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CCP asks Punjab to lift ban on new sugar mills

June 11, 2012


The CCP noted that legal, statutory and regulatory barriers to entry were usually the result of lobbying by existing players. - File photo

ISLAMABAD: The Competition Commission of Pakistan (CCP) has taken notice of the ban on establishment of new sugar mills and expansion of existing ones, in force since December 2006, and asked the provincial government to lift the ban to allow a fair competition in the sector.

In a policy note, a copy of which was obtained by Dawn, the commission mandated to foster free competition in all spheres of commercial and economic activities observed that consumers stood to gain from greater competition.

“Competitive markets encourage more trade and lower prices. (They) provide greater choice and more employment. Let market forces of demand and supply prevail which will ensure competition.”

The policy note sent to the chief secretary and industries secretary of Punjab said that in a free market an entrepreneur must be allowed to decide whether the opportunity to set up any business enterprise, including a sugar mill, was worth availing.

“This will encourage manufacturers and service providers to be more efficient, to better respond to the needs of consumers, to innovate, to initiate and to venture, and consumers will benefit from better prices, quality goods and more choices.”

The CCP noted that legal, statutory and regulatory barriers to entry were usually the result of lobbying by existing players.

“We note that in economics and especially in the theory of competition, barriers to entry are obstacles to the path of an undertaking which wants to enter a given market. It may be any factor that makes it difficult for a new undertaking to enter a market.

“The term refers to hindrances that an undertaking may face while trying to gain entrance into a profession or a trade,” the commission said while defining the term ‘barrier’.

It said the object of erecting barriers to entry was to exclude new entrants to a market or sector of industry. These prospective entrants might bring with them efficiencies that could reduce costs related to production (by introducing novel technology or through better research and development) which in turn would enhance competition by forcing existing players to stay competitive. This threat can be neutralised by erecting barriers to entry for new players.

It said that if existing players had managed to exploit some of the economies of scale that were available to undertakings in a particular industry, they would have developed a cost advantage over potential entrants. They may use this advantage to cut prices if and when new players enter the market. “Although they will be moving away from short-run profit maximisation objectives, they will, however, inflict losses on new undertakings and thus protect their own market position in the long run.

Once a potential entrant is successfully barred from a market, existing players are free to revert to their prior anti-competitive conduct.”

The policy note said that capacity expansion restraint in the industrial sector might indirectly support the anti-competitive practices such as production curtailment and quota allocation and eventually manipulation of prices by the incumbent undertakings.

However, incentives of capacity expansion would help achieve economies of scales and scope which could result in better prices and quality for consumers.

It rejected the plea of the Punjab government that the ban was meant to protect cotton from the encroachment of sugarcane crop.

Commenting on the note, chairman of the All-Pakistan Sugar Mills Association Javed Kayani warned that the price of sugar would go up if more sugar mills were established.

“Ground realities are different from what the CCP thinks,” he remarked. He said the existing sugar mills had a capacity to produce five million tons of sugar, but only 3.1 million was being produced currently due to what he claimed non-availability of sugarcane.

He further claimed that a ‘cane war’ was already going on in the province and the mills were getting sugarcane at prices much higher than the support price announced by the government.

In his opinion, any addition to the existing capacity would serve to create chaos in the sector.