REMOVING MISUNDERSTANDINGS ABOUT COMPETITION COMMISSION OF PAKISTAN
May 26 - June 01, 2008
The Competition Commission of Pakistan (CCP) has been much in the news recently. However, some of the comments made in the media about its role appear to be rather ill-informed, based either on misunderstanding or ignorance. For instance, there is a view that the activities of the CCP are damaging business confidence at a time when the economy is passing through a vulnerable period. The contention is that the CCP is "rocking the boat" by its actions. Such a contention suggests a fundamental misunderstanding of the role and functions of the CCP. What the CCP is trying to do is to prevent anti-competitive behaviour by companies in the form of price fixing which is against the public interest. By levying fines on banks, tackling the consequences of market dominance, a lack of transparency in certain sectors (e.g. fertilizers and telecommunications), protecting the interests of ordinary investors in the country's stock exchanges and mounting a raid on the offices of a trade association, APCMA (All Pakistan Cement Manufacturers Association), often against the determined opposition of powerful groups, the CCP is simply carrying out its legal responsibilities.
Another view is that instead of seeking to stop alleged anti-competitive behaviour by companies the CCP should be addressing more urgent and serious problems like the shortage of atta. The shortage of atta is a complex phenomenon responsibility for which primarily lies with the federal and provincial governments. The view that the CCP should be involved in solving this problem is based on ignorance regarding its mandate and responsibilities. Moreover, as regards wheat (and rice) procurement and distribution, there is a lot of direct and indirect government intervention and while there may have been inefficiency on the part of the government departments involved as far as the CCP is concerned there does not exist any real evidence that the competition law has been violated.
It appears to be the case that the criticisms made of the CCP are partially, at least, driven by questionable motives or the desire of producers and their lobbies to create a more favourable climate of opinion for their activities. Even where such motives do not exist, the criticisms nevertheless convey misperceptions regarding the role of the CCP. Indeed, if the role of the CCP were to be objectively examined the overwhelming conclusion would be that it is doing a difficult job with only meager resources. Furthermore, it is generally acknowledged that the responsiveness demonstrated by the CCP in its dealings with the private sector is at a level for superior to that of any other public agency in Pakistan. However, on account of its effectiveness the empire is striking back! And a disinformation campaign at a rather petty level is in evidence. Given this, it is particularly important that the wider public should know what the mandate of the CCP is and what its functions are.
At the risk of sounding trite it is a self-evident truth that all economic management by the government, including long term development, through macroeconomic policies, regulatory oversight of markets, the passage and implementation of laws covering the activities of companies and professional bodies is, or should ideally be, defined by one over-riding objective: the protection and promotion of the "public interest". Indeed, the notion of the public interest is almost as old as economics itself going back some 250 years. Adam Smith, the father of economics, stated then that while profit maximization and free markets delivered many benefits the very same free markets might also damage the "public weal" if producers of goods and services conspired to reduce output or raise prices or both.
One of the consequences of modern economic life is for producers to seek super-normal profits by forming oligopolies or cartels. It is worth stressing that even where oligopolies and cartels do not come into being firms often seek to achieve the same results by pursuing market dominance through which rivals can be destroyed by predatory pricing or other forms of market manipulation. Markets have thus needed to be regulated by governments to protect the public interest in all economies.
Over the years the notion of the public interest has been broadened and refined and its more modern version, dating essentially from the end of World War II, revolves round enterprises still operating autonomously on the basis of profit maximization but with the state providing a framework of laws and regulations for the protection of, for example, citizens" and employees" health and safety, including increasingly environmental and labour-related legislation, such as fines for pollution and the setting of a minimum wage. A further and relatively recent addition is the state regulating markets through competition policy to prevent abuses such as the emergence of monopolies and cartels, market dominance and preventing collusive price fixing behaviour between a few key producers or suppliers of goods. It is for this reason that mergers between companies require the approval of a competition authority in most countries.
The theoretical construct of perfect competition, in which many producers compete for consumers and consumers have perfect information of markets and products, rarely exists in real life. The real life norm is some variant of imperfect competition in which there is often no more than a few large producers, price fixing is rife and the competition authority is seeking to uphold the public interest. Why should such a state of affairs bother us?
