Both fertiliser producers enjoy a dominant position in the urea market. Fauji Fertilizer controls 48% of market share, while the market share of Engro Fertilizers is 26%. PHOTO: FILE
The country’s top antitrust watchdog has slapped a maximum collective penalty of Rs8.6 billion on Fauji Fertilizer and Engro Fertilizers – the two largest urea manufacturers in the country – after both entities were found involved in the “excessive pricing of urea”.
“Given the nature of [the] crime, the Competition Commission of Pakistan [CCP] has decided to impose the maximum penalty of 10% of the turnover on each company for unreasonable, unjustified and unfair increase in prices of urea in 2010,” CCP Chairperson Rahat Kaunain Hasan announced here on Tuesday. The chairperson said a Rs5.5 billion penalty had been imposed on Fauji Fertilizer and a Rs3.14 billion fine slapped on Engro Fertilizers. The fine was imposed by a two-member bench after almost a year and a half’s efforts in completing the investigation process.
The chairperson said both companies had raised the price of urea from Rs850 per 50 kilogramme bag to Rs1,580 in 2010 – an 86% increase – without proper justification. “The companies increased urea prices by 86% in just one year, while crop prices increased only 40-45% over a period of five years,” observed the chairperson.
“The bench felt restrained [in] that it could not impose a fine of more than 10% of turnover,” she added. Under the CCP Act, the maximum penalty that can be imposed by the commission is 10% of the errant company’s turnover, or Rs75 million, whichever is higher.
Hasan said the decision to impose the maximum penalty was taken after considering the importance of the agricultural sector to the economy, and the fact that these manufacturers had increased prices despite availing subsidies. She said the CCP has also advised the Securities and Exchange Commission of Pakistan to conduct a forensic cost audit of both the companies.
According to the bench’s findings, Rs77 billion were given in subsidies to the fertiliser industry over three years. In 2011 alone, Engro Fertilizers had received a subsidy of Rs4.5 billion, while Fauji Fertilizer had received approximately Rs11 billion in subsidies.
Both companies enjoy a dominant position in the urea market. Fauji Fertilizer controls 48% of market share, while the market share of Engro Fertilizers is 26%. The bench found that both had used their market power to initiate a price increase; with Engro initiating a price hike, which was followed by Fauji.
Hasan observed that Fauji did not have any justification for the increase: it is the single largest urea manufacturer in the country and should have behaved independently.
“In Fauji Fertilizer’s case, it is our considered view that – had there been competition – Fauji would not have increased its profits by more than 100% within one year,” Hasan said.
Both companies argued that they had increased prices to match the impact of gas curtailment on their input prices.
However, CCP’s findings show that Fauji’s plant was only slightly affected by gas curtailment, with impact in the range of 7-9%. Due to the price increase, Fauji Fertilizer’s gross profit margins increased from 43.6% or Rs19.6 billion in 2010, to 62.2% or Rs34.4 billion in 2011. Profits before interest and taxes, meanwhile, increased by a staggering 95%; from approximately Rs17.4 billion in 2010, to Rs33.95 billion in 2011. As per Fauji Fertilizer’s accounts, its rate of return on equity after tax comes out to 97% in 2011, up from 71.4% in 2010.
At the same time, Engro Fertilizers’ gross profit margin went up from 46.9% (Rs8.9 billion) to 53.37% (Rs16.7 billion), Hasan pointed out.
According to BMA Capital – an investment bank – the fines, if realised, will have an impact of Rs6.1 per share for Engro, and Rs3.9 per share for Fauji.
The CCP has so far imposed Rs17.1 billion in fines on errant corporate entities, but recoveries have remained at only Rs23 million as most parties have gone to court against the CCP’s decisions.
Published in The Express Tribune, April 3rd, 2013.
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COMMENTS (33)
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@Nida Ali: You might be over-simplifying a complex equation. That is why classical economics is against the idea of putting price floors and price ceilings. The alternative is to shut down the business and go home and the country / state will pay for the significant contraction in GDP and food shortages since the country will have to import the same fertilizer paying much more. Secondly, have you even read the link I posted above about Engro's losses. It is not about defending the 'justice party', it is about doing the right thing for the business ecosystem of the country regardless of who comes and goes out of power. Please don't get me wrong, CCP is one of the best institutions in Pakistan, but they have made decision without taking into consideration all aspects of the problem in my humble view.
