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Fitter referees for a competitive economy
We appear to be inching towards consensus on a more effective regulatory framework

Published: The Financial Express, June 25, 2005
By Pradeep S. Mehta & Vinayak R. Pandey

The Planning Commission is burning midnight oil to finalise its recommendations to the government for setting up an ideal enabling framework for infrastructure regulation across all sectors. It is engaged with several stakeholders to get their views on board, and a general consensus appears to be emerging on several counts.

Whether we need independent regulatory bodies, or should carry on with business-as-usual, of government continuing to handle this function, is now fairly settled. The thinking is on to how to empower the existing regulatory agencies and make these more effective, by learning from past mistakes. Such wider acceptance of independent regulation is evident from the fact that the demand for setting up regulatory agencies in those sectors where we still do not have one is gaining momentum every day. After having regulatory bodies for telecom, ports and electricity sectors, more are likely to be established for aviation, petroleum and gas, and transport sectors soon. The queue is getting longer with time.

Curiously, it is not only businesses who see a better future; it is consumers as well. This echoes the demand for separating the day-to-day regulation from policy formulation and on handing over the former to specialised and autonomous bodies. A consensus appears to have emerged on imparting regulators with required functional autonomy, which would mean imparting necessary decision-making powers to perform. The little experience that India has had so far with independent regulation suggests that regulatory bodies cannot be effective without having functional autonomy.

In the Indian context, the line ministry is viewed as the most potential source of likely threat to regulatory autonomy. Of course, there might be several other possible sources that can undermine the regulator’s autonomy. For instance, regulatory capture by business interests. Another issue on which an agreement seems to have largely emer-ged is about having an omnibus appellant tribunal for all sectoral regulators, with subject experts in corresponding benches. Further, one pioneering thought is to have an omni-bus law which will lay out the regulatory framework, for adoption by the relevant ministries. This need is being felt due to various variances in the sectoral laws, which are being drafted by various line ministries without adhering to the evolved best practices.

• Regulatory bodies need functional autonomy to be effective

• The trick is to find an agreed way of combining this with accountability

• An imaginative approach, such as get-ting Parliament to monitor, is one way

Yet, there are many issues which remain unresolved. The opinions are diverse and, quite often, contradictory. However, interestingly, even mutually contradictory arguments have equally valid concerns and substance at times! This explains why the matter is so complex. For instance, we still have to hammer out a workable solution to hold regulators effectively accountable on a sustained basis, without compromising on the autonomy. There are several other tricky issues, which do not have easy answers. Despite having a near-consensus on providing the regulators with financial autonomy, opinions are divided about the manner in which it should be done. While there are strong arguments in favour of allowing regulators to raise funds through the imposing of a cess, there are genuine concerns as well. Perhaps, we need a combination of both approaches, i.e. stable state funding, and allo-wing the regulator to impose a small cess. As in some other cases, the debate on this issue still remains inconclusive.

A possible overlap of functions between the sectoral regulators and the competition authority is another area on which views are entirely divided. Either the sectoral regulator and the competition authority can be empowered on an exclusive basis. The other option is to provide for joint jurisdiction, with clear functional demarcation. Presently, the Telecom Regulatory Authority of India Act does not prevent the competition authority from looking into competition dimensions. However, the Electricity Act, 2003, empowers the regulator to solely decide about competition dimensions, without recognising any possible role of the competition authority.

Therefore, prior to taking a firm decision, we must explore the arrangements in other parts of the world in this regard and the relative effectiveness. In this context, recently, a roundtable was organised by our organisation, that attracted a heterogenous group, including practitioners, politicians, academicians and opinion makers. The con- sensus which emerged was that since the regulator does not report to the line ministry concerned, the latter should not be expected to defend the decisions made by the former in Parliament. However, the line ministry cannot get away with possible systemic and process-related deficiencies.

It was suggested, given that the count of sectoral regulators in the country is set to grow, it would be appropriate to constitute a Parliamentary Standing Committee on Regulation. In such a scenario, regulators should be held accountable to the Standing Committee and the latter should be empowered to summon a regulator as and when required, to explain the possible systemic flaws, such as repeated setting aside of regulator’s orders by appellant authority. Though the effectiveness of this arrangement can be contested, the message is that of using imaginative approaches and moving towards a consensus at the earliest possible opportunity. The Planning Commission is seized of this fact, that the issues are fairly complex and challenging. Therefore, it plans to launch a discussion paper, with the expectation that it will be able to bridge the gaps, sooner than later.

Petro subsidies: Flawed basis

Published: The Hindu Business Line, June 21, 2005
By Pradeep S. Mehta & Manish Agarwal

THE Government has raised the prices of petrol and diesel, while kerosene and LPG have been spared. Prices of petrol and diesel had remained frozen since November 2004, despite international crude oil prices going up to $55 per barrel on several occasions. The oil companies have been clamouring for an equitable share of the burden, citing their shrinking bottomlines.

The Minister for Petroleum and Natural Gas, Mr Mani Shankar Aiyar, had suggested that all stakeholders — oil companies, consumers and the government — share the burden.

The Government's share of the burden is estimated at Rs 3,553 crore , which comprise subsidies on domestic LPG and PDS kerosene. Besides, the oil industry's share is estimated at Rs 20,310 crore, on account of the under-recoveries on petrol, diesel, LPG and kerosene. The total burden shared by these two stakeholders is about Rs 24,000 crore.

Considering this figure as the benchmark, a part of it is going to be transferred to consumers. But is this the real extent of the burden?

The method of calculating subsides on domestic LPG and PDS kerosene is based on import parity pricing of petroleum products and not unrecovered costs (which is more appropriate). Therefore, the subsidy amount being based on a flawed methodology results in misleading figures.

While the burden of subsidy is itself inflated, the Government mops up a large amount from the oil sector as indirect taxes, most of which is passed on to the public.

Compared to other Asian economies, India's levies on oil are high. The total tax revenue from the oil sector stood at Rs 1,10,000 crore in 2003-04 (Rs 69,000 crore went to the Centre, and the rest to the States).

Additionally, the Government imposes a `cess' on indigenously produced crude and collects about Rs 6,000 crore annually from the public. The cess was introduced in the mid-1970s to provide financial assistance to state-owned companies. Over the past three decades, the government has collected about Rs 50,000 crore as cess, and almost all of it has gone into the Consolidated Fund of India.

The rate of cess was doubled in March 2002 on grounds of providing subsidies on LPG and kerosene (but it was never intended to cover subsidies). This cess has become an arrangement to meet the petroleum subsidy burden. Considering the amount of petroleum subsidy vis-à-vis the cess amount collected, there is no net burden of petroleum subsidy on the Government. In fact, the Government is collecting much more than the burden it claims to be sharing.

Even oil companies are reaping profits from the current pricing system. The import parity allows oil companies to factor in the Customs duty to arrive at the import parity prices. Since the country does not import petrol or diesel, the amount collected as notional Customs duty from the public, estimated at Rs 10,000 crore, goes to bolster the financials of oil companies.

There is absolutely no transparency in the pricing of petroleum products. The government and the public-sector companies would seem to be making money from distortionary policies and practices. The claims of a huge subsidy burden and bleeding oil companies are exaggerated, as most of the burden is borne by the consumers.

Additionally, consumer interest is harmed by the government stifling competition in the sector. According to a paper by the Oil Ministry, state-run PSUs make considerable profits due to monopolistic practices.

A significant step towards introducing competition was to allow private parties to import, and market kerosene and LPG at market-determined prices. However, since only state-owned oil companies are permitted to market subsidised petroleum products, the non-targeted subsidies offered to the PSU oil companies (in terms of concessional pricing) distort the market, and restrict the ability of private retailers to compete effectively.

