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Busting
cartels for development
Published:
OECD Observer, May 28, 2008
By Pradeep S
Mehta
Promoting
effective competition in developing countries
means getting tougher on cartels in the OECD
area, and compensating customers
internationally. Through a new competition fund,
the OECD could play a lead role in making sure
poorer countries get a fairer deal.
Cartels are the
most egregious form of anti-competitive practice
in the world. Rival firms explicitly agree not
to compete with each other, to restrict output
and raise the price of their products. They harm
consumers in both developing and developed
countries because of their upward impact on
prices and their corresponding downward impact
on consumer welfare. They also afford firms the
luxury of being inefficient.
Little wonder
cartel busting is one of the most important
activities of competition authorities around the
world. However, while enforcement is quite
effective in many of the richer countries, it is
lacking in the developing world, because of
resource constraints and inexperience.
To be sure, the
OECD runs training workshops to assist
developing countries in building skills to deal
with cartels and other anti-competitive
practices. But innovative approaches are needed
to compensate consumers from developing
countries who fall victim to international
cartels, most of which are based in OECD
countries.
Cartels operate at
both national and international levels. They are
no small force. The imports of their products by
developing countries sold by sixteen
international cartels, which operated during the
1990s, amounted to US$81.1 billion or 6.7% of
these countries’ imports and 1.2% of their
national incomes in 1997. The resulting increase
in prices was about 20 to 40% of the market
price, which illustrates the immense adverse
impact they have had on economies. This means
overcharges in the range of $16 billion to $32
billion, which corresponds to between one third
to two thirds of the total development aid
received by developing countries in the late
1990s.
Across the globe,
cartel activities are being penalised. In recent
times, record fines of more than $500 million
have been levied by the UK and US competition
authorities on British Airways (BA) for
colluding with Virgin on transatlantic flights.
There are other airlines too, such as Korean
Airlines, which have been actioned against. BA
is also facing action under the EU laws and
other jurisdictions. Furthermore, the affected
consumers in the US have also filed for class
action damages against BA.
The fines levied
on the airlines will be credited to the
treasuries in the US and UK, and citizens who
have filed private action suits against the said
airlines will be compensated. Many consumers
from various countries in the developing world
also fly to the US, often via Heathrow airport,
yet neither these customers nor their
governments will be able to fine the airlines or
claim compensation!
Should a portion
of these fines not be used to strengthen
institutions in the developing world that help
in enforcing fair competition? The main reason
this does not happen is because there is no
effective global competition law and no agency
to enforce one.
In many cases
where the victims of cartels are numerous but
cannot be identified, it is common practice for
courts to award compensation to some public
institution or public interest group. Though
short of compensating the victims themselves,
this is widely seen to be an acceptable
alternative way of using the money–legally it is
referred to as a cy près award, a Latin
expression meaning “next best use”. In India,
when manufacturers won court cases against the
government for excess excise payments, the money
was not refunded to the manufacturers, but put
into a government-administered Consumer Welfare
Fund for investment in further consumer
education, advocacy and research. Similarly, in
Brazil the fines are put into a
government-administered fund and used
exclusively for consumer protection or
competition advocacy. In Peru, there is a system
whereby half the fines collected go to a
recognised consumer association, again to be
used for consumer education and advocacy.
In the US, fines
in antitrust cases are quite often put into a
trust account to be used only to pursue
education and research on competition policy
issues. In June 2007, the George Washington
University Law School received a cy près award
of $5.1 million from a class action antitrust
lawsuit to endow a centre on competition law.
The law school at Loyola University in Chicago
received an award to establish the Institute of
Consumer Antitrust in 1994.
These awards
relate to mainly domestic cases. However, there
are several international cases too, from which
no award has been made to parties outside the
domestic jurisdiction. One of the most notorious
international cartel cases related to bulk
vitamins. The cartel was penalised in all rich
country jurisdictions, but not in a single
developing country. In California, a Vitamin
Cases Settlement Fund was created from an out of
court settlement. It has already made grants
totalling $29 million and more are in the
pipeline.
