The Hindu, December 22, 2007
By D Murali
Chennai: A few days ago, the Monopolies and Restrictive Trade Practices Commission (MRTPC) found 44 cement companies guilty of cartelisation under the aegis of Cement Manufacturer’s Association (CMA) during the period February to April 1990. “Even though it took 17 years for the MRTPC to come to a decision on an old case of the pernicious cement cartel in India of 1990s, it is a case of better late than never,” says Mr Pradeep S. Mehta, who recently published ‘Competition & Regulation in India, 2007’ (www.cuts-international.org).
“Alas, the MRTP Act, 1969 does not have the teeth to do anything other than asking the cartel to cease and desist, i.e. in simple terms, to stop them from doing so,” rues Mr Mehta. The larger issue, according to him, is of the recent cartelisation in cement prices, fuelled by the economic boom in the country. “That case is yet to come up, and considering how slow the inquiry process moves, the same may also get dated.”
One just has to look at the balance sheets of cement companies that hiked prices by over 50 per cent in the recent past, he urges, in the course of an e-mail interaction with Business Line. “Remember what Mr Kamal Nath, the Minister for Commerce and Industry, had observed during his parleys with the cement cartel: that limitless profiteering is not acceptable and that various studies conducted show the increase in input prices not being commensurate with the extent of the cement price increase.”
However, Mr Mehta hopes that there will be good price competition in the cement sector in the wake of the recent decision by the MRTPC.
Excerpts from the interview.
What are cartels?
Cartels, in simple terms, are the result of a collusive, unethical and illegal action by firms in the same line of products getting together to fix prices, limit production, and divide territories and/or customers. Collusion by traders to maximise their profits is as old a phenomenon as trade itself, going back to when people began exchanging goods for cash.
In India, we have known about cartels as early as in 400 BC, when Kautilya in his monumental political economy treatise, Arthashastra, had prescribed norms for such anti-competitive behaviour. Cartels were recognised – and prohibited – in the days of the Eastern Roman Empire (Byzantium) . For instance, the Constitution of Zeno in 483 AD punished price-fixing in clothes, fish, sea urchins, and other goods with perpetual exile, usually to Britain, then a Roman colony.
Cartelisation is termed as the most egregious form of anti-competitive practice by the competition community.
How do cartels affect consumer interest?
How do cartels affect consumer interest?
Through artificial increase in prices. Take, for example, a cement bag being sold at Rs 200 per bag before cartelisation took place; and, say, after cartelisation, the prices shoot to Rs 250 per bag. If the cost of cement in a building were 10 per cent of the total construction cost, it would go up by 10.25 per cent. Is this a marginal increase? Yes, to a consumer it may be marginal, but to the builder, if the cost of all cement in a project were Rs 100 million, then his costs go up to Rs 102.5 million, or an extra cost of Rs 25 lakh. Shortages in cement bags are another story. What the builder does is to pass on the increased costs to the consumer. There are myriad such cartels in many goods and services, and one can imagine the increase in consumer cost as a whole. It can be quite high.
We have cartels in petroleum, don’t we?
Yes. The OPEC (Organisation of Petroleum Exporting Countries) is an example of a ‘legitimate’ cartel in the oil sector – legitimate because it is treated as sovereign function of states that own the oil reserves. This too has been challenged in the US, but has not progressed because of the jurisdiction problem.
The oil cartel is blamed for the high crude prices – going up to $100 per barrel currently, from a price of $35 about two years ago. Not long ago, the former petroleum minister of India, Mr Mani Shankar Aiyer floated the idea of forming a buyers’ cartel of net consuming countries, but that did not move far.
Another form of a legitimate cartel can be our own taxis in a city and the like, which are governed by tariff regulations set by authorities. In this case taxis do not compete on prices but do so in quality of services rendered.
In what forms does illegal cartelisation happen?
The most common form of cartels is ‘price-fixing,’ which is treated as a criminal act in the US; many other jurisdictions, including the EU (European Union), have started adopting the same treatment. Price-fixing is a term that is generically applied to a wide variety of concerted actions taken by competitors having a direct effect on price. The simplest form is an agreement on the price or prices to be charged on some or all customers.
Next on the list are cartel agreements that divide markets by territory or by customers among competitors. If anything, such arrangements are even more restrictive than the most formal price-fixing agreement, since they leave no room for competition of any kind, and hence are often held illegal per se by competition laws around the world.
Under the third category of cartel behaviour is output restriction, when companies producing/supplying the same products/services agree to limit their supplies to a lower proportion of their previous sales. The ultimate objective of limiting supplies is to create scarcity in the market and subsequently raise prices of products/services.
