TCP Preliminary Enquiry Report

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COMPETITION COMMISSIONOF PAKISTAN

TRADING CORPORATIONOF PAKISTAN

TENDERSFORIMPORTOF SUGAR


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This Preliminary Enquiry Report has been prepared by Noman A. Farooqi and SyedUmair Javed, officers of the Competition Commission of Pakistan, pursuant to Section 37

of the Competition Ordinance 2009

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INTRODUCTION AND FACTS

1. Annex I is the news clipping of Daily Business Recorder dated 19-01-2010;

wherein it has been inter alia reported that, the tender documents floated by TradingCorporation of Pakistan (the TCP) for the import of 350,000 metric tons sugar are

"tailor-made" to suit a particular Dubai-based refinery.

2. Annex II is the news clipping of Daily Business Recorder dated 22-01-2010;

wherein it has been reported inter alia that, TCP has been directed by the government

that its tender terms for the import of white sugar during 2010 should be in

conformity with the international standards in order to provide a level playing field toall international sugar suppliers. Following complaints by the stakeholders against

TCP's tender terms and conditions, the matter was taken up with concerned

ministries, who then raised the issue in the last meeting of Economic Co-ordinationCommittee (the ECC) held on January 12, 2010. It has been further reported that,

the first tender for import of 150,000 metric tons white sugar will be opened on

February 6, 2010 but the terms and conditions are still not ready.

3. Annex III is the news clipping of Daily Business Recorder dated 28-01-2010;wherein it has been reported inter alia that, TCP has failed to provide level playingfield to all international sugar suppliers. The international sugar trading community

had been voicing its concern on TCP's sugar tender terms since they were abruptly

changed in 2009. The alleged terms were tailor-made to establish monopoly of the

one Dubai-based refinery after the visit of the then TCP Chairman to Dubai inFebruary 2009. Thereafter the ECC thoroughly reviewed the concerns and instructed

TCP to make necessary changes in the tender terms to make it in line with

international sugar trading practice and to provide equal opportunity to all suppliersand origins to offer.

4. The Competition Commission of Pakistan (the 'Commission') tooksuo motonotice of the above mentioned news items and pursuant to the provisions of sub-

section (2) of Section 28 of the Ordinance appointed the undersigned officers as

Enquiry Officers to prepare a report under Section 37(1) of the Competition

Ordinance 2009 (the 'Ordinance') to determine whether any violation of Section 3 orSection 4 the Ordinance is taking place.

5. In the meanwhile, the Commission received a letter from Mr. Jawad Tariq dated 3February 2010, which complained about the irregularities and lack of transparency in

the tender process of TCP. The letter indicated that the documents for the tender to be

opened on 6 February 2010 were issued on 2 February 2010 which would have made

it impossible for any genuine international supplier to provide a bid thereforenegatively affecting competition. The letter also highlighted a number of clauses in

the tender conditions which did not conform to international standards and had the

effect of restricting the bidding to suppliers from a certain country. These conditionsinclude specifications regarding sugar, mode of submitting bids, packaging of sugar

and transportation of sugar.

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6. The Enquiry Officers met the complainant on 8 February 2010 to solicit furtherinformation on the matter. The officers were informed that the documents for the 13

February tender had still not been issued.

7. Another letter from Mr. Jawad Tariq dated 9 February 2010 was received by the

Commission which contained the results of the 6 February bidding and indicated that

the documents for the February 13 tender were issued just 4 days before thesubmission deadline. The results of the first bidding showed that only one bidder

from Dubai showed interest in providing the stipulated amount of refined sugar.

TRADING CORPORATION OF PAKISTAN

8. Before proceeding further, it would be relevant to discuss the role of TCP. TCP isthe principle trading organization of the Government of Pakistan. TCP was set up as a

private limited company in 1967. TCP is under the sole ownership and administrative

control of Ministry of Commerce, Government of Pakistan, to act as a public sectortrade house i.e. exports of agriculture & consumer goods and import of essential

commodities under specific directives of the Government. Being a companyregistered under the Companies Ordinance 1984, TCP is a undertaking according tothe definition given in Section 2 (1) (p) of the Ordinance.

