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Cartelist
behaviour is difficult to detect
The Hindu Business
Line, December 26, 2007
The Hindu, December 22, 2007
By D Murali
Chennai: A few days ago,
the Monopolies and Restrictive Trade Practices
Commission (MRTPC) found 44 cement companies guilty of
cartelisation under the aegis of Cement Manufacturer’s
Association (CMA) during the period February to April
1990. “Even though it took 17 years for the MRTPC to
come to a decision on an old case of the pernicious
cement cartel in India of 1990s, it is a case of better
late than never,” says Mr Pradeep S. Mehta, who recently
published ‘Competition & Regulation in India, 2007’ (www.cuts-international.org).
“Alas, the MRTP Act, 1969
does not have the teeth to do anything other than asking
the cartel to cease and desist, i.e. in simple terms, to
stop them from doing so,” rues Mr Mehta. The larger
issue, according to him, is of the recent cartelisation
in cement prices, fuelled by the economic boom in the
country. “That case is yet to come up, and considering
how slow the inquiry process moves, the same may also
get dated.”
One just has to look at
the balance sheets of cement companies that hiked prices
by over 50 per cent in the recent past, he urges, in the
course of an e-mail interaction with Business Line.
“Remember what Mr Kamal Nath, the Minister for Commerce
and Industry, had observed during his parleys with the
cement cartel: that limitless profiteering is not
acceptable and that various studies conducted show the
increase in input prices not being commensurate with the
extent of the cement price increase.”
However, Mr Mehta hopes
that there will be good price competition in the cement
sector in the wake of the recent decision by the MRTPC.
Excerpts from the
interview.
What are cartels?
Cartels, in simple terms,
are the result of a collusive, unethical and illegal
action by firms in the same line of products getting
together to fix prices, limit production, and divide
territories and/or customers. Collusion by traders to
maximise their profits is as old a phenomenon as trade
itself, going back to when people began exchanging goods
for cash.
In India, we have known
about cartels as early as in 400 BC, when Kautilya in
his monumental political economy treatise, Arthashastra,
had prescribed norms for such anti-competitive behaviour.
Cartels were recognised – and prohibited – in the days
of the Eastern Roman Empire (Byzantium) . For instance,
the Constitution of Zeno in 483 AD punished price-fixing
in clothes, fish, sea urchins, and other goods with
perpetual exile, usually to Britain, then a Roman
colony.
Cartelisation is termed as
the most egregious form of anti-competitive practice by
the competition community.
How do cartels affect
consumer interest?
Through artificial
increase in prices. Take, for example, a cement bag
being sold at Rs 200 per bag before cartelisation took
place; and, say, after cartelisation, the prices shoot
to Rs 250 per bag. If the cost of cement in a building
were 10 per cent of the total construction cost, it
would go up by 10.25 per cent. Is this a marginal
increase? Yes, to a consumer it may be marginal, but to
the builder, if the cost of all cement in a project were
Rs 100 million, then his costs go up to Rs 102.5
million, or an extra cost of Rs 25 lakh. Shortages in
cement bags are another story. What the builder does is
to pass on the increased costs to the consumer. There
are myriad such cartels in many goods and services, and
one can imagine the increase in consumer cost as a
whole. It can be quite high.
We have cartels in
petroleum, don’t we?
Yes. The OPEC (Organisation
of Petroleum Exporting Countries) is an example of a
‘legitimate’ cartel in the oil sector - legitimate
because it is treated as sovereign function of states
that own the oil reserves. This too has been challenged
in the US, but has not progressed because of the
jurisdiction problem.
The oil cartel is blamed
for the high crude prices - going up to $100 per barrel
currently, from a price of $35 about two years ago. Not
long ago, the former petroleum minister of India, Mr
Mani Shankar Aiyer floated the idea of forming a buyers’
cartel of net consuming countries, but that did not move
far.
Another form of a
legitimate cartel can be our own taxis in a city and the
like, which are governed by tariff regulations set by
authorities. In this case taxis do not compete on prices
but do so in quality of services rendered.
In what forms does illegal
cartelisation happen?
The most common form of
cartels is ‘price-fixing,’ which is treated as a
criminal act in the US; many other jurisdictions,
including the EU (European Union), have started adopting
the same treatment. Price-fixing is a term that is
generically applied to a wide variety of concerted
actions taken by competitors having a direct effect on
price. The simplest form is an agreement on the price or
prices to be charged on some or all customers.
