Editorial
The sugar crisis persisted for a long time. At one point, the Minister for Finance claimed, the government was unable to deal with, what he called, the powerful sugar manufacturers. The regulatory body had long warned about the anti-competitive and restrictive practices of the sugar industry but no one paid heed. It then sought to make a presentation before the Economic Coordination Committee of the cabinet during the current crisis but the matter was deferred, more than once.

overview
Politics of cartels
Towering political figures have ganged up and fleeced the masses of approx Rs 56 billion in a short span of two months
By Khalid Mustafa
Our poor masses have long experienced the adverse effects of cartelisation in cement, sugar, milk and auto sectors on their incomes and failed to get the required relief just because of bad governance and decisions at the policy level based on vested interests.

Government-industry collusion
How does the industry generally connect with politics -- to influence legislation, policies and even taxation? Economists have different answers to the question
By Farah Zia
It was in October 1998 that the then regulatory body Monopoly Control Authority (MCA) noticed a uniform price increase to the tune of Rs100 per bag by the cement manufacturers of Pakistan. APCMA, the manufacturer's association, said it was due to increase in cost of inputs and higher taxes by the government. Upon inquiry by MCA, both claims of the manufacturers were found to be false. The manufacturers were asked to deposit a sum of Rs4.25 billion which was earned by the industry as additional revenue between mid Oct 1998 and Feb 1999. MCA also imposed on each manufacturing unit a fine of Rs100,000. On non-compliance they were asked to pay Rs10,000 per day. The cement manufacturers got a stay from the high court and later the government intervened and fixed the price at Rs200 per bag and agreed to lower the taxes.

Auto-motives
The government should declare the auto sector as a national industry, targeting the middle class
By Aftab Maken
Besides major lobbies mainly dealing in commodities in the country, the automakers are also behaving like a cartel and fleecing the consumers while not increasing the number of autos to meet the local demand.

regulations
Anatomy of the law
Just how good is the new regulatory law and how can it be further improved?
By Asad Jamal
Pakistan's Monopolies and Restrictive Trade Practices Ordinance of 1970 (MRTPO) was the competition law till the present Competition Ordinance replaced it in 2007. The preamble to the Competition Ordinance of 2007 puts its objective as to "ensure free competition in all spheres of commercial and economic activity to enhance economic efficiency and to protect consumers from anti-competitive behaviour and to provide for the establishment of the Competition Commission of Pakistan to maintain and enhance competition".

Authority to Commission
A comparison between the MCA and the CCP
By Aoun Sahi
The government established the Competition Commission of Pakistan (CCP) in October 2007, under the Competition Ordinance 2007.
Experts believe that aim of competition laws is to promote competitiveness, and to protect public interest. "Promotion of competitiveness creates market opportunities (by preventing market dominance by few or one), which in turn encourages foreign investment, because investors also avoid investment in a country where monopolies flourish. Public interest is far broader than the sectional interests of the firms. More so, public interest stretches beyond the interests of consumers, of emerging entrepreneurs, or of labour and community constituencies" advocate Faisal K Daudpota, an expert on intellectual property, anti-money laundering and competition laws tells TNS.

"CCP prohibits the abuse of dominance"
-- Khalid Mirza, Chairman, Competition
Commission of Pakistan (CCP)
By Mehtab Haider
Chairman, Competition Commission of Pakistan, Khalid Mirza is a more confident man after his reinstatement that should see him through his tenure expiring July 2010. The powerful lobbies of LPG, cement, sugar, banking and many others which boast all the 'right' political connections made a successful attempt to show him the door -- unceremoniously, that is -- during the recent wave of the massive reshuffle in top bureaucracy, without even the full knowledge of the Prime Minister and the Finance Minister. But their success was short-lived and they could not get the desired results, as the media exposed them and stated that the government had bowed down before influential forces and removed the very person who wouldn't take a lenient view on the issue of cartelisation and the abuse of power by anyone, especially the business tycoons.

"We support the regulations"
-- Iskandar Khan, Chairman, Pakistan Sugar Mills Association (PSMA)
By Jawwad Rizvi
The News on Sunday: Is there a cartel in sugar industry?
Iskandar Khan: No. If the sugar millers were a cartel why would they compete during the crushing season and pay a price to the growers higher than the officially fixed rates. If we are a cartel then we should first cheat the sugarcane growers and then the consumers. The fact is, the millers have had to pay between Rs 100 and 140 per maund to the growers, something which negates the existence of cartel in sugar industry.

"CCP evidences are not based on facts"
-- Mazhar Rafi, Acting Chairman of All Pakistan Cement
Manufacturers Association (APCMA)
The News on Sunday: Does a cartel exist in the cement industry?
Mazhar Rafi: There is no cartel in the industry. The Competition Commission of Pakistan (CCP) blamed the APCMA that there was one. If a cartel exists in the cement industry then why has the industry suffered a net loss in the last financial year? Out of 20 cement factories, 17 were in net loss and only two factories of Karachi and one factory of Punjab gained profit as they are major cement exporters of Pakistan.

