Regulatory victory: CCP breaks cartel after Siemens admits to collusion

Eighteen firms collaborated on several contracts to supply equipment to power companies.

The anti-trust watchdog finally won a big one. The Competition Commission of Pakistan has managed to bust a cartel of power distribution equipment suppliers involved in price-fixing and quota distribution on Rs45 billion worth of public sector contracts after the biggest player – Siemens Pakistan – admitted guilt and asked for leniency.

CCP Chairperson Rahat Kaunain Hassan announced the watchdog’s triumph at a press conference in Islamabad on Tuesday. “Siemens Pakistan admitted infringement of Competition Act and sought leniency,” she said.

The Pakistani subsidiary of the German engineering giant is the dominant supplier of transformers and switchgears to the country’s power sector, with a 29.3% market share. The company had apparently been the largest player in an 18-member cartel that had systematically been rigging prices higher in contracts issued by the nine power distribution companies in the country, eight of which are state-owned.

Between 2008 and 2011, the power distribution companies spent about Rs45 billion on buying transformers and switchgears. Kaunain was unable to provide an exact figure of how much extra the power companies ended up paying the engineering firms, but did say that soon after the CCP began issuing show-cause notices, the prices of the equipment were reduced by the suppliers by between 12% and 18%. One power company was even able to save Rs541 million on its procurement.

Siemens Pakistan’s decision to seek leniency has exposed the 17 other companies in the cartel to penalties and punishment, including the second-biggest player, Pak Elektron Ltd, which has a 28.7% markets share. The penalties can go as high as Rs75 million or 10% of the convicted company’s revenues, whichever is higher.

The CCP had initiated two cases and began issuing show-cause notices to 25 entities in September 2011 for allegations for bid-rigging and collusion on public procurement tenders. The notices seem to have been enough to prompt the biggest player in the market to come clean and admit wrongdoing.

In doing so, Siemens has been able to take advantage of the leniency provisions in the law. “Siemens Pakistan has been granted a 100% reduction in penalty with respect to contravention of the Competition Act,” said the CCP chairperson.

Kaunain said the leniency application has been accepted on the grounds that it would promote free competition and break cartels that “have become norms in Pakistan rather than an exception”. She warned that if it were proven during the course of the events that Siemens-Pakistan has hidden any information or is reluctant to fully cooperate, the leniency will be revoked.

Siemens submitted 233 documents along with its Leniency Application which provide information about the two products – switchgears and transformers – and show collusive activities among the various manufacturers that determined who would bid for how much and what price they would offer.

A beleaguered regulator

The commission’s success in breaking up this cartel is the biggest achievement in the CCP’s four year history. The very existence of the commission had been opposed in Parliament, forcing President Asif Ali Zardari to keep reviving it via ordinances four times until the Competition Act finally became law in 2010. Yet the CCP’s struggles are still not over.

Over 150 cases involving Rs7.6 billion penalties are still pending in courts, as many influential industries such as the cement and sugar sectors have obtained stay orders against CCP orders. The anti-trust watchdog is also struggling to get 3% of the fees collected by five of the government’s regulatory bodies. These public sector regulators are withholding Rs952 million that they owe to CCP.

Published in The Express Tribune, April 4^th, 2012.