Themes > Current Issues
26.01.2001
C.P.
Chandrasekhar
Evidence that economic reform in
India has not managed to check or tame monopoly and promote competition
is growing. In some areas reform has fostered oligopolies. In others
it has served to consolidate the strength of existing oligopolies.
Combined with the fact that liberalization has taken the teeth out
of anti-trust institutions and policies, this has resulted in collusive
practices that have allowed these oligopolies to earn large rents
at the expense of consumers.
Consider for example the cellular telephone sector. Hitherto it has been dominated by a few service providers who won themselves licences by bidding to pay huge licence fees, and subsequently reneged on their promise. Claiming that they would have to shut shop if such fees were actually paid, and virtually frightening the public and the government into believing that this would ensure the mortality of an infant industry, they managed to migrate to a license fee regime that reduced their burden substantially. As has been argued by many, including some in government, this amounted to condoning the error and providing concessions to providers who, under false pretences, had in essence pre-empted entry by those who had originally submitted lower and more rational bids.
Having won themselves an oligopolistic position under false pretences, these operators, who combined under the banner of the Cellular Operators’ Association of India (COAI), have strenuously struggled to realize two objectives. They have sought to pressurize the regulatory authority, the Telecom Regulatory Authority of India (TRAI), to adopt a pricing principle and ceilings on tariffs that permits the realization of oligopolistic rents, despite regulation. And they have worked towards preempting competition from within and outside the sector, sp that such rents are actually realized.
They were successful in the pursuit of the first of these objectives because of the obvious bias of the originally constituted board of the TRAI in favour of the private operators that finally necessitated the reconstitution of the Board. The pricing principle that was adopted provides for a rental that goes to meet the capital cost of the provider and an airtime charge that covers operating expenses. This ensured that there was little risk left in the business. Other attempts to improve the profitability of the business such as the demand for a Calling Party Pays (CPP) regime, under which the caller meets the airtime charge for incoming calls whether or not the caller was a subscriber to the cellular network, were fortunately short down despite the then TRAI’s sympathy for the demand.
Given the rents implicit in the ceiling tariffs specified, if the view, which dominates reform, that the induction of private players into a business automatically induces competition were indeed true, actual cellular tariffs would have been driven well below the TRAI-specified levels. It did not because of collusion between the operators that transformed an oligopoly into a virtual monopoly.
What is shocking is the recent revelation that the cellular operators had in fact even flouted the TRAI ceilings. In a decision, which speaks for the credibility of the reconstituted board of the TRAI, especially when compared with its predecessor, the Authority has asked cellular operators to refund customers the excess amounts they have charged subscribers since August 1999, when the migration from the fixed licence fee regime to the revenue sharing system tool place. In the wake of migration the rental and airtime tariff ceilings worked out by the TRAI were Rs. 422 per month and Rs. 4.65 per minute respectively. As opposed to this cellular operators were charging Rs. 600 and Rs. 475 as rental for different time spans during the August 1999 to January 2000 period and Rs. 6 and Rs. 4 per minute as airtime charges. According to one estimate, after taking into account differences from the permitted maximum rate, subscribers on the standard tariff package have to be refunded as much as 13 per cent of the charges they have paid over the period August 1999 to January 2001. Across the country, the collusive practices of the operators have resulted in excess charges close to Rs. 400 crore.
Further, with the belated induction of new competitors into the business, it is now clear that the monopolistic position of the operators in different circles have helped them earn large profits from subscribers, by keeping tariffs close to the maximum permissible. This they ensured by preempting competition from outside the cellular industry. Since its inception the COAI has lobbied against the entry of new operators into the mobile telephony business, whether as fully-mobile operators or operators with limited mobility. For long, they managed, for example, to stall the entry of MTNL into the mobile telephony business using GSM, CDMA or WLL technologies. It has taken close to five years to break the stranglehold the COAI ensured over the industry through these means. The moment MTNL won its case to enter the GSM business in the Delhi metro circle with its Dolphin service, cellular tariffs have collapsed by more than a third on average. The willingness of Airtel and Essar to substantially cut tariffs to partially match the much lower tariffs announced by MTNL indicates that these providers had been earning huge margins relative to what they would now earn in the new competitive environment. And with the government having finally come around to the view that entry into the telephony business must be freed substantially, it would be no surprise if tariffs come down even further, revealing the extent to which private operators (inducted into the telecommunications area to reduce tariffs and improve customer service) have actually ended up fleecing the consumer.
