Sustainability and Competition in Chile: Review of Reality after Implementation of The REP Law

I. Chilean antitrust system does not have an ad hoc procedure for analyzing collaboration between competitors, nor does it typically take into consideration factors other than market efficiency.

Chile, like several other jurisdictions of reference, does not have an ad hoc system that allows competition authorities to analyze the effects that collaboration agreements between competitors may have on the markets. Indeed, this type of collaborations would be analyzed in exercise of the general powers of the authorities referred to: (i) by the National Economic Prosecutor's Office (“FNE”, for its acronym in Spanish) in exercise of its general powers of investigation of any fact, act or convention that may affect competition; (ii) by the FNE itself in application of the merger control procedure, in the event that the collaboration agreement between competitors meets the requirements to be considered a fully functional joint venture; or, (iii) by the Court for the Defense of Competition (“TDLC”, for its acronym in Spanish) in exercise of its general consultive powers.

On the other hand, it is also possible to state that Chilean competition policy and law have historically not considered environmental or sustainability factors as part of their analysis.

Chilean antitrust authorities conduct their assessments based on a technical analysis exclusively focused on antitrust considerations. This approach has been consistent since the establishment of said authorities in Chile. The primary justification for this approach is rooted in the legal standard applicable to competition cases. The first article of the Chilean Antitrust Law (“DL 211”) explicitly states that its purpose is to promote and defend competition.

In the case of mergers, the legal standard is “substantially lessening competition” (as outlined in articles 54 and 57 of DL 211). The FNE interprets this standard as reducing “the incentives of the merging parties to compete, to the detriment of consumers”. This reduction could manifest in various ways, with a common minimum being the impact on competitive variables. According to the TDLC, this standard is based on the United States' Clayton Act, which prohibits concentration operations if they result in substantially lessening competition or tend to create a monopoly.

A review of case law validates the statements above. Merger control analysis by the FNE has consistently followed a classic approach, assessing the effects of concentration operations on competition in relevant markets. The FNE employs various tools, including qualitative analyses of competitive proximity and indices like GUPPI (gross upward pricing pressure index), CMCR (compensating marginal cost reduction), and IPR (illustrative price rise), focusing exclusively on competition considerations.

The TDLC's analysis also aligns with a traditional competition-based approach, as mandated by law, evaluating whether the examined conduct has the objective aptitude to prevent, restrict, or hinder competition. Discussions before TDLC have made it clear that the protected interests under the DL 211, could be social welfare, market efficiency, consumer surplus, competition, the competitive process, and economic freedom. Interestingly, in some cases related to the media, the TDLC has also referred to the need to ensure political freedom and pluralism; however, as a result of assuring competition in the media relevant markets.

Accordingly, the FNE has clearly stated that it will not consider other factors, as a part of its analysis. This has been evident in utility merger analyses, like the CGE case, and natural resources operations (i.e., lithium, such as in the SQM-Tianqi case). In these situations, the authority has stuck to a strict antitrust evaluation approach.

In the CGE case, the parties submitted to the FNE the acquisition by State Grid International Development Limited (SGIDL) of Compañía General de Electricidad S.A. (CGE). The sellers were NII Agencia, an agency in Chile of Naturgy Inversiones Internacionales S.A. (a company incorporated in Spain), and CGE Magallanes (a closed corporation incorporated in Chile). SGIDL was an investment holding company incorporated in China, 100% owned by State Grid Corporation of China (SGCC). Both are state-owned enterprises incorporated in China, as the State-owned Assets Supervision and Administration Commission, a ministerial-level authority of China, has sole ownership over SGCC.

On March 31, 2021, the FNE approved the transaction. The FNE specified that it would only consider the aptitude of the operation to substantially reduce competition. The report indicates: “However, this Division received opinions from industry players who expressed various concerns regarding matters of national interest and security, in a broad sense, which, in their opinion, the materialization of the operation would entail. Such considerations are unfamiliar to the defense of competition, exceed the scope of the attributions of this Prosecutor's Office according to articles 1° and 2° of DL 211, and are not part of the legal standard of review applicable to concentration operations. Therefore, it does not correspond to the National Economic Prosecutor's Office to analyze their merit and plausibility”.

