ISLAMABAD: The Competition Commission of Pakistan (CCP) has imposed a penalty of Rs 8.64 billion on leading fertilizers manufacturing companies over violating the competition practices and artificially raising price of the commodity in the country.
"This is the highest penalty the CCP has ever imposed during the course of time", Chairperson of the Commission, Rahat Kaunain Hassan said duing a press briefing here on Tuesday
She said that the CCP bench comprising its senior member Abdul Ghaffar and herself found that Engro Fertilizers Limited (EFL) and Fauji Fertilizers Company (FFC) who by virtue of market power enjoyed dominant positions individually were able to increase the prices of urea fertilizers.
The commission has conducted an enquiry after observing the increasing trend in the urea fertilizers which directly related to agriculture sector of the country and put effect on daily used food and crop prices which increased by 40-50 percent during the year 2010-11, she added.
"This kind of price hike needed to be checked, corrected and must be stopped for encouraging the competition practices and discouraging the cartel in the country", she added.
Rahat Kaunain further informed that the FFC was producing 48 percent of fertilizers being used in the country whereas the EFL was producing 26 percent of the total consumption.
She said the bench took into consideration numerous factors including local concerns such as the nature of Urea as an essential commodity, its importance to the farmer and agricultural growth and the Government based subsidy provided to the undertakings and then employed numerous comparators (involving a comparison of profitability with jurisdictions of similar nature) in the light of the test laid out in the other developed jurisdictions.
The FFC was found to have more than doubled its profits from around Rs 11 billion in 2010 to Rs 22.5 billion in 2011.
Its return of equity (ROE) after tax of 97.5% was way above the ROE after tax enjoyed by undertakings in agro based economies similar to Pakistan in all aspect of the Urea business (ROE after tax in India having an upper ceiling of 12%), she added.
She said in respect of EFL the bench observed in the light of a case of excessive pricing in Turkey that plummeting profits or even a loss registered by an undertaking doesn't imply that it cannot abuse its dominant position.
The Bench looked at the increase in gross profits as they neutralized the effect of its debt obligation that was peculiar to it not just in terms of the fact that it carried out the investment but also in terms of the arrangement it agreed upon with the lender/financers to pay it back.
The gross profits of EFL went up by more than 80% from 2010 to 2011, furthermore the increase in its Profit before Interest and tax (PBIT) was 121% as against FFC's PBIT increase of 95%, implying that in the absence of EFL's debt obligation, with these prices prevailing it would have seen a tremendous increase in after tax profit just as FFC.
In light of the above it was found by the bench that both FFC and EFL took advantage of a lack of competition in the relevant market and continued to increase prices in excess of a level that would have prevailed in a market with appreciable competitive constraints and in having done so abused their individual dominant position in contravention of clause (a), subsection (3) of Section 3 of the Act.
Based on its findings and taking into account all relevant factor, including the product involved, its significance for the economy and the quantum of subsidy availed by the FFC and EFL which amounted to Rs 11 billion and Rs 4.5 billion respectively for the year 2011 only, the Bench imposed a maximum penalty provided for under the Act on both EFL and FFC i.e. 10% of their individual turnover (translating to sums of Rs 3.14 billion for EFL and Rs 5.5 billion for FFC) for each abusing its dominant position in violation of the Act.
"Furthermore the bench deemed it critical to advise Securities and Exchange Commission of Pakistan (SECP) that forensic cost audits pertaining to all the undertakings must be carried out by independent auditors in the interest of transparency and the information so obtained shared with the relevant departments of the provincial and Federal Governments along with the Commission", she added.
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