CCP issues policy note to SECP

The Competition Commission of Pakistan (CCP) has issued a policy note to the Securities and Exchange Commission of Pakistan (SECP) to ensure that its new framework dispenses with the requirement of placing cost audit reports on companies’ websites or making them available as public information through other means.
Implications for competition:
A statement issued on Monday said CCP took notice of a press release in which it was mentioned that the SECP has withdrawn the Companies Cost Accounting Records (General Order), 2008, and is actively involved in consultation to develop industry-specific guidelines and reporting format. Through its policy note, CCP has provided its input into the new cost orders of the SECP that may have implications for competition in the industries concerned.
CCP considers that sharing detailed cost data may be problematic in a competitive business environment. The data, once shared, becomes public information, and information exchange on cost may provide patronage and facilitate companies in their coordination and monitoring of anti-competitive practices, be it dividing the markets allocating quotas, or fixing prices and hence may facilitate collusion amongst independent economic agents. When asymmetric costs are treated as private information, this hinders cartel activity. Sharing these costs may facilitate collusion. It may create a public record on which collusive schemes may be based. Hence, publicising detailed cost data, as prescribed earlier by SECP, is harmful for competition and would be in violation of Section 4 of the Competition Act, 2010.
Promote competition:
The general order was applicable from the financial year commencing on or after October 1, 2008, to companies engaged in production, processing, manufacturing or mining activities, in the fertiliser, thermal energy, petroleum refining, natural gas, and polyester fiber industries. The companies engaged in cement, vegetable ghee and sugar industries were also required to comply with the order. It required companies to maintain cost accounting records, have a cost audit, and circulate and distribute the cost auditor’s reports. Later on, SECP deferred the applicability of the general order vide its SRO 371(I)/2011, dated May 9, 2011, for companies engaged in fertiliser, thermal energy, petroleum refining, natural gas, and polyester fibre industries till July 1, 2011. However, according to the order, this deferment did not affect special cost orders issued by SECP for cement, vegetable ghee and sugar industries.
It is CCP’s mandate to promote competition norms through advocacy and persuading economic agents including government agencies and regulators to act in accordance with the Competition Act, 2010. CCP is of the view that the requirement of circulating and distributing cost audit reports amongst shareholders as prescribed in Clause 4 of the withdrawn General Order was inconsistent with the overall spirit of Chapter II of the Competition Act, 2010.
Inclination towards self-regulation:
CCP observes that maintenance of cost accounting records and cost audits may contribute towards enhancing competitiveness of the sectors. However, in Pakistan, where the concept and practice of enterprise governance is developing, enterprises may not be inclined to self-regulate and conduct cost audits. This is despite the fact that they may benefit, for instance, by using results to improve their competitiveness through various measures.
CCP views cost audits as instruments that promote efficiency as they may identify processes and activities where improvements can be made to enhance productivity and reduce wastage of resources.
The order required companies to circulate the cost auditor’s report amongst shareholders and to publish the report on their websites. In case this order was implemented, this particular requirement would have resulted in making commercially sensitive information available in the public domain. This may affect the independence with which companies make their production and pricing decisions, thus, negatively affecting competition. Therefore, CCP considers that commercially sensitive cost information should be kept confidential. This spirit is embodied in the Cost Audit Rules in Pakistan, which confine the disclosure of the cost auditor’s report to the SECP and the directors of the company.