The fourth type, bid rigging, involves coordinated actions by firms on tenders and auctions. Bid rigging, as all other cartel-type behaviour, can be hard to spot and prosecute.
Cartelist behaviour is difficult to detect, and even when detected, might be countered by various defences. To make matters worse, cartels can occur in almost any industry and can involve goods or services at any level along the value chain.
How can cartels be busted?
Of course the government can take action against illegal cartels by implementing suitable competition or antitrust laws, such as the MRTPA. The only problem with busting cartels is collecting incontrovertible evidence against such cartels, because of their secretive nature. Most cartels exist only on verbal agreements, and colluders take care to never record their understanding.
Yet, cartels are being busted every other day in the western countries due to suitable legal provisions in their competition laws. It is mainly due to amnesty provisions, which are used by one of the colluding firms to spill the beans against their partners in crime.
Should consumers be vigilant about deeply embedded cartels too?
Definitely. Because, quite often cartels operate in the intermediate goods and services sector, such as in the animal feed additives business, so consumers do not feel the pain – they remain ignorant of the fact that such artificial price increases lead to a higher price of finished goods which they buy/consume. The direct costs of a cartel to consumers are increases in the cost price of the product if the cartel is successful, fewer product choices (if the geographical markets are allocated among producers), and a slower rate of product innovation and technological change. To ensure that a cartel survives, cartels may engage in activities that block or slow the entry by producers that are not members of the cartel.
Does the new competition law effectively tackle cartels?
A major challenge, this is, for the new competition authority in India, I’d say, apart from the other major challenge of abuse of dominance. Many experts consider anti-cartel activity the most important function of a competition agency. They feel that because cartels cause the greatest harm to consumers, finding and prosecuting these agreements should be a top priority of competition officials.
Prosecuting cartels may be the most difficult of the tasks assigned to competition authorities as cartels are conceived and carried out in secret.
Cartel operators, knowing that their conduct is unlawful, do not willingly cooperate with competition officials in the course of investigations. Thus obtaining evidence to prove the existence of cartel agreements requires adequate legal provisions, special investigative tools and skills.
The new law provides for these, including amnesty to whistle-blowers. The only problem is the lack of capacity in the new authority; to resolve this, though, personnel are being hired. These people need to be trained with the help of real-life case studies. It may also be advisable to draw upon training expertise from abroad, in this sphere.
Can the new competition authority act against cartels operating from outside India?
Under the MRTPA, the Commission had tried to prosecute two international cartels: one in soda ash and the other in float-glass, both of which are not consumer goods. But, while it succeeded in passing good orders, the Supreme Court turned them down on two grounds: first, that the MRTPC does not have extra-territorial jurisdiction; and secondly, that cartels are not properly defined in the MRTPA. The new Competition Act of 2007 has taken care of both these points by providing for jurisdiction on any anti-competitive practice that takes place outside the territory but having an impact on India; also cartels are clearly defined.
Has the response to cartels been different in the developed countries?
Over the last century, in particular, there was a global resurgence of international cartels, which became evident thanks to the numerous efforts to uncover them by the competition authorities. It is believed that the US and the EU authorities have prosecuted about 100 international cartels in the given time period. They have had effective competition regimes for many years, which have been refined over time.
Both the US and EU are capitalist economies and firmly believe in the private sector as the most important component of its economy. Yet, they are very tough on collusive activities such as cartels because they sap the economy. The record, sadly, has been much poorer in the developing world – not because cartels are less common here but because the law enforcement agencies are less well equipped to deal with them.
Are there any estimates of losses suffered by the developing countries as a result of cartels?
Sample this. Of the international trade flows identified in 1997 that best matched the products sold by 16 international cartels operating during the 1990s, developing countries’ imports of these goods amounted to $81.1 billion, representing 6.7 per cent of their imports and 1.2 per cent of national incomes.
With an estimated increase in prices of between 20 and 40 per cent, one can then calculate a range of estimates for the overcharges paid by developing countries in 1997, had all 16 of these cartels been in operation during that year. These overcharges are in the range of $16-32 billion, an amount equivalent to between one-third and two-thirds of the total annual multilateral and bilateral aid received by developing countries in the late 1990s.
Thus, there is a h5 case for strengthening the enforcement activity of competition authorities in developing countries vis-à-vis cartels. This continues to be hampered by inadequate legal frameworks or tools, information asymmetries, or worse, human resource handicaps. Such is the situation in countries like India.
How can we prosecute international and domestic cartels?
India has the Competition Act, 2002, amended in 2007, and this has provisions for amnesty for any firm that blows the whistle on the others in the cartel. The law is yet to be notified in full and made operational, but it is on its way. We hope that the new law will be operational soon and we can see effective action against such cartels.
