The Business of cartelisation
Rupert Murdoch: News Corp. Sunil Mittal: Bharti-Airtel Bill Gates: Microsoft Mohammad Bin Dha’en Al Hamili: OPEC K.M. Birla: AV Birla Group Vijaya Mallya. UB Group

With great power comes price-fixing, manipulations and the menace of cartels. India needs to tackle it, the way it is done internationally.

Mount Rushmore and the Statue of Liberty are two things one instantly identifies with US of A. Another classically American term (thanks to Hollywood) is Mafia. The bestselling book, The Godfather, and the movie adaptation where actor Marlon Brando enacts the role of Don Vito Corleone have made ‘mafia’ as well known, if not better than Mount Rushmore!

In the book (and the movie), the Tattaglia and the Barzini families declare war on the Corleones. At stake is control over al the illegal activities in New York. The Don is pumped with bullets but survives. The Don’s mercurial son Sonny Corleone unleashes a wave of revenge attacks that rattles the Tattaglias and the Barzinis. But Sonny is impulsive and is lured to his death. The Don calls for a peace meeting and the five major ‘families’ of New York agree to declare a truce. They also agree not to poach on each other’s territory, and consumers. Hollywood and the media call it the Mafia. If Adam Smith was a 20th century economist, he would have called it a cartel.

As sector after sector in India experienced wave after wave of consolidation, there are serious concerns emerging about a clutch of cartels stifling competition and stiffing the Indian consumer. In layman’s terms, a cartel can be described as a loose (usually informal and always unethical, if not illegal) association of companies in a sector. In a cartel, the companies outwardly ‘compete fiercely’ with each other; in reality they collude with each other, fix prices and raise entry barriers so high that a potential rival cannot barge into the sector even though the profits are alluring and enticing. Economics tells us that competition is good for the consumer; theory also tells us that companies relentlessly compete with each other to grab more market share. But that’s theory. The reality is Finance Minister threatening Indian cement companies with punitive action if they continue to indulge in price fixing. The reality is Vijay Mallya announcing that Air Deccan will raise fares within hours of Kingfisher Airlines acquiring a strategic stake in Air Deccan. The reality is Indian telecom companies refusing to allow the consumer to migrate from one service provider to the other without a change on her mobile phone number. And of course, the reality is a few mafia dons carving up illegal activities in the city of Mumbai!

Cement is emerging as a bit of a cause celebre for analysts who think a majority of Indian companies brazenly form cartels. Since the decontrol of cement prices in 1989, collusive price fixing exists in the sector. Of late, the matter was in the news again as the government said that they had concrete evidences against Grasim, UltraTech, ACC and other players that prices are being fixed and were consequently slapped by the notices from MRTPC.

In the race for market share and the quest for bridging the vast demand-supply gap, Grasim & L&T and ACC & Gujarat Ambuja (owned by Swiss cement giant Holcim) asked dealers in Mumbai to exclusively sell their cement bags for a commission or face a halt in supplies. “We have been told we would get about Rs.2.25 extra per bag if we exclusively sold products of both these cement majors,” one Mumbai-based dealer was quote saying in a leading financial daily. Cement companies have used the demand- supply mismatch equation to justify the pricing, A.K. Jain, Whole time- Director, ACC, says, “Cartels don’t work because of the level of fragmentation. However, it gives an impression that there is a cartel in terms of prices. Cement behaves just like a commodity. So the prices of all producers more or less move together. It is not possible for one producer to have a very high price and another to have a very low price. So, if one producer raises prices, everybody else also increases prices and vice-versa. Therefore, it gives an impression that someone is sitting somewhere and controlling the prices.”

