The rationale for a Competition Commission rests on the belief that the government's market-based policies relying on private sector as the engine for growth actually do very little to promote economic growth and efficiency if abuse by dominant firms and unfair trade practices are allowed to flourish.
For a market economy to cater to efficient use of resources, competitive forces must be able to operate freely and on a level playing field. I understand there is a lot of literature that supports this view.
In order to illustrate what can be achieved by a robust competition law and its enforcement by a strong competition agency, I would like to tell all of you a little story.
Once upon a time, there lived at the edge of a big forest a woodcutter with his beautiful daughter whose hand in marriage was being sought by a number of handsome young suitors and the girl was trying to figure out whose proposal she should accept. Before she had completed her analysis of this situation, a ferocious and lordly lion - a real king of jungle - appeared at the door of the hut and told the woodcutter, in no uncertain terms, that he had decided to marry the maid. The woodcutter was frightened out of his wits but replied that he will ask his daughter, and after a short while, the woodcutter returned with the girl's message to the lion that she would surely marry him but on the condition that he removed his big teeth, ie, his fangs, and also his claws. The lion returned after a few days, duly de-fanged and de-clawed,
whereupon he was brusquely told by the girl "to take a hike" or "get lost" or whatever young people say when they want to dismiss someone from their presence. However, she was kind enough to tell the lion that he was welcome to join the other suitors and compete for her hand on an equal footing with them.
For all intents and purposes, and for the most part, this is what competition regulation is all about ie, de-fanging and de-clawing dominant firms that abuse their position of dominance without, of course, being deceptive or rude like the girl in the story.
The new competition law regime that has recently been introduced in Pakistan through the promulgation of the Competition Ordinance, 2007 is inspired by the principles embodied in the Treaty of Rome and global best practices. It seeks to be non-discriminatory, to protect competition and not competitors, to facilitate business growth, to achieve coordination with other agencies and the public, and to maintain integrity in applying the law.
As opposed to the normative or prescriptive nature of the previous law, the new law requires the Competition Commission to take a reasoned approach; to carry out studies aimed at promoting competition; and to engage in advocacy through various means in order to create an awareness of competition issues and to promote a culture of competition. Besides, the law has endowed the Commission with adequate investigative and penal authority; and has also empowered the Commission to hold open hearings on any matter affecting the state of competition in Pakistan and to issue publicly a non-binding opinion or edict in this respect.
The task of the Competition Commission is to protect competition and facilitate business growth. It will only be regarded as well structured and organised if it actually fulfils this function effectively. A lot of detailed work has been done in this connection with expert assistance secured through the World Bank and DFID of the UK. There is also now a road map for operationalising the Commission, as well as its capacity building over a three year period to the point where it achieves effectiveness of near-global standards.
FOUR FACTORS HAVE BEEN, AND ARE, ESSENTIAL TO TRANSLATE THIS GOAL INTO REALITY:
-- First, the enactment of an adequate new competition law, (which has already been achieved);
-- Second, the appointment of appropriate persons of eminence (who can work together as a team) as members of the Commission - this too has been achieved;
-- Third, the earmarking of tied sources of funding to the Commission so that it does not have to depend on allocations from the federal budget; and
-- Fourth, donor funding to support capacity building of the agency.
-- Given political will to put in place a modern competition regime, it is very much hoped that all this will be realised.
-- Securities regulation - challenges
Let me now turn to an earlier period when I experienced the joys as well as the trials and tribulations of being a securities regulator, since, as you know, I remained Chairman of the Securities and Exchange Commission of Pakistan for one term of three years from March 2000 to March 2003. I would like to give you a sense of the challenges and difficulties encountered, including, most importantly, the political or tactical dimension of the job which is simply the struggle to foster and maintain regulatory independence as well as its effectiveness.
My experience was unique inasmuch as I was able, by the Grace of God, to accomplish a lot within a fairly short period, and at the same time, enhance the capacity, status and independence of the SEC. I was able to draw upon the leeway and wiggle room provided in the governing law of the Commission enacted in 1997 albeit the law had remained largely unenforced. Clearly, to do this was not easy - apart from other reasons, the regulatory agency that preceded the SEC, which was called the Corporate Law Authority, had been really a part of the Ministry of Finance and the Commission had inherited the staff of this agency who were all civil servants, and it was, therefore, very difficult for the SECP to break out of this mould. It is not possible to teach old dogs new tricks, and furthermore the Ministry of Finance was just not willing to let go of its domain!
THE REFORM PROGRAMME:
While I do not wish to go into the details of the comprehensive programme that was implemented, suffice it to say that these reforms, which were implemented substantially in consultation with the three stock exchanges and other professional bodies, have successfully addressed most governance and risk management issues, modernised and strengthened clearing and settlement systems, greatly improved the system of badla or carry over financing, put in place adequate investor protection arrangements, and instituted basic derivative products.