Further , the LPG Control Order specifies that cylinders, regulators and valves to be used by the parallel marketers have to be distinctly different from that used by the public sector oil companies. This reduces the freedom of LPG users in switching from one supplier to the other, restricting competition.

One of the most significant threats to sustained economic growth of the country is the global oil scenario. This requires an effective conservation strategy, which can be feasible only if prices of petroleum products are determined transparently and allowed to reflect in their economic cost.

The Government's intervention in the sector needs to be rationalised to facilitate the market process with subsidies targeted at the poor and the really needy. The petroleum sector requires a comprehensive competition framework and not stringent regulations.

The prevailing tax structure needs an overhaul. The import-parity pricing regime should be dismantled and oil companies allowed to charge market-determined prices. A price stabilisation fund must be created to take care of spikes in international crude prices. A petroleum and natural gas regulatory board should be established to foster competition and ensure transparency in the determination of prices of petroleum products.

These measures will ensure that prices of petroleum products are determined by market forces — free from distortions. They will also help in determining the real extent of the subsidy burden, which is expected to be much lower.

The subsidy on LPG can be removed as it largely benefits the high-income group in the urban areas. All these measures will ensure lower burden on consumers.

A cautious approach is required in providing kerosene subsidies as nearly half the rural households use this fuel for light and heat. For better targeting, coupons may be issued with entitlement to purchase kerosene from a retailer at the subsidised price. This would discourage diversion of subsidised kerosene to other sectors.

A list of beneficiaries and local level agencies involved in monitoring kerosene distribution could be made public.

Competition policy for 10% growth

Published: The Economic Times, June 16, 2005
By Pradeep S. Mehta

Your recent pronouncement, dear prime minister, that the country will not be able to cross 7% growth rate is perhaps right, and catharsis must begin from this confession. Much more needs to be done than just pursuing growth strategies. The NCMP has recognised widely that competition needs to be promoted to achieve higher growth.

But declarations are not enough. If we adopt a competition policy and promote competition in the marketplace, we can achieve at least 10% growth rate, let alone 8%! A well-designed and implemented competition policy promotes economic growth by ensuring better allocation of resources and proper functioning of markets.

A study carried out for the Australian economy in the ’90s estimated the expected benefits from a package of competition-promoting and regulatory reforms (including improvements in the competition rules) to be an annual gain in real GDP of about 5.5%. Of course, the Australian and Indian economy are not alike. Unlike in Australia, corruption distorts competition in India, causing huge delays in implementing projects and starting businesses. It is estimated that the GDP is affected by nearly 2% due to this. And yet, a double-digit growth is quite attainable.

Recently, CUTS has published a research report: Towards a Functional Competition Policy for India, which has thrown up interesting data. It was seen that it is government policies in many cases, both at the Centre and at the state level, that distort competition. Coupled with regulatory failures, the cost of these anti-competitive policies and practices to the economy is huge. On the issue of adopting a competition policy, some of the policy makers and opinion leaders that we lobbied, asked why do we need a competition policy now that we have a new competition law. You too may ask the same question. My response is quite simple. Competition policy and competition law are two distinct concepts.

Unfortunately, most of the policy community considers both terms synonymous and interchangeable, which is not the case. Though we have liberalised trade, some elements of the policy regime have severe anti-competitive dimensions, such as the use of anti-dumping measures. Competition law is but a subset of competition policy. Besides encompassing the law, competition policy tries to bring harmony in all government policies that affect competition and consumer welfare, such as trade policy, industrial policy.

The country, as you rightly said, has a competition law, but not a policy. And we require one. It is another story that the competition law is itself in a quandary.

The corollary to the above query is, why competition policy? Won’t the competition law suffice? Distortionary elements also exist in industrial policy, labour policy, etc. Then, there are several policies/practices at the level of state governments that lead to anti-competitive outcomes. These cannot be checked under a competition law, but need policy responses.

For example, many of our states implement their excise policies in such a way that liquor lobbies collude and fleece the consumers through exploitative pricing. The collusion also leads to revenue losses. The proposed competition authority cannot act against a policy-induced cartel.

Secondly, other forms of pernicious cartels exist in the construction sector and the trucking industry. The other day, farmers were up in arms against the truck unions in Sikar, Rajasthan, because of exploitative pricing, while threat of violence against competing trucks leave farmers at the mercy of the local truck union leaders.
In the public works construction sector, in nearly all activities contractors not only corner the market but also fleece the treasury by executing poor quality work. Most of the supervising engineers are happy with their standard ‘commissions’, and hardly ever bother to check either the collusion or the quality. Therefore, there is an urgent need to do strong policy advocacy to rationalise the role of the government, so that its intervention promotes the functioning of markets, rather than impeding it. A ‘competition audit’ of all new and old policies will help the government to promote competition.

What is the role of competition law and policy in a country where there is significant illiteracy, unemployment and poverty? Incidence of poverty, etc is a stark reality of our country. Distortions in markets hurt the poor the most. Let’s take the agriculture sector, for example. The market for agricultural products is often considered to be an example of a perfectly competitive market. However, there is a huge gap between the prices consumers pay and the prices received by farmers, due to a chain of intermediaries that do not always work in a competitive manner. For example, paddy millers in some areas often collude and pay low prices to farmers, but charge a high price for rice to consumers.

In the same context, the freedom of moving farm goods to the market which can deliver best prices is throttled by the myriad regulations which operate at the local level. The central government is trying to push states to adopt the new Agricultural Produce and Marketing Act, which can liberalise the movement of agriculture produce. But, you know how responsive the states are. Granted it is a state subject, but surely there can be a public debate about this, and our farmers’ organisations be made aware of the facts, so that they can campaign for freer markets.

In a country where two-thirds of the people draw their livelihood directly from agriculture, the linkage between market imperfections in agriculture goods and poverty is manifest. This is where competition law and policy can play a key role. It also needs to be understood that competition law is not a luxury of the developed world, but one of the necessary tools for developing countries, in their fight against poverty.

In January, 2005, through the front page of this newspaper, you had asked people to adopt this year as the ‘can-do’ year. We can do it, so can you.

Bandung II: New hope for the poor?

Published:Daily Mirror, Colombo, May 23, 2005
By Pradeep S. Mehta

Leaders of 106 countries from Africa and Asia representing about three-fourths of humanity met in Indonesia in April to reinvigorate the spirit of 1995. The Bandung Conference led to the emergence of the Non-Aligned Movement and was the first step towards promoting South-South Cooperation. Bandung I was more political in nature as most of the participating countries had got their political freedom very recently, much of Africa was still under colonial rule and a significant part of South-East Asia was still living under the shadow of US imperialism.

The world is a much different place now and the political objectives of Bandung I have been more or less achieved. The same, however, cannot be said in terms of economic aspirations of the countries. Though much of Asia has made significant progress, Africa remains far behind. Notwithstanding the much-talked about South-South Cooperation, a large part of Asia became closer to Americas particularly through the APEC while Africa has moved closer to Europe through the Lome Convention (and Cotonou Agreement).

Meanwhile, the importance of South-South cooperation was recognised by the global community as a whole and the UN General Assembly established a UN Day for South-South cooperation (December 20). However, South-South cooperation received a new meaning in 1999, as the High-level Committee on the Review of Technical Cooperation among Developing Countries (TCDC), in its eleventh session resolved that South-South cooperation should be viewed as a complement and not a substitute for North-South co-operation. This effectively meant that the committee was of the view that a North-South-South cooperation was needed. Thus, came the recognition for the importance of trilateral development cooperation.

