Breaking the cartel


Following widespread allegations of cartels and syndicates controlling markets for rice, sugar, edible oil, and other essentials, for a long time, the government has drafted the Competition Act 2010 to address anti-competitive practices in businesses. Saad Hammadi finds out how the government plans to address the issue and speculates how unethical businesses can still hoodwink the government initiative

The price of essential commodities has shot up manifold over the last decade, contributing to rising inflation in the country and eating away at people’s purchasing power capacity. The BNP-led government during their tenure from 2001-2006, the military-backed interim government between 2007 and 2008, as well as the present AL-led government, have all been faced with this acute problem, and despite many promises and some initiatives, the price of essential commodities is one thing all three governments have failed to control.

The accused in this case, as we have been told by all subsequent governments, are ‘cartels’ and ‘syndicates’. Apparently, traders, importers and other businessmen working in a particular area, form secret alliances and fix uniform prices for products, which do not reflect the production costs, thereby cramping customers for options and forcing them to pay their profiteering margins.

Ministers have openly threatened syndicates, however, we are yet to meet, or even see the face of at least one of these syndicates, nor have any government been able to curtail their influence to any measurable degree.

As part of their latest effort to rid the market of unfair practices, the government has recently drafted a competition law titled Competition Act 2010. The cabinet has, on October 4, approved the law which now awaits a review by the law ministry.

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Though governments have consistently failed to identify cartels and bring to them book, a simple comparison of prices of finished goods in the markets with that of raw materials, indicates clearly the presence of a large sum of money being siphoned off in the process.

For example, there are some nine crude oil importers who control the edible oil market in the country. As soon as prices of crude oil increase in the international market, the importers allegedly raise the prices of their existing stock, in the local market, even before purchasing the new shipments at higher prices.

‘Such market behaviour is existent owing to the presence of only a few market players, giving it the shape of an oligopoly’, says Dr Khondoker Golam Moazzem, senior research fellow with the Centre for Policy Dialogue.

During the first two weeks of September, the Nazirshail – one of the most consumed rice – in the retail market was selling between Tk 37 and Tk 45 a kilogramme. On September 15, the rice price increased by Tk 2 and was selling from Tk 39 to Tk 47 a kg. Five days later price once again increased by Tk 2 and stood at Tk 41 to Tk 49 a kg. As of October 7, the Nazirshail – one of the most consumed rice – in the retail market sells between Tk 42 and Tk 52 a kg.

While the price flared up several times within a span of one month, the retailers and wholesalers accused the mill traders for controlling the prices in the market by hoarding rice. The rice price has once again started to decline as the millers have started to release their hoarded rice ahead of receiving new stock of Aman rice in the next one and a half month.

There is no concrete evidence in any stage of the distribution channel as to who controls the market. However, the mill traders are currently accused of hoarding rice, paying advance payments to farmers, phoria (small agents) and bepari (paddy wholesalers) to reserve the yield.

Such trade practices lead to excessive pricing of some essential items, making the market for these items anti-competitive. The agents and traders, by pre-determining and operating in collusion, set artificial prices on most consumed essential commodities which do not reflect production costs at all. Economists claim that the price hike of essential commodities is owed to rising transportation costs and a lengthy distribution network. The necessity of some of the market players or intermediaries is widely debated.

As alleged cartels continue to exploit consumers concerned economists tell Xtra that all these practices are exercised through an unholy alliance with the government administration.

‘Circumstantial evidences in the past have indicated that there are very few market players, especially in the import of essential items like rice, sugar and oil,’ says Anu Muhammad, professor of economics at the Jahangirnagar University. ‘As a result, a few people are controlling the market, making the nature of the market oligopolic.’ Furthermore, it becomes difficult for new businesses to enter the market because of the influence exerted by existing market players, Anu points out.

‘We need more market players in order to keep the market competitive,’ says Moazzem adding that even the country’s hoarding policies are not effective.

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The drafted Competition Act 2010 lays down the definitions for anti-competitive agreements, abuse of dominant position and combinations, all of which will become punishable offences. The drafted law also sets down the provision for a Competition Commission to inquire into unfair practices in the market.

‘The competition policy will ensure competition for all and intervene into illegal merger or combination and abuse of dominant position,’ says Amitava Chakraborty, director general of the WTO Cell with the commerce ministry.

Since it is difficult to identify such unscrupulous trade, a commission is therefore required to identify the malpractices, he adds.

The commission shall inquire into all alleged anti-competitive practices as per procedures set out in the Act.

Section 5 of the competition law elaborates on the anti-competitive agreements, abuse of dominant position and combinations. Any agreement between enterprises or persons or formation of a cartel, that directly or indirectly determine purchase or sale prices or limits production, supply, markets, technical development, investment or provision of services, under this section is deemed illegal.

Section 6(2)(a) suggests there shall be an abuse of dominant position if an enterprise directly or indirectly, imposes unfair or discriminatory (i) condition in purchase or sale of goods or services or (ii) price in purchase or sale (including predatory price) of goods or services.

