Market failures in infrastructure contracting

Ritesh Kumar Singh writes in the Nikkei Asian Review about the Indian telecoms saga,

The government wrongly views the telecom spectrum as a cash cow, rather than acknowledging its contribution to the digital economy. That must stop. The cause of the financial stress for India's telecom sector in general and Vodafone Idea in particular is a race-to-the-bottom pricing war unleashed by Reliance Jio. The country's telecom regulator did not rein it in early enough, arguing that Reliance Jio's market share was too low to invite investigations into its pricing practices. High regulatory charges and taxes that consume as much as 30% of revenue, compared with 11% in China, have further squeezed the telecom companies. Shortsighted actions such as denying the refund of taxes paid on inputs or refunds from the goods and services tax, which will cost the sector 360 billion rupees ($4.9 billion), are adding to the predicament of Indian telecom companies. If that were not enough, a February ruling from the Supreme Court's means telecom companies cannot defer paying $13 billion in historic levies to the government. It was this in particular which has ruined any real chance of Vodafone Idea, which owes $7 billion now, surviving.

When the history of India's telecoms market is written, the regulator's reluctance to bite the bullet and crackdown on Reliance's predatory pricing would perhaps be seen as an important factor. 

This race to the bottom has happened with alarming consistency across sectors. Telecoms is the most salient example. A sector which was the epitome of market competition with 12 operators is now down to three, perhaps two, thanks to reckless race to the bottom with tariffs. 

In case of the bidding for the ultra mega power projects (UMPPs), the bidders had the option of quoting fuel price pass through or offering fixed tariff. All of them preferred the latter for each of the four UMPPs.

The road projects have witnessed developers volunteering to pay the government in tenders with viability gap funding as the bid parameter. Even the first round of road securitisation contract has seen the successful bidder offering unreasonable commitments to the government.

The solar power tenders have seen tariffs being quoted which are clearly unviable. It is only a matter of time before these unravel. Covid 19 may well prove one of the triggers.

The airline industry, along with telecoms the exemplars of success of private enterprise in the Indian economy, is another example of free market activity leading to race to the bottom with pricing and boom and bust cycle.

The common factor in all these is the failure of the market mechanism, on sides of both the businesses and their financiers, to undertake rational pricing decisions in the face of competition. In fact, perversely, competition itself has been the cause for market failures. It is a testament to the failure of the so-called disciplining powers of free market competition as well as of corporate India. 

There is another dimension to many of this, the entrenched urge to go for the cheapest and do so with pride.