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Unilateral Conduct Working Group Questionnaire

A. Objectives of unilateral conduct laws 1. With regard to your jurisdiction’s unilateral conduct rules – e.g., rules concerning the prohibition of abuse of dominance or monopolization - please state the objectives of these rules (e.g., consumer welfare, efficiency, protecting the competitive process), and identify the source from the following, as applicable:

a. Constitution b. Statutes c. Regulations d. Agency enforcement policy (e.g., guidelines, speeches) e. Case law f. Other (please identify)

Objectives: To protect economic well-being, growth, development and national interest of Pakistan in relation to the economic and financial stability. Relevant extract from the Law is as under:

“MONOPOLIES AND RESTRICTIVE TRADE PRACTICES (CONTROL AND PREVENTION) ORDINANCE, 1970

ORDINANCE NO. V OF 1970 1

(26th February, 1970)

(As amended upto 30th June, 1983) AN

ORDINANCE to provide for measures against undue concentration of economic power, growth of unreasonable monopoly power and unreasonably restrictive trade practices. WHEREAS the undue concentration of economic power, growth of unreasonable monopoly power and unreasonably restrictive trade practices are injurious to the economic well-being, growth and development of Pakistan; AND WHEREAS it is expedient to provide for measures against such concentration, growth and practices and for matters connected therewith or incidental thereto; AND WHEREAS the national interest of Pakistan in relation to the economic and financial stability of Pakistan requires Central legislation in the matter;”

1 Published in the Gazette of Pakistan Extra; dated Feb. 26, 1970 vide No. F. 24 (1)/ 70-Pub.

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Relevant sources: a, b and e. These are elaborated below. a: Constitution

Monopoly Control Authority (MCA) is a quasi judicial statutory organization. It was established in 1971 under the Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance, 1970 (MRTPO). This Law covers undue concentration of economic power, unreasonable monopoly power and unreasonably restrictive trade practices. While performing its functions, the MCA’s role complements that of the State under Articles 18 and 38(a) of the Constitution as under:

Article 18 of the Constitution:

“Subject to such qualifications, if any, as may be prescribed by law, every citizen shall have the right to enter upon any lawful profession or occupation, and to conduct any lawful trade or business: Provided that nothing in this Article shall prevent:- (a) the regulation of any trade or profession by a licensing system; or (b) the regulation of trade, commerce or industry in the interest of free competition therein; or (c) the carrying on, by the Federal Government or a Provincial Government, or by a corporation controlled by any such Government, of any trade, business, industry or service, to the exclusion, complete or partial, of other persons.”

Article 38 of the Constitution:

State is required to “secure the well-being of the people, irrespective of sex, caste, creed or race, by raising their standard of living, by preventing the concentration of wealth and means of production and distribution in the hands of a few to the detriment of general interest …”

b: Statute Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance, 1970. Extracts from the Law: “5. Circumstances constituting unreasonable monopoly power.—(1) Unreasonable monopoly power shall be deemed to have been brought about, maintained and continued if -

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(a) there has been created or maintained any such relationship between

two or more undertakings as makes them associated undertakings where they are competitors in the same market and together produce, supply, distribute or provide not less than 1

[one third] of the total goods or services in such market;

(b) there has been any acquisition by one person or undertaking of the stock or assets of any other person or undertaking, or any merger of undertakings, where the effect of the acquisition or merger is likely to create monopoly power or to substantially lessen competition in any market, including any acquisition which creates any such relationship as is referred to in clause (a);

(c) any loan is granted by a bank or insurance company to any of the

associated undertakings of amounts greater or on terms more favourable than for loans made available to other undertakings in comparable situations, or any loan is granted by a bank or insurance company to a person or undertaking not associated with it on the condition or understanding that the borrower or any of its associated undertakings will make any loan to a person or undertaking associated with the lender.

(2) No such relationship, acquisition, merger or loan as is referred to in sub-section (1) shall be deemed to have the effect of bringing about, maintaining or continuing unreasonable monopoly power if it is shown -

(a) that it contributes substantially to the efficiency of the production or distribution of goods or of the provision of services or to the promotion of technical progress or export of goods;

(b) that such efficiency or promotion could not reasonably have been achieved by means less restrictive of competition; and

(c) that the benefits of such efficiency or promotion clearly outweigh the

adverse effect of the absence or lessening of competition.” 2. Are non-competition influences (such as promotion of industrial policy or distributive welfare) incorporated in these objectives? Please describe any such influences.

1 Substituted for the words "twenty" percent by MARTP (Amend) Ordinance XXVI of 198O.

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Non-competition influences are not directly incorporated. However, when a particular situation is examined, the overall concept of public interest covers these as well. e. Case Law Selected instances from the case law are provided in the paragraphs to follow. Supply of information to the MCA: Caltex Oil (Pakistan) Ltd. Challenged Authority’s power to call for any information under Section 21 of the Law in a constitutional petition filed before the Sindh High Court. The petition was dismissed by the Court on the grounds that supplying the necessary information to the MCA would do no harm to the petitioner. (1976) Determination of value of assets: A few companies (namely AEG Telefunken Ltd., Sanaullah Wollen Mills Ltd., Indus Textile Mills Ltd and Mughal Tobaco Company Ltd.) went to the Sindh High Court against MCA’s order of converting them into public limited companies since their value of assets was more than the statutory limit. Their view was to only include fixed assets while calculating the value of assets not only the fixed assets but also the current assets should be taken into account “as the assets in their entirety” determines the economic power of an undertaking. 2. this judgment helped resolving the issue regarding the value of assets. (PLD 1987 S.C. 20). Defining public interest: In the Law the term “public interest” has not been defined. It has been left to the judgment of the MCA to decide what particular action of an undertaking is detrimental to public interest and in what way. In 1986, Rafhan Maize Products Company Ltd. went to the High Court against the decision of the MCA regarding the concentration of economic power. In the verdict of the Court, it is mentioned that though determination of public interest is subjective one, nevertheless it is decided on the basis of material that support the contention that making of a decision would serve ‘public interest’. Public interest does not necessarily imply the interest of shareholders. However, contravention of the provision of section 4(a)(i) and 4(a)(ii)does not lead to issuing of notice under section 11 for proposed order under section 12 of the Law which concerns dis-investment of shares. Regarding determination of public interest, it is important to determine that controlling shareholder, who is asked to divest, is not a foreign individual or company who has been allowed to invest on special terms or the order would not violate any public assurance given by Government of Pakistan to foreign