The dominant positions are abused in the market by way of setting barriers to other small market players. According to the Consumers Association of Bangladesh, sometimes the large scale importers are involved in purchasing the quantities of small scale importers so as to bar them from entering the market and facilitate competition.

Any combination that has resulted in significant adverse effect on competition in a market for goods or services inBangladeshis prohibited under section 7(1). If there is a merger between two companies that result in a size that can cause an adverse effect in the competition, this will be considered illegal, says Barrister ABM Hamidul Mishbah, a specialist in competition law.

A key element of the competition law is the formation of Bangladesh Competition Commission, which shall be composed of not more than five members. The commission shall be headed by a chairperson with the qualification of a judge having at 15 years’ experience in areas of business and economics.

The commission shall inquire into all alleged anti-competitive practices as per procedures set out in its regulations. According to section 18(2) the commission shall initiate inquiries on (i) receipt of a compliant; or (ii) on its own motion, subject to its reasonable belief that an undertaking is behaving in an anti-competitive manner in deterrence of the relevant market. The commission is empowered to initiate investigate in the fields in case it suspects of any kind of manipulation, says Mishbah.

In case of violation of any of the provisions under section 5 which explain anti-competitive behaviour, the commission is empowered to initially issue order to the accused to stop such practice. It can also penalise the accused if it deems fit, however, not more than 10 per cent of the average of the turnover for the last three preceding financial years.

The Act, according to Mishbah is very similar to the ones implemented in India and Pakistan. However, while the Act in European countries as well as in the subcontinent specifies the percentage of market share for a company that shall be considered dominant in an industry, our law does not have a scale to define the level of dominance.

In case of penalty, in other Acts abroad, there is financial penalty as well as jail sentences. But this has not been kept in our law.

While the draft Competition Act has been formulated to bring unscrupulous businessmen violating the principles of competition, to book, legal experts find the penalty provisions in the law as moderate.

‘Given the circumstance of the businessmen in our country and their tendency of doing corruption, the penalty is moderate,’ says Mishbah.

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While the competition law currently applies for all the sectors across the board, CPD’s Dr Moazzem is wary of its effectiveness in absence of authentic information related to individual companies and industries.

Firstly, there is no formal audit or maintenance of transaction, market share and such other data within the industries in the country. Often the data is informally arranged. Although the companies in the country have to disclose some information to different government agencies while making transactions, and some of them even maintain audits, the mechanism is relatively weak in the country. There is no coordination from one agency to another. ‘The competition commission should have access to all company related information from public and private agencies,’ he suggests.

Some of the markets are more complicated then they appear. For instance, to understand the level of hoarding in the market by each trader, it will only be possible to figure the quantity hoarded by a mill trader under his or her registered name.

However, the transaction made, is sometimes much larger than what may appear to the eyes. Some mill traders buy a large quantity in advance but this transaction cannot be traced. How much rice a mill trader owns or has stock of, is difficult to identify. It is happens through informal arrangements with farmers.

Such informal transactions are rampant in many sectors, says Moazzem. ‘Such practice among the small scale traders may not have an impact on the prices and therefore not affect competition. However, when the district stock dealers, better known as aratdars in Barisal, Dinajpur, Bogra, Jessore (whose share in the market is prominent), come into similar arrangements with the millers, then it has an impact on prices, thus affecting the competition.’

The commission has to prove such allegations. Unless there is authentic data throughout the chain of distribution, the detection of underhand practices become difficult. The mill traders have documents such as cash in credit (CC) loan for purchase of rice. Moazzem suggests that those data should be made available to the commission.

To contain the anti-competitive practices in the market, the trading systems have to be modernised, believes Faruque. Although the government has asked the traders to install cash registers and issue invoices, it is still not fully in practice.

However, amidst underhand trading practices between millers and paddy growers and similar arrangements in other sectors, it may be difficult to identify the offenders, fears Dr Selim Raihan, associate professor of economics at University of Dhaka.

Meanwhile, any provision of the government’s existing regulatory bodies that promotes anti-competitive practice will remain outside the purview of the commission and the competition law, said a source inside the commerce ministry. Economists doubt whether the commission will investigate into areas where the it may come into conflict with other government regulations.

Experts also doubt the ability of the commission, appointed by the government, to inquire into the activities of senior government officials who may be in collusion with cartels. ‘The government’s administrative patronage hands a big advantage to market players or those who control the market,’ says Anu.

Unlike the common civil laws, the cases of cyber crime and copyright are technical, and competition law is even more complicated, says Mishbah. ‘We do not have enough capacity to deal with it,’ he fears.

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The DO trick in trade

By Saad Hammadi

The government in its latest drive to breakdown syndicates has cancelled the delivery order (DO) system for procuring sugar and edible oil. The DO system is a process by which crude oil refiners issue order receipts to agents. The DO holders collect the delivery of the quantity ordered on the specific day.

The DO holders are one of the moles in the distribution channel who flare up the prices by undertaking unfair trading practices. They sell the receipts off to other smaller agents to make quick money. According to some economists, the delivery order holders are largely involved in making the market anti-competitive.

