiding principles to elaborate on “economic activity”, which includes offering goods or services in a given market. There is no need for a profit-making motive or economic purpose, whilst the legal status of the entity and the way it is financed are irrelevant.


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17. We have adopted a ‘general prohibitions’ approach in the Bill instead of a ‘per se infringement’ approach. We consider this approach appropriate for a cross-sector competition law as it would offer the greatest flexibility to cater for the circumstances of different sectors and the changing business practices and has been widely adopted in overseas competition jurisdictions from which Hong Kong can draw reference from their abundant case law and long history of experiences. To enhance clarity of the law and to facilitate compliance by the business sector, particularly SMEs which have expressed concerns on the adverse impact of the law on their operation, the Bill has included a non-exhaustive list of examples of anti-competitive conduct to supplement the general prohibition provisions, and made it a statutory requirement for the future Commission to draw up regulatory guidelines on interpretation and implementation of the law in consultation with any persons it considers appropriate. We have also built in the Bill provisions and mechanisms to ensure appropriate and sufficient promotion and educational work. Besides, clause 1 of the Bill has provided for the flexibility of staggered commencement of different parts of the Ordinance so as to allow a transitional period between the enactment of the law and the coming into force of the major prohibitions to allow the business community to get familiar with the new law and to make any necessary adjustments. The Bill also covers mechanisms under which undertakings may seek the future Commission’s decision on whether their business practices or activities are excluded from the new law subject to certain conditions. 18. We recognize the importance of market definition which is essential to competition analysis for enforcement and adjudication. Since market definition may vary from case to case and has to be dealt with specifically on a case-by-case basis, we have not proposed to include in the Bill provisions to define market in order to provide greater flexibility for the future Commission to cater for changes in market circumstances over time. In fact, the Commission will look into the useful experience of overseas competition regulatory authorities in this respect. It will follow their experience to set out the considerations and procedures in coming up with a market definition in the guidelines. Before issue of the guidelines, the Commission must consult any persons it considers appropriate.


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19. As regards merger regulation on a cross-sector basis, noting the Competition Policy Review Committee’s view that the focus of competition law in Hong Kong should be on prohibiting conduct, rather than targeting market structure through the regulation of monopolies and mergers, and that mergers may be an efficient way to achieve economies of scale in a small economy like Hong Kong, we consider it pragmatic and sensible not to regulate merger activities under the Bill at its infancy stage, except for carrier licenses granted by the TA which is already subject to such regulation (c.f. section 7P of the Telecommunications Ordinance (Cap. 106). We have, however, taken the opportunities to modernize merger control under the Bill in the light of recent developments in the merger rule of other competition jurisdictions. We have also adjusted the provisions to cater for possible extension to a cross-sector regulation. As experience and expertise about the competition law regime build up, we would be in a better position to review the effectiveness of the law and assess whether cross-sector merger provisions are suitable and needed in Hong Kong. Exclusion and exemption mechanism under the Bill 20. Part 2 and Schedule 1 of the Bill provide that the first conduct rule and/ or the second conduct rule will not apply to any agreement that enhances or would likely enhance overall economic efficiency (where the gain from economic efficiency is greater than the anti-competitive harm), or any agreement to the extent that it is made to comply with a legal requirement (where an anti-competitive agreement is required by law), or any undertaking entrusted by the Government with the operation of services of general economic interest, i.e. services that the authorities consider should be provided in all cases, whether or not there is incentive for the private sector to do so. Such services must be widely available and not restricted to a class, or classes of customers, e.g., public transport, water supply, power supply or postal services. The underlying principle of the exclusion mechanism is that certain agreement or conduct that yields efficiency gains which outweigh any anti-competitive harm, or achieve other important social or public policy objectives, should be exempted from the law. This mechanism follows practices in other overseas competition jurisdictions.


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21. The competition laws in other jurisdictions do not explicitly define these exclusions. There are however abundant sources of case laws and guidelines in these jurisdictions clarifying the scope of application of these exclusions. 22. Undertakings can self-assess their agreements or conduct in accordance with the general exclusions from conduct rules provided in Schedule 1 of the Bill. The rationale of this “self-assessment” is that undertakings are better placed to assess their actions as they possess the facts and could access the relevant sources of information which allow them to make an informed decision on whether to proceed with an agreement or conduct. That said, to enhance legal certainty to undertaking who may be faced with a case of sufficient novelty for which no existing case laws or rulings of the authorities may answer, the Commission may consider an application from undertakings under Part 2 of the Bill to decide whether or not an agreement or conduct is excluded from the conduct rules in accordance with those criteria in Schedule 1. If the Commission decides that the agreement or conduct is excluded from the conduct rules, such agreement or conduct will be immune from both public enforcement actions and private actions. We note from overseas experience, especially the European Community, that in the early stages of the implementation of a competition law, there would be great demand for an opinion or determination by the competition authorities that might drain the resources of the authorities. To minimize the risk of opening up a floodgate of applications for decisions, we have provided some conditions in the Bill which must be satisfied before the Commission is required to consider an application. These conditions are formulated to ensure that the case in an application poses sufficient novelty and importance in the wider interest in the community where no existing case law or literature can answer. The Commission is required by law to issue guidelines on how it will receive applications for and exercise its power to make a decision. 23. Part 2 of the Bill also empowers the Chief Executive in Council (CE in Council) to make orders to exempt agreements or conducts from the conduct rules if the CE in Council is satisfied that there are exceptional and compelling reasons of public policy that the conduct