THE TCP TENDERS

9. The Federal Cabinet on November 4, 2009 decided to import 500,000 tons of raw

sugar and 500,000/- tons of refined white sugar through the TCP during the currentseason. However, the TCP did not agree to import raw sugar as its cumulative cost

was found to be higher than that of the refined sugar. ECC agreed to the view point of

the TCP and decided to import only refined sugar and directed the TCP that its termsof tender should be in conformity with the international standards in order to provide

a level playing field to suppliers from all countries.

10. TCP has issued six tenders between the periods starting from December 31, 2009to January 20, 1010 (the TCP Tenders), for procurement of sugar totalling

500,000/- tons, the details are as follows:

Sr.

No.

Tender Ref# Quantity Date of

Publication

Date of

Submission

Date of

Opening

01. Imp/Sugar/9-14/09 150,000 MT 31-12-09 06-02-2010 06-02-1020

02. Imp/Sugar/9-16/2010 150,000 MT 08-1-2010 13-02-2010 13-02-201003. Imp/Sugar/9-17/2010 50,000 MT 13-01-2010 15-02-2010 15-02-2010

04. Imp/Sugar/9-18/2010 50,000 MT 15-01-2010 20-02-2010 20-02-2010

05. Imp/Sugar/9-19/2010 50,000 MT 18-01-2010 22-02-2010 22-02-2010

06. Imp/Sugar/9-20/2010 50,000 MT 20-02-2010 27-02-2010 27-02-2010

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11. From the perusal of the aforementioned news clipping and the informationprovided by Mr. Jawwad Tariq, it appears that the tender documents for the first two

tenders were made available only (4) four days prior to submission of bid.

12. The terms and condition of the TCP tender Ref# Imp/Sugar/9-14/09 (hereinafter

referred to as First TCP Tender) (copy of the Terms & Condition of First TCP

Tender is Annex IV) were also reviewed and following clauses were found to bepotentially of concern:

Clause 2: Commodity:

a. White Sugar.

1. Requirements for white sugar as prescribed by Pakistan Standard

& Quality Control Authority (PSQCA).

S. No. Characteristics

Requirements

Methods of TestSpecification

White Sugar

1. Polarization Min 99.7o s ICUMSA GS2/3-1

2.Moisture (loss on drying 3 hours at

105o C) % Max0.08 ICUMSA GS2/1/3-15

3. Invert Sugar, percent m/m, Max 0.04 ICUMSA GS2-6

4. Ash, percent m/m Max.

i. Sulphate Ash 0.06 ICUMSA GSI/3/4/7/8-11

ii. Conductivity Ash 0.04 ICUMSA GS2/3-17

5. Solution Colour ICUMSA Unit Max. 120 ICUMSA GS2/3-9

6. Sulphur Dioxide mg/kg, Max. 15.0 ppm ICUMSA GS2/7-33

7. Copper mg/kg, Max. 2.0 ICUMSA GS2/3/29

8. Arsenic mg/kg, Max. 1.0 ICUMSA GS2/3-259. Lead mg/kg. Max 1.0 ICUMSA GS2/1/3-27

Note: The relevant testing method of ISO, CAC and of other internationally recognized standard

methods might be taken into account for analysis purpose.

Clause (6) Packing:

In standard export packing as prescribed by PSQCA in new polypropylene

(PP) bags with an inner polythene lining. The contents of sugar in eachbag should be 50 Kgs net. The bags should be as per specification given

below: -

S.

NoCharacteristics Requirements Tolerance

Method of

test

1.

Dimension in mm (inch)

Outside length965 (38) -25*

PS:ISO 22198-

2008

Outside width 559 (22) -10*

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2. Mass per sq. meter (gm) 95 -5%*PS: ISO 3801-

2002

3. Mass per bag (gm) 105 -5%*PS: ISO 3801-

2002

4.

Density/dm (inch)

(Minimum) Ends43(11)

XXXPS: ISO 7211/2-

2002

Picks 43(11)

5. Denier of tapc (Minimum) 920 XXXPS: ISO 7211/5-2002

*Plus tolerance is upto infinity.

Clause (10) Submission of Bids:

Interested TCP pre-qualified and non pre-qualified foreign sugar

suppliers/ exporters may submit their bids in sealed envelope to bedropped in the Tender Box placed at Reception Counter of TCP at 4th

Floor, Block B, Finance & Trade Centre, Sharah Faisal, Karachi on

Saturday the 6th February 2010 latest by 1100 hours (11.00 am). Bidsreceived through fax, cable, courier or any other means except as

prescribed above shall not be considered.

