These two examples illustrate how the Competition Commission of Mauritius (CCM) used market studies to determine competition problems within the regulatory framework of the cement industry, and the need to consider competition in formulating regulations for the sugar industry. These case studies highlights the role that competition agencies can play in Government’s Industrial Policy decisions and more specifically the role that competition agencies can play in regulating and liberalizing sectors.
Deregulation of the Cement Industry
The CCM had heard a number of complaints relating to competition in the cement sector. To better understand the market the CCM, as permitted by the Competition Act 2007, undertook a market study from July 2010 to April 2011 that considered all aspects of the market to assess how the regulatory framework and business environment were affecting the levels of competition in the cement sector. The primary motive underpinning the study was to establish whether the competitive process was working in the market and whether the regulatory framework was promoting or distorting competition in the market. The study revealed the following pertaining to the regulatory framework of the cement industry:
Mauritius is a cement importing country that has a highly regulated cement market. Government intervention took place through three interlinked mechanisms: Retail price controls on bagged cement; imports of cement by the State Trading Corporation (STC); and import control.
There were three cement importers in Mauritius, of which two are private operators and the third was the state-owned enterprise; the State Trading Corporation. The STC, which initially entered the market to ensure there were no artificial shortages in the market, accounted for 50% of imports with the remaining 50% shared between the other two importers. Under the existing regulatory framework, government set the volume of cement to be imported by the STC to allow a tender of sufficient quantity to obtain a competitive price on the international market for cement. Based on the volume and price of the international tenders the Minister of Commerce allocated import permits to the STC and the remaining two importers and fixed the retail price of cement.
The CCM identified that the regulatory framework was hampering competition in the cement market and possibly deterring new entrants. The Commissioners advice conveyed these competition concerns and posed possible options for reform that emphasised the need to encourage new market entrants that would likely allow for the eventual dismantling of the regulatory framework. Following the completion of the market study, in April 2011 Government announced the liberalization of trade in the cement market.
The CCM endorsed the liberalization of this sector as new entrants were identified as a means to decrease market concentration which would encourage competitive pricing and output. However, the Commission was concerned that the liberalization would give rise to competition issues unless clear measures were taken to ensure new suppliers could effectively operate with substantial capacity. The Commission produced a second report to convey these concerns to Government and to propose recommendations for moving forward. Government proceeded with liberalization despite the competition issues that would result. More than a year and a half later there have been no new entrants to the cement industry, which is seeing gradual rising cement prices.
Illustration of Government-Agency Dialogue: Proposed regulations in the sugar industry
Mauritius is a large sugar producing country and the sugar industry is considered an important contributor to the country’s economy. Mauritian sugar fetches a higher price on the European market and as such, all domestically produced sugar is exported to Europe and sugar is imported for use in the domestic market.
However, the changing landscape of the both the import and export markets resulted in shifts in the sugar industry that began to raise a variety of competition-related concerns. Incentive mechanisms from the European markets began to decline, slowly making the export market less remunerative for domestic sugar producers. In the past domestic sugar prices were subsidised, which allowed importers to operate at a profit, until sugar subsidies were discontinued and the unique importer was allegedly faced with operating on a zero profit basis.
The unique sugar importer was responsible for subsidising the pensions of those dock workers who worked in the sugar import industry. This additional cost was transferred to domestic consumers by raising the price of domestic sugar. Given that there was only one monopoly importer in the market and there were no mechanisms in place to keep domestic sugar prices in check, the monopoly importer was in the position to decide prices freely to the negative impact of the consumer. Alternative suppliers of sugar decided to enter the market feeling that they could offer a lower domestic price.
The Ministry of Agro Industry and Food Security (The Ministry) responded to these issues by instituting proceedings to establish regulations to be imposed on the import sugar industry. At a relatively advanced stage in the regulation development process the Ministry called on the Competition Commission to assist with the formation of a regulatory regime. The Commission conducted an inquiry and recommended that the import market be open to all importers and proposed tax mechanisms to cover the cost of dock worker pensions. Given the late stage of entry of the Commission to the process, the formation of regulations was already at an advanced stage. Nonetheless, the Minister incorporated the recommendations proposed by the Commission by changing the regulations to allow for multiple importers and made changes to the tax regime in line with the Commission’s recommended mechanisms.
This case illustrates how agency engages with policymakers in an advisory capacity to convey to government the benefits of competition, as well as in shaping the outcome of policy review.