CCP’s landmark decision- Leniency granted to Siemens, to break cartels in switchgear and transformer markets
Summary of CCP’s Order
Cartels are termed as a major drain on the world’s economy and leniency program seems to be the single most important tool to be used by the competition agencies to detect and dismantle cartels. It is a concession granted to a cartel member who admits the contravention and also provides critical evidence of the alleged or otherwise cartel conduct of the accomplices and commits to abandon such behavior. CCP is one of 110 competition agencies all over the world which have leniency program in place.
CCP announces its decision in its first leniency application filed by Siemens (Pakistan) Engineering Co. Limited (Siemens) to seek leniency in respect of Show Cause Notice No.27 dated September, 2011 issued for, prima facie, bid rigging/collusive activities in the tenders called by electric power distribution companies (DISCOs) to procure switchgear and transformers from the members of Pakistan Electrical Power Equipments Manufacturers Association (PEMA). The Chairperson emphasized that one must recognize the importance of leniency program as cartel is the virus and leniency is the anti-virus to detect and prevent the harm. This is a landmark and historical decision which is most likely to be pivotal in shaping the landscape as to how cartel players may react and will serve as an incentive to insiders to come forward thus strengthening CCP to break the cartel which is beneficial for the economy.
Earlier, CCP had initiated a formal enquiry on information received from an informant against the, prima facie, collusive bidding by PEMA and its members in procurement tenders of different DISCOs. CCP also conducted search and inspection of the premises in use of PEMA, FICO Hi-tech (Private) Limited (FICO) and Pak Elektron Limited (PEL) and collected valuable evidence. Based on the evidence available in the form of impounded documents, the Enquiry Committee completed its Enquiry Report which revealed a structured framework of collusive bidding in the public procurement of switchgear, energy meters, and transformers. In terms of the Enquiry Report electric power manufacturers have formed fora/groups under the umbrella of the PEMA, according to the product in question to discuss and decide upon the prices and quantities to be quoted in response to tenders issued by DISCOs.
CCP in light of the findings of the Enquiry Report initiated the proceedings under Section 30 of the Act and issued Show Cause Notices to 25 undertakings, prima facie, found involved in collusive activities. Two hearings were also conducted in the matter. Thereafter, the Applicant filed the Leniency Application admitting unconditionally the infringement of the offence as alleged against it in the show Cause Notice and also gave the undertaking and commitment that it has abandoned its participation in the prohibited activity.
Leniency Granted by CCP to Siemens
Siemens claimed leniency under Regulation 3 or 4(1) of the Leniency Regulations. Regulation 3 empowers CCP to grant total immunity from financial penalties whereas under Regulation 4(1) CCP may grant reduction in the amount of penalty up to 100%. Regulation 3 operates as an effective tool to investigate by offering incentives to uncover the conspiracy and come forward to admit and implicate co-conspirators and collect evidence more quickly and at a lower cost. Regulation 4 operates as an encouragement for parties to break ranks with the cartel members even after the relation is found out or established. Corroborative evidence provided under Regulation 4 substantiates and strengthens the cartel proceedings initiated by CCP on leading to an efficacious resolution of case.
Documents/proofs Submitted by Siemens
Siemens submitted 233 documents along with its Leniency Application which provide information in relation to two products i.e. switchgear and transformer to show collusive activities among manufacturers to win a particular tender and strategize accordingly. A Bench comprising the Chairperson and Member, (C&TA) after scrutinizing these documents and found these documents explicitly provide additional evidence regarding existence of a switchgear and transformer forum, role played by the coordinator, decisions on price and share allocation bearing codes and signatures of participating bidders, meetings to be held to discuss tenders, faxes sent to by one party to other competitors regarding price to be quoted by it and also include charts showing share allocation among manufacturers.
Decision of CCP’s Bench
The Bench has held that though the contravention and nature of the evidence was previously known to CCP but the evidence provided by Siemens, no doubt, represents significant added value and substantiates alleged collusive activities of transformer manufacturers in terms of share allocation as well as price fixing and quota allocation with respect to switchgear forum. In this respect due consideration has been to the fact that it is the case of first instance for leniency.
Siemens has been granted 100% reduction in penalty with respect to contravention alleged in the Show Cause Notice No. 27 in the relevant markets of switchgear and transformer, in terms of Regulation 4(1) of the Leniency Regulations. Breach of any commitment or violation of the condition laid down in the law would entitle CCP to revoke such grant of reduction in penalty.