As recently as on 1-2 February 2005, the Development Assistance Committee (DAC) of the OECD and the UNDP jointly organised the Forum on Partnership for More Effective Development Co-operation at Paris to promote greater dialogue and mutual understanding among the world's principal providers of development co-operation. The Forum brought together for the first time the members of the OCED with a wide range of non-OECD governments and institutions involved in development co-operation and South-South initiatives. The Forum agreed that South-South and triangular co-operation could improve the aid efficiency and effectiveness in emphasising ownership and inclusive partnership.

Trilateral cooperation does not necessarily mean involvement of three partners only. It is a kind of partnership where three or three groups of actors are involved: donors, technical assistance providers and the recipients. This form of cooperation got extended when some developed country donors started involving agencies and experts from other developing countries. This was done through both involvement of other developing country government or that of private or non-governmental organisations. CUTS International, an India-based NGO is engaged in capacity building on trade, competition, consumer protection and investment issues in several developing countries under the trilateral cooperation framework. A recent example of such a cooperation is the CUTS project in Africa involving capacity building on competition and regulatory issues in seven countries of the region. The project is being supported by the Norwegian and British governments.

Bilateral assistance programmes have very often been criticised for its tied nature by which aid is tied to the donor country's provision of goods and services. Another issue related to tied aid is that when the donors tie up with local (donor's home country) technical assistance providers, there is a possibility that monitoring by the donors may get relaxed as they are likely to develop alliance. A third country provider of technical assistance is far less likely to develop such a relationship with a donor and hence monitoring is likely to be more rigorous. Hence, trilateralisation may bring more accountability in the implementation of development programmes.

It is well recognised now that importing technologies or policies or legal practices from developed countries may not be appropriate for most developing countries. It may be better for them to draw these from countries that are developing but yet at an advanced stage than they are at. In fact ignoring this has cost many developing countries, especially in Sub-Saharan Africa dearly as they implemented the Washington Consensus agenda. Trilateral cooperation can be an effective way of bringing "appropriate intermediate technology" and "appropriate policy" to developing countries while taking the help of developed countries in meeting the financial resource need.

However, the issue of trilateralisation of development cooperation has not received adequate attention in Bandung II. This may be due to the fact that the leaders were too overwhelmed by the spirit of Bandung I when the global reality was quite different. Despite the fact that big Asian countries like China and India taking significant stride in providing aid to other developing countries, the need for assistance from the developed countries cannot be ignored as they themselves are struggling with poverty. Moreover, under the Millennium Development Goals, the international community including the developed countries has accepted that the removal poverty is a global responsibility. One important departure in Bandung II was, however, the fact that the role of all stakeholders in South-South cooperation has been explicitly recognised as against Bandung I when only government level cooperation was envisaged.

ACCESS DEFICIT charge (ADC) is once again in the news. The Telecom Regulatory Authority of India (TRAI) recently changed the definition of roaming for calculating the ADC.

At the same time, it came out with a consultation paper, which suggests that telecom service providers other than Bharat Sanchar Nigam Ltd (BSNL) — the state-owned operator — do not deserve the compensation for ADC.

ADC is an issue that has hogged the limelight ever since it was first introduced in 2003. Several stakeholders, including consumer organisations, have questioned its logic.

The concept of ADC was first enunciated by TRAI in its Interconnection User Charge (IUC) Regulation of January 2003.

At that time, TRAI had recognised that basic telecom service providers had historically run a cross-subsidised system in which surpluses from long-distance calls were used to offset losses that resulted by offering services such as local calls, monthly rentals, services to rural exchanges, at below cost.

With competition eroding the margins available in the long-distance segment, this system clearly could not continue to work.

According to the regulator, either the prices, which were hitherto subsidised, would have to increase or an "access deficit charge" would have to be provided to basic service operators to cover the gap between tariff and costs.

Since the number of fixed-line subscribers far exceeded mobile subscribers at that time, any hike in their rental/tariff would have made basic telecom services unaffordable to many.

Moreover, the teledensity was low (4.2 in December 2002) and the objectives of affordability and universal access were of great importance. TRAI thus settled on increasing tariffs somewhat (by reducing the pulse rate) and providing an ADC to basic service operators to cover the rest.

To recall, the relevant objectives of the New Telecom Policy 1999:

• Make available affordable and effective communications for the citizens;

• Strive to provide a balance between the provision of universal service to all uncovered areas, including the rural areas, and the provision of high-level services capable of meeting the needs of the country's economy;

• Encourage development of telecommunication facilities in remote, hilly and tribal areas of the country.
  

It is observed that these objectives do not specify the type of service (read, basic) that has to be promoted. However, TRAI has been maintaining that ADC is required to make the basic telecom services affordable to the common man to achieve the objectives of NTP 1999.

But the circumstances have changed, in just two years. The number of mobile subscribers now exceeds fixed-line subscribers and the gap continues to grow (see Table). Thus, the circumstantial reason for placing an emphasis on basic telecom services for the purpose of ADC does not stand the test of time.

Moreover, as per TRAI's own assessment, India now offers the cheapest mobile tariffs in the world. This calls for an equal emphasis on mobile services for the purpose of universal service and access.

TRAI seems to have taken the view that only fixed services can improve accessibility. This presumption is also reflected in its recommendations on unified licensing regime, where it has recommended the creation of niche operators to provide (only) fixed telecom services in telecom-facility-wise backward areas.

Surprisingly, the regulator's stand is in contrast to the current thinking in the government. Recently, the Minister for IT and Communications had announced that the Government would facilitate mobile operators roll out networks in rural areas by sharing infrastructure.

The idea is to put towers in the rural areas so that cellular and Code Division Multiple Access (CDMA) lines can reach villages. The statement clearly acknowledges the potential of mobile services in meeting the objectives of NTP '99.

TRAI should, thus, focus on achieving the objectives of universal service and access by giving equal emphasis to all telecom services, rather than being obsessed with just basic telecom services. The larger question here is to facilitate access to affordable telecom services, and any support to meet this objective should be available to both fixed as well as mobile services.

As of now, BSNL receives ADC payments though it refuses to undertake tariff revision that current TRAI regulations allow it to carry out.

The perverse incentive to BSNL to adopt this approach is easy to see since the losses so incurred can be directly recovered from payments through ADC. BSNL, thus, does not face the risk of customer displeasure or of losing customers to competition in such an environment. Furthermore, whenever there is a talk of removal/reduction of ADC, BSNL threatens to increase local call charges, rentals, etc. TRAI has so far been succumbing to this pressure. What is not realised is that by giving this threat, BSNL is trying to block the substitution that would otherwise take place, as subscribers would move from fixed to mobile services. ADC is, thus, a big distortion in the working of market process in the telecom sector.

ADC was initiated at a time when fixed subscribers were much more than mobile subscribers. However, now, the number of mobile subscribers exceeds that of fixed-line subscribers. Hence, the rationale for continuing to ensure affordable fixed services does not stand the test of time.

The more important objective is to promote universal service and access by giving equal emphasis to all telecom services, which can be done through the Universal Service Fund. It is time to wind up the ADC regime rather than debate on who should be eligible to receive or collect it.

The IT-driven revolution has not come about due to Gats, the General Agreement on Trade in Services. However, Gats can help in the movement of persons, where India has a comparative advantage, but faces barriers in developed countries’ markets.

The IT-revolution en-abled India to achieve a dramatic growth in software exports, particularly BPO services. In 1997-98, BPO services accounted for only 4% of total software exports. By 2002-03, this had grown to 24%, having registered an average annual growth rate of more than 100% in five years. Another factor that has played a significant role in advancing the IT-led revolution are the policy changes at the domestic level. Liberalisation of FDI rules in telecom has allowed faster growth, created jobs and galvanised other sectors.

