Market Power, Democracy and (Un)Fair Elections

In the last eight years Poland experienced an illiberal shift. Key elements of constitutional democracy were undermined. The story is well-known to public law scholars, particularly with respect to judicial reforms. However, off most people’s radar have been the changes which increased the role of state-controlled and state-owned firms (SOEs) in the Polish economy which have supported Poland’s illiberal tendencies. The pre-election period is illustrative in this respect, with the ruling majority having benefited from various kinds of support from SOEs which undermined a level playing field. The Polish experience arguably sheds light on constitutional democracies’ weaknesses in effectively addressing the links between political and market power which can increase democratic backsliding. In this blogpost, I will highlight why the existing legal framework, in particular remedies available in law aimed at imposing limits on the use of market power, i.e. competition law, are insufficient to address this risk and why a broader debate in public law is necessary in this respect.

Looking Back

Poland’s post-1989 transformation affected not just its political system. In parallel to democratic change, a rule of free and open markets (in place of a state-commanded economy) was introduced and many former state enterprises were privatized and sold to foreign investors. Since 2015, however, the role of state-owned or state-controlled firms (SOEs) started growing significantly. While this process was already under way from 2011 onwards with privatization slowing down significantly, the scope and depth of post-2015 change was unprecedented. Privatization stopped completely, with the state regaining control over previously privatized companies. The re-nationalization processes have involved the banking and energy sectors and followed the Law and Justice (PiS) party’s political agenda. The first spectacular re-nationalization process involved the state-controlled large insurance group PZU, along with the state investment fund PFR, buying a controlling stake in Poland’s second largest bank, Pekao SA, from the UniCredit bank group. Another prominent example involved the acquisition by PGE, the largest, and state-owned, electricity producer in Poland of EDF Polska, a subsidiary of French EDF, the owner of an energy plant in Rybnik, the fourth-biggest producer of electric energy in Poland and the only one not controlled by Polish state-capital. As a result, SOEs dominate these two sectors today.

Another central development has been the increase of market power of already powerful SOEs. Orlen, a Polish oil refiner, has emerged as a key actor by acquiring control over its competitors and entering new markets. Post-2015 transactions involved Orlen’s acquisition of its primary competitor, Lotos, in the fuel market, and the acquisition of Energa and dominant PGNiG in the natural gas market. Most controversially, Orlen entered the regional media market by acquiring Polska Press, the owner of several leading regional newspapers, and the press distribution market by acquiring Ruch. These transactions created the most powerful company in Poland and one of the most powerful in Central Europe with unparalleled economic power. Orlen’s close alliance with the ruling party is due not just due to the state-treasure controlling assets in Orlen and its supervision by the relevant ministry but also due to direct personal links to PiS, including Orlen’s CEO declaring himself directly to be a PiS member. Orlen is an example of a broader trend that has seen the reduction of SOE’s decisional autonomy and their transformation into a financial resource for the ruling party, with well-paid jobs in these firms being dished out as rewards for party loyalists.

The Limits of Competition Law

Competition law appears well-suited to limit the increase and potential abuse of market power by SOEs in countries like Poland. Indeed, competition authorities review mergers which may lead to significant impediment of effective competition and are entitled to intervene when firms enter into anticompetitive agreements or abuse dominant position on the market. However,  an extensive study on Poland and Hungary (and on the EU response) has shown that competition law has not remained unaffected from the broader illiberal trends characterizing the countries ruled by populist governments. Competition authorities operate in an increasingly hostile environment as both the government and most powerful state-controlled firms steer the country’s economic system into one in which SOEs are favored. The idea of open markets with effective competition, which competition authorities are supposed to pursue, is not high on the governmental agenda. What’s more, the independence of competition authorities is under challenge and resources are not sufficient. As a result, competition authorities are increasingly involved in selective enforcement: cases which have the support of the government are opened, while those which could lead to political backlash are not (or are subject only to light touch review). In such a hostile environment, the limits of competition law also become more evident. For the last few decades, competition law has predominantly been interpreted narrowly as an area of law concerned only with firms’ behavior undermining price-measured consumer welfare. This makes it difficult for the competition authorities to protect other constitutional values or to intervene when adverse effect on prices is unclear. Moreover, enforcement of competition law at the EU level, i.e. by the European Commission, only rarely fills the gap left by politically constrained competition authorities of EU Member States .

The UOKiK’s Track Record

The Polish developments mentioned above well-illustrate the challenges the national competition law system faces. The Polish competition authority (“the UOKiK”) cleared the acquisitions by SOEs either unconditionally or subject to conditions which can be deemed insufficient (see here for the analysis of EDF’s acquisition by PGE). The European Commission was close to prohibiting the acquisition of Lotos by Orlen but eventually opted for clearance on condition that Orlen will sell 80 % of Lotos petrol stations and 30% of assets in Gdansk refinery. As a result, the Hungarian MOL (Magyar Olaj) and Saudi Aramco entered the Polish market. This coincided with the invasion of Ukraine, rendering national energy security a key issue. The UOKiK also cleared the takeover of Polska Press by Orlen. Despite journalist’s associations and the Ombudsman arguing that the protection of media plurality fell within its remit, UOKiK thought it not to be value which could be protected within competition law’s consumer welfare paradigm. It also fell short in screening in depth for classic anticompetitive risk of foreclosure which is an uncontroversial task of any competition authority. It thus ignored potential risks of exclusion of Polska Press’s competing titles from press distribution networks owned by Orlen which later materialized.

