REGULATORY: Global Competition Law: Pakistan’s Competition Commission grants Leniency in Electrical Products Cartel by Suzanne Rab

by King & Spalding
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In a landmark decision on 4 April 2012, Pakistan’s Competition Commission (CCP) granted Siemens total immunity from fines for its cooperation in a cartel investigation relating to bid rigging in supplies to power companies. This case is the first time that the fledgling competition authority has received and granted a request for leniency.

Allegations of collusion in tenders

The CCP is investigating allegations of collusion among 23 manufacturers and their trade association (the Pakistan Electrical Power Association (PEMA)) in the supply of electrical equipment, including air-insulated switchgear and transformers. The companies are suspected of rigging tenders put out by electric power distribution companies.

The CCP launched the investigation in 2011 when the case was brought to its attention by an undisclosed informant. Siemens later approached the CCP and applied for leniency and offered to cooperate with the inquiry. Siemens is reported to hold a market share of around 30 per cent in the sector, followed by the Pakistani firm PEL (28 per cent). According to public statements by the CCP, just after the issuance of a “show cause” notice to PEMA requiring it to explain its position there has been a 12 to 18 per cent decline in the prices of distribution transformers in Pakistan.

Siemens claimed leniency under the Pakistan leniency regulations which empower the CCP to grant up to total immunity from financial penalties in cartel cases. According to the CCP, Siemens provided direct evidence of how the manufacturers agreed on prices and allocated market shares in the tenders for the supply of switchgears and transformers. Although the CCP was on notice of the cartel before Siemens came forward, the latter was granted 100 per cent leniency for providing “critical” evidence which, according to the CCP, added “significant value” to the information already received.

According to the chairperson of the CCP, Rahat Kaunain Hassan, the decision will help to break alleged cartelisation in procurement of switchgear and power transformers which represents sales of around Rs 36 billion annually in Pakistan (approximately USD 400 million/ EUR 300 million).

Pakistan’s new competition authority gains momentum

The use of the leniency procedure in this case may be seen as a key step in endorsing the CCP’s attempts to deter and eliminate anticompetitive practices.

As a relatively newer competition authority set up in 2007, the CCP has surprised international observers by its speed and resolute action, issuing decisions in such high profile areas as cement, poultry, and even flights to Mecca. The new chairperson appears to be as resolute as her predecessor but has received vehement opposition from the business community. She has outlined the CCP’s priorities as: knowledge-based advocacy; pursuing collusive bidding; concession agreements; trade associations; improving the legal framework; and expanding the role of the CCP. She emphasises that law enforcement is at the heart of this role and that the CCP is a modern competition body and not an anti-corruption agency.

However, while Pakistan has gone some way along the path to becoming a modern competition authority, achieving financial stability and autonomy will remain a challenge. Hassan has regretted that other regulatory authorities in Pakistan are not paying their 3 per cent share of annual income to the CCP This shortfall hampers the work of the CCP since it is operating mainly under government funding. Pursuing financial independence from government will remain a priority for the CCP.

The case in context - International cartel investigations and multi-jurisdictional leniency

The Pakistani case may be contrasted with the recent competition investigation involving Siemens by the European Commission (Commission) in relation to gas insulated switchgear. On 24 January 2007, the Commission fined eleven groups of companies a total of EUR 750 million for their involvement, according to the Commission, in a cartel for gas insulated switchgear projects, in violation of the EU prohibition on restrictive agreements. The companies concerned were ABB, Alstom, Areva, Fuji Electric, Hitachi Japan AE Power Systems, Mitsubishi Electric Corporation, Schneider, Siemens, Toshiba, and VA Tech. According to the Commission, between 1988 and 2004, the companies rigged bids for procurement contracts, fixed prices, allocated projects to each other, shared markets, and exchanged commercially important and confidential information. ABB received full immunity from fines under the Commission’s leniency programme, since it was the first company to come forward with information about the cartel. At the time, the fine of EUR 396 million imposed on Siemens constituted the largest ever fine that the Commission had imposed on a single company for a single cartel infringement.

The use of the leniency procedure in Pakistan comes at an interesting time in the development of modernised competition law on the Asian sub-continent. In our April 2012 edition, we reported fines imposed by the Competition Commission of India in the LPG sector. “India Turns up the Heat on Cartel Enforcement with First Fines in the Energy Sector,” available at http://www.kslaw.com/library/newsletters/EnergyNewsletter/2012/April/article8.html. Comparisons may often be made between India and its neighbour Pakistan in terms of the pace of their economic, political, and legal development. India has had competition law since 2002 but did not gain formal powers to sanction cartels until 2009. While it has a leniency programme similar to that in Pakistan, it has yet to grant any requests.

Businesses operating in countries that have had developed competition laws for some time will be familiar with the use of leniency programmes as an investigatory tool to encourage cartel members to bring evidence to light and cooperate with the authorities. With the increasing number of jurisdictions adopting competition laws worldwide and with the accompanying spread of leniency programmes, the strategic dilemma of whether to stay silent or apply for leniency becomes more complex. The financial benefits of being awarded leniency may be significant when faced with a potential 100 per cent reduction in applicable fines.

Amongst the issues to consider are: is there a ‘skeleton in the closet’ (in the sense of a risk of infringement) ?; what is the likelihood of detection?; what is the risk that other members of the cartel may apply for leniency?; what are the likely penalties?; what type and quality of evidence and cooperation will be required if a leniency application is to be successful?; and what are the attendant litigation and regulatory risks including the risk of private damages actions or follow-on investigations in other jurisdictions?

The recent grant of full immunity from fines in Pakistan will reinforce the message that the authority’s work is to be taken seriously and may encourage other businesses to come forward with evidence of a cartel. As the authorities become more sophisticated in their tools to detect cartels, so too companies will need to be more sophisticated in their own risk management strategies. Business will need to ensure that they have the procedures in place to identify potential risks so that they can put in place mitigation strategies and, where appropriate, decide whether it is in the company’s best interests to apply for leniency in particular cases.


Suzanne Rab
London
+44 20 7551 7581

srab@kslaw.com
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