FIFTH UNITED NATIONS CONFERENCE TO REVIEW ALL ASPECTS OF THE SET OF MULTILATERALLY AGREED EQUITABLE PRINCIPLES AND RULES FOR THE CONTROL OF RESTRICTIVE BUSINESS PRACTICES Antalya, Turkey, 14–18 November 2005
Cartels and Collusions in Developing Countries Submission by FRANCE
AYT.05-099
Cartels and Collusions in Developing Countries Frederic Jenny Chair OECD Competition Committee Professor of Economics, ESSEC, France
Fifth UN Conference to Review all Aspect Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices Antalya, 14 – 18 November 2005 1
Issues to be discussed 1) What are cartels and collusive practices ? 2) What is the role of trade associations and professional organizations in the formation of cartels ? 3) What are tacit agreements? 4) What is the cost of cartels for developing countries?
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1) What are cartels and collusive practices ?
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Elements of horizontal anticompetitive practices One or more of the following elements: - Price fixing - Profit rate (or price/cost margin) fixing - Market sharing - Restriction of output - Limitation of production capacity - Limitation of innovation - Limitation on advertising - Collective predatory practices to drive potential entrants or non cartel members out of business 4
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The Peruvian Chicken Price Fixing case
Indecopi’s most impressive case is the well-known 1997 Chicken Case,which found that Peruvian poultry firms and their association engaged in what amounted to price fixing by agreeing to prevent new entry, exclude some existing competitors, and limit the availability of live poultry for sale in order to raise or maintain prices. Total fines were initially set at slightly over USD 5 million, but were later reduced to slightly over USD 2 million.
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Fixing the price of bread in Peru Indecopi’s first important cartel case was the 1996 “Bread Case” 13 against wheat flour producers and their association. The association settled the case by agreeing not to make any more suggestions about the price of bread, and it therefore was not fined. However, eleven producers were found to have ended a price war through a price fixing agreement, and each was fined about USD 50,000. Private and public opponents of economic reform sought to have Indecopi abandon the case, even appealing to Pres. Fujimori, but the case went forward and helped establish Indecopi’s reputation of independence. 1) OECD, COMPETITION LAW AND POLICY IN PERU, A PEER REVIEW,2004 6
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Milk processors cartel case in Chile Two cartels among the same milk processors are being investigated. The first case began in 1997, the second in 2001.That both cases remain unresolved does not reflect well on efficiency of the litigation process. The gravamen of these complaints is that the processors have set the prices paid to milk producers too low. While these cases have been pending, the Antitrust Commission has regulated the processors’ pricing practices. In the first case, the Commission’s interim order is designed to prevent arbitrary price discrimination by requiring milk processors to have, and to adhere to, written, publicly available statements setting forth the terms and prices for their raw milk purchases. In the second case, the Commission at one point issued an interim order preventing members of the alleged buyers’ cartel from lowering the prices they will pay. That order lasted for several months. 7 _____ 1) OECD, COMPETITION LAW AND POLICY IN CHILE, A PEER REVIEW, April 2003
Fish processor cartel on Lake Victoria Kenya Panafrican News Agency, June 26, 2001
« Fish processors and exporters in the Lake Victoria region are being heavily criticised by other stakeholders for alledgedly exploiting fishermen. Fishermen, government officials and local government chiefs accuse the processors of forming cartels to control the industry. According to Szhabbir Ahmed Sharkeel, the mayor of the lakeside town of Kisumu, the fish processors are making a fortune and investing nothing back to improve the welfare of the people living around the lake. « These processors buy fish at Ksh 80 a kilo of fish and sell it at over Ksh 200 (about US$25 ) abroad » Sharkeel said. 8
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Price fixing by purchasers of cotton in Malawi From « Spine chilling experiences of anti-competitive practices in Malawi », CUTS and Consumer Association of Malawi (CAMA), 2003
« The National Economic Council expressed the concern that there are very few companies in the business of purchasing raw cotton from growers, one of which is the Agricultural Development and Marketing Corporation of Malawi ( ADMARC) and its Subsidiary David Whitehead and Sons and Cotton Ginners, these companies collude over the terms and prices they offer to farmers»
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Cement cartel in the Philippines
« The local cement cartel is dumping its produce in other countries and getting back their losses from us poor Filipinos who are hosting their operations here. We even succumbed to the cartel’s lobbying and raised the tariff on imported cement so that it will not be able to compete with the cartel’s cement. »
F.Jenny
Philipine Daily Enquirer, November 26 2001 10
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The Importance of Cement in the Philippines1 Cement is an essential input to the construction industry which is important for housing and other types of infrastructure. In the Philippines the construction industry employs 1.584 million workers while the cement industry employs less than 5000 workers Cement accounts for about 65% of the cost of low-cost homes.