As for external challenges, we will have to bargain for better market access, in both Mode-1 (cross-border supply) and Mode-4 (movement of natural persons), where India has a comparative advantage. While independent service providers face a range of barriers, including tough visa formalities, discrimination through fiscal and regulatory means, non-recognition of professional qualifications, etc, cross-border trade in services faces few explicit restrictions. Though labour lobbies in importing countries, such as USA, are demanding legislation to check the outsourcing of domestic jobs.

• The proposed Services Export Promot-ion Council will face many challenges
• Institutional and regulatory reforms needed to help services exporters

India has to gear itself for some hard negotiations at the WTO, as progress on services trade liberalisation has been unsatisfactory so far. In international trade negotiations, it’s very difficult to push any agenda, unless endorsed by a formidable alliance. In Cancun, the G-20 put the big trading powers like EU, USA and Japan in the dock over agriculture subsidies. India needs to construct a similar alliance, or maybe a Cairns group type of alliance, comprising both developing and developed countries.

In the case of Mode-4, a major problem is that the temporary movement of service providers comes under the purview of immigration legislation and labour market policy and not international trade policy. Greater security concerns in the wake of 9/11 have further complicated the liberalisation of services trade through Mode-4. In such a scenario, things really go out of the remit of trade negotiators. An easier way forward is to negotiate through bilateral routes with countries such as the US.

The proposed Services Export Promotion Council (SEPC) has been brought in rather late. It will have many challenging tasks ahead in terms of giving proper direction and encouragement. These will increase in the light of the inter-ministerial task force’s report, which recommends bringing those service sectors that require hand-holding or policy support from the government under SEPC’s purview.

It means services such as health, accountancy and education would get priority. But there are many other services, like nursing, hotel trade, construction, etc., which can be exploited. For this, we will need to think seriously about promotion of skills. Here, the role of the other ministries, particularly labour and employment, and the state governments is very crucial.

Steps are also needed to ensure that the benefits of the liberalisation of the services sector accrue to the poor and weaker sections of society. For this, it it necessary to undertake strategic programmes for their skills upgradation.

Finally, institutional and regulatory reforms, which help service exporters deal effectively with regulatory impediments in foreign markets, are required. A strong and effective regulatory regime will help Indian services exporters make a credible case for recognition of their qualifications and licenses by foreign governments and regulators, so vital for securing effective access to foreign markets.

Earth Day 2005

‘Protect Children and their Future’

Published: HT Jaipur Live, April 23, 2005
By George Cheriyan

Despite the extraordinary efforts to protect our natural resources and the biodiversity, more than 1 billion children globally are denied a healthy and protected environment, and sound upbringing. Keeping this in focus, the Earth Day is observed on the theme "Protect Our Children and Our Future", which fall on the 22nd of April. This year, being the 35th anniversary of the Earth Day movement, worldwide efforts are made to protect our planet, our children, and our future. Observation of this day emphasizes the necessity for the conservation of the world's natural resources.

Environmentalists use it as an occasion to sum up current environmental problems of the planet: the pollution of air, water, and soils; the destruction of habitats; the decimation of hundreds of thousands of plant and animal species; and the depletion of non-renewable resources. The emphasis is on solutions that will slow and possibly reverse the negative effects of human activities. Such solutions include recycling of manufactured materials, fuel and energy conservation, banning the use of harmful chemicals, halting the destruction of major habitats such as rain forests, and protecting endangered species.

Status of our children
Children in developing countries are the worst victims of environmental hazards. India's high population density puts massive pressure on the country’s environment. Millions of Indian children are deprived of their right to survival, healthy environment and safe drinking water. The most serious environmental health problems in the country are related to water. Rivers and water reservoirs are polluted, and groundwater levels are falling several meters every year.

About 77 million children do not use save drinking water. Around 25 to 30 million children in India spend their lives on the streets in a poisonous environment. Being child labourers, they work in a polluted environment and are exposed to environmental hazards. About 20 million children are in such hazardous condition. They suffer from ill health and become victims of infectious diseases.

Girl child is the worst victim as she is often neglected and is discriminated against because of the preference for a boy child. The Supreme Court had earlier held that children’s right to dignified existence must be protected. The court also said that the government should work out a welfare scheme for the children working in pathetic conditions in hazardous industries.

Some of the figures related to the status of the children in the state of Rajasthan is alarming. Children work in hazardous conditions.

Though 88% of the total habitants in the State are having access to drinking water, more than 25% are exposed to high levels of fluoride, nitrates and salinity in drinking water. The major victims being children.

Sanitation coverage in the State is 30.6%, but in rural areas it is only 10.6%. Only 5% of primary schools in Rajasthan are having drinking water and sanitation facilities.

Drought is a frequent phenomenon in the State with adverse implications for children’s survival and growth.

Time to Act
The efforts to protect the environment or to conserve natural resources looks simple, but changing attitudes of one billion of people is not going to happen overnight. The best way to bring about a change in the environmental attitude of the society is through children. They have no vested interest. They are our future. Besides, they hold the single most important influence in any family. This will eventually bring about changes on a larger scale, creating a more socially just and ecologically sustainable society.

Earth Day has become an annual event in many communities around the world. It is a great opportunity to bring people together for the common good and future. Often it launches projects that bring ongoing benefits to the community, and it helps expand and strengthen networks of environmental groups.

Earth Day is a time to celebrate, to unite and to anticipate. To anticipate a future where we can protect the environment and affirm our nation’s economic competitiveness. It is a time to act. And by working together, we can find the solutions and effect the changes needed to protect our planet.

India needs to go a long way
An effective competition regime is still a distant dream

Published: The Financial Express, April 05, 2005
By Pradeep S Mehta

The Competition Act, 2002, of India, was adopted as another piece of the jigsaw puzzle, in our economic reforms, by replacing the extant Monopolies and Restrictive Trade Practices (MRTP) Act, 1969, which had become obsolete. The MRTPA’s focus was on curbing monopolies and concentration of economic power. That was the usual approach of a command and control economy.

Things have changed now, with the government being very serious about promoting competition. Like some of the laws in the more advanced economies, the Act has adopted a structural (size) approach to defining monopolies rather than tackle conduct. Under the MRTPA, a firm only had to be of a particular size to qualify to be a monopoly and this was good enough reason to curb its expansion, notwithstanding the potential for scale economies or its market power.

Most typically, a competition law has three main operational concerns: (i) curbing restrictive trade practices (RTPs), (ii) keeping in check abuse of dominant position, and (iii) regulating mergers and acquisitions (M&As). The effectiveness or otherwise of a competition law ought to be examined against the backdrop of its record of effectively performing these major functions. Under the MRTPA, RTPs per se are not considered bad, but deemed objectionable only when they are injurious to public interest. Getting sufficient evidence for a RTP, like cartelisation, itself is a big task.

Under the new law, the burden of proof has been shifted to the party indulging in that practice. The new law covers mergers, which were diluted in the 1991 amendment to MRTPA, but the financial thresholds have been kept rather high. A significant lacuna in the MRTPA is that the Commission could only ask the offending party to stop its restrictive practice, which never acted as a sufficient deterrent. Under the new law, the CA would be able to impose heavy penalties on the erring companies. Besides, there are also provisions for a leniency programme, which has been instrumental in busting cartels elsewhere. This means that one of conspirators can spill the beans, and get protected from prosecution.

The MRTPA, as interpreted by the Supreme Court of India, does not have extra-territorial jurisdiction, thus rendering it incapable of tackling anti-competitive practices that originate abroad. The new law has explicit provisions for extra-territorial jurisdiction.

