The Competition Commission has passed an order on a show cause notice issued to Pakistan Vanaspati Manufacturers Association for contravening a number of provisions of the Competition Act 2010.
Pakistan Vanaspati Manufacturers Association is a representative association of all ghee and cooking oil manufacturers in Pakistan and is registered under the Trade Organisations Ordinance 2007. The association was accused of contravening:
- Section 3(3)(b), which prohibits abuse of dominant position through price discrimination by charging customers different prices for the same goods or services without objective justification;
- Section 4(1), which prohibits economic agents from entering into a prohibited agreement or making a decision in respect of the production, supply, distribution, acquisition or control of goods or the provision of services, with the object or effect of preventing, restricting or reducing competition within the relevant market; and
- Section 4(2)(a), which prohibits agreements to fix purchase or sale prices or impose other restrictive trading conditions with regard to the sale or distribution of goods or the provision of services.
The commission carried out a study of the ghee and cooking oil sector which indicated that manufacturers, acting collectively, did not fully synchronise their prices with changes in input prices. They acted independently of market forces and influenced market prices. For example, in the event of a significant drop in international prices of palm oil, the manufacturers would not pass on the reduction to consumers.
In light of the observations in the sector study report, the commission closely monitored the prices of ghee and cooking oil. It found that between December 2010 and February 2011 there were four parallel price hikes in different categories and brands of ghee or cooking oil. From media reports, the commission observed that the increase was often referred to a collective decision by all manufacturers (or by their association), resulting in a simultaneous change in price.
The commission decided to search the association's offices. Documents impounded during the search were studied in detail and the inquiry report recommended that proceedings be initiated under Section 30 of the act.
The principal issues were whether the association:
- had taken a collective decision on behalf of its members and facilitated collusion between them to fix the price of hydrogenated oil and cooking oil;
- had entered into an arrangement with transporters to fix the transportation rates for edible oils; and
- was discriminating between manufacturing units and commercial importers by charging different rates.
The commission considered submissions by the association.
On the issue of whether the association had made a decision with respect to price fixing, the association contended that it had acted merely in a recommendatory or advisory capacity; rather, the implementation by its members constituted a violation of Section 4 of the act. However, the commission held that correspondence and other documents exchanged by the association, its members and the government showed beyond doubt that the association had participated in negotiations with the government to determine the price of ghee and cooking oil on behalf of its members. It had then announced the agreed price to its members in its circulars. This role in effecting price fixing or a price reduction on a collective basis, negotiating an agreement for a specific period and advising or recommending that all members implement the resulting decision was held to violate Section 4.
On the issue of whether the association entered into an arrangement with transporters to fix transportation rates for edible oils, the association contended that it had been put under pressure to enter into the arrangement with the transporters' association; moreover, it argued that it had various economic justifications for the arrangement. However, on the basis of the facts and documents before it and the allegations made against the transporters' association, the commission considered that no determination could be made on the issue without an examination of all parties concerned. If an inquiry finds that the terms of the act were violated, the commission may proceed against the relevant parties.
On the issue of whether the association discriminated between its member manufacturing units and commercial importers by charging them different rates, it was established that Customs had designated the authority to verify invoices for imports of palm oil, crude palm oil, palm olein and other edible oils from Malaysia, Indonesia and other countries. The association argued that the verification of invoices was undertaken to discourage suspected under-invoicing, thereby helping the authorities to compute duties, taxes and other levies. The commission deemed the association to hold a dominant position in the market for invoice verification in respect of imports of edible oils, since it is the sole service provider designated to verify invoices for members that import edible oils, as well as for commercial importers that are not members. The association appeared to be charging two different prices for providing the invoice verification services, requiring commercial importers to pay more than its member manufacturers. The commission held that the mere fact that pricing classification was based on membership of the association did not demonstrate an objective justification for, or a legitimate commercial interest in, applying different prices for identical services. In this case the association was acting in its capacity as a sole service provider, not as an association acting for the benefit of its members alone. Therefore, the association failed to apply an objective criterion when charging different rates to its members and other commercial operators importing the same product (ie, edible oil). The disparity contravened Section 3(3)(b) of the act.
In respect of the price fixing under Section 4, the commission imposed a fine of PRs50 million which the association was required to deposit within 30 days of issuance of the order.
In respect of the violation of Section 3(3)(b), the commission directed the association to cease the practice of charging discriminatory rates forthwith and to implement similar rates, charges or fees for invoice verification from manufacturers/members and commercial importers/non-members. The association was further directed to report compliance within a period of 30 days of issuance of the order, subject to a fine of PRs1 million for each day's default.
For further information on this topic please contact Samiya Fikree or Ferzeen Bhadha at Vellani & Vellani by telephone (+92 21 3580 1000), fax (+92 21 3580 2120) or email ([email protected] or [email protected]).