Knowledge powerhouses like KPMG has another viewpoint to share. Pradip Kanakia, Risk Advisory Services, sees no cartelisation, but a bit of speculation in the cement sector. “My personal opinion is that it is more of a protective gesture, and reaction to the injustice done to them,” he said. Monish Chatrath of Grant Thornton too endorses Pradip’s viewpoint and adds, “Cement industry has been on the target of the government for a long time now. Cement players operate in a high tax and high subsidy regime. On top of it, the government has also allowed cement import from Pakistan, which will hit Indian shores by August. All this has put a lot of pressure of cement companies in India.” But is it enough to justify the actions of the cement companies. Not everyone feels so. Udai Mehta, Policy Analyst with CUTS International – a non-governmental organisation pursuing social justice & economic equity, don’t buy the argument. “Excuse of high tariff regime can’t be used to manipulate markets. Ultimately it is the consumers and markets, which suffer,” he said. Udai further makes an interesting observation, “Forget about cement; telecom & electricity are two areas where public sector monopolies exist, till today, where private sector companies have to face stiff competition and high regulatory c h a r g e s , while there is always a laxity for PSUs. Monopolies of PSU needs to broken, as there are no level playing fields for private sector and public sector players in the telecom & electricity sectors.” Things have changed in the telecom sector a bit, but power remains a concern.

Of course, cartels are neither a new occurrence; nor are they a peculiar situation that exists only in India. In fact, cartels first originated in the heartland of capitalism, the United States and continue to be a serious threat to economic as well as consumer interests across the world. It is said that with great power comes great responsibility. But with the passage of time, this proposition has failed to hold the above assumption, as things like cartelisation, price-fixing, collusion & bid-rigging has taken place. Let’s take two distant examples – one of the early 20th century and other of the late 21st century and see how rampant cartelization was then and now.

Today, Fortune 500 companies and oil behemoths like Chevron, Conoco & Exxon trace their origin from 1860s when they were a part of Rockefeller empire – Standard Oil. At that time, Standard Oil had control of almost all of America’s oil market. Standard Oil gradually gained almost complete control of oil production in America. At that time, many legislatures had made it difficult to be incorporated in one state and operate in another. As a result, Rockefeller and his partners owned separate companies across dozens of states, making their management of the whole enterprise rather unwieldy. In 1911, the Supreme Court of the United States held that Standard Oil originated in illegal monopoly practices and ordered it to be broken up into 34 new companies. The logic was quite simple, there was (pseudo) competition, that too on paper. Two different companies, fighting for the same contract in the same markets, without realising that all the companies are being owned by same guy – Rockefeller. Rockefeller and Standard Oil are no more but there legacy lives on. Because of the strong oil lobby, the US hasn’t sign Kyoto Protocol, as some leading oil companies are opponent to anti-global warming measures. It is because of the oil lobby, alternate energy sources find it difficult to setup shops in the US. Alternatively, the US had to, a sort of, seek polito-economic pressure to get the industry going outside the US, like the civilian nuclear deal, which calls for establishment of shops for American companies that are into alternate power generations in India. When you have the size that matters, you influence decision in the sector, you dictate prices, you dominate, you are all pervasive.

Now let’s meet another Rockefeller of modern times – Martin Sorrell of WPP. One of the largest communications services group of the world, WPP owns names like JWT Group Inc., Ogilvy & Mather, Young & Rubicam, the public relations firm Hill and Knowlton Inc., and information and consultancy firm, the Kantar Group. Martin Sorrell now owns more than 50% of the total advertising industry. Different firms owned by Mr. Sorrell compete for the accounts of companies – again creating pseudo competition, without making it evident to the markets that both, contracts and money are going to the same man – Sorrell.

Sorrell and Rockefeller are two distant examples of how there were collusion in the oil and advertising industry, a bigger from of which is cartelisation, rampant internationally, and in India witnessed in industries where regulators have been less proactive and where market is oligopolistic is nature. Traditionally sectors like cement, aviation, real estate et al have been found more prone to such issues.

