Risk of anti-competitive conduct in sugar sector evident

ISLAMABAD: There are a number of areas in the sugar sector where risks of anti-competitive conduct are evident, according to a CCP report released on Monday.

The Competition Commission of Pakistan (CCP) has completed a study in four new sectors which are aviation, electric power, fertiliser and sugar as part of its ongoing programme of sectoral research.

The studies focus on competition-related vulnerabilities that may exist in particular sectors of the economy such as potential for cartelisation, abuse of dominance and use of deceptive marketing practices.

Sugar

The sector is highly politicised thus creating significant potential conflicts of interest between mill owners, sugarcane growers and the general public, said the report.

There are points along the value chain where mill owners can act collusively such as in their dealing with sugarcane growers and also in how they manage their production and stocks in response to international price developments.

The over-dependence on sugar encourages mill owners to indulge in production-sharing and other anti-competitive behaviour.

The CCP recommends that the sugar industry should strive to attain international levels of efficiency and this can only happen in a competitive environment in which sugar producers follow their own business strategies and are not bound by collective agreements reached on their behalf by their trade associations.

Power

The study on electric power highlights the market structure of what was a public utility until recently is now being exposed to the forces of competition by unbundling the generation, bulk purchase and delivery of electricity to the end-consumer.

Hydel sources account for about a third of electric power generation. However, hydel power generation varies significantly during the year depending upon the availability of water. Thus, in the period December to January and April to May, river flows are at their lowest and a substantial gap builds up between the power generated in the country and peak demand.

In order to obtain the best results from the perspective of the consumer, reliable, low-cost electricity and forces of competition need to be harnessed to this end. Cross-country experience suggests that there can be competition for entry into the electric power market rather than competition in the market itself.

The report recommends that there is a need to focus more on the overall framework of policies that delivers the best deal for the consumer rather than merely promote stop-gap additions to capacity.

Fertilisers

The study on fertilisers has found that in the production of urea the sector is dominated by three major firms who together control 80 per cent of the market. However, their ability to set prices depends ultimately on the level of subsidy that the government provides in feed-gas rates.

Prices of phosphate-based fertilisers, on the other hand, are determined primarily by international prices as only 30 per cent of Pakistan’s requirements can be met by domestic production.

In neither sub-sector do conditions provide complete freedom for producers to indulge in price-fixing.

Aviation

The study on aviation describes the nature of aviation sector reform adopted by Pakistan which is based upon a limited open skies policy.

The study underlines the risks involved in a fully market-driven industry such as adverse effects on safety and service levels and even some anti-competitive outcomes principally through an abuse of dominance that manifests itself in predatory conduct on the part of existing national carriers as well as the setting up of informal entry barriers for new airlines.

Such risks indicate the need for a strong sector specific regulator as well as close surveillance by CCP to prevent anti-competitive practices on the part of PIA and others.

Published in the Express Tribune, June 15^th, 2010.