All such awards
are given under national laws and remain
restricted to their boundaries. Action by
developing country authorities has been absent,
because most of them, including big countries
like India or China, do not have an effective
competition law. Smaller developing countries
too suffer for similar reasons.
There is thus a
strong case for strengthening the enforcement
and advocacy roles of competition institutions
in the poor world through funding from a part of
the fines paid. This could be done by creating
an international competition fund to be managed
by a credible intergovernmental organisation
such as the OECD. Such a fund should be
accessible to competition institutions and
non-government organisations in the developing
world to strengthen their competition regimes.
Secondly, to enable the creation of such a fund,
national laws in the rich world will need to be
amended to allow a transfer of a scientifically
determined amount from fines.
One has to
remember that the case is to assess the damage
of an international cartel on the developing
world and allocate funds accordingly. We are not
suggesting that fines be allocated on violations
of a pure domestic jurisdiction, though some
countries would not mind doing so. As we live in
a global village, rather than being
scientifically fussy about precise impacts of
such cartels on developing countries, it might
indeed be more cost effective simply to levy a
portion of fines in breaking up international
cartels by assuming a certain effect on poorer
countries. Such minima would help discourage
cartels from forming in the first place.
For the OECD,
competition is a natural fit. And at a time when
the organisation is expanding its contacts with
large developing countries such as China and
India, setting up a new competition fund could
help it build stronger relationships with
smaller, poorer victims of cartels too.
The author is
also the co-chair of the International Network
of Civil Society Organisations on Competition
and participates regularly in OECD competition
fora. He can be reached at
psm@cuts.org.
Udai Mehta and Sonia Gasparikova contributed to
this article.
This article can
also be viewed at:
http://www.oecdobserver.org
Competition policy and governance
Published:
Financial Express, May 18, 2008
By Pradeep S
Mehta
The possible link
between competition policy and good governance
is often a matter of debate in different forums.
However, in the Indian context, the debate seems
to be irrelevant. Not because the link is
non-existent or irrelevant, but implementation
of a Competition Policy is an essential
component of governance in India. According to
the Indian Constitution, the freedom to trade or
practice any occupation is a fundamental right.
As per Articles 301-305 of the Constitution,
only the Parliament or the State has the power
to impose restrictions on this right. Hence,
when barriers to entry are created by private
parties, or a business entity is thrown out of
business by predatory practices, or a business
entity is forced to close down due to a buyers
cartel, a fundamental right guaranteed by the
Constitution is violated.
The state does
maintain regulations on when it cannot allow a
business to operate, such as on environmental or
social grounds. But that too is in public
interest, so that the larger good of the
community over rides a personss fundamental
right to trade or practice any occupation. A
Competition Policy does reconcile to such
exceptions.
Reverting to the
linkage of competition with the Constitution,
the latter also provides for curbing
concentration of economic power, so that the
common good is not adversely affected. Since,
the core function of the government is to
protect the constitutional rights, an
appropriate mechanism to check such
anti-competitive practices becomes an essential
component of governance. Interestingly, it is
not only the present Indian Constitution, that
the country adopted after Independence,
recognises this right, but this was recognised
even in the Arthashastra, the first known
treatise on government and economy written by
Chanakya in the 3rd century BC. It emphasised
fair trade as one of the cornerstones of good
governance. There are of course several other
ways through which competition or competition
policy can promote good governance. If there are
few powerful companies rather than many
non-powerful companies, the ability of the
business to influence government policies and
decisions will be greater. The government in
such a situation is more likely to develop a
close nexus with the business leading to
corruption.