In the lithium market, in turn, in the SQM-Tianqi case, where the Chinese state-owned entity Tianqi acquired a relevant participation in the Chilean corporation SQM the FNE established in its report approving the acquisition that: “This limitation concerning the powers of public agencies to intervene for reasons of national interest in a broader sense (economic interest or national development) marks a difference concerning the existing regulation in foreign jurisdictions. As a general rule, foreign jurisdictions contemplate mechanisms for considering public interest elements in the analysis of concentration operations, at least for markets considered sensitive or strategic for the country. However, these are powers that, in general, are granted to authorities other than those empowered to exercise competition controls. In these cases, the possibility of intervening in the development of transactions has been developed based on powers explicitly granted by law to specific bodies to safeguard the elements of predictability and objectivity of competition procedures”, which, the FNE added, is not the case in Chile.

The two previous FNE heads, Felipe Irarrázabal Philippi and Ricardo Riesco Eyzaguirre have expressly endorsed this criterion of excluding any consideration outside of the technical competition analysis -including sustainability and environmental arguments- from the authority's decisions. Particularly, the latter expressed that “the National Economic Prosecutor's Office cannot legally take into account in its analysis geopolitical, national security, strategic or any other kind of considerations" and added that “such additional considerations are ‘extraneous or irrelevant to the technical competition analysis’”.

The Competition Court, in turn, has explicitly rejected defenses based on environmental factors. However, it must be pointed out that in the Helicopters case (Judgment No. 185/2023), the TDLC took into consideration, for the purpose of determining the amount of the fine, that “the agreement affected a sensitive market since this service plays a key role in protecting the lives of people and for the environmental care and preservation of our country's forestry heritage”.

In a different but related subject, regarding a private health insurance entities merger, the FNE held that the risks that the operation would generate should be evaluated based on the applicable legal standard, considering, however, the sensitivity of the market and the essential nature of the health insurance service for consumers. The FNE added that “it is illustrative that, in sensitive markets such as health, both this FNE and comparative jurisprudence have indicated that even small price increases in this type of market can imply a substantial reduction in competition, given the importance that consumers would give to it, and the percentage of expenditure that the good or service would represent in the total expenditure of families”. Hence, the FNE did not fail to apply the legal standard, although in stringent terms, due to the sensitivity of the market under analysis.

II. The Exception to the General Rules: The REP Law

In that context, one in which there was no ad hoc analysis for collaboration agreements between competitors and in which environmental considerations were not relevant in the analyses performed by antitrust authorities, Law No. 20,920 on waste management, extended producer responsibility and promotion of recycling (“REP Law”) issued in 2016, but whose implementation has been gradual in time, brought about a substantive change in Chile.

Indeed, REP Law enshrined the possibility for competing firms to act jointly, through a common legal personality, for the purposes of complying with their waste management and recovery obligations and established an ad hoc procedure so that the TDLC can be aware of the impact that such joint action could have on competition. In this sense, although the TDLC must continue to watch over the same legal values that it is called to protect under DL 211, it must now make the protection of competition compatible with the principles pursued by the REP Law.

II.1. Intervention of the Competition Authorities in the application of the REP Law

In general terms, REP Law is an economic instrument for environmental management whereby manufacturers and importers of finished products must take responsibility for the waste generated by these products at the end of their life, including financing their storage, transportation and treatment.

In order to meet waste collection and recovery targets, firms must set up management systems, which may be individual or collective. Thus, in order to generate economies of scale, the REP Law allows -and even encourages- firms -often competitors in the same relevant market- to participate jointly in organizations aimed at achieving certain recycling goals. Indeed, according to Article 19 of the REP Law, the extended producer responsibility obligations can be fulfilled through individual or collective management systems, specifying, in its second paragraph, that: “The decrees that establish goals and other associated obligations may restrict the application of one or the other [individual or collective] system, in order to avoid market distortions that jeopardize the effectiveness of the extended producer responsibility, or affect competition in the terms established in the [DL 211], previously hearing the FNE”.

For its part, paragraph 4 of Article 24 of the REP Law states that “The collective management systems must have a report from the TDLC stating that there are no rules in its constitution that prevent, restrict or hinder competition”.

In addition, Article 26 letter c) of the REP Law provides that “The management systems will be authorized by the Ministry of the Environment, for which they must submit a management plan containing at least the following: (…) c) The rules and procedures, in the case of a collective management system, for the incorporation of new associates and operation of the system, which guarantee respect for antitrust laws.

To ensure compliance with the above, it will be necessary to attach a report from the TDLC stating that in the rules and procedures for the incorporation of new members and operation of the collective management system, there are no facts, acts or conventions that may prevent, restrict or hinder competition”.