Next on the list are
cartel agreements that divide markets by territory or by
customers among competitors. If anything, such
arrangements are even more restrictive than the most
formal price-fixing agreement, since they leave no room
for competition of any kind, and hence are often held
illegal per se by competition laws around the world.
Under the third category
of cartel behaviour is output restriction, when
companies producing/supplying the same products/services
agree to limit their supplies to a lower proportion of
their previous sales. The ultimate objective of limiting
supplies is to create scarcity in the market and
subsequently raise prices of products/services.
The fourth type, bid
rigging, involves coordinated actions by firms on
tenders and auctions. Bid rigging, as all other
cartel-type behaviour, can be hard to spot and
prosecute.
Cartelist behaviour is
difficult to detect, and even when detected, might be
countered by various defences. To make matters worse,
cartels can occur in almost any industry and can involve
goods or services at any level along the value chain.
How can cartels be busted?
Of course the government
can take action against illegal cartels by implementing
suitable competition or antitrust laws, such as the
MRTPA. The only problem with busting cartels is
collecting incontrovertible evidence against such
cartels, because of their secretive nature. Most cartels
exist only on verbal agreements, and colluders take care
to never record their understanding.
Yet, cartels are being
busted every other day in the western countries due to
suitable legal provisions in their competition laws. It
is mainly due to amnesty provisions, which are used by
one of the colluding firms to spill the beans against
their partners in crime.
Should consumers be
vigilant about deeply embedded cartels too?
Definitely. Because, quite
often cartels operate in the intermediate goods and
services sector, such as in the animal feed additives
business, so consumers do not feel the pain – they
remain ignorant of the fact that such artificial price
increases lead to a higher price of finished goods which
they buy/consume. The direct costs of a cartel to
consumers are increases in the cost price of the product
if the cartel is successful, fewer product choices (if
the geographical markets are allocated among producers),
and a slower rate of product innovation and
technological change. To ensure that a cartel survives,
cartels may engage in activities that block or slow the
entry by producers that are not members of the cartel.
Does the new competition
law effectively tackle cartels?
A major challenge, this
is, for the new competition authority in India, I’d say,
apart from the other major challenge of abuse of
dominance. Many experts consider anti-cartel activity
the most important function of a competition agency.
They feel that because cartels cause the greatest harm
to consumers, finding and prosecuting these agreements
should be a top priority of competition officials.
Prosecuting cartels may be
the most difficult of the tasks assigned to competition
authorities as cartels are conceived and carried out in
secret.
Cartel operators, knowing
that their conduct is unlawful, do not willingly
cooperate with competition officials in the course of
investigations. Thus obtaining evidence to prove the
existence of cartel agreements requires adequate legal
provisions, special investigative tools and skills.
The new law provides for
these, including amnesty to whistle-blowers. The only
problem is the lack of capacity in the new authority; to
resolve this, though, personnel are being hired. These
people need to be trained with the help of real-life
case studies. It may also be advisable to draw upon
training expertise from abroad, in this sphere.
Can the new competition
authority act against cartels operating from outside
India?
Under the MRTPA, the
Commission had tried to prosecute two international
cartels: one in soda ash and the other in float-glass,
both of which are not consumer goods. But, while it
succeeded in passing good orders, the Supreme Court
turned them down on two grounds: first, that the MRTPC
does not have extra-territorial jurisdiction; and
secondly, that cartels are not properly defined in the
MRTPA. The new Competition Act of 2007 has taken care of
both these points by providing for jurisdiction on any
anti-competitive practice that takes place outside the
territory but having an impact on India; also cartels
are clearly defined.
Has the response to
cartels been different in the developed countries?
Over the last century, in
particular, there was a global resurgence of
international cartels, which became evident thanks to
the numerous efforts to uncover them by the competition
authorities. It is believed that the US and the EU
authorities have prosecuted about 100 international
cartels in the given time period. They have had
effective competition regimes for many years, which have
been refined over time.
Both the US and EU are
capitalist economies and firmly believe in the private
sector as the most important component of its economy.
Yet, they are very tough on collusive activities such as
cartels because they sap the economy. The record, sadly,
has been much poorer in the developing world – not
because cartels are less common here but because the law
enforcement agencies are less well equipped to deal with
them.
Are there any estimates of
losses suffered by the developing countries as a result
of cartels?
