Wed | Oct 18, 2017

Delroy Beckford | Fear of NWC bottled water market entry overblown

Published:Friday | June 30, 2017 | 12:00 AM
National Water Commission bottled tap water.
President of the National Water Commission, Mark Barnett. The state agency has been bottling water for 15 years for discrete distribution, but is now considering commercialising the product.
Delroy Beckford

The response from some members of the private sector to National Water Commission's (NWC) announcement that it intends to enter the bottled water market may be right on point in the allusion to its mandate to pursue public welfare - the response, in the main, being it should confine itself to providing efficient service in the context of its core function.

It is not entirely clear why its entry into this market would necessarily detract from, rather than complement, its core function or that the two are mutually exclusive.

If, then, the real concern is that a government entity's entry into a market can have the effect of crowding out the private sector from that market, this becomes real if, and to the extent that, there are no applicable rules to govern competition in the sector of concern or that the government entity is exempt from such rules.

That a government entity may be a statutory monopoly does not exempt it from the application of the rules of competition in the areas for which it does not enjoy a statutory monopoly.

Of greater concern may be whether the government entity's entry into a subject market is facilitated by its access to subventions from the government acquired from tax revenue. In such a case, the entity would be at a clear advantage by virtue of obtaining a subsidy or a gift that is not available to other competitors in the market.

This begs a larger question: should government entities be allowed to generate income from the private domain for their operations generally to supplement subventions obtained, in particular instances; and enter a specific market and enable it to sustain its entry.

It may well be past the hour when anyone would be objecting to the concept of state trading companies, albeit its relevance in a market-driven economy is often questioned. But no one would object to the idea that a government entity can enter into commercial transactions, whether in terms of buying or selling a commodity.

Organisational firewalls

It may be that appropriate organisational firewalls would need to be in existence, governing how such operations are funded - that is, without tax revenue - to ensure that government entities are exposed to the same barriers to entry that exist for commercial entities that have to acquire capital on commercial terms.

In this sense, ex ante competition rules would buttress ex post rules that may be useless when applied if the conduct giving rise to their application has already driven competitors out of the market by the time of enforcement.

In practical terms, no two firms are ever faced with identical barriers to entry, except generally in the case of regulatory barriers to entry. Indeed, firms often enter markets with different advantages, although the non-application of commercial considerations regarding acquisition of capital is often not one of these advantages.

If trade in any sector is conceived of as a zero-sum game, a government entity's entry into a market may be of no relevance in terms of revenue available to fund the public sector generally if a government entity's entry into a market crowds out the private sector, thereby reducing the taxable income from those companies exiting the market due to increased competition.

This is on the assumption that the government entity entered the market to acquire more income for its operations other than could be acquired from its yearly fiscal allotment.

Trade theories of absolute and comparative advantage rest on the assumption that trade is a win-win and not a zero-sum game, although these theories are themselves based on questionable assumptions yet to be realised, such as perfect competition.

In practical terms, it may be the better view that trade is a zero-sum game. This is doubtless borne out by the behaviour of market participants, but also by states in their interactions with other states as evidenced by trade rules designed to level the playing field, to recoup some advantage lost, or to neutralise some advantage given.

Competition rules are designed with a similar end in mind and are no less applicable to government entities engaging in a market than to private firms. In the European Union, for example, competition rules have been developed to address state aid that distorts competition.

True enough, such rules do not exist in the context of competition legislation in Jamaica. Nonetheless, the existing competition rules do provide a benchmark, or departure point, for examining possible anti-competitive conduct by government entities that may dissuade such behaviour and provide a modicum of comfort for private entities concerned about market entry by government entities.

These competition rules address exclusionary and exploitative anti-competitive conduct whether the subject conduct implicates, or may be characterised as, abuse of dominance or that the entity has entered into an anti-competitive agreement.

Where concern is about price undercutting as a competing strategy to gain market share, for example, pricing below average variable cost raises the presumption that such a pricing strategy is meant to eliminate competition.

Even if the pricing strategy is to align prices with competitors whereby identical prices are used, the same principle and presumption applies.

However, if pricing is above average variable cost but below average total cost, something more is required to establish that the pricing strategy is meant to be exclusionary.

This raises the concern of predatory pricing. There is, of course, far less flexibility in the application of this concept in the jurisprudence of the European Union than in the United States whereby below-cost pricing is sufficient to prove exclusionary abusive conduct in the former, but proof of the likelihood of recoupment is required, in addition, for the latter.

Such rules, when applied to a public entity, would yield no different result than when applied to a private firm and, to that extent, would carry the same burden or advantage in safeguarding the competitive process.

The broader objection to this view may be that these competition rules do not consider the initial advantage given to the government entity in the form of tax revenues establishing an infrastructure facilitating its dominance, or its ability to be dominant, in a particular market.

In other words, but for the government entity's entry into the relevant market and its concomitant infrastructural advantage, that market would be characterised by the nature and scope of the existing market players and whatever probabilities exist for further entry, exit from, or re-entry, into the market by private firms, given existing and future economic considerations.

On this view, the government entity's entry into the relevant market would by operation, if not by definition, be market distortive.

However, one would not know with any certainty if and when entry into a particular market may be by a large private market player. In this sense, the large private market player could presumably be in the same dominant position as the government entity when it enters the market.

Importantly, competition rules do not stipulate the time for market entry or who can enter a market. Nor do competition rules protect particular competitors. The rules are inclusionary, not exclusionary.

Relatedly, it cannot be gainsaid that a decision to enter or not to enter a market is part and parcel of the competitive process, unless the decision by the government entity to enter the relevant market is a decision that no private firm would rationally make, given the nature and scope of the existing market and its potential for realising a profit.

In this latter case, the market would self-correct the irrational decision or a competition authority can intervene to rectify the alleged exclusionary conduct. In either case, it would seem that the competitive process is not necessarily worse off by a government entity's entry into a market.

- Dr Delroy S. Beckford is general counsel to the Fair Trading Commission.