Foster competition via law & policy

Published: Economic Times, December 23, 2006
By Pradeep S Mehta

Is India moving into unchartered territory, when the new Competition Commission comes into life, to be able to order a split in a large firm indulging in abuse of dominance (ET edit: Power to split monopolies, November 25)? Not exactly. When the erstwhile Monopolies and Restrictive Trade Practices Act, 1969 was amended in 1991, it has done away with powers to regulate mergers and combinations. But it had retained the powers to order a de-merger. That this provision has never been used is another story.

The edit also quotes the famous case of AT&T in the US, which was ordered to be split into seven companies (mini-Bells). But the wheel is now turning full circle. Some of them are remerging into AT&T and it will revert to its glorious days of being a big player in the telecom market of the US. Big is no longer bad; it is their abuse which is actionable by the competition authority. Further is network industries, deep pockets do matter and can result in lower prices and higher quality for consumer, other than technological advancements.

In India, the new Competition Act, 2002, does have provisions on de-mergers, but unscrambling an omelette is not easy. Therefore, what will be more important is for the new Commission to check mergers for danger signals. In fact, the new law is based on a behavioural approach rather then a structural approach of the MRTPA.

Restructuring, mergers & acquisitions, both domestic and overseas, appear to be the flavour of the day. Many are in favour of promoting big national champions who can thwart overseas competition and takeovers. Nothing wrong in that, but what is more important is that these large firms do not create entry barriers to new entrants or import competition (particularly in the goods sector).

That is why abuse of dominance is the leitmotif of the new law, rather than dominance itself. This will require quality resources at the new authority, whenever it is set up. The amendments in the law itself are pending in Parliament, and one doesn't know when the same will be resolved.

One problem with the new law is that intellectual property rights have not been covered adequately. This means that firms holding patent rights will be able to charge the price that they want. One classic example is that of Monsanto's exploitative pricing on Bt cotton seeds, which has been challenged in the MRTP Commission and is awaiting final disposal at the Supreme Court.

It was reported recently that the government has assured that parliamentary committee (which is examining the amendment Bill) that MNCs will not be able to gouge. IPRs have been dealt with under the European competition regulations as a case of abuse of dominance, while the European court of appeals has ruled that IPRs by themselves cannot be considered anti-competitive, but their abuse can certainly be stopped.

On the issue of public sector monopolies such as railway or electricity, the movement towards promoting competition is slow. For example, the railways has allowed private operators on the container traffic, only after some persuasion. They will need to be nudged also when the new freight corridors come up with private participation. Except in the US, rail services are mainly in the public sector. The experiment in Thacherite Britain in rail privatisation has turned sour.

IN ELECTRICITY, the new Electricity Act of 2003 does provide for competition wherever possible but mindset problems are hurdles. In any event, in natural monopolies, competition can only be mimicked rather than be done upfront. Secondly, there are other out-of-the-box solutions which continue to crop up to promote competition, but their movement will also take time because of status quoism. For example, if competition has to be promoted in distribution, then the network has to be owned by a company, who can then sell its services to any distributor to reach any customer, i.e., separation of wires from the supply. Currently, the distribution network belongs to the distribution-and-supply company and is not independent. In power generation and trading it is quite easy to promote competition, and it has started happening.

The edit raises the issue of monopoly abuse by the public sector. There are two issues involved here: first, when framing policy that leads to the creation of public sector monopoly, it should be guided by competition principles. Once a monopoly is there, any abuse should be checked by the competition authority. For illustration, assuming that the proposed amendment in the postal law is passed to give monopoly to the post office for letters below 300 gms, it should be scrutinized under the competition lens. If and when the monopoly is granted, then post office’s behaviour should be checked for any abuse by the competition authority. The competition law does not give any exemption or exception to post office or any such public sector body.

Most importantly, the government is now considering adopting a national competition policy, which will guide all branches of the government to ensure that competition principles are embedded in all policies. The policy will address systemic issues in governance where policy-induced anticompetitive outcomes happen, and which the competition law cannot address. (Infact, there are two committees which are drafting a policy, one at the Planning Commission and the other at the ministry of company affairs, with many members being common. Alas, there are turf problems between them, which has also impeded the progress of the policy statement.

