A. INTRODUCTION

1. The market economy requirement for applicant states for EU membership

Next year, the central and eastern European countries will celebrate the 10th anniversary of their liberalisation from communism. They have made considerable progress towards a market economy. Privatisation, liberalisation and deregulation have been embraced across the entire region which is now preparing for EU membership.

Does the EC compel the applicant states to have a entirely free market economy? Is deregulation required by Community law? Privatisation is not an express requirement for EU membership. However, at the Copenhagen Summit in June 1993, EU Heads of State and Government decided laid down the so-called Copenhagen criteria the applicant states for EU membership are required to fulfil prior to their accession. One of the four criteria is that the candidate countries have a functioning market economy. The question is what role does the Community attribute to privatisation, liberalisation and deregulation in building a market economy in the transitional economies.

At the outset of economic transition there was the widespread belief that the essential difference between a centrally planned and a market economy was that in the first case there was almost complete state ownership of the means of production and in the other almost exclusively private ownership. A functioning market economy does not necessarily mean that the state cannot retain any interests in selected or some specific strategic sectors such as energy, military production, transport.

The Community, nevertheless, insists on open competition in these sectors and regards the move to private ownership in the transitional economies as a fundamental step on the road to building a market economy. The Commission believes that generally private companies show higher productivity and better performance than public enterprises.

The European Bank for Reconstruction and Development also came to similar conclusions. An EBRD report came to the conclusion that faster privatisation would automatically lead to faster restructuring of enterprises. An analysis of the early evidence on privatisation and restructuring of former state-owned enterprises in the Czech Republic, Hungary and Poland yielded several important findings. The mass privatisation programmes generally led either to insider ownership by workers and managers or dispersed outsider ownership.

In its Opinion on Lithuania's application for EU membership the Commission stated that:

"In its transition to a market economy, Lithuania has advanced considerably in liberalising and stabilising the economy. The introduction of a currency board, the liberalisation of financial markets, the freeing of foreign transactions, and the reduction of fiscal deficits had substantial stabilising effects. Price liberalisation, voucher and cash privatisation, trade opening, legal reform, institutional development, and social safety net enhancement have also been implemented or are under way. The investment regime is relatively liberal.

However, the more fundamental restructuring of the economy and the shift to a higher growth path have been delayed. Genuine "hard budget constraints" are not yet in place (in essence this would require that loss-making enterprises know they will not, as in the past, be bailed out by the authorities). Tax collection is weak; there are mounting payment arrears, especially in the energy sector; bankruptcy proceedings have been ineffective and cash-based privatisation designed to bring in strategic investors has only recently become a matter of priority."

Privatisation in the applicant states, including Lithuania, has gone a long way. But it needs to go further. However it is not enough to just privatise. The emphasis in the Community is now shifting to other key related issues like liberalisation and deregulation. In the existing Member States the emphasis is on conforming to the single market and deregulation. With regard to the applicant countries the Commission in its Progress Reports also focuses on the Copenhagen competitiveness criteria. In this sense, given the background of the candidate countries, privatisation should be accompanied by increased efforts to liberalise and deregulate.

2. Definition of terms

There is a close inter-relationship between the terms "privatisation", "liberalisation" and " deregulation", but they are not synonymous. All three concepts are however central to the current economic policy of the European Union and therefore important for the development of Lithuanian economic policy. "Privatisation" means the process of transfer of ownership from the public to the private sector. In the European Union, the term has been closely associated with "infrastructural" industries such as telecommunications, energy and transportation. "Liberalisation" connotes the diminution of state intervention in the economy - whether internally or externally. It implies not only the reduction of tariff and non-tariff barriers to trade and competition, (thereby combining, in the EC, the external trade policy and the law of the internal market) but also a reduction of state intervention, for example in the form of subsidies and other forms of assistance. It also connotes positive intervention by competition authorities to control and punish anti-competitive behaviour (including by the State itself). "Deregulation" implied the reduction of bureaucratic intervention in business, the simplification as well as a reduction in the volume of legislation.

The different significance in the concepts in Western and Central Europe.

Privatisation in Western Europe (reinforced by deregulation and economic liberalisation) has been a gradual process - enhancing competition in existing market economies.

In the applicant states of Central Europe and the Baltic area, privatisation was the primary vehicle for affecting the changeover from planned to market economies.

