Cartelisation in cement industry

National exchequer suffered Rs 120bn losses

KARACHI: National exchequer suffered an estimated Rs 120 billion losses due to cartelization
in cement industry, Chairman Competition Commission of Pakistan (CCP) Khalid Aziz Mirza
disclosed here on Monday.
Speaking with the members of Pakistan Federation of Chambers of Commerce & Industry
(FPCCI), he said that on acting like a cartel, CCP imposed a fine of Rs 6.3 billion on the various
companies of the cement sector.
Mirza said that the fine imposed on the cement companies was very low against the prevailing
rate and conditions in the other countries. He invited cement manufactures for discussion on the
fine. They have right to avail leniency provision as provided in the law, he added.
The CCP imposed Rs 6.352billion fine on 20 cement manufacturers as they were found involved
in cartelisation, resulting in hike of cement prices to the disadvantage of consumers. Cement
manufacturers had filed a case against the investigations being undertaken by the CCP and are
also likely to file against the CCP verdict in the Supreme Court.
About the fears of increase in the retail prices of cement due to imposition of this fine, Mirza
rejected these fears by saying that these have no substance and said it would not affect the
stakeholders negatively. He assured that the prices would come down and no stakeholder will be
hurt due to this decision.
Mirza defended his report presented to the Supreme Court of Pakistan (SCP) on sugar industry in
which federal and provincial governments were held responsible for sugar shortage. On the
general impression that the report is biased and a bid to protect sugar millers, he said, There is
no bias in the report and the findings are linked to the industrial outlook. He informed that
another investigation regarding cartelization of sugar mills is also in progress, which would be
completed within a week. In his report, Mirza pointed out that government decision to fix the
prices was main factor behind sugar crisis. staff report

news analysis - People of the same trade seldom meet together, even for merriment and diversion, but
the conversation ends in a conspiracy against the public, or in some contrivance to raise prices, Adam
Smith in The Wealth of Nations.
While capitalism may very often be attributed to bringing about economic wealth and prosperity, with
private corporations and firms competing against each other for the larger interests of the people, the
latest economic theory in the mix is that for purposes of profit maximization when the chips are down,
collusion becomes a norm for the greater common good of the profit churning businesses. Businesses
divide markets, restrict output, manipulate prices, through collusion or cartelisation. This universal truth
is applicable to any sector with excess capacity and few players. Instead of competing against each
other, they unite to beat competition.
Our competitors are our friends, our customers are the enemy is a famous statement of an official
working for a feed additive cartel which was caught on tape by the FBI. While collusive practices are
quite destructive for most economies, these are particularly harmful for developing economies that
have weak legal structures in place to make these corporations accountable.
Over the last few years, Pakistan has been held hostage by these cartels who have over the years
extended their influence through bribing politicians bureaucrats and other stakeholders. The increasing
influence of cartels has made it harder to make them accountable, since they lobby support from the
policy makers as well. As a result, the consumer and new entrants to the industry have been severely
affected by these malpractices that have collectively contributed towards the deterioration of the
industry. While privatisation in itself may benefit the economy through increased efficiency and
competitiveness, there is a need for strong regulatory policies to keep a check on collusion and
cartelisation.
Media is also culpable for forwarding the vested interests of these cartels. Biased reports based on
fallacious arguments are accepted as universal truths, where the role of media as a free and fair
disseminator of information is compromised.
Unregulated privatisation since the late 80s has lead to the creation of multiple cartels, including a
cartel of several oil companies, a cartel of three companies in the automobile sector, a sugar cartel
based on 24 companies, cement cartel based on 10 companies, food and beverage cartel comprising of
12 companies, fertiliser cartel based on 4 groups while other similar cartels prevailing in other sectors of
the economy as well.
Spiralling fertiliser prices especially in the last few months are being attributed to the presence of the
fertiliser cartel that is collectively working towards increasing the prices of their commodities. While
officials within the fertiliser companies are attributing the decline in production to gas load shedding,
other sources are pointing towards a possible collusion by the four major companies in this regard.
Pakistans total urea demand is estimated at around 6.3 million tones per year, while the domestic
production capacity of the sector also hovers around the same level. The highly profitable fertiliser
companies recently pressurised the government into abstaining from increasing gas tariffs to their feed
stock as well as fuel supplies, warning officials that such a step could result in the prices of urea to
double. An increase in the price of urea would translate into growing discontent among the rural and
semi-urban vote bank of the ruling party. According to sources the fertiliser sector duped those sitting in
the higher echelons of power into believing that a rise in gas tariffs would significantly raise fertiliser
prices, when in fact a 50 kg bag, according to sources is produced by utilising merely 6 per cent of gas.