Clause (15) Shipment:

a. First shipments of at least 12,500 MT 5% MOLSO within three (3)weeks (excluding voyage time) from the date of opening of L/C

and subsequent shipments of same quantity after every one week;

b. Afloated cargo and cargo under loading shall not be accepted;

c. Minimum shipment shall be 12,500 MT 5% more or less sellersoption (MOLSO).

Clause (16)(f) Pre-loading Inspection:

The offered sugar or packing bags or both shall be rejected if it does not

meet any of the Specifications or Characteristics prior to loading.

Clause (19) Terms of Shipment on C&F Free Out Basis (For Break Bulk):

a. Minimum shipped quantity should be 12,500 MT 5% MOLSO.

b. The cargo to be discharged at the average rate of two thousand fivehundred (2500) MT at Karachi Port or Bin Qasim Port per weather

working day (PWWD) of 24 consecutive hours based on minimumnumber of four (4) hatches and minimum four cranes/derricks of

minimum 15 M/Tons (All installed cranes/derricks should be

operative all the time during discharge). All time loss delay due tonon availability of cargo gears shall be on account of seller.

Sundays and holidays excluded, even if used.

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c. Trans-shipment not allowed.

d. Vessel not to load any other cargo/consignment(s).

RELEVANT MARKET

13. This case concerns possible violation of Section 3(1) read with Section3(2) of the Ordinance which forbid abuse of dominance by undertakings in the

relevant market. Before determining whether an abuse of dominance has taken place,

the relevant market needs to be defined. As per the definition of relevant market in

Section 2(1)(k) of the Ordinance, a relevant market comprises a product market and ageographic market.

14. A product market consists of all the products that are regarded by theconsumer as interchangeable or substitutable due to characters, usage and prices. The

product market in this case is the refined sugar made from crushing sugarcane or

refining raw sugar. Due to its intended usage and characteristics, refined sugar can bedifferentiated from other forms of sugar natural and unrefined. Most of the refined

sugar is used in the commercial food and beverage industry as an input for valueadded sugar products. These consumers of refined sugar cannot substitute unrefinedsugars as the latter are unsuitable for use in processed or confectionary items. Given

the changing consumption patterns and needs, even domestic consumers, including

those in the rural areas, rely more and more upon refined sugar to meet their dietary

needs. Therefore, the relevant product market is that of refined sugar.

15. The relevant geographic market consists of all areas where the conditions of

competition are homogenous. Since this case deals with import of refined sugar intoPakistan which is strictly regulated by the government, the relevant geographic

market is the whole of Pakistan.

DOMINANT POSITION OF TCP

16. TCP is the sole undertaking which is allowed to import refined sugar intoPakistan. TCP is also the single largest buyer of domestic and imported refined sugar.

This gives TCP unmatchable market power in the relevant market and therefore it is

dominant in the relevant market according to the definition given in Section 2(1) (e)of the Ordinance.

ABUSE OF DOMINANCE

17. A violation of Section 3(1) takes place if a dominant undertaking engagesin practices that prevent, restrict or reduce competition in the relevant market.

Competition in the relevant market can be prevented, restricted or reduced if a

dominant undertakings actions exclude other undertakings from participating in therelevant market. Similarly actions on part of a dominant undertaking which put some

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trading parties at a competitive disadvantage vis--vis others may also infringeSection 3(1).

18. From the review of the material available on record, the followingpreliminary conclusions can be drawn:

(i) Conditions in clauses 2, 6 & 10 along with the fact that the tender documentsknown only four days prior to the submission of bid, which is to be submitted

personally,prima facie, are likely to prevent, restrict and reduce the competition in

the relevant market for the following reasons:

(a) The terms & conditions provide unusual specifications of sugar and

packing bags, which is not in line with the international standards,

therefore, by providing the tender documents only (4) four day prior tosubmission of the bid appears, prima facie, to exclude a broad class of

suppliers;

(b) According to tender specifications, the required solution color

ICUMSA unit max, which is an indicator of whiteness, has been set at 120while the more common international standards are 45,100 and 150. Thisaction,prima facie, may exclude a broad class of sugar suppliers;