Neither in the EU nor in the applicant states is privatisation a panacea. It is necessary but not sufficient for ensuring economic prosperity and growth. To achieve its intended effects, privatisation must be linked with: a) improved corporate governance and management; b) freedom for foreign investments; c) a strong competition and state aids policy; d) liberalisation of trade; e) legal reforms.

Deregulation is about allowing markets to operate, by removing price controls and allowing free trade. In Germany, deregulation is often associated with the term "slim state" ("schlanker Staat").

3. The revival of economic liberalism in Western Europe

Two landmarks can be distinguished above all others. These are the Thatcher reforms in the United Kingdom from 1979 onwards. These were adopted and adapted at European level in the EC's single market (1992) program launched in 1985. Despite the fact that 13 out of 15 EU Member States governments today are broadly "socio-democrat" in political orientation, it is significant that the economic policy in the EC remains liberal, free market, essentially non-interventionist and pro-competitive. These policies have been legally underpinned by a number of key provisions of the EU/EC Treaties.

B. LEGAL BACKGROUND

1. The EC Treaty provisions

The Treaties establishing the EC (and since 1992 the EU) are essentially neutral on the degree of state control and intervention in the economy. It follows from Article 6, as well as from Articles 103 to 109, that economic policy is first and foremost the concern of the Member States, only consultation and co-ordination between them being foreseen to the extent necessary to guarantee the good operation of the Common Market. Article 222 of the EC Treaty expressly affirms:

"This Treaty shall in no way prejudice rules in Member States governing the system of property ownerships."

This conclusion is confirmed by Article 90(1), which not only foresees that Member States can maintain public enterprises but which even permits them to grant to these public enterprises "special or exclusive rights". Finally, Article 37 allows Member States to keep existing state monopolies of a commercial character, their only obligation being to adjust these monopolies in a way which ensures the exclusion of all discrimination between nationals regarding the conditions under which goods are procured and marketed.

2. Obligations resulting from the opening up of the markets

From 1976 onwards, the signs of a change of attitude among the Community institutions began to appear. The neutrality adopted with regard to national measures which did not directly impede imports or exports gave way to a more critical analysis, examining more closely the concrete effect of the measure on trade rather than its formal structure. The result of this approach was to lead to an increased liberalisation of the market. However, this liberalisation was not an objective in itself but a way of enabling the removal of barriers to trade.

Thus, the rules on freedom of movement of goods were invoked successfully to oppose the application of national regulations on prices, whether they were discriminatory or equally applicable to national products and imported products, or whether they involved the imposition of minimum, maximum or fixed prices, or a maximum profit margin, or the obligation to give a period of notice before every price increase.

The ability of Member States to regulate the marketing of products was also seen to be greatly limited as a result of the broad interpretation given by the Court of Justice to the concept of "measures having equivalent effect to quantitative restrictions" in the well-known judgement Cassis de Dijon. The result of this case was that a national measure, even if it applied equally to national products and imports, infringed Article 30 if it produced in practice a restrictive effect on imports and if it was not justified by a "mandatory requirement" of public interest.

This jurisprudence played a considerable part in freeing the market from a great many trivial regulations which had since ceased to be useful and which, even if they had not always had a projectionist purpose, nevertheless had such an effect.

3. Obligation to ensure undistorted competition

Since 1984, in addition to the liberalisation brought about by the demands of free trade, there has been a growing insistence on the part of the Community institutions on the need to ensure that, throughout the Community, a regime of undistorted competition be guaranteed. It is no longer solely a question of ensuring free movement of goods between Member States, but of making sure that distortions of competition within a Member State do not undermine the objectives of the Treaty.

This development is illustrated in three ways:

First, by giving a broad interpretation to the concept of state aids, the Community institutions assert the power to control the acquisition by public authorities of shares in undertakings. In its judgement Intermills of November 14, 1984, the Court of Justice approved the Commission's argument that a state aid can take the form of the acquisition by the State or by a public authority of a stake in the share capital of an undertaking.

Secondly, the obligation imposed on Member States by the second paragraph of Article 5, and confirmed by Article 90(1) with regard to public undertakings, not to undermine the effectiveness of the competition rules, gives the Court of Justice the competence to exercise its control over the operation - and even in certain cases over the creation - of national monopolies, even in cases where Article 37 is not applicable.