 

 

Editorial

The sugar crisis persisted for a long time. At one point, the Minister for Finance claimed, the government was unable to deal with, what he called, the powerful sugar manufacturers. The regulatory body had long warned about the anti-competitive and restrictive practices of the sugar industry but no one paid heed. It then sought to make a presentation before the Economic Coordination Committee of the cabinet during the current crisis but the matter was deferred, more than once.

The penalties for cement manufacturers at the hands of CCP followed the sugar crisis. The removal orders of the chairman of the CCP were, obviously, not far behind.

Only this time the media made it into a big issue. So big that the prime minister had to restore him the PPP government has become famous for making unwanted restorations now in less than a day's time. His ouster was illegal and went against the good governance claims of the government.

The train of events brought to light the state of cartels in the country yet again, with the only difference that it now has a regulatory mechanism which is better than ever. There are issues that need to be resolved; most importantly the collusion between politics and industry.

The only solution lies in letting this regulatory regime function the way it is. The businesses need to realise that ultimately, regulation of this kind will help the market function better and not just help the consumers against a non-competitive setup. This is all the Special Report this time is about.

 

overview

Politics of cartels

Towering political figures have ganged up and fleeced the masses of approx Rs 56 billion in a short span of two months

By Khalid Mustafa

Our poor masses have long experienced the adverse effects of cartelisation in cement, sugar, milk and auto sectors on their incomes and failed to get the required relief just because of bad governance and decisions at the policy level based on vested interests.

However, this time over, the Competition Commission of Pakistan (CCP) sprang into action and imposed a hefty penalty -- to the tune of Rs 6.3 billion -- on the cement industry for cartelisation. Though, it failed to take on the sugar industry.

Towering figures both in treasury and opposition benches, most of whom are sugar barons, have again ganged up and fleeced the masses by swindling them with approx Rs 56 billion in a short span of two months, reveals the investigation carried out by TNS.

The said powerful cartel committed daylight robbery, arguing that international prices of sugar had surged to $638 per tonne from $200 per tonne in November 2008 because of which it was necessary to increase the prices.

The powerful political lobby of the unscrupulous sugarcane growers and sugar industry managed the stage to fleece masses when the Ministry of Industries sent a summary to the Economic Coordination Committee (ECC) in November 2008, seeking the permission of the import of raw sugar pre-empting the shortfall of sugarcane crop by 14 million tonnes.

According to the documents available with TNS, all the ministers -- with agriculture background -- in that particular ECC meeting, strongly opposed the summary arguing that it would lower the price of sugarcane in the country.

The country produced sugarcane at that time about 50 million tonnes less by 14 tonnes if compared with the sugarcane production of 64 million tonnes in 2007. The country produced sugar of 3.2 million out of 50 million tonnes sugarcane crop against the requirement of 4.2 million tonnes sugar.

Keeping in view the one million tonne of sugar deficit, the MoI moved the summary but unfortunately Manzoor Ahmad Wattoo, who tabled the summary in the ECC, became part of the gang.

This is how the political growers ganged up to gain maximum price of sugarcane and they incurred monitory losses to the government, for if at that time the government allowed the Trading Corporation of Pakistan (TCP) to import raw or white sugar, then the landed cost of the sugar should have been at Rs 42 per kg.

In the wake of not taking the timely decision to import white and raw sugar in November 2008, the government sustained a massive loss from February 2009 to August 2009 as it had to spend the costly foreign exchange dollars which the government managed from the IMF under stand-by arrangement.

According to the TCP documents, the government -- later, in February 2009 -- imported 25,000 tonnes of sugar at $451 per tonne (Rs 51 per kg) at Karachi port. In April, the government imported 50,000 tonnes at $474 per tonnes (Rs 53 per kg) at Karachi port and in the same month it again imported 50,000 tonnes of sugar at prices of $494 per tonne (Rs 55 per kg) and in the month of August 75,000 tonnes at $638 per tonne, meaning the landed cost of the sugar is at Rs 74 kg.

According to Finance Minister Shaukat Tarin, the sugar lobby is so powerful that a probe against the swindlers, who created the artificial shortage of the commodity, seems impossible.

Tarin is right in saying this if the daunting list of the main owners of the sugar mills is looked at: Ch Zaka Ashraf, President of Zarai Tarqiati Bank Limited, and brother of President of PML-N's Women wing Mrs Ishrat Ashraf, owns the Ashraf Sugar Mills; cousins of Main Nawaz Sharif, under the name of Haseeb Group, are owners of Brothers Sugar Mills, Abdullah Sugar Mills and Haseeb Sugar Mills; Salman Shahbaz, son of Mian Shahbaz Sharif, Chief Minister of Punjab, is the owner of Ramzan Sugar Mills; Nawaz Sharif is the proprietor of Chaudhry Sugar Mills, Abdullah Yousaf Sugar Mills and Ittefaq Sugar Mills.

Humayun Akhtar Khan, former commerce minister and an eminent political figure and leader of the PML-Q, is the owner of three sugar mills that include Faisalabad Tandlianwala Sugar Mills, Muzaffargarh Tandlianwala Sugar Mills, Dera Ismail Khan Tandlianwala Sugar Mills. Jehangir Tarin, cousin of Humayun Akhtar Khan owns three mills that include two JDW Sugar Mills and United Sugar Mills. Amer Sultan Cheema, son-in-law of Ch Shujaat, President of PML-Q, owns National Sugar Mills, Sargodha. Former federal minister Nasrullah Dareshk is the proprietor of Indus Sugar Mills. Former federal minister Abbas Sarfraz, under the name of Premier Group, owns four sugar mills. Saleem Altaf, former federal minister, also owns two sugar mills namely Baba Farid Sugar Mills and Shakarganj Mills. Fehmida Mirza, Speaker National Assembly, is the owner of the Mirza Sugar Mills.