@ Ali mujtaba
Most likely you have commented without even reading the news... Read lines 5 & 6 "to impose the maximum penalty of 10% of the turnover on each company for unreasonable, unjustified and unfair increase in prices of urea in 2010".
Everyone knows who was then at the helm of affairs at Engro...
Now open up your eyes and dare ask your leader about his market manipulation as Chorman Engro!
@Blithe: he left engro in 2011 n this scandal is for 2013 dude use ur mind dont be biased :)
@ Falcon
Going by your logic, the CNG stations should immediately raise the price of their product as there is shortage/loadshedding of raw material. What a logic!! You should re-read the concepts of price floors and price ceilings. Please note that there are various dynamics of a regulated industry and one cannot unilaterally raise the prices, if so, it will be market manipulation.
This is like let the people rob others because they do not have any employment. A loss making fertilizer company drawing huge subsidies from taxpayer's money cannot be allowed to rob the farmers. . @ Zeeshan
The norms of justice require that ample opportunity be given to the accused. No doubt that this process is painfully slow but at least all stakeholders are given chance to prove their innocence. The judgement is based entirely on evidence and thorough deliberations. . @ Kamran Shariq
"The share price dropped to 40% in 2010...." This reason is quite similar to the recent action by the regulator of UK where, due to declining income/share prices during recession, various dominant banks including UBS, RBS, Barclays & BofA manipulated the interest rates to jack up profitability of their respective banks and endup with huge bonuses for their executives! What happened after the investigation?? Not only these pre-dominant market players were heavily penalized but their senior executives, found involved in dubious activity/public fraud, have been banned for life.
I am very sorry to see defensive comments coming from the trolls of a party that calls itself "justice movement". Take my words, with this myopic approach to defend a wrong-doer, justice can never be fully prevailed in Pakistan.
Yes, indeed I am eager to watch a movie on corporate fraud. Maybe Express TV Channel will show this movie on the pattern of superhit Turkish soaps.
@ Nida Ali Dear Nida..! Share price dropped to 40% of value at 2010 closing for which CCP has not mentioned any reasons despite "so much of money making by the companies". It's not the case of the sensational movies you expect to watch and get excited where the money making by the titans is done by artificially inflating share price. Its serious national economy issues where your vital industries of Pakistan can simply be wiped out and so our poor farmer to get the fertilizer at the international urea price which is more than Rs.3000/bag instead of Rs.850 to Rs.1600/bag on which CCP has concerns. Once this vital industry is gone... rest assured, no one will come to Pakistan with billion dollar investment on these conditions where our dear government is backing out of the basic clauses of the agreements and guarantees. There are good movies already available.. so watch them and enjoy :)
@Nida Ali: Going by basics of economics, it is the price and availability of raw materials (gas in this case) that determines the price of intermediary products (fertilizer in this case). When the supply of input is curtailed, it pushes up the price across the demand curve. It is not Engro that triggered this gas shortage, but bad planning on the part of Govt that has led to this. Govt. would have been well placed to push through this fine if it had delivered on its commitment. Engro is incurring bad losses because of severe gas curtailment (see the link I have posted above in one of my comments for details).
This is a story of another whitecollar theft as shown in various hollywood movies. Interesting to see how Engro's then CEO rose the prices artificially, caused food inflation in the country and took away largest ever bonus in Pakistan.
There should be "claw-back" clause, similar to that in western countries, where the hefty bonuses are recovered from corporate titans who had artificially boosted the share price & then took away hefty bonuses as reward.
I am sure there will be another movie produced by Hollywood or Bollywood on this whitecollar theft.
Cant beleive we are actually dragging asad umar into it. THe CCP has gone out of its mandate in this judgement. first of all - the fertillser firms are not the ones asking for subsidies. It is the failure of the government to provide subsidies directly to the end consumer. The prices increased simply. because thre was massive gas curtailment. Since it is a dregulated market, thre was nothing illegal in what Engro did. The local urea even after 86 percent hike was cheaper than imported urea, which is the purpose of the subsidy. The CCP will bite dust in this case
Asad Umer Rocks! Vote for PTI!
@Syed Umair Javed: yes there is recourse and I see you citing international best practice please take the time to review the quality of the show cause notice which you will agree does'nt even even match a high school paper one example installed capacity does not mean market share.As for the impartiality of the judgement I will leave it to those who bother reading it. By the way the appellant board is made up of ex CCP members. Still think that international or domestic the structure it is a conflict of interest situation. Why aren't Independent judges also included in decision structure at the first instant of the case?
