Allegations
Findings
Violation of Competition Act
Recommendations

The Competition Commission's inquiry committee has concluded its investigation under Section 37(2) of the Competition Act 2010 of a complaint filed by SPI Insurance Company Limited – formerly Saudi Pak Insurance Company Limited – against the Pakistan Engineering Council (PEC).

SPI provides insurance coverage in various sectors, including the industrial, financial, commercial and construction industries, and has been rated A- by the Pakistan Credit Rating Agency Limited (PACRA).

Allegations

In its complaint, SPI alleged that:

  • the PEC had restricted insurance coverage of public civil works to AA-rated insurers only, which placed other insurers – including SPI – at a competitive disadvantage;
  • the provisions of standard bidding documents were conflicting. Apart from the restrictions relating to bid security and performance security, other conditions of contract – such as those on the insurance of works, contractors' equipment and mobilisation advance – imposed no AA rating restrictions. Instead, the condition for insurance was "any other insurance company" or "an insurance company acceptable to the employer"; and
  • for contractors to secure bids against guarantees or bonds through banks or insurers, there was no criterion for an AA rating or any credit rating for banks, which involved the application of different conditions to equivalent transactions and placed other parties at a competitive disadvantage.

In response, the PEC stated that:

  • it was a statutory body constituted under the Pakistan Engineering Council Act 1976 (the PEC Act);
  • in accordance with the decision of the National Economic Council executive committee, the PEC had prepared the Standard Form of Bidding Documents (Civil Works) in June 2007;
  • the bidding document applied to all engineering works undertaken by federal or provincial departments, or organisations and district governments funded locally or through donor agencies;
  • the rationale behind imposing the AA rating requirement was to ascertain the strength of the companies and their capacity to perform, respond and ensure a satisfactory outcome; and
  • PACRA provided details of rating companies ranging from A to AAA, which were self-explanatory.

The inquiry committee approached the Insurance Association of Pakistan (IAP) to determine whether it had approached the PEC about the imposition of its AA rating requirement. IAP replied that it had raised the issue with the PEC and argued that all insurers which the Securities and Exchange Commission of Pakistan (SECP) has authorised to conduct insurance business should be able to issue the abovementioned guarantees regardless of their credit rating. It also noted that only four companies met the AA criterion. IAP also referred the matter to the SECP, which then referred it to its insurance reform committee, which later published its recommendations on the matter. IAP stated that it had requested another meeting with the PEC in November 2014, but despite repeated follow-ups the meeting did not take place.

Findings

After hearing the parties, the inquiry committee determined as follows:

  • The market under consideration was the market for bid and performance security for public-sector civil engineering services.
  • The PEC is a public body in terms of the PEC Act and an association of undertakings in terms of the Competition Act, as it is a statutory body that regulates engineering as well as a group of companies that perform a similar service (ie, the provision of engineering services).
  • As regards whether the bidding that the PEC had prepared was a decision by an association of undertakings, the inquiry committee referred to the Competition Commission's earlier decision in Price Fixing Directive Issued by The Institute of Chartered Accountants of Pakistan. Using the principle established therein, the committee determined that as all PEC management committee members and most of its governing body were undertakings – and the organisation was involved in governing its undertakings – the PEC could be considered an association of undertakings.
  • The lack of any specific statutory power or executive approval indicated that the PEC was acting in its capacity as a professional body regarding economic activity – and thus as an association of undertakings, rather than a regulatory authority – when it took the decision to impose the AA criterion on insurance companies.
  • Regarding whether the provisions of the Standard Form of Bidding Documents (Civil Works) relating to bid security and performance security were anti-competitive under Section 4 of the Competition Act, the inquiry committee observed that none of the international standards which the PEC purportedly followed when developing the bidding documents included conditions regarding the rating of insurance parties for engineering contracts. The inquiry committee opined that the AA rating criterion:
    • affected competition by reducing the choice available to public sector civil works engineering service providers regarding the procurement of bid and performance security;
    • restricted the vast majority of insurers from competing in the relevant market and thus increased the cost of procuring an insurance-based bid and performance security, leading to inefficiency in the market; and
    • put insurance companies with a credit rating of less than AA at a disadvantage to comparable banks. The inquiry committee argued that the PEC imposed no such credit rating restriction on banks for providing bid and performance guarantees. As both insurers and banks provided similar services, the restriction on the former put them at a disadvantage in terms of competing in the relevant market.
  • The inquiry committee stated that the PEC's contention that the aim of imposing the AA credit rating was to ensure that only insurers with the ability to meet their obligations provided bid and performance guarantees was unacceptable because:
    • the insurance sector is already regulated by the SECP, which has standards and procedures in place to guard against the risk-averse behaviour of insurers;
    • the publicly available credit rating of any insurer is a check on its ability to insure beyond its ability;
    • if the relevant public sector organisation were unsatisfied by the insurance cover provided, it could not reject the bids on its own without PEC intervention by looking at the insurer's third-party credit ratings, since by the PEC's own admission PACRA's ratings are self-explanatory; and
    • while credit ratings are available for banks, no such restriction was applied to them, which highlighted the weakness of the PEC's argument.
  • Therefore, in the inquiry committee's view, the only outcome of imposing the condition was its negative effect on competition in the relevant market.

Violation of Competition Act

The inquiry committee determined that Section 4 of the Competition Act had been violated because:

  • the restriction that the PEC had imposed on insurers without an AA rating was the decision of an association of undertakings with the aim and effect of preventing, restricting, reducing or distorting competition in the relevant market, thus violating Section 4(1) of the act;
  • the decision amounted to a restrictive trading condition which prima facie constituted a violation of Section 4(1) read with Section 4(2)(a) of the act; and
  • by allowing banks to provide guarantees without requiring them to hold a specific credit rating, the PEC imposed contradictory conditions on equivalent transactions, which was a prima facie violation of Section 4(1) read with Section 4(2) (f) of the act.

Recommendations

The inquiry committee recommended that proceedings be initiated against the PEC under Section 30 of the Competition Act.

For further information on this topic please contact Samiya Fikree or Ferzeen Bhadha at Vellani & Vellani by telephone (+92 21 3580 1000) or email (samiya.fikree@vellani.com or ferzeen.bhadha@vellani.com). The Vellani & Vellani website can be accessed at www.vellani.com.

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