Customers as enemies

The Economic Times, August 18, 2007

The only way forward is enforcement, and that is the only thing which the industry is afraid of, if at all, say Pradeep S. Mehta

This is a tale of two cartels, which is occupying front pages of pink newspapers in India and elsewhere. One is on the cement industry in India and the other is on the airline sector in the western world.

On the issue of cement cartels, the Indian competition regulator, the MRTP Commission, is struggling to bust them and has not succeeded so far, and will also not be able to do so.

On the second issue of airline cartels, competition authorities in the UK, US and Australia have cracked the whip successfully. Both sectors have the ideal market condition, that is, a large number of players and customers. Yet suppliers beat the ideal by colluding and gouging customers, until they are hauled up.

Cartels are the most egregious form of anti-competitive practices and every other day, one hears of cartels being busted in all jurisdictions, where there is an effective competition law. The title of this column: Our customers are our enemy… is an actual statement made by an executive of Archer Daniel Midland, in the famous case of lysine (feed additive) cartel, which was caught on a video tape by the US’ Federal Bureau of Investigation quite some time ago. It is symptomatic of the pathology of cartels.

Cement cartels are a universal pathological problem around the world. The other big news in this game of criminal collusion is in the airline sector, as British Airways has just been hammered with a fine of over US$550 million. There are some lessons for India and the new competition authority which we hope, with crossed fingers, will be effective before the year is out.

Our extant competition law, the Monopolies & Restrictive Trade Practices Act, 1969, is just not adequately equipped to deal with them, so we have decided to have a new Competition Act in 2002. Alas, the same hit road-bumps even before it could be implemented, and some amendments are under discussion, with the hope that these will be sorted out soon.

The MRTP Commission has made valiant efforts to crack the cement cartel in India on no less than three occasions in the past. On the other hand, cement companies and their association claim that there is no explicit cartel, and the price rise is an economic phenomenon. There is high concentration too in the industry.

Six players control 60% of the market, with 46 other firms holding the rest. The Cement Manufacturers Association (CMA) denies any collusive activity on their part. The association’s leitmotif, when it was formed, was to lobby the government precisely on obtaining higher levy prices until total decontrol in 1989.

In other jurisdictions too, the cement manufacturers association have been penalised along with the colluding firms, therefore there is no reason to believe that the Indian CMA confines itself to lobby the government on common issues affecting the industry.

In 1994, the European Commission levied fines to the extent of e248 million on the cement manufacturers’ association and six of its members. In judicial appeals finally decided in January 2004, the fine was brought down by e140 million, and the fine on the trade association was nullified. These six included Lafarge and Holcim. Lafarge was fined with e187 million by the EC in 2003 for participating in another cartel, the third largest fine ever levied for being a habitual offender.

In Korea, in September, 2003, the competition authority levied surcharges (fixed fines) of $22 million on seven companies in addition to $428,000 fine on the Korea Cement Manufacturers Association.

Coming to the airline sector, the Korean Air was fined $300 million in the US over conspiracies to fix passenger and cargo fares over a period of more than six years. This was a part of global web of conspiracies, and in the most recent case the British Airways (BA) were fined an unprecedented $249 million by the British competition watchdog for colluding with Virgin Atlantic on trans-Atlantic routes by agreeing on the same level of fuel surcharges.

The UK fine was compounded by the US department of justice which levied $300 million criminal penalty on BA. Virgin Atlantic blew the whistle and got away, while BA confessed to the crime. Further prosecution is awaited in other countries, while Quantas is already facing the music in Australia, and in the US.

In India, in the airline sector when the new Federation of Indian Airlines was formed in late 2006, we heard of a similar collusive action in the area of fuel surcharges irrespective of the distance covered, and in spite of a reduction in aviation turbine fuel costs. Following that, in November 2006 and January 2007 attempts were made to fix floor prices of airfares: Rs 2.40 per mile for major airlines and Rs 2 for low-cost airlines.

But both attempts failed, because the low-cost airlines did not agree to play ball. One of these low-cost airlines, Deccan, is now a partner of Kingfisher and thus the scene has changed. On being queried, airline executives fobbed the press thus: “We discussed prices as a generic issue”; “some airlines may have spoken about fixing floor prices, but we don’t know what transpired” and so on.

Colluding firms do not record their agreements, which are always oral, often facilitated by their trade associations. On the other hand, courts do not accept evidence of implicit cartels based on parallel price movements. The new law in India has amnesty provisions, which allow a colluder to spill the beans, like Virgin did, and are thus the best way through which competition authorities uncover damning evidence and action cartels.

The prime minister has appealed to the industry to stop cartelisation. A naïve proposal is going around that various industrial sectors will be asked for an undertaking to stop indulging in anti-competitive practices. If such persuasive appeals could succeed, and cannot ever succeed in any jurisdiction, then we can wind up the competition agencies. In the case of cement itself, Lafarge has been hauled up time and again, and stiffer penalties imposed.

But they have never learnt. The only way forward is enforcement, and that is the only thing which the industry is afraid of, if at all.

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