The actual owner of the Ansari and Sakrand Sugar Mills in Sindh is the top man of the country, but the said mills are being run by others.

The abovementioned political figures own 33 mills out of a total of 79 sugar mills in the country. And, in the presence of the most influential, it is not quite possible that an effective probe can be initiated against the swindlers which is mainly why the federal and the provincial governments -- particularly the Punjab government -- have failed to take on the said lobby except taking cosmetic measures by conducting raids on the sugar stockists to befool the masses.

The unholy nexus of political figures has forced Main Manzoor Ahmad Wattoo, Federal Minister for Industries, to fix the ex-mill price of sugar at Rs 48 per kg in Sindh and Rs 49.75 in Punjab and NWFP. Soon after the Punjab government struck a deal with sugar mills, according to which the ex-mill price was worked out at Rs 45, the chief executive of the country came into action and accorded approval to Rs 45 as ex-mill price across the country.

However, the documents show that the input cost of the sugar stands at Rs 33.48 per kg which means that after swindling the masses by selling the commodity at Rs 50 to Rs 55 per kg still has the maximum margin to pocket the profit of Rs 12 per kg when the ex-mill price was fixed at Rs 45 per kg.

Khalid Mirza, Chairman, Competition Commission of Pakistan, recently fined the cement industry Rs 6.23 billion after it was proved that the cement manufacturers had made a cartel. He resolved to act accordingly, in the case of sugar industry, and not be influenced by the political bigwigs.

He decided to advertise in the newspapers that any one who provided solid information about any cartel would be awarded a cash prize of Rs 5 million.

The Commission conducted surprise inspections in All Pakistan Cement Manufacturers Association (APCMA) from where it managed to get some correspondence with regard to 'market arrangements'. On the basis of the said documents, a hefty penalty has been imposed.

General (retd) Rehmat Khan, APCMA spokesman, tells TNS that the CCP has imposed a hefty penalty to the tune of Rs 6.3 billion on cement industry and Rs 50 million on APCMA despite a lack of evidence to establish its involvement in the alleged cartel.

"The entire case against the cement industry is based on the documents allegedly recovered from the office of the APCMA in the raid conducted on April 24, 2008, by the Commission," he says.

The Commission imposed penalty on cement industry at 7.5% based on net turnover for the financial year 2007-2008 and failed to deal with the fact that if there is a cartel, then surely each cartel members should have roughly the same level of profits.

However, during the year 2007-2008, 17 units suffered a loss of Rs 8 billion while only three units namely Attock Cement, Fauji Cement and Lucky Cement earned profit. While in the year 2006-2007, 14 units suffered a loss of Rs 3.7 billion while only 6 units namely Askari Cement, Attock Cement, Cherat Cement, D G Khan Cement, Fauji Cement and Lucky Cement earned profits.

"The CCP tries to create a cartel situation in which some cartel members have made profits, some have made losses and some even shut down. An alternate definition of the situation is, of course, competition and the interplay of market forces in which some companies make profits and some make losses," he says.

In response to a question, he says the industry will not be able to pay such a heavy penalty due to liquidity crunch and the CCP will take punitive action against the industry.

 

Government-industry collusion

How does the industry generally connect with politics -- to influence legislation, policies and even taxation? Economists have different answers to the question

 

By Farah Zia

It was in October 1998 that the then regulatory body Monopoly Control Authority (MCA) noticed a uniform price increase to the tune of Rs100 per bag by the cement manufacturers of Pakistan. APCMA, the manufacturer's association, said it was due to increase in cost of inputs and higher taxes by the government. Upon inquiry by MCA, both claims of the manufacturers were found to be false. The manufacturers were asked to deposit a sum of Rs4.25 billion which was earned by the industry as additional revenue between mid Oct 1998 and Feb 1999. MCA also imposed on each manufacturing unit a fine of Rs100,000. On non-compliance they were asked to pay Rs10,000 per day. The cement manufacturers got a stay from the high court and later the government intervened and fixed the price at Rs200 per bag and agreed to lower the taxes.

No wonder the authority was considered toothless. Cartelisation continued to exist in many industries in Pakistan to the detriment of the consumers as well as the market itself. As it did in the 1960s when Mahboobul Haq made his famous claim about 22 big families holding most of country's wealth. Demands for a more powerful regulatory commission were raised till the making of, what has been termed as, one of the best regulatory laws in the world in 2007. The formation of a strong Competition Commision of Pakistan was a logical conclusion of the law.

The cement manufacturers may have bypassed MCA's demand of Rs4.25 billion in 1998-99 by getting a stay order. But on Aug 31, 2009, once again the CCP imposed penalties to the tune of around Rs6.352 billion on 20 cement manufacturers including "some top companies owned by influential groups involved in cartelisation for earning windfall profits." The CCP, reportedly, proved "cartelisation against the cement manufacturers" and imposed penalties under the provisions of Competition Ordinance 2007.

