JCR engaged in predatory pricing: CCP

The Competition Commission of Pakistan (CCP) has observed from the antitrust/competition law perspective that in the credit rating market in Pakistan, debt issuers have no choice but to request rating either from Pakistan Credit Rating Agency (PACRA) or JCR-VIS Credit Rating Company Limited (JCR) in exchange for a fee.
According to a latest order passed by the CCP, the commission finds that JCR has indulged into exclusionary conduct because of its predatory pricing strategy in violation of subsection 3(3)(f) read with subsections 3(2) and (1) of Section 3 of the Competition Act. On account of violation of the provisions of the Competition Act, a penalty of Rs 500,000 is imposed on JCR.
The CCP concluded that the JCR (respondent) has been engaged in predatory pricing in contravention of subsection 3 clause (f) read with subsection 3(1) and (2) of Section 3 of the Act. In simple terms, predatory pricing refers to a strategy or a price charged by the dominant undertaking(s) that are not market-related but below what is to be expected of a market price, the CCP order said.
The Commission hereby directs Neelum-Jhelum Hydropower Company (Private) Limited (NJHPC) to cancel the impugned bid forthwith and file compliance report with the office of Registrar of the Commission. NJHPC may conduct a fresh bid pertaining to the credit rating for the proposed issue of Sukuk comprising of Rs 100 billion. In doing so, NJHPC shall ensure that the bid is conducted in a fair, transparent and competitive manner, the CCP order added.
The CCP has issued order in the matter of show cause notice issued to the JCR for alleged violation of section 3 of the Competition Act. The CCP order said that the relevant market is characterised by a high degree of concentration. However, pricing strategy or pricing below the average variable costs with no objective justifications are in themselves unequivocally predatory and abusive under the Competition Act. Such conduct, if left unchecked, is likely to result in the exit of either of the competitors, resulting in anticompetitive monopolisation and ultimately harm to the customers and consumers.
The Commission is of the considered opinion that both PACRA and JCR hold dominant position and are, therefore, in a position to behave to an appreciable extent independently of their competitors, customers, consumers and suppliers irrespective of their market share in the relevant market.
The order shall dispose of the proceedings initiated pursuant to show cause notice no 22 of 2016 dated 15.07.2016 (the 'SCN') issued to M/s JCR-VIS Credit Rating Company Limited for, prima facie, violation of Section 3 of the Competition Act, 2010. The SCN was issued pursuant to the enquiry report dated 01.07.2016 wherein an enquiry was carried out after a complaint filed by M/s Pakistan Credit Rating Agency Limited on 19.04.2016 under Section 37(2) of the Act.
The background of the issue revealed that the complainant has alleged that the credit rating award to the respondent dated 23.06.2016 for a sum of Rs 1,100 (impugned bid) for the proposed issue of Sukuk comprising of Rs 100 billion by Neelum-Jhelum Hydropower Company (Private) Limited is too low or below the cost bidding in contravention of Sections 3 and 4 of the Act.
In the impugned bid, both the complainant and the respondent participated in procuring credit rating assignment for Sukuk issue of Rs 100 billion by NJHPC. The complainant quoted Rs 7.22 million, whereas the respondent quoted a total of Rs 1,100 for the rating assignment spanning 10 years.
The complainant alleged that the token bid by the respondent is devoid of any legitimate business justification or lacks a commercial sense thereof and was solely made to oust its competitor from the bidding. The complainant further alleged that the respondent has acted in contravention of Section 4 and since the bid is far too low, it also amounts to predation in violation of Section 3 of the Act.
The complainant further alleged that in the initial bid carried out for the same project, the complainant had been awarded the assignment for being the lowest bidder and having the requisite expertise rating projects of such a magnitude. However owing to certain procedural irregularities by NJHPC alleged by the respondent, the award was cancelled and re-bidding was announced which then resulted in the aforementioned situation.
On the basis of allegations, the Commission initiated an enquiry on 20.04.2016 pursuant to Section 37(2) of the Act and appointed officers (the 'Enquiry Committee') to investigate the matter for possible violations of provisions of the Act.
The enquiry committee thereby corresponded with the respondent and NJHPC seeking their comments/submission with respect to the allegations made in the complaint. The NJHPC was specifically directed to furnish details in respect of both rounds of bidding.
A perusal of the information received revealed that even though the initial bidding resulted in the rating mandate being awarded to PACRA, there was a clear difference of opinion as to who was the lowest bidder from amongst the evaluators within the procuring entity ie NJHPC, for the foremost whether or not certain taxes being included in the calculations. Furthermore, even though financial experts representing the NJHPC were of the opinion that the respondent was the lowest bidder, calculations by WAPDA, however, showed, PACRA to be the lowest bidder. To address the allegation levelled by the respondent, a Grievance Redressal Committee (GRC) was formed and the complainant's contract was cancelled in favour of a fresh bidding which was called under the Public Procurement Rules.
