Searching new laws to promote competition
 

Published: The Economic Times, October 20, 2007
 

By Pradeep S Mehta

Recently, Microsoft lost a judicial appeal against the European Commission’s charge of abuse of dominance in bundling its operating software with other add-ons, such as media player.

There are other suppliers, but they get shut out by Microsoft’s exclusionary behaviour. This reduces customer choice and increases costs.

So after a nine-year battle, Microsoft has to pay a record fine of e497 million, as hopes of them getting a stay on that at the apex European court is rather dim.

Earlier, the US and UK competition authorities slapped British Airways with record fines of over half a billion dollars for running a trans-Atlantic cartel on passenger and goods fares in partnership with its arch rival Virgin. What do these two incidents have to do with India? Quite a lot!

Firstly, whatever happens in Europe or in the US has a spillover effect on markets and consumers all over the world, including India, where these two businesses operate. In India too they indulge in the same type of anti-competitive practice.

The Monopolies & Restrictive Trade Practices Commission (MRTPC) has tried to deal with Microsoft’s exclusionary behaviour in India, and against several cartels, but did not succeed as the MRTP Act is quite weak.

Therefore, after setting in motion the process of adopting a new and modern Competition Act in 1999, we adopted a law in 2002. In 2007, Parliament passed a revised version of the Act. It has taken eight years to do so. Despite the delay, the economy continued to grow at 8-9%.

Had thee revised law been in operation, the growth rate would have been higher by at least 2-3%. An effective competition law, along with other market regulatory laws, ensures that markets are orderly and economic democracy prevails.

Cartels and abuse of dominance in the goods and services sectors will be the two major areas for the new competition authority to engage in, with determination and skills.

How do we get these attributes, and where do we look for them? The 2002 Act was put on hold by the Supreme Court, because the person being appointed as chairman of the Competition Commission was not a judge.

The apex court reminded the government that it must respect the doctrine of separation of powers between the judiciary and the executive.

So, the government agreed to a trade-off with the court, by amending the Act to create two bodies: a regulatory commission headed by an expert, and an appellate tribunal headed by a judge. We hope to see a functioning competition authority soon.

It is not sufficient to have the law, which is only as good as the people who implement it. If we want an effective competition regime, we need to appoint capable persons as chairmen and members of the two new authorities.

A new selection committee has been spelt out under the law to hunt for such persons. It will comprise a Supreme Court judge as its head and the secretaries in the ministries of corporate affairs and law & justice, thus reducing the manoeuvring capability of retirees to smuggle themselves in. Procedures for selection have not been spelt out, but the committee can advertise and carry out due diligence in the appointments to attract the best persons in the country to apply.

There is a clear political will to implement the new law, which is better than what had existed for the MRTPA. This was evident from the very small budget that it had got to operate. That should be the next item on the agenda which needs to be done concomitantly. The new competition authorities will need to hire a large number of investigative and prosecutorial staff and that will require a large budget.

Assuming a gradual implementation of the new law, the annual outlay of the new authority should be at least 0.010% of the total plan expenditure of the government or Rs 20.51 crore in 2007-08.

In a cross-country study that we did in 2000-02, it was found that the MRTPC’s budget was 0.0009% of the total government plan expenditure, while the USA with its two competition authorities (Federal Trade Commission and the Antitrust Division of the Justice Department) jointly had a budget outlay of slightly over 0.01386%. The competition authorities require a substantial budget to perform their functions effectively.

Of course, there will be some tension between the competition authority and sector regulators, and even forum shopping, due to the overlapping nature of their jurisdiction in competition matters in the regulated sectors.

To remedy this, the competition agency can advocate on specific cases before the sector regulators and also build up a consensus on some type of ex ante resolution of conflicts. There are other ways to avoid friction, such as forming a co-ordinating body that can decide on the authority best suited to handle a particular case.

There will be problems in implementation, due to legal infirmities and attitudes, vis-a-vis independence, appointments and removal of commission members. Such problems will have to be documented and brought to the attention of the people and policymakers, so that the Competition Act, 2007 is amended to enable the independence of the commission.

The competition agency will need to be proactive in its advocacy role, by generating awareness among all stakeholders, imparting training to build capacity in its staff and other actors, providing political education to policy makers, and building alliances with stakeholders in India and outside.

These activities will have to be carried out scientifically, and some of it is already being performed quite well. These activities can be spread out extensively through alliances with educational and research institutions, media, civil society groups and business chambers. Another important advocacy function covers policy advice to government, whenever asked. However, even when not asked, it can be done through media effectively.