In another news item, that appeared on Aug 20, 2009, the nation was told that the Economic Coordination Committee of the cabinet had for the second time deferred the presentation by the CCP seeking government support to proceed against "alleged cartelisation of the sugar industry."

Together, both the news items ought to have prepared us for the eventual sacking of chairman CCP by the prime minister. He was reinstated the next day after a huge rumpus over the issue (the chairman's contract expires in June 2009).

Apparently, the cartel that no regulator can act against is the government-industry cartel; the collusion that appears indomitable, for the time being, is between politics and cartels.

The sugar industry's connection with politics is too obvious and the media has exposed it at length. The cement and fertilizer may have a sizeable presence of military which is a recognised political actor in our context. But how does the industry generally connect with politics to influence policies and legislation and even taxation to its advantage? In short how does an industry become a cartel and stay one.

"There is no harm in lobbying with parliamentarians. All interest groups do that, even the media groups etc. It becomes problematic when they assume the shape of cartels and start uncompetitive practices," says economist Haris Gazdar. "The financial sector (banks, insurance companies, stock brokers) have had a cosy relationship with the central bank which is their regulator."

So what does one make of this lack of, or ineffective, regulation in Pakistan. According to Gazdar it may not be Pakistan-specific. "The international recession came because of the regulatory failure in the US, endangering the world economy. This happened because of the financial sector and its speculative business."

In Pakistan what has happened, in Gazdar's view, is that "all kinds of trading have become a financial activity, as if the investment is only for the financier. Now this is not investment in normal economics. Speculative hoarding is a result of collusion. Moreover, when international prices increase because of speculation, it becomes a national problem."

The truth is that the state's capacity to regulate is diminishing progressively; it was witnessed in the decision to dismiss the CCP chairman. Gazdar thinks it started getting worse in Ziaul Haq's time "when the World Bank told us that we need to have everything market-oriented without any regulation."

"The government launched a crackdown on money-changers last year because of the collusion they had with banks and things started stabilising after that. Unlike the financial sector, sugar and flour have a production cycle. Some sectors like the basic need items sugar, wheat, tea should be strictly regulated while the rest should be left alone. Raiding stores is non-sense; the government would probably need to introduce the rationing scheme," says Gazdar.

Ijaz Nabi, economist and professor at LUMS, turns everything upside down for sugar. "The problems will remain as long as Pakistan remains involved in the sugar industry. There aren't many advantages in sugar manufacturing: the technology and the machinery are simple; in terms of quality we are as good as anywhere else. If you happen to be close to the consumer, the transportation costs are reduced but we can only reap this comparative advantage provided the cost of manufacturing is the same as in the rest of the world."

But, Nabi points out, the cost of production is higher in Pakistan while the quality of sugarcane is low. "Across the border, in Indian Punjab, the sugarcane has double sucrose content. We have not made any investment in getting good sugarcane."

The grower is forced to sell his sugarcane to the sugar mill in his area and the consumer can never buy imported cheap sugar under any circumstances. "So our manufacturers either screw the grower or the consumer. And that is why only the rich and the powerful go into sugar manufacturing."

This may not be the ideal time to launch a public awareness campaign but the truth is that we are consuming sugar to make ourselves sick. Nabi is of the view that it is crucial to launch this campaign. "Pakistan is the biggest sugar consumer in the region, more than India, Bangladesh and China. We have to get our people to consume less crystal sugar which is the worst. We also have an abnormally high incidence of diabetes. Obviously the sugar lobby will oppose it."

When the politicians are saying they are raiding the stores for consumers, they are not telling the truth which is that we have no business manufacturing sugar.

 

Auto-motives

The government should declare the auto sector as a national industry, targeting the middle class

By Aftab Maken

Besides major lobbies mainly dealing in commodities in the country, the automakers are also behaving like a cartel and fleecing the consumers while not increasing the number of autos to meet the local demand.

Although the Complete Knockdown (CKD) kits, imported by three major players of auto sector, have significantly decreased from 26,967 units in 2006-07 to 16,121 units in 2007-08 and 5,556 units in 2008-09, the decreasing number of units by the Original Equipment Manufacturers (OEMs) is to ensure the profit.

According to figures quoted by the Pakistan Automobiles Association (PAMA), the market share of various auto brands during July-May 2008-09 is as follows: Suzuki Motors Limited, 47 %; Indus Motors Ltd, 38%; Honda Motors, 14 %; and others, 1 %.

Out of the six auto firms that include Honda, Suzuki, Toyota, Nissan, Kia and Hyundai, four Japanese assemblers are catering for 97 per cent of the domestic market. Also, the market share of domestic manufacturers has substantially reduced but their number and size distribution remain roughly the same.

Three Japanese car assemblers increased the prices, within a period of just three months, from Rs 84,000 to Rs 359,000 per unit without any rational justification.

Auto car imports in the month of June this year was reported to be $6,102,000 while in July it slashed to $5,804,000, says a figure of FBS. Last July, the car imports were reported $12,067,000.