1) Philippine Daily Inquirer, April 7 2002 11 F.Jenny
Cement Catrtel in Egypt: From Price Competition to Price Fixing (December 2002) 1 « Representatives of almost all local cement producers met last week and set a price range for cement of between LE167 and LE176 a ton. Just hours before the meeting, the price had fallen to an exceptionally low LE 125 a ton. The drop had caused serious worry among cement producers, pushing traded cement shares over the edge and rendering the sector less appealing to foreign investors. » « Cement company representatives discussed other solutions in the meeting. « We could agree on another plan to fix market share for different cement companies according to their production capacities », Said Maged Nezar, head of Suez Cement sales departement. While Nezar agrees that such agreements would violate market forces, he believes they would be better than the price wars (…) » 12
F.Jenny
1) Al Ahram, December 19 2002
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Domestic Bus Cartel: Jordan1 « (…) the governement allowed the licensing of three additional tour bus operators to share the market with the government owned tour bus company in 1994. The three entrants competed well at first due to an excellent tourist season. However when the market shrank (…) the three tour bus companies formed one booking agency to regulate the rental of buses and avoid what they termed « harmful competition ». As a result, tour operators could only deal with the marketing or booking entity, which allocated rental among the three companies according to their turn at set quotas and prices. Many tour operators complained that bus rental fees increased after the move and several claimed that they were forced to rent buses that were larger than their needs at full price » 1)
From « Competition Law and policy in Jordan » by Yusuf Mansur and Bashir Zu’bi , presented at the Expert group on Competition Laws and Policies: 13 Identification of Common Ground in ESCWA Member Countries Abu Dhabi 28-30 January 2002
Borneo: shipping cartel decreases productivity of industry1 « The Federation of Sabah Manufacturers (FSM) has taken to task eight shipping lines in Sabah for behaving like a cartel when imposing congestion surcharges on imports. (…) These shipping lines are imposing a congestion surharge of RM 150 for a 20-footer container and RM 300 for a 40-footer container. A vessel carries between 200-400 containers and this means they stand to earn RM 15,000-RM 20,000 more per trip.(…). It is infair to pass the cost of the surcharge on to consumers to absorb through manufacturers and traders, FSM said. FSM President Wong Ken Thau said the effect of the surcharge will no doubt increase production cost and render the finished products less competitive compared to those from Peninsular Malaysia and Sarawak. » 14 1) Borneo Bulletin , April 10 2001
F.Jenny
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Bank cartel in Papua New Guinea1 « The cost of starting or expanding a business in PNG is prohibitive. As a start, interests rates are among the highest in the region. Two years ago it was about 25% per annum. In the past year, it has fallen to about 18%, still very high by regional standards. Who is making all the money? Why, it’s the banks, of course. The spread, the difference between what the banks pay for its funds and the interest it charges its customers for loans is one of the highest in the world, about 13-14%. The banks are also notorious for providing substandard service. With only four banks operating in the country, its another comfortable cartel » 15
1) « Why PNG’s Economy is going nowhere » Canberra Times, April 18 2002
F.Jenny
2) What is the role of trade associations and professional organizations in the formation of cartels ?
