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Last week, the Competition Commission imposed Rs 44 billion worth penalties on Pakistan Sugar Mills Association and its member firms for alleged anti-competitive behaviour. This is one of the largest fines imposed on any industry since CCP’s establishment, made only more unique by the fact that the Order is not unanimous; and the CCP chairperson had to cast the tie-breaking vote. Although BR Research claims no legal competence to comment on CCP’s jurisdiction, the economic theory cited in the lengthy order makes for a very interesting – and possibly contentious - reading.

The Order has flagged six issues which prima facie indicate collusive behaviour by PSMA and its members firms. However, BR Research will restrict its comment only to issues that concern economic theory and do not pertain to any forensic analysis (conducted or lack thereof). This column is the first in a three-part series which will separately examine each issue raised, the most significant of which is “exchange of highly sensitive commercial information by PSMA and its member firms”.

The Order argues that between 2012 and 2020, member firms shared mill-wise stock position with the association, highlighting instances where such information was shared on monthly and, in some cases, on fortnightly basis. The Order concludes that because mill-wise stock position constitutes “highly sensitive commercial information”, which prima facie has the “object or effect of distorting, preventing, restricting, or reducing competition”; thus, PSMA and its members acted in violation of Section 4(1) of the Competition Act.

Before commenting on the merits of the conclusion drawn, it must be noted that by circulating firm wise stock position among its member firms, PSMA has acted recklessly and invited barrage of scrutiny upon itself. Firm-wise stock position – particularly when shared on fortnightly or monthly basis - is never publicly available information, irrespective of whether any statutory requirement necessitates submission of the same to governmental agencies in aggregated or disaggregated form.

Moreover, at least 10 out of 55 mills fined by CCP are publicly listed entities, in effect making monthly stock position “material non-public information” for those firms, disclosure of which may qualify as violation of securities law (as, in principle, it places minority shareholders at a disadvantage). Reputed listed entities go to lengths to protect such proprietary information, even where its disclosure is required by law. SBP regulations, for example, require borrowers to submit monthly stock report to banks. However, listed companies often ensure that these reports only disclose Rupee value of inventory and obtain exemption from reporting volume/quantity.

Thus, even if Sugar Advisory Board or Office of Cane Commissioner required PSMA to collect such information, industry leadership should have demonstrated the foresight of putting audit controls or firewalls in place to avoid circulation of such information among member firms, especially not in disaggregated form. Without commenting on intent behind association’s actions, the lack of internal audit controls on flow of information reflects complete absence of operational risk management mechanisms in seth-run industries. But did such actions result in “distorting, preventing, reducing, or restricting competition?”

This is where CCP appears to have hastened to drawing conclusion. While information exchange (of stock position) is not contested by PSMA or its members, it is unclear why CCP believes stock position to be inherently price-sensitive (here, price-sensitivity refers to market price of sugar, not price of common stock of listed firms). Although the Order goes to lengths in citing case law from developed markets to establish that stock position is by definition “highly sensitive commercial information”, it fails to appreciate the unique dynamics of local sugar industry where firm-wise stock position may have little bearing on market price of sugar, in and of itself.

The local sugar industry runs crushing operations for 90-120 days on average every year. Since at least 2005, information regarding aggregate quantity of sugar produced every month – which takes places between November and April – is collected by PSMA and reported to Ministries of Industries and Production, which supplies these statistics to PBS. PBS, in turn, publishes the same as part of monthly Large-Scale Manufacturing Index, albeit with a minimum 40-day lag.

Although mills are operational for up to six months, on average 80 percent of production has historically taken place between Jan – March. Thus, aggregate sugar production during any season becomes publicly known latest by May. But how does that negate the materiality of firm-wise disaggregated monthly stock position shared over rest of the year?

Here is the kicker: PSMA, MNFS&R, Sugar Advisory Board, FIA inquiry report, and even CCP’s own enquiry have repeatedly insisted that Pakistan’s domestic per capita sugar consumption is estimated at 25kg. Using this figure in conjunction with seasonal sugar production as inputs, available national stock position on any given date becomes easily estimate-able, using only publicly available data. Over the past two years, BR Research has also regularly published analysis of nationwide sugar availability, and its estimates have been corroborated by stock positions included in CCP’s own inquiry.

Thus, in an industry such as sugar where production is concentrated in few months while demand is “assumed” to be fairly constant (and month-on-month consumption uniform during the course of a year), it is debatable whether disclosure of stock position in and of itself can “have the effect of distorting competition”. Bear in mind that because export of sugar is ordinarily prohibited, data concerning utilization of export quotas (when allowed) is published in real time on SBP website every day. Similarly, because TCP is usually responsible for import, import quotas are announced in advance and tender notices are published in print media. Thus, any information pertaining to foreign trade of sugar - and its impact on domestic stock position - is also readily available public information.

Similarly, no evidence has been produced to prove that PSMA or its members made decisions to restrict or withhold supply of sugar to domestic market as a result of their access to firm-wise stock position. Or that access to this “material” information allowed PSMA (or its members) to raise market prices. In fact, it could be argued that had information disclosure not been mandated under law, firms could be better off supplying disinformation viz own stock position to rivals to gain competitive advantage. Firms could also have an incentive to under-report own stock to create a semblance of shortfall, which may lead competitors to raise their asking price. However, CCP has made no such charge, instead claiming that the very act of information exchange is anti-competitive conduct by definition.

Thus, explanation for PSMA’s practice notwithstanding, concluding “collusion” simply based on exchange of information appears to be a giant leap of “assumption” on CCP’s part. Although PSMA still needs to explain the wisdom behind circulating this information to member firms – rather than restricting its reporting to relevant government authorities under law - and that too in disaggregated form!

As the dissenting opinion notes, “there is a need to conduct further analysis into various factors affecting the price discovery mechanism in sugar industry before concluding that firm-wise stock position is highly sensitive commercial information, sharing of which is alone sufficient to establish an anti-competitive conduct on ‘per se’ basis.” Thus, whether information exchange took place “with the object or effect of restricting competition” is in no way an indisputable assertion, which in all likelihood will find itself being strongly contested in appellate courts.

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