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investors. In another judgment on the case of M/s. Ilyas and Sons Ltd., the High Court observed that determination of the situation contravening to public interest and competition, rests only with the MCA. It is, however, not possible to precisely define the ‘public interest’ for the purposes of the Law as the situations may vary from one case to another. (Rafhan Maize Products Company Ltd. PLD 1986 -346; and for M/s. Ilyas and Sons Ltd :PLD 1976 Lahore-834) Plus factors:

In 2003, the MCA took suo moto notice of the national press against cement price increase in mid May. It decided in June, 2003 to conduct special enquiry under section 14(1) of the MRTPO. After due process of the law, it issued Orders in October/ November 2005 directing 18 cement factories to break the cartel and reduce cement prices. The cement factories did not report compliance, therefore, penalties were imposed as per law. The cement factories filed appeals in the High Courts of Sindh, Punjab and NWFP. Lahore High Court has recently accepted the appeals of 18 cement factories and set aside the decision of the MCA.

The Court said that the MCA had no authority to control the prices of cement, issuing the Order of reducing the price was beyond its jurisdiction. It is noted that the MCA issued show cause notices in 2003 but the order to reduce price was issued with considerable delay in 2005 stating that the Federal Government had given substantial relief in central excise duty in the 2003 budget, but the same had not been passed on to consumers because there was a cartel of cement companies to fix the prices and under-utilise the manufacturing capacity.

The Court ruled that if a mere change in prices was sufficient to spell out a cartel then the whole matter would be at the unfettered discretion and sweet will of the MCA and it could condemn a price movement or leave it undisturbed as a market condition. If the Authority was allowed to take action at any time there is a price change unacceptable to it (on the basis that such a price change can in and of itself establish a cartel), then there would essentially be no difference between the power exercised by the Authority under the Ordinance, and the power exercisable by the Federal Government under the Price Control and Prevention of Profiteering and Hoarding Act, 1977 to regulate prices. The Orders of MCA against the cement manufacturers were passed in a fundamental misconception of the powers and jurisdiction of the Authority and resulted in a complete transformation of it’s role from a regulator of competition to a regulator of prices without any warrant in law. The Court further went on to say that the Authority has purported to fix the price of cement for each manufacturer by requiring it to reduce its price, as prevailing on the date of the order by the amount specified in the order. This is nothing other than price fixation or regulation which is beyond the scope and remit of the Ordinance and indeed, is the very anti-thesis of that law, since the price is being fixed by the

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administrative body and not market conditions. The Court held that the purported action taken by the Authority is, unlawful and contrary to the provisions of Ordinance. The appeals were therefore, allowed and the impugned orders were set aside. (Judgment of Lahore High Court, Lahore in the matter of Dandot Cement Company Limited Vs. MCA alongwith similar Appeals filed by the undertakings under Section 20 of the MRTPO, 1970 against the orders of the MCA dated October 27, 2005.).

2. Are non-competition influences (such as promotion of industrial policy or distributive welfare) incorporated in these objectives? Please describe any such influences. Non-competition influences are not directly incorporated. However, when a particular situation is examined, the overall concept of public interest covers these as well. 3. If there are multiple objectives, how are these balanced or reconciled? The Law clearly spells out the situations relating to control and prevention of undue concentration of economic power, unreasonable monopoly power and restrictive trade practices. Any prima facie contravening situation is analysed with reference to criteria prescribed in the Law. 4. How has your jurisdiction balanced the risks associated with over-deterrence (deterring efficient, pro-competitive conduct as a result of excessive intervention) with the risks associated with under-deterrence (permitting anti-competitive conduct as a result of too little enforcement) in choosing its objectives for unilateral conduct rules? Is this choice affected by the nature of your economy? Pakistan’s Law dates back to 1970, since then there has been no major change. There is hardly any deterrence effect in the Law. For instance, the penalties are as low as US$ 1666 for non-compliance of the Orders of the MCA; there are no separate penalties for cartelization or abuse of dominance. Also ‘Single- firm’ monopolies are not covered in the Law. This particular exclusion can be attributed to the economic norms prevailing at the time when Law was promulgated i.e., in 1970s. Reasons included the economies of scales generated by single-unit monopolies, relatively small market size and investment base. 5. With regard to exemptions or exceptions to your laws specific to unilateral conduct (for example, for regulated sectors, government entities, purchasers, or exercise of intellectual property rights), please identify the exemption or exception and explain whether and how its goals differ from the objectives of your general