An important factor that determines effectiveness of a competition regime is the level of public awareness. The new law provides for competition advocacy. It thus, becomes an important instrument, which did not exist in the MRTPA. This is a significant improvement. On the issue of policy advice, the new authority can only render advice when it is asked. That is not very wise.

Despite the improvements, the Competition Act, 2002, did not have a smooth takeoff and needs to be amended even before it became effective due to Supreme Court’s objections to some of its provisions. The major ones being that the role of the CA involves adjudicatory functions as well and hence it should not be headed by a non-judicial person; and that the CA cannot ask the high courts to implement its decisions.

The government now proposes to create a competition tribunal, headed by a judge, which will hear appeals against the Competition Commission. The latter body should be headed by experts, persons with a good understanding of law and economics. That is what the government averred before the apex court, but the trend is to appoint retirees. This opportunity should also be used to resolve other problems, which are retrogressive.

The sweeping power of the central government to: decide on policy issues; make appointments in the CA; and supersede or even dismiss the CA are not good things and need to be reversed. Another weakness is the provisions to deal with IPR-related anti-competitive practices, which need to be strengthened. Obviously, India needs to go a long way in effecting a healthy competition and regulatory regime that promotes growth with equity.

VIEW: Why should trade await a final settlement?

Published: Daily Times, March 27, 2005
By Pradeep S Mehta & Huma Fakhar

Cricket seems to be a far greater force uniting nations and sentiments than war. If commonality of purpose can exist on the sports field it can also be a part of trade processes. If one can play cricket, one can also undertake trade

India and Pakistan have been at loggerheads over Kashmir, among other things, since independence. However, times seem to be changing. This change gathered momentum when Pakistani Prime Minister Shaukat Aziz, at the World Economic Forum meeting in Davos, Switzerland, at the end of January, proposed to his Indian counterpart to evolve a series of confidence building measures that need not be held hostage to the resolution of Kashmir, the central dispute.

The Kashmir issue has been singularly responsible for blocking cooperation between the two countries, except where it is imperative and unavoidable. At international fora, at times, both share similar views and stands. For example at the World Trade Organisation (WTO), both are members of the developing countries’ alliance — G-20 — which is trying to ensure that the Doha Development Agenda will protect the interests of poor countries. Both countries have been founder members of the WTO and its predecessor, the General Agreement on Tariffs and Trade (GATT).

The two countries are also members of the South Asia Association of Regional Cooperation (SAARC) and its various instruments: this includes the South Asia Preferential Trade Arrangement (SAPTA), to be succeeded by the South Asia Free Trade Arrangement (SAFTA). However, any progress on either of these protocols has been mortgaged to the Indo-Pak détente. Consequently, the entire region has suffered.

India-Pakistan economic relations have been facing the bugbear of some myths that continue to define the debate on whether the countries should or shouldn’t resolve all disputes prior to forging trade and economic relations. Thus, progress on economic cooperation between India and Pakistan has taken a backseat. In this article, we have identified the major myths and proceed to demolish them.

Countries at war can play cricket but cannot trade!

Cricket seems to be a far greater force than war. If commonality of purpose can exist on the sports field it can also be a part of trade processes. If one can play cricket, one can also undertake trade!

All disputes need to be resolved before economic cooperation?

Policymakers in Pakistan have so far been insisting that unless all disputes between the two countries are resolved, trade and economic cooperation will proceed on a case-by-case basis. While some change is taking place in this line of argument, the jury is still out. We need to proceed with gradual opening up on both sides: India should look into serious tariff reduction and Pakistan should give up on ‘sensitive’ lists. A good way to begin could be a Bilateral Investment Treaty (BIT).

Disputes have never prevented economic cooperation around the world. France and Germany had been at loggerheads for over a millennium, but now both are major players in the European Union, which is continuously deepening economic and political cooperation. Malaysia and Thailand too have border disputes but this has not prevented them from cooperating economically through the ASEAN Free Trade Agreement.

The deepening India and China economic ties also set a precedent. India and China have a border dispute but have decided to keep it on the backburner. In 2000, bilateral trade between both countries was around three billion dollars. Within three years, it crossed $10 billion. Several estimates show that India and Pakistan can also achieve similar levels of trade if they decide to open up their borders.

Reciprocity should be followed in dispute settlement

Reciprocity may not be useful in the current environs. Times are testimony to the adverse impacts economic growth has faced in both these countries. What cannot be undertaken officially has somehow been substantiated unofficially. The market apparently knows what is right. Unofficial trade has already reached an estimated staggering two billion dollars. Imagine if this trade is carried out officially, reducing costs and having a trickle down effect. India has already granted Pakistan the MFN status, in spite of pending disputes. Curtailing trade due to unsettled issues is reciprocity at its worst. One should therefore, attempt a non-reciprocal approach to foster more trade.

India will dominate the economy of Pakistan if trade is liberated

There is concern that if Pakistan liberalises trade relations with India, the latter will dominate Pakistan’s economy. Undoubtedly India will have a trade surplus against Pakistan as it has with other neighbours, Bangladesh, Nepal and Sri Lanka. Yet no one complains. To the contrary, the Free Trade Agreement between Sri Lanka and India has led the two to initiate talks on further custom union integration. Simple economic rationale indicates that India enjoys these surpluses because of the size of its economy and the comparative advantages it enjoys. But this does not translate into a domination of Pakistan’s economy by India.

If strong economies always dominated bilateral trade then China and the US would dominate all economies with which they have a trade surplus.

On the contrary, USA runs a deficit with most trading partners, which do not dominate the American economy. China has a trade surplus against US, which exceeded $68 billion in 2000. China had a trade surplus of $ 0.8 billion in 2003 against Pakistan. This doesn’t indicate economic subjugation. On the contrary it indicates vibrancy and a leashed domestic demand waiting to be harnessed and catered to. Bilateral trade will help both countries. Take the case of the India-Pakistan-Iran pipeline. It will fetch Pakistan an annual income of $500 million.

Trade will lead to disputes which will promote more conflict

Trade disputes take place between all trading partners, as can be seen from the history of the WTO and other dispute settlement machinery. These are resolved through legal processes. Countries do not and should not resort to violence to resolve commercial disputes. This is not something to worry about. Disputes indicate a dynamic relationship.

Will there be a peace dividend if the cooperation is concretised?

There will be a huge peace dividend if trade relations are strengthened. When two countries trade with each other, people develop an interest in maintaining peace, so that the flow of goods and services is not disrupted.

Will it lead to the dissolution of other issues?

When countries are trading with each other, they avoid conflicts. If there are any disputes, as is likely to happen, they use dialogue to resolve them. What has been seen in many similar situations is that countries decide to maintain the status quo (somewhat like the LoC) and move on.

They always say one should learn from the lessons of history. We should also not repeat the mistakes that were made while history was being written.

Pradeep Mehta heads a leading consumer protection NGO in India. Huma Fakhar heads Fakhar Law International and M@P in Geneva and Pakistan

Sustaining Life on Earth

Published: Hindustan Times, Jaipur Live, March 21, 2005
By George Cheriyan

The international observance of World Water Day on 22 March is an initiative to galvanize global action. This year, water day will mark the beginning of the International Decade for Action “Water for Life 2005 – 2015”. The goals of the ‘Water for Life’ decade are aimed at having “a greater focus on water-related issues, while striving to ensure the participation of women in water-related development efforts, and further cooperation at all levels to achieve water-related goals of the Millennium Declaration”

According to the World Health Organization (WHO), about 1.1 billion people lack access to improved water sources, 2.6 billion to basic sanitation, and approximately 1.8 million people die every year from diarrhoeal disease, 90 percent of them are small children. Safe drinking water and basic sanitation help prevent water-related diseases.

