The cartelisation phenomenon in Pakistan

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices,” Adam Smith in ‘The Wealth of Nations’.
While capitalism may very often be attributed to bringing about economic wealth and prosperity, with private corporations and firms competing against each other for the larger interests of the people, the latest economic theory in the mix is that for purposes of profit maximization when the chips are down, collusion becomes a norm for the greater common good of the profit churning businesses. Businesses divide markets, restrict output, manipulate prices, through collusion or cartelisation. This universal truth is applicable to any sector with excess capacity and few players. Instead of competing against each other, they unite to beat competition.
“Our competitors are our friends, our customers are the enemy” is a famous statement of an official working for a feed additive cartel which was caught on tape by the FBI. While collusive practices are quite destructive for most economies, these are particularly harmful for developing economies that have weak legal structures in place to make these corporations accountable.
Over the last few years, Pakistan has been held hostage by these cartels who have over the years extended their influence through bribing politicians bureaucrats and other stakeholders. The increasing influence of cartels has made it harder to make them accountable, since they lobby support from the policy makers as well. As a result, the consumer and new entrants to the industry have been severely affected by these malpractices that have collectively contributed towards the deterioration of the industry. While privatisation in itself may benefit the economy through increased efficiency and competitiveness, there is a need for strong regulatory policies to keep a check on collusion and cartelisation.
Media is also culpable for forwarding the vested interests of these cartels. Biased reports based on fallacious arguments are accepted as universal truths, where the role of media as a free and fair disseminator of information is compromised.
Unregulated privatisation since the late 80’s has lead to the creation of multiple cartels, including a cartel of several oil companies, a cartel of three companies in the automobile sector, a sugar cartel based on 24 companies, cement cartel based on 10 companies, food and beverage cartel comprising of 12 companies, fertiliser cartel based on 4 groups while other similar cartels prevailing in other sectors of the economy as well.
Spiralling fertiliser prices especially in the last few months are being attributed to the presence of the fertiliser cartel that is collectively working towards increasing the prices of their commodities. While officials within the fertiliser companies are attributing the decline in production to gas load shedding, other sources are pointing towards a possible collusion by the four major companies in this regard.
Pakistan’s total urea demand is estimated at around 6.3 million tones per year, while the domestic production capacity of the sector also hovers around the same level. The highly profitable fertiliser companies recently pressurised the government into abstaining from increasing gas tariffs to their feed stock as well as fuel supplies, warning officials that such a step could result in the prices of urea to double. An increase in the price of urea would translate into growing discontent among the rural and semi-urban vote bank of the ruling party. According to sources the fertiliser sector duped those sitting in the higher echelons of power into believing that a rise in gas tariffs would significantly raise fertiliser prices, when in fact a 50 kg bag, according to sources is produced by utilising merely 6 per cent of gas.
The automobile sector of Pakistan has also been engaging in similar practices over the years, with the manufactured cars having sub-standard components when compared to the same models being manufactured overseas. While they argue that a relaxation of import duties on cars from abroad will impact jobs in the country and affect the domestic industry as well, these companies continue to fleece customers with over-priced and substandard cars. Many of the cars manufactured do not meet international emission standards or safety features that have been made mandatory in a plethora of international countries. For instance, no car being manufactured by Pak-Suzuki in Pakistan offers airbags. The industry has over the years also been blamed for charging customers a premium on the urgent delivery of vehicles; effectively selling cars at a higher rate than their official retail price. The same automobile cartel has in the recent past also put forward objections to the incentives being provided to new assemblers to enter the indigenous market.
Most importantly the functioning of the sugar cartels being operated by notable politicians and businessmen has lead to the country facing severe shortage of sugar on several occasions in the last few years. In 2001, the price of sugar was hovering around Rs14-16 per kg that rose to Rs24-25 per kg in 2005. By 2009 the price of sugar crossed Rs58 per Kg. Things got so bad that at one point the price shot up to Rs100 per Kg. Many of these price fluctuations were cosmetic and artificial which lead to the sugar cartels minting billions of Rupees in revenue. The government eventually took steps to bring the sugar prices down to Rs65-68 per Kg.
It is indeed unfortunate that while the country is going through the most turbulent time in history, where the economy has been adversely affected by volatile law and order situation, widening trade deficit and a negligible GDP growth rate, those sitting at the helm of affairs whether in politics or businesses are clawing at every opportunity to make the proletariat miserable. The government needs to take effective measures to root out the evil of cartelisation. In this regard the CCP has taken some good steps to root out collusive practices. It needs to be understood that the harm caused to developing countries is greater since they lack effective competition regimes.
The recent financial meltdown has with it made the presence of cartelisation more palpable. Since competition is restricted companies are now finding it more profitable to collude at cost of the customer, by setting a high price that benefits them. However, they need to realise that these short term policies may handicap a market of prospective customers who are being deprived of greater purchasing power through such corrupt practices.