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unilateral conduct law and how the jurisdiction balances or reconciles these factors. The sectors regulated by the sector specific regulators and the government entities are exempted. There are not so many state-owned enterprises as a result of privatization. IPR issues are a relatively recent phenomena, the Law of 1970s does not address these in an elaborate manner. To elaborate, MCA has the power under the Law to make appropriate recommendations/ advice to the Government to prevent or eliminate undue concentration of economic power, unreasonable monopoly power or unreasonably restrictive trade practices, which, in its opinion exists in case of any undertaking or group of undertakings engaged in business activities in a sector regulated by a sector regulator. However, in practice certain difficulties are faced. For instance, Pakistan Telecommunication Authority (the sector regulator), referred a case of acquisition of Pak Tel by Instaphone (mobile telephone companies) for intervention of the MCA, but the telecommunication sector was not included in the definition of ‘services’ which were under the purview of MCA. Difficulties in obtaining necessary information are also faced, since such undertakings are not bound to provide information tot eh MCA. This situation hinders any systematic study leading to formulation of advice or recommendations. Relevant extract from the Law: Government of Pakistan amended MRTPO to provide freedom to certain undertakings of the energy sector that are in the phase of privatization, such as Karachi Electricity Supply Corporation and those under the purview of sectorial regulators e.g., National Electric Power Regulatory Authority, etc. Relevant amendments of the MRTPO (Amendment) Ordinance, 2002 are reproduced below:

“THE GAZETTE OF PAKISTAN

Islamabad, the 26th October, 2002

F.No. 2(1)/2002-Pub.—The following Ordinance promulgated by the President is hereby published for general information:-

ORDINANCE NO. CI OF 2002.

AN

ORDINANCE

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Further to amend the Monopolies and Restrictive Trade Practices (Control and

Prevention) Ordinance, 1970 WHEREAS it is expedient further to amend the Monopolies and Restrictive Trade Practices (Control and Prevention) ordinance, 1970, (V of 1970), for the purposes hereinafter appearing. AND WHEREAS the President is satisfied that circumstances exist which render it necessary to take immediate action; NOW, THEREFORE, in pursuance of the Proclamation of Emergency of the fourteenth day of October, 1999, and the Provisional Constitution (Amendment) Order No. 9 of 1999, and in exercise of all powers enabling him in that behalf, the President of the Islamic Republic of Pakistan is pleased to make and promulgate the following ordinance:- 1. Short title and commencement.- (1) This ordinance may be called the Monopolies and Restrictive Trade Practices (Control and Prevention) (Amendment) Ordinance, 2002. It shall come into force at once. 2. Amendment of section 25, Ordinance V of 1970. In the Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance, 1970, (V of 1970), in section 25. in clause (d), for the full stop at the end a comma and word, “or” shall be substituted; and after clause (d), amended as aforesaid, the following new clause shall be added, namely:- “(e) to the activity or functions of an undertaking or undertakings as are regulated, prescribed, determined or required to be approved by a Regulatory Authority. Explanation.- For the purposes of clause (e) the expression “Regulatory Authority” means- the National Electric Power Regulatory Authority established under the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997 (XL of 1997); the Pakistan Telecommunication Authority established under the Pakistan Telecommunication (Reorganization) Act, 1996 (XVII of 1996);

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the Oil and Gas Regulatory Authority established under the oil and Gas Regulatory Authority Ordinance, 2002 (XVII of 2002); and any other Regulatory Authority as the Federal Government may, by a notification in the official Gazette, specify.” 6. If the objectives of, or exemptions or exceptions to, your unilateral conduct rules are influenced by the nature of your economy (e.g., small, transition, or recently-liberalized), please explain. During the last two decade, the economy has been liberalized substantially with reference to privatization and de-regulation but the regulatory reform structure is yet evolving. For that matter, the objectives, exemptions and exceptions are the same as these were three decades ago regardless of changed economic norms at the national and international levels. 7. If the objectives of, or exemptions or exceptions to, your unilateral conduct rules have been substantially reviewed or revised, please describe any change and the reason. No, there has been no amendment in the statute book though it is strongly being realized to amend the Law. The reasons are inadequate legal provisions e.g., definitions, low penalties and inadequate Law enforcement powers provided to the MCA. 8. Are there institutional features (e.g., the possibility for a ministry to overrule competition agency decisions or the requirement the competition agency consult with other governmental agencies) that affect your agency’s ability to achieve the objectives of the unilateral conduct rules? If so, please explain. There is no such possibility, as far as Law is concerned, MCA is fully competent to give its judgments and opinions. But in practice this was observed once, when an outcome of cartelization (high price and restricted production) was dealt with by the Ministry of Industries with reference to its objective of improving supplies and stabilizing market price. This case is elaborated below:

• In October, 1998, the cement manufacturers simultaneously and uniformly increased prices (about Rs. 100/ bag).

• Under section 14 of the MRTPO, MCA initiated an enquiry in November 1998 to look into the possibility of cartelization.

• All Pakistan Cement Manufacturing Association (APCMA), individual units and the user associations were involved in the enquiry. They attributed the increase in price to the increase in cost of inputs, high taxation regime, and an effort by the industry to partly recover huge losses that it incurred due to

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low prices/ low demand in the preceding years. In their view, it was the only way to sustain units from closing down.

• MCA observed that:

o the input cost did not show comparable increase; o there was no increase in furnace oil and excise duty since June

1997; o the level of taxation was reduced from 47.5% to 40% (budget 1997). o the price of furnace oil was reduced by Rs.800/tonne in June, 1998.

there was only a marginal increase in electricity charges in late 1997;

o except for units which were paying very high financial charges, cost of cement production in all other cases was lower than the prices charged prior to the price hike of February.

• MCA concluded that: o the price increase was to unreasonably increase profit margins and

was not an economic compulsion; o the manufacturers, under tacit agreement increased the price

prevailing in the market in early October i.e., Rs 135/bag to Rs.235/ bag in mid October, 1998; and

o this increase was through cartel formation as per section 6(1)(a). • MCA passed an Order on February 20, 1999 as per section 12(c); • Cement manufacturers were asked to break the cartel, reverse the cement

price to pre-cartel level, to remove the restriction on their capacity utilization and to operate at the optimum level. MCA further directed to utilize full production capacity that was worked out to lower the overhead expenses thus lowering the overall cost.