The Bench also held that since price fixing has not been alleged in the Show Cause Notice issued to Siemens and other respondents in switchgear market. Therefore, an independent contravention of Section 4 of the Act has been brought to the CCP’s notice which entitles Siemens for immunity from future proceedings that would be initiated in respect this new prohibited activity.
The Bench in its Order has also discussed the economic impact of the collusion in the relevant markets involved. In Pakistan, there are 12 local manufacturers of distribution transformers and the only demand for transformers comes from DISCOs which is around 90%. Total orders issued by DISCOs during the period of 2008-2011 were for the value of PKR 36 billion. Further, as stated by Siemens, it holds 29.3%, PEL holds 28.2% market share while the rest of manufacturers occupy 42% of total market. On the other hand there are 10 local manufacturers of medium voltage switchgears. It is estimated that overall market for Air-insulated Switchgears in Pakistan for the 2008-2011 was Rs. 9.2 billion, out of this volume 60-65% approximately comprises of DISCOs. It has been observed that the exact calculation/evaluation of the economic impact is difficult because the market was never allowed to work and function as a ‘free market’. By now it is well established that cartel invariably impacts on price, quality and innovation. In fact, “it is akin to a termite, which is eating up our economy. They often don’t get detected until it is too late- by which time they would have done significant damage to the structure. It may take a long time before the structure collapses, or is so weakened; leaving little or no resilience to recuperate.”
Collusion in power equipment sector has not only killed free and fair competition in the market amongst the players, but curtailed their respective efficiencies. “Conduct of business with an over pronounced sense of camaraderie and ensuring quotas to smaller manufacturers or ensuring quotas without considering efficiencies or any amalgam of such considerations erodes the spirit of the free market.” The Bench also observed that “we do not wish to undermine the relevance of the point that a procuring agency cannot remain dependant on a single supplier, but the point that we wish to emphasize is that all involved in the procurement need to remain cognizant of the competition laws in vogue and thus must put in place a more transparent mechanism, which does not promote or in any other way encourage anti-competitive practices.”
Benefits of Leniency
The Bench in its Order has emphasized on major benefits that this Leniency Order would entail including:
i. Value of enhanced deterrence for other cartel participants that would result from grant of leniency which is equally important to keep businesses compliant with law;
ii. This grant of leniency may also heighten the uncertainty amongst the participant undertakings in other cartels; spurring them to compete for leniency. Thus acting as an effective deterrent, such participants may be encouraged not to withhold any such information and avail leniency at the earliest;
iii. The great importance to encourage insiders to bring evidence which not only makes the evidence more decisive but also gives an insight into the sector/industry/relevant market, thereby giving more data, useful information and most importantly the cartels’ working and operating practices. It is indeed true that ‘the better cartels are understood the more effective we can be in designing policy against them’;
iv. Apart from creating deterrence for cartels and anticompetitive practices, the role of competition law enforcement agency is to bring about corrective behavior. A cartel involves numerous questions to be addressed. How prices/quota are agreed upon? What modalities and business practices exist as norms? Is there any ring leader or party coercing other undertakings to take part in the prohibited activities? What role (if any) the procurement agencies play? What legal loops and lacunae exist in the system? – are all questions that can be answered and discovered in the process of leniency;
v. Role of CCP to enhance economic efficiency and to protect consumers from anti-competitive behaviour’. As an arm of the Government, public good is perhaps the ultimate goal for which all regulators are striving. Protection to the consumers from such anticompetitive practices in real terms perhaps can only be achieved when businesses, rectify their behaviour. Leniency, therefore, emerges as an effective tool; while encouraging compliance; it works towards building acceptability and helps in recognition and implementation of competition principles;
vi. Not only does leniency strengthen the adjudicatory authorities in terms of evidentiary value; it is also time and cost effective. Considering the time spent and involved in the detection prosecution and penalization of cartels and the costs incurred in pursuing the same – leniency as a tool indeed is valuable in curtailment of time and cost thus enhancing effectiveness of enforcement. Furthermore, in our view it also serves the public interest by not only unveiling but establishing the existence of a cartel, and also, pre-empting any possible abuse of process through technical objections to thwart the interest of justice.
Invoking of leniency provision by Siemens is to be viewed as a stepping-stone and endorsement of Commission’s hard core labour for the daunting tasks undertaken and accomplished against powerful lobbies and vested interests – to deter, rectify and eliminate the anticompetitive practices in Pakistan.