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rules ought not to apply. The Bill will also empower the CE in Council to make orders to exempt agreements or conducts from the application of the conduct rules if the agreements or conducts are required to avoid a conflict with international obligations. These orders will be subject to vetting by the Legislative Council. This mechanism is in line with international best practices. 24. As for the exclusion and exemption mechanism for mergers of licensees whose licenses are granted by the TA, the Bill provides that the merger rule will not apply to any merger that enhances or would likely enhance overall economic efficiency. The CE in Council may also make orders to exempt a merger from the merger rule on public policy ground. According to international experience, it is rare that a merger would be compelled by other laws or international obligations. Moreover, a merger involving general economic interest is usually entrusted by the Government and will usually fall under the public policy test according to which a merger is allowed to apply for exemptions through CE in Council. Both the UK and Singapore adopt the same arrangement under their competition regulatory regimes. (C) Exemption for statutory bodies and non-statutory bodies by

regulations

25. Activities of many statutory bodies are non-economic and regulatory in nature or involve provision of essential public services. Having regard to cases in other jurisdictions, such activities would effectively be excluded from the application of the competition law. However, to provide certainty, we propose that exemption should be given to these statutory bodies and their activities to ensure that the efficient implementation of public policies as well as measures which are required to react quickly to problems in the community would not be affected. Thus, under clause 3(1) of the Bill, we propose not to apply those parts of the Bill relating to competition rules (Parts 2 and Schedule 7) and enforcement (Parts 4 and 6) (referred to as “non-applicable parts of the Bill” below) to statutory bodies.


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26. Specifically, the Bill will provide that the non-applicable parts of the Bill will not apply to statutory bodies or their activities except those statutory bodies or their activities specified in regulations to be made by the CE in Council under clause 5(1)(a). Such regulations may be made by the CE in Council only after the commencement of the relevant empowering provisions in the Bill. The CE in Council will have to satisfy that the following four criteria under clause 5(2) are met before making the regulation –

(a) the statutory body is engaging in an economic activity in direct competition with another undertaking;

(b) the economic activity of the statutory body is affecting the economic efficiency of a specific market;

(c) the economic activity of the statutory body is not directly related to the provision of an essential public service or the implementation of public policy; and

(d) there are no other exceptional and compelling reasons of public policy against making such a regulation.

27. These criteria reflect the prevailing doctrines and case laws in overseas jurisdictions on the essential qualities of an entity which should be made subject to the regulation of competition law. Entities not satisfying one or all of these criteria are likely to fall outside the scope of competition law, as they are either not an “undertaking”, or that they would likely satisfy the tests for exclusions or exemptions on economic or public policy grounds.

28. For the purpose of the Bill, ‘statutory body’ means a body of persons, corporate or unincorporate, established or constituted by or under an Ordinance or appointed under the Ordinance, but does not include a company, a corporation of trustees incorporated under the Registered Trustees Incorporation Ordinance (Cap. 306), a society registered under the Societies Ordinance (Cap. 151), a co-operative society registered under the Co-operative Societies Ordinance (Cap. 33), or a trade union registered under the Trade Unions Ordinance (Cap. 332). These ordinances concern mainly vehicles of incorporation of private


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entities which if not excluded, may fall under the definition of “statutory body”. Hence, we have included these exceptions to reflect better our policy intention in respect of statutory bodies.

29. Clause 4(1) of the Bill further provides that the non-applicable parts of the Bill do not apply to a person or a person to the extent that the person is engaged in an activity specified in a regulation to be made by the CE in Council under clause 5(1)(b). In considering making the application to exempt certain persons or specified activities, the CE in Council may take into account the relevant considerations, including but not limited to exceptional and compelling reasons of public policy in doing so. The flexibility is considered necessary to cater for unforeseen circumstances which may require exemption under this clause. The regulation will be subject to vetting by the Legislative Council.

30. The Administration is working on its proposals on which statutory bodies or their activities will be brought under the purview of competition law. As there are a large number of statutory bodies with very diverse functions set up in Hong Kong, we are carefully examining the operation of and activities engaged in by these entities within the legal framework set out above, and will brief the Bills Committee on the proposals in early 2011.