• MCA worked out that the cement consumers, during the cartel period, paid about Rs. four billion by way of additional amount to the manufacturers and Govt. (as excise duty) consequent to the price increase of Rs. 100 per bag.

• The cement manufacturers continued to charge a high price, ignoring the judgment of the MCA. Therefore, MCA imposed penalties. The undertakings appealed against decision of the MCA in the High Court.

• The Economic Coordination Committee of the Cabinet (ECC) directed the Ministry of Industries to ensure that cement manufacturers sell their cement at an indicative price of less than Rs.200 per bag. Also, M/O Industries recommended to lower down cement prices by decreasing excise duty.

• On the basis of ECC’s decision, the High court disposed off the appeals. Thus in reality the MCA’s decision was set aside.

• At the price level of Rs.200 per bag, the approximate benefit accruing to the consumers comes out to be about Rs.6 billion.

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9. Please describe any difficulties that your jurisdiction has experienced with its objectives for unilateral conduct rules. Based on your experience, what, if any, suggestions (including selection of other objectives) would you have for your or other jurisdictions, and why?

Difficulties faced relate generally to inadequate legal and enforcement provisions. On the basis of experience from the investigation of the cartels and other anti-competitive practices, the following major problems are identified:

(1). Insufficient Information Received from Stakeholders An attempt is made to gather all information necessary to process a case.

The problem, often faced is that the required information, at times, is not available from the stakeholders themselves. They are not able to provide readily the evidence that they are paying higher prices with effective dates or shortages of products. The principal issue is the lack of general awareness about the law. Consumer’s societies have a low profile. Therefore, MCA does not have the sources within the general public who may come forward with evidence about the violation of the Law. Consequently, in almost all the cases, it had to move sou-moto and collect the evidence from the information supplied by the accused party.

(2). Under-Developed/ Inadequate Data Sources

As in other developing countries, the data sources in Pakistan are few

and far between, therefore, MCA, at times has to rely on the data provided by the relevant parties. An attempt, of course, is made to cross-check the same from other sources, as is a practice in other competition regimes - this may be in the form of discussions with ‘whistle blowers’, competitors, major customers, etc. This sort of oral evidence, however, could only serve as a guideline/basis to move in a particular direction, rather than solid evidence for prosecution.

(3). Legal Limitations Some of the legal limitations faced by the MCA are as under:

o Definition of ‘services” is quite limited, therefore, major areas are outside the Authority’s jurisdiction under section 25 of MRTPO, 1970. Besides, the definition of undertaking does not cover the ‘association of manufacturers’ which are the prime suspect in cartel cases.

o The situations of ‘single unit’ monopolies are not regulated by the Law.

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o Though the MCA can conduct enquiries for the purposes of the Law ‘raids’ or ‘leniency programs’ to get quick evidence are not provided in the legal instruments.

o The penalties which MCA can impose in case of non-compliance with its orders are very low i.e., a one time penalty upto Rs.100,000 and Rs. 10,000 per day in case of continuous default. These penalties are quite low as compared to other countries. In addition to this the penalty is same for first time, second time violation of law. Current practice clearly shows that there are companies, which repeatedly breach the rules of fair competition, as in case of cement sector in Pakistan, despite penalties, because they consider them worth the trouble.

o There is no provision in the MRTPO, 1970 that gives right of appeal to MCA against High Court’s decision.

(4). Resource and Structural Constraints

MCA’s budget only covers pay/allowances of employees and other

necessary expenses. No provision for research, investigation, travel or training is provided in the budget. Besides, low number of professionals, their capacity is also a major area of concern

Regarding choice of objectives:

Objective, infact needs to be maintenance and promotion of competition in order ultimately to enhance economic development and consumer welfare. To point out a few instance; the objectives of the Law are not so comprehensive, which in turn has affected the coverage of the Law for instance, as pointed out above, the definition of services is limited, single- firm monopolies are excluded, the groups of manufacturers are not covered in the definition of ‘undertaking.’

B. Assessment of Dominance/Substantial Market Power

1. Please provide a brief description of single-firm dominance/substantial market power as defined in the provisions of your jurisdiction’s general competition law, relevant agency policy statements (e.g. guidelines, speeches) and/or case law that pertain to unilateral conduct. As appropriate, please also explain whether and how your agency categorizes different levels of dominance/substantial market power (e.g., “super dominance”).

Relevant extracts from the Law:

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Definition: “Section 2(1)g) - "monopoly power" means the ability of one or more sellers in a market to set non-competitive prices or restrict output without losing a substantial share of the market or to exclude others from any part of that market;” It may be noted that the definition covers the ability of one or more sellers but in the operative clause mentioned below, the single seller is not covered. There is a need to have ‘association’ between the undertakings to fall in this clause. The Law defines the term as under: “Section 2(1) (b)-“associated undertakings" means any two or more undertakings interconnected with each other in the following manner, namely:—

(i) if a person who is the owner or a partner 1[ ....] of an

undertaking or who directly or indirectly holds or controls shares carrying not less than 2[thirty] per cent of the voting power in such undertaking, is also the owner or a partner3 [........] of another undertaking or, directly or indirectly, holds or controls shares carrying not less then4 [thirty] percent of the voting power in that undertaking; 5

[or]

(ii) if the undertakings are under common management or common control or one is the subsidiary of another;”

“5. Circumstances constituting unreasonable monopoly power.—(1) Unreasonable monopoly power shall be deemed to have been brought about, maintained and continued if - (a) there has been created or maintained any such relationship between two or more undertakings as makes them associated undertakings where they are competitors in the same market and together produce, supply, distribute or provide not less than 1 [one third] of the total goods or services in such market; (b) there has been any acquisition by one person or undertaking of the stock or assets of any other person or undertaking, or any merger of undertakings, where

1 The comma and words, “officer or director” omitted by MARTP (Amedt.) Ordinance, 1980( No. XXVI of I 1980). 2. Substituted for the word " twenty ", ibid. 3 Omitted, ibid. 4 Substituted for the word “twenty ", ibid. 5 Inserted, ibid. 1 Substituted for the words "twenty" percent by MARTP (Amend) Ordinance XXVI of 198O.