Before the second round of bid, the NJHPC vide its letters dated 08.12.2015 communicated to the complainant and the respondent, "The earlier quote dated 29.09.2015 is quite on the higher side, therefore in view of the budgetary constraints, besides national importance of the project, we anticipate that you will provide your services at bare minimum cost." Afresh invitations to bid were issued on 08.03.2016 in response to which the respondent submitted the bid of a total cost Rs 1,100 whereas the complainant quoted Rs 7,220,000.
Based on the information and submission of the parties to the bid, the enquiry committee observed that "the general approach with regards to predatory pricing is that prices are assumed to be predatory if they are below average variable costs. In such a case, there is no conceivable economic purpose other than the elimination of a competitor, since each item produced and sold entails a loss for the undertaking. Secondly, prices below average total costs but above average variable costs are only to be considered abusive if an intention to eliminate can be shown."
In line with the above observation, it was concluded that "by JCR's own admission it was submitting a bid that did not reflect its cost and rather it was submitting a token bid. It is noted that Rs 1,100 for credit rating over a period of ten years is insufficient to cover JCR's cost and the sum is so nominal so as to assume that it is below its average variable cost. As for the JCR's claim that it has quoted such a low bid in consideration of this project bearing national importance, the question arises as to why JCR did not quote such a low price or something close in the earlier bidding and whether the same was an afterthought to justify it's almost free offer. Based on the standard for predation, the bid amount submitted by JCR is without any shred of doubt below its average variable cost which could have no other economic purpose but to eliminate a competitor." It is, therefore, the enquiry report proposed that the Commission may consider initiating proceedings against the respondent for a prima facie violation in terms of subsection 3(3) (f) read with subsections 3(2) and (I), which constitute a violation of Section 3 of the Act. Consequently, the SCN was issued to the respondent wherein it was required to respond in writing within fourteen (14) days, as well as to appear before the Commission Oil 02.08.2016 to avail the opportunity of being heard and place facts and materials in support of its contentions.
To examine an alleged abuse of dominant position, it is imperative to delineate the relevant market. In Pakistan, Credit Rating Agencies (CRAs) are regulated by the Securities and Exchange Commission of Pakistan (SECP) under the Credit Rating Companies Rules 1995, the Code of Conduct of Credit Rating Companies/Agencies 2014 and the Credit Rating Companies Regulation 2016. The Regulation 2(l)(b) of the Regulations provides that "credit rating means a process of evaluating the creditworthiness of a person which expresses its ability or willingness to meet financial obligations in full and on time." In the matter at hand, the assignment pertains to the credit rating of debt instruments ie 'Sukuk' of Rs 100 billion to be issued by NJHPC.
According to the SECP, there are two agencies ie PACRA and JCR are engaged in the business of credit rating in Pakistan. Therefore, the market for credit rating in Pakistan is highly concentrated. It is a duopoly and both PACRA and JCR are providing their services in all categories of ratings such as entity rating, instrument rating, infrastructure project rating, real estate grading, corporate governance rating and financial risk assessment.
The order said that from the antitrust/ competition law perspective, the Commission finds that in the credit rating market in Pakistan, debt issuers have no choice but to request rating either from PACRA or JCR in exchange for a fee. The relevant market is characterized by a high degree of concentration. Needless to reiterate, it is a duopoly and both Undertakings had been indulged in a parallel behaviour by cutting their prices in each successive round of bid, which finally has resulted into an exclusionary conduct by the Respondent. Pricing low to woo customers for a short while may not constitute abuse under the Act. However, pricing strategy or pricing below the average variable costs with no objective justifications are in themselves unequivocally predatory and abusive under the Act. Such conduct(s), if left unchecked, are likely to result in the exit of either of the competitors, resulting in anticompetitive monopolization and ultimately harm to the customers and consumers.
The Commission is of the considered opinion that the final bid submitted by the respondent reflects a predatory pricing strategy. The respondent has failed to provide a viable commercial sense or any objective justification in terms of efficiency gains for the same. The credit rating sought by NJHPC is essentially solicited for which it had called for a competitive bidding. The Commission finds no merit in the Respondent's argument that its quotation of Rs 1100 is a pro-bono and in the national interest.
Structurally speaking, "predatory bidding" is similar to "predatory pricing". Section 3 of the Act outlaws the conduct of a dominant undertaking which harms the competitive structure of the markets by resorting to a strategy which has the potential of foreclosing or eliminating the competitors or other economic partners ie customers or suppliers in the related markets. Such exclusionary conduct(s) ultimately weakens the competition and harm consumer welfare. If such practices are allowed on the grounds of a pro bono and national interest as having been put forward by JCR, the strategy may result in harm to competition with the elimination of specific undertaking, which is likely to trigger financial instability. Having said that, the Commission concludes that the Respondent has been engaged in predatory pricing in contravention of subsection 3 clause (f) read with subsection 3(1) and (2) of Section 3 of the Act, CCP order added.