"The Japanese manufacturers are not unilaterally responsible for costly autos to the public but it is the government which privatised Pak Automobile Corporation to the Japanese in 1993, helped the other automakers to join hands for price and supply manipulation," says an official of the Ministry of Industries & Production.

Pakistan only requires "Made-in-Pakistan vehicles", he adds, and the policy makers should form a strategy of getting local brands in vehicle manufactures.

"It is not the job of the Engineering Development Board (EDB) to regulate the auto prices; rather it is the market which determines them. The only solution for auto price stability in the market is to bring or allow in new auto players."

The official laments the fact that Renault, a Euro car manufacturer, decided against setting up its unit in Pakistan and switched to neighbouring India.

The Competition Commission of Pakistan (CCP), in its report to the Economic Coordination Committee (ECC) of the cabinet, terms the auto manufacturers a classic case of an oligopoly characterised by very high entry barriers in the form of minimum investment needed.

The CCP further points out that the car assemblers even after a decade or so of no significant local component suppliers have emerged on the scene and there is no meaningful deletion programme in the sector to reduce dependence on imported inputs.

The Commission also highlights 'evidence' that the assemblers have, thus, indirectly caused the closure of several local component suppliers.

Another factor which has strengthened the auto cartelisation is the problem of premium payments on new cars. The government seems to be backing this safety valve to operate on a sustained and predictable basis, the CCP adds.

The government is encouraging the private sector investors, both national and international, to come forward and establish auto manufacturing units in Pakistan. However, it is the low demand of the vehicles/cars which is attracting comparatively lesser investment in the sector, says an official spokesman of the Ministry of Industries & Production.

About the auto monopoly of Japanese manufacturers, he says the government has an open and liberal policy for investment and there are other brands -- particularly Chinese -- since Pakistan has entered an Free Trade Agreement (FTA) with China which not only deals with trade but investment as well.

Similarly, almost all car manufactures attribute last year's increase in prices to the Pak Rupee depreciation vis--vis the Japanese Yen, the levying of 5% FED, the increase in GST from 15% to 16% and the imposition of withholding tax at the time of the first registration of vehicles.

At least 24 players in the car industry are manufacturing auto in neighbouring India but there are only five auto assemblers in Pakistan. Suzuki Motors, India, alone is producing 0.9 million units with 90% deletion while in Pakistan it is only 164,710 units with 50% deletion, questions an auto analyst.

Two solutions to the break-up of this monopoly of Japanese carmakers in Pakistan is to bring a new player of carmaker, particularly from Europe, Korea and other countries rather than Japan, and to also revive consumer financing by the local banks, opines an auto dealer from Islamabad.

"The government, in the name of privatisation, made a blunder in 1993 when it privatised Pak Suzuki. Otherwise, we have an indigenous auto similar to India's," he adds.

Banning imports of used cars and autos by the federal government was removed on the intervention of Japanese diplomats in Islamabad and some minor SROs related to car imports or its prices were not issued without consulting some diplomats in the Japanese embassy, the same dealer claims.

TNS tried to contact the Japanese mission in Islamabad but there was no reply.

To sum up, the government should switch its focus from elite to the middle class and also declare the auto sector as a national industry, targeting the middle class for affordable autos.

 

regulations

Anatomy of the law

Just how good is the new regulatory law and how can it be further improved?

By Asad Jamal

Pakistan's Monopolies and Restrictive Trade Practices Ordinance of 1970 (MRTPO) was the competition law till the present Competition Ordinance replaced it in 2007. The preamble to the Competition Ordinance of 2007 puts its objective as to "ensure free competition in all spheres of commercial and economic activity to enhance economic efficiency and to protect consumers from anti-competitive behaviour and to provide for the establishment of the Competition Commission of Pakistan to maintain and enhance competition".

After nationalisation of industries and services in early seventies, there wasn't much the Monopoly Control Authority established under the MRTPO could do. But times have changed, so have the dynamics of economy. The state is getting out of the business of running businesses, and fast paced liberalisation of economy has taken place in the last two decades or so. Role of the private entrepreneur and market forces is being increasingly relied upon for economic growth.

But market forces alone do not ensure economic growth. Unless the market-based economy is accompanied with appropriate regulation, especially as to free competition, market forces are likely to cause distortions to the detriment of general public and the business itself. The push for change in law in Pakistan came from international donor agencies resulting in the adoption of the Competition Ordinance (Ordinance of 2007) which in many ways is an improvement upon the former MRTPO and recognises present day economic realities.

It has been recognised by the economists that fair competition is distorted to the detriment of the competitive market where market players enter into agreements, or abuse existing dominant share, or merge or combine together so as to distort competition. These are the three aspects that provide the focus for most competition laws in the world today, i.e.

- Agreements among enterprises/undertakings

- Abuse of dominance

- Mergers or, more generally, combinations among enterprises.

The new law addresses all the three components as well as deceptive trading practices such as dissemination of false or misleading information by any person, and adds competition advocacy as a function of the Competition Commission, the successor of MCA. The Competition Ordinance of 2007 is different from the MRTPO, inter alia, in following important respects:

A) The Ordinance of 2007 prohibits the abuse of dominance rather than prohibiting dominance. Dominance of a market player or players is assumed beyond a certain minimum market share but this does not necessarily assume that the dominance is being abused. Unlike the MRTPO which prohibited only "restrictive trade practices" that "unreasonably" reduced competition, the Competition Ordinance prohibits any agreement between enterprises that reduces competition within the relevant market, whether or not it is "unreasonably" restrictive.