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the effect of the acquisition or merger is likely to create monopoly power or to substantially lessen competition in any market, including any acquisition which creates any such relationship as is referred to in clause (a); (c) any loan is granted by a bank or insurance company to any of the associated undertakings of amounts greater or on terms more favourable than for loans made available to other undertakings in comparable situations, or any loan is granted by a bank or insurance company to a person or undertaking not associated with it on the condition or understanding that the borrower or any of its associated undertakings will make any loan to a person or undertaking associated with the lender. (2) No such relationship, acquisition, merger or loan as is referred to in sub-section (1) shall be deemed to have the effect of bringing about, maintaining or continuing unreasonable monopoly power if it is shown - (a) that it contributes substantially to the efficiency of the production or distribution of goods or of the provision of services or to the promotion of technical progress or export of goods; (b) that such efficiency or promotion could not reasonably have been achieved by means less restrictive of competition; and (c) that the benefits of such efficiency or promotion clearly outweigh the adverse effect of the absence or lessening of competition.”

2. Under your general competition law governing unilateral conduct, at which stage(s) can your competition agency intervene against potentially abusive unilateral conduct? - If dominance/substantial market power is present

yes/no - Acquisition or creation of dominance/substantial market power yes/no - Attempt to acquire or create dominance/substantial market power yes/no

- Other (please identify)

Why did your jurisdiction choose these stages?

3. Does your law contain or do you use a market share threshold at which you presume single-firm dominance/substantial market power and/ or as a “safe harbour”? yes/no If so, please respond as applicable:

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- What is the market share level of the dominance presumption?_____33.33 per cent - Is the dominance presumption rebuttable? yes/no - What is the market share level of the safe harbour? No such concept of safe harbour exists in the Law with reference to the market share. - Is the safe harbour absolute (i.e., dominance/substantial market power cannot be found below the specified percentage level)? yes/no - What is the legal basis of the presumption statute /case law/guidelines - What is the legal basis for the safe harbor? statute /case law/guidelines - NA 4. Does your competition law enable the competition agency to intervene against unilateral conduct at a level below the dominance/substantial market power threshold ? yes/no

If so, please explain why and in which circumstances.

Relevant extract from the Law: Section 2(1)(g):

"monopoly power" means the ability of one or more sellers in a market to set non-competitive prices or restrict output without losing a substantial share of the market or to exclude others from any part of that market;

Section 5(1)(b)

“there has been any acquisition by one person or undertaking of the stock or assets of any other person or undertaking, or any merger of undertakings, where the effect of the acquisition or merger is likely to create monopoly power or to substantially lessen competition in any market, including any acquisition which creates any such relationship as is referred to in clause (a);”

5. Does your jurisdiction’s analysis of dominance/substantial market power first require that a relevant product and geographic market be defined? yes/no

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6. Which of the following criteria do you use for the assessment of single-firm dominance/substantial market power?6

- Market share of the firm and its competitors yes/no - Market position and market behavior of competitors yes/no - Durability of market power yes/no - Barriers to entry or expansion yes/no

- Economies of scale and scope/network effects yes/no - Buyer power yes/no - Access to upstream markets/vertical integration yes/no - Access to essential facilities yes/no - Market maturity/vitality yes/no - Financial resources of the firm and its competitors yes/no - Profits of the firm yes/no - High prices (at absolute or comparative level) yes/no

Please specify any other criteria that you use to assess single-firm dominance/substantial market power: The above covers it all.

It is noted here that single-firm dominance is not covered in the substantive provisions of the Law.

7. Of the criteria that you use to assess single-firm dominance/substantial market power, which are the most important criteria? Market share of the firm and its competitors. 8. Please explain how your authority evaluates each of the criteria that you use, and also how it weighs the different factors. As per response of 6 above. 9. How do you evaluate the competitive significance, if any, of intellectual property rights (patents, trademarks, copyrights, etc.) in assessing dominance/substantial market power?

6 The answer “yes” should be provided if you use this criterion (amongst other criteria) at least in some of your cases. Conversely, the answer “no” should be provided if in practice you have not ever used that criterion.

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IPR issues are a relatively recent phenomena, the Law of 1970s does not address these in an elaborate manner. Nevertheless, the evaluation criterion remains that of market share. Is intellectual property presumed to create dominance/substantial market power in your jurisdiction? yes/no MCA has not yet dealt with any such case. 10. Does the assessment of dominance/substantial market power differ in a small or isolated economy from the assessment in a large or integrated economy? For example, might dominance in small markets be presumed at lower (or higher) levels of market share than in other jurisdictions? Do free trade agreements alter the assessment of dominance/substantial market power? If so, please explain why. [NB: Jurisdictions that do not consider themselves “small” economies are welcome to skip this question.] Yes, the assessment of dominance/substantial market power differs in a small or isolated economy from the assessment in a large or integrated economy, for instance considering the market size and resources available for investment. 11. Please explain briefly the link between the definition and assessment of dominance/substantial market power in your jurisdiction and the objectives of your unilateral conduct laws.

Definition and substantive provision – single firm monopoly case as covered above in responses of Part B.

