Competition in Infrastructure Sector by Vinod Dhall , Former Member & actg Chairman, Competition Commission of Ind

1. Competition in Infrastructure Sectorby Vinod Dhall,Former Member & actg Chairman, Competition Commission of India at Forum of Indian Regulators (FOIR), Chennai, 31January, 2009

2. Organisation of the Presentation • Competition- why and how? • Evolution of Competition Policy and Law in India • Competition in Infrastructure • Competition Law and Infrastructure • Competition Act, 2002 • Suggestions

3. Competition- why and how? What is Competition (in economic field)? • Striving for the custom and business of people in the market place (Prof Whish) • The situation in which firms or sellers independently strive for buyers’ patronage in order to achieve a particular business objective (World Bank-OECD)

4. Competition- why and how? Benefits of competition (economic theory): • Promotes efficiency: productive, allocative • Maximises ‘consumer welfare’; more choice, better prices • Incentivises innovation Competition is not an end in itself, but a means to achieve societal goals

5. Competition- why and how? Empirical evidence of benefits: • Australia: average household income up by A$ 7,000 p.a. (OECD/ APC study); gain 5.5% of GDP(Paul Crampton, OECD-IADB) • New Zealand/UK: added 2.5% to employment rate over 1978-1998(OECD) • USA: fall in real prices following de-regulation (OECD): raised productivity by 4% (Paul London) India: benefits visible since reforms (auto, white goods, consumer electronics, milk, etc)

6. Competition- why and how? Competition framework: • Competition policy: set of government and regulatory policies / laws that facilitate competition; need for legal framework • Competition law: to prohibit anti-competitive practices / activities

7. Competition- why and how? Competition Policy permeates various areas e.g.: • Industrial policy • Trade policy • Financial sector policies (interest rate, forex allocation, entry of banks, etc) • Privatisation (dis-investment) • State aid: subsidies, guarantees, tax incentives • Policy towards to SOEs (PSUs)

8. Competition- why and how? Legal framework includes laws for: • Property rights • Contracts • Firm structures (company law) • Insolvency (bankruptcy, BIFR) • Capital markets ( SEBI, SEs) • IPRs • Consumer protection • Competition law

9. Evolution of Competition Policy and Law in India Competition oriented policy reforms starting 1991: • Industrial policy-licensing, controls, MRTPAct • Trade policy- physical barriers,tarrifs • Financial sector- interest rate, forex allocation, entry of banks, capital markets • Dis-investment • Patronage to PSUs • Reduction in SSI reservations

10. Evolution of Comp Policy and Law in India Some reform deficit areas: • Coal – Coal India ‘monopoly’ • Labour – exit barrier • FI restrictions e.g. retail, civil aviation • Insolvency law – litigation in courts • Professions – restrictive rules e.g. medical, legal, accountants • Infrastructure – rail, post, urban transport

11. Evolution of Comp Policy and Law in India Evolution of competition law: • MRTP Act, 1969 • Amendment of MRTPAct in 1984 • Amendment of MRTPAct in 1991 (economic reforms) • FM’s statement 1998; Raghavan Committee report 2000 • Competition Bill,2001

12. Evolution of Comp Policy and Law in India Evolution of competition law: • Competition Act, 2002 in Jan03 • Competition Commission of India established Oct03 • Challenge in Supreme Court; judgment in Jan05 • Competition (Amendment) Act,2007 in Sep07

13. Evolution of Comp Policy and Law in India Highlights of Competition Act, 2003 (as amended): • Prohibits: • Anti-competitive agreements • Abuse of dominance • Regulates mergers (mandatory notification) • Mandates competition advocacy

14. Evolution of Competition Policy and Law in India Activities of Commission: • Competition advocacy (post, shipping,telecom) • Groundwork for: • Enforcement ( draft Regulations, internal guidelines, processes) • Institution building ( training, organisational structure) Actual enforcement cannot start till government notifies enforcement provisions. India only major economy without functioning Competition Commission !

