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Saturday, April 13, 2013

The Romanian State against the market economy and the economic freedom


UPDATE 2
The Deputy Assistant Secretary of State Hoyt Yee, on 8 September 2014, in Bucharest: ”Using emergency government ordinances, which avoid the public consultation, creates uncertainity and scares-off the investors”. Mr.Hoyt gives, as an example, EGO 25/2013. 


UPDATE 1 
The President of Romania refused to enact and decided today, 16 July 2013, to send the bill aproving EGO 25/2013 back to the Parliament for further reconsideration. The main arguments invoked by the President refers to the same infringement of the economic freedom of the TV stations and of their clients and the breach of the principle of the free competition.
The most terrifying words in the English language are: I am from the government and I am here to help.” - Ronald Reagan
Yesterday, 12 April 2013, when everybody was preparing for a sunny week-end, it eventually happened.  The attack by the all-mighty State on a set of purely private economic relations, announced at the end of November 2012, finally took place.  At the sunset, when nobody expected it, the public authority of the state, crossed the border separating it from the market economy and walk with its boots over the freedom to enter into a contract and to the principle of the free market itself. 

The assault was not done through any physical violence but on through an apparently benign publication of the Government Emergency Ordinance 25/10 April 2013 (GEO 25/2013) in the Official Gazette of Romania, which aims to regulate the sale of TV advertising space and practically forbids the wholesale of the advertising time on TV and the intermediation by the media agencies.  The Romanian Competition Council issued in December 2012 a negative opinion (aviz) regarding the prohibitions and restrictions imposed of the sale of TV advertising space and I commented on this blog, at the beginning of 2013 about the precedent proposal.  The regulation announced in November 2012 was, eventually, not published, and hence, did not come into force. I thought that the government understood that the problems in the advertising industry cannot and should not be solved in such a brutal way.  I admit now that I was over-optimistic and the publication of the GEO 25/2013 in the Official Gazette on Friday, 12 April 2013 abruptly ends my optimism.  

In line with the rules for an efficient attack, the adoption and publication of GEO 25/2013 came without a warning – nobody new and, although the text of the ordinance appears to be different from the one adopted (also quietly) in November 2012, there was no information that the draft of such a GEO was on the agenda of the government on its meeting on 10 April 2013 (the date of this ordinance).  But this is a “blitzkrieg” type attack, hence the “emergency” of the ordinance and the total lack of transparency. 

I cannot give any appreciation as to the nature and the extent of the problems which might affect currently the advertising industry and the relations between this industry and the broadcasters.  It is odd that the new regulations intend to set rules only for the TV (?!) advertising due to the fact that the televisions are indeed an important communication channel, but they are part of the larger advertising market.  What about radio or the written press ?
I generally belive that intermediaries, in any industry, are not a must and they should justify their role.  On the other hand, even if the problems of the industry would be true, the right solutions are not those envisaged by GEO 25/2013. In this context, it is about private business and private agreements, hence if the problems exist, these are also private and the state must abstain from doing anything more than creating the framework for solving the problems (through the justice system) or sanctioning the villains, if they exist.  Any interference from the state, except those mentioned, cannot be conceived in the context of a free market economy and this is a clear breach of the economic freedom.  Business people, unlike consumers, do not need protection and their private disputes cannot be settled through a direct state intervention. 
The state is only a referee in the game of the private interests and cannot decide to alter the rules of the game in favour of one of the players, neither can decide to stop the game.