C. State-created Monopolies

Throughout this section of the questionnaire, the term “state-created monopolies” refers to firms that are dominant or that have substantial market power due to state-imposed restraints of competition. In most cases, these firms were (or are still) owned by the state and the state did not (or still does not) allow for any private competitor. In an effort to avoid duplication with the ICN’s previous work, this project does not address the interface with network access or price-cap regulation implemented by a sector-specific regulator. Accordingly, we request that you do not focus on sectors that are/were regarded as “natural monopolies” and that are now subject to such regulation. Therefore, please answer the questions excluding references to the telecoms, energy, water, and railways sectors.

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I. State-created Monopolies 1. What are the main sectors of your country in which state-created monopolies exist? Please describe important sector examples, including whether these monopolies are state-owned7, state-controlled8, state-enabled or facilitated9, recently privatized and/or liberalized, regional monopolies,10

etc.

An overview of the Privatisation Process:

Privatisation efforts spurred after the creation of Privatisation Commission (PC)

on January 22, 1991. Although the PC mandate was initially restricted to

industrial transactions, by 1993 it had expanded to also include Power, Oil &

Gas, Transport (aviation, railways, ports and shipping), Telecommunications and

Banking and Insurance. During January 1991 to June 2005 the Commission

completed 151 transactions for Rs 177.328 billion.

During the financial year 2005-2006, the Commission has successfully completed

privatisation of 8 transactions including privatisation of PTCL, CTI, KESC, UBL

(IPO), United Industries Limited (additional shares), Bolan Textile Mills Ltd.,

Mustehkam Cement and Pak American Fertilizers for Rs.196.231 billion, which is

356% higher than the previous year. The Commission, during the year, has

remitted Rs. 97.259 billion to the Government of Pakistan for debt retirement and

poverty alleviation program and Rs. 24.540 billion to entities whose shares were

sold.

The Commission during period from July 2006 to August 12, 2006, has

successfully completed privatisation of 2 transactions amounting to Rs. 4.472

7 Those undertakings that are 100% owned by the State. 8 The control belongs to the State, without taking into consideration the amount of the % of the State share. 9 E.g. where a monopoly exists due to exclusive rights granted by the state or due to state-imposed restraints of competition. 10 Includes public/private undertakings that are granted exclusive rights within a certain region.

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billion on account of privatisation of Lasbella Texitle Mills and Javedan Cement.

The sources of the proceeds have been shown in the figure 1.

During the period upto August 12, 2006, 71% of the proceeds received were transferred to the Federal Government, 20% was returned to legal entities whose shares were sold, 3% was utilized to pay off EAD loan of Pak American, 3% were used for restructuring expenses associated largely with golden handshakes and rehabilitation, and 2% was used for PC’s privatisation-related expenditures (Figure 2).

While almost all the transactions were settled in local currency, about 65% of the proceeds have been received in foreign exchange from transactions pertaining to 2nd tranche of PTCL vouchers, Kot Addu Power Plant (KAPCO), Six Oil & Gas Concessions, Habib Credit & Exchange Bank, United Bank Limited, Habib Bank Limited, KESC, and sale of 26% shares of PTCL. The table 2 provides the number of transactions privatised and the Annex provides detail of each transaction.

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Table 2 : Number of privatised transactions

(Rupees

Million )

1991 to Jun 2005

Jul 2005 to Jun 2006

Jul 2006 to August 12,

2006

To Date Total

Sector

No.

Amount

No.

Amount

No.

Amount

No.

Amount

Banking 7 41,023 7 41,023

Capital Market Transaction 17 30,644 1 1,040 18

31,684

Energy 13 37,320 1 20,240 1 14 57,560

Telecom 2 30,558 2 155,500 4 186,058

Automobile 7 1,102 7 1,102

Cement 15 8,655 1 3,205 1 4,316 17 16,176

Chemical / Fertilizer 21 24,355 1 16,110 22

40,465

Engineering 7 183 7 183

Ghee Mills 22 838 1 8 1 23 846

Rice / Roti Plants 23 328 23 328

Textile 2 87 1 128 1 156 4

371

Newspapers 5 270 5 270

Tourism 4 1,805 4 1,805

Others 6 160 6 160

Total 151 177,328 8 196,231 2 4,472 161 378,031

Recent Progress

During the period from November 2002 to August 12, 2006 privatisation proceeds of Rs. 284.902 billion have been realized from 35 transactions. The Privatisation Commission in order to ensure participation of the small investors and benefit from the privatisation programme also sold GOP shareholding in NBP, POL, ARL, DG Khan Cement, OGDCL, SSGC, PIA, PPL, UBL and KAPCO through Capital Market. Some of the major transactions completed are:

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1) Sale of 51% of GOP stake in HBL for Rs. 22.409 billion

2) Sale of 26% shares of PTCL for Rs. 155.0 billion

3) Sale of GOP share holding in KESC for Rs. 20.240 billion

4) Sale of shares of Pakarab Fertilizers Rs. 14.125 billion

5) Sale of shares of National Refinery Ltd for Rs. 16.415billion

6) Sale of GOP shareholding in POL, ARL and D.G Khan Cement through Stock Exchange for Rs. 5.862 billion.

7) Divestment of 30% shares of Bank Al-Falah for Rs. 620million.

8) Sale of Management Rights of ICP-SEMF for Rs. 787million

9) Divestment of 13.2% shares of National Bank of Pakistan for Rs. 1.386 billion

10) Sale of Associated Cement, Rohri for Rs. 255 million

11) Sale of 5% ordinary shares of Oil & Gas Development Company Limited (OGDCL) through Capital Market for Rs. 6.851 billion.

