ICH. price fixation and quota allocation are illegal


The Competition Commission of Pakistan (CCP) has issued a Policy Note to the Ministry of Information Technology (MoIT) and Pakistan Telecommunication Authority (PTA) recommending the withdrawal of the Directive dated 13 August 2012 issued by the MOIT proposing establishment of international clearing house exchange for international incoming calls for long distance international, fixed-line local loops, wireless local loops and mobile operators (Proposed ICH Arrangement).

In its Policy Note, CCP has also advised MOIT & PTA that any such proposed arrangement/agreement if entered into, is not tenable in terms of Section 4 of the Competition Act, 2010.

The Proposed ICH Arrangement has been supported by MOIT through its directive for amicable settlement of the pending cases relating to Access Promotion Charges (APC) and to curtail and eliminate the grey traffic, in line with the existing Deregulation Policy 2003, and the existing regulatory regime.

CCP has observed in its Policy Note that while it may be within the domain of MOIT to issue policy directives in relation to the subject industry, it needs to be appreciated that any such policy decision/directive/circulars are in fact subject to the substantive provisions of the statute in force.

Regarding the amicable settlement aspect, it has been noted that the pre-ICH outstanding liabilities on account of regulatory and GoP dues will continue to be individual responsibility of each LDI operator i.e. ‘to be discharged as final settlement through legal process’. Therefore, CCP has observed that it is thus not clear how the matter stands resolved when the settlement is subject to judicial review i.e. ‘final settlement through legal process’ which in any event, the parties are bound to honor.

With respect to the curtailment and elimination the grey traffic, CCP has observed that under the Proposed ICH Arrangement the termination rate for Pakistan is expected to go up to 8.8 cents from currently lower rates. This may provide further incentive for Grey market players to increase their traffic. Also, in future if an arbitrage opportunity exists the players operating in the Grey traffic will likely exploit that, thus ICH move is unlikely to curb the Grey traffic and may kindle its further growth.

As far as the De-regulation Policy, 2003 is concerned, it has been observed by the Commission that the said policy apart from other objectives provides for increase service choice for customers of telecommunication services at competitive and affordable rates, liberalize the telecommunication sector by encouraging fair competition amongst service providers and maintain an effective and well defined regulatory regime that is consistent with the international best practices. However, through the Proposed ICH Arrangement it appears that the competition among the LDI Operators is restricted/prevented/diminished as each operator will have a guaranteed quota of incoming international traffic as per their existing market share.

As for the aspect regarding regulatory regime for the telecom operators, CCP in its Policy Note has observed that all relevant laws and applicable rules and regulations which inter alia includes the Competition Act must be taken into account. The CCP reiterates that it had already passed an order dated 8 February, 2012 in which the CCP made it abundantly clear that the subject matter has serious competition concerns.

The CCP further notes that the Proposed ICH Arrangement directly violates Section 4 of the Act, and particularly, clause (a) & (b) of subsection 2 of Section 4 which prohibits price fixing and division of market via quotas. . Under the Proposed ICH Arrangement the consortium will designate PTCL to undertake negotiations on termination rates with foreign operators, and LDI operators also signing up to a percentage quota, will be guaranteed from the revenue PTCL collects from the incoming international terminations. Thus the consortium as such will fix price for termination rates and also via percentage quota allocated, share in the proceeds from the terminations from foreign operators, a clear violation of the Act. It has also been observed that in this environment there is no incentive for a LDI Operators to improve sales, or enhance quality of service (QoS) or for that matter to invest in Network. With fixed quotas there will also be less incentive for LDI’s to bring in additional voice traffic from overseas operators as any upside will be shared as per quota.

It has also been observed by CCP that in terms of Para 3(d) of the Directive, the representatives of PTA and MOIT on Board as observers of Proposed ICH Arrangement, in itself curtails the free market commercial decision making of the LDI Operators and perhaps undermines the regulatory powers of PTA.

The CCP also noted in its Policy Note that a substantial advantage will be available to the existing LDI operators due to the Proposed ICH Arrangement. The incumbent LDI operators will be in a position to exploit the said arrangement through a cost advantage over potential new entrants. They may use this advantage to cut prices if and when new players enter the market. Although they will be moving away from short run profit maximization objectives, they will however inflict losses on new undertakings and thus protect their own market position in the long run unless the new entrant also agree to such an arrangement. Once a potential entrant is successfully barred from a market, existing players are free to revert to their prior anticompetitive conduct. This will eventually have a negative impact on the end consumer, who must now face higher prices (due to monopolistic or oligopolistic pricing structures and inefficient and obsolete technology), lower quality products (the effect of less research and development) and ultimately fewer alternatives. It has also been observed that although it has been stated in the Para 3(bi) of the Directive that the appointment of an independent undertaking to monitor the said arrangement and submit MIS reports on a daily basis to PTA or MOIT to prevent “collusive behaviour” and to ensure transparency; however, under the given arrangement it seems more likely that such arrangement results in monitoring the consortium members to prevent any deviation from allocated quotas, which in itself is anti-competitive under the Proposed ICH Arrangement.

CCP in its Policy Note concludes that Under the Directive and Proposed ICH Arrangement price fixation and sharing of market (quota allocation) are promoted. Such practices i.e. price fixation and quota allocation are considered per se illegal being the most pernicious anticompetitive conducts. Competition regime is all about applying competition policy & principles of law to make undertakings compete vigorously with each other. This fair business rivalry ensured through the competition rules brings efficiency, increased productivity, creates a wider choice for consumers and helps reduce prices and improve quality. It also plays important role in weeding out inefficient undertakings and relocation of output from less productive to more productive undertakings. It needs to be recognized that the larger benefit of competition is to promote and enhance economic efficiency.

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