Foster competition via law & policy

The Economic Times, December 23, 2006

If we in India wish to accelerate our growth rate to 10%, we need to not only speed up the establishment of the Competition Commission but also have a pro-active competition policy, say Pradeep S. Mehta

Is India moving into unchartered territory, when the new Competition Commission comes into life, to be able to order a split in a large firm indulging in abuse of dominance (ET edit: Power to split monopolies, November 25)? Not exactly. When the erstwhile Monopolies and Restrictive Trade Practices Act, 1969 was amended in 1991, it has done away with powers to regulate mergers and combinations. But it had retained the powers to order a de-merger. That this provision has never been used is another story.

The edit also quotes the famous case of AT&T in the US, which was ordered to be split into seven companies (mini-Bells). But the wheel is now turning full circle. Some of them are remerging into AT&T and it will revert to its glorious days of being a big player in the telecom market of the US. Big is no longer bad; it is their abuse which is actionable by the competition authority. Further is network industries, deep pockets do matter and can result in lower prices and higher quality for consumer, other than technological advancements.

In India, the new Competition Act, 2002, does have provisions on de-mergers, but unscrambling an omelette is not easy. Therefore, what will be more important is for the new Commission to check mergers for danger signals. In fact, the new law is based on a behavioural approach rather then a structural approach of the MRTPA.

Restructuring, mergers & acquisitions, both domestic and overseas, appear to be the flavour of the day. Many are in favour of promoting big national champions who can thwart overseas competition and takeovers. Nothing wrong in that, but what is more important is that these large firms do not create entry barriers to new entrants or import competition (particularly in the goods sector).

That is why abuse of dominance is the leitmotif of the new law, rather than dominance itself. This will require quality resources at the new authority, whenever it is set up. The amendments in the law itself are pending in Parliament, and one doesn’t know when the same will be resolved.

One problem with the new law is that intellectual property rights have not been covered adequately. This means that firms holding patent rights will be able to charge the price that they want. One classic example is that of Monsanto’s exploitative pricing on Bt cotton seeds, which has been challenged in the MRTP Commission and is awaiting final disposal at the Supreme Court.

It was reported recently that the government has assured that parliamentary committee (which is examining the amendment Bill) that MNCs will not be able to gouge. IPRs have been dealt with under the European competition regulations as a case of abuse of dominance, while the European court of appeals has ruled that IPRs by themselves cannot be considered anti-competitive, but their abuse can certainly be stopped.

On the issue of public sector monopolies such as railway or electricity, the movement towards promoting competition is slow. For example, the railways has allowed private operators on the container traffic, only after some persuasion. They will need to be nudged also when the new freight corridors come up with private participation. Except in the US, rail services are mainly in the public sector. The experiment in Thacherite Britain in rail privatisation has turned sour.

IN ELECTRICITY, the new Electricity Act of 2003 does provide for competition wherever possible but mindset problems are hurdles. In any event, in natural monopolies, competition can only be mimicked rather than be done upfront. Secondly, there are other out-of-the-box solutions which continue to crop up to promote competition, but their movement will also take time because of status quoism. For example, if competition has to be promoted in distribution, then the network has to be owned by a company, who can then sell its services to any distributor to reach any customer, i.e., separation of wires from the supply. Currently, the distribution network belongs to the distribution-and-supply company and is not independent. In power generation and trading it is quite easy to promote competition, and it has started happening.

The edit raises the issue of monopoly abuse by the public sector. There are two issues involved here: first, when framing policy that leads to the creation of public sector monopoly, it should be guided by competition principles. Once a monopoly is there, any abuse should be checked by the competition authority. For illustration, assuming that the proposed amendment in the postal law is passed to give monopoly to the post office for letters below 300 gms, it should be scrutinized under the competition lens. If and when the monopoly is granted, then post office’s behaviour should be checked for any abuse by the competition authority. The competition law does not give any exemption or exception to post office or any such public sector body.

Most importantly, the government is now considering adopting a national competition policy, which will guide all branches of the government to ensure that competition principles are embedded in all policies. The policy will address systemic issues in governance where policy-induced anticompetitive outcomes happen, and which the competition law cannot address. (Infact, there are two committees which are drafting a policy, one at the Planning Commission and the other at the ministry of company affairs, with many members being common. Alas, there are turf problems between them, which has also impeded the progress of the policy statement.

The policy will outline at least six principles and also suggest a competition assessment of all laws and politics to recommend corrective measures. Australia has an active competition policy, which has adopted in consultation with their provincial governments. The model is quite suitable for India in many ways, including the fact that we have different parties in various states. What it also does is to offer competition payments to provincial governments to discard anti-competitive measures, somewhat on the lines of our VAT system. Ever since Australia adopted the competition policy, its economy has been booming.

If we in India wish to accelerate our growth rate to 10%, we need to not only speed up the establishment of the Competition Commission but also have a pro-active competition policy.

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