B) The law, however, at the same time, makes provision for the Competition Commission to prescribe block and individual exemptions from prohibited agreements on the grounds of efficiency or economic merit. There was no such provision in the MRTPO.

C) Further, the Competition Ordinance stipulates an elaborate ex-ante merger control procedure for review and clearance of mergers and acquisitions that meet the notified thresholds.

D) The Ordinance also specifically requires the Competition Commission to carry out studies for promoting competition in all important sectors of the economy and to engage in advocacy through various means in order to create awareness of competition issues and to promote a culture of competition. An important function of the Competition Commission is to issue publicly non-binding opinions or policy notes. This was not the case under the MRTPO. Thus the Commission recently issued policy note to the federal government advising it to scrap the agreement it had reached with the sugar producers as it was against the letter and spirit of the law.

E) The Competition Ordinance is different from its predecessor in another very important respect and that is that the officers of the Commission have powers to enter and search any premises even forcibly (Section 34 and 35). These powers have been effectively used especially, in case of enquiry into the cement cartel. Leniency for parties making full and true disclosure incase of violation of the provisions of the law, is also possible under section 39. Such provisions enhance significantly the investigative capacity of the Commission.

F) Penalties under the new law are higher than they were under the MRTPO, with further provision for these penalties being varied by notification. The Competition Ordinance allows the Commission to penalise not only any breach of the law but also any disregard of its orders, whereas MCA could only impose penalties for not carrying out its orders. The Competition Commission is also able to recover penalties through a variety of means including the attachment of property and the appointment of a receiver under section 40.

G) Most importantly, the new law gives the officers and members of the Commission security of tenure in order to preserve their independence. That is why the federal government had to take back its decision of sacking the Chairman of the Commission. But after the present Chairman retires, the Federal Government can appoint a pliable person, most probably a government employee, of its choice to toe its line. The Indian law has tried to tackle this problem with the vesting of power of appointing chairman of their Competition Commission in the hands of a selection panel. When the Competition Ordinance of 2007 is taken up by the parliament to convert it into an Act, it will do a great good to the people of Pakistan if it could provide an impregnable mechanism to ensure independence of the Commission.

H) Equally important is the provision that the Competition Ordinance, provides for the establishment of a Fund consisting of tied sources of income without relying on the government allocations alone. The MCA was wholly dependent upon allocations from the federal budget. These provisions significantly add to the ability of the Commission to act to ensure free competition, a constitutional requirement to be fulfilled by the state. However, the Ordinance of 2007 does not take care of lack of political will on part of the government, but then no law can.

 

Authority to Commission

A comparison between the MCA and the CCP

 

By Aoun Sahi

The government established the Competition Commission of Pakistan (CCP) in October 2007, under the Competition Ordinance 2007.

Experts believe that aim of competition laws is to promote competitiveness, and to protect public interest. "Promotion of competitiveness creates market opportunities (by preventing market dominance by few or one), which in turn encourages foreign investment, because investors also avoid investment in a country where monopolies flourish. Public interest is far broader than the sectional interests of the firms. More so, public interest stretches beyond the interests of consumers, of emerging entrepreneurs, or of labour and community constituencies" advocate Faisal K Daudpota, an expert on intellectual property, anti-money laundering and competition laws tells TNS.

Article 18 of the Pakistan's Constitution maintains that: "Subject to such qualifications, if any, as may be prescribed by law, every citizen shall have the right to enter upon any lawful profession or occupation, and to conduct any lawful trade or business Provided that nothing in this Article shall prevent regulation of trade, commerce or industry in the interest of free competition therein;". It is clear from simple reading of the above cited Constitutional provision that the right to enter a lawful trade or business is a fundamental right having constitutional protection in Pakistan, qualified only to the extent that free competition also must be ensured by the state.

The history of anti-cartel laws is not very old in Pakistan. In 1963, for the first time an effort was made on the part of then government to work on the subject and it set up an anti-cartel laws study group. The deliberations of this law led to the enactment of the Monopolies and Restrictive Trade Practices Ordinance 1970 (MRTPO). The Monopoly Control Authority (MCA) was the organisation to administer this Law.

The MCA's main functions were to register undertakings, individuals and agreements; to conduct inquiries into the general economic conditions of the country, with particular reference to the concentration of economic power and the existence of (or increase in) monopoly power and restrictive trade practices; to conduct inquiries in specific cases; and to give advice to individuals or undertakings on whether or not a certain course of action was consistent with the provisions of the law. It also had discretionary, recommendatory, investigative and legislative powers. When proceeding with an inquiry, the MCA had the powers of a civil court. It was also able to make recommendations to the central or provincial governments with regard to governmental actions that might affect the concentration of economic power, monopolies, or restrictive trade practices.

