The Competition Commission of Pakistan (CCP) has made a set of recommendations for enhancing productivity and competition in the wheat flour market, stressing the need for revisiting policies, documentation of wheat milling business, a well-functioning commodity exchange and implementation of an integrated agricultural policy. In this regard, the CCP has issued a competition assessment study of wheat flour industry here on Monday.
According to the CCP study, 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. Its positive impact for both farmers and consumers ie. 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 Mostly the outdated laws and rules made there-under for control of production and distribution do not facilitate and encourage establishment of modern mills, branding and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 optimize 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 encourages anti-competitive conduct.9In the past, the CCP has observed the likely anti-competition impact of negotiating prices with the associations.10Therefore, 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, CCP recommended.
The CCP has recommended that the 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.
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 point 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, minimizing price differentials and more focus towards maintaining strategic reserves.
Almost a year ago, the Securities and Exchange Commission of Pakistan (SECP) approved listing of wheat futures contracts on Pakistan Mercantile Exchange Limited (PMEX). Wheat futures contracting was launched as a pilot project in some districts of Punjab. However, the wheat volumes traded are relatively low as investors in Pakistan generally invest in internationally liquid commodities such as gold, silver, crude oil, and to a limited extent in wheat.
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, CCP recommended.
Enhancing competition requires ease of market entry and exit. The flour millers in Islamabad informed that the revision in the CDA bylaws and the Islamabad Manufacturing Industry Area Zoning Regulation, 1963 was approved in 2015. Even without notification of these amendments, the CDA's Building Control Section (BCS) received fees to change the drawings. The amendments and the new drawings are still pending approval from the CDA. Owing to this, the present resource allocation is suboptimal. To shed the excess milling capacity, it may be considered that the bylaws may allow certain provision to provide ease.
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, 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, CCP added.