Preventing market competition

LAHORE: Anti-competitive practices are innumerable in Pakistan even at state level. Collusive bidding in public procurement is an anti-competitive practice that deprives the exchequer of billions annually, while subsidies provided to state-owned enterprises also undermine the competitive process.

Public sector procurement accounts for 20-25 percent of Pakistan’s GDP. Collusive bidding in these procurements is highly attractive but uncompetitive, depriving the exchequer of billions of rupees annually.

A decade back, Transparency International in one of its reports quoted the head of Pakistan’s Public Procurement Regulatory Authority (PPRA) that the country could save up to $8 billion (Rs712 billion a decade back) out of $50-60 million contract bidding, if the globally accepted procurement rules were applied in letter and spirit.

This money is pilfered through anti-competitive practices in the form of collusive bidding/bid rigging that take many forms. Some of the broad categories, which are not mutually exclusive, include cover bidding, where one or more bidders submit bids which are highly unlikely to be accepted, to give an impression of competition bidding.

Or they indulge in bid suppression where one or more competitors who normally bid do not submit their bids so that a particular competitor’s submission is accepted (something we have seen in many recent bidding processes).

Major players in high value contracts collide to agree to do rotation, where competitors take turns in submitting the lowest bid for similar projects. In addition, some big players agree to restrict to specific markets where the others agree not to enter.

This is known as market allocation, under which competitors divide up markets geographically or sector wise and agree not to compete with each other.

Another way to eliminate competition from the bidding process is to ensure the competitors a share in the contract through sub-contracting. Under this arrangement the competitors agree that those who submit a losing bid or do not bid will be subcontracted on the project by the winner.

Collusion between employees of Public Procurement Agencies (PPAs) and prospective bidders for a particular procurement cannot be ruled out.

Collusive bidding agreements can be very difficult to detect as they are negotiated in secret. Some inside information or search and inspection is usually required to establish such conspiracies.

Perhaps the CCP lacks expertise to unearth them or there is a need to fine tune PPRA rules. Fair public procurement practices have been established in most of the developed economies, but Pakistan is way behind them.

Subsidies also undermine the competitive process as they interfere with market signals and when provided on inputs lead to inefficient allocations as perceived prices deviate from cost base prices. We cannot equate the subsidies provided regularly to the state-owned enterprises with the bailout package provided by the developed economies to the banks after the 2008 financial crisis.

These subsidies were condoned by their competition authorities as subsidies were targeted at market failure and there was no other way to tackle the issue.

Subsidies that distort competition are prohibited in developed economies, unless targeted at stated objectives of state and cause minimum trade and competition distortion. The European Union Competition Commission for instance has the powers to order the recovery of illegal and incompatible subsidies. Creditable research has shown that limitation of wasteful subsidies attracts foreign direct investment.

Subsidies or state aid in Pakistan is a preferential public assistance or financial support given by a government to a certain business or economic sector in the shape of grants, interest and tax reliefs, guarantees, provision of goods and services at preferential terms, or waiver of license fee etc.

State aid thus gives the aid recipient an economic advantage that it would not otherwise have enjoyed under normal market conditions. It thereby confers an advantage to the aid recipient on a selective basis, which may distort competition in the relevant market.

State aid directed towards SOEs comes under this definition as well. Governments regularly devote considerable amounts to subsidise SOEs.

However, experience has proved that government support gives the SOEs little incentive to change. The common argument in sustaining inefficient SOEs is saving employment for a large number of employees.

The state should differentiate the difference between employment and welfare.

Subsidies to SOEs that in turn provide workers (whether needed or not) with an “iron rice bowl,” that is lifetime employment and social welfare.

This is beside the point that SOEs usually give employment as a favour and not on merit. Power sector, Pakistan International Airlines, Railways and Pakistan Steel Mills are the main recipients of government aid.