The Hindu Business Line : `Competition law must look at concessions in infrastructure'

Even as the Competition Act 2002 is yet to be made operational, there is a case for explicitly stating in the concession agreement in infrastructure areas that competition law provisions would apply to the concessionaire when the latter gets the right to provide infrastructure facilities through the competitive process.

The Government involves the private sector in infrastructure development and marketing through agreements known as concession agreements.

Writing in the latest quarterly Infrastructure journal of the NCAER in his personal capacity, Mr Vinod Dhall, Member, Competition Commission, has said that a number of infrastructure organisations currently treated as natural monopolies are no longer so, with power and telecom industry being instances in this regard.

He said that concession grants a private firm the right to operate an infrastructure service and to receive revenues generated, though the ownership of assets that vest with the Government.

However, concessions create privately operated monopoly or extreme cases of dominant position, with consequent market power, which is prone to be abused. This raises the relevance of competition policy in the handing out of concessions, he said.

Mr Dhall also said that the way it is designed, a concession could turn out to be anti-competitive in effect.

Amplifying this, he said that vertical integration in the infrastructure sector, where the concessionaire will have monopoly position in two or more integrated sectors, would foster considerable market power, which might be abused by exclusionary or exploitative behaviour.

Exclusionary behaviour includes predatory pricing, denial of market access or use of dominant position in one market to access another market.

Mergers, acquisitions or amalgamations among concessionaries or their parents could also result in added market power, with likelihood of abuse, he added.

While competitive bidding is a good way of allocating concessions, auction should aim at identifying the most efficient service provider.

Since the scope for renegotiation is inherent in concession contracts, given the long span of concession and the uncertainties involved concerning demand growth, price and related variables, renegotiation could also be opportunistic.

Hence, competition law enforcement is the best way to deter collusion.

Mr Dhall said that the Competition Commission of India could slap a penalty of higher of either three times the profit made out of cartelisation or 10 per cent of last three years' average turnover.

He added that rigged bids are estimated to have cost the exchequer $20 million in 2000 in India.

According to him, renegotiations could nullify the benefits of competitive allocation mechanism.

Existence of a regulatory body has been noticed to help minimise the chance of renegotiation.

Renegotiations 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.

Hence, he has suggested that concession contracts include "obligation to continue providing services until a new concessionaire has been chosen."

In infrastructure areas like roads, it must be recognised that legal entry barriers provided by the concession agreement make anti-competitive practices all the more easy for the concessionaire.

This underscores the need to allow new/parallel facilities to come up when demand for the service crosses a pre-determined level defined in terms of production/supply capacity of the concessionaire.

When such additional capacity is created, for instance in the form of additional lanes or an altogether new road parallel to the extant one, the incumbent concessionaire should be restrained from predatory behaviour, that is, pricing below cost with a view to eliminating competitor or competition.

The contention that Government is a party to the concession does not come handy for the concessionaire to be outside the purview of the competition law, he said, adding that Competition Act 2002 brings under its scope practices of Government Departments.

"Enforcement of competition law alone can ensure that the legal monopolies created through concession enhances efficiency and increased consumer welfare."

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