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CCP takes fertilizer producers to task

June 27, 2012


"Collective dominance is also there as two groups, Fauji and Engro, hold over 84 per cent of total installed capacity of urea fertilizer industry," the CCP report stated. - File photo

KARACHI: Competition Commission of Pakistan (CCP) enquiry into price of 'locally manufactured urea fertilizer' in the country has come up with the conclusion that the hike of 86 per cent during the period from Dec 2010 to Dec 2011, from Rs850 per bag to Rs1,580 per bag "seems to be unjustified and unreasonable."

It said that the increase was unprecedented and highest during last 20 years.

The commission has issued show-cause notices to fertilizer producers and summoned a representative on July 12 to explain why an appropriate order may not be passed and a penalty for violation be not imposed under Sec 38 of the Competition Act.

In reply to queries by Dawn, the chairperson CCP, Ms Rahat Kaunain Hassan, argued that such actions do make a difference.

Her attention was drawn to similar steps earlier taken against cement cartels of which nothing tangible seemed to have emerged.

Ms Hassan stated that cement makers were a powerful lobby. Also that they had obtained stay orders from the courts.

She said that though errant groups, such as cement makers, may have escaped paying penalty, they and others against whom CCP had taken actions would sooner or later have to face the music.

Also, if a third party, consumers or farmers, were to seek remedy from courts against errant players, they could be facilitated by the CCP actions and enquiry reports.

For CCP, the chairperson said it was one institution that was 'documenting the economy' despite financial constraints.

For four years, the CCP budget had remained unchanged at Rs600 million with government grant at Rs200 million, coming in trickle. The results of CCP actions, she said, were visible to relevant persons even if they were not clear to all. She said that one positive outcome of CCP censor was that compliance with regulations had increased.

About remedies, the CCP chairperson said that one of them could be directing any one organisation that was getting too big to dominate, to restructure or divest part of its holdings. And she stressed: "It is vital that the matters of economic importance be prioritised in judicial reviews, in order to transfer the benefits to general public."

And now back to the enquiry report on fertilizer units, released by the CCP on Tuesday (dated Feb 25). The report stated that all the factors were taken into account, such as gas curtailment, input costs, subsidies, profitability analysis and government policies, after which it was thought that the undertaking "appeared to have indulged in the practice of unreasonable price increase."

The report observed: "Market of locally manufactured urea in Pakistan is a 'captive market' and all the undertakings in this relevant market have the ability to behave to an appreciable extent independent of its customers, consumers and competitors, irrespective of their market share."

In a notice it said: "Simultaneous and coherent increases in prices of urea (same rate at same time) in the absence of an objective justification by the industry players indicates common policy/economic linkages between urea producers and therefore, the fertilizer market also appears to satisfy the conditions for existence of 'collective dominance'.

The commission pointed out that the industry composition was of seven producers out of which four producers linked by two groups held 84 per cent of the total current capacity of the industry.

The break-up was: Fauji Fertilizer 32.7 per cent; Fauji Bin Qasim 8.8 per cent; Engro 36.4 per cent and Dawood Hercules 7.1 per cent.

The balance of 16 per cent was divided into three producers namely, Fatima, Pak Arab and Agritec.

"Collective dominance is also there as two groups, Fauji and Engro, hold over 84 per cent of total installed capacity of urea fertilizer industry," the CCP report stated.

The commission argued against a dozen excuses for raise in prices, including the main issue of gas shortages. The CCP stated that gas curtailment impacted only 27 per cent of the total capacity. However, the producers representing 73 per cent also increased prices by the same amount – indicating some formal or informal understanding for such action in a coherent fashion.

"Thus, there was no justification for unprecedented price hike. Gas curtailment hit only Pak Arab, Agriteck, Dawood Hercules and Engro new plant.

Profitability increased to unreasonable proportion in spite of gas curtailment," summed up the CCP enquiry report.