The policy will outline at least six principles and also suggest a competition assessment of all laws and politics to recommend corrective measures. Australia has an active competition policy, which has adopted in consultation with their provincial governments. The model is quite suitable for India in many ways, including the fact that we have different parties in various states. What it also does is to offer competition payments to provincial governments to discard anti-competitive measures, somewhat on the lines of our VAT system. Ever since Australia adopted the competition policy, its economy has been booming.

If we in India wish to accelerate our growth rate to 10%, we need to not only speed up the establishment of the Competition Commission but also have a pro-active competition policy.

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Technical assistance on trade and regulatory policies

Published: The Green Cross Optimist, Autumn 2006 Issue
By Pradeep S Mehta

THE CHALLENGES

Most developing countries have embraced more open and outward-oriented trade policy regimes over the last couple of decades, either unilaterally or due to international commitments, and they continue to engage in further trade negotiations, both at the WTO and at bilateral and regional levels. Even if the negotiations at the WTO are stalled for the time being, they may resume soon. Moreover, even if WTO negotiations are not resumed, implementation and interpretations of the existing WTO rules will always remain a complex issue for most developing countries. It is well recognized that trade negotiations do not necessarily follow economic logic to promote win-win outcomes but involve power equations. Thus, even after substantial trade liberalization, the issues related to trade policy, trade rules and trade negotiations remain as important as ever before.

The global market is more open today. However, many developing countries are not able to take advantage of that due to supply-side constraints prevailing in these countries. These constraints involve weakness of physical infrastructure as well as regulatory and supporting institutions. In fact, weakness of these institutions can be at least partly responsible for weak physical infrastructure. Recognizing this, strategies to reduce administrative and regulatory barriers are being developed in many countries, including the use of transparency measures, regulatory reforms and other efficiency reforms. Many governments are developing new initiatives to reduce the compliance costs of achieving pubic policies, which, when properly implemented, can reduce regulatory costs and improve policy outcomes.

However, this is just one side of the story. Regulatory reforms do not only mean the removal or rationalization of existing regulatory measures. In many countries, particularly developing ones, there are not many of the regulatory measures that are essential to promoting a better investment climate. Obviously, they need to bring in many new regulations.

However, the moot question, particularly in the context of developing

countries, is: Are the set of regulations and their associated institutional arrangements the most appropriate for them, or are they simply aligning their set of regulations and institutions to those of the developed world disregarding their needs based on size, structure, stage of development and political economy situations? One common refrain is that they should be given adequate technical assistance and capacity building support. The same suggestion is also given to augment the negotiating capacities of developing countries.

These countries are often creating too many new institutions simultaneously, even though their resources are very limited and government capacities are often weak. Removal of regulations also create certain gaps that need to be taken care of immediately, which is not so easy. Indeed, some deregulations involve jumping from the frying pan into fire. Moreover, such new institutions are often unable to sort out the problem of overlap of jurisdictions and conflicts among themselves or with existing institutions, creating uncertainty in the business environment.

In many countries, there is little understanding of how to manage the reforms they are undertaking. Reform management can be rendered difficult because many investment climate reforms are politically contentious: they often favor organized over unorganized groups and the benefits tend to accrue only in the long term, while costs are felt up front. They face technical as well as political challenges.

THE CASE FOR TRILATERAL COOPERATION

The issue that assumes importance is whether the technical assistance programs can be suitably designed to tackle these challenges. The technical assistance offered needs to be appropriate for the specific needs of developing countries. It also needs to be cost effective, considering the resource constraints of developing countries. Trilateral cooperation can be an appropriate approach in such situations. Under trilateral cooperation aid from developed countries is channeled through institutions in third countri and applied to technical assistance projects in developing countries.

Trilateral cooperation takes a broad-based approach that promotes partnership with various actors, which include traditional donors, multilateral agencies, private sector, academic institutions and civil society organizations. Hence, trilateral cooperation does not necessarily mean involvement of three partners only. Nevertheless, it is a kind of partnership where three groups of actors are involved: donors, technical assistance providers and the recipients.