(c) In the required white sugar, the sulphur dioxide is required to be 15.0

ppm. However the sulphur dioxide occurrence is 20.0 ppm in Brazil,which is the largest sugar producer and exporter. Similarly the copper

required is 2.0 mg\kg while in Brazil sugar copper normally occurs at 3

mg\kg. Therefore it appears, prima facie, that the specification of thetender may exclude a broad class of suppliers;

(d) The specifications of bags demanded are not in line with theinternational standards. The bags normally used for sugar are 10 mm

shorter in length as compared to the specifications of the tender. For most

international suppliers hailing from Brazil, EU or Thailand, it may be

extremely difficult to meet the specifications detailed in the tenderespecially on a short notice;

(e) It would be extremely difficult for many foreign companies to submittheir bids given the short time limit of four days.

(ii) From the perusal of clause 15, 16 & 19 of the terms and conditions of First TCP

Tender relating to the shipment, it appears that the same are not in conformitywith the international standards and,prima facie, appear likely to prevent, restrict

and reduce the competition in the relevant market for the following reasons:

(a) Time line for offloading the cargo is given in the First TCP Tender.

However there is no provision for loading the cargo;

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(b) The average rate of offloading the cargo from ship in the tenderdocument is 2500 MT per weather working day (PWWD), which is

also not inline with the international standards. Reference in this

regard is made to the LIFFE London No 5 white refined sugarscontract, a copy of which is attached, wherein a standard of 1500 MT

PWWD for loading/offloading of ships is benchmarked. It appears that

the clauses are likely to be exclusive in nature;.

(c) The prohibition of transshipment and the direction not to load any

other cargo/consignment necessitates that a particular and dedicated

ship be used by the suppliers. This means that a partially loaded largeship, which is common in international trade, will not be feasible. In

turn this would deter long distance suppliers. Following are the

standard cargo ships sizes:

Small Handysize = deadweight of about 20,000 28,000 tons

Handisize = deadweight of about 28,000 40,000 tonsHandymax = deadweight of about 40,000 50,000 tons

It is also worth mentioning that there is no well defined or widely

accepted size sector below 15,000 tons.

(d) Even if it is assumed that a shipment larger than the minimum requiredshipment of 12,500 MT 5% MOLSO is sent, then the timeline for

subsequent shipments of equal quantity makes is practically

impossible the dispatch of shipment in the prescribed (7) days timeperiod.

(e) It therefore appears that,prima facie, the conditions of the tender seemto suit suppliers located at a very short distance from Pakistan. It becomes

practically impossible for long distance suppliers to meet the conditions

prescribed and remain cost effective.

(f) Furthermore, TCP has issued (6) six tenders simultaneously totaling

5,00,000/- MT, in a season when crushing is going on and when

determination of a production shortfall is extremely difficult andpremature. In such circumstances the haste and manner in which the

tenders are being calledappears,prima facie, to be suspicious.

RECOMMENDATIONS

19. In light of the discourse above, it is likely that the present structure andmanner of the TCP Tenders offers an undue advantage to suppliers located at a

nearby port with access to smaller ships and excludes suppliers from all major sugar

producing and exporting countries such as Brazil, EU and Thailand.

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20. If the TCP Tenders proceed in their current form, a situation is likely toemerge where there is a violation of Section 3(1) read with Section 3(2) and Section

3(3)(a) & (g) of the Ordinance. In our opinion, such a situation would likely have an

upward impact on the prices of refined sugar in the relevant market and thereforewould not be in public interest.

21. A complete Enquiry Report cannot be submitted without taking intoconsideration the view point of TCP. However in doing so, all TCP Tenders would

have been decided and it is likely that an irreparable loss would have occurred. This

time constraint warrants that interim measures be taken right now to ensure that till

the time the Enquiry Report is finalized, reasonable safeguards are in place tominimize the possible negative effects on competition in the relevant market and the

public at large.

22. It is therefore recommended, keeping in mind the urgency of the matter that

the Commission may exercise its power under Section 32(1) of the Ordinance, read

with Regulation 25 of the Competition (General Enforcement) Regulations 2007, todirect TCP to maintain status quo till the final Enquiry Report is issued.

Noman A. Farooqi Syed Umair Javed

Deputy Director (Legal) Assistant Director (M &T.A)

Dated: February 09, 2010

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Documents

TCP Preliminary Enquiry Report