Carving up Cartels

Author Name: Dr. Usman W. Chohan      21 Dec 2020     Covid-19/ Economy

The vitality of capitalism is premised on markets that do not exhibit distortionary behaviors, such as cartel behavior and mass tax evasion. Yet recent examples from two major Pakistani industries, sugar and cement, indicate that they are not acting in ways conducive to vibrant markets. Major players in the sugar industry have been found to conceal the majority of their sales for tax evasion purposes, while the cement industry has been found guilty of widespread cartel behavior.

For the cement industry, the Competition Commission (CCP) has found “hardcore evidence” that the industry, as represented by the All-Pakistan Cement Manufacturers Association (APCMA), has been acting as a cartel that fixes cement prices through unlawful processes. Such cartel behaviour has netted APCMA members gross profit jumps in the past cycle of anywhere between 100 percent and a wild 800 percent. According to the CCP, cement manufacturers conspired to raise prices to the Rs45-50 per bag range, thus gouging consumers for up to Rs40 billion in the past year alone. This cartel-scheming occurred despite two important government steps to facilitate the industry. First, the government removed lockdown restrictions on the construction industry to keep it going through the pandemic, which kept cement sales buoyant. Second, the government reduced the federal excise duty on cement by 25 percent, which the cement manufacturers pocketed rather than passing it on consumers. As such, this anti-competitive behaviour by a major industry occurred despite public support for their profitability.

This is a telling example, in a society where everyone is quick to blame the government of the day for every imaginable ill. Yet whenever the government proceeds to provide all manner of support to private entities, the public receives short shrift from the beneficiary industries. The recent CCP revelations in fact represent the second occasion on which it has busted cartel behaviour in the cement sector, and it has come on the back of revelations in the sugar sector of serial manipulation by industry barons as well. In the sugar industry’s case, aside from cartel behaviour discovered by the CCP, there has also been a major recent incidence of tax evasion revealed by the Large Taxpayers Office (LTO) of the Federal Board of Revenue (FBR). The LTO has found that nine major sugar mills had engaged in mass accounting gimmickry (reducing credit entries) to the tune of Rs220 billion. This amount would make up more than half (60 percent) of their topline sales as reported in their statements.

In both instances, it is positive to note that regulators at the FBR and CCP launched thorough investigations, and are now proceeding to take remedial measures (fines) against culprit companies. However, the track record of the sugar and cement industries suggests that such behaviour may well be repeated, despite the fact that it is entirely unnecessary. From an economic perspective, such cartel behaviour only would make sense in two scenarios: (1) the players are engaged in an illegal industry (e.g. drug cartels), or (2) there are no future avenues to market growth. The former is plainly untrue, since sugar and cement are entirely legal industries and are central to Pakistan’s economy. The latter is also untrue since there is considerable growth to be realised in future years.

At present, Pakistan’s cement per capita consumption is only half of the world average (around 200kg versus 520kg for the world). This suggests that there is more than ample opportunity for secular growth in the industry, without the need for cartel shenanigans. The CPEC megaproject and increased urbanisation already offer a strong case for the cement sector to play a clean game with robust prospects.

For sugar, by contrast, Pakistan’s per capita consumption of 25kg per person in fact exceeds the world average of 22kg, but it is marred by inequalities of consumption, and a rising middle class could balance the consumption across the country in a more equitable way. However, there is a strong case for reducing sugar consumption domestically, since high sugar consumption can trigger a variety of chronic diseases including diabetes, obesity, heart disease, liver problems, cognitive problems, and even some cancers. In the longer-run, the healthcare costs associated with treating such diseases far outweighs the profits of industry players. Yet the sugar cartel is likely to gouge our livers before the sugar they sell will ruin our health.

Taking a step back, a society must ask the larger question from such major economic sectors in terms of the risks that they pose to its security when they behave in such a manner. If mafias and cartels characterise our major industries, then they extract excessive profits at the expense of the public, even when public subsidies, infrastructure, and material support help them to function. The security risk that cartel behaviour poses rests in ballooning prices that cut into the purchasing power of ordinary citizens. As inflation rises, it erodes the economic power of a society. Inflation that is too high sends people into the streets. This is why cartels must be kept in check, for they weaken the public economy by expropriating profits for private interest.

The same threat emerges from tax evasion, which stifles public investment potential while enriching oligarchic interests. The tax proceeds which might have been used to strengthen government spending on public requirements instead end up in the hands of private power, and society is all the worse for it. A dynamic market economy depends on respect and fairness, without which it can easily fall prey to private schemes that sabotage the national interest. While Pakistan’s regulatory authorities are working hard to stem such acts, the onus lies with the owners of capital who are expropriating in excess. The government can provide them all the relief and support in the world, but they are wont to refuse even a slice of that gain to the consumer. That is when the public must carve up the cartels.

 

Dr. Usman W. Chohan is the Director for Economics and National Affairs at the Centre for Aerospace and Security Studies (CASS). The article was first published in The Nation. He can be reached at cass.thinkers@gmail.com.

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