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About the control of vehicle technical condition – how a monopoly denies the idea of competition

Author: Skaidrīte Ābrama, the Chairwoman of the Competition Council

In the middle of summer, the Competition Council of Latvia (the CC) caused a storm in the public space by coming up with conclusions that in the area of vehicle technical inspection, more specifically – control of technical condition, there are competition restrictions and policy-makers must reconsider the existing model. It seemed that nobody was indifferent. Some expressed their support to the existing procedure by saying how could it come to somebody's mind to destroy such a well-considered system and they see in the activities of the CC just lobby of service stations or even a political order. Others especially those, who have dealt with technical inspection outside Latvia are puzzled – why the legal framework and requirements in Latvia are so excessive?

We did expect such opposition because monopoly sectors are usually sensitive even to small market changes. We remember, for example, how much resistance and objections were caused when telecommunication markets were opened for competition. Although the competition was the element that stimulated development of the sector, creating innovations and other consumer benefits, which all of us enjoy now.   

The vehicle technical inspection belongs to monopoly sector. The existing market model was created artificially, because the state historically decided to restrict competition, referring to safety and other interests significant for the public. I believe that in the 90-ies of the last century, when entrepreneurship was not developed in Latvia yet, such a decision was reasonable. But almost three decades later the entrepreneurship environment has changed in Latvia, entrepreneurs have become more responsible and able to provide qualitative services also in the markets where safety, health and other interests of residents are crucial.

Opponents about and around – but not to the substance

Speaking about the necessity for competition in technical condition control market, the opponents excessively focus on service stations, particularly talking about tax evaders and primitively equipped service providers, but do not look at the issue as to its substance. During the investigation, the CC did not look for something, that could create actual competition on the market of technical condition control, instead the goal was to find answers to questions: are there any objective and justified conditions for the requirements that technical condition control in Latvia can be performed only by the Road Traffic Safety Directorate (RTSD) and four other private companies partially owned by RTSD, and whether the existing legal framework does not impose inconvenience on consumers.

As a result, I do not think that the opponents should spend their time for listing European Union (EU) Member States where technical inspection is performed or is not performed by service stations. Instead they should think strategically and responsibly, considering the interests of consumers first. At least answering honestly to questions – are the interests of consumers sufficiently respected in the current model and is there room for improvements.

I would like to calm down RTSD and all its advocates – our story is not about how good or bad the main supervisor of technical inspection deals with its tasks. RTSD operates within the framework of the model established and permitted by the Ministry of Transport (MoT). However, I do not understand why there are such concerns about RTSD, if the MoT plans to release it from performance of technical condition control in the coming years anyway. The future is unclear, because the policy planning documents do not provide clarity, also no consultations with the CC has taken place at least in the context of section 88 of the State Administration Structure Law, which concerns involvement of the state in entrepreneurship.

However, it is clear – the model of technical inspection will have to be revised by the policy maker. This is why the announcement by the MoT on its intention to change the market is an appropriate moment to listen into the arguments of the CC on the disproportionate legal framework, which imposes an obligation for consumers to acquire a service, which is less qualitative in terms of accessibility and convenience, for a fixed price.

How consumers (do not) benefit from the existing system

Firstly, the area of technical inspection in Latvia stands out on EU scale with the fact, that we have introduced much more stricter requirements than described in the EU Directive both in terms of periodicity of technical inspection and possibilities of entrepreneurs to enter this market. Consequently, we cannot blame EU requirements for excessively strict legal framework and increase in price.

In terms of frequency of technical inspection, Latvia is among the leaders in EU. We like to compare ourselves with Lithuania and Estonia; here are some facts: In Lithuania, a 5 and 15 years old car must have respectively 2 and 7 technical inspections during these operating cycles, whereas in Estonia – 1 and 9 respectively. In Latvia, this number is 3 and 13 technical inspections respectively. This indicator was even higher until the beginning of this year, but was lowered due to public pressure. Why so frequent technical inspections are required, and for relatively new cars? Are we so much different from our neighbours in terms of car’s technical condition?

On this background, the frequency of technical inspections determined in Latvia makes them the most expensive and complicated in the Baltics both in terms of costs and consumed time.

Secondly, a significant benefit of consumers in competition conditions, which is not less important than price, is the possibility to receive any service in a fast and convenient manner, and maximally close to the place of residence or employment. The accessibility of service in Latvia is still insufficient, despite the activities implemented by performers of technical condition control by opening new inspection lines and offering non-standard additional time of performing technical inspection.

