The CCP must not perish

News that the ordinance of the Competition Commission of Pakistan (CCP) has lapsed is deeply dismaying.

Unless revived and passed into law, Pakistan will be amongst only a handful of countries which has no institution that is mandated to exercise oversight, check anti-competitive abuses and protect the interests of its consumers.

Such protection is urgently required since a look at the structure of Pakistan’s economy will show that we have what is called a ‘highly concentrated’ economic structure in virtually all sectors of the economy, especially in manufacturing and services.

Industrial economists measure concentration by calculating the share of output or sales of the largest three or four firms in an industry. This is known as the three – or four – firm ‘concentration ratio.’ sectors such a food, beverages, tobacco, leather, carpets, automobiles, steel, some engineering and textile goods, surgical instruments, and services such as banking and insurance have very high concentration ratios.

In other words, only a few large firms, perhaps two or three, control up to 90 per cent of the total market. Barriers to entry are high, which means that new firms find it difficult to enter the market because of high capital requirements and other impediments to entry. For consumers
the bad news is that such a highly concentrated structure leads to monopolistic pricing behavior and excess profits.

There is an abundance of empirical evidence based on careful studies to support this proposition as reflected in the tight and robust link between profitability and concentration ratios. Productivity improvements which help cut unit costs instead of being passed on to consumers in the form of lower relative prices as one would expect in a more open competitive environment are arrogated in terms of excess profits and a shift in the factor distribution of income away from wages to profits.

When Ayub Khan’s regime fell amid revelations of high concentrations of income and wealth in a few hands, Pakistan set up a Monopoly Control Authority (MCA). Like so many well-intentioned government initiatives, the MCA proved to be a toothless institution, never doing much in the area of identifying and punishing firms for anti-competitive behaviour whether in the form of price-fixing, price-leadership and market sharing or other collusive behaviour that generates excess profits.

Some 30 years on, the news of the establishment of a truly powerful CCP led by a dynamic no-nonsense person must have come as a proverbial breath of fresh air. The new CCP wasted no time in moving against well-entrenched powerful vested interests in the economy that had abused, and continue to abuse, their dominant market position and exploit Pakistan’s hapless consumers.

But it was not to last. These vested interests hit back and at one point managed to have the chairman removed. He was quickly re-instated thanks to the intervention of the prime minister and continued to move bravely and aggressively against cases of market abuse even at the cost of his own personal safety and that of his staff, but the ordinance of the CCP inexplicably lapsed, or was allowed to lapse, without being passed into law.

It would be a great tragedy if the CCP is allowed to perish. It was a fine institution, well-manned with professionals who knew their job and it had a strong mandate which it used wisely and well to go after and fine heavily the worst cases of anti-competitive behaviour. It was inevitable that after years of unchallenged pricing power, resistance to the CCP would be fierce. And so it was.

But Pakistan’s consumers cannot allow vested interests in business and the services sector to fleece them through their untrammeled pricing power, as they have done for so many years. This is all about that oft-heard expression — ‘good governance.’