II.1.1. Participation of the FNE in the application of the REP Law

In January 2019, the Ministry of the Environment consulted the FNE regarding its understanding of the intervention of the competition authorities in the implementation of the REP Law and requested its collaboration in the drafting of the decrees that establish collection and recovery goals and other obligations, in order to specify the requirements to be imposed on collective management systems (CMS”), thereby limiting anti-competitive risks.

Regarding the first point, the FNE at the time answered indicating that: (i) the REP Law gives the exclusive competence to issue the reports indicated in Articles 24 and 26 to the TDLC, which is consistent with other special laws; and, (ii) the CMSs could constitute a concentration operation if the association gives rise to an independent economic agent, different from them, with a permanent performance of activities over time, and could have to be notified to the FNE under the merger control regime if the requirements of Article 48 of DL 211 are met.

With respect to the second point, during the consultation process of the preliminary drafts of respective decrees issued by the Ministry of the Environment, which establish targets for the collection of priority waste and other obligations to producers, extended operational committees (“EOC”) have been constituted, in which a representative of the FNE has normally participated. This allows the perspective of protection of competition to be considered during the process, even before the producers appear before the TDLC.

This is relevant because, as indicated, the Ministry of the Environment can restrict the application of CMSs or individual management systems. In fact, in the case of lubricating oils, the intention of the Ministry of the Environment was to prohibit the individual management of this waste, making it mandatory for producers to join a CMS. In the opinion of the Ministry of the Environment, the existence of individual systems would jeopardize the effectiveness of the REP Law and this type of system would generate risks to competition, given that: (i) there would be an actor with a very high market share in the lubricating oil market (Copec), which would generate efficiencies of scale that the other actors could not achieve, thus accentuating its dominant position by ensuring access to lubricating oil waste that is easier to collect; and, (ii) the two main competitors would have preferential access to waste from the mining sector (being suppliers of that industry), which would generate a competitive disadvantage to the other producers. At that time, the FNE had not been requested to participate in the EOC.

In view of the above, the Ministry of the Environment sent an official request to the FNE for its opinion on the relevance of the aforementioned restriction. The FNE replied that it was not possible to confirm a dominant position of Copec in the lubricating oil market in Chile in general, nor in its segments in particular; and that no information was provided regarding the economies of scale that Copec could achieve, identifying that the other market agents could reach similar or higher levels than Copec through CMS.

In addition, the FNE pointed out that although there could be advantages in favor of some agents that operate in the mining customers segment, due to the possible lower capillarity in the generation of waste, there is no information that would allow dimensioning the impact of these possible advantages at the cost level, nor how and to what extent such differences could affect the lubricating oil market; or justify for what reasons whoever supplies the lubricating oils would necessarily be the one who collects the waste. Ultimately, the FNE concluded that the risks to competition put forward by the Ministry of the Environment - and which justified the prohibition of individual management systems for lubricating oils - were not sufficiently substantiated.

Based on what the FNE pointed out, the environmental authority changed its criteria and decided to partially limit the individual management systems, in the sense that they will only be able to meet their collection and recovery goals with the lubricating oil waste that they have introduced into the market. According to the MMA, “this partial restriction encourages producers to internalize in their cost function the value of managing the waste into which the products they place on the market are transformed, which is fundamental for the success of the REP and for the effectiveness of its environmental objectives.”

Moreover, the same partial restriction has been imposed in relation to all priority products for which the Ministry of the Environment has issued decrees to date.

In short, the participation of the FNE in the application of the REP Law translates into participation in the EOCs cited by the Ministry of the Environment for the regulation of each priority product and, eventually, to pronounce on the relevance of restricting or not the individual systems or collective management systems in order to avoid market distortions that jeopardize the effectiveness of the extended producer responsibility or affect competition.

II.1.2 Participation of the TDLC in the application of the REP Law

Regarding the participation of the TDLC, Report No. 26/2022 (“Report No. 26”) was the first opportunity in which the TDLC had to apply the REP Law and rule on a request filed by the Packaging Management System (“SIGENEM”, for its acronym in Spanish), made up of 25 companies from different sectors of the mass consumption segment.

Although, after Report No. 26, six other reports have been issued^- and two requests for modification of reports already issued are currently being processed, in the following, this paper focuses on that first report, since it was the one that set the basis for the analysis of competition that the TDLC has carried out in the following years and, in general, what was indicated in that opportunity has been repeated in the following reports.

The TDLC reviewed both the bylaws of SIGENEM (“Bylaws”) and the bidding conditions for the selection of managers (“BCSM”). Specifically, the TDLC examined, on the one hand, the Bylaws to evaluate the conditions of entry and operation of such CMS; and then, it studied the design of the BCSM.