The kind of trilateral cooperation discussed here should not be confused with many other cooperation initiatives that involve three parties. For example, India, Brazil and South Africa recently launched a cooperation initiative known as IBSA. However, it is essentially South-South cooperation rather than this variety of trilateral cooperation.

Traditionally, technical assistance has been provided through bilateral or multilateral channels. Bilateral assistance programs have frequently been criticized for the conditional nature by which aid is tied to the donor country’s provision of goods and services. The reasoning was that this would allow donor countries to build greater support for development assistance. Nevertheless, the nature and extent of tied aid has caused concerns in several quarters. Tied purchases of goods and services usually led to recipient countries paying higher prices. On average, a developing country expert costs one-third the cost of experts at prevailing international rates. Trilateral cooperation can thus be a cost-effective way of promoting development cooperation.

The problem can be even more complex in the provisioning of technical assistance and consulting services as concerns have often been raised that the type of technical assistance or services offered may not be appropriate to the recipient country’s needs. Moreover, having a number of donor countries coming to a country, each with their own type of technical expertise, can create problems for the recipient country due to confusion and duplication. The problem of a set of incoherent policies becomes onerous for many recipients as a number of donors come to a country and experiment with their own perspectives and views. By de-linking aid from the technical assistance process through trilateral cooperation, such problems can be substantially reduced.

Another issue related to tied aid is that when the donors tie up with local (donor’s home country) technical assistance providers, there is a possibility that monitoring by the donors may get relaxed as they are likely to develop alliances.

A third country provider of technical assistance is far less likely to develop such a relationship with a donor and hence monitoring is likely to be more rigorous. Hence, trilateralization may bring more accountability in the implementation of technical assistance programs. With the involvement of third country technical assistance provider, it is likely that more information will be made public thereby increasing overall transparency in aid administration and creating a positive impact on global governance. Because, with a transparent aid administration system, the impact of politics on aid would be far less.It is now well recognized that importing technologies, policies or legal practices from developed countries may not be appropriate for most developing countries. It may be better for a country to draw these from other developing countries that are already at a more advanced stage than them. Though the importance of “intermediate technology” is well documented, the issue of “intermediate policy” has hardly been recognized in development literature. Ignoring this has already cost many developing countries, especially in Sub-Saharan Africa, dearly as they implemented the Washington Consensus agenda. Trilateral cooperation can be an effective way of bringing “intermediate technology” and “intermediate policy” to developing countries while taking the help of developed countries in meeting their financial resource needs.

Many developing countries are relatively more advanced with significant experience, particularly in the area of socio-economic development. Many successful development models and tools have been developed. As a matter of fact such innovative development models and tools are available not only in more advanced developing countries but also in some least developed countries. Such expertise and experience can be usefully utilized in other developing countries through trilateral cooperation.

Although technology is by and large considered to be value-neutral, the same cannot be said about policies and legal frameworks. Importing these while ignoring the social and cultural values behind them can be counter-productive for a recipient country. Technical assistance providers based in countries with similar value systems would be in a better position to deal with such issues.

Similar problems are found even when the technical assistance is provided through multilateral agencies as they tend to source their expertise mostly from developed countries. However, now even these agencies are recognizing the usefulness of trilateral cooperation. In 1999, the High-level Committee on the Review of Technical Cooperation among Developing Countries (TCDC), resolved that South-South cooperation should be viewed as a complement and not a substitute for North-South cooperation. This effectively means that the committee was of the view that a North-South-South cooperation was needed. Thus, the importance of trilateral cooperation was recognized.

The Special TCDC Unit of UNDP is engaged in promoting South-South cooperation programs. However, in reality, it is mainly promoting trilateral cooperation. Trilateral cooperation takes a broad-based approach that promotes TCDC partnership with various actors, including traditional donors, multilateral agencies, private sector, academic institutions and civil society organizations.

