Blessing monopolies

Sometimes, it would seem that governments are even fonder of monopolies than private businessmen. The latest piece of evidence in support of such a thesis comes in the shape of the new city gas distribution policy, which makes all the right noises about competition but ends up proposing city-wide monopolies for gas supply to homes. This is of a piece with the power distribution monopolies that have been handed out in Delhi and Orissa (again, in the name of competition), and with the stipulation that those who win the right to run the Delhi and Mumbai airports will be given the right of first refusal when it comes to building a second airport for each metropolis—whereas a competition policy would have said that the same company cannot run both airports. Competition, it would seem, has no godfathers, monopolies do.

The city gas distribution policy now talks of throwing the field open to multiple players, and of open access. It specifies that any operator building a gas pipeline will have to create capacity that is a third greater than that required for its own use, so as to allow others to use the pipeline on the basis of the common carrier principle. And a regulator is to be in place next month, to fix pricing and other related policies. Having said all this, the policy relapses into creating monopolies, though it says that exclusive contracts for cities will be for a limited period of 3-5 years, with the size of investment and the population of a city to determine the exact period.

The only argument in defence of this approach is that, if a limited period of monopoly profits is not allowed, no one will come forward to develop the city gas market. But there were several operators, such as the Ambani brothers, who were in favour of non-exclusive licences; so it cannot be that no one was interested in a competitive scenario. The level of interest also shows that the market is lucrative enough for firms to want to build pipeline capacity and then supply the gas. Second, the very limited spread of city gas in areas where there are already monopolies, such as in Delhi and Mumbai, is evidence that monopolies in themselves don't generate development. While there could still have been a case for allowing an exclusive period for the pipeline so as to allow recouping of costs, the same cannot be said for the distribution of gas which is a totally different business and does not involve fixed/sunk costs in the same way. In other areas such as television (both direct-to-home via satellite, and the conditional access service through cable), which have also been opened up recently and are fairly capital-intensive as well, it's interesting that no such monopolies have been considered.

A policy of limited-period monopoly naturally brings with it the question of choosing the monopolist. How is this to be done? Bids cannot be on the price at which the gas is supplied to consumers, since there are too many variables involved that are outside the control of the firm which is supplying gas—international energy prices being one example. Will it depend upon committed gas supplies that the bidder already has—in which case, those with their own gas supplies have a natural advantage over the others? If the monopolist is to be chosen on the basis of the revenue to be shared with the government, does it imply that others will have to match this share once the exclusive period is over?