The Telegraph
Since 1st March, 1999
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- It will be a while before India sees competition in infrastructure

In one decade, India has tried to do a U-turn on competition. The Monopolies and Restrictive Trade Practices Act like many laws before liberalization constrained competition. The MRTP Act was to restrict and control monopolies and monopolistic practices. The new competition law aims to encourage competition and prevent anti-competitive practices. It has been awaiting implementation for over a year because of disputes over whether the bureaucracy or the judiciary should head it.

When it comes to infrastructure ' roads, railways, posts, power, water, oil and gas, coal or airports ' the government has been ambivalent. It is not clear in many cases what are the preconditions for competition in infrastructure. Legislation in some sectors, like power, has the objective of achieving competition. Others, like coal, do not even state such an intention. Now there is the subterfuge in the budget of 'captive' users getting coal blocks and being allowed to sell to other users in their 'captive' network. Monopolies, like posts, allowed couriers to encroach into their area and are now trying to control them.

The Indian context in infrastructure is the reason given for not moving ahead. Markets and demand are highly segmented between the well-off and the poor, the urban and the rural. Services have to reach the poor and the rural. Costs of delivering infrastructure services to them are higher than that to urban consumers and buyers of large quantities. Cross-subsidy or dual pricing alleviates the inability of government finances to bear these costs. The better-off are made to pay more. Cross-subsidies have led to leakage through corruption, waste and only a fraction of the subsidized services reaching their targets.

The other set of constraints on competition starts with the limited number of service producers and providers, the relative shortage of the services and the constraints imposed by limited transportation mechanisms. This is made worse by single or limited ownership of the transport mechanisms. Nor is the effect of limited ownership contained by open access to the available transportation methods. Political interference in pricing keeps adding to the subsidized groups. Ownership of the whole chain from production to supply tends to be concentrated with governments, which have shown themselves to be inefficient at the state level (for example, state water and electricity boards and their accumulated losses). The Central government has been lacking in vision and enterprise even if the management is good (for example, the inability of Central government electricity generating companies to leverage their resources to substantially add to capacity).

The resultant subsidies stretch government finances, create leakages and strain the finances of producers and providers. Private providers find ways to avoid losses. Government-owned service providers make huge losses, reimbursed by the governments. But when laws are amended to enable greater private entry, as with electricity through captive generation, regulators, governments and state-owned companies delay implementation.

There has been some progress in private entry into providing such services, but this has raised new issues. For example, competition could be between bidders for projects, with decisions to be taken on the basis of agreed rules. This could be on different parameters, from the lowest cost quoted for the project, to the tariffs charged to customers, to government subsidies. The experience with privatization of Mumbai and Delhi airports shows that there are enough pressure groups to change the parameters and skew the decision unfairly.

Another problem is with services that have huge lumpy 'natural monopoly' costs like airports, railway lines or roads. British Railways split the loose parts out of the 'lumps' by treating tracks and signalling as one item on which all users paid rents and the trains and carriages as competing elements using the common tracks and signalling. But it has not been particularly effective in offering convenience, cheaper rates or safety.

The limitations imposed by shortage of transportation and dominant government ownership create other issues. Transmission and distribution of electricity and oil and gas through pipelines were considered natural monopolies during the command and control economy. In electricity, the law was amended in 1998 to allow private investment. In oil and gas, the issue has been debated over the years. In both, incumbent government enterprises have resisted private entry.

On 'natural monopoly', India has recognized in the Electricity Act, 2003 that parallel transmission lines could be laid, thus accepting that more than one transporter could cover the same route. This has been implemented in telecommunications, when separate fibre optic wires have been laid all over India by different providers. But neither electricity nor gas has seen parallel networks yet. In the case of roads, this seems to be happening without forethought, as, for instance, in the Bangalore-Mysore highway, where both the government and a private provider are creating their own. In the case of electricity, the justification was that the existing transmission and distribution lines were unable to carry much more than they were doing. Also, most distribution wires were installed a long time ago. There has been much technical progress since, making parallel lines more cost effective.

Another issue in competition in infrastructure awaiting resolution is that of monopoly being encouraged by permitting vertical integration. Vertical integration is said to make possible the exploitation of the consumer. A truly independent regulator can ensure that there is no exploitation by closely monitoring capital and revenue expenditures. In electricity, the law does not allow a generating company to own transmission lines. There is a move to do the same in the case of oil and gas. Similarly, airlines cannot own airports. One argument for vertically integrated enterprises is that ownership of its source of fuel generation plant, transmission and distribution, can guarantee for its consumers steady supplies and tariffs. Independent regulators can insist on separate business units for each activity, separation of costs and determination of tariffs at each point, and so avoid exploitation of consumers. Of course, the integrated monopolies with state electricity boards have led to worst results: erratic supplies, poor quality, high and rising tariffs, waste, thefts and inefficiencies.

Government ownership does not stop exploitation. The state electricity boards have had their biggest increase in costs from electricity bought from Central government enterprises like the NTPC. These bodies have long-term contracts (up to 30 years) for committed quantities of power. Tariffs are determined for 3 to 5 years. But there is no spot transaction, an important element for a competitive market. In a market with varying demand over seasons or time of day, there are always surpluses and deficits for short phases that can be traded on spot transactions.

Many issues need to be resolved when introducing competition into infrastructure services. One is whether competition is going to be on capital cost bids, tariffs to users, loss reductions or revenue shares to the government. The bid process must be faultless and transparent, including the selection of the independent assessors of the technical and financial bids. No participant must have an unfair advantage over others. Hence production of the service and its transportation to users must be clearly separated. When the service has consumer segments that need price support, the eligible users and methods for giving that support as well as reimbursing the supplier must be clearly spelt out. There must be no changes made to rules and procedures after the process has started or during implementation. The price relationships between different services must be clear. India has to go a long way before we have competition in infrastructure services.

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