Often we hear
about money playing an important role in
elections. Obviously, the money generally comes
from business houses. It goes without saying,
when business houses have monopolistic power in
the market, they will be more inclined to share
their booty with the politicians and, with the
intent of maintaining the policy environment
that would help them to maintain their
monopolistic status. A company operating in a
competitive market will be reluctant to pay
money to the politicians. Lack of competition,
thus, may even undermine the democratic process
of the country
In many developing
countries, some public monopolies, especially in
the utilities sector were (and still are) both
service provider as well as regulator. This
often leads to corruption. One may recall that
in India, a few years ago, getting a telephone
connection or ensuring it works, often required
paying bribes. Competition has changed this
scenario. Alas, this still happens in getting an
electricity connection, where there is no
competition. Even now, it is not uncommon for a
postman to ask for bribes while delivering money
orders or even a registered letter. Regulatory
environment and process in such sectors can
reduce the scope of corruption even if the
monopoly status of the service provider remains
intact. A regulatory framework brings
accountability and transparency in the system
thus bringing down the level of corruption.
Through injection of competition, if possible,
is the best solution, as has been seen in
telecom in India.
Much of the
corruption in government happens in the area of
procurement. Though in India there is a system
to promote transparency and accountability in
the procurement process through a vigilance
establishment, government audit etc, it may not
be sufficient as bid rigging without involvement
of the relevant government officials may not
come under the existing system of scrutiny
However, bid
rigging and corruption are closely linked and
without an effective anti-bid-rigging system in
place, corruption in this area cannot be
checked. The present system in India is not
adequate to check bid rigging. By bringing in an
effective mechanism to tackle bid rigging with
adequate investigative capability, corruption
can also be reduced.
At another level,
businesses too collude through cartelisation,
and overcharge consumers or do not allow easy
availability or divide markets. That too is a
part of the competition-governance nexus. In
many cases, this cannot be done without the
acquiescence of the enforcement machinery. If it
is not explicit, it can be implicit. In
conclusion, the above points do buttress the
argument that competition can promote better
governance
The Author is
Secretary General, CUTS International, a leading
research, advocacy and networking group and can be
reached at psm@cuts.org
This article can
also be viewed at:
http://www.financialexpress.com
About
tender tendering
Published:
Financial Express, May 04, 2008
By Ramrao Mundhe
At a point when
the future of the country hinges on the
development of its infrastructure, unfair
bidding can only be an impediment in the way to
development.
Even while mere
bidding does not guarantee a fair outcome of
best quality and price, an unfair one can simply
be disastrous to the public service delivery
system at large.
The Planning
Commission, Government of India expects a
massive investment of $492 billion in the
infrastructure sector over the Eleventh Five
Year plan.
For this the
government is largely banking on support from
the private sector, as nearly a third of this
investment is likely to come through the private
sector with public private partnership (PPP)
mode as one of the preferred routes.
PPPs in our
country are still at a nascent stage compared to
those in other countries. In its efforts to keep
pace with the global scenario across sectors,
the government at all levels is procuring at a
rapid rate and entering into contracts with the
private sector.
However, while it
does so, the government's contractual
interactions with the private sector, and
resistance to adoption of modern procurement
tools due to vested interests, are becoming
increasingly complex.
The country is
desperate to see new capacities come up as fast
as possible and flaws in the bidding process is
the last thing one wants to witness. For that to
happen we need to evolve a sound mechanism in
our tendering process to accelerate an
infrastructure upgrade.
Favouritism,
double standards, illegal are often the terms
used by the losing bidder in the court of law.
For instance, Anil Ambani's RIL Airport
Development was crying foul over the Delhi and
Mumbai airport bidding. It argued that, as
originally the highest financial bidder for the
Delhi airport and the highest technical bidder
for the Mumbai airport modernisation programme,
the company should have been awarded at least
one of the projects. But the bids swung in
favour of the GMR and GVK groups.
Similarly, the Rs
20,000 crore Sasan ultra mega power project to
be set up through tariff-based competitive
bidding got delayed by nearly seven months as
the Lanco-Globeleq consortium, which initially
won the bid in December last year, was
disqualified later for violation of norms.