UOKiK scrutiny’s of any abuse of the SOE’s dominant position has also been light in recent years, having adopted only two commitment decisions. This contrasts with earlier periods, where SOEs were often punished for abusing dominant position. After 2015, no infringement decision with fine in abuse of dominance case was adopted against the SOE, despite their significant increase in market power and other warning signs. For example, UOKiK could have scrutinized more in depth the alleged manipulation of gasoline prices by Orlen. Instead, it did not find sufficient grounds to open in-depth proceedings in the alleged case of excessive prices of gasoline at the end of 2022, and denied to even open a preliminary proceedings in an alleged case of below-cost prices, which risked the exclusion of Orlen’s competitors from the Polish market in September 2023.

Notably, the European Commission has (so far) also not been particularly eager to pick-up cases which can be politically sensitive at the national level. Indeed, even though Poland’s systemic rule of law violations are believed by the EU General Court to be able to undermine effective legal protection in competition proceedings in Poland, the Commission refused to open an investigation in the Sped-Pro case, in which a competitor claimed that the Polish SOE engaged in anticompetitive behavior in the rail-freight market. According to the GC, before rejecting the complaint the Commission should have assessed whether the complainant’s rights will be sufficiently protected in the proceedings before the UOKiK. The question about rule of law violations in Poland and the safeguards of UOKiK independence have been considered by the GC to be relevant in this context.

Market Power and (Un)Fair Elections

The increase of market power of SOEs (or private but politically-linked firms as evidenced in the Hungarian KESMA media merger case) which is not subject to sufficient check by state authorities has a negative consequence for democracy. In practice, SOEs seem to work as government agents taking actions which are perceived to benefit the ruling majority. To the extent they do so in the run-up to elections, it puts the fairness of the elections into question. In the Polish case, SOEs have been involved in the policy of financing government-linked initiatives and financial support for pro-government media. Thus, SOE’s have lent financial support to PiS’ campaign in favor of the government-initiated national referendum which will be held jointly with the national elections on 15 October. On top of it, board members of SOEs generously support the ruling party through individual donations. Special funds such as the Polish Forest Enterprise fund are also seemingly used to finance initiatives beneficial for  the ruling coalition. Certainly, the influence of SOE’s is well visible on the media market. Polish Public Television (TVP) and Polish Radio, which receive hefty state support for the realization of its public mission every year, are effectively a channel of pro-governmental message, while regional media controlled by Orlen deny the publication of promotional materials of opposition parties claiming that they go against their editorial line. Finally, SOEs may be inclined to adopt economically irrational market policies which are aimed to please consumers before elections. For example, Orlen has kept the prices of gasoline artificially low, despite high inflation and rise of global gasoline prices, as well as Polish currency fluctuations.

Constitutional Democracies’ Toolbox

These are just a few examples of how market power of state-linked firms can be used to undermine not only competition on the market but also the democratic order. Currently, constitutional democracies appear unequipped to address this risk. Regional organizations such as the EU are also not doing enough to help Member States address such risks. Competition law, while it certainly has a potential, cannot on its own address these challenges. Effective protection against corruption and the protection of merit-based character of public procurement are also key elements. Yet, both have been under attack in countries ruled by populist governments. The EU, while increasingly concerned with the negative knock-on effects this carries for its own financial interests, should do more to address these developments in the systemic manner. Moreover, policies in other areas of law such as energy, telecommunication or data protection that render the enforcement of the law ineffective must be subjected to more intense scrutiny. These include the limitation of operational independence of state regulators and the abandonment of professional character of civil service.

There is an urgent need for broader reflection among public law and EU law scholars on how constitutional law could help in addressing the challenges described. Discussion about the independence of the judiciary is not enough. We must also ask how public law can address the challenges that the political instrumentalization of market power poses for the health of democracy and the rule of law. On the institutional side, a helpful step could be to consider the constitutional entrenchment of regulatory agencies and their mission, including adding constitutional safeguards of their independence and rules concerning their accountability. We should also consider democratizing procedures in the field of economic regulation to limit the risks of regulatory capture by business interests and to enable the voices of various civil society groups to be heard. At the EU level, the rule of law challenges in Member States must be considered in a more holistic manner to better understand its various dimensions, including how it bears on the field of economic regulation.

To sum up, the toolbox of constitutional democracies does not seem to be sufficient today to tackle the interconnections between market and political power which currently converge to undermine the liberal-democratic order. An important first but on its own insufficient step is to acknowledge that connections between public law, politics and markets exist and that empirical, market-oriented studies are necessary in order to better grasp the existing interrelations.