The Competition Commission of India (CCI) has fined 11 cement companies to the tune of Rs 6,300 crore, that is, 50 percent of their net profits for 2009-10 and 2010-11, for violation of provisions of the Competition Act, 2002 which deals with anti-competitive agreements including cartels. These companies include ACC, Ambuja Cements, Ultratech Cements and JK Cements.
The CCI passed the order pursuant to a complaint filed by the Builders Association of India (BAI), a lobby group of engineering and construction contractors, in June 2010 according to which the named cement companies under the platform provided by the Cement Manufacturer Association (CMA) have indulged directly and indirectly in the monopolistic and restrictive trade practices, in an effort to regulate and control the price of cement by limiting and restricting the production and supply of cement as against the available capacity of production.
Some time back, a news report stated that 11 airlines including British Airways were handed massive fines for running a price-fixing cartel on cargo flights. The EU competition commission said the cartel was “deplorable” and fined the companies 799 million euros (688.4 million pounds), following a four-year investigation. It was ruled that the firms illegally fixed surcharges for fuel and security in Europe between 1999 and 2006. The decision leaves the firms vulnerable to lawsuits from customers.
Another news report said that the Competition Commission of South Africa had named Apollo Tyres South Africa (Pty) Ltd, a subsidiary of India’s largest tyre maker in terms of sales by volume, for alleged involvement in a cartel that practised price-fixing.
The imperative question herein is what is a cartel and how does it impact us, the consumers. Cartel means an association of producers, sellers, distributors, traders or service providers who, by agreement among themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services (Section 2(c) of Competition Act, 2002).
Cartels are an age-old phenomena in our society and have co-existed with business ever since. Adam Smith said in his classic Wealth of Nations that people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
As they are agreements formed in secret primarily between firms in direct competition with one another in the relevant market, cartels create an unfavourable effect on the market and are against the ethos of free and fair competition.
The cartels institutionalise the system of sharing the prices, capacities and production among each other using the platform of their associations to limit the production and supplies and determine the prices of product in the market. The cartels have been alleged to control supplies and determine prices of products which are not only detrimental to consumers but also to the economy.
CCI in its order against the cement companies has said that it had “considered the parallel and coordinated behaviour of cement companies on price, dispatch and supplies in the market”. After its investigation, CCI had also found that the cement companies had underutilised available production capacity “to reduce supplies and raise prices in times of higher demand”.
The most common form of cartelisation is by way of forming the trade associations which bring down the cost of meetings and coordinating activities among firms in a market thereby facilitating the establishment and enforcement of a cartel.
Government policies, especially those that make prices readily available to all interested parties or those that divide markets into small segments, also facilitate cartel activity. Many of our government policies are framed and implemented to promote competition. However, there can be exceptions. One example observed in India is the policy and practice of state governments to give preference to local units in their procurement policy. Under such a policy, price and/or purchase preference is given to small scale sector units, with the objective of protecting and promoting such small scale sector units.
In the context of the overall development policy of the state, such policies may be desirable. However, concerns arise, when the policy creates conditions for formation of a cartel of local manufacturers, which is solely dependent on government’s patronage.
Another sector in India where cartelization has been encouraged due to faulty government policies is the distribution and marketing of liquor. In certain states, licences for liquor sale in large geographical areas are auctioned; competition is thereby restricted to a small number of players, who have the muscle power and the money to run the business. Thus, over a period of time, it leads to cartelization which in turn leads to a loss of government revenue and poor consumer choice. Some state governments have sought to tackle this collusive practice by allotting liquor trade licences through a lottery system. This has helped in keeping a check on collusive practices. Such licence systems have been found to be successful in states such as Madhya Pradesh, Uttar Pradesh, Maharashtra, West Bengal, Andhra Pradesh, Karnataka, and Kerala.
Another area of government procurement where there are cases of collusion is construction contracts. All the projects are generally taken up by government agencies through the medium of contractors. Except in some cases, the works are awarded through a system of (open and widely publicized) competitive bidding, which may be international or domestic. The system of competitive bidding is sound. A notice inviting tenders for a particular work is published in newspapers. Bids are opened in front of all the bidders, and the lowest bidder is determined through a transparent system and awarded the work. Be that as it may, this seemingly faultless system may not yield the desired results, because of cases where contractors collude and there is a tender mafia at work. As a result of these distortions, competition is subverted and the bidding system fails to produce efficient results. Additionally, there is now a trend towards awarding contracts in bigger packages, which leads to the exclusion of small contractors from bidding for the contract, thus restricting competition and providing large contractors with incentives to collude.
Whatever be the source for formation of cartels, the bid to curb its menace is the major challenge for CCI and the next sector contemplated to be in the focus of CCI is the tyre sector which can have a huge impact on its major players, viz., Apollo Tyres, JK Tyres, MRF and Ceat Tyres. What the future beholds for these companies is to be seen only with times.
However, for now the cement companies would have already finalized their appeals to be filed before the Competition Appellate Tribunal (COMPAT) or taken a decision to directly approach the Supreme Court considering the huge amount of penalty of Rs 6,300 crore.