Dealing with vested interests that mar competition

Published: The Economic Times, June 28, 2007

By Pradeep S Mehta & VV Singh

Good intentions of the government in pushing reforms are often thwarted by vested interests. So, any policy aimed at accelerating growth must also identify the opposition.

Globally, economic liberalisation has brought many policy changes, with reliance on market forces. Alongside these policy changes, several developing and transition economies, including India, have adopted competition laws as a follow-up to their market-oriented reforms. Further, most of these countries have deregulated several sectors and adopted regulatory regimes for their healthy growth. The rising interest in competition and regulatory laws in India and elsewhere reflects the big changes that have been taking place in their economic governance systems.

In developing countries, adoption and implementation of competition and regulatory laws are politically charged, as its objective is to constrain concentrated political and economic power while helping the more diffuse interests of ordinary, often poor, consumers and producers.

It might not be wrong to say that vested interests, which dominate political power, limit economic growth by curtailing economic opportunities which help in growth and poverty reduction. Competition benefits are often directed to the well-connected and the entrenched. For example, the competition law in Mauritius states that anti-competitive agreements can be exempted from the provisions of the law, if the minister is satisfied that such agreements are beneficial to consumers. In Thailand, competition law has allegedly had very limited impact due to the unholy nexus between politicians and businessmen, and cronyism. Only the other day, PM too expressed similar concerns in India.

Competition policy is part of an investment climate aimed at improving economic growth and thereby helping the poor. Competition policy should be more than a technical intervention in markets when competition challenges vested interests. As Joseph Stiglitz has observed: “Strong competition policy is not just a luxury to be enjoyed by rich countries, but a real necessity for those striving to create democratic market economies.”

Competition policy must align with those political forces for change through economic growth while supporting the political stability on which sustainable growth dynamics depend. The political governance approach to competition policy suggests that it must be judged not by economic efficiency gains alone, but by the greater aim of breaking the monopolies of economic and political power that currently prevent poverty reduction.

This pursuit of political equity and fairness, as well as economic efficiency, requires that competition policy must build a culture of competition by gradually confronting vested interests that are well embedded in the system.

The competition authority should focus on cases with strong vested interest element so as to build the credibility of the agency, rather than focus on economic impacts. Competition policy is therefore much more than a technocratic tool for achieving economic efficiency gains. It is important to develop and customise our own policy and law, rather than copy it from rich countries. We need a justice promoting system rather than an efficiency enhancing approach.

Competition policy should be judged explicitly against its contribution to tackling the dominance of vested interests for better growth and poverty reduction outcomes. For this, a vibrant civil society and an active public interest law practice are crucial. The adoption of competition policy can help create a culture of competition. Civil society demand can help, through consumer organisations undertaking competition advocacy on behalf of the poor and vulnerable, said Max Everest-Phillips.

Political will and consumer advocacy are extremely important for the success of competition and regulation regimes in developing countries. The new challenge for fair competition is on how to make governments around the country more capable, more accountable and more responsible to deliver growth and welfare in a fair manner to common people. Therefore the success of implementing competition law will depend upon how the gains are distributed, rather than on growth per se.

This article can also be viewed at: http://economictimes.indiatimes.com/

Cement cartels: flavour of the day

Published: The Financial Express, June 10, 2007

By Pradeep S Mehta

Policymakers need to implement an effective competition law that could be a deterrent and policeman

Cement enterprises are the most favoured flavour of competition authorities around the world. Because they almost always collude as a cartel and fix prices, thus adversely affecting consumers and other businesses. In India the scene is no different. But they have never been prosecuted, because our extant competition law: the Monopolies and Restrictive Trade Practices Act (MRTPA) is just not adequate to deal with them. One reason why we adopted a new Competition Act in 2002, but that too is dysfunctional awaiting amendments in the Parliament. Alas, we remain where we are, with a little respite coming through some cheaper imports from Pakistan.

Currently, we are witnessing a cartel-type behaviour in cement prices with everyone in the government, including the Prime Minister crying foul. All admit that we need a competition law, which can bite. The Parliamentary Standing Committee has gone through the proposed amendments in December, 2006.

The MRTPC too has woken to push the cement cartel case pending before it for several years. It has not succeeded in the past and thus there is little hope that it will do so in future. Both then and now the government has used import tariffs as the competition-promoting instrument. However, the cement industry is typical and imports may not always help.

Colluding firms do not record their agreements, which are always oral, often facilitated by their trade associations. On the other hand, courts do not accept evidence of implicit cartels based on parallel price movements. The new law in India has amnesty provisions, which allow a colluder to spill the beans, and are thus the best way through which competition authorities uncover damning evidence and action cartels.

In 1994, the European Commission levied fines to the extent of 248 million euros on six companies and the cement manufacturers’ association. In judicial appeals finally decided in January 2004, the fine was brought down by 140 million euros, and the fine on the trade association was nullified. These six included Lafarge and Holcim. Lafarge was fined with 187 million euros by the EC in 2003 for participating in another cartel, the third largest fine ever levied for being a habitual offender. In Taiwan, in December, 2005, Cemex, one of 11 manufacturers along with 10 distributors, were fined $6.3 million.

In Korea, in September 2003, the competition authority levied surcharges (fixed fines) of $22 million on seven companies in addition to $4,28,000 on the Korea Cement Manufacturers Association. In Argentina, five cement companies operated a cozy cartel during 1981-99, until caught and fined a whopping $107 million, the largest fine levied by the country’s competition regulator. In Romania, in 2005, three cement companies: Lafarge Romcim, Holcim and Heidelburg’s subsidiary — Carpatcement were fined 27 million euros or six per cent of their turnover. These three companies shared 98% of Romania’s cement market. The probe found that they had inflated prices by as much as 38%. The list is endless…and only goes on to prove what was said in the introduction of this article.

Let’s now take a look at countries, where there is no effective competition law, and how cement cartels behave. In December 2002, the price of cement had fallen to an exceptionally low £125 a tonne in Egypt. The drop had caused serious worry among the cement producers. In response, almost all local cement producers met and set a price range for cement between £167 and £176 a tonne. There was an outcry, but no action could be taken as Egypt did not have a competition law then. It has one now, in spite of strong business opposition, but is yet to become fully operational.

In Pakistan, which has a law similar to our own MRTPA, the authority did take action against cement cartels in October, 1998. Cement manufacturers raised the price of cement in a collective action from Rs 135 a bag to Rs 235 a bag. Enquiry by the Monopoly Control Authority probed to find that none of the input costs had gone up. The authority passed orders for reversion to the old prices and levied a fine. The order was stayed by the High Court. The Ministry of Commerce intervened and persuaded the MCA, despite the theoretical independence, to close the case.

Research in Philippines, which has no competition law, has shown that the cement industry has grown under heavy government protection. The market leader, a state enterprise, Philippines Cement Corporation decides which company produces how much and where it can sell. Collective price action has been seen from a long time. Analyses of cost structures show that in spite of differences, the selling price is uniform. Research in Malaysia shows that the local cement producers maybe indirectly affected by Lafarge’s international cartel arrangements.

If we look closer at the cement industry in India, it is the second largest in the world with total capacity of 151.2 mt, and growing. All major internationals: Holcim, Italocementi, Cemex and Lafarge are here. There are some significant domestic players like Gujarat Ambuja and Birlas, but they too are closely linked to the foreign players through cross holdings. Thus the disease is here to stay and grow in a culture of non-regulation, unless our policy makers are serious in dealing with the malady through an effective competition law which can not only be a deterrent but be a strong policeman.

This article can also be viewed at: http://www.financialexpress.com/