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Competition in Infrastructure Sector by

Vinod Dhall,Former Member & actg Chairman, Competition Commission of India

at

Forum of Indian Regulators (FOIR),Chennai, 31January, 2009

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Organisation of the Presentation

• Competition- why and how?• Evolution of Competition Policy and Law in

India• Competition in Infrastructure• Competition Law and Infrastructure • Competition Act, 2002• Suggestions

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Competition- why and how?

What is Competition (in economic field)?• Striving for the custom and business of

people in the market place (Prof Whish)

• The situation in which firms or sellers independently strive for buyers’ patronage in order to achieve a particular business objective (World Bank-OECD)

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Competition- why and how?

Benefits of competition (economic theory):

• Promotes efficiency: productive, allocative

• Maximises ‘consumer welfare’; more choice, better prices

• Incentivises innovation

Competition is not an end in itself, but a means to achieve societal goals

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Competition- why and how?

Empirical evidence of benefits:• Australia: average household income up by

A$ 7,000 p.a. (OECD/ APC study); gain 5.5% of GDP(Paul Crampton, OECD-IADB)

• New Zealand/UK: added 2.5% to employment rate over 1978-1998(OECD)

• USA: fall in real prices following de-regulation (OECD): raised productivity by 4% (Paul London)

India: benefits visible since reforms (auto, white goods, consumer electronics, milk, etc)

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Competition- why and how?

Competition framework:

• Competition policy: set of government and regulatory policies / laws that facilitate competition; need for legal framework

• Competition law: to prohibit anti-competitive practices / activities

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Competition- why and how?

Competition Policy permeates various areas e.g.:• Industrial policy• Trade policy• Financial sector policies (interest rate, forex

allocation, entry of banks, etc)• Privatisation (dis-investment)• State aid: subsidies, guarantees, tax incentives • Policy towards to SOEs (PSUs)

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Competition- why and how?

Legal framework includes laws for:• Property rights• Contracts• Firm structures (company law)• Insolvency (bankruptcy, BIFR)• Capital markets ( SEBI, SEs)• IPRs • Consumer protection• Competition law

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Evolution of Competition Policy and Law in India

Competition oriented policy reforms starting 1991:• Industrial policy-licensing, controls, MRTPAct• Trade policy- physical barriers,tarrifs• Financial sector- interest rate, forex allocation,

entry of banks, capital markets• Dis-investment• Patronage to PSUs• Reduction in SSI reservations

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Evolution of Comp Policy and Law in India

Some reform deficit areas:• Coal – Coal India ‘monopoly’• Labour – exit barrier• FI restrictions e.g. retail, civil aviation• Insolvency law – litigation in courts• Professions – restrictive rules e.g.

medical, legal, accountants• Infrastructure – rail, post, urban transport

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Evolution of Comp Policy and Law in India

Evolution of competition law:

• MRTP Act, 1969

• Amendment of MRTPAct in 1984

• Amendment of MRTPAct in 1991 (economic reforms)

• FM’s statement 1998; Raghavan Committee report 2000

• Competition Bill,2001

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Evolution of Comp Policy and Law in India

Evolution of competition law:

• Competition Act, 2002 in Jan03

• Competition Commission of India established Oct03

• Challenge in Supreme Court; judgment in Jan05

• Competition (Amendment) Act,2007 in Sep07

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Evolution of Comp Policy and Law in India

Highlights of Competition Act, 2003 (as amended):

• Prohibits: Anti-competitive agreements Abuse of dominance

• Regulates mergers (mandatory notification)

• Mandates competition advocacy

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Evolution of Competition Policy and Law in India

Activities of Commission:• Competition advocacy (post, shipping,telecom)• Groundwork for: Enforcement ( draft Regulations, internal guidelines, processes) Institution building ( training, organisational structure)Actual enforcement cannot start till government

notifies enforcement provisions. India only major economy without functioning

Competition Commission !

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Competition and Infrastructure

• Competition principles apply across all sectors

• However, certain features distinguish infrastructure sectors, e.g.:

Natural monopoly Network effects Switching costs

Heavy capital costs

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Competition and Infrastructure

Some infrastructure sectors also have individual characteristics that affect competition, e.g in electricity:

• Cannot be stored

• Relatively inelastic demand

• Demand fluctuations - within day and inter-seasonal

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Competition and Infrastructure

Measures that promote competition:• Vertical separation (unbundling) of ‘natural

monopoly’ from contestable parts• Horizontal separation to encourage inter

se competition and ‘yardstick competition’• Open access (essential facility doctrine)• Remove entry barriers; facilitate entry• Mitigate switching costs (number

portability, bank account portability ?)

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Competition and Infrastructure

• Competition ‘for-the-market’ vis-à-vis competition ‘in-the-market’ (competitive bidding):

Maximise number of bidders, consistent with qualification parameters

Level playing field for new biddersConcession agreement to avoid ‘monopoly’

strengthening provisions• Competition oriented Regulation

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Competition law and Infrastructure

• Competition law generally has overarching jurisdiction in all sectors, though picture varies across countries/ industries-Australia, Mexico, USA

• Examples of application of competition law: Merger: EC prohibited (2004) proposed acquisition of

GDP by EDP and ENI Merger: EC allowed (2000) merger of German

electricity companies VEBA/VIAG subject to commitments to divest holdings and drop T-component transmission charges

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Competition law and Infrastructure

AOD Divestiture: UK Competition Commission’s interim order (2008) requiring BAA to divest Gatwick and Stanstead airports in London, and abide by behavioural remedies.

AOD: Energy company ENI fined EUR 290 mn for abusing its dominant position in gas transport through its subsidiary TTPC; also ordered it to allow transport of 6.5 bn c.m. per year and guarantee time bound completion of gas pipe expansion.

AOD: EC has objected (Dec08) to French state-controlled power giant EDF’s long term contracts for sale of electricity to customers

AOD: Aeroporto de Roma required to provide non-discriminatory access to rival caterers

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Competition law and Infrastructure

Cartel: Korea FTC imposed huge penalty (2003) on price cartel between telecom companies KT and Hanaro Telecom

Cartel: French antitrust authorities slapped record fines amounting to Euro 534m on mobile operators Orange, SFR and Bouygues for illegally sharing sales data and conspiring to undermine competition

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Competition Act 2002

Enforcement not commenced, but live concerns exist in markets:

• Cartels alleged in shipping, steel, cement, Copper-T, explosives, civil aviation, brake linings

• Abuse of Dominance alleged in coal, telecom, post, airports

• M & As proceeding without prior review: civil aviation, cement, alcoholic beverages

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Competition Act 2002

• Applies to all sectors, alongside sector regulation where existing

• Especially relevant provisions: AOD and Mergers

• Sec 21 and Sec 21A, CA02 provide for mutual consultation between Commission and sector Regulator

• Consultation to be at two levels: Individual cases Broader policy level

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Some suggestions

• Needed a National Competition Policy: competition impact assessment, competition neutrality, essential facility doctrine, separation of policy/operation/regulation, incentives for reform at state level, etc

• Sector Regulation’s primary objective should include a duty to promote effective competition, and in assessing the interests of consumers, the Regulator should have due regard to the views of enterprises

• Immediate commencement of enforcement of Competition Act

• Mandate close co-operation between Sector Regulators and Competition Commission of India

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Thank you

Vinod Dhall,

DHALL LAW CHAMBERS,

Dewan Manohar House,

B-88, Sector 51, NOIDA (U.P.), India – 201301

Phones: +91-(0)-120-4547550 / 1,Telefax: +91-(0)-120-4547550,

Mobile: +91-9811322324

Email: dhall.vinod1@gmail.com