Evidence from the cellular telephony sector and the cement industry indicates that reform breeds predatory and collusive oligopolists, who earn monopolistic rents at the expense of consumers.
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 liberalisation 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 shu t shop if such fees were 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 licence fee regime that reduced their burden substantially. As has been argued by many people, including some in government, this amounted to condoning the error and providing concessions to providers who, under false pretences, had in essence pre-empted the entry of those who had originally submitted lower and more rational bids.
Having won themselves an oligopolistic position under false pretences, these operators, who come together under the banner of the Cellular Operators' Association of India (COAI), have since strenuously struggled to realise two objectives. They have sough t to pressure the regulatory authority, the Telecom Regulatory Authority of India (TRAI), to adopt a pricing principle and ceilings on tariffs that permit the realisation of oligopolistic rents, despite regulation. And they have worked towards pre-emptin g competition from within and outside the sector, so that such rents are actually realised.
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 pri nciple 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 profitabili ty 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 shot down despite the th en 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, cellular tariffs would have been driven well below T RAI-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 au thority has now 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 took place. In the wake of migration the r ental and airtime tariff ceilings worked out by the TRAI were Rs.422 a 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 ch arges 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 totalling close to Rs.400 crores.
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 has helped them earn large profits from subscribers, by keeping tariffs close to the maximum pe rmissible limit. This they ensured by pre-empting competition from outside the sector. Since its inception the COAI has lobbied against the entry of new operators into the mobile telephony business, whether as fully mobile operators or as operators with limited mobility. For long, they managed, for example, to stall the entry of MTNL (Mahanagar Telephone Nigam Limited) into the mobile telephony business using GSM, CDMA or WiLL technologies. It has taken close to five years to break the stranglehold that 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 collapsed by more than a third on average. The willingness of Airtel and Essar to cut tariffs substantially in order to match partially 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 gov ernment having finally come around to the view that entry into the telephony business must be freed substantially, it would be no surprise if tariffs came down even further, revealing the extent to which private operators (inducted into the telecommunica tions 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 finally set things right. If the TRAI play s 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 oligopolisation. 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.
Liberalisation 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 tonnes in 1990-91 to 88 million tonnes in 1998-99, because of a w ave of capacity creation in the wake of liberalisation. However, with public investment depressed and growth in the construction business slowing, the industry came to be characterised by excess capacities and depressed prices. In order to help the indus try, 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 a tonne and a countervailing duty of Rs.350 a 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 acquis itions. 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 to acquire 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 crores, India Cements has acquired Raasi Cement and Italcementi has taken a 50 per cent stake in Zuari Cement. All this is occurring in an industry where already capacity with the top six pla yers accounts for more than 60 per cent of total production, though there are 60 cement 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. 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 capacity concentration affords, producers have consciously jacked up prices. Prices which were slack till about November last have been escalating rapidly since, as leading producers repeatedly hiked prices supported by measures aimed to reduce supply and create an artificial shortage. Thus, in November these producers ha d decided to shut down capacity for 35 days, instead of the usual 25 days for maintenance purposes. Restrictions on distribution have also reportedly been adopted by what is clearly a cartel. With the support of such measures, prices were hiked by 36 per cent in five successive revisions during the last two months of 2000, taking the price in Mumbai 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 over a short period of time met with an adverse response from the building industry. The Builders Association of India called for government intervention in the form of import duty reductions and price regulation, and the Department of Company Affairs reportedly instituted an inquiry. The fact, however, remains that liberalisation 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 sector and the cement industry is worth noting. Though they belong to a new sector, cellular operators have used the same strategy as the traditional oligopolistic groups that flourished during the imp ort 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 pre-empt entry and charge tariffs that ensured high profits for themselves. 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 wak e 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 oligopoli sation. 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.