Another such project at Mundra in Gujarat has
been transferred recently, after delays, to the
Tata Power Company.
Considering the
magnitude and the number of upcoming projects in
the PPP mode in the infrastructure sector, the
bidding or tendering process assumes immense
significance. And for that tendering in the
public sector has to get more transparent so as
to minimise the scope of vested interests at
several levels, making the otherwise not so
complex decision - a complicated and tedious
procedure.
While the goal of
the government is to get the most cost-effective
services at a competitive price, most often the
objective is lost in government-bending rules to
favour one party over the other. More often than
not most tendering disputes relate to
non-pricing factors like quality, which is
usually determined at the prequalification
stage.
Ministerial
conferences have been emphasising on the timely
completion of power projects as a major reform
agenda. But reforms are for the consumption of
bureaucrats only. Distressingly, non-technical
managerial issues and not equipment supplies,
etc. are found to be responsible for holding
back power projects. But the government now must
ensure that such "mishaps" do not happen in
future.
While
incorporating reforms in PSUs tendering is not a
Herculean task - it requires will on the part of
the government. For one the process of
short-listing the competent bidder should rest
in the hands of professionals with expertise in
the particular sector or alternatively with
available cutting edge software.
According to
experts, the Government of India agencies and
all corporations should also consider using
Request for Proposal (RFP) evaluation software
like eRFP from a procurement management
standpoint. The eRFP software permits purchasing
organisations to track the progress of each
evaluator, capture the evaluator's comments for
use at review meetings, identify strengths and
weaknesses of each proposal, score proposals in
a more objective and less subjective manner, and
produce detailed reports that assist in the
decision-making process.
The use of
technology makes it simpler to identify the
"best qualified" firm or proposal objectively.
By ensuring the selection of the most qualified
firms, the agencies anticipate that it will
realise cost savings by having projects
completed on time and within budget.
From the
evaluator's point of view, the eRFP software
gives them the ability to enter their evaluation
online.
The software
guides each evaluator through an organised set
of on-line forms with pre-defined evaluation
criteria and standards. Evaluators have access
to the relevant sections of the RFP that was
issued for the project without having to revert
to a paper copy of the RFP. Using the software,
evaluators can record strengths, weaknesses,
deficiencies, and statements regarding their
rating of each evaluation criteria.
While UP and
Punjab governments have announced e-tendering
for greater transparency and accountability in
the bidding process, other states have yet to
come up with such steps to improve the bidding
process. We do have the technology - but it
needs stronger political will to implement?
The Author is
an Economist
with CUTS Centre for Competition, Investment and
Economic Regulation and
can be reached at
rm6@cuts.org
Desperate
measures!
Published:
The Economic Times, May 03, 2008
By Pradeep S
Mehta
The current
inflation scenario is a global phenomenon, being
spurred by a host of factors, such as escalating
commodity price
and buoyant
demand amidst slowdown in some countries.
Governments around the world are doing many
things to rein it in.
The measures
include using trade policies, fiscal actions and
what not. India too is struggling to tame the
beast, with looming elections guiding some of
the pronouncements and short-term actions. But
what is lacking is a long-term view of an
effective regulatory framework, which can curb
anti-competitive practices, hoarding and black
marketing.
The rise in prices has been observed across
almost all sectors. Increase in the prices of
food items, manufacturing goods, fuel items,
cement and steel are largely responsible for
the rise in the overall inflation rate at the
wholesale level.
These
factors, when pooled together, have contributed
around 75% of the total rise in the inflation
rate. And it is feared that the increase in
public expenditure announced in the last budget,
the Sixth Pay Commission fall outs, coupled with
rising
metal and crude oil prices, might take
inflation to new heights.
The inflationary situation is getting worse with
every week. The latest figure, shows inflation
in wholesale prices to be at a peak of 7.57%,
the highest in recent times, and likely to
travel north. This trend is certainly a blow to
the government’s efforts to control the
situation.
