The Economic Times, May 23, 2006
By Pradeep S Mehta
While the sensex continues to take a big and unprecedented tumble, both cement and oil prices have been going north. A very peculiar situation, but what is the correlation.
Firstly, with the cement shares showing an improvement, the sensex had became a bit stable. Oil has not been a cause of the diving sensex. But, in future it will, and this is an area where the government can do little, unless it responds through some out of box thinking.
To tackle the cement issue, commerce and industry minister Kamal Nath cajoled and coaxed the cement cartel into lowering prices. What came out is but a consolation, that the manufacturers will offer a voluntary 5% discount on government purchases.
Admittedly, such advices are anachronistic with a modern liberalised economy, where the market forces determine the prices.
However, a modern liberalised economy doesn’t mean laissez faire. Therefore countries have competition and regulatory regimes to control restrictive and unfair business practices in the marketplace. In India, we are on the way to have a modern competition law, but when, is a million dollar question.
Probably world over, cement cartels have been hauled up and penalised where ever an effective competition regime exists. The situation in India is no different.
Cement industry has been unsuccessfully enquired into for possible cartelisation on few occasions under the extant competition law: the MRTP Act, 1969. Colluding firms do not record their agreements, which are always oral, and executed in good faith. On the other hand, courts do not accept evidence of implicit cartels based on parallel price movements.
One just has to look at the balance sheets of cement companies, whose prices have increased by almost 50% over the recent months, that they have been making far bigger profits than before.
In his parleys with the cement cartel, Mr Kamal Nath observed: “[l]imitless profiteering is not acceptable and that various studies conducted show that the increase in input prices is not commensurate with the extent of the cement price increase”.
The world’s largest cement company, Lafarge was fined by the EC in 2003 for participating in a cartel in the German cement market. In December 2002, the price of cement had fallen to an exceptionally low E£125 a tonne in Egypt. The drop had caused serious worry among the cement producers.
In response, almost all local cement producers met and set a price range for cement between E£167 and E£176 a tonne. There was an outcry, but no action could be taken as Egypt did not have a competition law. (Now it has one, which is under implementation). There are scores of such examples.
The suggested strategy of the government could be a wrong medicine for a recurring disease with associated side effects. Asking the Cement Manufacturers Association (CMA) to find measures to reduce the price is quite similar to the control era when government used to negotiate prices with them.
In fact the alleged collusive activities spearheaded by CMA could be a legacy of the erstwhile control regime, when CMA used to negotiate prices on behalf of its members.
Thus cement companies must behave responsibly in the interim while, the government must install a functional competition authority as soon as possible.
When our new competition regime becomes a reality, it could be expected to deal with the cement and hundreds of other cartels, but its ability to deal with the oil export cartel is rather remote.
At every possible competition event that I have participated in, people ask in absolute puzzlement about the Opec cartel and why governments cannot take action against it. The stock answer is that it is a sovereign act of governments and therefore another government cannot take action.
In the case of the cement cartel in India, when the government was unable to anything about it in the year 2000, the Builders Association of India launched a selective boycott, which succeeded.
This was not against any sovereign activity, but boycotts have been used successfully in many mercantile and political situations when the law fails. Our freedom movement is replete with such episodes. There is no sound reason that we cannot boycott oil on a symbolic basis, which will send a strong signal to oil exporters.
This article is not looking into the political economy of the oil industry, but is just about raising some issues, which have not been thought of so far. Not so long ago, former petroleum minister Mani Shankar Aiyer had floated the idea of forming a buyers’ cartel of net consuming countries, but that did not move far.
If India and China can jointly explore oil in third countries, I see no reason why they cannot join up to get better deals on oil purchases.
Everyone from IMF to ADB, and all the economic supremos in India, are crying hoarse on the possible deleterious effects of the oil fire, and how it will affect vulnerable economies adversely.
The Opec, in a passing-the-buck mode claims that it is toothless to tame high oil prices, because of supply-driven distortions in the face of a robust demand.
Opec could be sued for price-fixing in the US, if a radical bipartisan bill tabled in the US Congress is passed. The bill will also make oil company mergers in the US more difficult.
There are actually two intertwined issues here. First, that foreign crude oil producers are raising prices abnormally, and secondly that petroleum companies in the US have been reaping vulgar profits riding on the Opec action. What happens to the bill is yet to be seen, but the rationale behind the move is quite valid.
Like most jurisdictions, the new competition law in India has provisions for extra territorial jurisdiction, and it too can take on abusive cartel behaviour abroad. But when will the new law be implemented, and whether it will have the imagination to take on the Opec is a moot question.
After all, most foreign oil producers are government companies rather than the state itself. If most competition laws do not exempt government businesses from the purview of their competition law, I see no reason that competition authorities anywhere cannot sue oil companies abroad, whether in private or public sector. For this, we need a concerted global action.
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