Almost no one would quarrel with the fact that price fixing behaviour damages the public interest in the form of higher prices and sub-optimal production outcomes and has to be prevented through competition policy. Additionally, from a wider perspective, competition policy aims at creating a level playing field for all existing and potential market participants and addressing the problems of market failure in particular sectors of the economy. Its overall purpose is to strive, in the name of fairness, to strike a balance between the legitimate interests of the producers of goods and services and equally the legitimate interests of their consumers.
In Pakistan, competition policy actually began in 1963 with the establishment of an anti-cartel laws study group. Its deliberations led to the enactment of the Monopolies and Restrictive Trade Practices Ordinance 1970 (MRTPO 70) and the establishment of the Monopoly Control Authority (MCA), the forerunner of the CCP. It has to be said that despite the relatively long history of competition policy in the country the results on the ground in terms of a general acceptance that anti-competitive behaviour is wrong and giving sustenance to a pro-consumer culture have not been satisfactory.
A number of reasons can be adduced for this. Historically, within a year of its formation the MCA was confronted with a massive programme of nationalization that severely curtailed its functions and importance. Thereafter, between 1981 and 1994, the MCA remained a handmaiden of the Corporate Law Authority (CLA) with the Chairman of the CLA officiating as Chairman of the MCA. Then, as now, funding support from the government for the MCA remained limited and its Chairmanship had little or no attraction for senior civil servants or indeed for any able outsider. As a result, the MCA merely limped along and whatever powers that it possessed were not put to any imaginative use. It is no wonder therefore that in the eyes of influential international bodies like the World Economic Forum, indicators for a "perception of competition" in Pakistan have deteriorated sharply in the last four years (as against an improvement in the case of India).
What then is the current CCP seeking to achieve? In line with trends virtually across the world, in both developed and developing countries, the government has sought to strengthen competition law in the country. The Competition Ordinance 2007 has replaced the MRTPO 70 and a plan to improve the internal working of the CCP is on the anvil but substantial resources are needed by the CCP to carry out its mandate effectively. Resources are required to make the CCP independent in both form and substance, to recruit qualified staff and for participation in training programmes abroad. With respect to resources, it is essential that the government start implementing the provision (embodied in section 20) of the Ordinance whereby the CCP can have an independent and secure financial base and establish a Commission Fund through a tied levy on the income of sector-specific licensing agencies. This would not only strengthen the operational and financial independence of the CCP but also free significant budgetary resources for the government. Participation in training programmes arranged by credible competition agencies in developed country jurisdictions, the International Competition Network and other international bodies is urgently required so that the CCP can learn from "best practices" in competition policy in a peer group of countries. For this, it would be necessary to enter into agreements with foreign donors to develop and implement an organized training programme as soon as possible.
Notwithstanding obvious handicaps, a framework for competition policy embodying the most effective practices from other countries is being established at the strategic level with help from the UN and the World Bank. The long term objective is to provide equal opportunities for all capable individuals and entities to participate unhindered in the economic life of the country so that the sovereignty of the consumer is recognized, both de jure and de facto, and producers gain their rewards through higher efficiency than by collusive price fixing arrangements and other anti-competition malpractices. Progress in this area has been slow, however, on account of the CCP's resource constraint.
It would be clear from the above that the functional rationale of the CCP is to protect and promote competition in the Pakistan economy. For this, it has been given legal powers which it has used judiciously, i.e. only when adequate prima facie evidence exists that a transgression of competition law has occurred, rather than in response to popular pressure in an area where it has no legal jurisdiction. The objective of CCP actions is not to seek to merely punish those in contravention of the law but to shift their focus to alternatives to collusive behaviour and anti-competitive practices, such as the pursuit of greater business efficiency thus achieving in Pakistan a more competitive economy.
It is worth remembering, too, that there is a wide-ranging consensus that development is not only a rise in per capita incomes; it is equally a measure of improvements in the quality of life. The latter is ultimately underpinned by a sense of fairness in society so that all citizens may participate in, and enjoy the fruits of, development. In the latter context, competition policy with its objective of promoting more efficient competition, improved consumer rights and welfare is an important component and, hence, a significant contributor to a more inclusive process of development. Against this background, a major effort is needed to not only raise the profile of the CCP but to also convey to the public, through advocacy, the rationale of competition and of competition policy in the larger context of development, a connection that is either not well understood or ignored by the media.
* The writer is freelance columnist and formerly Lead Economist, UN ESCAP Bangkok