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The Role of Trade Associations and Professional organizations Professional organizations are the conduit through which members of a profession meet and discuss issues of general common interest. They should not be allowed: -to condone discussions on prices and output of individual firms or -to impose collective rules on their members’ market strategies or -to monitor agreements between their members - to establish restrictive rules on who is allowed to enter the market. 17
Price Fixing and Trade Associations: the Case of Bakeries in Malawi From CUTS and Consumer Association of Malawi (CAMA), 2003
« The industry consists of a few giants, notably Press Bakeries and Portuguese Bakeries, and many small baking firms. The Master Bakers Association fixes prices, and hence there is no competition. The Ministry of Commerce and Industry in 1998 intervened in a bread boycott which the consumers Association of Malawi had called when the Bakers Association had increased and fixed the price of bread. The Ministry demanded the immediate dissolution of the cartel and since then we have noted competitive bread prices in the market ». 18
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Baker’s Cartel and Flour Monopoly: Trinidad and Tobago1 « (…) National Flour Mills ( NFM) plans to increase prices. (…) NFM which has over 90% of the local market share, has cited a global rise in wheat prices- by as much as 40 per cent- for the increase in flour prices » « The country’s bakers have responded ( through Tom Chin Fatt Director of the Bakers Association) that in the event of a price hike, they would be forced to pass on the increase to consumers » « Consumers Affairs Minister Camille Robinson-Regis said the proposed price hike for bread was inevitable; (…) as there was no price control on the commodity, there was nothing the Government could do ». _______ 19 The Daily Express,Trinidad and Tobago, January 7 and 8 2003
Frederic Jenny
Insurance cartel in Turkey A 2003 proceeding found an agreement among 11 insurance companies and a reinsurance facility to set prices for fire insurance, as well as a separate scheme orchestrated by the Turkish Union of Insurance Companies to set tariffs and conditions for various forms of insurance coverage. References to similar cases of cartel behavior in the insurance sector in Peru and in Kenya are in the paper in your folder.
1) OECD, COMPETITION LAW AND POLICY IN TURKEY, A PEER REVIEW,2005 20
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4) What are tacit agreements?
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Tacit Agreements 1) In concentrated industries in which there are only a few players, firms do not have to meet and sign an agreement to eliminate competition among them.They can easily communicate and agree to cooperate without actually meeting, for example through interviews of the CEO in the press or advertising or price signaling. 2) In a perfectly competitive market, all firms would charge the same (competitive) price and thus behave in a parallel way even though there would not be any anticompetitive behavior on their part. 3) Thus to establish the existence of a tacit anticompetitive agreement, competition authorities need more than the simple parallelism of behavior ( such as simultaneous increase in prices). They must establish that the parallel price or behavior would not 22 have been observed in the absence of a (tacit) agreement.
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The challenge of fighting cartels in small countries1 It is not surprising that there have been few challenges to true hard core cartels, which are hard to investigate and harder to prove. Moreover, Chilean officials and academics agree with the view expressed at the February 2003 meeting of the OECD Global Forum on Competition that in a small economy, the small business elite may be able to restrict output and increase price through tacit collusion (i.e., without reaching an explicit oral or written agreement). It was also suggested that if businesses had reached an explicit agreement, the small and closely knit business community would make it nearly impossible to find an executive willing to provide evidence against his co-conspirators, because doing so would mean never again being able tohold an executive position in Chile. _____ 23 2003 1) OECD, COMPETITION LAW AND POLICY IN CHILE, A PEER REVIEW, April
The challenge of fighting cartels in small countries1 Apparently, the Prosecutor’s Office has generally sought to prove price fixing through surveys showing otherwise unexplainable uniformity of prices or price movements. If there is no other plausible explanation, such uniformity can be persuasive evidence of price fixing. The Antitrust Commission has apparently found price fixing on the basis of such survey evidence. But in other cases the Commission has not accepted economic or other circumstantial evidence of an agreement. According to Professor Paredes, the timing and nature of the price movements and other circumstantial evidence in a 1993 case against Chile’s two most important pharmaceutical laboratories clearly showed a cartel agreement, but The Antitrust Commission rejected the case because of lack of “concrete”evidence that company representatives had actually reached an agreement.
24 _________ 1) OECD, COMPETITION LAW AND POLICY IN CHILE, A PEER REVIEW, April 2003
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Price fixing in the distribution of pharmaceutical products in Chile The Prosecutor’s Office succeeded in proving price fixing in a 1995 pharmacy case. Low prices by a new entrant set off a price war among the four pharmacies operating in Santiago. To end the price war, the four firms agreed to fix prices, and the Office was able to show this through price surveys and statements from some executives who had participated in the conspiracy. The three incumbent pharmacies were fined about US$ 80,000 each, while the new entrant was fined about half that amount because of its co-operation in providing evidence of the cartel.
