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.

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

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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

This article can also be viewed at: http://epaper.financialexpress.com

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.