Cartelisation in developing countries

Formation of cartels is a global phenomenon and Pakistan is no exception. By definition it is defined as:

"A cartel is a collection of independent businesses or organizations that collude in order to manipulate the price of a product or service. Cartels are competitors in the same industry and seek to reduce that competition by controlling the price in agreement with one another. Tactics used by cartels include reduction of supply, price-fixing, collusive bidding, and market carving. In the majority of regions, cartels are considered illegal and promoters of anti-competitive practices. The actions of cartels hurt consumers primarily through increased prices and lack of transparency."

Cartelisation is illegal in most of the OECD countries. In the US, also cartels are illegal and defaulters are proceeded against under strict anti-trust laws. The laws are also applicable on companies of foreign origins registered with the US stock exchange and their Security Exchange Commission. The anti-trust laws are equally applicable in all corners of the world. Many European companies have been heavily fined for overseas default, mostly in Africa and Asia.

In developed countries, cartelisation was once a routine way of business where mostly the emerging markets were exploited - often in collusion with bureaucratic and political cadre of the country. As a trade-off, safe havens were facilitated for them to park their ill-gotten money.

With strict enforcement of anti-trust laws and imposition of heavy penalties in the last two decades, the practice of cartelisation is by and large over in these countries.

Cartelisation mostly affects the lower segments of society as high costs in development projects suck social development funds, pushing more people below poverty lines.

Cartelisation continues to be the way of business in Pakistan and it is a country where it flourished unchecked.

The following are main reasons:

- The fraternity of cartelisation comprises business leaders, political leadership and other vested interests as facilitators.

- No government has ever made efforts to put in place meaningful laws and its effective enforcement to check and penalize cartels.

- The regulators of the country such as Competition Commission of Pakistan (CCoP), National Electricity Regulator Authority (Nepra), Oil & Gas Regulatory Authority (Ogra) and others are rendered ineffective by design.

The importance of regulators in the eyes of political leadership can be judged from the fact that the previous government placed Nepra and Ogra under the domains of the respective ministries, forfeiting their independence and autonomy.

Cartels in Pakistan are quite effective in all segments and commodities.

The ones that mostly affect the lower segments of population are sugar and wheat producers as these two commodities are the ones on which the poor survive.

Lately, the massive unrest in public on account of 10 to 26 percent increase in prices of wheat flour and sugar and its subsequent hoarding prompted the incumbent government to conduct an enquiry. All eyes are now on the final outcome and enforcement of a detailed report expected to be published on 25 April 2020.

In infrastructure projects and industry, there is an alleged cartelisation in IPPs, cement, steel, textile and other sectors.

From record, it has come to light that in 2009, CCP imposed a penalty of Rs 6.5 billion on 20 cement manufacturers including some top companies owned by influential groups involved in cartelisation for earning windfall profits.

Sugar producers have the distinction of being provided rebates on exports and subsidies to provide sugar to public at an affordable price.

For a long time, the textile industry enjoyed unchecked duty drawbacks on exports which has lately been withdrawn.

By their very nature, incentives like duty drawbacks and subsidies are instruments of use of discretion placed in the hands of government and political functionaries, favoritism, misuse, corruption and political compromises - all in favour of a well-knit fraternity of elites and at the expense of public interest which suffers as being the last in line of the supply chain.

Consistent poor governance and compromised role of regulators have created a highly conducive environment for the growth of cartels. In other words, the incidence of cartelisation faces no challenge in the country.

The wheat and sugar price and hoarding crises in Pakistan have generated public and media debates with voices underscoring the need for doing away with incentives to this favoured industry and subjecting them to the regime of free market practices.

As the effluent countries moved to free domestic market and trade globalization, the regime of selective incentives and subsidies has been abandoned except in very few selective cases in the larger public interest.

In mature markets, prices declined and quality improved in due course of time when commodities were forced to compete in open market. The prices of commodities, electricity and telecommunication have considerably come down and quality of products and services improved in these markets.

This was however made possible with introduction of powerful regulators and enforcement of regulations to keep a close tab on the trend of monopoly and price fixing, which is equally bad.

Reportedly, the prices of wheat and sugar are cheaper in the international market as compared to those in Pakistan - hence the recent grant of export incentive to sugar exporters to enable them to compete in global markets.

In case Pakistan opts to withdraw all incentives to sugar, wheat and similar commodities then it has to put in place a strong regulatory and enforcement regime.

The main issue is the affordable price level. Either price is fixed by the government based on open book policy to be audited by pre-qualified independent external auditors or open imports of commodities to subject the local producers to open competition.

In either case, the alternate to subsidies will eventually turn out to be a better option in favour of the public.

The remaining issue is the sustainability of a subsidy-free regime which may fail to hold ground in the tenures of future governments in view of political expediency and greed of vested interests.

(The writer is former President of Overseas Investors Chambers of Commerce and Industry)