Finally, the most important role of the new competition agency will be enforcement. It will need to deal with myriad anti-competitive practices, such as the formation of cartels and abuse of dominance pointed out in the beginning. To begin with the agency should tackle winnable cases to build up public acceptance and raise the morale of its staff. It should then move ahead slowly and steadily, as in a marathon.

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/

Airline cartel fines could be better used

Published: Financial Times, October 16, 2007

By Pradeep S Mehta

Record fines of more than $500m have been levied on British Airways and Korean Air Lines by the UK and US competition authorities for their part in a web of global conspiracies in airline travel.

These fines will accrue to the British and American treasuries. In the case of the US, private action against the airlines is bound to be taken to seek compensation for American travellers.

The victims of these cartels are from all over the world, rather than residents of the US and the UK alone. The question arises as to who will defend the claims of non-residents and whether they will be compensated at all. The problem is that in the developing world, competition regimes are either weak or non-existent. For their consumers the hope of recovering compensation by local action is rather dim.

If damages suits in the US are successful, compensation will be paid to its citizens only. It would appear unfair to compensate only one group of passengers and indeed paying damages to individual customers may be cumbersome. Hence a popular opinion is that such damages should be used to promote education about competition in developing countries. Greater awareness would speed up the legislative process in such countries and strengthen their competition culture.

Competition culture and enforcement in rich countries is fairly advanced. Under the provisions of the UK Competition Act 1998, which grants amnesty to whistle-blowers, Virgin Atlantic squealed on British Airways. BA admitted to the Office of Fair Trading that it had fixed rates for air-cargo shipments between March 2002 and February 2006, and co-ordinated fuel surcharges with Virgin between August 2004 and January 2006. During that period, the surcharges rose from £5 to £60 per ticket for BA and Virgin Atlantic long-haul flights. These cartels are also facing action in Australia, South Africa and other countries with developed competition regimes.

A suggestion to create a fund out of such fines to assist the developing world was proposed by the Czech Republic at the annual United Nations Conference on Trade and Development intergovernmental group of experts meeting on competition policy and law in Geneva in July. The Czech proposal stirred up quite a storm. In the debate, the delegate from the US Department of Justice suggested that the Czechs should start such a scheme in their own country and then advocate it to others; in other words, "put your money where your mouth is".

In fact, in the US, quite often fines in antitrust cases brought about through private class actions are put into a trust account to pursue education and research on competition law issues. From time to time the courts authorise distribution of unclaimed funds from the settlement of class action cases to charitable or educational entities closely related to the nature of the case under a legal doctrine called cy pres , a legal tag meaning "next best use".

In June, the George Washington University Law School received a cy pres award of $5.1m to endow a centre for competition law. The award resulted from a successful class-action antitrust lawsuit. The centre's mission would include sponsoring and conducting research into competition law and its private enforcement, organising conferences for judges, executive officials, academics and lawyers, serving as a resource for those seeking to promote private enforcement in competition law in the US and abroad, and enhancing the skills of current and future private practitioners of competition law.

The law school at Loyola University in Chicago received an award to establish the Institute of Consumer Antitrust in 1994. The Vitamin Cases Consumer Settlement Fund (California), created out of a settlement with manufacturers in the case of a bulk vitamins cartel, has already made 52 grants totalling more than $29m for a wide range of projects involving food delivery to the needy, antitrust enforcement and public policy, nutritional and health outreach, food quality, professional education and training and nutrition research. More is in the pipeline.

The vitamins case was one of the 16 egregious international cartels that operated during the 1990s. Others included electrical equipment, graphite electrodes and food additives. Developing countries' imports of goods from the cartels in 1997 amounted to $81.1bn, or 6.7 per cent of their imports. With an estimated increase in price of between 20 and 40 per cent, one can calculate a range of estimates for the overcharges paid by developing countries in 1997, if all 16 of these cartels were operating during that year. These overcharges are in the range of $16bn to $32bn, equivalent to between a third and two-thirds of the total annual multilateral and bilateral aid received by developing countries in the late 1990s.

Thus, the case for strengthening the enforcement and advocacy activities of competition authorities in the developing world vis-à-vis damages from legal action against cartels is strong. This can be done through the creation of an International Competition Trust Fund, to be managed by a credible inter-government organisation such as the World Bank. Such a fund should be accessible to any developing country's government and/or non-profit institution to promote competition culture through generation of awareness and capacity-building. Such a project would make eminent sense and promote the agenda for competition law and -policy worldwide.