12) Sale of Thatta Cement for Rs. 794 million

13) Sale of Mustehkam Cement Limited for Rs. 3,205 million

14) Sale of 10% shares of Sui Southern Gas Limited for Rs.1.734 billion throughCapital Market

15) Sale of shares of Kohinoor Oil Mills Limited for Rs. 80.7million

16) Sale of 5.8% shares of PIA for Rs. 1.1 billion through Capital Market

17) Sale of 15% shares of Pakistan Petroleum Limited (PPL) through Capital Market for Rs. 5.5 billion

18) Sale of the Falleti’s Hotel, Lahore for Rs. 1.211 billion

19) 10% additional shares of Kohat Cement for Rs. 40.8 million

20) Sale of 20% shares of Kot Addu Power Company through Capital Market for Rs. 4.604 billion

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21) Sale of 4.22% shares of UBL through Capital Market for Rs. 1.040 billion

22) Sale of Carrier Telephone Industries for Rs. 500.0 million

23 Sale of International Advertising (Pvt) Limited for Rs. 5.117 million

24) Sale of Bolan Textile Mills for Rs. 128.0 million

25) Additional shares of United Industries for Rs. 7.7 million

26) Sale of 85.29% shares of Mustehkam Cement Limited Rs. 3.205 billion

27) Sale of 100% shares of Pak American Fertilizer Rs. 16.110 billion

28) Sale of shares of Lasbella Textile Mills for Rs. 156.0 million

29) Sale of shares of Javedan Cement Limited for Rs. 4,316 million

To conclude, it is noted that the monopolistic role of state enterprises in trade has been done away with. The Cotton Export Corporation and the Rice Export Corporation have been wound up. The private sector is now actively involved in the export of these products. The Government of Pakistan is firmly committed to privatization of state-owned enterprises. A Privatization Ordinance has been promulgated to provide comfort to investors and to ensure transparency in the sale process. The Privatization Commission is currently focusing on the sale of some large companies where the buyer would assume management control. Plans are also under way to carry out several smaller capital market transactions. Some of the main public sector enterprises offered for privatization till June 2003 include: Banking and financial institutions (e.g. Habib Bank Ltd, United Bank Ltd, National Investment Trust, etc.), Oil and Gas Companies (Pakistan State Oil, Pakistan Petroleum Ltd, Sui Southern Co, Sui Northern Pipeline Ltd), Insurance (State Life Insurance Corporation, Pakistan Reinsurance Co. Ltd), Telecommunications (Pakistan Telecommunications Co. Ltd, Telephone Industries of Pakistan), Power (Karachi Electric Supply Corporation) and various other industrial units (cement, vegetable oil, fertilizer, etc.). Till 1995 the PC carried out 66 privatization transactions but by end 2000 the number rose to 106. The units privatized so far include commercial banks, automobile plants, cement manufacturing plants, chemical and fertilizer plants, power plants, and engineering units besides assorted smaller units. During the period from November 2002 to August 12, 2006 privatisation proceeds of Rs. 284.902 billion were realized from 35 transactions.

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2. Please discuss the objectives behind the creation and/or perpetuation of state-created monopolies by providing specific examples from your jurisdiction. If the rationale for retaining the state-created monopoly was challenged (for example as a condition of membership in an international organization or to join an economic alliance or regional trade agreement) or has changed over time, please explain.11

-- 3. Are there any legal or practical restrictions or difficulties faced by your competition agency in antitrust enforcement against state-created monopolies? If yes, please provide details and/or sample cases, for example:

- Legal restrictions/scope of application: Is there a "state action defense" (i.e. competition law does not apply to state entities or state acts) or any special exemptions/exceptions for the state-created monopolies from the general antitrust law in your jurisdiction?

- Practical restrictions/difficulties: Please describe any practical

restrictions that you have faced or may face in antitrust enforcement against state-created monopolies, such as instructions that your agency may receive from the government, political pressure, or overcoming vested interests.

As covered in response to 5 above.

4. How does the assessment of dominance/substantial market power of state-created monopolies differ from other dominance/substantial market power cases?

NA

II. Privatization and Liberalization Process and the Advocacy Role of Competition Agencies

5. Please briefly describe the ongoing or past privatization and liberalization process in your country. Is there a specific legal framework for the privatization in your country (e.g. a specific privatization law) ? yes, there is a Privatisation Ordinance, 1991. An overview is provided in Section C above. Investment Ordinance is also attached.

11 The relevant information for answering questions 2, 5 and 6 may not readily be available within your agency. In this case, it is not necessary for you to conduct a research effort.

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6. What are the objectives of your government in the privatization and liberalization of state-created monopolies (for example, raising competition/consumer welfare, maximizing revenue from the sale, etc.)? As covered in response to 5 above. Objectives of privatization are noted below. Extract from the Law:

GOVERNMENT OF PAKISTAN MINISTRY OF LAW, JUSTICE, HUMAN RIGHTS AND PARLIAMENTARY

AFFAIRS (LAW, JUSTICE AND HUMAN RIGHTS DIVISION)

F.No.2(1)/2000-Pub. Islamabad, the 28th September,2000

The following Ordinance made by the President

is hereby published for general information

ORDINANCE NO;LII OF 2000

An Ordinance to provide for the establishment of the Privatisation Commission

WHEREAS it is expedient to provide for the establishment of the Privatisation Commission for implementing the privatisation policy of the Federal Government and to

provide for matters connected therewith or incidental thereto; WHEREAS the Federal Government is carrying out a programme of privatisation;

WHEREAS it is expedient to provide for a fair and transparent process of privatisation to secure transactions resulting therefrom;

WHEREAS it is expedient to provide for the utilization of the proceeds of privatisation for the retirement of Federal Government debt and for poverty alleviation