The guidelines adopted by the MoT determine the maximum distance between technical inspection stations, which can constitute up to 45 km from any populated area. This means, that consumers in regions do not have any alternative for choosing other stations. Of course, it is not only a question, whether it is an adequate distance, but also whether this requirement is observed in practice. The service is available only at 33 stations in 29 populated areas, which means, that drivers may have to travel quite far and wait in a queue in addition.

Also in terms of the number of stations we are far behind the countries, where the market is open for competition. Even in the territorially smaller Estonia, where the number of passenger cars is similar to ours, the number of technical inspection stations exceeds 100.

About the conditions mentioned above, it can be asserted, that the system of vehicle technical condition control is established, first thinking about benefits of the service providers – RTSD and its accredited companies, instead of benefits of consumers. Legal framework of the sector shows that the objective of the sector is to protect the existing market players from possible competition. The absurdity of the legal framework is also confirmed by the fact, that RTSD as the supervisory institution is allowed to carry out economic activity and gain profit in this area itself. How objectively and neutrally the sector supervisor can control processes, if it is closely related to the supervised companies?

What are the benefits of the privileged participants of the existing system

The CC considers unacceptable, that for already more than 20 years the sectoral policy protects the financial interests of the initially accredited companies, thus basically loading the costs and inconvenience on consumers. The accredited companies, where RTSD is a shareholder, have historically obtained such rights without any competition; consequently, they have never had any competition “threat”. The number of passenger cars in Latvia has increased more than twice during these 20 years. Accordingly, also the number of consumers has increased, whereas the market has remained closed.

During many years, the accredited companies – providers of technical inspection service – have gained significant revenue from vehicle owners, who observe the mandatory requirements set by the state. According to the data of the Central Statistical Bureau and information available from annual reports, the average profitability indicators of the accredited companies are significantly higher than the same indicators of companies, which operate in the sector of wholesale, retail sales and repairs of cars, and motorcycles. In 2016, the average profit of the accredited companies after taxes comprised approximately 25% of the net turnover, whereas in the private sector – below 1%. Of course, these sectors differ, but the existing market model (monopoly) has ensured significant profit to the accredited companies, whereas in the sector with competition the profitability level is much lower.

Foreign partners of RTSD in the accredited companies throughout many years are in financially privileged situation. It is very unlikely they are this privileged in their home countries, where they operate in the area of technical condition control and where the market of technical inspection is opened for competition long ago.

Traffic safety is not ensured by a monopoly or a free market

The CC is confident that strong and fair competition in the sector can give more diverse and accessible services in terms of price in Latvia as well in other countries. And what about frequently mentioned safety? We do not deny, that safety is an undoubtedly important aspect, but it should not be used as a reason for ceasing any further debates on the change of technical inspection model.

A monopoly is not a basic condition for road traffic safety, which is confirmed by the experience of other countries. It is obvious, that in countries with free competition on the technical condition control market, for example, Spain, Denmark, Sweden, the Netherlands, England, also our neighbours Estonia, the level of safety has not deteriorated. On the contrary, compared to these countries, the number of fatalities in Latvia on common use roads is much higher.

A significant role is played by regular supervision of road traffic safety. Some portion of cars may not be maintained according to the requirements also between the annual technical inspections. Accordingly, a more extensive set of measures is required for ensuring efficient control of road traffic safety – involvement and coordination of several supervisory institutions to guarantee safety of other road traffic participants and ensure responsible and regular car maintenance. By being released from the technical condition control function, RTSD surely would have more resources to undertake more efficient supervision and promotion of safety.

So - what the CC wants?

Of course, the CC wants to achieve fair and strong competition, where it is possible and necessary. The area of vehicle technical condition control is among sectors, where there are no obstacles for achieving this goal, except political willingness.

At the same time, the CC indicates, that even if the long-term conflict of interest of RTSD in terms of accreditation and supervision and performance of economic activity would be terminated, it would not be enough yet. The previously mentioned problems have to be solved, all of them having the same diagnose – restriction of market development, preventing service users from receiving benefits resulting from competition. Technical condition control is not space science, where only the chosen ones can operate. It is a growing market, which can be entered by new market participants through fulfilling clear and substantiated accreditation requirements, thus creating actual competition for the existing companies.

Due to this reason we expect meaningful response by the MoT concerning the vision of the CC - that it is necessary to shape a technical inspection model, which is more accessible and friendly for consumers. The existing regulatory framework has to be revised, removing the restrictions, which are disproportionate to achieving the goal of road traffic safety, and ensuring competition of service providers, thus promoting development of the sector in favour of the public interests, instead of interests of separate groups.

Article published in the Latvian news portal www.delfi.lv on 19 September, 2018.