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.ft.com/

Once opportunities arise
 

Published: The Financial Express, October 03, 2007

By Pradeep S Mehta

At a recent seminar in Kathmandu on trade in South Asia, the issue of regional trade cooperation figured prominently. The meeting resolved to focus on supply-side issues, which include a rationalisation of standards and implementation of an effective competition policy and law. It is no secret that the cause of regional trade is mortgaged to Indo-Pak relations. Alas, recent incidents of two-way non-tariff trade barriers, though unconnected, only appear to stall the story. One was Pakistan’s blocking of sugar exports from India, while India blocked cement imports from Pakistan. And we wish to take the volume of trade from $1.76 billion per annum to $10 billion by 2010. Both those barriers were erected in the name of standards, but clearly, there existed vested interests behind them in the form of local producer cartels: sugar in Pakistan and cement in India. And neither country has an effective competition law.

Now, India and Pakistan are signatories to the WTO’s SPS and TBT agreements, and if these consignments are not in conformity with the stated standards, then officials have a right to hold them up. But if the same sugar is good for Indians and cement for Pakistanis, why the brouhaha?

On the other hand, both India and Pakistan argue at the WTO that there should be mutual recognition of standards and/or equivalence. If they cannot do so at the regional level, what right do they have to do so at the WTO in Geneva? Whenever either party opens its mouth in Geneva at the negotiating table, someone points this out.

Thus, the way ahead is to start identifying minimum standards and safeguards which should have mutual recognition, taking into account existing standards in the respective countries, and possibly accept them as regional standards for trade within the region. Second, they should also adopt good competition laws to foster regional cooperation under the Safta framework. Once this is done, not only Pakistan and India, but the whole developing world can demand the same at Geneva.

That traders are sometimes a little too clever is a worldwide observation. One example from Zambia beats all logic. Recently, the Zambian government confiscated sugar imports from Zimbabwe on the pretext that imported sugar is not fortified with vitamin A. No prizes for guessing who was behind this illogical standard; Zambia has just one rent-seeking sugar factory that is making a mountain out of a sugar heap under the pretence that fortified sugar is the health equivalent of iodised salt. The sobering truth is that vitamin A can easily be obtained via other food sources in a balanced diet.

Trade theory amply demonstrates that imports are an effective competition policy tool to reduce the local market dominance of domestic interest groups, a circumstance that delivers suboptimal outcomes which go against the interests of the consumer and economy at large. Domestic trade policy must never be held hostage to vested interests, and a perspective of the larger national welfare must never be lost in devising trade and other policy instruments and practices.

Engaging in mutual trade brings benefits to all. This is not rocket science, and even the common man understands this. Pointers in this direction were offered by a recent opinion poll conducted simultaneously in India and Pakistan by The Indian Express in alliance with Dawn News and CNN-IBN, as also by an NDTV 24x7 debate held in Karachi and telecast on June 18, 2007 (“Indo-Pak: Generation Gap”): people on both sides of the border feel that friendship and cooperation (read trade) are a prerequisite for improving relations between the two neighbours.

There are examples across the globe of trade playing a positive role in conflict resolution between neighbouring countries. Even regional trade agreements (RTAs) that expand trade flows, as some studies indicate, appear to have a substantial dampening impact on conflict. Mansfield & Pevehouse (2000) found that the outbreak likelihood of a militarised inter-state dispute declines by around 50% if both belong to the same regional trade agreement. As an RTA, Safta can provide institutions and a forum for the bargaining and negotiations needed to address tensions before they erupt in conflict. The EU, Asean and Mercosur are often cited as venues for improved political-military relations. In Africa, RTAs that address the management of cross-border resource issues are more effective in reducing military conflict than other RTAs.

There are examples galore of conflicts being contained by trade agreements. China imposed a ban in 2003 on Japanese rice by putting it on a list of agricultural imports deemed at risk of insect infection. But now, an agreement (“rice diplomacy”) has been signed between Japan, the world’s most expensive rice producer, and China, the world’s largest rice consumer, and this has rekindled the relationship. In 1979, Brazil signed an agreement with Argentina and Paraguay, thereby ending their dispute over the use of hydroelectric resources of the river Parana (“water diplomacy”). These are only some examples of conflict resolution through trade and economic cooperation.

So, let’s rationalise trade policy. And let’s face down trade barriers. The rest will follow once other opportunities arise for mutual assurance and lasting peace.

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