It is not difficult to figure out why cartels in India have been having a more successful run – at least as compared to their counterparts in Europe and North America. In those developed regions, even though consolidation of sectors and concentration of market shares is even more pronounced than India, regulators and policy makers have been acting in a determined manner since early 20th century to break monopolies and oligopolies. The Standard Oil example is quite well known. An even more telling example is the intriguing tale of how ‘Ma Bell’ that is otherwise known as AT&T was broken up and divided into many telecom companies because regulators-and Supreme Court of the United States-were convinced that such monopolies were not good for the consumer, the economy, the society and even the nation. More recently, Microsoft has been repeatedly fined hundreds of millions of dollars by regulatory authorities in the EU for price fixing, monopolistic behaviour & predatory pricing. And of course, who can forget how Ralph Nader and his consumer movement forced the ‘Big Three’ in Detroit – GM, Ford & Chrysler to comply with consumer safety norms and stop acting like a cartel.

That kind of action is still unthinkable in India. You can have P. Chidambaram threatening cement companies, to no avail. You have Electricity Regulatory Commissions who are helpless even when private sector distribution companies charge the Moon and the Earth to hapless consumers. You have a Telecom Regulatory Authority of India that has still failed to force mobile companies to allow consumers the freedom to migrate. You still have an Insurance Regulatory Development Authority that can’t help poor patients who have been duped by insurance companies and hospitals in tandem. And of course, you have been hearing about a Competition Commission for years – a body that is stuck in the quagmire of red tape because the judiciary and the bureaucracy cannot agree on who will head the body.

“The MRTP Act is still the extant competition law in India, as the Competition Act has not yet been fully implemented,” said, Udai Mehta, adding, “It might take at least three years from now for the Competition Act to come into full swing”. MRTP Act has to some extent become obsolete in the light of the economic developments relating more particularly to competition laws and the need was felt to shift the focus from curbing monopolies to promoting competition.

The Act has so far become operative only partly and the Competition Commission of India has not yet been constituted fully. However, the Act still manifests certain lacunas. While the MRTPC can only ‘cease and desist’ orders, Competition Commission of India can actually impose monetary penalties on companies, but it hasn’t done yet since the commission is not fully operational yet. And even if monetary penalties are imposed, that is not a deterrent for companies to return back to such malpractices. In United States and Brazil there are provisions of imprisonment, which nowhere exist in India. Moreover, the Act does not address the abuses of Intellectual Property Rights, which are monopoly rights for limited period of time.

Belgium – member of the European Union has this provision of rewarding cartel whistle blowers. Under the new law, the first company to blow the whistle on a cartel will be spared a fine if the information it provides is enough for a commission to launch a ‘dawn raid’ on members of the conspiracy. The commission has the power to fine companies involved in a cartel upto 10% of their annual sales. Last year, Brussels levied record fines of $1.6 billion on companies involved in more than 50 cartels, including a €855 million fine on eight companies for conspiracy to fix vitamin prices. India can learn lesson from Belgium and the European Union inspiration from number of cartels fines and penalties imposed. Hence, both ‘carrot & stick’ approach needs to be put in place.

The burning question is: if industrialists join the Parliament and they themselves become regulators, who will then regulate and punish the cartels in India?

After OPEC, a gas cartel! Well, Putin is impressed

What was meant for all, actually fall into the hands of countries that behaved like corporations. First it was Organisation of Petroleum Exporting Countries (OPEC) world’s foremost recognised oil cartel; now a gas cartel appears to be in making, courtesy, Vladimir Putin’s Russia and Ahmadinejad’s Iran. The intentions of Vladimir Putin can be gauged from the act when recently Putin took the whole world by surprise by planting its flag on the ocean floor under the North Pole in a symbolic gesture to claim the rights to the sea-bed, which could be rich in oil and gas.

