CCP raids offices of PVMA, PEORA

The Com-petition Commission of Pakistan has conducted search and inspection of the offices of the Pakistan Vanaspati Manufacturers Association (PVMA) and Pakistan Edible Oil Refiners Association (PEORA) in Islamabad and Karachi and impounded documentary proofs of the associations' alleged involvement in anti-competitive practices.
According to an announcement of the CCP here on Friday, during the search and inspection, conducted under Section 34 the Competition Act, important data has been confiscated from the Associations' offices that would be analysed by the Commission's enquiry officers. This bold initiative to take action against the alleged cartel of the ghee/cooking oil manufacturers has been taken by Chairperson CCP Rahat Kaunain Hassan.
Details of the events took place on Friday revealed that the CCP took notice of continuously rising ghee/cooking oil prices, as reported in various media sources. Ghee and cooking oil are very important commodities and concerns have been raised that historic increase in prices may have been the result of possible anti competitive practices by the manufacturers.
Similarly, the findings of a Competition Assessment Study of Cooking Oil and Ghee Sector in Pakistan, recently conducted by CCP has highlighted that despite a thin diffusion of market share involving about 100 firms, there are certain instances inviting concern from a competition perspective. It has also argued that the industry is able to thrive even by maintaining capacity utilisation of less than 50 per cent, which points to absence of competitive pressure particularly in the middle market segment.
According to the CCP, it has also been observed that price increase in different categories and brands of ghee/cooking oil has always taken place in parallel manner. Upon further examination of media reports it has also been noticed that the price increase is often referred to a collective decision of all manufacturers, or their association, resulting in simultaneous increase in price.
It is a norm of competitive markets that decisions are taken and implemented independently by competitors. However, simultaneous increase in the prices of ghee and cooking oil by equal amounts at various occasions prima facie raises suspicion of collusive behaviour and collective decision in the ghee and cooking oil industry. Such collusive behaviour is prohibited under Section 4 of the Competition Act, 2010.
Sharing background of search and inspection of PVMA/PEORA, sources told Business Recorder that the commission has taken notice of continuously rising ghee/cooking oil prices as reported in various media sources. Ghee and cooking oil are very important commodities and concerns have been raised that historic increase in prices may have been the result of possible anti competitive practices by the manufacturers.
The report has highlighted that despite a thin diffusion of market share across about 100 firms, there are certain instances inviting concern from a competition perspective. It has also argued that the industry is able to thrive even while maintaining capacity utilisation of less than 50 per cent , which points to absence of competitive pressure particularly in the middle market segment.
Some of the major findings of this report revealed that the cooking oil and vegetable ghee industry is driven by import of raw materials, mainly palm oil - 76 per cent of total demand is met by imports. Prices of vegetable ghee have fluctuated erratically in light of international palm oil price trends over the last few years. The report provides explanation - manufacturers accumulated stocks at time of low price but didn't decrease price. Later on, such stocks put downward pressure on prices despite hikes in international palm oil price. The ability of manufacturers to be able to do this suggests that they can act independently.
Among all edible oil and fats, palm oil and soya bean are major import products in Pakistan. Soya bean which is considered to be an alternative of palm oil but is imported in much less quantity than palm oil because of its high structured import price This creates a protection for palm oil dependent firms and asymmetry that speaks of absence of level playing field. However, transportation costs also favour the trend to import of palm oil over soy bean oil.
The CCP study demonstrates that the manufacturers did not fully synchronise their prices with the changes in the input prices. In 2006-07, a 90 per cent increase in the price of palm oil was not fully passed on to the consumer as the output price rose by 40 per cent. However, in 2007-08, a reduction in the price of imported palm oil resulted in an increase of the output prices. It shows firms do not face intense competitive pressure; rather they have capacity to influence prices.
The CCP said that the firms may create a hurdle for new firms by creating and maintaining excess capacity. Thus whenever a new firm wishes to enter, the existing firm can increase the production levels. Excess capacity also provides leverage to firms to control production levels. This seems quite true in the case of COG industry in Pakistan in which the average capacity utilisation is 44 per cent.
The presence of countless unregistered suppliers of vegetable ghee should have created pressure on the registered firms to be more efficient and price sensitive but this has not happened, which is intriguing. As a matter of fact, losses should have resulted in the closure of a few units, which also did not take place. Instead, the market has absorbed new players in 2005-06.
In addition to the above factors, it has also been observed that price increase in different categories and brands of ghee/cooking oil has always taken place in parallel manner. Upon further examination of media reports it has also been noticed that the price increase is often referred to a collective decision of all manufacturers, or their association, resulting in simultaneous increase in price, CCP said.
The Commission has at countless times in the past, found evidence that trade associations have been involved directly or indirectly in anti competitive activities. In fact, associations have been found to be the front runners for collusive activities. It is, therefore, natural that in order to obtain evidence of any anti competitive practices as indicated by the abovementioned extracts, the most natural choice of the Commission will be the trade associations in the ghee and cooking oil industry. The two most prominent associations in the ghee and cooking oil sector are Pakistan Vanaspati Manufacturers Association (PVMA) and Pakistan Edible Oil Refiners Association (PEORA).
In cases of alleged collusive activities, it is crucial to obtain evidence while maintaining an element of surprise since otherwise evidence of such activities maybe destroyed since collusion is essentially a conspiracy. In view of above it was proposed that the Commission should authorise a search and inspection of PVMA and PEORA offices under Section 34 the Act.
The following offices of the said associations were searched by the CCP officers nominated thereafter. The PVMA Central Office located at House 386, Street 11, Sector I-8/2, Islamabad by Ikram Ul Haq, Director (SP), Syed Umair Javed, Deputy Director (C&TA), Amun Sikander, Junior Executive Officer (C&TA) and Fahad Qureshi, Trainee Officer (C&TA). The inspection of PVMA Zonal Office located at C-55-C Mezzanine Floor, Street Phase, Ext Defence Housing Authority, Karachi by Ikramul Haq Qureshi, Director General (Legal), Nadia Nabi, Joint Director (C&TA), Asfandyar Khattak, Joint Director (Media) and Irfanul Haq, Junior Executive Officer (C&TA). The inspection of the POERA Central Office located at House 392, Street 71, G-11/2, Islamabad by Shaista Bano, Director (C&TA), Nooman Farooqi, Joint Director (Legal), Syed Khurram Saeed, Assistant Director (IT) and Qasim Khan, Junior Executive Officer (C&TA), sources added.