Finally, by dispensing with any requirement of discrimination, either formal or material, as a condition for the application of Article 30, the Court of Justice expresses its control over every national measure which is capable of affecting imports, even though the such measure be devoid of any protective effect either in law or in fact. In doing so, the Court applies the standard of "mandatory requirements" which it alone has the competence to define.

4. The Maastricht Treaty and the Amsterdam Treaty

Now, the Maastricht and Amsterdam Treaties do indicate that EC economic policy is to be based on open market principles. In this sense, the Treaty is not neutral. Article 2 of the EC Treaty speaks of a "high degree of competitiveness and convergence of economic performance". However, Article 2 also gives equal standing to "social protection", "protection of the environment" and "social cohesion and solidarity among Member States". Article 4(1) provides that "the activities of the Member States and of the Community shall include … the adoption of an economic policy … based on the close co-ordination of Member States' economic policies, on the internal market and on the definition of common objectives, and conducted in accordance with the principles of an open market economy with free competition".

Article 4(3) provides that the policies and activities of the Member States and the Community shall entail compliance with the principles of "stable prices, sound finances and monetary conditions and a sustainable balance of payments."

The Treaty of Maastricht of 1992 accompanied a growing trend towards increased privatisation, launched initially by the UK under Prime Minister Thatcher. The Maastricht Treaty, provided the legal framework for Economic and Monetary Union, requires the Member States to limit government deficits to 3% of gross domestic product and government debt to 60% of gross domestic product. Privatisation seemed to many Member States a viable way to obtain new revenue with relatively little effort.

At Maastricht, EU Member States reached a political agreement on the need to reduce and place limits on the regulatory and decision-making intervention by the Community. The application of the principle of subsidiarity should therefore work in the direction of deregulation.

The pro-competitive approach to economic policy in the EC Treaty is reinforced by the "four freedoms" which underpin the single market. These are the free movement of goods, persons, services and capital. Article 14 of the Amsterdam Treaty provides that "the internal market shall comprise an area without internal frontiers in which of the freedom of goods, persons, services and capital is ensured in accordance with the provisions of the Treaty. The political commitment on subsidiarity made at Maastricht was given legal form in the Amsterdam inter-governmental conference by the conclusion of a Protocol on the application of the principles of subsidiarity and proportionality.

Two factors above all others have led the EU to adopt free market principles on the foundation of the Union's economic policy. These are the widely shared belief that European economies are less competitive than that of the United States (the EC's principal global competitor) and that the Community is over-regulated compared with the United States. The Community's approach to deregulation in particular is also significantly influenced by the fact that public opinion across Europe perceives the EC has being interventionist and over-regulatory. At the same time however, it is significant that European citizens and workers tend to expect and demand a higher level of social and environmental protection than their American counterparts.

The following Declarations made at Amsterdam are relevant to the issues of deregulation and liberalisation:

a) Declaration 26 - The High contracting parties note that the Community does not intend, in laying down minimum requirements for the protection of the safety and health of employees, to discriminate in a manner unjustified by the circumstances against employees and small and medium undertakings (implying recognition of the crucial role of in economic growth);

b) Declaration 39 on the quality of the drafting of Community legislation stresses that Community legislation should be made more accessible and intelligible to the public ( a necessary ingredient of de-regulation);

c) Declaration 42 provides for further consolidation of the EC Treaties, partly in order to make them more comprehensible to the public.

5. General principles on privatisation developed by the Commission

With respect to privatisation, the Commission applies general principles developed on the basis of individual cases as set out in the Twenty-Third Report on competition policy for 1993:

1. In general, no aid is involved where shareholdings are sold to the highest bidder as a result of an open and unconditional bidding procedure. Before flotation, debt may be written off or reduced without giving rise to a presumption of aid, as long as the proceeds of the flotation exceed the reduction in debt.
2. There must not be discrimination based on the nationality of prospective buyers of the shares or assets concerned.
3. Any sales on terms that cannot be considered normal commercial terms must be preceded by an evaluation carried out by independent consultants.
4. Privatisation in sensitive sectors (synthetic fibres clothing and textiles, shipbuilding, and the motor coal and steel industries …) must all be notified to the Commission beforehand. Indeed, a number of industrial sectors, undergoing or having undergone major restructuring, are covered by Community frameworks on state aid. The Commission felt that, under those circumstances, even stricter control of aid was necessary and that all aid proposals should be notified . This is not the case of the telecommunications sector.
5. Not specifically related to privatisation, but relevant to material disclosure in the prospectus is that failure by Member States to notify state aids to the European Commission can give raise to future liabilities (even if the aid is subsequently found to be lawful). The requirement to pay back aid received in the past can be onerous.