_____ 25 1) OECD, COMPETITION LAW AND POLICY IN CHILE, A PEER REVIEW, April 2003
Price fixing in petroleum distribution in Chile An ongoing case involves gasoline (petrol) distribution. The market is very concentrated at the wholesale level and increasingly concentrated at the retail level as well. There is little price competition, and it is generally perceived that prices are quick to rise and slow to fall. The Prosecutor’s Office has initiated a proceeding against four firms without specifically alleging collusion. The case is now in discovery. By way of relief, the Office is seeking mainly structural remedies. For example, the Office is asking the Antitrust Commission to recommend that the government modify two laws that create entry barriers (one preventing the installation of new gas tanks in some areas and the other preventing all but the government-owned firm from laying pipelines). It is also seeking an order requiring a firm to grant access to its pipeline, and an order directingall four 26 firms not to agree to fix prices. _____
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Cartel in the distribution of oil in Kenya: erecting barriers to entry The Nation , Nairobi,21 December 1998
« Cartel-like behaviour by major oil companies has resulted in high retail prices of oil products in the country », the Permanent Secretary for Energy said at a Christmas party for staff of National Oil Corporation of Kenya. « Major oil companies with truck-loading facilities have refused to extend the hospitality to new entrants at a fee ». As a result, Mr. Crispus Mutitu said, « new entrants into the market were finding it difficult to set up business. "This undermines competition and promotes cartel-like behaviour, resulting in high retail prices."
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Tacit agreements in Turkish competition law With respect to horizontal agreements, the non-exclusive list of anticompetitive practices in Article 4 includes price fixing, market division, concerted control of outputs or inputs, boycotts, and entry deterrence. A unique feature of Article 4 is language providing that the existence of unlawful collusion among competitors may be inferred if market conduct or conditions are similar to those that would arise in a market where competition is artificially distorted. The Board’s approach to this presumption has been a topic of considerable controversy (…).
1) OECD 2005 28
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6) What is the cost of cartels for developing economies ?
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The Consequences of Transnational Anticompetitive Cartels for Developing Countries: Macro Assessment1(I) « In 1997, the latest year for which we have trade data, developing countries imported US$ 81.1 billion of goods from industries which have seen a price-fixing conspiracy during the 1990’s. These imports represented 6.7% of imports and 1.2% of GDP in developing countries.They represented an even larger fraction of trade for the poorest developing countries, for whom these sixteen products represent 8.8% of imports.The consumption impact appears to be the largest for upper middle income countries, for whom these imports represent 1.5% of GDP ». 1) Margaret Levenstein and Valerie Suslow « private International cartels And their Effects on Developing Countries », Background paper for the World Bank’s 30 Development report 2001
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Lessons from the Recent History of the Egytian Cement Industry The Egyptian consumption of cement in 2002 was 26,682,000 tons. The cement producers agreed to increase the price of cement from LE 125 to LE 171 ( on average), an increase of about LE 46 per ton. The annual cost to Egyptian consumers of this price fixing agreement is LE 1.227 billion or US$ 227,291,111 per year Note, for comparison purposes, that the annual budget of the competition authority of South Africa is US$ 9, 000,000. The enforcement activity of this authority has just been peer-reviewed in the OECD Competition Committee and considered to be quite satisfactory by international standards. Even if the annual cost of a competition authority in Egypt were twice the cost incurred in South Africa, this cost would be recouped even if the authority 31 F.Jenny did nothing more than stop the cement price cartel for one month
Conclusion Cartels and collusive practices either by multinational firms or by domestic firms are common in developing countries They can develop in a wide diversity of sectors: -basic staples (bread, chicken, meat, dairy products, beer, -pharmaceutical products), -services (insurance, banking, transportation, intermediate distribution, retail), -the construction sector (cement, building materials, procurement markets), -the industrial sector (chemical products, steel, aluminium, heavy electrical equipment etc….) They impose a large cost on developing countries (hurting consumers, farmers, localfirms, diminishing the competitivity of the economy etc). Anti cartel enforcement should therefore one of the priorities of 32 competition authorities in developing countries.
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Thank You
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