I would like to summarize what is wrong with this GEO, in the form it has been published:
  • TV stations are, virtually, forbidden to pay intermediaries for the sale of their advertising time to their clients, even if they want to do so and it is beneficial to them (!). (the GEO is not formally forbidding making use of intermediaries but the interdiction to make any payment for the activities they perform, will have a similar effect).
  • The media buying agencies cannot act as wholesalers either, purchasing volumes of advertising minutes from the TV stations and, then, reselling them to final clients.  
The first affected by these provisions could be the purchasers of advertising space (manufacturers and distributors wanting to promote their products).  They will have to handle their TV campaigns on their own, by entering in direct commercial relations with each TV station and negotiating with every stationThe Romanian broadcasting market has a large number of TV stations, but with regard to the revenues obtained is dominated by a few large broadcasters, so that organizing a well-focused campaign will prove to be a difficult – and more costly. It must be taken into account that the producers/distributors prefer to spread their commercial messages through several TV stations and, in addition, to run the same campaign on other communication channels - internet, radio, outdoor billboards.  In economic terms, the transaction costs of the clients of the televisions will most likely increase.  In order to respond to this complexity, the clients might concentrate their campaigns on a few TV stations - the market leaders, which are a kind of "must have" for any significant campaign.  As a consequence, the revenues of the major TV stations will be even larger, on the expense of the majority of the (smaller) televisions.  In the eventuality of more and more campaign being directed towards the large TV stations, the negotiating power of the later will increase even further.  Of course, the purchasers of advertising space will be able to hire the services of an intermediary but this one will need, in its turn to go round and discuss with all the TV stations, for each of its clients, so, its tariffs will be higher than today.  In any of these scenarios, the purchasers of advertising space will be have higher costs than in the present and the difference costs will be either absorbed by the producers/distributors or, they will be (more likely) transferred to the consumers.  At the end of the day, a few large televisions shall be better-off, on the expense of the purchasers of advertising and of the consumers. 
Although GEO 25/2013 claims to want to protect the all the TV stations, the great majority of them will be affected.  The TV stations are all in direct competition and they all have the same advertising time available for sale, as this time is capped through regulations issued by the audio-visual regulator.  If an intermediary will no longer be used for promoting the sale of the advertising time most TV stations might be affected. They will have to handle directly a few hundreds significant corporate advertisers, with the increase in the transaction costs mentioned before. They will have to hire specialized staff and create special departments and, besides, these smaller TV stations would incur the risk of not selling their advertising space timely and at the best prices.  Eliminating the intermediaries might, thus, help the TV stations keep more of the advertising budgets for themselves but their cash-flow might suffer - and the cash-flow matters!  
What is wrong about the new legislation, is that up to know no TV station could be forced to use intermediaries and was always free to sell its advertising space either through intermediaries or directly.  Models to improve the transparency and the control over the money received from the clients, such as the "three parties agreement" used since 2011 by the largest broadcasting group – Pro TV could be voluntarily agreed by the market players.  So, where from came this need to intervene so brutally in the freedom of the business people and in the free functioning of the market ??  Why the legislator had to intervene so abruptly and prohibit a broadcaster to enter, by its own will and only if this corresponds to its commercial interest, into a sale-purchase agreement or an agency agreement with a media agency, for the sale of its product (the advertising time) ?  

In addition, it struck me that GEO 25/2013 does not provide any specific term for the entry into force of the new restrictions, meaning that these will have to be applied with immediate effect and the agreements previously signed and still in corse will also have to be terminated immediately, without any transition period, against the will of their signatories - manu militari.  Thus, in the absence of any transition norms, GEO 25/2013 may bring about another dangerous interference, with the binding force of an agreement - pacta sunt servanda - which represent the cornerstone of the civil law system.
The Romanian Constitution states, in article 45 that “The free access of a person to an economic activity, the free initiative and its exercise within the limits set forth by the law are guaranteed” – the limits mentioned here are those regarding the prohibition of cartels, abuses of dominance or the unfair competition.  Besides, according to article.135, para.1 of the Constitution “The economy of Romania is a market economy, based on the free initiative and competition”.
What remains of all these provisions and legal principles after such a legislative intervention ? 

Like democracy, the free market economy is not negotiable and the number of limitations and exceptions is strictly limited. Market economy cannot be modeled to take the shape and fit of any of the particular interests functioning inside it but it is supposed to provide a framework for the coexistence and the equilibrium of all the legitimate interests.  Moreover, democracy and the free market economy seem to be interconnected - there are a few exemples of countries with market economies but not a democratic political system but there is no example of a single democracy existing in the absence of a free market economy.

The most worrying thing regarding this issuance of such legal norms is that, once the Rubicon has been crossed, nobody should feel safe - the government may target, later on, other areas of the private business where tensions and disputes exist – and there are plenty of them.  At the end of the day, the very functioning of a free market economy in Romania may be jeopardized, so that the whole business community – and not just those affected directly by GEO 25/2013 – should pay attention and have a firm stance against such regulations. 
The care is necessary since GEO 25/2013 is not the only measure adopted by the government in the recent period, which enters into an open conflict with the principles of the free market economy, to the benefit of few and, most likely, to the detriment of most – see the case of the Government Decision commented here (Romanian only), adopted a week before, on 3 April 2013, which protects only some selected, state-owned (!), energy producers by guaranteeing them access to the power grid, in fact a way to guarantee them a minimum volume of sales. 

The promoters of GEO 25/2013 should have learned from the exemple of the Law 321/2009, better known in the market as the "Code of good practices between the producers and retailers of food products".  The law, a result of the efforts of the producers of foodstuff products to alleviate their problems, in the face of the growing negotiating power of the large supermarkets chains, imposed, among other things, maximum payment terms for the products sold to the retailers, ranging from 12 to maximum 35 days, and compulsory delay penalties for any payment beyond the legal deadlines.  After only one year, in 2010, upon request from both the Competition Council and the same producers that the law aimed at protecting, the provisions regarding the payments terms and the delay penalties have been repealed by Law 247/2010 and replaced by good sense provisions which state that such contractual terms will be the result of the negotiations among the signatories.  The tormented evolution of Law 321/2009 may serve as a good example of how not to regulate and why the public administration should not arbitrate between private interests, in the absence of any effects on aspects of public interests and without due consideration to the side effects of such measures.