Competition policy and governance

Financial Express, May 18, 2008

A regulatory framework brings accountability and transparency in the system thus bringing down the level of corruption. Through injection of competition, if possible, is the best solution, as has been seen in telecom in India, says Pradeep S Mehta

The possible link between competition policy and good governance is often a matter of debate in different forums. However, in the Indian context, the debate seems to be irrelevant. Not because the link is non-existent or irrelevant, but implementation of a Competition Policy is an essential component of governance in India. According to the Indian Constitution, the freedom to trade or practice any occupation is a fundamental right. As per Articles 301-305 of the Constitution, only the Parliament or the State has the power to impose restrictions on this right. Hence, when barriers to entry are created by private parties, or a business entity is thrown out of business by predatory practices, or a business entity is forced to close down due to a buyers cartel, a fundamental right guaranteed by the Constitution is violated.

The state does maintain regulations on when it cannot allow a business to operate, such as on environmental or social grounds. But that too is in public interest, so that the larger good of the community over rides a personss fundamental right to trade or practice any occupation. A Competition Policy does reconcile to such exceptions.

Reverting to the linkage of competition with the Constitution, the latter also provides for curbing concentration of economic power, so that the common good is not adversely affected. Since, the core function of the government is to protect the constitutional rights, an appropriate mechanism to check such anti-competitive practices becomes an essential component of governance. Interestingly, it is not only the present Indian Constitution, that the country adopted after Independence, recognises this right, but this was recognised even in the Arthashastra, the first known treatise on government and economy written by Chanakya in the 3rd century BC. It emphasised fair trade as one of the cornerstones of good governance. There are of course several other ways through which competition or competition policy can promote good governance. If there are few powerful companies rather than many non-powerful companies, the ability of the business to influence government policies and decisions will be greater. The government in such a situation is more likely to develop a close nexus with the business leading to corruption.

Often we hear about money playing an important role in elections. Obviously, the money generally comes from business houses. It goes without saying, when business houses have monopolistic power in the market, they will be more inclined to share their booty with the politicians and, with the intent of maintaining the policy environment that would help them to maintain their monopolistic status. A company operating in a competitive market will be reluctant to pay money to the politicians. Lack of competition, thus, may even undermine the democratic process of the country

In many developing countries, some public monopolies, especially in the utilities sector were (and still are) both service provider as well as regulator. This often leads to corruption. One may recall that in India, a few years ago, getting a telephone connection or ensuring it works, often required paying bribes. Competition has changed this scenario. Alas, this still happens in getting an electricity connection, where there is no competition. Even now, it is not uncommon for a postman to ask for bribes while delivering money orders or even a registered letter. Regulatory environment and process in such sectors can reduce the scope of corruption even if the monopoly status of the service provider remains intact. A regulatory framework brings accountability and transparency in the system thus bringing down the level of corruption. Through injection of competition, if possible, is the best solution, as has been seen in telecom in India.

Much of the corruption in government happens in the area of procurement. Though in India there is a system to promote transparency and accountability in the procurement process through a vigilance establishment, government audit etc, it may not be sufficient as bid rigging without involvement of the relevant government officials may not come under the existing system of scrutiny

However, bid rigging and corruption are closely linked and without an effective anti-bid-rigging system in place, corruption in this area cannot be checked. The present system in India is not adequate to check bid rigging. By bringing in an effective mechanism to tackle bid rigging with adequate investigative capability, corruption can also be reduced.

At another level, businesses too collude through cartelisation, and overcharge consumers or do not allow easy availability or divide markets. That too is a part of the competition-governance nexus. In many cases, this cannot be done without the acquiescence of the enforcement machinery. If it is not explicit, it can be implicit. In conclusion, the above points do buttress the argument that competition can promote better governance

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