Ensure PPP concessions don't mar competition
Infrastructure deficit presents, perhaps, the most critical constraint in achieving miracle growth rates. Financial resources and technical expertise in management and execution constitute the major gaps.
By Vinod Dhall, |
Infrastructure deficit presents, perhaps, the most critical constraint in achieving miracle growth rates. Financial resources and technical expertise in management and execution constitute the major gaps. Investment required in infrastructure in India until the end of the XI Plan has been estimated at over $350 billion.
Government will not be in a position to find resources on such a large scale. The comparative efficiencies of the government and private sector to manage infrastructure services also differ. This has led to the greater recognition of the importance of Public-Private Partnership (PPP) in infrastructure development.
In the past, infrastructure services were under the government control and were operating without any competition from the public or the private sector. This has added to the perception that competition is infeasible in this sector. However, many infrastructure services, treated as natural monopolies, are no longer so. Unbundling of generation, transmission and distribution in the electricity sector, for example, has made competition possible.
There are other areas like telecom, where there is an emerging view that competition policy and law can be applied in India. When it is the judgment of decisionmakers that competition is infeasible, as in a natural monopoly, the next best option available is to allocate the right to supply a specified market, known as a concession, through a competitive process. This has come to be known as a concession.
A concession grants a concessionaire the right to operate a defined infrastructure service and to receive revenues generated. Ownership of assets remains with the government. However, concessions create a privately-operated monopoly or extreme cases of dominant position, with consequent market power, which is prone to be abused. This makes the design of the concession agreement important so that it does not have anti-competitive effect.
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Concession design is important in the sense that it should not turn out to be anti-competitive in effect. A school of thought views that rather than relying on ex-post law enforcement, it is better to reduce the incentive for engaging in anti-competitive behaviour. Areas where competition will not prevail will have to be specified in advance and in the other areas competition law provisions should apply. Vertical integration generates market power. Such integration in the infrastructure sector, where the concessionaire might have monopoly in two or more integrated or interconnected areas, could generate considerable market power that might be abused by exclusionist or exploitative behaviour on the part of the concessionaire.
Competitive bidding is a good way of allocating concessions. The more the bidders, the more competitive the auction is likely to be. Auction should aim at identifying the most efficient service provider. However, the scope for re-negotiation is inherent in concession contracts, given the long period of concession and the uncertainties involved regarding demand, growth, price and related variables. Re-negotiation could also be opportunistic. Competition law enforcement is the best way to deter collusion.
Collusive bidding is almost universally recognised as hard core cartelisation and is visited by heavy fines, besides being treated as a criminal offence in a growing number of jurisdictions. According to one estimate, rigged bids are estimated to have cost the Indian government $20 million in 2000. The Competition Act, 2002, treats bid rigging and collusive bidding as serious violations.
Oversight of the concession agreement and its implementation is generally by the government or an agency under the government. It has to be recognised that legal entry barriers provided by the concession agreement make anti-competitive practices all the more easy for the concessionaire. This points to the need for allowing new/parallel facilities to come up when demand for the service crosses a pre-determined point defined in terms of production/supply capacity of the concessionaire.
When such additional capacity is created in the form of additional lanes or an altogether new road parallel to the existing one, the incumbent concessionaire might need to be restrained from predatory behaviour i.e., pricing below cost with a view to eliminating the competitor or competition.
The argument that government is a party to the concession cannot put concessionaire outside the purview of the competition law. The Competition Act, 2002, brings under its scope practices of government departments, except when discharging sovereign functions. Enforcement of competition law can ensure that the legal monopolies created through concession do not militate against efficiency or increased consumer welfare.
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Re-negotiation can nullify the benefits of the competitive allocation mechanism. It is necessary to take steps at the stage of auction design and auction allocation to eliminate chances of opportunistic re-negotiations. The existence of a regulatory authority has been noticed to help minimise the chances of re-negotiation.
Re-negotiations have been noticed to result in higher tariffs, decrease in investment obligations and decrease in the annual fee paid by the concessionaire to the government. The best way to address the issue of opportunistic behaviour is to envisage repeated contest. However, this may turn out to be costly. Performance bonds and step-in-rights on the part of government can reduce incentives to re-negotiation. It is advisable that concession contracts include the obligation to continue providing services until a new concessionaire has been chosen.
The efficiency gains arising out of concessions have been documented in studies related to the experiences in Latin America, where the system of concessions in an organised way is believed to have originated. In India with limited experience in competition law, it may be advisable to state in the concession agreement that competition law provisions would apply to concession. This would make concessionaires sensitive to the act and deter anti-competitive practices.
(Author is member, Competition Commission of India. Views expressed are personal)
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