CPC decision on the sugar industry: the second opinion

ISLAMABAD:

Adam Smith noted centuries ago: “People in the same trade rarely get together, even for fun and entertainment, but the conversation ends with a conspiracy against the public, or a ploy to raise prices.

He was probably right here and perhaps rightly predicted the trend of professional associations to collusive practices.

This is the main message of the Pakistan Competition Commission (CCP) ruling in the case of the Pakistan Sugar Mills Association (PSMA) and its members, finding them guilty of collusive practices and imposing the biggest fine ever. view of Rs44 billion.

The CCP discovered that the PSMA deliberately facilitated the formation of a cartel on behalf of its members, which resulted in a loss of well-being.

The CPC also found that real-time inventory counts by companies were done to manipulate the availability of sugar in the market, influence export decisions and therefore influence prices.

The CPC classified the sharing of stocks as “commercially sensitive information” and relied almost entirely on this statement in reaching the conclusion.

A rare event in this case is that the four-member committee was split in two and the chairperson voted for the second time in favor of the decision. Although this legal point is disputed, we need to understand the economics of it.

The authors of the “second opinion” disagreed with the judgment on question I (sharing of sensitive information on commercial stocks), question II (collective decision to export), question III (effect of collective decision to export). export on price), Question IV (area divisions in Punjab to coordinate sales) and Question V (practice of collective bargaining in USC tenders).

It will be instructive to read the “Second Opinion” – as posted on pages 135-173 of the 186-page ruling the CCP issued. These pages contain an in-depth analysis of the dynamics of the Pakistan sugar market as well as some legal arguments leading to dissent.

Dissenting members of the committee felt that the allegation of market manipulation against PSMA required further analysis.

In keeping with this, the sugar industry being a highly regulated sector is a special case where rent-seeking by companies on the one hand and excessive government intervention on the other hand has resulted in the “worst of both worlds”. .

Consumers get expensive sugar while farmers and industrial units remain inefficient. The net winner may be the government, which collects more income in the form of taxes than the profits made by companies.

Here is my theory. The CCP is unanimous that no company is in a dominant position to influence the market, but collectively they do.

What is the factor that causes these competing companies to become one voice? It is the collective formed by the Sugar Advisory Council, the cane commissioners and the Economic Coordination Committee (CEC).

By actively deciding the price of inputs, when to harvest, when to grind, and by controlling import and export, these collectivist institutions create a uniform condition for market players, kill competition and encourage them to form a cartel.

In this case, by constantly asking the PSMA and the sugar factories to provide their stock data, the government effectively made the price levels insensitive to the state of stocks. As stated in the second opinion, the forces of supply and demand are no longer at work.

What laws can be used to accuse the government of encouraging collusive behavior?

Unfortunately, the 2010 Competition Law prohibits the CCP from charging the government itself if found guilty. This is why we find that the CCP seems too preoccupied with price control, which is not its mandate.

He recommended that the government make efforts to collect information on stocks independently. Instead, he should have recommended that the government pull out of this industry.

The moment the government pulls out, the sugar companies will lose the platform where they can directly negotiate business decisions with the government. Perhaps they will continue their own “fun and fun”. Let them be.

The government should allow free market forces to play their role. If the national players collectively decide to increase the price, a competitive trader, while pursuing his own interest, will import sugar, thus keeping prices under control.

If prices go up on the international market, local producers will be free to sell on the foreign market. Rising sugar prices will ultimately dictate consumer behavior. But we have killed this cycle of free competition in the name of welfare.

This goes beyond the CCP, but the role of the ECC in granting authorizations to import or export sugar should be discontinued.

All archaic laws (the 1934 Sugar Cane Act, the 1948 Sugar Products Control Ordinance, the 1950 Sugar Factory Control Act, and the 1963 Sugar Factory Control Ordinance establishment and expansion of industries) and associated institutions should be phased out and abolished.

The CCP’s decision can be welcomed by the public and the government alike, as it confirms the “mafia” image of the sugar industry.

But this does not make it possible to understand a centrally controlled market, where supply and demand are irrelevant. Without understanding the market, the law itself cannot prevail.

The writer is the founder and executive director of PRIME, an Islamabad-based independent think tank

Posted in The Express Tribune, August 30e, 2021.

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Rachel J. Bradford