Treasure Magazine

Treasure Magazine

CCP imposes penalties of Rs 44bn on PSMA, sugar mills

5 min read
sugar
A full four Member Bench of the Commission was constituted in the instant matter, comprising of, namely: Ms. Rahat Kaunain Hassan (Chairperson) and three Members: Ms. Shaista Bano, Ms. Bushra Naz Malik and Mr. Mujtaba Ahmad Lodhi.

ISLAMABAD: In a historic judgment, the Competition Commission of Pakistan (the “Commission”) passed an order against PSMA and 81 member mills for violations of Section 4 of the Competition Act, 2010 (the “Act”).

Briefly, by way of background, the Commission initiated an enquiry in order to analyse “possible anti-competitive activities in the sugar industry”. To gather evidence, search and inspections were carried out under Section 34 of the Act at two premises of PSMA and of one of the sugar mills.

The penalty imposed by the Commission, which is the highest till date, is approximately PKR 44 billion (approximately above USD 265 million) (based on calculation of 55 mills’ 2019 turnover figures, including consolidated turnover figures for same group mills, available with the Commission):

a)    PSMA has been imposed the maximum fixed penalty of PKR 75 million each for four contraventions, amounting to a total of PKR 300 million, having been found to be persistently and actively at the forefront of such collusive anti-competitive practice.

b)    5% of the respective 2019 annual turnover of each of the member undertakings, located in Sindh, KPK and Punjab for collectively deciding the quantum of exports invariably affecting/controlling the domestic supply of sugar in the relevant market for the period 2012 to 2020

c)     7% of the respective 2019 annual turnover of each of the member undertakings located in Punjab, for sharing and discussing sensitive commercial stock information with PSMA for the period 2012 to 2020.

d)    A fixed penalty of PKR 50 million on each of the 22 participating member undertakings in the 2010 USC Tender.

A full four Member Bench of the Commission was constituted in the instant matter, comprising of, namely: Ms. Rahat Kaunain Hassan (Chairperson) and three Members: Ms. Shaista Bano, Ms. Bushra Naz Malik and Mr. Mujtaba Ahmad Lodhi.

All four Members of the Commission are unanimous in their view and have arrived at unqualified consensus on background facts, formulation of issues, determination of preliminary/technical objections, the determination of the relevant market and the spill-over effect, and the determination of Issue VI (ceasing of sugarcane crushing) as addressed in the opinion of Ms. Rahat Kaunain Hassan and Mujtaba Ahmad Lodhi dated 6 August 2021.

However, two Members, Ms. Shaista Bano and Ms. Bushra Naz Malik, have recorded a different opinion dated 12 August 2021 on other Issues, thus, the Commission was faced with a deadlock situation. Therefore, having duly considered the overall purpose and intent of the Act, the attending public policy framework and consideration and the general public interest that the Act seeks to protect and enforce, the Chairperson exercised her second and casting vote as envisaged under the Act to break the deadlock. This is the first time the Commission has passed a split decision.

The Order disposes off Show Cause Notice (SCN) proceedings against PSMA and 84 sugar mills pursuant to the prima facie findings of the Enquiry Report. The hearings for 80 mills (5 mills chose not to appear or respond to the SCNs) spanned a considerable period, commencing on 7 January 2021 and concluding on 26 May 2021, where all concerned parties availed the opportunity of hearing on multiple occasions and submitting detailed written arguments in their defence.

As per the Commission’s majority decision, PSMA and the Punjab sugar mills have been found to have shared commercially sensitive stock information amongst themselves in violation of Section 4 of the Act. It was observed in the Order that given the peculiarities of the sugar sector (inter alia the cyclical production of sugar, the homogeneity of the product and the relative stability of demand) makes such stock information highly sensitive and critical. Such information would allow mills to assess and coordinate on future sales volumes and pricing strategies, effectively distorting competition in an already highly regulated market. Nothing on record showed that the Government/SAB required PSMA to collect the same. Punjab mills went even further to share and discuss the same between themselves through establishment of zonal sub-committees and creation of a Whatsapp group. The Commission also found that such information was not ‘publicly available’ given that it was mill-specific, shared frequently and in real-time/on fortnightly basis.

The majority decision of the Commission held that, through discussion of supplies and stock of sugar, PSMA and sugar mills collectively pre-determined export quantities, as evidenced by the minutes of PSMA’s annual general meetings on record, in violation of Section 4 of the Act. Although no violation was alleged on account of lobbying in the SCNs, the Commission has recognized that lobbying activities may be a mere guise for conducting anti-competitive activities, where in the instant matter, PSMA is clearly lobbying as a mechanism to pursue a favorable decision regarding quantum of exports and thereby controlling domestic supply of sugar that is likely to have a resultant impact on prices. The minutes of the SAB meetings evidenced that PSMA asserts an estimate for exportable surplus, which is based on higher estimates of stock available or sugar production figures.

With regard to the USC Tenders, the majority decision of the Commission found that PSMA has gone beyond its role as an association and interfered in the award of the tenders by fixing quantities amongst certain member mills in violation of Section 4 of the Act. The Commission took a lenient view for concerned mills in relation to the 2019 USC Tender as USC’s record showed that the tender was undersupplied and only awarded to 5 mills, who won the tender. However, for the 2010 USC Tender, the participating mills were found liable as PSMA could not have acted without their consent/agreement. The Commission was of the view that protecting or promoting competition does not solely mean ‘having the lowest price’ and that the choice to participate in a competitive bid and the submission of bid rates are all independent commercial decisions to be made by each individual sugar mill.

With regard to stoppage of crushing in the crushing season 2019-2020 by 15 Punjab mills on call of PSMA, the Commission, unanimously, found insufficient evidence to establish a contravention of Section 4 of the Act. Three mills were also found not liable for any contravention during the concerned period on account of their non-participation or being non-members of PSMA.

The Commission directed:

a)    The Mills whose turnover figures were not available with the Commission to provide the same.

b)    The Registrar to issue SCNs to all mills located in Sindh and KPK for contraventions on account of sharing commercially sensitive information.

c)     Remanded the matter in relation to Issue VI (ceasing crushing of sugarcane) to the Enquiry Committee for further probe.

d)    PSMA and the sugar mills to discontinue and stop the said violations forthwith and to deposit the penalty within 60 days of the issuance of the Order.

The Commission observes that Governmental interventions at any end makes it all the more important to preserve the latitude for competition that remains in the relevant market. The Commission is cognizant that it must engender best practices in the conduct of business and continue to encourage businesses to adopt behavioral change, so that not only do they individually achieve greater economic efficiency and benefit but their responsible business ethic passes on the benefits of the economic enterprise at the national level.