6. The link between the Single Market, EMU and the EU's international trade policy

The global trend towards economic liberalisation which prevails today was initiated jointly (and individually) by Reagan and Thatcher in the early 1980s. Thus:

a) the Single Market (based on subsidiarity, minimum standards, mutual recognition and strong competition) aimed to replace 15 national regulations with one set of EC rules. The Single Market programme is therefore inherently de-regulatory;

b) EMU aims at price stability with limits on state aid and fiscal deficits. This also limits state expenditure in the form of subsidies for loss-making, un-competitive or inefficient public sector enterprises. It may indirectly encourage privatisation as a way of raising State revenue, thereby contributing to meeting the Maastricht criteria;

c) international trade policy under the WTO, since 1980, has emphasised market access at the expense of protectionism, thereby promoting liberalisation and de-regulation of trade in goods as well as services. In this respect, the Uruguay Round Agreements in 1994 marked a watershed.

C. LIBERALISATION IN THE EU

As far as liberalisation is concerned, much of what is happening in the applicant states is going in the right direction. In some sectors some applicant states are more advanced in deregulation than their western neighbours, but liberalisation of the market may still be questioned. The relatively advanced state of civil aviation encouraged the October 1996 meeting of EU transport ministers to grant permission for negotiations to extend EU aviation market rules to the applicant States according to the Commission, "nearly all the applicants have draft laws in place to free up maritime transport, waterways, civil aviation, roads and rail transport. But it is less clear how soon they will be able to implement and enforce the basic legislation."

On the other hand, in more sensitive areas like energy, state monopolies and subsidies continue to characterise business practice. Although in formal terms foreign investors are being given similar access to markets as domestic investors in most cases, old monopolies are still abound.

After the coming into force of the Single European Act, the Commission attempted to develop new theories to open up markets that had hitherto been dominated by national or regional monopolies, such as telecommunications, railroads, gas and electricity supply, and postal services.

The Commission argued that since it is contrary to Article 86 for an undertaking in a dominant position to take over a competitor and thereby increase its dominance over the market to the point where competition is substantially fettered (Continental Can judgement of 21 February 1973) and that it is equally contrary for a dominant undertaking to reserve to itself, without objective necessity, an ancillary activity which might be carried out by another undertaking, where the result is to eliminate all competition from such undertaking (Telemarketing Judgement of October 3, 1985). The Commission states that it follows that Member States may not, without contravening Article 90 (1) adopt measures having the same effect as those that are prohibited by Article 86.

In its judgement RTT v. GB-Inno-BM of December 13, 1991 the Court gave its clearest and most explicit endorsement of the Commission's argument based on the application of the Continental Can and Telemarketing reasoning in the context of Member State measures granting or extending a national monopoly. The Court accepts that such a measure may, in theory, be justified under Article 90(2).

1. Liberalisation in the telecommunications sector. the EU, the liberalisation process has entailed a substantial reduction of costs with cheaper telecommunications services which have produced substantial positive effects for the Member States' economies. The EU directives impose the obligation of full liberalisation in the infrastructure, services and terminal equipment markets by January 1, 1998. Nevertheless, some extension periods have been granted to some countries such as Spain, Greece, Portugal and Ireland, as the European Commission considered that these countries did not have sufficiently developed telecommunication markets in order to implement the EU rules on telecommunications compared to the rest of the EU.

The EU-Mobile Directive abolishes all remaining exclusive and special rights in the mobile communications market, for both service provision and use of own and third party infrastructure. The EU-Cable Directive means unlimited use of all cable network licences in the EU for liberalised telecoms services, including public telephone service. Satellite communications were fully liberalised at EU level in Autumn 1994. The Full Competition Directive provides for the lifting of all remaining restrictions on the provision of public networks and voice telephony as of January 1, 1998.