The automobile sector of Pakistan has also been engaging in similar practices over the years, with the
manufactured cars having sub-standard components when compared to the same models being
manufactured overseas. While they argue that a relaxation of import duties on cars from abroad will
impact jobs in the country and affect the domestic industry as well, these companies continue to fleece
customers with over-priced and substandard cars. Many of the cars manufactured do not meet
international emission standards or safety features that have been made mandatory in a plethora of
international countries. For instance, no car being manufactured by Pak-Suzuki in Pakistan offers
airbags. The industry has over the years also been blamed for charging customers a premium on the
urgent delivery of vehicles; effectively selling cars at a higher rate than their official retail price. The
same automobile cartel has in the recent past also put forward objections to the incentives being
provided to new assemblers to enter the indigenous market.
Most importantly the functioning of the sugar cartels being operated by notable politicians and
businessmen has lead to the country facing severe shortage of sugar on several occasions in the last few
years. In 2001, the price of sugar was hovering around Rs14-16 per kg that rose to Rs24-25 per kg in
2005. By 2009 the price of sugar crossed Rs58 per Kg. Things got so bad that at one point the price shot
up to Rs100 per Kg. Many of these price fluctuations were cosmetic and artificial which lead to the sugar
cartels minting billions of Rupees in revenue. The government eventually took steps to bring the sugar
prices down to Rs65-68 per Kg.
It is indeed unfortunate that while the country is going through the most turbulent time in history,
where the economy has been adversely affected by volatile law and order situation, widening trade
deficit and a negligible GDP growth rate, those sitting at the helm of affairs whether in politics or
businesses are clawing at every opportunity to make the proletariat miserable. The government needs
to take effective measures to root out the evil of cartelisation. In this regard the CCP has taken some
good steps to root out collusive practices. It needs to be understood that the harm caused to developing
countries is greater since they lack effective competition regimes.
The recent financial meltdown has with it made the presence of cartelisation more palpable. Since
competition is restricted companies are now finding it more profitable to collude at cost of the
customer, by setting a high price that benefits them. However, they need to realise that these short
term policies may handicap a market of prospective customers who are being deprived of greater
purchasing power through such corrupt practices.

The cellular phone sector is one of the most competitive sectors in the country witnessing an unending
price war among market players who are slashing call and SMS tariff one after another to attracting
customers but sometimes a reverse phenomenon are seemed as these players act in a way of cartel to
increase their service charges.
All five operatorsMobilink, Telenor, Ufone, Warid and Zong- have slapped 1 to 1.5 percent fix rate of
services charges on millions of customers as operational, administration or maintenance fee.
The joint imposition of charges is simple example of cartelization of cellular sector, which left no choice
for customers to avoid it in any way in the price-hike environment because a customer has to pay it at
any cost using any cellular network among all five.
The nature of the charges is also compelling, as customers have to pay it in advance at the time of load
of balance or recharge of airtime. Hence, a customer whether he buys Rs 1,000 airtime or Rs 100
balance, he needs to pay it along with high taxes and already services charges imposed by cellular
operators.
In August 2009, the same anti-competitive practice was witnessed in the cellular sector when four out of
five introduced 10 paisa on the balance inquiry request of the subscribers.
This concurrent levy of service charges has been taken seriously by concerned authority as anticompetitive practice and hold an investigation study to check possible cartelization in the sector.
The Competitive Commission of Pakistan (CCP) found cellular sector involved in cartelization and issued
24 show-cause notices to top brass officials of all four operators in this regard.
It is although no doubt that the calls and SMS packages have been falling down one by one by all these
operators in the visible unending price war among market players, but it is also true that they rarely
impose charges on their telephony services. And whenever they have slapped or increased charges, they
have done it jointly and sometimes covertly leaving no option for millions of customers for the other
choice, they said.
On October 1, 2008, all these companies also levied 5 percent services charges at a time on the balance
re-charge through upload and scratch card. If a pre-paid customer recharge his/her balance, then it has
to pay 5 percent service charges to its mobile operators on every move. Same condition applies to postpaid customers.
Since last year, three out of five operators had also hiked helpline call charges by 50 to 100 percent
Warid Tel increased its helpline call charges by 50 percent to Rs 1.50 min plus tax in May 2011 followed
by Mobilink and Telenor, which spiked 100 percent of their helpline call charges in the past few months
ago.

Mobilink and Telenor helpline call charges have been increased to Rs 2 per call in Nov 2010 and April
211 respectively. Mobilink charges have increased to Rs. 2.42 including taxes whereas Telenor has
surged its helpline cost to Rs 2.79 including tax and IVR applied charges.
It seems that cellular phone companies are reducing call and SMS rates constantly but the fixed services
rates on different account show that the most competitive sector adopts anti-competitive practice when
they need to enhance their revenues.
Telecom analysts said that cellular phone companies are looking for phasing out all the free services
given to customers in order to generate earnings in the stiff competitive market.
They said that the unending price-war among all cellular phone operators have dragged them in the red
zone, therefore, they all are seeking to increase their revenues to beat the operation expenses in the
country.
Though the rate of new service charges is minimal but the number of subscribers is overwhelmingly high
varying from different income bracket.
The cellular subscribers in the country are on the rise, crossing 100 million benchmark to reach 107.8
million by April 2011-end as per statistics of Pakistan Telecommunication Authority (PTA).
The mobile phone users are already paying high taxes on the services including 10 percent withholding
tax, 19.5 General Sales Tax (GST) on calls. MMS, GPRS and SMS their packages and bundles. Besides,
they are also overburdened with 5 percent services charges by cellular operators and now they have to
pay 1 to 1.5 percent additional services charges.
The concerned authority should take notice on anti-competitive practice of the cellular operators and
impose heavy penalty to refrain them for forming cartelization in the future.

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