Let the principles of competition guide privatization

In defense of her privatization program, the then Prime Minister of the UK Margaret Thatcher said that reducing the power of the state and increasing the power of the people. This is in stark contrast to the recent statement by Finance Minister Nirmala Sitharaman that the government was selling public sector banks to keep these businesses afloat. As Prime Minister Narendra Modi has said that the government has no business in business, the reason for privatization should not be limited to economic efficiency. A clear and consistent utterance of the benefits that citizens expect from the program will help to create a broad consensus for it and overcome unreasonable obstacles.

Tango takes two. Privatization alone is not enough to democratize its interests. Healthy competition is needed in our privatization process and beyond to reduce conflicts in bringing these to the masses in large quantities.

NK Singh, chairman of the 15th Finance Commission, recently said that privatization should not distort the principles of competition. A coordinated approach by the Union Finance Ministry, the Competition Commission of India (CCI) and sector regulators is needed to address the concerns of the few companies that acquire the most distressed assets. The sooner we put Singh’s wise advice into practice the better.

The role of the CCI did not start after the government decided to privatize its own companies, but very quickly. The CCI should take notice whenever the government decides to protect certain sectors from market competition, whether it is an excuse, whether it is the distribution of public goods, strategic interest, national security, lack of private sector expertise or anything else. To ensure proper competition, we need a transparent and impassioned assessment of government arguments, including the consideration of alternative market-based mechanisms for the distribution of government goods and the measures needed to remove barriers to the creation of local capabilities. The government should not just protect its inefficiencies in the garment of public interest. Under its enabled law, the CCI can make such moves as sumo moto.

Furthermore, while arguments in favor of public ownership and protecting certain sectors from market competition make sense at certain times, these cannot be done for permanence. Public sector exemptions from the 2002 Competition Act should not be permanent. The government should clarify the period for which this is required. Along with the CCI, the Comptroller and Auditor General (CAG) and the vigilant civil society, it is important to see that government agencies are under competitive pressure before things turn chaotic.

In sectors where local private sector capacity is limited, think-tanks such as the CCI, relevant government departments and the Nitish Aayog should work on reforms to attract global expertise, technology and capital.

The CCI also needs to look at the privatization process from a competitive lens. This should not result unfairly in giving large companies abusive market dominance. Admission barriers, eligibility criteria and entry restrictions, all of which can unnecessarily limit the number of bidders, should be reviewed. In Oman, for example, the privatization authority selects bidders through policies that take into account the principles of transparency, publicity, equal opportunity, non-discrimination and free competition.

The large flawless process of privatization does not automatically ensure that companies are subject to competitive pressure or operate effectively. There have been instances where privatization efforts have gone awry, both in emerging and developing economies, especially in the utility sectors. The UK, Argentina and Mozambique are lagging behind in privatizing water and railway services. Some of the negative effects of sub-optimal privatization are unreasonable price increases, exclusion of vulnerable consumers and increased inequalities. At the same time, Gabon and Brazil had a very rewarding experience.

While not a one-size-fits-all formula, it has been found that strong regulatory and competitive regimes are needed to ensure that the benefits of privatization flow into some but not all.

In a recent paper (bit.ly/3cxu2HN) that summarizes the lessons from privatization in developing countries, Estrin and Pelletier suggest some requirements for success. The ability to limit barriers to the entry of new domestic firms, avoid bureaucratic interference and limit competition by enhancing cozy relationships, open competition to foreign investment, effective competitive governance and arm-length relationship between government and privatized firms under a strong and independent regulator.

In a variety of policies, from its goods and services tax to its new agricultural sector laws, the government has been pursuing pro-competitive principles for success. The same logic should be extended to its new privatization program. In general, the center should inform the public of the two benefits of competition and privatization and how the two are interrelated. It should be explained that these are market-friendly rather than just business-friendly versions, as we need them in the pandemic-affected world. The country must adopt a comprehensive national competitive approach in this effort to promote economic democracy.

Amol Kulkarni of CUTS contributed to this article.

Pradeep S. Mehta CUTS International Secretary General

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