(D) Complaints and investigations, disclosure of information

31. Part 3 of the Bill sets out the powers and procedures of the Commission in relation to the investigation of alleged contravention of the competition rules and creates offences in relation to investigations. The Commission will be vested with investigatory powers including the power to require production of documents and information and attendance before the Commission to give evidence, power to enter and search premises as well as power to seize and retain evidence and property under a court warrant, etc. Non-compliance with the Commission’s investigative power in the absence of reasonable excuse will be subject to criminal penalties. 32. The Bill also provides for safeguards in relation to the Commission’s investigative power to address concerns from the business


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sector, particularly SMEs on the impact of the Bill to their business operations. For instance, the Commission must have reasonable cause to suspect that a contravention of any of the competition rules has taken place, is taking place or is about to take place before exercising its investigative powers. The power to enter and search premises as well as power to seize and retain evidence and property could only be exercised upon obtaining a warrant issued by a judge of the CFI. In fact, when preparing Part 3 of the Bill, we have made reference to the relevant provisions in the competition laws of other major jurisdictions as well as Hong Kong’s existing legislation, in order to ensure that the future Commission will be able to effectively enforce the new law while necessary control is in place on its exercise of investigative power. Moreover, the Commission is required by law to issue guidelines on how it will exercise its investigative powers, including the de minimis approach under which it would not pursue a case where the aggregate market share of the undertakings involved do not exceed a certain level. 33. Part 8 of the Bill requires the Commission (including the TA and the BA) to establish and maintain safeguards to prevent the unauthorized disclosure of confidential information provided to it by complainants or persons under investigation, or acquired using its statutory evidence gathering powers. The Bill also imposes a duty on ‘specified persons’ as defined in clause 121 not to unlawfully disclose confidential information; and sets out how confidential information may be lawfully disclosed. (E) Enforcement

Enforcement powers of Commission 34. Part 4 of the Bill provides for a two-tier commitment mechanism under which the Commission will be empowered to accept commitments from, or issue an infringement notice bearing a sum of payment up to HK$10 million to require, a person to take or refrain from taking certain actions to address the Commission’s concerns about a possible contravention of the competition rules in exchange for cessation of investigation and/or proceedings against the person.


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35. The commitment mechanism set out in the Bill is borrowed from the UK legislation, which provides for a statutory framework to empower the future Commission to reach settlements during the process of investigation and before the institution of trial in the Tribunal. Commitments are mainly focused on future conduct of the undertakings in question, i.e. agree to take or refrain from taking certain action, such that the Commission’s concerns about a possible contravention of a competition rule can be addressed. 36. On the other hand, the infringement notice procedure should be viewed as an alternative to bringing proceedings in the Tribunal for a contravention of a conduct rule of lesser scale and severity, so as to facilitate mediation and hence to reduce overall litigation cost in the community. Under this procedure, the Commission may issue an infringement notice to a person whom it has reasonable cause to believe has contravened a conduct rule. The notice will contain an offer not to bring proceedings in the Tribunal against that person in return for the person making a commitment to comply with certain specified requirements. These requirements may include paying a sum of up to HK$10 million, refraining from certain conduct, taking certain actions, and admitting to a contravention of the conduct rule in question. A person is not obliged to make a commitment to comply with the requirements of an infringement notice but if a commitment is made, the Commission may not bring proceedings in the Tribunal against the person, in relation to the alleged contravention. 37. Recognising that leniency programme is increasingly regarded as an effective tool in detecting and prosecuting collusive behaviour in recent years and in order to provide greater certainty for leniency arrangement under the Bill, Part 4 of the Bill also empowers the Commission to enter into leniency agreements with persons who have allegedly contravened the conduct rules in exchange for their cooperation in the Commission’s investigation and bringing enforcement proceedings before the Tribunal in respect of other parties involved in the same contravention. The Commission will not institute or continue with proceedings for a pecuniary penalty in respect of a contravention of a conduct rule against those with which it has reached leniency agreements. In other major competition jurisdictions, the details of their leniency


