Let the principles of competition guide privatization

Livemint, April 07, 2021

By Pradeep S. Mehta,

Rolling the benefits of both together will help convince people why disinvestment is good for them.

In defence of her privatization programme, Margaret Thatcher, the UK’s then prime minister, said it was to reduce the state’s power and enhance that of the people. Contrast this to a statement by finance minister Nirmala Sitharaman, who recently said that the government was selling public sector banks for these businesses to continue. While similar to Prime Minister Narendra Modi’s articulation that the government has no business being in business, the rationale for privatization cannot and should not be limited to economic efficiency. A clear and consistent articulation of the benefits that citizens can expect from the programme can help create a broader consensus for it and overcome unreasonable barriers.

It takes two to tango. Privatization alone is insufficient to democratize its benefits. To ease frictions in taking these to people at large, we need a healthy dose of competition in our privatization process and beyond.

N.K. Singh, chairman of the 15th Finance Commission, recently said that privatization must not distort the principles of competition. Addressing concerns of a handful of companies acquiring most stressed assets would require a coordinated approach by the Union finance ministry, Competition Commission of India (CCI) and sectoral regulators. The sooner we put Singh’s wise counsel into practice, the better.

The CCI’s role doesn’t begin after the government decides to privatize the firms it owns, but much sooner. The CCI should take notice whenever the government decides to shield some sectors from market competition, whatever the pretext, be it the delivery of public goods, a strategic interest, a matter of national security, an absence of private-sector expertise, or any other. To ensure optimal competition, we need a transparent and dispassionate assessment of government claims, including an examination of alternate market-based mechanisms for the delivery of public goods and steps needed to remove barriers impeding local capacity creation. We must ensure that the government isn’t merely protecting its inefficiencies in the garb of public interest. Under its enabling law, the CCI can make such moves suo moto.

Moreover, while arguments in favour of government ownership and shielding some sectors from market competition may make sense at particular points in time, these cannot be made for eternity. Public sector exemptions from the Competition Act of 2002 should not be permanent. The government should clarify the period for which it’s needed. The CCI, along with the Comptroller and Auditor General (CAG) and a vigilant civil society, needs to see that state-run firms are subject to competitive pressure, before things go awry.

In sectors where local private-sector capacity is limited, the CCI, relevant government departments and think-tanks like the Niti Aayog should work on reforms to attract global expertise, technology and capital to plug the gaps.

The CCI also needs to scrutinize the process of privatization from a competition lens. It should not unfairly result in granting big firms the kind of market dominance that could be abused. Entry barriers, eligibility criteria and threshold limits, all of which may unnecessarily restrict the number of bidders, should be reviewed. In Oman, for instance, the privatization authority selects bidders through procedures that take into consideration the principles of transparency, publicity, equal opportunity, non-discrimination and free competition.

A largely glitch-free process of privatization does not automatically ensure that firms will be subject to competitive pressure or will operate efficiently. There are instances galore of privatization attempts gone wrong, in emerging as well as advanced economies, particularly in utility sectors. The UK, Argentina and Mozambique have faltered in privatizing water and railway services. Unreasonable price hikes, the exclusion of vulnerable consumers and increased inequalities have been a few adverse impacts of sub-optimal privatization. At the same time, Gabon and Brazil have had a fairly beneficial experience.

While there is no one-size-fits-all formula, robust regulatory and competition regimes have been found to be essential to ensure that the benefits of privatization flow to all and not just a few.

In a recent paper summarizing lessons from privatization in developing countries (bit.ly/3cxu2HN), Estrin and Pelletier suggest some prerequisites for success. These include lowering barriers to the entry of new domestic firms, doing away with bureaucratic interference and the ability of incumbents to restrict competition by leveraging cozy relationships, openness to foreign investment, an effective competition regime under a strong and independent regulator, and an arm’s length relationship between the government and privatized firms.

In various policies, ranging from its goods and services tax to its new farm-sector laws, the government has been following pro-competition principles for success. It should extend the same logic to its new privatization programme. In general, the Centre should communicate to people the twin benefits of competition and privatization, and how the two are inter-related. It should explain that these are market-friendly rather than just business-friendly reforms, as we need in a pandemic-impacted world. In this endeavour to promote economic democracy, the country should adopt a comprehensive national competition policy.

Amol Kulkarni of CUTS contributed to this article.

Pradeep S. Mehta is secretary general of CUTS International

This news item can also be viewed at: