'State aid/bailouts as subsidies harmful for competition in economy'

Member Competition Commission of Pakistan (CCP) Dr Joseph Wilson shared an interesting experience with the heads of the competition agencies that the use of state aid/bailouts as government subsidies for the public sector entities is harmful for competition in the economy.
While giving a comprehensive presentation on the "State Aid and Distortion in Competition" on the second day of the international conference here on Friday, he cited examples of bailout packages for Pakistan Steel Mills, PSO, PIA and other entities and said that such state aid is promoting inefficiencies in public sector entities as well.
Dr Joseph Wilson further informed that at present there is no specific provision dealing with State Aid within the Competition Law. The bailouts/State Aid while seems to be preserving employment and keep afloat a single entity, it, in effect, distorts competition in the industry of the aid recipient thereby affecting the whole industry and preventing it from growing. There is a need to devise State Aid rules/policy for state-owned enterprises in Pakistan. In his presentation, he proposed to the government that State Aid rules should be defined in Pakistan so as to limit state aid (subsidies) only for the useful purposes and not for the sick public sector entities that is resulting in lessening the competition in Pakistan.
He said that the State aid 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. Hence, state aid needs to be controlled to ensure that government interventions do not distort competition and trade. He said that the State aid rules are designed to regulate subsidies and to stop public authorities from distorting the markets. They also provide a framework and discipline to assist public authorities to ensure that scarce public resources are targeted where they are most required in an efficient and effective manner.
CCP Member concluded that a study was conducted to observe the nexus between State Aid and Productivity looking at the economies of South Korea and Mexico. The study concluded that productivity growth in industrial sectors targeted by state aid has been poor compared with productivity growth in untargeted sectors.
Miek Van der Wee European Commission DG Competition also gave a detailed lecture on the 'State Aid and Distortion of Competition'. He stated that the subsidies undermine competitive process as they interfere with market signals. The core task of competition agencies have to eliminate distortion of competition. It included anti-competitive behaviour of companies and distorting state interventions.
He recommended adoption of the State Aid control system by the countries using effective criteria. The useful criteria would require demonstration that aid is targeted at market failure. There should be demonstration that there are no other more effective ways to address the market failure. There should be limited magnitude and duration of aids, and the ability of the same recipient to be granted subsidies on a regular basis, he added.