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programmes are often stipulated in the regulatory guidelines or policy documents. We therefore consider it appropriate to defer the detailed design of the leniency regime to the future Commission. Enforcement before Tribunal 38. As mentioned in paragraph 9 above, the Tribunal as a superior court of record will have the power to review certain determinations of the Commission, including but not limited to those relating to exclusion/exemption of specific conduct/agreement, variation of a commitment and termination of a leniency agreement etc. With reference to the competition laws of some major jurisdictions, Part 6 of the Bill also empowers the Tribunal to apply a full range of remedies, as set out in Schedules 3 and 4, for contravention of a competition rule. These remedies include in particular pecuniary penalties not exceeding 10% of the turnover (including global turnover) of the undertaking(s) in breach of the competition rule for the year in which the contravention occurs; award of damages to aggrieved parties; interim injunction during investigations or proceedings; termination or variation of an agreement or merger; and disqualification orders against directors and others who have contributed to the contravention of the competition rule. 39. Some stakeholders in the business sector consider the 10% global turnover cap for pecuniary penalty as too high and opine that the benchmark turnover should be confined to the portion generated by business activity in Hong Kong only. We consider that our proposed cap is consistent with the approach adopted in some of the comparable overseas competition jurisdictions. With the prevailing trend of globalized business operation, it is also difficult to delineate the portion of business turnover in Hong Kong for calculation of pecuniary penalty. What is stipulated in the Bill is a maximum penalty that can be imposed by the Tribunal. We are of the view that the Tribunal will exercise its due diligence and reasonableness when applying this particular remedy.

(F) Private actions

40. In addition to public enforcement through the Commission, Part 7 of the Bill also provides for private actions to be brought by


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persons who have suffered loss or damage as a result of a contravention of a conduct rule. Such private actions could either follow on from a determination of the Tribunal, the CA or the Court of Final Appeal that the conduct is a contravention of a conduct rule, or could be ‘stand-alone’ actions seeking a judgment on particular conduct and remedies. The CFI will be empowered to make determinations on alleged contravention of the conduct rules in cases involving composite claims made under the Bill and those claims which are not made under the Bill. 41. We note some stakeholders’ concern that by allowing stand-alone private rights of action, large businesses may abuse the system and use it to harass small business operators. Such concern, however, are not substantiated by international experience. There are in fact limited number of private cases related to competition with the exception of the US conceivably reflecting the special characteristics of its legal system such as contingency fees and award of treble damages. Moreover, the future Tribunal or CFI will be able to strike out vexatious and frivolous lawsuits at the early stage of litigation. 42. Access to justice by way of private action is a fundamental right which should not be easily denied without convincing justification. Experience from overseas regulators indicates that having a stand-alone private action regime actually alleviates some of the pressure and resources in respect of public enforcement. Most competition regimes provide a standalone private right of action as the option of a “self help” remedy to business and customers who consider themselves the victims of anti-competitive conduct. Indeed, the European Commission and the UK’s Office of Fair Trading are exploring how to remove roadblocks to greater use of private rights of action.

(G) Consequential amendments, transitional and saving provisions

43. Schedule 8 of the Bill makes consequential and related amendments to other enactments, whilst Schedule 9 contains transitional and saving provisions to reconcile the existing sector-specific competition regulation in the broadcasting and telecommunications sectors. As the conduct rules of the Bill will apply to all sectors, competition-related provisions under the Broadcasting Ordinance (BO) (Cap. 562) and the


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Telecommunications Ordinance (TO) (Cap. 106) will be repealed. To this end, the Bill includes some “transitional provisions” to make sure that there is a smooth transition from the application of the competition provisions of the TO & BO to the application of the future Competition Ordinance (CO) in the telecommunications and broadcasting industries. Since the CO will not have retrospective effect, as a guiding principle, conduct or agreements which occur prior to the commencement of the CO which are actionable under the BO or TO repealed provisions but in respect of which no investigation has commenced will still be addressed post commencement of the CO under the repealed TO or BO provisions. Advice sought 44. Members are invited to note the contents of the paper and provide their views. Commerce and Economic Development Bureau November 2010


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PCM/CLW/P/002/11(for discussion)

Current Status Remarks

5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

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Planned scheduleactual progress as of 1 August 2011

20132011

Consolidate and deliberate the interests and concerns of small and medium-sized contractors

Competition Law

Prepare ToR and Membership List for Com-PCM's endorsement, and invite theagreed stakeholders to join the Task Force

completed

Drafting of Guide Notes (Draft Guide Notes shall be completed after approval ofthe Bill if appropriate)

The ToR and Membership List were endorsed by Com-PCM on 13 May 2011.

Consolidate the impacts identified and assess the degree of implication due tothe application of Competition Law

Task

Task Force on Competitive Law - Work Plan 2011/20132012

Consult stakeholders on the draft Guide Notes and fine-tuning (Depends on theapproval date of the Bill)

Seek endorsement by the Com-PCM and approval by CIC for issuance(Depends on the approval date of the Bill)

Deliberate the representation of the construction industry in the futureCompetition Commission

Legend:

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Documents

PCM/CLW/A/001/11 Committee on Procurement Meeting No. …hkgbca.coolpage.biz/download_files/cic/11082011.pdfagreed by Com-PCM at Meeting 002/11 held on 13 May 2011. (See Annex A) 2.5