Monopolies and infrastructure sectors

Adani Ports and Special Economic Zones Ltd (APSEZ) has announced taking a 75% stake in Krishnapatnam Port Company Ltd (KPCL). 

APSEZ already operate India's largest minor port at Mundra and Krishnapatnam is the country's second largest minor port. Besides, APZEZ will now operate 45 berths and 14 terminals with annual capacity of over 300 mt, up from just one port in 2011. APSEZ will also handle 27% of all cargo passing through the country's ports. The graphic below captures its national footprint. This coupled with speculation about APSEZ's shopping list does raise concerns about competition. 

The Adani Group recently purchased a big stake in a leading cold chain logistics operator. It has also won the bids for long-term concessions in 5 Tier II airports. All these reveal the contours of the Group's plans to expand across the logistics chain.

We may have a similar situation developing on the telecommunications, e-commerce, and digital money side. Reliance is already in pole position to utilise its unmatched last-mile access through OFC networks to push ahead into e-commerce, mobile money, digital television and so on. 

So we have public policy challenge, where large groups are in the process of positioning themselves as monopolists in important sectors of the economy. In this context, some observations

1. Infrastructure sector across developing countries is characterised by the presence of vertically and horizontally integrated behemoths. This has reasons that go beyond the monopolistic nature of many infrastructure assets.

Allegations of political connections and crony capitalism accompany all these firms. Further, even in developed countries, sectors like mining, petroleum and gas exploration, ports, and airports are effectively controlled by at most 2-3 behemoth companies which function as oligopolies. Allegations of crony capitalism and preferential policies are never far away in these countries too. Just look at mining in Australia and petroleum in the US. 

The nature of such projects exposes the developer to several risks. Is it the case that in a second-best world, many of these risks are perhaps mitigated to an acceptable degree only by large conglomerates? For example, how many developers can wait out the reasonably long times before the asset starts getting utilised closed to its capacity? 

2. Then there is the point about rapid and high economic growth, which has to be supported by large investments in infrastructure. There is an argument that only large companies have the capacity and expertise to be able to mobilise resources and respond to such challenges.  

3. On a related note, there is the issue of financing. There is a case that rapid mobilisation of large amounts of long-term finance for infrastructure projects is perhaps best achieved by leveraging the balance sheets of large corporate groups than by stand-alone project finance.

After all the major flush of infrastructure finance mobilisation in the 2003-08 period was on the balance sheets of a few major contractors. As I have blogged several times earlier, the idea of developing deep enough long-term bond markets is fraught with several challenges. 

4. Finally, the concerns on competition are real and need to be mitigated through regulatory oversight. But this raises the question of regulatory capture, one which TRAI has already been accused of in recent times. However, such capture is not very uncommon across the world. 

In case of Reliance though, the case may also be different. The regulatory issues being raised in the context of Alibaba and Amazon are relevant. This is even more so given that unlike US and China, where these issues are being raised after these companies have become established, Indian regulators have the benefit of experience of these countries to shape their policies. So how will they respond?