In Asia today, there are still almost 700 million people who have inadequate access to safe drinking water and 2 billion without adequate sanitation. This means that half of the population living in the Asia-Pacific region does not have adequate sanitation, and one in five lacks access to safe drinking water. In almost all South Asian countries, the ground water tables have been rapidly declining. India, which has 16 percent of the world’s population but only 4 percent of the world’s water resources, has a grave drinking water crisis. An estimated 200 million Indians lack access to safe and clean water. In 15 states with major metropolitan centres, under ground water levels have been falling almost 5 percent per year.

In Rajasthan, unsustainable extraction of ground water, as reported by the state irrigation and ground water department, is leading to serious deterioration of water quality, particularly with greater concentrations of fluoride and salinity, and causing irreparable damage to the ground water aquifers in the State. As water table recede, tapping of ground water from deeper rock formations, is likely to increase fluoride contamination. In addition, many of the defunct water supply structures, like bore wells and hand pumps, which are large in numbers, are not capped/closed, leading to direct seepage of drains and contaminants into ground water.

According to WHO, 80 percent of all sickness and disease in the world is attributable to non-potable water and inadequate sanitation. A study in Bikaner found that about 70% of the sample population were suffering from atleast one type of water borne disease. High levels of various types of water contamination - dissolved solids, bacteriological and chemical - are found all over Rajasthan. Fluorosis is emerging as a major public health crisis for Rajasthan. The major manifestations of the disease are skeletal and dental fluorosis.

An integrated approach to water resources management is critical to the survival of the State of Rajasthan, says a background paper prepared by the consultants of the EC (European Commission) Technical Support and Facilitation Mission - Rajasthan. Due to the lack of integrated management of water resources and policy coordination, various priorities seem to be at war with each other. Since 90% of drinking water, and 60% of irrigation water, come from ground water sources, sustainable management of the ground water therefore is a key priority for the state. At a recently held national consultation, experts recommended for speedy enactment of an effective ground water act in Rajasthan.

Doha round: work out new alliances
It’s in the services sector that India will emerge as a major global player

Published: Financial Express, March 15, 2005
By Pradeep S Mehta

India has made services a pivot of its stand on negotiations under the Doha round of the WTO. At Geneva, before it went into the winter break, India’s new ambassador, Ujal Singh Bhatia, said India might have a problem in accepting the whole Doha package if the deal on services was not at par with agriculture and non-agricultural market access. This caused a furore among the trade negotiators community in Geneva. It was not received well by Brazil, one of India’s closest pals in the WTO and leader of the G-20 alliance.

The dramatic turnaround by India has resulted in developing countries showing signs of fragmentation for the first time since the Cancun Ministerial of the WTO. The sudden aggressive posture of India may have surprised many, but it was definitely not unexpected. India has been a known protagonist of services trade liberalisation, largely because of its strong competitive advantage in services trade. India expects greater commitments, especially in mode-1 (cross-border supply of services, such as offshoring) and mode-4 (temporary movement of natural persons, such as skilled professionals) from developed countries.

Many experts were puzzled by India’s over-emphasis on agriculture in the recent past, more particularly since the Cancun Ministerial. Undoubt-edly, the sector is the most important source of livelihood for millions of poor in India. However, if we look at India’s trade interest, it is not agriculture, but services, where it will emerge as one of the bigger players in the global market. During the 1990s, the Indian service sector grew at an average annual rate of 9%, contributing to nearly 60% of the economy’s overall growth rate. At the same time, India’s exports of services displayed one of the fastest growth rates in the world—over 17% per annum in the 1990s.

So far, agriculture has hogged the limelight in the current Doha round. This despite the fact that, of the three major components of world production— agriculture, industry and services—agriculture has the smallest share. Yet, it generates the greatest political heat and is the toughest to deal with at the WTO. However, services are no less important. In recent years, growth in world exports of services has outpaced merchandise. According to the 2004 international trade statistics, between 2000 and 2003, the annual growth rate of services trade has been 7% in comparison to 5% of merchandise trade.

At the WTO, the nature of the services negotiations is different from the other two market access negotiations, viz., agriculture and non-agricultural market access. The services negotiations proceed through a rather laborious process of requests and offers. The alternative is the use of negotiating formulae or model schedules that would lead to all WTO members making comprehensive commitments.

• The services sector is a huge source of employment for poor Indians
• A big challenge before India is to push forward its agenda on services

However, in the past, many members, including India supported the request-and-offer approach over the formula approach, as it allows considerable freedom to decide on how much to liberalise. India, which has a comparative advantage in two key modes of service supply, viz., mode-1 and mode-4 can, and is, easily taking a far more aggressive position.

In the case of cross-border trade, India must seek to pre-empt potential protectionism, by locking in the current open international trade regime. As for movement of natural persons, the task is to seek carve outs in the highly restrictive immigration regimes, thus generating greater scope for service delivery per se.

Given the emerging situation in Geneva, the biggest challenge for India is how to push forward its agenda on services in the Doha round of trade negotiations. The chances of using the G-20 alliance to further its interest look remote, as India is facing opposition from Brazil, the leader of the G-20 alliance. Other members are also not very keen to go along with India on this issue.

This leaves India with little option but to try and work out new alliances on services—maybe this time with some of the other rich and not-so-rich countries, such as Canada, Switzerland, South Korea, Singapore, etc.

Education is the key

Published: Hindustan Times, 14 February 2005
By George Cheriyan

‘WE ACCEPT our responsibility and we urge all people to join with us in doing all we can to pursue the principles of the Decade with humility, inclusivity, and a strong sense of humanity. As we gather in the city, where Mahatma Gandhi lived and worked, we remember his words: “Education for life; education through life; education throughout life,” says the one page crisp and brief Ahmedabad Declaration made on January 20, 2005 by more than 800 learners, thinkers, practitioners and activists from over 40 countries at the Education for a Sustainable Future Conference held in Ahmedabad, marking the beginning of UN Decade of Education for Sustainable Development (UN-DESD). The first event in the world of the Decade was held in India, while the formal launch of the decade is still awaited to be held in New York. 

Why a decade on ESD?

The 1992 Rio Earth Summit marked the beginning of an unprecedented effort to understand and work towards achieving 'sustainable development', addressing human needs holistically by integrating environmental, economic and social goals. The 2002 World Summit on Sustainable Development in Johannesburg re-emphasized the vital role of education, not only in building awareness about the sustainable development, but also in fostering the necessary changes to bring it at all levels. As a continuation of these efforts the UN decided to launch the Decade of Education for Sustainable Development (2005-2014). Many reports have defined sustainable development, but progress has been slow, and the global environment continues to deteriorate. This failure has largely been due to a lack of political will and motivation to make the necessary changes in individual lifestyles and social action. Hence the planned UN Decade. The biggest challenge now is to take an idea that sounds abstract, sustainable development, and turn it into a reality.  

Role of Education
More than the dissemination of information and knowledge, the key role of education in enabling and enhancing sustainable development is now recognised. Education for Sustainable Development (ESD) is a dynamic concept that utilizes all aspects of public awareness, education and training. Education can equip individuals and societies with the required skills, perspectives, knowledge and values to work and live in a sustainable manner.