The regulatory capacity of the SEC was also substantially upgraded - it was drastically restructured and strengthened through appropriate reorganisation, automation, massive revamping of staff, staff training programmes, an almost doubling of staff emoluments, and a completely new staff incentive orientation. Reasonably well-functioning units were set up to keep the market under surveillance, enforce the laws administered by the SEC, and maintain vigil to ensure that the agency does what it is supposed to do. It is noteworthy that the imposition of a small fee on stock exchange transactions made the SEC financially independent.
A direct regulatory nexus was also established between the SEC and the brokerage community; a code of conduct for brokers was instituted; a code of corporate governance, essentially based on the OECD principles, was made applicable to all listed companies, stringent regulation of transfer pricing was established; and effective measures were taken to enhance accounting standards and to ensure reliable audits, including, importantly, a ban on auditors providing other services, mandatory rotation of auditors after five years, implementation of 38 out of 41 IAS standards, and the requirement that listed corporates publish quarterly financials.
Allow me to tell you that none of this was easy. Every step taken initially encountered heavy resistance and from all sides - from the regulated, from within the SEC, from the media, and from the bureaucracy. I even had to suffer the most vicious personal attacks and vile propaganda. To some extent this was understandable because the regulated and other affected people have short-term considerations, perhaps conditioned by events in the immediate past, whereas the regulator has a long-term perspective and it is difficult to develop a "shared vision" without seriously compromising the objective.
I am most grateful to Allah Almighty that by His Infinite Grace I was indeed successful -- on many occasions, after the most virulent opposition, the regulated publicly acknowledged the fact that the measures taken were in their best interest. Also, I might point out that the regulatory reforms carried out received international acclaim, in particular, within the halls of IOSCO, and I may mention that by the end of my tenure, Pakistan was very nearly in full compliance with IOSCO's 30 Principles of Securities Regulation that constitute the International Standard adopted by the Financial Stability Forum.
THE REGULATORY ENVIRONMENT:
Here, I must also point out that like many developing countries the regulatory environment in Pakistan is actually an almost impossible format. I am talking about the lack of political will to support regulatory action, the constant threat to the independence of the regulator, the lack of resources to strengthen regulatory capacity and to implement regulatory programmes properly, the dis-functionality of the judicial system as well as self regulatory bodies, like the stock exchanges, the obvious weaknesses in the investor constituency, and the ineffectiveness of the accounting profession.
All this constitutes a formidable environment in which to foster a fair, efficient and transparent market, sound institutions, and investor protection, and to ensure reduction in systemic risk. I had to clearly battle with enormous handicaps and broken tools, and I had to use every trick and all possible means to achieve the Commission's goals. I refused to be bogged down by legal niceties. I circumvented them and surmounted them through all possible ways. I told my officers and my lawyers not to tell me about difficulties. I told them I wanted solutions, not problems. I, wanted innovation. I wanted a "how to do it" approach, not "why it cannot be done" because this approach was useless to me.
THE MODUS OPERANDI - HOW WAS IT DONE?
Within the first few days of taking charge, it was obvious to me that the Commission actually continued to act and behave just like the former Corporate Law Authority did, referring any matter regarding which there was even the slightest question or doubt to the Ministry of Finance for clarification or approval. I knew straight away that in order to make any progress, this had to stop. And that's exactly what I did. This was a major about-turn which was done quietly and without fanfare - and before anyone realised what had happened, the new practice got firmly entrenched.
Second, another matter that required my immediate attention in the early days was the anachronism arising from the Policy Board through which the government tried to exercise its control levers. As it happened, the then chairman of the Policy Board resigned and I was able to get myself appointed Policy Board Chairman, and this, of course, helped me keep matters under control. It was rather like Thomas Beckett being appointed Archbishop of Canterbury!
THIRD, I ADOPTED A SOMEWHAT RADICAL, OUT-OF-THE BOX APPROACH. FOR INSTANCE:
-- to insulate the Commission from political pressures, regulatory authority was largely delegated to the professional executive director level;
-- instead of prior consultation, often regulatory directives were first issued and then this fait accompli negotiated if there were objections; and
-- to build a coalition of support, a Capital Markets Consultative Group comprising eminent stock market professionals and participants was set up to periodically discuss capital markets issues - an endorsement of any measure by this Group clearly carried a lot of weight.
Fourth, it is noteworthy, that I would take on only one market segment at a time. For instance, I would not promulgate measures affecting the corporate sector as well as those affecting stock brokers at the same time. As you know, these elements are on opposite sides of the fence.
Thus, it would naturally so happen, that when stock brokers were up in arms against regulatory measures affecting them, people in the corporate sector would applaud the SEC, and whenever the corporate sector agitated against measures affecting them, the stockbrokerage community would commend us. This approach also had the salutary impact of keeping Government ministers off-balance and considerably muted their interventions in our reform measures.
