CCP imposes penalty of Rs 8.64b on fertilizer companies

Attention: open in a new window. PDFPrintE-mail

ISLAMABAD - The Competition Commission of Pakistan (CCP) has imposed a penalty of Rs 8.64 billion on leading fertilizer manufacturing companies - Engro Fertilizer Limited (EFL) and Fauji Fertilizer Company Limited (FFC) - for abuse of their dominant position through unreasonable price increase. The Commission took notice on its own of a price increase carried out by all the urea manufacturers (‘undertakings’) in Pakistan in December 2010 that continued through 2011. The Commission constituted an Enquiry Committee to identify whether the subject price increases amounted to a contravention of the provisions of the Competition Act, 2010 (the “Act”). In this regard the Enquiry Report concluded on 25-06-2012, carried out an analysis of factors such as  gas curtailment, input costs, profit margins, subsidies, government policies etc. to reach at the conclusion that the undertakings found to be individually as well as collectively dominant, abused this position in carrying out unreasonable increase in prices in violation of Clause (a), Subsection (3) of Section 3 of the Act. All urea manufacturers were issued show cause notices (SCN) for individual and collective abuse of dominant position.

The Bench comprising the Chairperson Ms Rahat Kaunain Hassan and senior member Abdul Ghaffar, in its order, observed that in determining whether the undertakings were individually dominant in the urea market (the “relevant market”) particularly with respect to the aspect of unreasonable price increase, it was necessary to go one step ahead of establishing that the market was captive and determine on a case by case basis whether each undertaking had the market power to effect, influence or initiate a price change in the market. In this regard EFL had itself demonstrated by being the price initiator, that it was in fact dominant in the relevant market. With respect to FFC, it was thus found by the bench that having a much greater market share in the relevant market in terms of production and satisfying the test for market power provided for under Section 2(1)(e) of the Act, it was the only other undertaking in the relevant market with the ability to initiate price changes in the relevant market other than EFL. All the other undertakings were found by the bench to be lacking in the ability of being the agents of unreasonable price increases in the relevant market and were therefore not found to be individually dominant.

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 Of Pakistan 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. FFC was found to have more than doubled its profits from around Rs 11b in 2010 to Rs 22.5b in 2011. Its 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%). 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 factors, including the product involved, its significance for the economy and the quantum of subsidy availed by the FFC and EFL which amounted to Rs 11b and Rs 4.5b 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 3.14b for EFL and Rs 5.5b 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. Lastly the bench was of the considered view that a mechanism needs to be evolved by the Government of Pakistan so that the subsidy (if any) should be directed at the farmer who is the ultimate beneficiary of subsidy as per the objective of fertilizer policy 2001 to ensure availability of Urea at an affordable price.

 

Courtesy: The Nation


Forex open Market rates & comments Archive

Login Form