Advocates of reform would however argue that, while some mistakes were made in the early stages of reform in the telecommunications industry, the reconstitution of the TRAI and recent revisions of policy would set things finally right. If the TRAI plays the role of watchdog appropriately, it may. Otherwise it would not, as experience elsewhere indicates. This is because competition even if temporarily ensured, as it seems to have been in the telecom sector, could soon lead to oligopolization. This is illustrated by the experience of the cement industry, which has for some time now been freed of restrictions on entry as well as controls on prices. Liberalization did initially spur competition, which led to increased capacity, an improved demand-supply balance and better prices for the consumer. Cement production rose from 49 million tones in 1990-91 to 88 million tones in 1998-99, because of a wave of capacity creation in the wake of liberalization. However, with public investment depressed and growth in the construction business slowing, the industry came to be characterized by excess capacities and depressed prices. To help the industry the government stepped in with protection from international competition with a basic customs duty of 38 per cent, a special additional duty of 4 per cent, an anti-dumping duty of Rs.10 per tonne and a countervailing duty of Rs. 350 per tonne.
Behind these protective barriers the demand-constrained industry has been witnessing a substantial change in structure. The industry has seen a process of growing consolidation of capacity in a few hands as a result of a spate of mega-mergers and acquisitions. Leading the movement has been international cement major Lafarge of France that has acquired the cement businesses of Raymond and Tata Steel and is reportedly gearing up for an acquisition of Jayaprakash Cement. But there have been others in the game as well. Gujarat Ambuja has bought out the Tata stake in ACC for Rs. 925 crore, India Cements has acquired Raasi Cement and Italcementi has acquired a 50 per cent stake in Zuari Cement. All this is occurring in an industry where already capacity with the top six players accounts for more than 60 per cent of total production, though there are 60 companies and 120 plants in the industry.
Acquisitions such as these may be dismissed as inevitable in a more market-driven environment. But what is disturbing is that the process of consolidation has been accompanied by growing evidence of monopolistic practices. The demand for cement picked up in 1999-2000, as reflected in the 20 per cent increase in output during the first eight months of that financial year. Using the occasion, as well as the base for collusive practices that concentration in capacity affords, producers have consciously jacked up cement prices. Prices which were slack till about November last year, have been escalating rapidly since, as leading producers repeatedly hiked prices supported by measures aimed at reducing supply and creating an artificial shortage. Thus in November, these producers had decided to shut down capacity for 35 days more than the 25 during which capacity is normally shut down for maintenance purposes. Restrictions on the distribution of cement have also reportedly been adopted by what is quite clearly an organized cartel. With the support of of such measures, prices were hiked by 36 per cent in five successive revisions during the last two months of 2000, taking the Mumbai price of cement from Rs. 140 a bag to Rs. 190 a bag. Other markets such as those in Andhra Pradesh, Tamil Nadu and Kerala have witnessed similar increases.
The large increase in price over a short period of time has met with an adverse response from the building industry. The Builders Association of India has called for intervention by the government in the form of import duty reductions and price regulation and the Department of Company Affairs has reportedly instituted an inquiry. The fact, however, remains that liberalization has done away with many of the instruments that the government has at its command to deal with cartels of the kind that have formed in the cement industry. Reform not only engenders monopoly, it provides greater leeway to oligopolistic firms to exercise their market power.
The difference between the situation in the cellular and cement industry is worth noting. Though a new industry, cellular operators have used the same strategy as the traditional oligopolistic groups that flourished during the import substitution years. Just as the traditional oligopolistic structure used the licensing system as a means to prevent the entry of new players into their bases of monopoly power, the cellular operators used the State including the official regulatory authority to preempt entry and charge tariffs that ensured high profits. The cement industry, on the other hand, has seen the emergence of oligopoly as a natural result of unbridled competition. And the withdrawal of the State in the wake of deregulation has helped those oligopolies to protect and increase their profits.
The cement experience suggests that even if recent policy decisions have helped reduce the strangehold over the market of the early entrants into the cellular industry and widen and intensify competition, this is no guarantee against subsequent oligopolisation. What remains to be seen is whether the reconstituted TRAI would be able to prevent those oligopolies, when they emerge, from reaping unfair benefits from their market power. Even if that happens, the lesson is clear. Markets freed by reform breed anti-competitive practices. The State must come in to prevent them, as it must in the case of cement.