Sample this. Of the
international trade flows identified in 1997 that best
matched the products sold by 16 international cartels
operating during the 1990s, developing countries’
imports of these goods amounted to $81.1 billion,
representing 6.7 per cent of their imports and 1.2 per
cent of national incomes.
With an estimated increase
in prices of between 20 and 40 per cent, one can then
calculate a range of estimates for the overcharges paid
by developing countries in 1997, had all 16 of these
cartels been in operation during that year. These
overcharges are in the range of $16-32 billion, an
amount equivalent to between one-third and two-thirds of
the total annual multilateral and bilateral aid received
by developing countries in the late 1990s.
Thus, there is a strong
case for strengthening the enforcement activity of
competition authorities in developing countries
vis-à-vis cartels. This continues to be hampered by
inadequate legal frameworks or tools, information
asymmetries, or worse, human resource handicaps. Such is
the situation in countries like India.
How can we prosecute
international and domestic cartels?
India has the Competition
Act, 2002, amended in 2007, and this has provisions for
amnesty for any firm that blows the whistle on the
others in the cartel. The law is yet to be notified in
full and made operational, but it is on its way. We hope
that the new law will be operational soon and we can see
effective action against such cartels.
Meanwhile, there is an
important source of information that may be explored:
careful analysis of offers by different companies in the
Central and state government bids. This can give
important clues if there have been patterns of
systematic rotation of winning bids, stable shares of
companies in overall procurement etc. Cooperation from
the CAG (Comptroller and Auditor General of India) can
be sought by the new authority to study these patterns.
This information would be helpful in detecting collusive
behaviour in the market as well.
Secondly, by recruiting
the help of investigative agencies such as CBI (the
Central Bureau of Investigation), the Economic Offences
Wing and so on, the new authority can also get
incontrovertible evidence on collusive action by firms
and nail them down.
Thirdly, by popularising
the amnesty scheme through seminars and compliance
education among businesses, cartels can be unearthed.
One or two cases can build confidence in the business
community.
On international cartels,
since many of the cartel originators are situated in
western countries, our competition authority will need
to have cooperation agreements with competition
authorities in other countries to get evidence. It may
not be an easy task but if we look at the way India is
growing, any request from us will not be treated
lightly. For cartels already busted, the information may
be easily obtained; but, for suspected cartels, it might
be difficult. Informal cooperation may be tried,
instead.
Reverting to the amnesty
provision, it is not only the first party who blows the
whistle that can get away with no fines, but also
subsequent parties, who can cooperate to get lesser
penalties.
In a very recent case of
cartelisation against five elevator manufacturers in
Austria, ThyssenKrupp, as the first party who blew the
whistle, got away without any fine, while Otis Elevator
received a 50 per cent remission in fines for active
cooperation in the enquiry. The others in the cartels
who were fined a total of 75 million euros, included
Kone, Schindler, Doppelmayr and Haushahn. Some of these
operate in India too.
Have there been instances
of cement cartels in other countries?
Among cartels, one of the
most pathological ones is the cement industry, unless
there is a state monopoly as had existed in few
socialist countries.
In 1994, the European
Commission (EC) 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, a fine of $6.3 million was imposed on Cemex, one
of 11 manufacturers along with 10 distributors.
In Korea, in September
2003, the competition authority levied surcharges (fixed
fines) of $22 million on seven companies in addition to
$428,000 on the Korea Cement Manufacturers Association.
In Argentina five cement companies operated a 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, viz. 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 per cent of Romania’s cement
market. The probe found that they had inflated prices by
as much as 38 per cent. The list is endless.
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 E£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 E£167 and E£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 the same is yet to
become fully operational.
In Pakistan, which had 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 found 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. Now, even
Pakistan has a new competition law.
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 may be 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 international cement companies are here. There
are some significant domestic players too, but they are
closely linked to the foreign players through
cross-holdings. Which is why we need an effective
competition law.
This
News item can also be viewed at:
http://www.hindu.com/thehindu/holnus/006200712222166.htm
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Cartel
is a small group of producers of a good or service who
agree to regulate supply in an effort to control or
manipulate prices, defines www.investopedia.com. "The
best known example of a cartel is probably the
Organization of Petroleum Exporting Countries (OPEC)."
Adam Smith wrote in The Wealth of Nations (1776) that
when people of the same trade meet, `the conversation
ends in conspiracy against the public, or in some
contrivance to raise prices.'