Fifth, as opposed to the classical or traditional approach taken by regulators, I decided to engage the media and would often meet the press or appear on TV and radio to explain the SEC's reform program and any steps recently taken. The press is basically interested in news and if you give it to them as it is and in forthright fashion, I have found that, over time, they become partial to you.
An aspect of our enforcement strategy was to pick a major problem, solve it, and then widely publicise it for impact - the press loved the meat it gave them and eagerly co-operated.
Lastly, and this is most important, deliberately and consciously, I emphasised substance over form, there was no gimmickry and I publicly articulated as well as meticulously followed a basic policy creed for the SEC which had four elements:
-- Firstly, the SEC would be an agency that in all its dealings would be "firm, helpful and fair";
-- Secondly, the SEC will not compromise on integrity - in relation to staff, market players, corporate managers, auditors etc;
-- Thirdly, the SEC would hold the protection of the small investor or shareholder supreme; and
Fourthly, the SEC will lay emphasis on the equitable approach ie it will eschew technicalities and strive to engage in a progressive interpretation of laws, rules etc in order to achieve equity and justice. I took the view that we were a court of justice, not a court of law.
I can tell you, with due modesty, that by taking this high road, I was able, by the Grace of God Almighty, to develop considerable moral authority which was acknowledged on all sides. Towards the end of my tenure, the Courts were treating the SEC's pronouncements with respect - and so was the Government albeit after I left, it appears, there were some decisions that the Government found it politic to undermine. I honestly believe that the true independence of a regulator only comes when he or she acquires this moral authority and it is then immaterial whether or not the law confers independence to the regulator.
CORPORATE GOVERNANCE:
And now, perhaps, I should turn to a specific aspect of capital markets regulation and that is the area of corporate governance. It is appropriate for me to speak in the context of all developing countries, not simply Pakistan. Here, may I first remind you that, in the final analysis, the ultimate, underlying aim of capital market regulators - and this is the cornerstone of all their policies and actions - is to create an environment that is attractive for capital.
Attracting capital is by no means an easy task. Capital seeks the best risk-adjusted returns in stable, hospitable, uncertainty - free law-abiding, even virtuous, environments. Of course, globalisation and the IT revolution have meant greatly increased mobility of capital and integrated markets that are more contagious and sensitive than ever before. This poses a huge challenge for regulators and economic managers. In fact, despite whatever we may do, capital knows no barriers; and often, even a slight change in circumstances can cause billions of dollars to move from one end of the globe to another - at the press of a few buttons!
Now, the question for us is: what constitutes a hospitable environment for capital?
While an adequate physical infrastructure, skilled manpower, exploitable resources, a level playing field, and sound monetary and fiscal policies are all important features, there are certain fundamental factors that are really a sine qua non for the attraction of capital and investment, both internal and external.
LET ME FRANKLY SPELL OUT WHAT THESE FUNDAMENTALS ARE FOR ANY COUNTRY:
-- First, the state, ie the country, must be stable ie it must not be threatened from without or be prone to internal strife from within. There must be normalcy or détente with neighbouring countries, and internally, the state should not have unsettled and divisive ideological or political issues;
-- Second, the law and order situation must be satisfactory and the writ of the Government or the established, de lure, authority must effectively prevail in all parts of the state;
-- Third, the judicial system must not be dysfunctional, and must efficiently and expeditiously deliver the due enforcement of rights and obligations in a fair manner, without fear or favour;
-- Fourth, corruption must not be all-pervasive and society must adhere to a value system that is, for the most part, in line with generally accepted norms of civilised conduct; and
Fifth, business enterprises must be managed responsibly and look after the interests of all stakeholders in accordance with recognised principles of good corporate governance.
You will, no doubt, note that in respect of each one of these five fundamental ingredients, most developing countries are deficient to a lesser or greater degree. You will also appreciate that with the sole exception of corporate governance, these fundamentals really fall outside the jurisdiction of a securities regulator. It is, therefore, incumbent on securities commissions to tackle this aspect in earnest. But this has been, and is, an uphill task.
In essence, the concept underlying good corporate governance is really very basic, almost inane. With the exception of a few onerous requirements recently imposed by law in some advanced jurisdictions, like certain provisions of the US Sarbanes-Oxley Act, corporate governance is like "good housekeeping"! Why should anyone make a big deal of it? I am always astounded by the strong opposition in very nearly all developing countries to even the most basic set of principles of corporate governance. And I note that the opposition almost invariably comes from all quarters!
(Chairman of the Competition Commission of Pakistan in his speech recently delivered at the Leadership Forum of the School of Management, Forman Christian College, Lahore, talked about the challenges CCP faced as a securities regulator and focussed on the subject of corporate governance.)
(To be continued)