Published: The Business Line, December 10, 2002 ,
By Pradeep S Mehta
SHOULD the `national treatment’ idea be kept out of the new Competition Bill (now in Parliament)? While the Commerce Ministry’s Trade Policy Division thinks so, the Department of Company Affairs does not. The latter argues that the law does have provisions for exemptions, under which, such issues can be dealt with if required. But the Commerce Ministry feels that this is the only way to promote national champions.
The debate on national champions exists in many countries, including the rich ones. Recent developments in the German energy market have revived the debate. This may signal either the strengthening or introduction of industrial policies that encourage national champions, and thus have serious implications for competition policy. A country’s industrial policy can be regarded as the active intervention by the state in the market to strengthen domestic industrial sectors to serve goals (such as successfully competing in global markets) other than competition and economic efficiency.
Unlike the competition policy, which aims at protecting the competitive process, the industrial policy seeks to channel the market forces into working for particular national or industry interests. Recently, the German Economics Ministry overruled, for the second time, a Federal Cartel Office (FCO) decision rejecting Eon AG’s proposed $10.2-billion takeover of Ruhrgas AG, Europe’s largest gas importer. The Ministry argued that the takeover would create a powerful national champion to negotiate in international markets. (A Dusseldorf court has, however, temporarily stayed the Ministry’s decision.) A Ruhrgas-Eon deal would strengthen the groups’ already dominant position in gas and electricity distribution in Germany, in effect reducing competition in these markets, just months after they were officially liberalised. Through the so-called “ministerial approval” included in the competition law, the government can overrule an FCO veto if a merger’s anti-competitive effects are either “outweighed by the advantages to the economy as a whole” or if the merger is “justified by the overriding public interests”.
A variation of this intervention exists in France and Belgium. The draft Indian competition law also proposes such an override. In 2001, New Zealand too approved the merger of two dairy companies, resulting in a 90 per cent market-share. Officials indicated that the merger would help promote the sector’s export competitiveness. The advocates of national champions argue that such interventions lead to completely independent decisions from the competition authority, in that they are devoid of industrial policy considerations. However, this view does not explain why the UK and the Netherlands are set to adopt a different approach.
Their new competition laws propose to limit ministerial intervention to national security grounds at the most; other national interest deliberations will be left to the competition authorities.
Moreover, in the US, industrial policy considerations have not influenced the anti-trust law much. It could even be said that `competition’ lies at the core of the US industrial policy.
The tendency to heed the calls for national champions is not restricted to industrialised countries. The Latin American brewing industry, for instance, recently witnessed a spate of consolidation despite their anti-competitive effects.
However, for developing countries, other factors contribute to their desire to create globally competitive entities. These include trade liberalisation, perceived to be threatening their national policy space and largely favouring multinationals, and the proposed multilateral competition framework in the WTO.
In India, two government departments, one responsible for competition and the other for WTO issues, are at odds on whether to provide for national treatment in the proposed new competition law. Opponents cite that this would inhibit the Government’s desire to promote national champions.
These sentiments are reflected in the ongoing Government divestiture exercise. Unfortunately though, the new competition law is not in place and that skews the privatisation efforts. The Defence Minister, Mr George Fernandes, is right in pointing out that if Reliance is allowed to bid for IPCL and BPCL, it could lead to a high market concentration.
Other developing countries, such as Pakistan and Malaysia, are also resisting attempts to bring competition within the WTO ambit for fear that it would limit their ability to base their economic development on the promotion of national champions and other industrial policy considerations. The economic arguments in favour of this view recognise that in the initial stage of economic development, it can make sense to use industrial policy tools to promote growth and development.
Hence, in the case of developing countries, an ideal level of competition is needed which complements the industrial policy rather than maximising competition. The `national champion’ argument may have been misused by many countries, and wrong `winners’ picked, but some East Asian economies have applied the strategy well, giving local concerns breathing space to build industrial capacity and achieving commercial success in world markets. Some countries have tried to strike a balance between the two policy objectives — competition goals and national interests — by pursuing them concomitantly. In South Africa, for instance, this has been through the incorporation of a public interest criterion into the country’s competition law objectives.
One of the criteria is to make the country’s firms competitive internationally. However, this has also often been abused to justify the uncompetitive activities, without commensurate benefits to the public.
Practice has shown that a firm that does not face competition locally invariably fails to be competitive internationally. The question of how to balance the two policy areas so as to maximise economic and consumer welfare without losing out to foreign companies in the global market still remains.
Hence, the challenge for policymakers is how to strike a balance between competition policy and industrial policy when formulating and integrating them into national development strategies.
In the case of India, a carve-out on national treatment in the proposed competition law could drive away much-needed FDI, which comes in mainly through the mergers and acquisitions route.
It could also promote more national laggards, as seen in the pre-reform era. Thus, a more holistic approach to our industrial policy is required, but not by tinkering with the new competition law.