According to a paper, "competition in Pakistan: the new regime" co-authored by chairman CCP Khalid A Mirza, in 2007 before the promulgation of the Competition Ordinance, 2007, the performance of MCA was largely ineffective for nearly 25 years following its establishment. The nationalisation process, which started in 1972, limited the scope of the MRTPO. "Consequently, during the 1970s and1980s, the MCA's emphasis was on the diversification of the capital resources of undertakings. To this end, a few private companies, with a total value of assets that was not less than the prescribed limit under the law, were converted into public limited companies. The agency only started asserting itself in the mid 1990s, but had to face a lot of interference in carrying out its functions" the paper reads.

MCA also suffered from a chronic shortfall in funding. It also had very limited penal powers it could fine a maximum of only Rs100,000 for not carrying out its orders, or, in the event of a continuing infraction, not more than Rs10,000 per day. "Apart from these pathetic penalties, MCA had no power to grant leniency or a reprieve, which is an important tool used by competition agencies in other countries to adduce evidence. It also could not conduct dawn raids to gather evidence. As a result, the MCA simply limped along, failing to do anything substantive or worthy of mention. Whatever powers it had were not put to any imaginative use in the public interest," says Faisal K Daudpota.

 

"CCP prohibits the abuse of dominance"

-- Khalid Mirza, Chairman, Competition

Commission of Pakistan (CCP)

 

By Mehtab Haider

Chairman, Competition Commission of Pakistan, Khalid Mirza is a more confident man after his reinstatement that should see him through his tenure expiring July 2010. The powerful lobbies of LPG, cement, sugar, banking and many others which boast all the 'right' political connections made a successful attempt to show him the door -- unceremoniously, that is -- during the recent wave of the massive reshuffle in top bureaucracy, without even the full knowledge of the Prime Minister and the Finance Minister. But their success was short-lived and they could not get the desired results, as the media exposed them and stated that the government had bowed down before influential forces and removed the very person who wouldn't take a lenient view on the issue of cartelisation and the abuse of power by anyone, especially the business tycoons.

The government, led by Prime Minister Syed Yousuf Raza Gilani, removed the Chairman CCP, who held a tenure-based position protected under the Competition Ordinance. After becoming conscious of its mistake, the government reversed the decision and reinstated Khalid Mirza within 24 hours of his dismissal.

In an exclusive meeting with TNS, post-reinstatement, Khalid Mirza says he was going to take action against such violation on the part of the regulators such as SBP, PTA, SCEP and others.

In response to a query, the Chairman says the Competition Law authorised him to call in Army, Rangers or Police to conduct inspection into the premises of the business enterprises on the basis of solid information.

When asked whether the Competition Law empowered the government to appoint any bureaucrat with or without relevant experience, the Chairman CCP says, "Yes, it's the prerogative of the government."

However, he adds, the CCP is working towards developing new rules and procedures in order to ensure an effective operation. The strengthening of the organisation will make it difficult for the high-ups (in the CCP) to deviate from the course set by him and his other colleagues while staying within the parameters of the Commission.

Citing the example of India, he says New Delhi's leadership has put in place different mechanisms for making Competition Commission of India (CCI) more effective but they have not been able to achieve the desired results.

About the possibility of him getting another term in the office of the Chairman CCP, Khalid Mirza says the existing law does not allow for that. "The upper age limit is 65 years; unless the Competition law is amended I will not be eligible for reappointment to the slot because I will have turned 65 by 2010."

Interestingly, the upper age limit for the chairman of CCI is 68 years.

Replying to a query about financial and technical assistance provided by the multilateral or bilateral donors for preparing the Competition Law, he says the UK-based DFID has provided up to $500,000 for the purpose while the World Bank provided Technical Assistance (TA) for the same.

He claims the CCP is negotiating with the USAID, World Bank and Asian Development Bank for arranging $5 million in order to enhance its capacity building over the next five years.

The already approved TA loan of WB, worth $1.5 million, meant for capacity building of the CCP high-ups, has lapsed. "The best way to utilise the TA amount is to bring international experts here in Pakistan," he says.

According to Khalid Mirza, the CCP is currently conducting studies about ghee, fertilizer, civil aviation, energy, polyester, auto sector, spare parts, milk and sugar which should be completed within four months' time.

When asked to relate the difference between the olden Monopoly Control Authority and the new CCP, he says, "The Competition Ordinance 2007 is inspired by the principles embodied in the Treaty of Rome and it draws upon the United Nation's Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices as well as the OECD's Recommendations and Best Practices on Competition Law and Policy.

"Unlike the Monopoly Control Authority, the CCP does not seek to curb or reduce a dominant position. Instead, it prohibits the abuse of dominance. Although the law indicates a certain minimum market share beyond which there will be a presumption of dominance -- 40% -- such limit is by no means definitive; nor does a presumption (or finding) of dominance suggest in any way that this dominance is being abused. Also, depending on the facts, the new law does not rule out either dominance or abuse at lower levels of market share. He continues, "While the MRTPO prohibited only 'restrictive' trade practices that 'unreasonably' lessened competition, the new law prohibits any agreement that reduces competition within the relevant market, whether or not it is unreasonably restrictive. In addition, the new law forbids unfair trading practices and stipulates an elaborate procedure for review and clearance of mergers and acquisitions that meet the thresholds that would be notified under the rules.

"Secondly, the new law provides for the Commission to prescribe block exemptions from prohibited agreements on the grounds of efficiency or economic merit. There was no such provision for block exemptions in the MRTPO.