Meanwhile, there is an important source of information that may be explored: careful analysis of offers by different companies in the Central and state government bids. This can give important clues if there have been patterns of systematic rotation of winning bids, stable shares of companies in overall procurement etc. Cooperation from the CAG (Comptroller and Auditor General of India) can be sought by the new authority to study these patterns. This information would be helpful in detecting collusive behaviour in the market as well.
Secondly, by recruiting the help of investigative agencies such as CBI (the Central Bureau of Investigation), the Economic Offences Wing and so on, the new authority can also get incontrovertible evidence on collusive action by firms and nail them down.
Thirdly, by popularising the amnesty scheme through seminars and compliance education among businesses, cartels can be unearthed. One or two cases can build confidence in the business community.
On international cartels, since many of the cartel originators are situated in western countries, our competition authority will need to have cooperation agreements with competition authorities in other countries to get evidence. It may not be an easy task but if we look at the way India is growing, any request from us will not be treated lightly. For cartels already busted, the information may be easily obtained; but, for suspected cartels, it might be difficult. Informal cooperation may be tried, instead.
Reverting to the amnesty provision, it is not only the first party who blows the whistle that can get away with no fines, but also subsequent parties, who can cooperate to get lesser penalties.
In a very recent case of cartelisation against five elevator manufacturers in Austria, ThyssenKrupp, as the first party who blew the whistle, got away without any fine, while Otis Elevator received a 50 per cent remission in fines for active cooperation in the enquiry. The others in the cartels who were fined a total of 75 million euros, included Kone, Schindler, Doppelmayr and Haushahn. Some of these operate in India too.
Have there been instances of cement cartels in other countries?
Among cartels, one of the most pathological ones is the cement industry, unless there is a state monopoly as had existed in few socialist countries.
In 1994, the European Commission (EC) levied fines to the extent of 248 million euros on six companies and the cement manufacturers’ association. In judicial appeals, finally decided in January 2004, the fine was brought down by 140 million euros, and the fine on the trade association was nullified. These six included Lafarge and Holcim. Lafarge was fined with 187 million euros by the EC in 2003 for participating in another cartel, the third largest fine ever levied for being a habitual offender.
In Taiwan, in December 2005, a fine of $6.3 million was imposed on Cemex, one of 11 manufacturers along with 10 distributors.
In Korea, in September 2003, the competition authority levied surcharges (fixed fines) of $22 million on seven companies in addition to $428,000 on the Korea Cement Manufacturers Association. In Argentina five cement companies operated a cartel during 1981-99, until caught and fined a whopping $107 million, the largest fine levied by the country’s competition regulator.
In Romania, in 2005, three cement companies, viz. Lafarge Romcim, Holcim and Heidelburg’s subsidiary Carpatcement were fined 27 million euros or six per cent of their turnover. These three companies shared 98 per cent of Romania’s cement market. The probe found that they had inflated prices by as much as 38 per cent. The list is endless.
Let’s now take a look at countries where there is no effective competition law, and how cement cartels behave. In December 2002, the price of cement had fallen to an exceptionally low E£125 a tonne in Egypt. The drop had caused serious worry among the cement producers. In response, almost all local cement producers met and set a price range for cement between E£167 and E£176 a tonne. There was an outcry, but no action could be taken, as Egypt did not have a competition law then. It has one, now, in spite of h5 business opposition, but the same is yet to become fully operational.
In Pakistan, which had a law similar to our own MRTPA, the authority did take action against cement cartels in October 1998. Cement manufacturers raised the price of cement in a collective action from Rs 135 a bag to Rs 235 a bag. Enquiry by the Monopoly Control Authority found that none of the input costs had gone up. The authority passed orders for reversion to the old prices and levied a fine. The order was stayed by the High Court. The Ministry of Commerce intervened and persuaded the MCA, despite the theoretical independence, to close the case. Now, even Pakistan has a new competition law.
Research in Philippines, which has no competition law, has shown that the cement industry has grown under heavy government protection. The market leader, a state enterprise, Philippines Cement Corporation decides which company produces how much and where it can sell. Collective price action has been seen from a long time. Analyses of cost structures show that in spite of differences, the selling price is uniform. Research in Malaysia shows that the local cement producers may be indirectly affected by Lafarge’s international cartel arrangements.
If we look closer at the cement industry in India, it is the second largest in the world with total capacity of 151.2 mt, and growing. All major international cement companies are here. There are some significant domestic players too, but they are closely linked to the foreign players through cross-holdings. Which is why we need an effective competition law.