Russia happens to be a dominant player in the natural gas and a major supplier to many erstwhile USSR countries and other European countries. Russia’s state-controlled Gazprom exports natural gas to nine European countries. Russia has world’s largest proven natural gas and eight largest oil reserves. As such Russia has the ability to dictate gas prices and influence the natural gas supply, Russia turned off the natural gas tap to Ukraine and Moldovo in January 2006 and threatened to pull out the plug to Belarus and Georgia in late 2006 over price negotiations. The above examples not only damaged Russia’s image as a reliable energy provider, but also made it quite apparent that Russia is using gas a political tool to gain economic mileage.

A string of deals by Russia with other Central Asian countries like Kazakhstan, Turkmenistan & Uzbekistan indicates for a high probability of Russia along with countries mentioned above, along with Iran joining hands for a natural gas cartel. “A gas OPEC is an interesting idea,… our main aim is to co-ordinate our activities with an eye to the solution of the main goal of unconditionally and securely supplying the main consumers of energy resources,” Putin said in a Kremlin new conference. But past instances fail to prove Putin’s viewpoint, where Russia has used gas as a weapon to control its neighbours.

The Cartel Attack And Then The Flak

Aug 2007 Korean Airlines was fined $300 millions by the US Justice Department for fixing prices for passengers and cargo flights. The company thus posted its first loss in two years.

February 2007 The European Commission fined Otis, KONE, Schindler & ThyssenKrupp Groups €992 million for operating cartels for the installation and maintenance of lifts and escalators

February 2006 British Airways was fined £350 million for its involvement in an alleged price-fixing scandal that included colluding with competitors over fuel surcharges on passenger and cargo flights.

November 2005 Mexico imposed its biggest anti-monopoly fines ever, totaling about $68 million (€ 58 million) against Coca Cola and dozens of its distributors and bottlers.

October 2005 The United States Department of Justice slapped a fine of $300 million on Samsung Electronics for participating in an international conspiracy to fix prices in the DRAM market.

October 2004 Infineon Technologies AGcompany was sentenced a fine of $160 million for participating in the conspiracy to fix prices in the DRAM market.

October 2003 The European Commission fined Aventis €99 million for its alleged involvement in a cartel alongside four Japanese companies for controlling price of the sorbates. The five companies controlled up to 85% of European sorbates market and met twice a year to set prices and production quotas.

March 2004 The European Commission slapped a fine of €497.2 million ($611.8 million) for violating the European Union the anti-trust law on software giant Microsoft. The commission ordered the unbundling of Windows Media Player within 90 days and required that ‘complete and accurate’ information be given to rival or other makers of computer servers within 120 days

Grossly indebted BRIC economies!

Brazil
The general government debt and the long term debt of Brazil have witnessed a minimal increase of $26 million and $ 20 million, respectively in the first quarter of this year, as compared to 2006 Q2 figures. The bank debts and the direct investment has been on the surge, the bank debts stand at $49.913 billion and direct investment figures stand at $33.462 billions. The gross external debt has increased by 21%.

Russia
The general government debt and the long term debt have been on the decline for Russia. The 2007 Q1 figures for the two stand at $43.3 billion and $40.93 billion, respectively. On the other hand bank debts & direct investment have increased to $110.01 billion and $29.03 billion, respectively. The gross external debt has increased to $339.3 billion in 2007 Q1 from $288.8 billion in 2006 Q2.

India
The general government debt and the long term debt both bear equal figures; they stand at $48.6 billion in 2007 Q1 as compared to $45.87 billion in 2006 Q2. The banks debt has been continuously on the surge; there has been an increase of 12% in bank debts in 2007 Q1, as compared to the same figures in 2006 Q2. The gross external debt too has increased to $155.03 billion from $132.27 billion.

Hong Kong, China
The general government debt at the end of 2007 Q1 stands at $1.667 billion, as compared to $1.631 billion at the end of 2006 Q2. The long term debt too bears the same figures. The bank debt has increased by 11% to $337.6 billion and the direct investments have decreased by 4.8%. The gross external debt stands at $509.9 billion in 2007 Q1, as compared to $472.87 billion in 2006 Q2.