Consider for example the cellular telephone sector. Hitherto it has been dominated by a few service providers who won themselves licences by bidding to pay huge licence fees, and subsequently reneged on their promise. Claiming that they would have to shut shop if such fees were actually paid, and virtually frightening the public and the government into believing that this would ensure the mortality of an infant industry, they managed to migrate to a license fee regime that reduced their burden substantially. As has been argued by many, including some in government, this amounted to condoning the error and providing concessions to providers who, under false pretences, had in essence pre-empted entry by those who had originally submitted lower and more rational bids.
Having won themselves an oligopolistic position under false pretences, these operators, who combined under the banner of the Cellular Operators’ Association of India (COAI), have strenuously struggled to realize two objectives. They have sought to pressurize the regulatory authority, the Telecom Regulatory Authority of India (TRAI), to adopt a pricing principle and ceilings on tariffs that permits the realization of oligopolistic rents, despite regulation. And they have worked towards preempting competition from within and outside the sector, sp that such rents are actually realized.
They were successful in the pursuit of the first of these objectives because of the obvious bias of the originally constituted board of the TRAI in favour of the private operators that finally necessitated the reconstitution of the Board. The pricing principle that was adopted provides for a rental that goes to meet the capital cost of the provider and an airtime charge that covers operating expenses. This ensured that there was little risk left in the business. Other attempts to improve the profitability of the business such as the demand for a Calling Party Pays (CPP) regime, under which the caller meets the airtime charge for incoming calls whether or not the caller was a subscriber to the cellular network, were fortunately short down despite the then TRAI’s sympathy for the demand.
Given the rents implicit in the ceiling tariffs specified, if the view, which dominates reform, that the induction of private players into a business automatically induces competition were indeed true, actual cellular tariffs would have been driven well below the TRAI-specified levels. It did not because of collusion between the operators that transformed an oligopoly into a virtual monopoly.
What is shocking is the recent revelation that the cellular operators had in fact even flouted the TRAI ceilings. In a decision, which speaks for the credibility of the reconstituted board of the TRAI, especially when compared with its predecessor, the Authority has asked cellular operators to refund customers the excess amounts they have charged subscribers since August 1999, when the migration from the fixed licence fee regime to the revenue sharing system tool place. In the wake of migration the rental and airtime tariff ceilings worked out by the TRAI were Rs. 422 per month and Rs. 4.65 per minute respectively. As opposed to this cellular operators were charging Rs. 600 and Rs. 475 as rental for different time spans during the August 1999 to January 2000 period and Rs. 6 and Rs. 4 per minute as airtime charges. According to one estimate, after taking into account differences from the permitted maximum rate, subscribers on the standard tariff package have to be refunded as much as 13 per cent of the charges they have paid over the period August 1999 to January 2001. Across the country, the collusive practices of the operators have resulted in excess charges close to Rs. 400 crore.
Further, with the belated induction of new competitors into the business, it is now clear that the monopolistic position of the operators in different circles have helped them earn large profits from subscribers, by keeping tariffs close to the maximum permissible. This they ensured by preempting competition from outside the cellular industry. Since its inception the COAI has lobbied against the entry of new operators into the mobile telephony business, whether as fully-mobile operators or operators with limited mobility. For long, they managed, for example, to stall the entry of MTNL into the mobile telephony business using GSM, CDMA or WLL technologies. It has taken close to five years to break the stranglehold the COAI ensured over the industry through these means. The moment MTNL won its case to enter the GSM business in the Delhi metro circle with its Dolphin service, cellular tariffs have collapsed by more than a third on average. The willingness of Airtel and Essar to substantially cut tariffs to partially match the much lower tariffs announced by MTNL indicates that these providers had been earning huge margins relative to what they would now earn in the new competitive environment. And with the government having finally come around to the view that entry into the telephony business must be freed substantially, it would be no surprise if tariffs come down even further, revealing the extent to which private operators (inducted into the telecommunications area to reduce tariffs and improve customer service) have actually ended up fleecing the consumer.