With all the protection, subsidies, dominant position and hefty gains in revenue as mentioned by the chairperson, Engro Fertilisers had to book loss of about Rs.3 billion in 2012. Share price plunged steeply to 40% value of 2010 closing. CCP should definitely have explored reasons for that. CCP should also have enquired from GOP, who has been selling imported urea fertiliser within the same price range of Rs.1500+ imported through Trading Corporation of Pakistan. Irrational distribution of natural gas to urea fertiliser manufacturers which can cause a complete shift in the cost structure also have been studied to explore any "justified reasons for price increase". High risk of default and loss of public money borrowed through banks also have been discussed with the companies. Govt inability to create a fair competition because of unjustified distribution of the basic and the only raw material of this industry also comes in CCP's domain. Going forward with the same pricing, atleast three three fertiliser manufacturers Engro Fertilisers, Dawood Hercules and Agritech would have been declared insolvent by now leaving behind two players to promote "fair competition" in the market.
m missing Bangladesh.. but i know what he will comment.. all the fertilizer company should relocate to our promised n blessed bangladesh..
@Syed Umair Javed: Two questions for informational purposes: why didn't CCP take into consideration the fact that Government's inability to meet the contract will require the companies to shift fixed costs somewhere and that will affect pricing? Looking at the just first year or two for gross profit margins is not good enough in this case since that is too short of a duration to arrive at the affects of strangulated gas supply and new pricing structure on gross margins (and Engro's recent earnings reflect that). Please see the link I posted above for reference. So on one hand, Govt is not delivering on its own responsibility and on the other hand, it is slamming the fine through another arm for charging abusive dominant pricing? Secondly, are you tied to CCP in anyway yourself?
@ Joy through work - CCP is a quasi-judicial statutory body structured on an integrated agency model which is consistent with international best practices vis-a-vis newly established regimes. This means that both the investigative and adjudicatory functions are done within the same organization. However, within the agency there are separate divisions for both functions. In CCP the investigation is carried out by independent enquiry committees and adjudication is done by the Members of the Commission themselves. There are several instances where the inquiry reports of the departments have been rejected during adjudication which speaks to the transparency and objectivity of CCP. Moreover, the Competition Act, 2010, under which CCP operates, allows for appeal against CCP decision at the Competition Appellate Tribunal and from there to the Supreme Court. Hence there is ample room for correction if required. There is no need to cry foul without an iota of proof !!! The comprehensive order which undertakes extensive economic, financial and legal analysis speaks for itself. Try to be objective rather than making sweeping statements.
@Syed Umair Javed: you do recognise the prosecuetion and the judge are the same and if read you will see the quality of investigation so poor that dates are wrong or left blank.
@ i like it - If you read CCP's decision, you will find that the gas curtailment had very little impact on production for fertilizer manufacturers.
@ Zeeshan - Rather than making sweeping statements, first go figure out the time line that was involved in the CCP decision process. CCP has better things to do than look at which company's CEO has joined which political party. Moreover, the price increase under consideration has to do with a particular time period and was declared excessive after taking into account all the cost related elements which automatically includes inflation.
This case has nothing to do with Asad Omar or other CEO's. It has to do with providing a level playing field to businesses in the country and making its markets more competitive. Kindly focus on the economic and legal underpinnings instead of pointing fingers at individuals. And if you really have to, start with the ex-generals who are minting countless billions every year in the name of 'national security' and 'welfare of poor soldiers' rather than professional businessmen\managers whose job it is to maximize profit for their commercial undertakings.
lol he was given Sitara-i-Imtiaz that time..and now all of a sudden this? 3 years investigation and results had to come out just before elections? well done PML-N..for sure you are far more experienced in politics.......in a dirty way!
Asad brought the largest private investment in the history of Pakistan to build the biggest single train urea plant which takes gas as raw material. Then the gift decides to Cut Engro's gas. Mind you, FFC made record profit in 2012 while engro made a net loss due to debt servicing.
Instead of being so shallow and throwing garbage on Asad Umer, ask yourself, why import and give subsidy when the country has export capacity?
@Syed Umair Javed: how is a government regaling on its contract good for investment? try to make a coherent argument. in the developed world, the contract would be honored, gas would be give, hence the prices would not have increased and therefore no CCP ruling.
