PFMA allegedly involved in fixing flour prices: CCP

Pakistan Flour Mills Association (PFMA) was allegedly involved in fixing flour prices and providing its members a platform to exchange commercially sensitive information and strategic data on flour prices which is, prima facie, violation of section 4 of the Competition Act. This was, prime facie, conclusion of an inquiry completed against the PFMA by the Competition Commission of Pakistan (CCP).
Sources said that chairperson CCP recently submitted a report on alleged price fixation by the PFMA to the Standing Committer of National Asse-mbly on Finance and stated that PFMA also took decision with reference to the allocation of production quota between its members, which is a prima facie violation of the Competition Act. The PFMA on January 21, 2018 decided to increase flour bag prices of 20 kg by Rs 20 and Maida fine 84 by Rs 100 and with this increase 20 kg flour bag rate will be at Rs 735 while on June 25, 2019 PFMA demanded grinding charges to be increased by Rs 10, revealed the report
The CCP report added that the above activities prima facie seem to obstruct the normal functioning of the flour mills in the economy and is against the spirit of competition and level playing field. On regulatory framework, the report stated that the government procures around 70 percent of marketable surplus wheat through provincial food departments (PFDs) while flour mills obtain wheat from their respective PFD based on a quota allocation dependent on the flour mill's capacity and wheat grain is provided to the flour millers at support price by PFDs. The deputy district officer (revenue) is responsible to check prices and stock of wheat while grinding charges are fixed by PFD and ex-mill, wholesale and retail prices are fixed by the provincial government.
The report also mentioned that increase in prices was also contributed by increase in transportation cost as well as increase in import cost of machine, spare parts, etc, following depreciation of rupee against dollar. Prime Minister Imran Khan has also taken notice of increasing prices of naan and roti and decided to take immediate steps to revert them to their original rates and subsequently a meeting of the Economic Coordination Committee (ECC) of the Cabinet approved Rs 1.52 billion gas subsidy for naan/rooti tandoors for reverting gas tariff to before July 2019 level.
The CCP has made a set of recommendations for enhancing productivity and competition in the wheat flour market. According to the CCP's competition assessment study of wheat flour industry, a review of the regulatory framework indicates that the present system of wheat procurement and quota has generated excess production capacity and 'ghost mills' (which are actually not in production but sell their allocated government wheat quota to other mills). Besides the system is expensive and has inefficiencies.
There would be its positive impact for both farmers and consumers, for whom the whole system was designed, is questionable in the present day circumstances. The reason is that the implementation experience has made the industry less competitive internationally as well as providing costly flour to the national consumers. Mostly the outdated laws and rules made there-under for control of production and distribution do not facilitate and encourage establishment of modern mills, branding and marketing nor can optimise the role of the private sector engaged in the flour milling.
The CCP study has highlighted that a well-functioning commodity exchange can help create a marketplace where producers of agricultural commodities could meet potential buyers and get benefit from fair transactions. The advocacy agenda of a competition agency has to focus on producers' associations and groups, here the Flour Mills Association, to create awareness about the competition law and cartel formation.
It is to be mentioned that the government may not 'negotiate with the associations, which encourage anti-competitive conduct. In the past, the CCP has observed the likely anti-competition impact of negotiating prices with the associations. Therefore, in the case of wheat flour also, the government should not involve in price negotiation with the Association, and should fix price of this essential commodity based on independent analysis of market situation, the CCP recommended.
The CCP has recommended that establishment of Special Economic Zones (SEZs) with special incentives to industry and agriculture is an essential step under the CPEC. China has huge food imports of about $500 billion. Therefore, Pakistani industry needs to convert SEZs into an opportunity, instead of taking SEZs as a threat, by identifying potential avenues for exports. The key elements of an export strategy would be production as per international standards at competitive rates.
The CCP recommended that a large portion of the wheat flour industry is in the un-documented informal sector. This situation promotes unfair competition to the advantage of un-documented milling due to avoidance of taxes and social security. The competition based on investment, innovative branding, fortification and quality improvement, is thus restricted to a disadvantage of consumers.
Likewise the existence of ghost mills points towards flaws in the administrative mechanism, which in fact is not possible without the connivance of the relevant government functionaries. In the present setup, the inefficient mills continue operations while getting cheaper wheat on quota.
There is an elaborate mechanism for monitoring of quotas but the system has loopholes. Consequently, non-operative/ ghost mills receive a quota and sell it to other millers. The installed capacity data has discrepancies. Therefore, the quota system requires overhaul targeting phasing out of inefficient interventions, minimising price differentials and more focus towards maintaining strategic reserves.
Farmers are not able to get the right price of their produce due to the middlemen and inefficient traditional markets. A well-functioning commodity exchange can help create a marketplace where producers of agricultural commodities could meet potential buyers and get benefit from fair transactions.
However, the farmers in Pakistan lack capacity to use the opportunity of marketing and investment through futures market. Commodity exchange serves as a transparent trading platform for the growers. However, there is a need to create awareness about the functioning of futures trading. In addition, the adequacy of mechanism for insurance, performance guarantees and indemnity funds be ensured to align domestic and international parameters. Once in place, the system will improve documentation of the informal business dealings, the CCP recommended.
After the National Agricultural Policy, 1991, there have been some documents which provided useful information about the agriculture sector in Pakistan. The fact remains that Pakistan was without a suitable agriculture policy for decades. Though agriculture became a provincial subject under the 18th Constitutional Amendment, yet the country needs a holistic agriculture policy. However, at any level, one can readily identify the absence of much needed land reforms, which continue to hamper development of the agriculture sector in Pakistan.
The CCP has recommended that the several factors that limit productivity need to be reduced and eliminated by concerted efforts. Considering the practices prevailing in other countries, the wheat experts suggest the following the specific areas requiring actions:
Efforts to abridge the yield gap through coordinated efforts of institutions involved in training and information dissemination. Availability of high quality inputs and credit are necessary for meaningful efforts. The agricultural policy, environment protection policy and water policy are crucial to address major concerns identified. Therefore, the need to implement an integrated agricultural policy was reiterated, the CCP recommended.
Wheat flour being an essential commodity faces strong regulation. The laws and regulations implemented so far were there for the last several decades, which breed and perpetuate inefficiency. During the recent past, market friendly reforms were introduced. However, little change is visible at the market place. The awareness about the new laws governing markets is negligible. The business is being carried out on the way it was being done traditionally.
The same people, whose monopoly over the markets was broken through the new law, are running the markets due to their strong hold. A working group needs to be formed involving market regulators, to review the situation, otherwise promotion of competition will remain a far cry, the CCP added.