Life Style of Bishnois
The Indian culture have placed great emphasis on people to nature relationships, as a means to sustainable development, preserving the environment, wise use of resources in the interest of coming generations. For example, the Bishnois in Rajasthan have evolved their life-style into a religion that fiercely protects the environment. The Bishnois, are a practical, wise people who hold lessons for everyone. The Bishnois manage sacred groves called orans in the arid and desert regions of Rajasthan. Despite sparse vegetation and limited water resources, the area reportedly supports a higher density of human and animal populations than any other desert region in the world because of the conservation practices of its people. The basic philosophy of the Bishnoi faith is that all living things have a right to live and share resources, and the group has a set of abiding laws including a ban on killing animals and on felling trees, especially their most sacred khejadi tree, which has numerous life-sustaining properties. Through ESD, we need to spread the message of such sustainable life styles. Unfortunately, Govt. or CSOs, either in Rajasthan or in other parts of the county, promote no such education.

The writer was a delegate to the ESF meet.

Big agenda ahead for a fair regime — 
The law needs to take care of many issues to meet international standards

Published: Financial Express, 28 January 2005
By Pradeep S. Mehta

We can breathe a sigh of relief, now that the Supreme Court has disposed of the writ petitions challenging the validity of the appointments to the new Competition Commission. Earlier, the court was so angered that it even expressed a disdain for the law. The government will now need to amend the Competition Act, 2002 to provide substance to its pleadings before the apex court. It may take another year or so, but it will be worthwhile to see what should be done, so that the law doesn’t face another challenge, and we do get a modern and first class competition authority in the country.

First, the government has offered to split the competition authority into two: a commission and an appellate authority, somewhat like Trai and Sebi. It is welcome. However, the commission will need to have adjudicatory powers, otherwise it will lack teeth. It is not a recommendatory body like Trai but a regulator like Sebi. Besides, the appointments to the new commission and the appellate body also have to undergo a transparent selection procedure, as the government has averred.

It will need to establish two selection committees, while the hunt for the personnel should not be restricted to sinecures: retired bureaucrats and/or judges. Such bodies need to be headed by persons, who have a good understanding of ‘law and economics’, and particularly their nexus. These can be specialist economists or lawyers, as the trend all over the world is. The job will require great vigour and rigour, and that should be the attributes one will have to look for.

A CUTS research report, Towards a Functional Competition Policy for India (to be released on January 31) has shown how a huge amount of anti-competitive practices which exist in our market place is sapping the economy, thus harming both consumer and business welfare. The UPA government is very serious about both promoting competition and ensuring that we have the best international practices in regulation. Therefore, both the government and the new competition authority have a huge agenda. The authority cannot handle such problems if it is not given the comfort and wherewithal of being able to function without fear or favour.

The existing law contains a Damocles sword, in terms of the ability of the government to remove any member, including superceding the entire body. Such medieval provisions will have to go. Other than that, the government’s power to issue policy directives will also have to be defined, rather than kept in such a manner, that even a section officer can create problems. The staff of the two bodies also need to be experts and professionals, rather than only deputationists from civil services. Services also offer good talent, but such appointments should be done through a proper selection procedure.

Another issue which requires serious consideration is the weak coverage of the competition law on intellectual property rights. The new Act has to provide for active coverage of abuse of IPRs (patents, copyright, trade marks etc), which we can do as per the provisions of the WTO-TRIPs agreement. The patent amendment Bill provides for an enabling provision for compulsory licencing for medicines etc., which engage in an exploitative pricing strategy. However, the role of the competition authority to examine such matters, needs better coordination between it and the patent office.

Coordination with other agencies and the competition authority is another grey area that needs to be re-examined. After all, it is the competition authority’s mandate to ensure that competition prevails in the market, while most of other agencies are mandated to protect competitors. For example, if a telecom operator is engaged in predatory pricing, Trai may not act on it, but the competition agency will. Similarly, it is the Reserve Bank of India, which regulates mergers between two banks, but it may not examine the competition angle. It is, therefore, necessary that the competition authority has the prime or at least the concurrent responsibility of acting on sectors, even if there is a sectoral regulator.

In conclusion, awareness about competition in India is very low. Many anti-competitive practices are taken for granted. The Competition Commission’s predecessor, MRTP Commission, did little on this due to its own legal and resource limitations. The new authority has thus a mandate and a big agenda for research and advocacy, which it can carry out methodically and effectively. That could be a good exercise for it until such time the law is amended and operationalised.

Crossed connections in open markets

Published: Business Standard, 24 January 2005
By Pradeep S. Mehta

The first WTO dispute on trade and competition in the telecom sector points to some dangers for smaller economic powers.

The first WTO dispute on a matter related to trade and competition has been reported rather scantily in the Indian media. This case is about a dispute between US telecom operators and Mexico’s Telmex.

But it will have great repercussions and assumes importance since it has close bearings to a similar case that may arise between American telcos and India’s dominant international long distance (ILD) services operator, VSNL.

The US Telecommunication Industry Association (TIA) has accused VSNL of anti-competitive practices and has asked the US government to monitor them.

It alleges that VSNL is undertaking anti-competitive practices by keeping the bandwidth price high and preventing upgradation of undersea cables landing in India.

India has denied these charges in spite of the fact that the Telecom Regulatory Authority of India (Trai), too, raised the same issue in a discussion paper.

Somewhat similar charges were made by the US against Mexico in the Telmex case a few months ago. The US had charged Mexico for nurturing a monopoly in the telecom sector by allowing Telmex to provide discriminatory access to only one US operator, Sprint.

The dispute that was raised mainly by two other US telecom giants, AT&T and MCI, was won by the US, who alleged that Mexico had failed to prevent anti-competitive practices in its telecom market.

It had relied on the WTO Reference Paper on pro-competitive regulatory principles under the agreement on telecommunications, a part of the General Agreement on Trade in Services (GATS) framework.

This contains broad directions obligating signatories to enact “appropriate measures” to prevent “major suppliers” from engaging in “anti-competitive practices”, and to provide interconnection on terms, conditions and cost-oriented rates that are reasonable.

In the mid-1990s, Sprint had partnered with Mexico’s largest supplier of telecoms services, Telmex (with a market share of 74 per cent in international traffic and 75 per cent of international gateway capacity), to provide long distance services between the two countries. AT&T and MCI had to settle for lesser Mexican players and could not benefit from Telmex’s large network.

Therefore, they called on the US Trade Representative to help them get the same type of access that Sprint enjoyed. This finally led to the dispute requiring Mexico to provide these US firms with non-discriminatory access as provided in the WTO Reference Paper.

The Telecom Reference Paper is a separate accord signed by around half of WTO’s members (including Mexico) setting out self-regulatory principles.

The Reference Paper establishes disciplines on telecom competition safeguards, interconnection guarantees, transparent licensing, independence of regulators from telecom operators, and fair allocation of resources such as frequencies, numbers, and rights of way. India has also committed itself to the reference paper, albeit with qualifications.

What were the main allegations? First, Mexico’s ILD rules require Telmex to negotiate a settlement rate for incoming calls from abroad and apply that rate to interconnection for incoming traffic from the US.

Telmex must also give up or accept traffic from other suppliers, regardless of whether the proportion of traffic is less or more than the proportion of its outgoing traffic through that supplier’s network. To this end, Telmex may enter into “financial compensation agreements” with other operators, which are then approved by the Mexican authorities.

The US alleged that this was a state-authorised cartel, benefiting Telmex and Sprint at the cost of other US rivals. Mexico countered that its ILD rules set up a pricing mechanism that allocated revenues with responsibilities, and to prevent predatory pricing by foreign companies with deep pockets. Mexico added that by having a competition law in place, it did maintain “appropriate measures” to prevent anti-competitive practices.

As an intervener, the European Union argued that even if Telmex’s acts were “anti-competitive”, they could not be “practices” in the true sense of the word, as they were not freely undertaken.

“If Mexico does not allow competition between telecom operators on a certain matter, there is no scope for anti-competitive practices. It is not possible to restrict competition where competition is not allowed.”

