Introduction

The Competition Commission recently conducted an enquiry and started proceedings against the Pakistan Engineering Council, following a complaint from SPI Insurance Company Limited alleging that the council had restricted competition in the insurance market for public civil works. The commission found that council had violated Section 4 of the Competition Act 2010.

Facts

The bidding documents that the Pakistan Engineering Council prepared for the procurement of public sector engineering projects included provisions restricting the insurance cover of public civil works to AA-rated insurance companies. As a result, insurance companies without a AA rating were at a competitive disadvantage. Further, the bidding documents placed no credit-rating restrictions on banks providing bid and performance securities.

The main issue that the commission examined was whether the provisions regarding credit ratings in the bidding documents constituted a decision by an association of undertakings to prevent, restrict or reduce competition in the relevant market under Sections 4(1), 4(2)(a) and 4(2)(f) of the Competition Act.

Analysis

Pursuant to Section 4(1) of the Competition Act, agreements containing provisions that prevent, restrict or reduce competition in the relevant market are void unless they are exempted by the commission. Section 4(1) of the Competition Act reads as follows:

"4. Prohibited agreements.- (1) No undertaking or association of undertakings shall enter into any agreement or, in the case of an association of undertakings, shall make a decision in respect of the production, supply, distribution, acquisition or control of goods or the provision of services which have the object or effect of preventing, restricting or reducing competition within the relevant market unless exempted under section 5."

The test for establishing whether the Pakistan Engineering Council had violated Section 4 of the Competition Act included determining whether:

  • the council, as an association of undertakings, made a 'decision' (ie, came to an understanding between its members); and
  • the decision had anti-competitive aims or effects.

The bidding documents (including the disputed provisions) were formulated by the Pakistan Engineering Council Act, the Bye-laws Committee and were approved by its governing body. Therefore, the documents were formulated by Pakistan Engineering Council members and constituted a council 'decision'.

In order to determine whether the council's decision had anti-competitive aims or effects, the Competition Commission referred to the non-exhaustive list of anti-competitive agreements under Section 4(2) of the Competition Act. Section 4(2)(a) refers to "fixing the purchase or selling price or imposing any other restrictive trading conditions with regard to the sale or distribution of any goods or the provision of any service", while Section 4(2)(f) refers to the application of "dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a disadvantage".

Restrictive trading conditions

When examining whether the rating requirement amounted to restrictive trading conditions, the Competition Commission made the following observations:

  • At present, 41 non-life insurance companies are registered with the Securities and Exchange Commission of Pakistan, of which only five have a AA credit rating from the Pakistan Credit Rating Agency Limited (PACRA) or the Japan Credit Rating Agency (JCR). Limiting the provision of bid and performance securities to AA-rated insurance companies restricts the market for 37 insurance companies.
  • The rating requirement prevents a majority of market participants from competing. The loss of business to excluded insurance companies is not limited to the provision of bid and performance securities, as contractors prefer to use one insurance company to cater for all of their risk management needs. By being unable to provide bid and performance securities, these insurance companies are also excluded from providing services to construction and infrastructure projects.
  • The cumulative effect of such a loss has more far-reaching consequences than the inability to underwrite certain securities. Insurance companies that cannot attract business cannot be expected to improve their ratings with PACRA or the JCR.
  • The detrimental effect of the rating requirement extends to consumers, as the Pakistan Engineering Council reduces the choices available, thereby indirectly manipulating the costs of insurance in the relevant market. Further, since all federal and provincial departments and district governments must use the bidding documents for the procurement of engineering services, the increased cost of insurance may place a greater burden on the public exchequer.

As regards Section 4(2)(f) of the Competition Act, the Competition Commission observed that:

  • the bidding documents give the contractor a choice between obtaining a mobilisation advance, performance security and bid security from a listed bank or an insurance company;
  • banks must be registered with the State Bank of Pakistan, while insurance companies must be AA rated by PACRA or JCR. Further, PACRA and JCR also provide credit ratings for banks; however, no equivalent rating requirements have been stipulated for banks; and
  • a clear distinction exists between the treatment of banks and insurance companies. Banks and insurance companies must fulfil a multitude of regulatory requirements before they are considered to be financially viable and are licensed to operate.

Decision

The AA rating requirement led the Competition Commission to conclude that the Pakistan Engineering Council had violated Section 4(1) of the Competition Act by resorting to restrictive trading conditions under Section 4(2)(a) and applying dissimilar conditions to equivalent transactions under Section 4(2)(f) to prevent, reduce and restrict competition on the relevant market.

Penalties

The Competition Commission declared the AA rating requirement void and ordered the Pakistan Engineering Council to:

  • refrain from engaging in similar practices in future;
  • remove the rating requirement within 30 days; and
  • submit a compliance report to the commission in this regard.

A cumulative penalty of PRs30 million was also imposed for the violation of Section 4 of the Competition Act.

For further information on this topic please contact Sanaya Vachha at Vellani & Vellani by telephone (+92 21 3580 1000) or email (sanaya.vachha@vellani.com).

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