A curious case of whitelisting competition

Updated: Jun 22 2003, 05:30am hrs
This is the story of a case that was lost, finally. There are no more appeals or reviews and hence the story can be told. It deserves to be told because it is a story of how bad economic policy gains legitimacy.

Jawaharlal Nehru Port Trust (JNPT ) or Nava Sheva is a major port that is situated right next to Mumbai port. You may say the two ports are cheek-by-jowl to each other. JNPT has two container terminals. One is operated by JNPT itself, so it is in the public sector. The other was privatised in 1997. There was an international bidding and P&O, one of the leading port operators in the world, won the bid. P&O offered the highest royalty to JNPT and was granted a licence under a licence agreement.

JNPTs 680 metre-long container terminal competes with P&Os 600 metre-long container terminal for the same business containers that are shipped out of the port and containers that arrive at the port. Needless to say, P&O won hands down and continues to out-perform JNPTs terminal. P&O has also delivered more than the stipulated level under every parameter contained in the license agreement. Between JNPT and Chennai, P&O owns 27 per cent of the total container handling capacity in India, but because of its higher efficiency commands 48 per cent of the total container business in India. As a consequence, P&O did not have many friends or admires among the JNPTs management.

When the Chennai container terminal was offered to the private sector, the government opted for the revenue-share model, which is a vast improvement over the license fee model. P&O offered 37.128 per cent as the revenue share of the government; the next highest offer was only 27.111 per cent. That is how P&O got the Chennai container terminal.

JNPT decided to convert its bulk terminal which is situated at some distance away from the two container terminals into a third container terminal. Wisely, it chose the revenue-share model. In November 2001, JNPT invited expression of interest from prospective bidders including P&O. P&O duly submitted its EoI. The extant government policy was also clear. The policy guidelines expressly stated, Private participation will be on the basis of open competitive bidding.

Mumbai Port, which is next door, also decided to establish more container terminals under the same policy guidelines. Anyone familiar with the landscape of Mumbai would know that Mumbai port and JNPT (Nava Sheva) are only 6.5 nautical miles apart. Actually, Mumbai port is a competitor to JNPT. A ship entering the Arabian Sea has the choice of calling at either Mumbai port or JNPT. Besides, there is growing competition along the western coast. Between Kandla and Kochi, the coast has many ports. There are two more in the public sector (Mormagoa and New Mangalore) and several in the private sector (Mundra, Vadinar, Dahej, Pipavav ).

P&O, by all accounts, is the most efficient terminal operator in the country. It already operates one container terminal in JNPT. A wise management would have encouraged P&O to bid for the proposed new terminal. Intense and competitive bidding would have fetched a larger revenue-share for the government perhaps more than the 37.128 per cent offered for the Chennai terminal. Even if P&O had lost in the competitive bidding, the government would have gained.

That is not the way the government of India works or thinks. The JNPT management wanted to keep P&O out of the bidding, and in this it had the blessing of the ministry of surface transport. The fact that the chairman of JNPT had moved to the post of secretary, department of shipping, ministry of surface transport, could be attributed to coincidence. So, how did JNPT and the government keep P&O out They latched on to an ambiguously-worded paragraph in the policy guidelines which read: The port should ensure that private investment does not result in the creation of private monopolies, and that private facilities are available to all users on equal and competitive terms. After inviting an OI from P&O, JNPT did a somersault, and citing the paragraph quoted above excluded P&O from the bidding process. To soften the blow, JNPT wrote to P&O that the exclusion was in no way intended to cast any aspersion or be a criticism of the performance of P&O! To coin a word, it was a case of whitelisting. P&O cried foul.

The paragraph relied upon by JNPT is open to two interpretations. The first and the one consistent with an open economy is that any facility created by a private operator cannot be a captive facility but must be accessible to all users on equal and competitive terms. The second and the narrow one is that if an operator had one facility he cannot be allowed to operate a second facility of the same kind. So, if P&O had one container terminal in JNPT, it cannot be allowed to operate a second container terminal. No matter that JNPTs own 680 metre terminal offers competition. No matter that Mumbai port barely 6.5 nautical miles away offers fierce competition. In the eyes of the government, two out of three terminals in one port (among several ports on the western coast) is a monopoly!

P&O raised another issue. Where is the question of a monopoly A monopoly means the power to determine ones own prices. In the case of ports, the prices for various port services are determined by an independent regulatory authority called Tariff Authority for Major Ports (TAMP). Periodically, every operator is required by law to submit its proposed prices to TAMP and shall not charge more than TAMP-approved prices for any of its services. Without the power to fix ones own prices, there cannot be a monopoly. Governments answer was, irrespective of the power to determine prices, government was entitled to take a policy stance that one operator operating two container terminals in one port would amount to a monopoly!

P&O filed a writ petition but lost the case in the High Court. The Supreme Court declined to interfere. The High Court acknowledged the power of the government to adopt a policy and observed that it could not question the wisdom of the policy because its jurisdiction was limited. It is perhaps not possible to find fault with the judgement on purely legal grounds.

Nevertheless, the undeniable fact is that the policy of the government is wrong on economic and commercial principles. The most efficient operator has been excluded from the bidding in JNPT, even while it is allowed to bid in the neighbouring Mumbai port, on the specious ground of monopoly.

The loser is the government. Because the bidding excluded a potential winner, the real price in the revenue-share model will not be discovered. Besides the loss of revenue, there is also the loss of credibility. Economic reforms continue to remain hostage to arbitrary and whimsical policies of the government and, sometimes, an individual bureaucrat.