Analysing Lag Ride as a state-owned enterprise in the ride hailing market

The Lagos State government recently launched a state-owned or state-partnered ride-hailing service, Lag Ride, designed to compete with Uber, Bolt and other ride-hailing services. While this perhaps is a good initiative to further improve transportation accessibility in Lagos, the new enterprise may distort competition in the ride-hailing market.

Lag Ride fits neatly into a state-owned enterprise (SOEs) category. Due to their advantaged position, SOEs may negatively affect competition and for this reason, it is pertinent that SOEs are subject to similar competition regulations as private enterprises.

Competition law alone is not sufficient in ensuring a level playing field for SOEs and private enterprises. Governments may create an uneven playing field in markets where an SOE competes with private firms, as they have a vested interest in ensuring that state-owned firms succeed.

Accordingly, despite its role as regulator, the government may, in fact, restrict competition by granting SOEs various benefits not offered to private firms. The consequence of this type of behaviour will drive out existing market players, hence tilting the market in favour of the SOE.

Prospects for predatory pricing?

One of the potential anticompetitive activities SOEs may engage in is to charge below the average variable cost for the relevant market, which results in predatory pricing. This will typically occur when a dominant undertaking charges unreasonably low prices for a service, resulting in competitors being unable to match or keep up with such prices, and eventually leads to the competitor exiting the market.

When private enterprises engage in predatory pricing, this is usually unsustainable for a long period of time and because the prices charged during the predatory period are so unreasonably low that it results in losses for the enterprise, there usually needs to be a post-predatory recoupment period to allow the undertaking recover the losses.

However, in the case of government enterprises, government support of SOEs allow SOEs to carry losses for extended periods and more importantly via direct support from public resources. Consequently, such predatory behaviour is sustainable enough to chase out competitors without the need for a recoupment period as the losses may be cross subsidised by another government entity.

When predatory behaviours win, this affects customer welfare as the market then becomes concentrated in the hands of the predatory firm, leaving consumers with no actual choices, and eventually leading to service inefficiency.

The only way private enterprises outperform SOEs like the Lag Ride is through innovation and fresh service offerings in the market. For example, when Uber and Bolt arrived in the Nigerian market, it significantly distorted the competition in relation to the yellow and black taxis affiliated with the government, snatching the market away almost completely. Now that the government has decided to match the competitive leverage of private enterprises through technology, both institutions must compete fairly, and one does not leverage its state-backed power over the other.

Read also: Apps facilitating ride-hailing services in Nigeria

Competition should be neutral – concept of competition neutrality

Competitive neutrality can be understood as a regulatory framework (i) within which public and private enterprises face the same set of rules and (ii) where no contact with the state brings a competitive advantage to any market participant. In other words, competitive neutrality aims to promote efficient competition by minimising competitive advantages government business activities may enjoy over their private sector competitors simply because they are government owned.

In identifying the scope of application of the Nigerian Competition Act to determine competitive neutrality, Section 2 stipulates that the Act applies to all undertakings and all commercial activities within, or having effect within Nigeria, and applies to and is binding upon body corporates and agencies of the government engaging in economic activities, if the body corporate or agency engages in commercial activities.

Further, the Act includes a body corporate in which a government of the Federation or government of a State or a body corporate or agency of Government of the Federation or any State or Local Government has a controlling interest “where such a body corporate engages in economic activities.

On this basis, the scope of the Act and competitive restraints apply equally to both private and public undertakings, thus creating a neutral environment for competition enforcement.

However, a point of distinction is when SOEs argue that such anticompetitive conduct has an overriding public service advantage in line with a government policy or agenda and consequently, not liable for a competition law infringement notwithstanding the anticompetitive effect on the market.

This will indeed be an interesting point for debate before the courts particularly, on what is the extent of harm to competition that should be justified based on economic benefit or progress. This will even be more interesting in a jurisdiction like Nigeria with an emerging antitrust jurisprudence especially with the fact that the Nigerian competition Act does not have any provisions creating an obligation on state agencies to refrain from enacting policies which contradict the competition act or policies.

To the extent the scope for competitive neutrality in Nigeria is yet to be tested, it will be interesting to see how this will play out before the court should the Nigerian competition authority ever get the boldness to challenge an initiative by its government which may be anticompetitive. Or in the alternative, just maybe, another ride-hailing service takes this on when the potential anticompetitive effect rears its head in the ride-hailing market.

Alade, a lawyer, writes from London