February 01, 2005, Financial Express

By Pradeep S Mehta

In Europe, a lot of issues which were dealt with by the government are now in the domain of a competition authority

Frederic Jenny is a class apart. A former vice-president of the French Competition Authority, and presently chairman of the OECD Committee on Competition Law and Policy, Dr Jenny has the unique distinction of being a judge in the French Supreme Court without a judicial background. But that, as he tells FE in an exclusive interview, should not really raise eyebrows because in today’s complex world, judges need to know much more than law alone. In India to attend a conference organised by the Jaipur-based CUTS, “Moving the Competition Policy Agenda in India” Dr Jenny spoke on competition and the lessons India can learn from experiences in the rest of the world. Excerpts:

In India we’ve had a raging debate on whether the Competition Commission must be headed by a judge and even now, after the Supreme Court ruling, the matter has not been settled. What is your opinion? How critical is a judicial background for such a body?
You do need to have a judicial background in principle. However, I don’t believe it is essential. Take my case. I am the first-ever economics professor to be appointed a judge of the highest court of law in France.

There is some relationship between the debate in India and France in this regard but it has taken a different form. What has happened in France and other European countries is that dereservation, globalisation along with opening up to competition have taken place. So, a lot of issues which were dealt with by government earlier are no longer within the ambit of the authorities. Initially, one needed government permission to set up an industry. Issues like petrol pricing, outsourcing, etc. have come within the judicial ambit. Judges themselves started questioning how apt the judiciary was to deal with these issues.

With reference to the competition law it is difficult to separate law from facts. Laws are usually written in a short phase and then it is up to the judge to interpret the law taking into account the relevant environment as to whether the sort of practice in question is permissible.

There are a number of different ways in which the magistrates can become competent in these matters. One is that they consult an expert body as in the United States. But the major flaw with this system is that if the judge does not know the right questions to ask, it can fail. Another way is to have a competition authority composed of judges and experts and this is the model followed in many parts of the world today.

In France the issue of whether the members of the commission need expertise in other areas became a focus of intense debate, particularly in the context of a number of socio-economic damage cases came up. It was in this context that I was selected through a long procedure of selection.

But does one need a separate body to ensure competition. Is it not enough to remove barriers to entry and then leave it to the market?
There are several ways of answering this question. In some sense national monopolies remain as in airlines, education, electricity, water distribution because there is no easy technology that is available as in the water distribution system. It is quite another matter in the case of telecom where, due to advances in technology, government participation has declined. The extent of government control varies from sector to sector. In some sectors where private players want to come in there is a need for a regulator to create an enabling environment so that they can set up business and eventually grow. A regulator is required depending on the network of competitors. In areas where it is useful to attract investment, regulation is justified.

How would you define the role of the Competition Commission?
A Competition Commission can either regulate, or look at a specific sector or both. In Australia, for instance, the competition authority has two divisions – a competition division and regulation division. In UK, however, each regulator enforces competition law in the sector concerned. In France there are two authorities. The regulator does not do competition work and makes limited decisions. The competition authority looks at the plans and what are the qualities of the firm entering. There is a division of labour between the two.

Which route should India take?
It should follow the one it wants to. Oh! I forgot! There is also a fourth model to the ones I mentioned earlier which operates in New Zealand where everything is done through the Competition Council and this has not been very successful because of the procedures and the unfamiliarity of judges with technicalities. The division of labour model, however, is the most common one.

As the trend of mergers and acquisitions grows worldwide are companies becoming inherently anti-competitive?
There are two possible answers to this. Sectors in which there is reason to believe economies of scale are required for efficiency expansion should not be curtailed. The benefit must be passed on to consumers. Size is not something to worry about, it is the abuse of power. Sometimes a big-sized company captures a limited market to the detriment of consumer interest. Take the case of Microsoft, which has captured the market due to its better products and innovation. It hasn’t grown through mergers. The fact that you have grown does not mean you are using invasive practices.

It is quite different when you absorb a competitor. In case the company going in for merger has a huge share in the market then a check should be made at the time of the merger. It must be found out whether there is good reason for the merger or that the company is doing it solely to eliminate competition. The latter is not good for the consumer. Mergers are permissible where there are good technical reasons for increase in size.

The Indian Competition Commission should not prevent mergers as a whole but prevent those which do not have a redeeming value as such. There are three kinds of markets – where entry is easy, where entry is not relatively free and where the market power of few firms serves as barriers to entry.

Our Competition Act bans cartels. But are cartels necessary anti-competitive?
They mostly are. In the US, forming cartels is a criminal offence and laws are severely enforced. Export cartels, however, are allowed so that small firms get access to international market. The government has to see whether private cartels are of any use to industry and the benefit can be passed onto the consumer. The role of the Competition Commission and the competition policy is that the benefits can be passed to the consumer. But it is very hard to see a case where a cartel would be justified. Government cartels like those on oil, rice, coffee and rubber are reasonable but not private ones as they have no role in policy. The WTO has done nothing to prevent government cartels.

If the benefits of competition are so widely recognised, what explains the opposition of developing countries to getting competition into the WTO?
Well I would think we need to decide whether they were opposed to the EU initiative because the way it was worded or because they lacked the ability to compete. There is also a lot of distrust on the part of developing countries in the WTO.

In India the government can remove any member of the Competition Commission and can even supersede the entire body. Your reactions?
Well, it’s not like that in France. There members are appointed to the Commission for a tenure of six years and cannot be removed from office. Independence is essential to the credibility of the Commission. There is a need for an independent commission as the government being a big actor economically may not have views which are neutral. Secondly, transparency is important in transforming the economy. There must also be transparency in the decision-making process which should be accessible to the press and the public.

One of the reasons for resistance to competition bodies in the developing countries is lack of transparency and misuse of power. If there is no transparency the government can overrule decisions and exercise control by squeezing the budget of the commission.