To carry out its analysis, the TDLC identified the following relevant markets: (i) the CMS market at the national level; (ii) related upstream markets in which two or more members of the same CMS participate as sellers of the same product or service or substitute products or services; and, (iii) related downstream markets related to waste management (collection, reception and storage, sorting and pre-treatment of waste, and sale of waste for recovery, which, in turn, should be segmented according to waste material: glass, plastic, paper, metal or cardboard).

II.1.2.1. Anti-competitive risks and mitigation measures related to CMS Bylaws

Regarding the Bylaws, Report N°26 expressly stated that the TDLC should ensure that CMSs can operate as autonomous economic entities and compete to attract members; and, especially, that they “(i) have incentives to form, and that market players or producers have incentives to join such management systems; (ii) allow the change of producers from one system to another, so that their incentives to compete and be more efficient once established in the market are maintained; (iii) act for the benefit of all their associates and not for the particular interests of some members; and (iv) do not encourage or facilitate coordination, collusion or the exchange of sensitive information among their associates”.

Thus, the anticompetitive risks that occur in this type of entities are both unilateral (exclusion of members with respect to others interested in entering the CMS and exclusion of a CMS with respect to other CMSs that wish to enter such market), and coordinated (facilitating coordination between members competing in an upstream market with respect to production agreements, price agreements or boycotts, as well as the exchange of sensitive commercial information).

Regarding the first type of risks, Report N°26 indicated that since SIGENEM groups a significant part of the producers that introduce containers and packaging, it could have sufficient purchasing power to materialize unilateral risks. Therefore, it focused on analyzing the following elements of the Bylaws:

(i) The categories of members and their political rights: the TDLC considered that it was reasonable that SIGENEM's Bylaws contemplate three categories of members (permanent, active class A and active class B), with different incorporation fees and dissimilar political rights, in order to avoid free riding practices in the conformation and management of the CMS.

On this point, it was only required to contemplate the possibility that members could opt to change category and that fines for non-compliance with the goals required by the REP Law be distributed among SIGENEM members in proportion to the amount of waste introduced by each one of them, in order to encourage SIGENEM members that generate more waste to become involved in its operation, thus mitigating the risks of having different political rights.

(ii) The restriction of political rights by business group: the TDLC determined that business groups may participate as a single member of a CMS with one vote if they voluntarily join the CMS in such capacity, but if any of the subsidiaries of the companies that make up the business group joins independently, it will have the corresponding political rights according to the category of partner it chooses. This is because the interests of the companies forming a corporate group are not necessarily homogeneous in relation to the REP Law.^-

(iii) The determination of the joining fee: it should be based on objective and non-discriminatory economic cost criteria and not on the applicant's willingness to pay.. The fee for permanent members and class A active members may take into account sunk costs. In the case of class B active members, it should only cover the administrative costs of their incorporation.

(iv) The determination of ecotaxes (fees to be paid by producers to the CMS for the cost of management): it should reflect the cost of each unit of measurement of containers and packaging that enters the system, with the value being different for each material involved (cardboard, glass, plastic, metal or other), but the same for all those who produce the same type of waste.

Regarding coordinated risks, although the TDLC recognized that CMSs, as collaboration agreements between firms, may affect competition by facilitating coordination between competitors, it also found that the risks of exchanges of commercially sensitive information were duly mitigated if the following measures are complied with: “(a) representatives of the members must not be relevant executives of the members in commercial matters; (b) there is an explicit duty not to exchange information, opinions, sensitive commercial background or any other background outside the general meetings of SIGENEM and its formal bodies; (c) the information to which SIGENEM may have access must be the minimum necessary, namely: (i) information to decide on the request for access of new members and (ii) information on the E&E [containers and packaging] incorporated in the market; (d) the delivery of disaggregated information must always be channeled through the Audit and Compliance Management, which will group it to deliver it to SIGENEM's internal bodies that require it for the exercise of their functions; (e) the receipt and delivery of information must be recorded in writing; (f) a Confidentiality Agreement must be signed with respect to the information received. Infringement of this duty must be reported to the appropriate public authorities, without prior notice to the Board or to SIGENEM's members; (g) independence of the Audit and Compliance Manager to inform the FNE of any possible infringements of competition; and (h) members may not access confidential information in connection with the auditor's reports”.^-

II.1.2.2. Anti-competitive risks and mitigation measures related to the design of BCSM

Regarding the design of the BCSM, the TDLC was clear in stating that its role was to ensure that they: (i) did not incorporate evaluation criteria that favored the award to an actor or group of actors related to any of SIGENEM's members; (ii) did not unjustifiably exclude a supplier; (iii) provided for operating risks once the service was awarded and was in operation; and, (iv) avoided the risk of collusion in the bidding process.

