Around the world, the cement industry is a favourite target of competition authorities. Authorities have found cement cartels in countries as diverse as Germany, Poland, Pakistan, Argentina and South Africa. Now, it is India’s turn.
Last week, the Competition Commission of India (CCI) fined 10 cement companies Rs 6,307 crore for price-fixing, an amount approximately equal to the industry’s profit in 2010-11.
There is no doubting that cement matters in the Indian economy. Production last year was 224 million tonnes, up from 100 million tonnes 10 years ago. In the intervening period, prodigious levels of investment saw nameplate capacity more than double. Cement is a key cost driver in roads, bridges, ports and airports. It is used every year by countless homeowners, small builders and businesses. Some 70% of Indian cement is sold to small users through myriad retail and trade channels, perhaps the highest such proportion in any major economy. Far away from the vagaries of the Dalal Street and North Block, millions of enterprising folk are building their future every day, and the material they are using is cement.
In short, it makes sense for CCI to care about the cement market. It is how CCI concluded that price-fixing happened which is likely to attract debate. In the five countries mentioned above, the cases were based on direct evidence of collusion. Customised software, signed agreements, meeting notes and testimony from co-conspirators, all played a role. In the case of India, the director general’s office, the investigative arm of CCI, did not have any such direct proof. Instead, relying on indirect evidence, it built its case against the cement producers by inference.
Proving a price-fixing agreement by inference is a valid approach. But it is harder than it sounds, and quite rare. The reason is that ordinary non-cartel business practices are often difficult to distinguish from what one would see in a cartel. In the cement case, for example, much is made of the claim that the prices of different cement producers broadly moved in parallel. That would indeed occur in a price-fixing cartel; but a similar pattern would also be observed in many other market types with widely varying degrees of competition—particularly if the product is fairly standardized. Similarly, in a cartel, producers sometimes cut production in order to support prices; but one could also see capacity utilization fall in a market where capacity expansion has outstripped demand growth, even without a cartel.
Economists have developed rules of inference, statistical and otherwise, to tell apart true cartel indicators from ordinary business outcomes. When one seeks to prove by inference, one needs to play by these rules. Otherwise, one runs the risk of finding a cartel where there is none, the so-called “false positive” dreaded by statisticians and regulators alike. By necessity, it becomes a more technical debate, and one which will only be fully aired when the Competition Appellate Tribunal considers the order.
The CCI order emphasizes the exchange of price information by members of the Cement Manufacturers’ Association (CMA). This is indeed an important facet. If a price-fixing arrangement is to work, the conspirators need to be able to monitor each other’s prices. Otherwise—especially in a cartel with many members—secret undercutting in search of increased sales will result in the unravelling of the conspiracy.
Here, CCI and the parties differ starkly on both the facts and the inferences one can reasonably draw from them. All agree that indicative pricing information was gathered by CMA members upon the request of the ministry of commerce and industry, and provided to the government. The producers point out that these indicative prices, provided by one firm per region, were wholly insufficient to do the job of enabling a conspiracy to police its members: were this to a be cartel, it would be a hopelessly leaky one. In any event, argue the producers, how could anyone police prices for sales to more than 100,000 of cement outlets, often at opaque negotiated discounts? CCI’s response, in effect, is that any exchange of pricing information between competitors is odious, no matter how ineffectual.
In summary, it is fair to say that the cement producers’ fate remains uncertain. Increasingly clear, though, is the growing prominence of CCI. The two emerging economies with the most influential competition regulators are Brazil and South Africa. Like India, these are democracies with both energetic business firms and large income disparities. In such societies, a well-functioning competition authority is seen as an assurance that the market mechanism works in favour of citizens, and not against them. CCI, too, has been resolute in scrutinizing powerful industries— and bold in penalizing what it considers to be unacceptable conduct. At the same time, its great powers, now apparent for all to see, are best exercised fairly, prudently and rationally. More than who wins or loses, that is the scorecard to apply to the cement case as it unfolds.
Stephan Malherbe is chairman of Genesis Economic Consulting, the first competition economics firm in India. Genesis advised one of the parties in the cement matter.
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