Price fixing, information sharing: CCP to start legal proceedings against PFMA

The Competition Commission of Pakistan (CCP) has busted a cartel within the wheat flour industry and will start legal proceedings against Pakistan Flour Mills Association (PFMA) for indulging in price fixing and sharing commercially sensitive information. Sources told Business Recorder here on Tuesday that the CCP appears to have unearthed a cartel in the wheat flour industry. The legal proceedings would be started on the recommendations of an inquiry conducted against the said association. The association seemed to be indulged in price fixing and sharing commercially sensitive information, which is a violation of Pakistan's Competition Law.
A recent inquiry completed by the anti-trust watchdog states: "It appears that the issues of pricing and quantities have been amongst the most important agenda items of the PFMA and its member undertakings in all of its executive committee meetings going as far back as 2011."
The inquiry report available with Business Recorder further states: "... PFMA has, on several counts from time to time and continuously, prima facie, violated Section 4 of the Competition Act 2010. It appears that the anti-competitive practices adopted by PFMA and endorsed by its member undertakings have violated Section 4(1) read with Section 4(2)(a) and Section 4(2)(b) of the Act. This may be viewed in light of competition law jurisprudence, which contemplates, inter alia, that even a single instance of price fixing or production limitation or distribution, is sufficient to constitute a violation of Section 4 of the Act."
According to the report, between 2015 and 2016, the Cartel and Trade Abuses (C&TA) Department of the Commission noticed several news items appearing in different newspapers suggesting an unusual hike in the prices of wheat flour on a regular basis across Pakistan. It says, "The Pakistan Flour Mills Association (PFMA) announced its first hike of Rs 10 for each 20kg bag, citing increasing wheat prices. Barely two days after it, was the second raise of Rs 10 and came the third increase - on the same pretext - taking the bag price up from Rs 710 to Rs 740." The inquiry says that the price of wheat flour continued to rise and though the PFMA called it "market correction," but commoners thought it was killing - taking food inflation to new highs."
The CCP inquiry further states that the PFMA has 1,171 members nationwide, comprising individual flour mills and has provincial chapters in all four provinces. The central office of PFMA is located in Lahore. The chairman rotates on an annual basis from each province and the Central Executive Committee makes the decisions that are then implemented by members of the association.
Seeing its role in price fixing, the CCP teams had also raided the office of PFMA in Lahore and impounded relevant documents.
The CCP also held a meeting with the PFMA representatives in December 2016 where the association informed that the provincial food departments (PFDs) set a maximum retail price for flour as per a formula for pricing set in 2008 according to which the base input costs are plugged in and a margin for the flour millers is set to reach a maximum ex-mill and retail price. The price is still being set through the same mechanism. The flour millers procure wheat from the open market, as it is cheaper than the government issued rate of wheat. When the prices increase in the open market as the supply depletes, the millers switch to the government issued wheat as the issue rate becomes cheaper than the open market. Currently, there is a daily 280,000 tons installed capacity of producing flour across the country, whereas the daily demand is 40,000 tons, so many mills are not in production. Furthermore, if the government does not stop other entrants, the industry will deteriorate further. The provincial district food controller is mandated to communicate the government set maximum prices to the flour mills.
Moreover, from the documents, both in print and electronic forms impounded during the search and inspection, the inquiry report concluded that PFMA had engaged in fixing and communicating the price of flour to its member millers in Punjab. The CCP also tracked SMS messages sent by PFMA management to its members conveying the prices at which wheat flour had to be sold. "Since at least 2011, PFMA has actively been engaged in communicating to its members, through SMS, the prices at which atta (wheat flour) is to be sold. In some of the SMSs, the PFMA was asking the millers to increase prices by a certain percentage/margin on different prices. In one such SMS, the vice chairman of PFMA was asking the millers of Sheikhupura and Lahore to increase the price by Rs 3 per 20kg bag of atta and add Rs 100 rupees in the price of maida," the report stated.
Moreover, the documents analyzed show that the executive committee of PFMA has regularly been meeting, exchanging information and strategic data on prices and quantities and discussing/deciding the price of atta between 2012 and 2016 and apparently acting as a medium to facilitate cooperation among millers to fix prices, which has the object and effect of preventing, restricting and reducing free competition in the relevant market.
The inquiry report concluded that regardless of the fact whether it is lower than the government prescribed maximum price or not, the observation that the association appears to be fixing prices for the various flour mills in the Punjab province, leaves no room for competition on price amongst the competing millers.
"It is not the functions of the association to coordinate and decide upon and communicate prices to its member undertakings. Such decisions and communications leave no room for the millers to set their own price and compete amongst the industry players on price. Therefore, it appears that the practice of PFMA in fixing price and possibly the quantities for its member millers is in violation of Section 4(1) read with Section 4(2) (a) and 4(2)(c) of the Act," it said.
The inquiry report has recommended initiating proceedings against PFMA and its member undertakings for prima facie violation of Section 4 of the Act under section 30. The association will be given full opportunity of hearings and the CCP bench will pass an order after that, it added.