Tailoring competition laws for state-owned enterprises

Written by Pradeep S Mehta | Updated: Feb 17 2014, 06:05am hrs
On December 9, 2013, the Competition Commission of India levied a fine of Rs 1,773 crore on Coal India Ltd, a state-owned enterprise (SOE), for abuse of dominance in the fuel-supply services market, and also recommended that it should be broken up. Although CCI has slapped heavy fines on other firms since it started operating, this was its first major penalty on an SOE.

SOEs operate under the protection of the state. Hence, they are complacent about how they go about their business without respecting market principles. The mindset stems from the old adage that the king can do no wrong. In fact, SOEs were exempt under the old competition law, the Monopolies and Restrictive Trade Practices Act, 1969, until 1991, when reforms were launched. The message was loud and clearthat the law will not be preferential of SOEs henceforth. SOEs performing sovereign functions, such as currency production, space, etc, are albeit exempted.

SOEs occupy a large space in many economies, including India, but modern competition laws are applicable to them equally. China, with the largest number of SOEs in the world, too makes no exemptions.

Early this year, Chinas State Administration for Industry and Commerce (one of the three competition authorities in the country) fined the state-owned water company, Yiyuan Fresh Water Company, 3.2 million renminbi (388,000 euros) for abuse of its monopoly position. The company was engaged in tied selling, where it was bundling its water supply services with the construction of water meters and pipes.

During the same period, Polands Office of Competition and Consumer Protection (UOKiK) fined the country's National Health Fund 361,000 zloty (86,000 euros) for abuse of dominance. The health agency managing the funding for all state medical services was found to have set unfair criteria in two separate government contracts.Many other examples can be found across the world.

Section 4 of the Competition Act, 2002, of India prohibits all enterprises from abusing dominant positions. The ambit of this provision extends to enterprises and departments of the government, as long as they are engaged in the production, storage, supply and distribution of goods or services in a commercial manner.

The harm to consumers in terms of overpricing is even more pronounced for state-owned enterprises, as they are mostly licenced monopolies in their own markets. Some SOEs simultaneously carry out activities in areas where they face competition with the private sector while operating in others where they do not. This means that they are capable of leveraging their monopoly position in the markets where they compete with private participants through cross-subsidisation, for example. It is on this basis that almost all competition laws frown upon anti-competitive practices.

Despite being covered by competition legislation in many countries, there continues to be some level of apprehension over whether, in its application, the competition law should be blind to ownership of the company. SOEs generally have an additional difficulty in their operations as they have to balance public interest and profit objectives.

Most SOEs do not fully guard against the consequences of success or failure, as this is governed by their corporate governance structure, usually defined by a regulatory framework. These can pose rigidities which their private sector counterparts are not subjected to. In addition, public service obligations are often costly, warranting the use of SOE profits from market activities to subsidise these obligations.Thus, applying the usual competition law tests, such as recoupment theory in predatory pricing and even the small but significant non-transitory increase in price test, may be unfair as some SOEs have goals other than profit maximisation.

More importantly, imposing fines on a government-owned enterprise by another government body (the competition authority) can be regarded as a smokescreen, given that the fines would find their way back to the treasury, and can still be passed back to the enterprise. The SOE might also not be fully independent in its decision-making. As established by the CCI, Coal India did not enjoy full commercial freedom as its business is constrained by directions from the government.

This might call for a relook on the manner in which the competition law is applied to SOEs. Whilst the competition law should indeed apply to SOEs, there might be need for the law to apply with some narrow derogation when it comes to SOEs. It is, therefore, not surprising that the central theme for the International Competition Networks annual conference in April 2014 would be to debate on the application of competition laws to SOEs.

Cornelius Dube of CUTS contributed to this article

The author is the Secretary General of CUTS International.