Tuesday September 1 2015

Cartels: The disease that is killing business competition

Cartel-like tendencies have been more visible

Cartel-like tendencies have been more visible in the fuel sector where prices quickly rise but sluggishly drop even when economic fundamentals are reading right. Photo by Abubakar Lubowa. 

By Mark Keith Muhumuza & Ismail Musa Ladu

The growth of cartels where prices are determined by connivance contrary to the principle of market forces should be a concern for every Ugandan given that the country continues to exist without a competition law.

Uganda, unlike Kenya does not have a competition law and there has been concerns over the growth in prices of specific services and goods, especially for fuel, telecom, banking, sugar and power sectors, which consumers blame on the growing cartel-like tendencies.

Ideally, in a free market economy, prices are determined by forces of demand and supply but instances of uncompetitive tendencies of fixing prices by big market players have been cited.

During the 13th Makerere University Business School dialogue, which was discussing Uganda liberalisation policy and the growth paradox, David Mpanga, a Kampala lawyers noted with concern that cartels seem to be freely forming in the country.

“….in absence of a competition law,” Mpanga, said it was hard to regulate fair competition, recommending that Uganda should “urgently enact the competition law to curb monopolies and other uncompetitive practices”.

Tired song
But Mpanga’s recommendation could be becoming a tired song considering that others have also advocated for the same before.

In 2004, the Uganda Law Reform Commission completed a study on “Competition Law in Uganda” where they described the laws ‘as inadequate and scattered”.

A year later the Bill drafted around the same period continues to gather dust at Parliament.
The economy has expanded, with more investment both foreign and local rising but Parliament continues to ignore the Uganda Law Reform Commission advice which emphasised that “most developing countries have enacted laws governing competition to ensure that the market is economically efficient, protects consumer welfare and provides a balanced development of the economy.”

The rocket feather effect
Uganda’s fuel sector where the “rocket feather effect,” principle has gained its perfect definition is typical of cartel tendencies with prices sharply rising (like a rocket) but fall at a slow pace like a feather weighed up by heavy winds.

This was more visible early this year when global oil prices from an average of $100 to $46 per barrel but reduction in Uganda remained unnoticeable on claims of the falling Shilling and high taxes.

The denial
The suspicion – often denied by the department of petroleum supply at the Ministry of Energy – is that there is a cartel-like tendency in the fuel sector, not considering that it doesn’t have a mandate to contain any price fixing.

“There is anecdotal evidence that price fixing is prevalent in the petroleum industry,” Chrispas Nyombi, a law lecturer at the University of Bedfordshire in London says.

“Anti-competitive practices include agreements involving explicit and implicit arrangements between firms in the same sector or market. For instance, collective price fixing is prevalent in Uganda largely due to the absence of an effective competition authority,” Nyombi said in an email exchange.

What the draft law says
According to Nyombi, the Bill “provides for a prohibition on anti-competitive agreements and outlaws agreements for fixing the price, bid rigging, limiting production and exclusive supply and distribution agreements, among others.”
Thus he says: “The law endeavours to protect consumer interests while safeguarding the economic actions of market participants.”

Other proposals include setting up of the Uganda Competition Commission, which would monitor, punish and protect any anti-competitive behaviour.

However, the challenge, as Nyombi points out is when the powers of the commission would be translated as being anti-investment, especially when there is a delay in reaching decisions.
“This could damage the commercial profile of the country and deter future mergers. It remains to be seen whether Uganda can in fact put in place a robust competition commission,” he says.

What others say
Mwambutsya Ndebesa, the chairperson of Southern and Eastern African Trade, Information and Negotiations Institute (Seatini), believes the competition law can be useful but warns against using the law to perpetuate political interest especially in a situation where politics and business are fused.

The law, he says, “should indiscriminately favour none even if they are local investors.”
The indiscriminate application of the law, according to Rijit Sengupta, an analyst on competition policy, not only helps to protect consumers but also creates a vibrant environment that can help to spur economic growth.

“… economy gets free of monopoly tendencies, which opens up the economy to competitive investment,” he says.
Dan Marlone, a consumer activist, says such a law is critical to protect the welfare of the consumers and without it there could be economic exploitation perpetuated by barons.
Thus in the absence of the law, trade analysts such as Amb Nathan Irumba recommend the establishment of a regional authority to oversee issues of commercial exploitation and unfair trade tendencies.

Interest rates
In banking, even with the presence of a regulator, banks set their own rates in consideration of the economic environment of the time.

However, much of this is influenced by the Central Bank, which usually adjusts rates to control growth in inflation as well as stabilising the currency markets.
Often times commercial bank lending rates rise sharply, but fall rather slowly.

Even this, apparently baffles the Central Bank with Governor Emmanuel Tumusiime Mutebile, saying how “we (Bank of Uganda) do not direct commercial banks on what rate to lend at”.

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