The rise in food prices, which have contributed
to the jump in inflation rate, is the most
spoken about because it affects the aam admi.
Adding fuel to fire,
traders will indulge in hoarding and black
marketing to make a quick buck. The central
government can hardly do anything about it,
because it is the state governments’
responsibility. If one examines the record of
action and convictions under the blackmarketing
law in states, the figures are dismal. What the
central government can do is to create an
innovative incentive scheme for states to crack
down on hoarders. Reward the states who perform
the best.
But, the multiplier industries such as fuel,
cement and steel are mainly under the direct
control of the central government and hence the
cause of much of the inflation. This is where
the government has to take both short-term and
long-term measures, bearing in mind that growth
is not adversely affected. Otherwise, we may end
up with another problem.
In the fuel
sector, are the factors beyond our control?
There is a ‘legitimate’ international cartel,
the Opec, which has pushed the price of the oil
barrel to over $100. The prices will continue
rising. It can only be countered by creating a
consumers cartel. This idea was advocated by the
former petroleum minister, Mani Shankar Aiyer
and reiterated by the
finance minister, P Chidambaram recently at
Singapore. The government has to stop uttering
homilies and start taking action.
Closer at home, the government has not been
successful in regulating the cement cartel in
spite of two recent actions by the MRTPC. But
these actions have had no effect on the
industry. To show its disappointment at the
tactics of cement industries to keep prices
high, the Tamil Nadu government went to the
extent of threatening cement manufactures by
proposing nationalisation of the cement
industry. Given the government’s inability to
run such industries at large, taking over the
cement industry would be as bad as cartelisation
itself.
Similarly, the
government, which is one of the major steel
players itself, has been threatening price
controls. Steel prices too are soaring, and as
the industry claims, it is on account of an
increase in input prices. In most cases, the
increase in prices of steel cannot be justified
by the increase in the prices of inputs.
Another problem
with the steel industry is price distortion
mainly due to local manufacturers trying to
match their prices to that of imported steel.
This has widely affected real estate,
construction and other related industries.
It will hardly be a surprise if the already
worried government decides to come up with some
stringent actions against steel manufactures.
Some relief is
being seen particularly in the construction
sector, but that will not be able to deal with
the industrial consumers which are crying hoarse
over the artificial price increases.
Ideally the government should be concentrating
on long-term measures to control inflation
coupled with sensible short-term measures.
Supply-side measures such as expansion of the
domestic commodity base by encouraging the
manufacturing industry to expand its capacity
over time, bringing reforms into the farm
sector.
Nevertheless, it is equally important to improve
competition and the economic regulatory
environment in the country.
One good thing is that the Competition
Commission of India (CCI) is in the process of
establishing itself after the new born 2002 Act
was amended in 2007. But the manner in which
things are progressing, it will take another 1-2
years for CCI to become operational in the real
sense. Its effectiveness will depend upon the
type of people who will man it, something which
this writer has often argued on this page in the
past.
In practice, the government is adopting
short-term measures, many of which are out of
desperation. Since elections are approaching, it
is not only an economic but also a political
challenge for the government. Many of the
short-term measures that the government is
following will affect the investment environment
in the country, e.g. restrictions on the exports
of many commodities which will hurt business and
farmers. The government has also decided to
reduce import duties on many commodities
including food items. This would hurt domestic
farmers at large.
Therefore, it is important that policymakers
should weigh the cost of controlling inflation
against that of offsetting economic growth and
then adopt an appropriate strategy.
Citizens will appreciate the government more if
it behaves sensibly in controlling inflation,
than in just concentrating on short-term
measures which may lead to a further
complication of a situation that is already
serious.
The Author is
Secretary General, CUTS International, a leading
research, advocacy and networking group and can be
reached at psm@cuts.org
This article can
also be viewed at:
http://economictimes.indiatimes.com |