@Asif-Paki: Do you know how much urea prices have moved during the last 3-5 years? Do you know how much gas loadshedding happened to urea manufacturers in Pakistan? Do you know how much subsidy Govt.paid to Urea companies on imported urea because they are much expensive compared to locally produced urea? Do you know how much urea price these EFL/FFC could have increased if they decide to keep their urea prices in line with international market urea prices? Do you know 'Paki' is nothing buta slang word used to abuse Pakistanis?
I think you should know that little knowledge is dangerous. God bless all of us.
My dear brothers, it is worth noting that CCP realized it NOW i.e. after 3 years or more. Why not earlier? why now when elections are near? It is just a political move; this penalty will never be materialized. The fertilizer sector is subject to severe gas loadshedding, further they are paying Gas Infrastructure Development Cess to the government. These fertilizer plants carry huge fixed cost of operations which can never be recovered under the gas curtailment plans together with imposition of GIDC. CCP is another weak institution of Pakistan which takes action based on dictation from influential politicians etc.
Don't forget that repeated rupee devaluations over the last 5 years have already doubled the prices of almost all commodities related to agriculture. With all these parameteres one can not survive in Pakistan without price increase. Petrol, Electricity, Gas, bus fares, air fares, etc everything has inflated according to the rupee devaluations and excessive borrowings. CCP while contemplating the scenarios of this case did not get out of the box. CCP please stay in the box as you are made for BOX.
@ ET - This was a case of abuse of dominance (unilateral conduct) and not collusion. You have wrongly titled your news item as 'collusive activities'.
@ i like it - Antitrust regimes prohibiting, inter alia, excessive pricing by dominant undertaking, is a norm in the globalized world. Providing a level playing field actually attracts more investment than restricting it. Intervention by competition authorities in cases of excessive pricing is very rare given the strict criteria that is required for the intervention itself.
CCP's decision can be read at http://cc.gov.pk/images/Downloads/urea_manufacturers_order.pdf
A Slap on the Face of ASAD UMAR; so called future planner of Pakistan; I cannot believe that such a blunder has been made by him; Obviously he knew that Competition Commission of Pakistan exists in Pakistan, and while increasing prices of Urea he was negating the very existence of CCP. Was he trying to DECEIVE the nation, farmers and Urea market; An excellent step by the CCP for the economy of Pakistan; Urea Price must decrease for growth of the Agriculture and control of Inflation.
The fines will eventually be paid in 20 years time when the litigation comes to an end.
Other side of the story:
http://www.thenews.com.pk/Todays-News-3-160201-Gas-supply-cut-causes-Engro-loss-of-Rs10bn
Out of interest, is the CCP considered a robust and honest institution without any government backing? I'm not insinuating anything, but just wondering, as I don't know much about the CCP. Some of their members seem like pretty upright individuals.
Additional thoughts: weren't Engro cheated out of fair access to gas by the present government, and were forced to shut one of their plants down?
Unless excessive pricing is tied to price fixing, I don't understand why government is fining these companies. Furthermore, gross margin profit increases in case of Engro (YoY increase of 6.5%) does not sound good enough of a reason to back up this fine. Secondly, pricing is usually adjusted taking into consideration all the future information rather than the current year. As of now, parts of Engro are really struggling keeping their head above water because of this strangulated gas supply despite govt. promises, is Govt. going to pick up the blame on it?
Isn't this timeline at Engro the time when Assad Umar was its CEO? So we have a person supposed to be one of the torch bearers of honesty in PTI who as CEo of the company had gouged the farmers to make his millions, while at the same time enjoying enormous subsidies from the state. Wow!. This guy has some guts indeed, to be lecturing others on honesty and fair play while doing the exact opposite himself. Can we please have someone from PTI answering these charges against one of their mascots?
yes, another blow to engro. lets make a example of these honest idiots for believing in the country and for making the largest single private investment in the country's history. dont give them gas, and when they increases prices to avoid bankruptcy, slap on a fine for "unjustified" price increases. for all those idiots thinking of making investments in our land of the pure, let this be a warning. take your money elsewhere, don't pay your taxes, and take advantage of amnesty schemes... pakistan zindabad!!!!
Army under attack... this time by financal pundits and not TTP
Will Asad Umer stand up and explain his role in this ?
The money should be given back to the growers, these prices are and have been insanely high for three years! currently the average cost of fertilizer for a single acre is well over rs.20,000.
So much for Oner Asad and his moral compass !!!
PTI should sack him immediately!