PSUs can`t be more equal than others

Business Standard, March 19, 2007

India needs $70bn of private investment in infrastructure and will not get it without a level playing field, say Pradeep S. Mehta

One anachronism which the telecom regulator TRAI is taking another bash at is the issue of access deficit charge (ADC) being levied on private sector telecom operators to supposedly subsidise the state player BSNL for its un-remunerative operations. This is over and above the Universal Service Obligation fund for servicing rural areas, towards which private telecom operators also contribute 5 per cent of their total revenues. Insofar as the ADC is concerned, it disappears in the account books of BSNL, thus one doesn’t know how it is being utilised.

Ultimately, it is the consumer and the economy which bear the burden of these irrational charges through higher tariffs and associated inefficiencies. More importantly, in the larger context, the state sacrifices the principle of competitive neutrality, which is so essential to attracting the huge private investment required over the 11th Plan period.

We have a mixed economy and it is imperative to maintain it for the infrastructure sector over the 11th Plan period and beyond, which is so crucial to help the whole process of economic growth. Of the estimated $350 billion required for building our infrastructure, based upon World Bank’s data, approximately 20 per cent or $70 billion (or even more) is expected from private sources, foreign and domestic, while the rest has to come from the state and international development institutions. For that to happen smoothly, we need independent regulation so that investors get a predictable and stable environment. Equally vital, we also need to promote sound competition principles to not only attract investment but also ensure that people do not lose out to monopolistic and other anticompetitive practices.

One sound competition principle is that of ‘competitive neutrality’, that is, providing a level playing field in particular to private investors vis-à-vis the state enterprises. That is at a premium in India and some other developing countries.

The ADC feature in the telecom sector is one which is not explicitly ‘competitive neutral’. On the other hand, there are implicit discriminatory practices existing due to a variety of factors. Furthermore, the ministry itself is softer to state companies than it would be in its dealings with private investors. This is because the state owned companies and the regulator in any sector report to the same ministry. What is required is that all state enterprises be under a standalone ministry, rather than under line ministries, as in South Africa.

A recent example of explicit discrimination is worth mentioning here. The Insurance Regulatory and Development Authority’s recommendation to the finance ministry to do away with sovereign guarantee for LIC was turned down. LIC thus has a huge marketing advantage over private players who have come in recently. Other than this, even today, LIC is the dominant player in the life insurance sector having had a long stay, a huge network of over 2,500 offices and thousands of agents in the country.

Pursuant to a sound research-based advocacy by CUTS, the government is now in the process of adopting a national competition policy which includes competitive neutrality as one of the principles to be followed by the state to ensure that competition prevails and a level playing field is created. It is a fallacy to believe that extra favours are required by state companies to be able to compete effectively in the market place. In fact, the reverse is true — when state companies have to compete at par, they improve their bottomlines considerably.

Indian Airlines is a case in point. It turned the corner soon after the opening of the sector to private players. Not only that, it also stopped treating its customers like doormats. However, both Indian Airlines and Air India paradoxically offer an exactly opposite example of reverse competitive neutrality. Over many years, neither airline was allowed by the government to upgrade its fleet, due to several specious reasons. On the other hand, new private sector players like Jet and Sahara could acquire new aircraft and grab a market share which is today bigger than Indian Airlines’.

In fact, competitive neutrality is enshrined in the Constitution of India under two different articles on fundamental rights. Article 14 provides for equality before the law or the equal protection of laws to every person. This means that among equals, the law should be equal and that like should be treated alike. The maxim: ‘Equal treatment of unequals is as bad as unequal treatment of equals’, has been echoed in various apex court judgements when disposing off matters relating to discrimination. It is thus inferred that providing positive discrimination to state incumbents is tantamount to unequal treatment of equals, or prevents aspirants to become equals.

More importantly, the other article 19(1)(g) enshrining the ‘freedom to practice any profession, or to carry on any occupation, trade or business’ is also relevant to the issue at hand. However, the same article allows reasonable restrictions in the interest of the general public, or the so called ‘public interest’ clause, under which the state has the right to provide positive discrimination to a deserving class of persons/entities. The issue here is what are ‘reasonable restrictions’ and what is ‘public interest’. These windows have often been misused and abused through state arbitrariness (read whims and influence), or to accommodate political economy considerations rather than efficiency, and to favour state enterprises.

One can however argue that there could be situations where positive discrimination is required to satisfy public interest goals. But, that has to be done transparently and equitably, rather than arbitrarily.

In conclusion, some may argue that in spite of the lack of competitive neutrality, private players continue to invest merrily, like in the telecom sector, and it is therefore not a problem. However, what prevents investors to shy away from investing in other sectors if they do not get a level playing field? Then our ambitions to raise private capital would not materialise to the extent as we would like to. Our infrastructural investments will suffer, thus affecting the entire economy and the desired growth rate of over 9 per cent to create more jobs. That would be bad for both the people and the economy, and truly not in the public interest.

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