Advocates of reform would however argue that, while some mistakes were made in the early stages of reform in the telecommunications industry, the reconstitution of the TRAI and recent revisions of policy would set things finally right. If the TRAI plays the role of watchdog appropriately, it may. Otherwise it would not, as experience elsewhere indicates. This is because competition even if temporarily ensured, as it seems to have been in the telecom sector, could soon lead to oligopolization. This is illustrated by the experience of the cement industry, which has for some time now been freed of restrictions on entry as well as controls on prices. Liberalization did initially spur competition, which led to increased capacity, an improved demand-supply balance and better prices for the consumer. Cement production rose from 49 million tones in 1990-91 to 88 million tones in 1998-99, because of a wave of capacity creation in the wake of liberalization. However, with public investment depressed and growth in the construction business slowing, the industry came to be characterized by excess capacities and depressed prices. To help the industry the government stepped in with protection from international competition with a basic customs duty of 38 per cent, a special additional duty of 4 per cent, an anti-dumping duty of Rs.10 per tonne and a countervailing duty of Rs. 350 per tonne.
Behind these protective barriers the demand-constrained industry has been witnessing a substantial change in structure. The industry has seen a process of growing consolidation of capacity in a few hands as a result of a spate of mega-mergers and acquisitions. Leading the movement has been international cement major Lafarge of France that has acquired the cement businesses of Raymond and Tata Steel and is reportedly gearing up for an acquisition of Jayaprakash Cement. But there have been others in the game as well. Gujarat Ambuja has bought out the Tata stake in ACC for Rs. 925 crore, India Cements has acquired Raasi Cement and Italcementi has acquired a 50 per cent stake in Zuari Cement. All this is occurring in an industry where already capacity with the top six players accounts for more than 60 per cent of total production, though there are 60 companies and 120 plants in the industry.
Acquisitions such as these may be dismissed as inevitable in a more market-driven environment. But what is disturbing is that the process of consolidation has been accompanied by growing evidence of monopolistic practices. The demand for cement picked up in 1999-2000, as reflected in the 20 per cent increase in output during the first eight months of that financial year. Using the occasion, as well as the base for collusive practices that concentration in capacity affords, producers have consciously jacked up cement prices. Prices which were slack till about November last year, have been escalating rapidly since, as leading producers repeatedly hiked prices supported by measures aimed at reducing supply and creating an artificial shortage. Thus in November, these producers had decided to shut down capacity for 35 days more than the 25 during which capacity is normally shut down for maintenance purposes. Restrictions on the distribution of cement have also reportedly been adopted by what is quite clearly an organized cartel. With the support of of such measures, prices were hiked by 36 per cent in five successive revisions during the last two months of 2000, taking the Mumbai price of cement from Rs. 140 a bag to Rs. 190 a bag. Other markets such as those in Andhra Pradesh, Tamil Nadu and Kerala have witnessed similar increases.
The large increase in price over a short period of time has met with an adverse response from the building industry. The Builders Association of India has called for intervention by the government in the form of import duty reductions and price regulation and the Department of Company Affairs has reportedly instituted an inquiry. The fact, however, remains that liberalization has done away with many of the instruments that the government has at its command to deal with cartels of the kind that have formed in the cement industry. Reform not only engenders monopoly, it provides greater leeway to oligopolistic firms to exercise their market power.
The difference between the situation in the cellular and cement industry is worth noting. Though a new industry, cellular operators have used the same strategy as the traditional oligopolistic groups that flourished during the import substitution years. Just as the traditional oligopolistic structure used the licensing system as a means to prevent the entry of new players into their bases of monopoly power, the cellular operators used the State including the official regulatory authority to preempt entry and charge tariffs that ensured high profits. The cement industry, on the other hand, has seen the emergence of oligopoly as a natural result of unbridled competition. And the withdrawal of the State in the wake of deregulation has helped those oligopolies to protect and increase their profits.
The cement experience suggests that even if recent policy decisions have helped reduce the strangehold over the market of the early entrants into the cellular industry and widen and intensify competition, this is no guarantee against subsequent oligopolisation. What remains to be seen is whether the reconstituted TRAI would be able to prevent those oligopolies, when they emerge, from reaping unfair benefits from their market power. Even if that happens, the lesson is clear. Markets freed by reform breed anti-competitive practices. The State must come in to prevent them, as it must in the case of cement.
© MACROSCAN 2001