Collusion is not an illusion


The Competition Commission of Pakistan (CCP) on Wednesday imposed a penalty of Rs 50 million on the Pakistan Vanaspati Manufacturers Association (PVMA) for price fixing. A two-member bench of CCP comprising of Rahat Kaunain Hassan and Abdul Ghaffar passed an order imposing a penalty of Rs50 million on PVMA for violation of section 4 of the Competition Act, 2010.
In the detailed order CCP also directed PVMA to cease the practice of price discrimination between its members and commercial importers in contravention of Section 3(3)(b) of the Act. PVMA has been directed to submit its compliance report within a month of issuance of the order. Failure to comply with this directive will make PVMA liable for a penalty of Rs1 million for each day default.
Market discrimination by Authorities: CCP had carried out a study in the sector of ghee and cooking oil which identified competition vulnerabilities that may have object or effect to prevent, restrict or distort competition in the sector. Following the observations in the sector study report, prices of ghee and cooking oil were also closely watched which revealed that within a short period of 4 months, from December 2010 to February 2011, price hiked four times in a parallel manner in different categories and brands of ghee and cooking oil. It was also noticed that the price increase was often referred to as a collective decision of all manufacturers, resulting in simultaneous increase in price. Based on the information available, CCP deemed it appropriate to search and inspect the offices of PVMA. During the search and inspection conducted on February 17, 2011, relevant documents were impounded by the duly authorized officers of CCP. Thereafter, to examine the impounded material and conduct a formal enquiry, CCP appointed Shaista Bano Gilani, and Nadia Nabi, as enquiry officers to prepare a detailed enquiry report under Section 37 of the Act. The Enquiry Officers submitted their enquiry report on April 25, 2011 which concluded that there is, prima facie, evidence of violation of Section 3 and 4 of the Act by PVMA. The report recommended that proceedings under Section 30 of the Act be initiated against PVMA. CCP issued a Show Cause Notice to PVMA on April 27, 2011 directing it to submit a written reply within fourteen days, and to appear before the CCP offering an explanation into their practices. After hearing PVMA at length, it was observed by the Bench that PVMA has played a significant role in fixing the price of ghee and cooking oil. Prices were regularly discussed in the meetings of PVMA. Costing was also prepared by PVMA and then active negotiations were made by PVMA with government to fix the price around its own costing. Once price was fixed, it was communicated to all of its members to follow the decision of PVMA.
PVMA engaging in collusive behaviour: The bench also reiterated the view of CCP that it is not the mandate of an association to deliberate on commercial sensitive information and engage into such activities of costing and taking decisions on pricing of commodities manufactured by its members. There is ample proof that this has happened in the case of PVMA which demonstrates collusive behavior of PVMA in violation of competition principles enshrined in Section 4 of the Act. The bench gave its observation on the conduct of the government that the government engaged PVMA, instead of individual manufacturers to discuss price. This may have resulted in repercussions on competition which cannot be condoned. They added that the government should not provide any patronage to measures that in effect promote and encourage any collusive behavior in any industry. However, the bench held that there is nothing on record to prove involvement of government in price fixation in this case as has been portrayed by PVMA. The demand on behalf of government for reduction in price, in wake of decline in prices of edible oil used as raw material in manufacturing of ghee and cooking oil seemed legitimate. The bench emphasized that the government did not fix price rather urged manufacturers to reduce prices. In the case where price was suggested by the government, it was based on the costing prepared by PVMA itself. The bench also made it clear that PVMA cannot take the plea of state action defense, as nothing has been brought on record in this regard.
Price fixation: The bench also set aside this argument that PVMA is just a custodian of record. For that the bench referred to its earlier provisional order passed against Pakistan Sugar Mills Association wherein it was stated that associations should not keep and exchange competition sensitive information with members. In another argument taken by PVMA, that it does not have any statutory backing therefore instructions communicated to members are mere recommendatory or advisory in nature, the bench made it categorically clear that decision of association falls in violation of Section 4 of the Act whether it be in the nature of rules, recommendations and even co-ordination of an association. Hence, it was held that PVMA’s role in causing such price reduction and fixation on a collective basis, negotiating it for a specific time period and advising all its members implementation of such decisions, is in blatant violation of Section 4 of the Act and PVMA is liable to pay a penalty of Rs 50 million. On the other issue of charging two different rates to manufacturers, PVMA members and commercial importers, non-members, for invoice verification in respect of same product edible oil, the bench held that objective justification offered by PVMA for such discrimination is not satisfactory. Classification of customers on membership and non membership is misplaced. This justification could have been valid where the services provided were originally part of mandate of PVMA as an association. Whereas, the services in question are those allowed to PVMA by a third party i.e. Customs Authority. As a result of charging Rs 10 per metric tonne to commercial importer and Rs 4 to manufacturer, PVMA member, Rs 6 differential per metric tonne would inevitably increase the cost of business for importers who may pass on the cost to its buyers. Therefore, it was held that disparity of rates charged by PVMA from members and commercial importers importing the same product is in contravention of Section 3(3)(b) of the Act. PVMA has been directed to cease the practice of price discrimination between its members and commercial importers and report compliance within a period of 30 days. Failure to comply with this direction shall make PVMA liable to a penalty of Rs1 million for each day default.