The point here was that Mexico’s telecom policy decided to regulate its telecom networks in a manner so as to promote growth in an orderly way. Following North American Free Trade Agreement (NAFTA), public sentiments in Mexico may want the government to ensure the primacy of national champions in most fields of the economy, especially when it is faced with the powerful US, which is its free-trade partner.

In fact, the Telmex case is the first of its kind in the telecommunications services in the history of the WTO. Experts argue that the Reference Paper is only a broad enunciation of principles that straddle both the competition and the regulatory aspects of telecom.

Writes Philip Marsden, a noted trade and competition lawyer, in Competition Law Insight, (May, 2004): “Competition lawyers in any jurisdiction should be surprised at the decision, and dismayed by the reasoning behind it.... It seems that when trade negotiators fail to reach agreement, dispute settlement panels will create new commitments to open markets. This is troubling in itself but even more so when panel decisions affect terms of competition in the markets without applying disciplined competition analysis.”

What is more surprising is that Mexico has decided not to appeal against the panel report. Says former ambassador to the WTO and former Deputy Chairman of Trai B K Zutshi: “Mexico did not wish to appeal because it suited the government. This was a good way to reduce Telmex’s dominance. Second, Mexico has an agreement with the US on Mode-1 of the GATS, which relates to cross-border supply of telecom services.”

An appeal would have certainly explored the manner in which the panel went about the interpretation of competition issues. While any panel decision is not a precedent in WTO jurisprudence, unchallenged decisions create an adverse situation for developing countries when faced with such disputes.

To apply the same analogy in the VSNL case, if recourse in taken to the WTO dispute settlement panel, the management of the telecom market will get influenced by the greater economic powers.

The anti-competitive behaviour of VSNL has already been brought to the notice of Trai by users, and which were found to be true to an extent. Trai officials had, in fact, acknowledged the absence of effective regulations designed to prevent and remedy VSNL’s behaviour and the fact that VSNL is taking advantage of such regulatory loopholes.

A recent research project of CUTS, “Towards a Functional Competition Policy for India”, has thrown up several issues in better regulation in the telecom sector that need to be resolved.

Given the current scenario, unlike Mexico, we cannot even argue that we have a competition law. The extant MRTP Act is toothless, while the Competition Act, 2002, will only begin to take effect now — after the Supreme Court dismissed a writ petition over whether a judge or a bureaucrat should head the Competition Commission last week.

Competition breaks cartels

Published: Business Line, 12 January 2005
By Pradeep S. Mehta

Cartels operate across the economy, particularly in the intermediate goods and services sector. They hike production costs, thus making finished goods less competitive. The Finance Minister could launch a `competition audit' across all sectors to weed out such unhealthy practices.

THE Minister for Steel, and Fertiliser and Chemicals, Mr Ram Vilas Paswan, should push for the installation of the new Competition Commission at the earliest, agitated as he is with the lack of competition in two of the sectors he handles — steel and drugs. In "Why a steel regulator makes little sense," (Business Line December 17), I had argued why a competition authority would be the antidote to the cartelising behaviour of the steel industry, or for that matter any sector. Take the case of pharma retail trade that has agitated the Minister, and the consumer community. For years, the trade has squeezing out huge commissions.

A CUTS (Consumer Unity and Trust Society) study on developing a "Functional Competition Policy for India" found that cartels exist everywhere and not just in the pharmaceutical sector. But in this sector it is not so much the manufacturers as the trade which calls the shots. Conventional economics says that a large number of players and a large number of buyers assure perfect competition. But the pharma sector beats this logic. Why?

In India, though there are 20,000 pharma manufacturers, there are nearly eight lakh retailers. These retailers are said to dictate to the pharma companies what number of stockists a company should appoint; how many brands or its combinations should be available in the market; what should be the free samples policy and so on. Liberal margins are demanded and offered by the pharma companies on generic drugs, even up to 2000 per cent.

In 1984, the Retail and Dispensing Chemists Association, Bombay, was brought before the MRTP Commission after it directed all wholesalers and retailers to boycott a company's product till the Association's demands were met by the company. The Commission observed that the impact of the chemists' boycott could by no stretch of imagination be considered negligible. The boycott represented an attempt to deny the consumers certain products to which they are accustomed and, therefore, the hardship to such consumers was patent. The Commission passed a `cease and desist' order (RTP Enquiry No. 10/1984).

Even before that, in 1982, the All India Organisation of Chemists and Druggists (AIOCD) had to face a similar fate (RTP Enquiry No. 14/1982, order dated September 25, 1984). The AICOD was hauled up before the Commission once again in 1983 when it issued a circular to various pharmaceutical companies threatening that if they dealt with the State cooperative organisations and appointed them as stockists granting them sale rights, it would expose the companies to a boycott by its members. The case was decided in 1993 and the Commission struck it down as a restrictive trade practice of `refusal to deal' (RTP Enquiry No. 37/1983, decided on June 25, 1993).

Now the government has decided to set margins under the Drug Price Control Order, 1998 to cap trade margins: For generic drugs, 35 per cent for retailers and 15 per cent to wholesalers, and for drugs sold under brand/trade names, 20 per cent and 10 per cent respectively. The trade is protesting loudly, but hopefully the government will remain firm.

Usually cartelising is indulged in by producers rather than buyers.

What could be of potential concern for India is a case study from Hong Kong, when two large department stores boycotted some consumer goods, for them to stop supplies to smaller stores.

Cement is a sector that has a tendency to cartelise, all over the world. In Europe, action was taken against the cement manufacturers association too, because it had coordinated the concerted collusion. Cement involves heavy freight costs, and hence the cartelisation is done regionally.

In 2001, the Builders' Association of India, Mumbai, resorted to the boycott of cement companies, faced with a recalcitrant producers' cartel. Two enquiries before the MRTPC still remain unresolved.

In 2004, regional imbalance in the matter of a cartel in the supply of pre-stressed cement sleepers came under the scrutiny of the Standing Committee on Railways. "The Committee note that the procurement of concrete sleepers have become a very sensitive matter because a lot of unscrupulous existing manufacturers have formed a cartel to secure orders by unfair means or tempering (sic) with procedure and simultaneously keeping the new competitors out of the race. The Committee are constrained to notice that there exists a regional imbalance in the setting up of concrete sleeper manufacturing units. They also express their unhappiness that new entrants are not encouraged which ultimately strengthen the cartel of old/existing manufacturers." In procuring 160 lakh broad-gauge sleepers for 2003-05, the Railways awarded contracts to the existing 71 firms, and ignored the new 24 firms.

A similar anti-competitive decision was taken recently when domestic private airlines were allowed to fly overseas routes, hitherto the preserve of the national carriers. But an entry barrier was created: To qualify to fly abroad an airline had to have five years experience. This would keep two new low-cost airlines which plan to acquire a major fleet out of lucrative routes.

Did a cartel manoeuvre this? For, the two national carriers have not been able to use the bilateral rights because they do not enough aircraft, or most of what they have are too old. In this, perhaps, the airline cartel saw an opportunity to consolidate its presence.

Cartels operate across the economy, particularly in the intermediate goods and the services sectors. Whether it is transmission line towers, electric cables, or construction and transportation... they hike up production costs, thus making the finished goods less competitive. The new Competition Commission of India, if it comes into being soon, has a huge agenda. The National Manufacturing Competitiveness Council too needs to flex its muscles, if it has to deliver results. Also, the Finance Minister, in his forthcoming Budget, could launch a `competition audit' across all sectors to weed out unhealthy practices. The Comptroller and Auditor General should be roped into this project. The new Government has taken competition very seriously. It now has to deliver.

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