Friday, October 13, 2017

Bullying of local businesses by powerful foreign owned entities in large state contracts in order to make super profits.

I am referring to the previous issue in a general sense, to highlight a very real problem in small countries, that have monopoly suppliers, for state contracts. These monopoly suppliers, that have set up business entities in developing countries, have the resources to do so, knowing that as a monopoly, they can exploit that position in monopoly pricing, as there are NO other suppliers.

In sophisticated contracts where alternative suppliers are not available, such as in the supply of highly specialized gases for the health sector of a Country, the state has NO option but to accept the only supplier’s price. It is therefore possible that even if the price is high when comparison with foreign competitors supplying in other countries, there is NO choice but to accept that tender price. The only alternative to the state is to set up their own company in competition, and if they are able to manufacture and sell at a lower price, then so much the better.

It is unlikely that the state is able to grow a business of this nature, and should instead encourage the Private Sector to create a competitor, in the hope of reducing the price of their purchases. Of course NO private sector manufacturer will want to set up a company to manufacture, unless they have reasonable assurance that the hospital sector will purchase their output. Gas for Hospital Patients MUST be of a higher quality than the same gas for say an Acetylene Torch, as one deals with human lives and the other is used for welding purposes only!

This creation of competition should be built into public policy, where there is NO competition. One then begs the question, that is ONE company was promised business, in order to create competition,  then with regard to pricing, should there be upper limits on pricing, irrespective of what the previous supplier was charging. What then if the previous supplier decides to under bid on the order at a lower price? should the tender be awarded to the lower bidder, as they want to loss lead this year, to ensure the competitor does not come on the scene?  later they will be able increase their charges to a much higher level, safely knowing that there is NO competition.

What happens when the new company and the old company join hands in pricing and decide not to compete on certain contracts, so the other gets the contract at a higher price? This is called price rigging.  Withholding from the tender, to benefit each other, is a practice common in the Sri Lankan business space, that often the Government has had to pay a huge price for their essential requirements at higher than necessary prices.

It is common in Construction Contracts, that the approved contractors DIVI-UP the contracts (by not competing, or putting a high price) quoting high prices, and sharing the loot amongst themselves, which then means the Government pays a much higher than needed price and the public lose out on this transaction.

WHAT MECHANISMS ARE IN PLACE to ensure equity in pricing?

The main point to note is that the procurement committees of large state contracts, must be aware of prevailing prices of these essential supplies, so that there is NO obvious collusion between suppliers to fleece the Government by agreeing on bidding strategies that end up costing the state the more than is necessary.

Otherwise collusion can result in paying over the odds for such supplies. Even if there are outwardly two independent bidders for a contract, it is difficult to prove or disprove collusion. Further if there is NO collusion, but one supplier believes the only option would be to purchase the competitor, giving an instant monopoly pricing advantage, what does the state do in this regard?

Both the above practices are common in Sri Lanka and the State in fact pays a huge premium over and above what they should have in fact agreed to. There is often corruption involved in bribing procurement committee, or other officials to sweep these situations under the cover, so it does not get picked up by media and blown up into an embarrassment of allegations.

It looks like the Government must establish, technical evaluation committees of qualified and skilled people in their fields to independently comment on these prices quoted to ensure they are NOT fleeced, in the way that the history of Sri Lanka is replete(filled) with such incidences cropping up every day.

In order to encourage healthy competition, in some instances because the barriers to entry are extremely costly, there may have to be some private public partnership, or threat thereof to call monopolistic companies to heal!

In an economy with Economic Freedom, independent competitors can enter into the market if they believe their pickings in a situation of monopolistic pricing, can be had, by them being able to bid lower to gain the business. However in instances such as this in Sri Lanka, it is a known fact that when these threats emerge, the Monopoly Supplier, purposely under bids at a much lower price, to drive this new entrant out of the market forever. Unilever with their immense reserves and marketing and branding power have been known to always resort to these practices, when they believe competitors are about to emerge, and there are many startups that have gone under due to this.

The answer in this case is Consumer Rights Laws, to encourage competition, and state intervention to enforce fair completion with a view to abandoning monopolistic pricing, as the likelihood of collusion when few players are present is very high, and without good technical evaluation of costs, fair prices are not obtained on state contracts. 

One must always be cognizant that in small markets, economies of scale and good pricing can only be achieved by monopolies. Therefore the integrity of the technical evaluation committees, and their knowledge on pricing issues, and assistance from UNITED NATIONS agencies to assist the smaller countries, in getting a fairer deal is necessary if the public are to be served better, at reasonable costs, without being fleeced. 


Anonymous said...

Tough one. Competition is good, but in cases of low pricing, governments should be able to have a long term agreement to ensure both monopoly and government benefit by long term purchase contract at favorable rates, allowing monopoly company to make profits but ensuring the prices are competitive and reasonable.

After all today pricing information can be obtained via UN agencies within minutes to know what is a reasonable price to pay for some goods or services, that is if the internet does not supply it in the first place.

Anonymous said...

Public Private Partnerships can help in finding a solution where the barriers to entry in sophisticated or capital intensive industries are apparent. We know what the objective is, to prevent being fleeced by monopolies, surely we can take steps to avoid that in the interests of the Country.