2. Liberalisation in the electricity market. The liberalisation of the electricity market has been one of the most difficult issues in recent years in the EU, due to some specific factors of this market. Thus the strategic feature of energy for each Member State as it was demonstrated in the Oil Crisis in the 1970s, the different interpretation of public service in the EU Member States, the partial failure of the different liberalisation process carried out in the UK, the high cost of the transport of energy and certain components of a natural monopoly in the distribution of energy have meant that the progress achieved in this sector has not been as great as in the telecommunications market.

Nevertheless, the Council of the EU adopted Directive 96/92 on the common rules of the internal market on electricity in December 1996, which entered into force in February 1997 requiring implementation by 1999 by the Member States. The directive establishes common rules for the generation, transmission and distribution of electricity. As from January 1999, all Member States must open at least 25.37 per cent of their markets to free competition with the aim of bringing lower electricity prices to all.

3. Liberalisation in the transport sector. The transport sector has been one of the most significant examples in the process of liberalisation as it has been one of the sectors where most changes and modifications have been introduced. The adoption of less and less interventionist rules by the institutions of the EU has led to a substantial opening up of to free competition for the markets in this sector such as road transport, railways, air transport, maritime and river transport.

The internal market requires effective enforcement of the competition rules of the EC Treaty and the Merger Regulation. The Commission has been dealing with several competition cases, especially in the air transport market. The authorisation for the merger between Swissair and Sabena in July 1995 and the alliance between Lufthansa and SAS in January 1996 are some illustrative examples of this enforcement of competition principles in the transport sector.

D. PRIVATISATION

1. The principles of non-discrimination and the freedom of establishment and capital movements applied to privatisation

Article 7 prohibits all discrimination on grounds of nationality. This principle is reinforced by Article 221 of the Treaty which provides that Member States are to grant national treatment to undertakings wishing to invest and participate in the capital of an undertaking located in another Member State. This means that privatisation laws in the Member States must allow all persons who are of the nationality of a Member State to participate in offers under the same conditions. Provisions, however, which limit the investment in a privatised company by foreign undertakings to a certain percentage are incompatible with Article 7 and 221 if they apply to companies from other EU member states of from countries with non-discrimination provisions for investments or capital movements. It is possible, however, to limit the investment by non-EU undertakings, subject however (for OECD countries) to the OECD codes on the liberalisation of capital movements.

Pursuant to Article 52 and 67 of the Treaty, Member States must avoid all restrictions likely to restrain a company's freedom of establishment and the free movement of capital. Legislation which limits a company's ability to participate in a privatisation or to pull out from a privatised company could be viewed as contrary to the Treaty.

However, the simple absence of discrimination between companies from different Member States does not mean tat the provisions are compatible with Articles 52 and 67. These Articles prohibit all restrictions on the freedom of establishment and the free movement of capital. Against this background it is irrelevant, whether or not the national provision in question is discriminatory since it is the restriction of the freedom as such which is prohibited.

Article 55 of the Treaty provides that these provisions may be set aside when the company participates in activities of "public authority". It is difficult to see, however, how this could apply in case of privatisation of a company since when a government privatises a company, it specifically wishes to give up control over such company. Nevertheless, it has been argued that the "public authority" principle could be applied in such cases as the privatisation of Elf (national independence in the energy sector) and Rh?ne-Poulenc (protection of public health).

2. Merger control and abuse of dominant position rules applied to privatisation

a) Merger control. Since privatisation may lead to a change in control, it could be viewed as a concentration subject both to national and EU regulations in this area. If the operation does not fall within EU thresholds, it may still be caught by national merger control legislation.

The Commission has carefully examined all mergers submitted to it, including those arising out of privatisation. This means that a privatisation authorised by a national parliament could still be blocked in the event that the Commission decides that the anti-competitive effects on the market are too important.

b) Position of the privatised company on the market. Since privatised companies are often companies that previously had the position of a legal monopoly on the market, the privatisation often gives rise to considerations of abuse of a dominant position. As a result, these privatised companies will be subject to Article 86 of the Treaty prohibiting the abuses of a dominant position.

This may mean that where a company holds a facility which is essential to the development of other products or services, the privatised company may have to allow other companies to have access to it to develop competing products or services ("third-party access").