15. Competition and Infrastructure • Competition principles apply across all sectors • However, certain features distinguish infrastructure sectors, e.g.: • Natural monopoly • Network effects • Switching costs • Heavy capital costs

16. Competition and Infrastructure Some infrastructure sectors also have individual characteristics that affect competition, e.g in electricity: • Cannot be stored • Relatively inelastic demand • Demand fluctuations - within day and inter-seasonal

17. Competition and Infrastructure Measures that promote competition: • Vertical separation (unbundling) of ‘natural monopoly’ from contestable parts • Horizontal separation to encourage inter se competition and ‘yardstick competition’ • Open access (essential facility doctrine) • Remove entry barriers; facilitate entry • Mitigate switching costs (number portability, bank account portability ?)

18. Competition and Infrastructure • Competition ‘for-the-market’ vis-à-vis competition ‘in-the-market’ (competitive bidding): • Maximise number of bidders, consistent with qualification parameters • Level playing field for new bidders • Concession agreement to avoid ‘monopoly’ strengthening provisions • Competition oriented Regulation

19. Competition law and Infrastructure • Competition law generally has overarching jurisdiction in all sectors, though picture varies across countries/ industries-Australia, Mexico, USA • Examples of application of competition law: • Merger: EC prohibited (2004) proposed acquisition of GDP by EDP and ENI • Merger: EC allowed (2000) merger of German electricity companies VEBA/VIAG subject to commitments to divest holdings and drop T-component transmission charges

20. Competition law and Infrastructure • AOD Divestiture: UK Competition Commission’s interim order (2008) requiring BAA to divest Gatwick and Stanstead airports in London, and abide by behavioural remedies. • AOD: Energy company ENI fined EUR 290 mn for abusing its dominant position in gas transport through its subsidiary TTPC; also ordered it to allow transport of 6.5 bn c.m. per year and guarantee time bound completion of gas pipe expansion. • AOD: EC has objected (Dec08) to French state-controlled power giant EDF’s long term contracts for sale of electricity to customers • AOD: Aeroporto de Roma required to provide non-discriminatory access to rival caterers

21. Competition law and Infrastructure • Cartel: Korea FTC imposed huge penalty (2003) on price cartel between telecom companies KT and Hanaro Telecom • Cartel: French antitrust authorities slapped record fines amounting to Euro 534m on mobile operators Orange, SFR and Bouygues for illegally sharing sales data and conspiring to undermine competition

22. Competition Act 2002 Enforcement not commenced, but live concerns exist in markets: • Cartels alleged in shipping, steel, cement, Copper-T, explosives, civil aviation, brake linings • Abuse of Dominance alleged in coal, telecom, post, airports • M & As proceeding without prior review: civil aviation, cement, alcoholic beverages

23. Competition Act 2002 • Applies to all sectors, alongside sector regulation where existing • Especially relevant provisions: AOD and Mergers • Sec 21 and Sec 21A, CA02 provide for mutual consultation between Commission and sector Regulator • Consultation to be at two levels: • Individual cases • Broader policy level

24. Some suggestions • Needed a National Competition Policy: competition impact assessment, competition neutrality, essential facility doctrine, separation of policy/operation/regulation, incentives for reform at state level, etc • Sector Regulation’s primary objective should include a duty to promote effective competition, and in assessing the interests of consumers, the Regulator should have due regard to the views of enterprises • Immediate commencement of enforcement of Competition Act • Mandate close co-operation between Sector Regulators and Competition Commission of India

25. Thank you Vinod Dhall, DHALL LAW CHAMBERS, Dewan Manohar House, B-88, Sector 51, NOIDA (U.P.), India – 201301 Phones: +91-(0)-120-4547550 / 1,Telefax: +91-(0)-120-4547550, Mobile: +91-9811322324 Email: dhall.vinod1@gmail.com