National Competition Policyand 10 Competition Principles

Presentation byPradeep S Mehta,

Secretary General, CUTS International, Chairman, Planning Commission Task Force on National

Competition Policy, andMember, Committee on National Competition Policy and

related matters, Government of India, September, 2011

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JOURNEY THROUGH THE TENPRINCIPLES OF COMPETITION

POLICY

FEW TREES IN THE DENSEWOODS OF COMPETITION

IMPEDIMENTS 2

Backdrop: National Competition Policy in India

• After a long process, Government initiates a National Competition Policy in June, 2011 likely to be adopted in Dec, 2011

• Inspired by the experience in Australia, where competition reforms resulted in 5.5% growth

• This experience now guiding many countries to sequence competition policy followed by a competition law

• In addition to Competition Act, which covers market failures, while the NCP will attack competition distortions and impediments arising due to government policies

• Testing and correcting all policies, laws, regulations and praxis through the lenses of competition principles

1. Competitive neutralityImpediments: Lack of level playing field: public sector enjoys special privileges, procurement preferences, subsidies etc, though reverse examples also. Result: inefficiency, discourages investment and dampens economic growth and innovation

-Bank deposits only in PSU banks, one percent subsidy on agri loans available only to public sector banks

- Only PSU petroleum companies getting subsidies Purchase preference policies in favour of central PSUs extended for three more years in 2005 discriminated against private players but finally dropped in 2008 in light of the distortions

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2. Procedures should be rule bound, transparent, fair and non-discriminatory

Impediments: Many procedures are opaque, arbitrary and formulated without consultation.Result: High transaction costs, corruption, cost to economy etc

Motor Vehicles Act empowers States to authorise long distance bus transport, which grant the permits to SRTUs only, even if private operators are equally capable

In Mithilesh Garg v. Union of India, Supreme Court ruled “that restricted licensing of motor vehicles led to concentration of business in few hands leading to a monopoly and hurting public interest….More operators means healthy competition and efficient transport system”.

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3. Third party access to ‘essential facilities’

Impediments: Control over essential facilities in network industries by dominant enterprises undermines competition by denying access to new entrants. Eg. Interconnection and infrastructure access in mobile telephonyResult: Consumer and producer welfare losses

- There are still no regulations on IUC - BSNL not providing access to private players on mobile telephony infrastructure

- Supreme Court in 2011 directed TRAI to evolve new set of revenue-sharing norms and IUC regulations

- Private operators providing access to each other

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4. Free and fair market process and “FTA with India”

Impediments: Incoherent and inconsistent laws and proceduresResult: Fragmented markets and losses in both producer and consumer welfare

- Agriculture Produce and Marketing Committee Act (state subject)

- Differential sales tax structure

- Committee of State Agriculture Ministers lead by Maharastrain 2011 recommended a “barrier free national market” including incentives for reforms in states- GST on its way, though contentious

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5. Notification and Public Justification of Deviations from Competition Principles

Impediments: Interventions in markets to achieve social, environmental, security or strategic objectives can be entirely appropriate. But should be justified and done transparentlyResult: Fig leaf of public interest could promote rent seeking

-Export restrictions on food and primary goods -Price control is prima facie against free market but…

- Ensures affordability and availability of essential commodities; manipulation possibility and political costs - Cotton on OGL following Bombay High Court’s directions - USO on telephone companies, airlines and banks

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6. Fair pricing and inclusionary behaviour

Impediments: IPR related issues and exclusionary conductResult: Exploitative monopolies raise costs unreasonably

Monsanto Mahyco’s exploitative behaviour results in high cost of Bt cotton seeds

- Actions under competition rules: MRTPA - For 2010 sowing season, states of AP, Maharashtra and

Gujarat fixed an unchanged maximum retail price for Bt cotton packets incorporating Monsanto Bollgard (BG-I and BG-II) technologies and farmers benefited from lower prices

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7. Effective Competition RulesImpediments: Weak MRTP Act, 1969, while new competition law still finding its feetResult: Anticompetitive practices continue to prevail thus sapping both consumer and business welfare

- Weak definitions, could only order cease and desist - Appeals went to Supreme Court

- CA, 2002 with clearer definitions, strong deterrent powers (fines) e.g. abuse of dominance cases, like DLF - Exclusive appellate body, then apex court

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8. Regulatory arrangements

Impediments: Conflicts between CCI and sector regulatorsResult: Jurisdictional gridlocks, forum shopping and turf wars

PNGRB v. CCI on aviation fuel cartel, SEBI vs. IRDA on ULIPs, FMC v. CERC on futures trading in electricity

Bombay High Court Judgment in FMC v. CERC case: “Futures contracts in electricity cannot be exclusively dealt with by any one of these regulators and courts cannot be the appropriate forum to resolve such matters”. It went on to say that such matters should not come to courts but be resolved by the Government amicably.

Planning Commission and Committee on NCP have proposed mandatory consultations requiring legislative action

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9. Institutional separation between policy making, operations and regulation

Impediments: Policy v. Operations v. RegulationResult: Lack of competitive neutrality and costly delays

- DoT/BSNL vs. TRAI: Government’s role as licenser, policy-maker and service provider in the telecom sector

- IGNOU Act,1985 provides for Distance Education Council to regulate the distance education sector, which is headed by VC of IGNOU

- CAG recommendation to make DGH independent of Ministry of Petroleum and Natural Gas- Arms length relationship: e.g. Railway Safety under Ministry of Civil Aviation

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10. International Obligations

• National policy needs to be framed in a way so as to respect international obligations, such as UN Conventions, TRIPs, WTO etc.

• Competition provisions in RTAs or RECs• Bilateral or regional competition agreements• Ensures a competitive environment for trade and

investment

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Relevant lessons

Australia: Launched competition reforms in 1995; regulatory impact analyses (RIA) showed 1,800 impediments, removed

most of them; achieved 5.5 percent growthUK: Mandatory Impact Analysis including competition

assessment of all policies and regulations launchedMexico and Korea: RIA models incorporated in laws through

formal provisions and amendmentsIndia: Over 10,000 impediments may exist, therefore RIA with competition audits should be done at Centre and every state

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Thank you for your kind attention

National Competition Policy for assisting our economic growth

psm@cuts.orgwww.cuts-international.org

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