Similarly, privatised companies which were in a legal monopoly situation and which are still under an obligation to provide public services, as is often the case in the telecommunications sector, will usually be obliged to hold separate accounts for public and private activities, to ensure that the subsidies they may receive for public services do not benefit their activities in the market to the detriment of their competitors.

E. DERGULATION

The following outlines the nature of barriers in the single market:

• additional costs to render products or services compatible with different national specifications
• unusual testing, certification or approval procedures
• state aids favouring competitors
• difficulties related to the VAT system and VAT procedures
• restrictions placed on market access, due to exclusive distribution networks
• discriminatory behaviour of certain national administrations
• discriminatory practices of awarding authorities in public procurement markets
• rights or licences to be kept in the hands of local competitors
• costly financing arrangements for cross-border transactions
• lack of legal security of cross-border transactions
• other legislative or regulatory obstacles
• outright refusal (by public authorities) of permission to sell products or services legally marketed in other EU countries
• insufficient protection of trade marks
• insufficient protection of technological inventions
• insufficient protection of copyrights

COMPANIES ASSESSMENT OF THE REMOVAL OF BARRIERS WITHIN THE SINGLE MARKET

Companies from the 3 newest Member States perceived the impact of the Single Market most positively. 50% of the large companies in the EU says that they have seen a reduction in barriers to doing business over the last two years. 18% of the companies think that administrative burdens have decreased with regard to trading in the Single Market over the last two years.

• Companies' priorities for steps to improve the legislative environment are the following:
  1. Simplify the applicable legislation: 73%
  2. Provide clearer and simpler instructions on how to comply with legislation: 53%
  3. Streamline overlapping formalities: 42%
  4. Provide a predictable legal framework: 23%
• Priority area's identified by companies for simplification of administrative procedures are as outlined below:
  1. Fiscal and tax rules: 76%
  2. Product and services regulation; 53%
  3. Environmental legislation: 31%
  4. Labour and social regulation: 26%
• Persistence of certain obstacles to trade and business activities is attributed:
  1. to the lack of uniform European rules
  2. the lack of information about EU rules overly complex legislation
  3. over-zealous application of national rules by public authorities
  4. lack of familiarity on the part of public authorities with the applicable rules.

D. CONCLUSION

The EU demands a commitment from the candidate states for EU membership to a free market. Each of the applicant countries needs to take steps to privatise and, more generally, to liberalise their economies at a pace suitable them individually. The timing and message of privatisation must take into account various economic and social concerns specific to that country. Some questions regarding privatisation still require political answers. Amongst those questions are: Which company should be privatised? To what extent should one privatise? However, since privatisation involves important legal aspects relating to the principles of non-discrimination, free movement of capital, the freedom of establishment, merger control and abuse of a dominant position the ways EC law and policy influence privatisation are varied and become more and more intense.

However, ownership is only half the battle. What is really needed is competent management and effective corporate governance as well as a legal framework which ensures a level playing field for all economic operators.

In the EU progress has been made on deregulation in mainly two ways. On the one hand there has been increasing respect for subsidiarity, on the other hand several specific programs promoting deregulation have been introduced.

According to the Commission the Member States are still the main producers of legislation and hence the most direct cause of complex legislation. The principle of subsidiarity at EU level is not sufficient therefore to counter the problem of over-regulation. Subsidiarity also needs to be respected on the Member State level, ensuring that legislation is being made at the lowest possible level. Deregulation should occur at all levels.

The introduction of EMU on 1.1.1999 (for 11 EU Member States) should give further momentum in the EU to the process of deregulation and, above all, market liberalisation.

¹ According to the Council "membership requires: that the candidate country has achieved stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities; the existence of a functioning market economy, as well as the capacity to cope with competitive pressure and market forces within the Union; the ability to take on the obligations of membership, including adherence to the aims of political, economic and monetary union" and the administrative capacity to apply the EU body of law (as required by the Madrid European Council in December 1995).

² FN-6. See section 403, p.276

³ See the privatisation of public loss-making steel companies, involving six companies in four Member States: Ilva in Italy, CSI and Sidenor in Spain, EKO Stahl and SEW Frietal in Germany and the Siderurgia Nacional in Portugal

⁴ See Article 1 of Regulation 4064/89, the so-called "Merger Control Regulation".