In this regard, the TDLC positively valued the BCSM contemplated bidding processes with a technical stage, establishing a minimum technical and service quality standard; and then, an economic stage, based on the lowest price to the user -in the case of the bidding conditions for the collection service, reception and storage facilities and the waste classification and pretreatment service-, or the highest price to be paid -with respect to the bidding conditions for the sale of waste-. It also agreed with the incorporation of a maximum secret reserve price, a minimum guaranteed demand and considered that the bidding terms were reasonable.

However, the TDLC also ordered adjustments to the BCSM, in order to: (i) incorporate the possibility that interested parties may participate in consortiums or joint ventures, to reduce barriers to entry; (ii) allow the participation of municipalities under equal conditions; and (iii) eliminate the requirement of prior experience in the bidding conditions for reception and storage facilities services, as it was unnecessary.

Ultimately, the TDLC found that the Bylaws and the BCSM do not prevent, restrict or hinder competition, provided that they incorporate the modifications described above, in addition to other minor adjustments.

As indicated, the reports that have been subsequently issued by the TDLC with respect to the bylaws and bidding conditions of other CMSs have generally been along the same lines. However, it should be noted that since Report No. 29/2022, the TDLC has provided an additional measure to avoid coordination between CMSs that are in competition with each other, which consists in that the members that are members of another CMS for the management of the same type of waste, either directly or through a related company, must opt for one of the CMSs, within a period of three months. This is to mitigate possible coordinated risks between CMSs.

III. Conclusions

Chilean antitrust institutional design does not have an ad hoc system to analyze collaboration agreements between competitors. Also, competition law has not historically considered in its analysis factors other than market efficiency, such as sustainability, environmental care, recycling or other public policy goals that are legitimately desirable to achieve. This has been expressly stated by both the FNE and the TDLC, emphasizing that they can only apply the substantive standard of analysis provided by DL 211 in each case.

However, the REP Law implied a relevant change, since it provided for a mechanism to assess certain agreements between competitors and forced the competition authorities to maintain the technical analysis from the legal and economic perspective that they had traditionally applied, but including also sustainability considerations that allow compliance with the objectives of reducing the generation of waste, promoting its reuse, recycling and recovery. To this end, the constitution of CMS is fundamental as they allow firms to achieve their sustainability goals.

In this line, the FNE has helped the Ministry of the Environment to define whether or not it is appropriate to prohibit individual waste management systems, as occurred in the case of lubricating oils, and has provided background information in the various proceedings before the TDLC at the request of various CMSs. For its part, the TDLC has already ruled seven times on requests for reports requested by CMS, either for the approval of its bylaws and/or the bidding conditions for the selection of waste managers.

Regarding the analysis of the CMS statutes, TDLC has sought to ensure that they can develop as autonomous economic entities and compete among themselves to attract members, for which they must have incentives to form and other actors must want to join, and mobility from one CMS to another must be allowed. Also, CMSs must act for the benefit of all their members and not in favor of one or more of their associates and, of course, the necessary safeguards must be taken to ensure that they do not facilitate anti-competitive coordination or the exchange of commercially sensitive information among their members. In Report No. 26 and subsequent reports, the TDLC has ordered the adoption of mitigation measures that go precisely in the line of limiting exclusionary risks (both of possible members and of other CMSs) and coordinated risks.

On the other hand, regarding the design of the BCSM, the TDLC has sought to ensure that evaluation criteria that favor companies related to any of the members of the CMS are not incorporated; that a supplier is not unjustifiably excluded; that the operating risks that could be incurred by the successful bidder once the service is in operation are prevented; and that risks of collusion in the bidding process are avoided. TDLC has also ordered adjustments to the BCSM that seek to prevent such risks.

In summary, the REP Law has introduced a significant challenge to Chile's institutional framework for competition by establishing a link between DL 211 and legal principles associated with environmental protection and sustainability. The evolution of this jurisprudence remains to be seen, as, to date, only a few decrees concerning priority products have been issued, and only a limited number of CMSs programs are currently operational. This model is still in its initial stage and the intervention of antitrust authorities has already been crucial in ensuring its proper development.