At another level, the Development Assistance Committee (DAC) of the OECD and the UNDP jointly organized the Forum on Partnership for More Effective Development Co-operation in Paris on 1-2 February 2005. The meeting was held to promote greater dialogue and mutual understanding among the world’s principal providers of development cooperation. The Forum brought together for the first time the members of the OCED DAC with a wide range of non-OECD governments and institutions involved in development cooperation and South-South initiatives. The Forum participants acknowledged the important contribution of South-South cooperation, particularly through the sharing of experience and know-how, to furthering the development of poor countries. Forum participants agreed that South-South and triangular cooperation can improve aid efficiency and effectiveness by emphasizing ownership and inclusive partnerships. The latest multilateral agency to appreciate the usefulness of trilateral cooperation is the WTO. The WTO Task Force on Aid for Trade recommended that the valuable technical expertise of the South could be used to implement projects through triangular schemes of cooperation.

THE CUTS EXPERIENCE

As already mentioned before, development cooperation has traditionally been bilateral in nature even though the donors very often use the services of private agencies or non-governmental organizations in their home countries. This has led to the emergence of several large NGOs mainly based in developed countries, CARE, Oxfam and ActionAid, to name a few. As some of them could attract support from donor governments, a form of trilateral cooperation started involving rich country donors, developed country technical assistance providers and developing country recipients.

This form of cooperation got extended when some developed country donors started involving agencies and experts from developing countries. This was done through both involvement of other developing country governments or that of private or non-governmental organizations. Third World Network, CUTS, AERC (African Economic Research Consortium) are just some of the developing country based NGOs engaged in such activities.

CUTS International, the India-based NGO of which I am Secretary General, is engaged in capacity building on trade, competition, consumer protection and investment issues in several developing countries under the trilateral cooperation framework. Here are a few examples.

CUTS made a quantum leap in this regard when it launched its 7Up Project that involved research, advocacy and capacity building on competition regimes in seven developing countries under assistance from the Department for International Development (DFID) of the UK Government. Both UNCTAD and the World Bank supported the project. The countries covered under the project were: India, Kenya, Pakistan, South Africa, Sri Lanka, Tanzania and Zambia.

Similarly, again with DFID’s support, CUTS launched its “Investment for Development (IFD)” project in seven countries. The objective of the project was to catalyze a congenial environment for promoting investment and also to make investment development-friendly. UNCTAD was our strategic partner in implementing the project. The countries covered under the project were: Bangladesh, Brazil, Hungary, India, South Africa, Tanzania and Zambia.

CUTS also implemented a capacity building project on competition policy issues in select countries of South and South-East Asia with support from the State Secretariat for Economic Affairs (SECO) of Switzerland, and DFID, UK. A similar project in select countries of Eastern and Southern Africa has also been launched in a trilateral cooperation mode with assistance from the Norwegian Agency for Development Cooperation (NORAD) and DFID.

CUTS is further engaged in capacity building on trade policy issues under its program: Fostering Equity and Accountability in the Trading System (FEATS) in sub-Saharan African countries with support from the Dutch foundation Hivos and the Ford Foundation in the U.S.. Earlier, CUTS had implemented a similar project in South Asian countries in a trilateral cooperation mode, with the support of Friedrich Ebert Stiftung and IDRC.

CUTS is currently implementing a unique project on trade and its linkages with environmental and social issues under which it is engaged in capacity building of developed country stakeholders on Southern concerns. The project is supported by DFID, UK, the Swedish International Development Cooperation Agency (Sida) and Ford Foundation.

CONCLUSION

Designing appropriate technical assistance programs on trade and regulatory issues for developing countries is a big challenge today. Promotion of trilateral cooperation can be a great help by drastically increasing the efficiency and effectiveness of the assistance. However, the important stakeholders, namely the donors, the recipients and civil society need to appreciate the related issues dispassionately. Donor governments need to show genuine commitment to development and poverty reduction rather than furthering their own political interests. The trilaterlization of aid may make it easier to do this as this may de-link their assistance programs from their national politics.

Recipient governments also need to appreciate the importance of trilateral cooperation. Granted that very often they may not be in a position to get an aid program of their liking, the least that they can do is to ensure transparency in all development programs. Civil society organizations need to be on the alert regarding development cooperation programs and their impacts. Through appropriate advocacy efforts they can further promote trilateral cooperation programs and their associated benefits, namely, more efficient, effective and accountable development programs, better policy framework in recipient countries and a better global governance system.

This article can also be viewed at URL:
http://www.optimistmag.org/gb/0014/one.php?id=1838