WEDNESDAY APRIL 03: Engro, Fauji Fertilizer: CCP imposes highest-ever penalty

ISLAMABAD: The Competition Commission of Pakistan (CCP) has imposed the highest-ever penalty of Rs 8.64 billion on Engro Fertilizer and the Fauji Fertilizer Company for increasing urea prices to unreasonable level- one of the main reasons behind high food inflation in the country.
The CCP order passed on Monday April 1, 2013 has been conveyed to the two urea manufacturers over their alleged abuse of dominant position in the market and unreasonable price increase. This is the highest ever penalty imposed by the CCP. In this regard, the CCP has issued a order against two leading Fertilizer companies.
The Bench comprising Chairperson Rahat Kaunain Hassan and senior Member Abdul Ghaffar, in its Order, imposed a maximum penalty provided for under the Competition Act on both EFL and FFC ie 10% of their individual turnover (translating to sums of Rs 3.14 billion for EFL and Rs 5.5 billion for FFC) for each unit abusing its dominant position in violation of the Act.
In its order the CCP has strongly advised the Securities and Exchange Commission of Pakistan (SECP) that it is critical to conduct forensic cost audits of all the urea companies by independent auditors in the interest of transparency and the information so obtained be shared with relevant departments of the provincial and federal governments along with the CCP.
The CCP took notice of the rising trend in urea pries in December 2010 and conducted the inquiry in 2011, the CCP Enquiry Report was concluded on 25-06-2012. Incidentally, during the year of enquiry, the price of urea bag surged by around 86 percent from Rs 850 to Rs 1,580 and local urea production also increased. The enquiry included an analysis of factors that could lead to increase in urea prices.
Talking to media persons, Rahat Kaunain Hassan, chairperson CCP said here on Tuesday, "these factors are gas curtailment - the most important issue as always raised by the urea manufacturers." The other factors considered by the CCP enquiry committee were input costs, profit margins, subsidies given by the government and other policy issues, etc.
"After the enquiry, show cause notices were issued to all the urea manufacturers and many hearings were held so that their point of view could be obtained," she said, adding, "During the course of hearings, Fauji Fertilizer Company (FFC) acknowledged that the price rise was initiated by Engro Fertilisers Limited (EFL) and FFC was the only price follower." The order passed by the CCP has noted that urea is not merely a commodity or an industrial product- because Pakistan is an agricultural country urea is an essential item.
"The increase in urea price is directly related to food inflation - which has gone up by around 45 percent in five years," she said adding, "Incidentally the two companies FFC and the ECL had obtained Rs 77 billion subsidies in the past three years from the government to keep the prices reasonable." For the year under review (2011) the Fauji Fertilizer received Rs 11 billion in terms of subsidies, while Engro Fertilizer obtained Rs 4.5 billion from the government.
Responding to a question why only two companies have been fined by the CCP, Hassan said it was found by the bench that FFC and the EFL had the dominating market shares of 48 percent and 26, respectively. The detailed CCP order highlights that despite concerns of gas shortages the profits of FFC increased by more than double from around Rs 11 billion in 2010 to Rs 22.5 billion in 2011.
Its return on investment (ROI) after tax of 97.5 percent was way above the ROI after tax enjoyed by undertakings in agro-based economies similar to Pakistan. The ROE in Urea business in India is capped at 12 percent, whereas in the case of EFL the CCP bench referred to a case of excessive pricing in Turkey.
The Turkish authorities had ruled in case that dropping profits or even loss registered by any company did not imply that it could not abuse its dominant position. However in the year 2011 the gross profits of EFL soared by more than 80 percent from that in 2010. The CCP Bench after hearings of urea companies decided to impose a maximum penalty provided for under the Competition Act on both EFL and FFC.
This is 10 percent of their individual turnover, which comes to Rs 3.14 billion for EFL and Rs 5.5 billion for FFC. Chairperson CCP said a mechanism needed to be evolved by the Government so that the subsidy (if any) should be directed at the farmer, "who is the ultimate beneficiary of subsidy as per the objective of Fertilizer Policy 2001 to ensure availability of urea at an affordable price."