"The new law also eliminates unnecessary transactions or compliance costs. For example, the requirement for registration of agreements, undertakings and individuals that was specified in the MRTPO has been eliminated.

"Then, the new law specifically requires the Commission to carry out studies for promoting competition in all important sectors of economy and to engage in advocacy through various means in order to create an awareness of competition issues and to promote a culture of competition. An important function of the Commission is to hold open hearings on any matter affecting the state of competition in Pakistan and to issue a non-binding opinion or edict publicly in this respect. This was not so with the MRTPO.

"Finally, the Commission can authorise its officers to enter and search any premises, using forcible entry if need arises, under appropriate safeguards provided in the law. In other words, it is authorised to carry out raids. Leniency or a reprieve, as may be merited, is also possible under the law. These provisions were not available in the previous law and should strengthen considerably the investigative capacity of the Commission."

 

"We support the regulations"

-- Iskandar Khan, Chairman, Pakistan Sugar Mills Association (PSMA)

 

By Jawwad Rizvi

The News on Sunday: Is there a cartel in sugar industry?

Iskandar Khan: No. If the sugar millers were a cartel why would they compete during the crushing season and pay a price to the growers higher than the officially fixed rates. If we are a cartel then we should first cheat the sugarcane growers and then the consumers. The fact is, the millers have had to pay between Rs 100 and 140 per maund to the growers, something which negates the existence of cartel in sugar industry.

TNS: If the cartel does not exist, why was the CCP forced to take suo motu action?

IK: The CCP took suo motu action not against any cartel but upon a statement by the PSMA Punjab branch which was wrongly communicated. The PSMA didn't sort of threaten the government for not starting sugarcane crushing this year; it only said that the scenario could lead the industry to problems.

TNS: Are regulations good for the industry or the consumers?

IK: We support the regulations. In fact, we asked the government to introduce a long-term policy for the sugar industry. It is impossible for any producers to sell their product continuously at a price lower than its production cost. The same goes for sugar; the government has been demanding that sugar be sold at a price lower than its production cost, which is not possible. It's an international law that a high court cannot fix the price of a commodity but it can take action on cartel and hoarding. If the court fixes the price of sugar which is not a staple food, it should also fix the prices of cars and others items.

It is not under the purview of the Prime Minister to fix the prices of commodity. The government can provide subsidies to people, though.

The PSMA asked the government to ban brown sugar export under the regulation. The Sugarcane Factory Act was made in 1950 when there were only 4 mills in the country, as opposed to today's 80 plus. Given that context, the Act stands obsolete now; the need of the day is fresh regulations which must be made in consultation with all stakeholders.

TNS: How much political influence is there in sugar industry?

IK: Some political families of the country have their own sugar mills but they are not important enough to influence decisions and regulations as they like.

TNS: So, would you say the whole situation -- which led to sugar scarcity despite sufficient stocks -- was created in order to just hike the prices?

IK: This happened because of the farmers' lobby sitting in the National Assembly. But, let me say, the sugar industry must not be destroyed because of the politicians' wishes. Once the rules and regulations are made and implemented, the interference of the politician will end automatically.

TNS: Give us your honest opinion on the CCP ordinance and authority?

IK: The CCP ordinance is not an issue. We offer the Commission inquiry into the sugar crisis issue.

 

 

"CCP evidences are not based on facts"

-- Mazhar Rafi, Acting Chairman of All Pakistan Cement

Manufacturers Association (APCMA)

The News on Sunday: Does a cartel exist in the cement industry?

Mazhar Rafi: There is no cartel in the industry. The Competition Commission of Pakistan (CCP) blamed the APCMA that there was one. If a cartel exists in the cement industry then why has the industry suffered a net loss in the last financial year? Out of 20 cement factories, 17 were in net loss and only two factories of Karachi and one factory of Punjab gained profit as they are major cement exporters of Pakistan.

TNS: If a cartel does not exist then why has CCP fined the APCMA over Rs 6 million?

MR: The CCP evidences are not based on facts and we will prove it in Lahore High Court. The APCMA had already moved to the court on the decision of commission.

TNS: Are regulations good for the industry or do they benefit the consumers?

MR: Regulations are good for every industry but price control is not a regulation. The government must evaluate the cost of production of the cement industry. No one can sell their produce below its production cost on a regular basis and every cement manufacturing unit produces one commodity but its cost varies with the production levels.

TNS: Why do prices fluctuate so quickly?

MR: Fluctuations in the price of cement occur due to supply side distortion which could happen because of any reason. For example, a cement manufacturing unit of an area was closed due to some technical fault and this unit was mainly supplying cement to Lahore and other cities of Punjab, this supply was in turn covered by the other unit which was supplying to Rawalpindi and the frontier area. So the supply gap pushed the prices. Sometimes a brand is popular among masons so it sells for a slightly higher price than other brands.

TNS: How much political influence is involved in the cement industry?

MR: There is no political influence in cement industry. There are no ministers or politicians who are cement manufacturers.

TNS: What is your opinion about the CCP ordinance and authority?

MR: The government did not consult the cement industry before promulgating the Competition Ordinance and establishing the CCP. The APCMA had also questioned the status of CCP in court as well.

 

-- Jawwad Rizvi

 

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