May 2, 2010

Living on the edge

Markets are generally characterised by imperfect competition where firms can manipulate price by reducing output

By Hussain H. Zaidi

After dilly dallying, the government has re-promulgated the competition law. The Competition Ordinance 2007 was first promulgated on October 2, 2007. It was among the ordinances protected by General Musharraf under his Provisional Constitutional Order (PCO) dated November 3, 2007. The Supreme Court’s July 31, 2009 judgment provided that all the ordinances protected under the PCO would lapse unless passed by parliament in four months i.e., by the end of November 2009.

The Competition Ordinance was re-promulgated on November 26, 2009 and expired on March 26 before it was re-promulgated in April. The new competition bill is being reviewed by a parliamentary committee and one of the proposed changes is to allow the aggrieved party to challenge the Competition Commission of Pakistan’s decisions in the High Court instead of going straight to the Supreme Court as previously.

Advantages of an effective competition regime in a market economy are enormous. Markets work efficiently when they are competitive, that is when no firm or a group of firms is strong enough to affect market price and there are no barriers to entry and exit. Competition not only leads to lower prices but also helps improve product quality. Existence of a large number of firms also gives greater choice to the consumer and business user of the product or service.

In practice, however, markets are generally characterised by imperfect competition — monopolies or oligopolies — where firms can manipulate price by reducing output. This combination of higher price and lower output breeds inefficiency and harms consumer interests. As in the case of the recent sugar crisis, businesses collude to fix prices, divide markets, create shortages or supply sub-standard goods. There is, thus, need for a powerful competition regime to curb the powers of monopolies and collusive behaviour.

Pakistan has lacked an effective competition regime. The country had a competition law entitled Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance 1970 (MRTPO) as amended (the last amendment being in 2002) and a body to administer that law called the Monopoly Control Authority (MCA). However, cartels ruled the roost in several industries, most notably, sugar, ghee and cement industries. These cartels would create artificial shortages in the market to raise prices. There was thus a strong demand to upgrade the competition regime. This was done through the Competition Ordinance 2007.

The ordinance, under Sec 1, applies to all undertakings, public as well as private, and matters that distort competition. The following practices/agreements are prohibited: abuse of dominant position (Sec 3); deceptive marketing practices (Sec 10); and mergers which substantially lessen competition by creating or strengthening a dominant position in the relevant market (Sec 11). Undertakings intending to merge are required to seek a prior approval.

However, mergers which substantially attenuate competition may be allowed if it is proved that it will contribute substantially to the efficiency of the production or distribution of goods or services; such efficiency cannot be achieved by a less restrictive means of competition; and the benefits of efficiency outweigh its adverse effects on competition. Mergers once approved might also be undone.

Abuse of dominant position is defined as practices which prevent, restrict, reduce, or distort competition in the relevant market. That may take the form of an explicit agreement or a tacit decision. Section 4 provides an illustrative list of such agreements, which include fixing price or output, dividing markets, and collusive tendering or bidding. However, under Sec 5 read with Sec 9, an exemption may be granted to a particular practice or agreement if it substantially contributes to improving production or distribution of goods or services, promoting technical and economic progress while allowing consumers a fair share of the resulting benefit, or the benefits of that arrangement outweigh its adverse effects on competition.

The ordinance has set up an independent, quasi-judicial body — the Competition Commission of Pakistan. The Commission has its own fund to be called "CCP Fund" to meet its expenditure. It has powers of a civil court in enforcing the attendance of any person or production of any document and the power to enter or search any premises for enforcement of the Ordinance. One of the proposals before the parliamentary committee scrutinizing the new draft competition law is to significantly reduce the powers of the Commission to enter or search any premises.

The Commission is empowered to initiate proceedings, make orders in case of contravention, and conduct inquiries into the affairs of any undertaking, and take all other actions necessary to carry out the purpose of the ordinance. This power is broad enough to curb all-anti-competitive practices. The Commission is also empowered to award penalties up to Rs50 million for contravention of any of its orders and up to Rs1 million for non-compliance. The failure to comply with any order of the commission is a criminal offence punishable with up to one-year imprisonment or fine up to Rs25 million.

Any order made by a member or officer of the Commission can be challenged in the Appellate Bench of the Commission, comprising no less than two of its members. The Appellate Bench order can be challenged in the Supreme Court. Thus the High Courts have no jurisdiction over competition cases as was the case under the old law. Presumably this was done to expedite disposal of cases.

Thus, the Competition Ordinance 2007 represents a marked improvement over the previous one. To begin with, under the old law monopoly power was justified if, inter alia, it contributed to growth of exports. This provision gave leeway to monopolists because it was not difficult for a monopolist firm to show that its monopoly power was contributing to increase in exports. The new law does not have such provisions. Secondly, the old law did not provide for mandatory pre-merger notification.

The MCA had only the power to undo mergers and acquisitions — a power which can only be exercised after mergers have taken place. Hence, it was not possible to prevent such mergers as might have the potential of distorting competition. The existing law, however, provides for mandatory pre-merger notification so that potentially anti-competition mergers cannot take place thus nipping the evil in the bud. Thirdly, contravention of the old law was only a civil offence punishable with fine up to Rs1,00,000.

This penalty was ridiculous and failed to constitute a strong deterrence, because it was only the big, powerful firms that contravened the provisions of the law. Under the existing law, not only has the penalty been increased to Rs50 million, the violation of the law has also been made a criminal offence punishable with imprisonment, as in case of the US anti-trust law. These provisions make the Competition Commission far more powerful than the erstwhile MCA.

The State of Competition Report 2008 issued by the CCP provides a useful insight to the state of competition in Pakistan: Businesses and industry of Pakistan have been characterized by a culture of protectionism in the form of licences, quotas, import restrictions, high tariffs, subsidies, duty drawbacks, and concessionary credit to export enterprises in particular. This stifled competition and promoted inefficiency. Restrictive business practices — such as price fixation, collusion and denial of goods and services — have remained in vogue at the cost of both the business user and final consumer.

Political and economic powers go hand in hand. A number of industries characterised by cartelisation are owned or controlled by powerful politicians or their cronies, which has always made it difficult for the state to act against cartels. It was those powerful cartels which got the chairman of the Competition Commission removed last year, who was later reinstated. Attempts are being made to significantly reduce the powers of the Competition Commission. Thus despite putting in place a powerful legal regime, competition cannot be ensured unless strong political will exists.

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