According to a study by the Bureau of Economic Research with the University of Dhaka titled ‘An assessment of competition in the edible oil market’, though the DO holders should normally sell these DOs to wholesalers, a practice of selling the DOs by the primary DO holders to smaller players has evolved.

The informal trading of DOs takes place at Moulvibazar in Dhaka and Khatunganj inChittagong. Transactions of DOs at Moulvibazar go on at a place known as the underground (basement) Gulbadan market.

Speculation seems to play a major role in the DO exchange floor. Both the large and the small DO holders sometimes hold on to the DOs for some time, speculating on future prices of edible oil. Fluctuations in the world prices of edible oil, which impact on local prices with varying lags, have encouraged the DO holders to engage in such practices to optimise on the risks associated with such fluctuations. It also gives them some market power to influence the prices through their DO holdings and DO transactions.

The study by the Bureau of Economic Research could not identify any cartel or collusive behaviour in the edible oil market. ‘It is difficult to identify cartel without refiner-level data,’ says M Helal Uddin, an assistant professor of the economics department with theUniversityofDhaka, also one of the two persons involved in the oil market study.

There is no DO system in the bottled oil market. ‘Then why does the price increase in the bottled market?’ he asks. The price factors are determined at the refiner level, says Helal.

This DO system has been a part of the supply chain for long. He fears that removing DO system may disrupt the supply chain.

However, some economists argue that so many change in hands of transaction for the DO, leads to higher price of edible oil in the market and thus make the market anti-competitive. ‘Such increase in the chain of distribution, adversely affects the product prices which the consumers have to put up with,’ says Dr Selim Raihan, an associate professor with the department of economics at theUniversityofDhaka.

The secretary of the commerce ministry, Ghulam Hossain says that the government will think about an alternative (distributorship or dealership) system, based on the report of a six-member committee formed to deal with this matter.

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Defining the limits

By Saad Hammadi

In absence of a clear specification of the quantity permissible for hoarding, it is difficult to understand how much of the quantity is illegally hoarded in any of the markets, say traders of different commodities. If the refiners’ capacity is 1,000 tonnes a day, there is no clear guideline specifying the quantity that they can stock, the traders point out.

‘We do not know how much a refiner can stock and for how many days,’ says MA Rouf Chowdhury, president of the Bangladesh Vegetable Oil Refiners and Vanaspati Manufacturers’ Association. He reasons that if there is a shortage in supply and demand is high for the product, the price will increase. ‘The government should concentrate on ensuring sufficient supply,’ says Chowdhury.

A section of market analysts allege that the edible oil is imported under many names to mask collusions. However, Chowdhury brushes aside the allegation saying, you cannot import crude oil unless you have a refinery. ‘Such allegations are baseless,’ he says.

TheEast Bengal(Food Stuff) Price Control and Anti-Hoarding Order 1953, was effective until 1991 when the government decided to repeal the order to facilitate the concept of a free market economy.

After 20 years of exercising the free market economy, the government believes it needs to have some tools to keep the prices of essential commodities that affect the larger population, within the purchasing power of the people.

The issue will be finalised in consultation with the stakeholders and experts, said food minister Abdur Razzaque, during a meeting last month which discussed about the need to formulate the law.

According to the earlier order, essential commodities include rice, wheat, refined sugar, edible oil, lentils, onion, powdered milk and baby milk.

The cancellation of the law allowed importers and traders to hoard commodities, create artificial crisis and increase prices of the products in the market.

The East Bengal(Food Stuff) Price Control and Anti-Hoarding Order 1953 allowed importers to hoard 20,000 tonnes of rice or wheat for 120 days. The food ministry this time proposed the reduction of this time period to 90 days.

The previous order allowed the wholesalers to stockpile 5,000 tonnes of rice or wheat for 45 days while retailers can keep 50 tonnes of the commodities for 30 days. The food ministry proposed the wholesale stock to be 2,000 tonnes for 45 days.

‘The government in the last two to three years has permitted a number of mill traders that have a capacity of nearly 100 to 150 tonnes,’ says Kowsar Alam Khan, vice president of Bangladesh Rice Merchants Association. This has created an excessive competition at the mill traders’ level. Thus, the millers have got the power to manipulate the market.

Kowsar is however, indifferent to the formulation of an anti-hoarding law. ‘The large wholesalers do not keep more than 500 tonne of rice anyways,’ he says.

‘It takes 45 days to ship in soybean oil fromBraziltoBangladesh,’ says Chowdhury. So when the government formulates an anti-hoarding law, it needs to be done in consultation with the business communities and experts, he believes. ‘The legislators do not have the expertise to do this,’ he says.

In case of soybean oil, at least 90 days of stock has to be allowed. ‘On the other hand for onions, it takes 15 days to import and therefore, the stocks for various commodities should be allowed for varying lengths,’ Chowdhury concludes.

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This article was first printed in Xtra, the weekend magazine of The New Age on October 22, 2010

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