As someone keenly involved in promoting consumer sovereignty, fair competition and quality improvement, I wish to thank the Commissioners for inviting me to participate at this public hearing. I strongly support the Government’s decision to liberalize the cement market.
It is true that liberalization and decontrol of price will remove the cycle of shortage, uncertainty, rising prices, abundance and marginal drop in prices. There can even develop stronger affinity between the cement industry and the construction industry with mutually beneficial gains, given the recognition of inter-dependence.
At the outset I wish to underline that in the wake of globalization and the rapid pace of development, no country with the level of development attained in Mauritius can put the clock back. The construction sector is in full swing and we need healthy competition that will lower prices, improve product quality and enhance product diversification.
Cement is one of the few products where government still exerts price controls in a generalized context of liberalization. Controls were introduced in a specific context of exiguous market, uncertain demand, duopolistic market structure and disproportionate economic power that importers wielded.
It is feared the current practice with a state-owned enterprise without basic storage infrastructure is at odds with world trends and causes prejudice to domestic consumers. I understand this is a study of the market and not an investigation of restrictive practices. Even so, we have to take into account the danger of restrictive practices if the market, with a few operators without proper buffer or monitoring left to itself can face. This is the biggest concern.
With the impending government decision the cement market would progress from a duopoly, if we ignore the role of STC, to an oligopoly, comprising the existing two companies Holcim and La Farge and three new companies, Binani, Oriental Group and a joint venture between an Emirate firm and the former Mauritius Chemical Fertilizer group. The three last ones proposed to manufacture cement. Since manufacturing has been an integral policy of overall economic policy, there should be no objection in terms of economic or development principles. The current cement market is estimated at some 680,000 tonnes. So far the main market of cement is residential houses and commercial buildings; infrastructure development absorbs a relative smaller fraction of total cement consumption. Since the construction sector is in full swing and fast expanding, and Mauritius is moving at a relatively fast rate in terms of reducing the deficit in infrastructure, it would not be surprising if cement consumption rises to 700,000 tonnes. Both Neotown and Jin Fei are potential clients for increased consumption of cement.
Mauritius has a strong home base and has always cherished an export-oriented approach. During the late 1980s Madagascar had invited Mauritius to participate in a joint venture for the setting up of a cement factory. At that time the cement consumption of Mauritius with a population of 1.1 million was slightly higher than that of Madagascar with a population then of around 16 million. In the meantime Mauritius has increased its development pace while Madagascar suffers from relative stagnation owing largely to political instability. I believe that our expanding market, the potential for renovation, the potential for demolition of existing housing estate and re-construction to meet modern aspirations as affluence increases and the potential to penetrate new markets in the region, particularly Madagascar, all collectively open new vistas of growth for the cement industry. In this respect we should turn to Madagascar, particularly to the Antsirabé region where Madagascar claims important quarries of inputs for the cement industry. This should strengthen cooperation and open new vistas of trade between the two islands. A positive indirect effect is that a flourishing cement industry in Mauritius would give a boost to economic development in the big island while ensuring a successful pollution-free cement industry in Mauritius.
The Construction sector with a share of some 6% of GDP is viewed as a growth stabilizer in terms of employment creation, the linkages effect and value-added. Hence, the cement industry may envision a fast expansion with nearby untapped export market. The MCFI project which projects a production of 1 million tonnes is in line with this analysis. I believe that subject to environmental safeguards these promoters should be given all possible encouragement to implement their project.
With more producers, provided there is no collusion, tacit or implicit and an effective monitoring system, the country will gain on many fronts including lower prices for the consumer, a strengthening of the industrial base through diversification and consolidation of the economic structure, earning foreign exchange rather than spending foreign exchange, job creations and a ripple effect on the rest of the economy. It can take advantage of global demand for cement.
Implications
The hitch is whether STC will continue to operate as we have read in one daily press this morning that the STC will cease the importation of cement as from 1st July 2011. My feelings are that STC may operate as any private entity along strictly commercial line, and provide a buffer against collusive temptations monopoly pricing. This is why we vehemently condemn the decision of the STC of withdrawing from the importation of cement in Mauritius. For STC to compete on equal terms, the same rules as practiced within a private firm in terms of efficiency, decision-making, relative independence and incentives for performing officials should be introduced. The only difference would be that the shareholders are government and the management should be answerable to the board members who should forge a distinct role for the STC in terms of economic efficiency or strategic management rather than be subservient to ministerial intervention. In the past the role of government through the STC has been detrimental to economic progress and consumer sovereignty that may have had to pay higher prices for lower grade product and limited choice products. Therefore, diminishing state intervention is in line with economic logic. The price setting itself is quite complicated with different layers added, which at the end of the day is borne by the consumer. The role of STC which purports to protect the consumer turns to swell the price adding unnecessary complexity. STC plays the role of a middleman, and it would not be an exaggeration to draw a similarity with the banyan role in India.
In an exiguous market like ours, the temptation for collusion and cartel organization or behaviour is intense. That’s precisely the reason some interest groups advocate price control. The decision for liberalization is laudable. However, without proper watchdogs with teeth to ensure prices are as close as possible to marginal costs, and firms’ prodigality kept to a minimum, the spectre of collusion will ever lurk in the horizon. We may cite the recent collusion between Procter & Gamble and Unilever that hit the headlines about collusive practices. The example that follows is mind blowing and can be a model for Mauritius if we are to liberalise and ensure genuine competition.
G. Riley wrote in April 2011 that “The EU Competition Commission got into a LATHER about alleged price fixing by a number of multinational soap and washing powder producers.” In a ruling the EU CC have imposed fines on Unilever and Procter & Gamble( €315.2m) for fixing washing powder prices in eight countries within the single market. An investigation was prompted by whistle-blowing from Henkel, a German competitor (manufacturer of Persil) and so the investigation CYCLE began. Unilever was fined €104m and Procter & Gamble was fined €211.2m. “Henkel was not WHITER THAN WHITE but under EU cartel rules, it avoided a hefty fine because of alerting the authorities to the price fixing scheme.”
Hence, the Competition Commission should be doubly on the alert and regular information be shared with the public in terms of concentration ratios, conduct of price leaders, international comparative prices, consumer surpluses, environmental degradation apart from conventional data found in annual report. The CCM may mount the relevant set up to emulate the EUCC. For example the Competition Act 2007 could be amended and provision for the protection of whistle blowers be made to enable the Competition Commission to act in a more proactive manner.
Another fear is that an oligopoly is always fraught with the instability of a possible price war. According to economists an oligopoly is faced with a kinked curve, so that its marginal cost curve is often indeterminate. Oligopolists make decisions based on the reactions of rivals. If one operator lowers price, consumers would flock to him/her and provoking the rivals to follow suit. Will such a situation bring a price war?
Conclusion
I wish to round up to say that I concur with the CCM’s conclusion that import liberalisation and price liberalisation will create a conducive environment and greater competition with resulting benefits to consumers. The price mechanism remains the most appropriate vehicle to allocate resources and ensure the most competitive price through the interaction of the forces of demand and supply. With more producers, there will be greater competition, and therefore better outcome is a priori expected. Moreover, since we will equally be manufacturing cement, we would be introducing backward integration and give the sector a strong international image of a key regional player. My reservations are that efforts should be stepped up to protect against the adverse impact of externalities on the environment, the more so as we depend on tourism and are still considered a green economy. Unfortunately, on this issue the CCM has put a disclaimer. We disagree because a decision of this nature should be taken within a holistic framework, not piecemeal. Moreover, the new trends in economics have made externalities an integral part of the pricing decision.