Why we should embrace competition? — I

We are a nation of rentiers, this column said last time, but why is that? Why are businesses so averse to competition and why are they—even the ones that are growing and have reached a certain level of efficiency—always seeking a “level playing field” in the form of government protection and intervention?

Let’s take the example of the construction sector. Cement and steel makers in the country are the two prominent sectors that have been catering to the local construction demand that is rapidly picking up, judging by the many infrastructure projects and subsequent domestic sales of cement over the past year.

Today we will talk about cement. Cement dispatches have been growing consistently around 9-10 percent since this fiscal year kicked off, with a sharp decline in cement exports that once constituted a good chunk of total sales (20-30 percent).

Most of the sector is highly self-sufficient producing both clinker and cement at lower costs while also relying on own power production and alternative energy to meet their high electricity needs. They have all the right fixtures in place which is why margins for the sectors’ prominent players average between 40-45 percent. The sector is what we call a highly efficient industry with a massive potential to grow.

On the other hand, there hasn’t been a lot of competition. Imports have a 20 percent duty. Limestone, a basic ingredient to produce cement, is in abundance in the country and reserves are enough to cater the next two centuries. Yet, it’s next to impossible to get a new license, especially for those who do not have an existing stake in the industry.

The market share for each player has remained virtually the same per capacity and for consumers, there has been little advantage in terms of prices. That is one of the functions of competition—to provide some level of consumer welfare in the long run. But guess what, we are in the long run for a long time.

Cement price index has increased exponentially over the course of the past two decades. Pakistani firms sell at a retention price of Rs350 per 50-kg bag (Rs540 after taxes and levies) while exporting at around 20 percent discount. This is because they have to remain competitive in the international market and can’t sell at the same prices they are selling locally.

Higher local prices is probably why the merits of their claims that Iran is dumping cement into Pakistan seem legitimate. Iranian cement is significantly cheaper, and probably even inferior in quality. But the solution is not imposing a regulatory duty or increase the existing import duty on clinker, as suggested by the cement lobby. The solution is simpler and more long-term: that the case be taken to the National

Tariff Commission (NTC) so they can determine whether injury to domestic producers has occurred.

While the NTC is doing that, the Pakistan Standards and Quality Control Authority (PSQCA) which many businesses complain is not competent enough should determine quality controls for cement imports and efficiently regulate the quality of incoming goods. If the NTC finds injury, it can impose anti-dumping duties on country-specific importing companies to protect local producers from said injury. These trade remedy laws exist in Pakistan, and have worked for many industries.

The role of these government bodies is no doubt key but in no way should the existing import duty be increased because it is simply not justified. In fact, there shouldn’t be any duty. If consumers are getting high-quality and low-cost product from imports, and keeping their construction costs down through these imports, no business should take that away without reason. It’s called economic freedom.

Many businesses claim that they should get import protection as they provide thousands of jobs that would otherwise be eliminated if they shut down their factories and, we simply became a trading country. But proponents of this argument forget that competition serves both parties. Without competition, most businesses settle in a lull, producing the same products, not introducing any innovation or value-addition and never growing to the scale that they can when they have to actually work for it.

The cement sector is efficient and productive enough to not have to seek a “level playing field”. They need to work towards even higher productivity, and rally for efficient regulation and quality control. Most of all, the sector needs tougher competition so some benefit can be passed onto the consumer while also keeping them on their toes to remain competitive.