WHEREAS it is expedient to provide for an expeditious mechanism to resolve all disputes relating to privatisation;

WHEREAS the National Assembly and the Senate stand suspended in pursuance of the Proclamation of Emergency of the fourteenth day of October, 1999, and the Provisional

Constitution Order No. 1 of 1999; AND WHEREAS the President is satisfied that circumstances exist which render it

necessary to take immediate action” 7. Is competition law applicable to privatization transactions (e.g. approval of interested bidders or the successful bidder under its merger control powers)? No binding consultation is required under the Law. However, while taking notice of any such situation, MCA can make recommendations for suitable action. Also its advice can be obtained on such matters by the parties involved. In 2004-2005, the Cabinet Committee on Privatisation, in the process of prequalification of

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bidders for privatization of Pakarab Fertilizer (Pvt.) Ltd. (a state owned unit) directed the Privatisation Commission (PC) to seek MCA’s advice before deciding prequalification of Fauji Fertilizer Company Limited (FFCL), a potential bidder for the said unit. On the direction of the PC, FFCL sought MCA’s advice. MCA’s view was that the said transaction would result into unreasonable monopoly power of the FFCL. Therefore, this company was excluded from the bidding. Apart from this, PC was apprised about competition aspects relating to other bidders that may also constitute monopolistic practice as per MRTPO. Relevant extract from the Law:

“CHAPTER IV

FUNCTIONS AND POWERS OF THE AUTHORITY

10. Functions of the Authority:—The functions of the Authority shall be—

(a) ………;

(b) to conduct enquiries into the general economic conditions of the

country with particular reference to the concentration of economic

power and the existence or growth of monopoly power and

restrictive trade practices:

(c) to conduct such enquiry into the affairs of any undertaking or

individual as may be necessary for the purposes of this Ordinance;

(d) to give advice to persons or undertakings asking for the same as to

whether any actions proposed to be taken by such person or

undertaking are consistent with the provisions of this Ordinance, or

any rules or orders made thereunder;

(e) to make recommendations to the Federal Government or a

Provincial Government or to the appropriate authority or officer of

such Government for suitable governmental actions to prevent or

eliminate undue concentration of economic power, unreasonable

monopoly power or unreasonably restrictive trade practices: and

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(f) to make such orders and to do all such things as are necessary for

carrying out the purposes of this Ordinance.”

8. Please summarize the advocacy role of your agency in the privatization and liberalization of state-created monopolies, including as applicable:

- What are the legal instruments used by your agency for that purpose? To what extent are other government entities obliged or encouraged to seek the competition agency’s opinion on or approval of privatization and/or liberalization proposals?

- To what extent does the advocacy role of your agency have impact on privatization and liberalization? Please provide examples of successes or failures if available.

As per response of 7 above.

D. General 1. From among the following, how would you characterize your jurisdiction: developed / developing / transitioning? Transitioning 2. Please provide English-language citations to or summaries or excerpts of legislative history, leading judicial or agency decisions, or articles that explain your jurisdiction’s choice of its unilateral conduct law objectives, its definition and assessment of dominance/substantial market power and/or its approach to state-created monopolies and privatization. Legislative history: Briefly, the MCA’s experience can be divided into three distinct periods:

• 1971-80, during which businesses were nationalized and state monopolies were created;

• 1981-94, during which MCA became a wing of the Corporate Law Authority (CLA). This was because of the limited scope for the anti-monopoly law considering state monopolies’ exemption from the Law; and

• 1995 onwards, during which MCA worked as an autonomous quasi judicial body.

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The case Law is provided in response to A above. Some cases are mentioned below. Acquisition of the Polka Group of Companies by Unilever Group (UK):

Pakistan Industrial Promoters Ltd., Mehran International (Pvt) Ltd. and

Ambrosia International Ltd. were associated undertakings (Polka Group).

In September, 1996, MCA allowed acquisition of Polka Group by Unilever

Group (UK) through their subsidiary in Pakistan namely Lever Brothers

Pakistan Ltd. with certain conditions including the payment of acquisition

cost in foreign exchange. The merger was monitored with respect to plant

capacity and output, prices, taxes, quantity of important raw materials and

assets of the undertakings involved. However, later the separate entity

Pakistan Industrial Promoters amalgamated with the Lever Brothers and

thus emerged single firm monopoly that was outside the purview of MRTPO

i.e., section 5(1)(a) was no more applicable. However, it was required to

register itself, as a single firm monopoly with the MCA.

Acquisition of Automotive Battery Co. Ltd by Exide Battery Co. Ltd.

The case attracted gateway provisions of Section 5 as the acquisition

created efficiency in production, improvement in technology and savings in

foreign exchange. The undertakings submitted evidence to support their

arguments. Price was reduced by 11.1 per cent for F.B batteries. Capacity

utilization increased. Foreign exchange saving were $ 157,000 on account

of bulk purchases. Evidence of Agreements to use Japanese technology

were also produced.

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Merger of Lever Brothers Pakistan Ltd. with Brooke Bond Pakistan Ltd.

This merger was allowed on the conditionality that the company will

develop tea cultivation at 600 hectares in areas identified around Shinkiari,

Mansehra District – as a first step towards indigenous tea production. The

United Kingdom is supplying technical support and computer based

planning system during the entire period; LBPL exported a number of tea

clones and tea plant selections to private buyers in Hawai, USA.

Relevant documents are attached. Attached documents:

• A copy of Anti- Monopolies Law alongwith explanatory notes.

• Board of Investment Ordinance, 2001 • Privatisation Ordinance, 2000.

Contact Person: Kishwar Khan Chief, 87, Main Double Road, F-10/! Islamabad Ph: 92 – 51 – 9235105 E.mail: chief.ri@mca.gov.pk MCA, Pakistan