When our public sector is much in news whether it involves privatisation or disinvestment, it is worth recalling whether they are good corporate citizens, especially when they are monopolies.
Many are not. This was evident when the Competition Commission of India imposed a whopping fine of Rs 1,773 crore on Coal India for abuse of dominance in December 2013.
This was the first case of fining by CCI on a PSU, while it has come down with a heavy hand on several private firms.
Most of the big players in China are also PSUs, but some of them may behave in an anti-competitive manner. In the beginning of 2014, China’s State Administration for Industry and Commerce, armed with powers to check anti-competitive practices, fined the state-owned water company, Yiyuan Fresh Water Company a sum of 3.2 million renminbi for abusing its monopoly.
The company was engaged in tied selling, where it was bundling its water supply services with the construction of water meters and pipes. This was also the first ever competition case in China on a PSU.
Like other laws, Section 4 of the Competition Act, 2002 of India prohibits all enterprises from abusing their dominance. Enterprises are defined under the Act to include PSUs and departments of the government.
Only activities of the government relating to the sovereign functions of the government and activities carried by the departments dealing with atomic energy, currency, defence and space are exempted.
Despite the privatisation wave across many countries in the 1990s, PSUs still command a significant level of economic activity.
A 2013 study by Büge Max et al for example reveals that top five countries with the highest PSU role in sales, assets and market value were China (96%), the UAE (88%), Russia (81%), Indonesia (69%) and Malaysia (68%).
This implies that PSUs are too prevalent for their possible anticompetitive practices to be ignored. In any case, the harm from the anticompetitive practices on consumers and other businesses continues to be dire.
The damage to consumers in terms of overpricing is even more pronounced for PSUs, as they are mostly monopolies in their own markets. Some PSUs simultaneously carry out activities in areas where they face competition with the private sector while operating in others where they do not.
This leaves them in a position where they are capable of leveraging their monopoly position into the markets where it competes with private players through cross-subsidisation.
In 2009, the Competition Board of Estonia fined Narva Elektrijaamad AS, a subsidiary of the state-owned electricity monopoly Eesti Energia 16,000 euros for abuse of its dominant position. In 2005, the Czech Office for the Protection of Competition imposed a fine of approx. 7.8 million euro on Èeský Telecom, a PSU for abuse of dominance.
In early 2002, the Finland Competition Council imposed a fine of 20,000 euro on the Finnish Meteorological Institute with a monopoly on distributing basic weather radar data, for abuse of dominance.
Many other examples can be found across the world. Despite being liable to competition laws in many countries, there continues to be some level of apprehension over whether in its application, the competition law should be blind to the fact whether the firm is state owned or privately owned.
The operation models for most PSUs is that they do not fully guard against the consequences of success or failure, as this is governed by their corporate governance structure, usually defined by a regulatory framework. These can pose rigidities which their private sector counterparts are not subjected to.
In addition, public service obligations are often costly, which would warrant the PSU to use profits from its market activities to subsidise these obligations.
Thus applying the usual competition law tests such as recoupment theory in predatory pricing and even the small but significant non-transitory increase in price test may be unfair as some PSUs have goals other than profit.
More importantly, imposing fines on a government-owned enterprise by another government body (competition authority) could be regarded as a smokescreen.
The PSU might also not be fully independent in its decision-making. As established by CCI, Coal India did not enjoy full freedom.
This might call for a relook on the manner in which the competition law is applied to PSUs.
The writer is the secretary general of CUTS International
