Tailoring competition laws for state units

The Asian Age, November 22, 2014

By Pradeep S Mehta

When our public sector is much in news whether it involves privatisation or disinvestment, it is worth recalling whether they are good corporate citizens, especially when they are monopolies. Many are not. This was evident when the Competition Commission of India fined a whopping `1,773 crore on Coal India for abuse of dominance in December 2013. The matter is still pending final adjudication but the issue is that Coal India has been truant. This was the first case of fining by CCI on a state owned enterprise (SOE), while it has come down with a heavy hand on several private sector firms.

Most of the big players in China are also SOEs, but some of them may behave in an anticompetitive manner. In the beginning of 2014, China’s State Administration for Industry and Commerce, armed with powers to check anticompetitive practices, fined the state-owned water company, Yiyuan Fresh Water Company a sum of 3.2 million renminbi for abuse of its monopoly position. The company was engaged in tied selling, where it was bundling its water supply services with the construction of water meters and pipes. This was also the first ever competition case in China on an SOE.

Like other laws, section 4 of the Competition Act, 2002 of India prohibits all enterprises from abusing their dominant position. Enterprises are defined under the act to include SOEs and departments of the government as long as they are engaged in the production, storage, supply and distribution of goods or services. Only activities of the government relating to the sovereign functions of the government and activities carried by the departments dealing with atomic energy, currency, defence and space are exempted.

Despite the privatisation wave across many countries in the 1990s, SOEs still command a significant level of economic activity. A 2013 study by Büge Max et al for example reveals that top five countries with the highest SOE in sales, assets and market value were China (96%), the UAE (88%), Russia (81%), Indonesia (69%) and Malaysia (68%). In terms of sectoral distribution across the world, sectors with the highest ratios — between 20-40% — are those related to the extraction or treatment of natural resources, energy and heavy industries although telecommunications, financial intermediation, warehousing, architectural and engineering activities and manufacturing sectors also had SOE shares of above 10%.

This implies that SOEs are too prevalent for their possible anticompetitive practices to be ignored. In any case, the harm from the anticompetitive practices on consumers and other businesses continues to be dire. The damage to consumers in terms of overpricing is even more pronounced for SOEs, as they are mostly monopolies in their own markets. Some SOEs simultaneously carry out activities in areas where they face competition with the private sector while operating in others where they do not. This leaves them in a position where they are capable of leveraging their monopoly position into the markets where it competes with private players through cross-subsidisation for example. It is on this basis that almost all competition laws frown upon anticompetitive practices, even from SOEs.

In 2009, the Competition Board of Estonia fined Narva Elektrijaamad AS, a subsidiary of the state-owned electricity monopoly Eesti Energia 16,000 euros for abuse of its dominant position. In 2005, the Czech Office for the Protection of Competition imposed a fine of approx. 7.8 million euro on Èeský Telecom, a SOE for abuse of dominance. In early 2002, the Finland Competition Council imposed a fine of 20,000 euro on the Finnish Meteorological Institute with a monopoly on producing and distributing basic weather radar data, for abuse of dominance. Many other examples can be found across the world. Despite being liable to competition laws in many countries, there continues to be some level of apprehension over whether in its application, the competition law should be blind to the fact whether the firm is state owned or privately owned. SOEs generally have an additional difficulty in their operations as they have to balance between public interest and profit objectives.

The operation models for most SOEs is that they do not fully guard against the consequences of success or failure, as this is governed by their corporate governance structure, usually defined by a regulatory framework. These can pose rigidities which their private sector counterparts are not subjected to. In addition, public service obligations are often costly, which would warrant the SOE to use profits from its market activities to subsidise these obligations, which would be beneficial to the society. Thus applying the usual competition law tests — such as recoupment theory in predatory pricing and even the small but significant non-transitory increase in price test — may be unfair as some SOEs have goals other than profit maximisation.

More importantly, imposing fines on a government-owned enterprise by another government body (competition authority) could be regarded as a smokescreen, given that the fines would find their way back to the treasury, which can still pass them back to the enterprise. The SOE might also not be fully independent in its decision-making. As established by CCI, Coal India did not enjoy full commercial freedom as its business is constrained by directions from the power ministry, the coal ministry, and the Central Electricity Authority (CEA) among others.

This might call for a relook on the manner in which the competition law is applied to SOEs. Whilst the competition law should indeed apply to SOEs, there might be need for the law to apply with some narrow derogation when it comes to SOEs.

The writer is the secretary-general of CUTS International

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