Unlevel playing field is wasteful

Financial Express, May 21, 2012

By Pradeep S Mehta

Private railway container operators are likely to face a double whammy. First the haulage charges were raised and then the terminal charges have gone up by a whopping 35%. The railways container company Container Corporation of India Ltd (CONCOR) will not face this injustice because it operates out of its own terminals. This is a classic case of lack of competitive neutrality, which is now being addressed under the draft National Competition Policy (NCP).

This is not the only instance of railways’ step-motherly treatment of private container operators. They have been subject to discrimination ever since container operations were deregulated. A CUTS study, done for the corporate affairs ministry, shows that private operators have to pay to railways in advance, while CONCOR need not do so. Furthermore, private operators cannot acquire land from railways at reasonable costs for building container depots. They are then left with the only option of using CONCOR’s depots. For that, they have to pay high charges which is tantamount to an entry barrier and denial of access on fair, reasonable and non-discriminatory grounds. This is a violation of the essential facility doctrine, another issue dealt with under the NCP. Some commodities can only be carried by CONCOR and not by the private operators.

The necessity of competitive neutrality and access is something that we are yet to appreciate in our approach to a mixed economy. As a national policy, we have decided to deregulate infrastructure sectors rather than privatise to promote competition in the market. But the government has not yet been able to stop mollycoddling the public sector; old habits die hard, and the purpose is lost.

Another great irritant is the mandate to fly only on Air India for civil servants and people like me, when travelling on government business, even though the private carrier may haul us for lower fares and offer more convenient flight timings. For example, when I have to attend a government meeting in Delhi flying from Jaipur, if I take the Air India flight, then I will have to spend nearly three days out of Jaipur because the flights operate around lunch time. This would involve two-nights stay in Delhi, which means higher cost to the ministry whose work takes me to Delhi. A better option for me is to fly by a private carrier in the morning and return home in the evening. There are opportunity costs too, because I will be out of Jaipur for nearly three days. Granted that the host ministry seeks a case-to-case exemption for my travel on a private airline from the civil aviation ministry, but the delay in settling my bills is phenomenal. I can afford the delayed payment, but smaller NGO representatives cannot wait for long. This is not to count the unnecessary administrative costs of babus seeking clearances from other babus in the civil aviation ministry and its opportunity costs as well. What a waste of my money as a tax payer!

As always, the issue of proportionality does not exist in the lexicon of our inertia-ridden babus. But I must compliment the finance ministry here. Whenever flying for their meetings by a private airline, one is paid on the spot without questions asked. The only little thing that one has to do is to certify that there was no convenient Air India flight available. Speaking of Air India, which is running perpetual losses, the Competition Commission of India is also reviewing the issue of bailing them out by the government as something that will adversely affect the competition scenario in the country.

There is some good news as well. Our public sector telephony companies BSNL and MTNL have been making losses for long as well, but fortuitously the government is not insisting on its departments using only their telephony services. (I pray that some babu does not get the bright idea of seeking special favours for BSNL and MTNL also).

State aid and subsidies promote inefficiency and go against the interests of the industry that competition processes seek to protect and promote. This is the reason why EU recognises the need to regulate state aid within its competition law regime, and also to promote a seamless internal market. Studies have also been carried out in countries like South Korea and Mexico to analyse the effect of aid on various industries which clearly show that productivity growth in industrial sectors targeted by state aid has been poor compared to productivity growth in untargeted sectors. Further, the act of granting aid to selected PSUs with a public policy objective is against the principle of competitive neutrality and disincentivises private sector players.

The best example of this in India comes from the fuel oil retailing sector. Some time ago fuel retailing was opened up to private players. Reliance, Shell and Essar stepped into the sector and started establishing outlets through out India. But they could not compete with the three public sector giants Indian Oil, Bharat Petroleum and Hindustan Petroleum, because the public sector receives subsidies from the government to sell goods at suppressed prices. This happens in spite of the fact that the administered price mechanism was abolished some time ago. Ad nauseam calls to peg fuel prices to international oil prices remain as calls in the wilderness, due to political economy constraints.

Consequently, Reliance has shut down its outlets, while Shell and Essar continue to operate some of their outlets only in the hope that better sense might prevail on the government in the future. The simple thing would be to offer the same subsidies to the private sector also and level the playing field, but the government is unwilling to do this. They claim that when licences were awarded, this was a condition. It is also a violation of the fundamental right to equality under our Constitution. Imagine the huge costs of such outlets, which are either haemorrhaging or lying shut.

It is, therefore, necessary to carefully monitor wasteful state aids and subsidies that can be a big menace to a country’s economy and the governance regime. Since the poor do need state aid, such programmes should be done through more efficient means and through the demand side rather than the supply side.

India is fraught with examples of distortion of competitive neutrality and wasteful subsidies and bailout packages. It is time we looked into the regulation of such grants as well, and wherever possible to provide cash support to the poor. The way forward is through the proposed National Competition Policy, which has addressed all these issues in depth. It is hoped that it will be adopted by the government sometime in not too distant a future.

The author is secretary general, CUTS International.

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