Developing World Antitrust

By Francisco Beneke*

One of the biggest challenges for the Competition Superintendence, the antitrust authority in El Salvador, is posed by the sugar industry. What makes this case worth studying is that it basically has it all: a cartel in the manufacturing stage, a dominant wholesale distributor, and a law that shields the industry against the competition authority (and as we will see, from any source of competitive pressure).

Starting with the law, enacted in 2001, the Sugar Act paints a good portrait of the manufacturing industry’s lobbying power. This law mandates and enforces a cartel as follows. Article 2 states that dividing market quotas between the processing plants is a matter of public interest. Articles 19 and 20 specify how this system works. Each plant is yearly given a percentage of the internal market based on past production history. This quota is subdivided in 12 equal parts, which represent the maximum of sugar that a firm can produce per month. If this maximum is not complied with, the processing plant is not only fined but also in the next year will be deprived of a portion of its market share equal to twice the size of the excess with which it is charged.

To enforce this mechanism, the manufacturers have to constantly disclose production information to the regulator (CONSAA), who also has auditing powers granted by the law. Another and more effective way of monitoring the market quotas is performed through the industry’s common sales agent, Dizucar.

Entry is also regulated in the Sugar Act. Any plant that wants to join the club has to be cleared by the CONSAA. The problem with this is that 3 out of 8 members of the board of directors of this state entity are representatives of incumbent plants. It is no majority but one has to bear in mind the political influence this industry has in order to assess the likelihood that the board would take a decision that affects the interests of incumbents. The chances of entry are, therefore, slight at best.

As the reader can see, the Sugar Act solves most of the problems that a cartel faces: coordination, cheating, and entry of new firms. In addition, the monitoring of the quotas is done with greater efficiency through the common sales agent mentioned above, which all but monopolizes the distribution of the production of the sugar mills.

Because the law states that this market division is in the public interest and regulates its functioning, the hands of the Competition Superintendence are tied in what concerns the cartel. Therefore, the authority took the only legally available course of action that it had. In April of 2010 it opened and investigation regarding alleged exclusionary conduct in which Dizucar, the wholesale distributor and common sales agent, was engaging.

In 2012, the Competition Superintendence found that Dizucar was guilty of abuse of dominance and fined the firm with approximately 1.1 million dollars. The amount is rather small since the decision states that the damage caused to consumers only in 2010 was as high as 12 million dollars. Nonetheless, the Competition Superintendence argued that the fine is the highest possible amount allowed by the law, which is the equivalent of 5 thousand times the legal minimum monthly wage. Technically, according to the law, this is not the highest possible amount. Article 38 of the Competition Act states that if the infringement is of particular gravity, then the fine can be established between twice and ten times the estimated amount of the profits acquired through the anticompetitive behavior. There is no discussion in the decision as to why this criterion was not applied when quantifying the fine but in light of the loss in consumer welfare that was claimed it is hard to see a good reason for keeping the fine so low.

Moving on from the case, the Competition Superintendence also undertook great efforts to do something about the Sugar Act. According to an opinion issued by the authority in August last year, since May 2010 the competition authority worked with other government institutions such as the Ministry of the Economy, the Ministry of Agriculture and representatives from Casa Presidencial (the equivalent of the White House) to form a consensus about the reforms that were needed to bring competition into the sugar industry. The work of this team culminated in a joint report in 2012 and a proposal to amend the law that basically aims to abolish the market division system.

Congress has undertaken no reforms yet, but to be fair with the Competition Superintendence and the other state institutions involved, lobbying for a change of the status quo can be a titanic task. Indeed, a very comprehensive study of the lobbying industry in the US found out that one of the strongest predictors of failure for lobbying activities is when the efforts are aimed at changing an established policy (see “Lobbying and Policy Change: Who Wins, Who Loses and Why” by Baumgartner, Berry, Hojnacki, Kimball and Leech (2009)).

To conclude, it can be seen that the strategy of the Competition Superintendence has been to coordinate both enforcing and advocacy tools at its disposal to tackle the problem. Beyond the law and beyond the economics of the decision and the proposed reforms, it is worth highlighting this coordination of activities at a strategic level. Some examples in Latin America suggest that a good enforcement policy aids antitrust authorities in gaining support for reforms they advocate. One such example is the price fixing case of medicines at the retail level by pharmacies in Chile in 2009. After the decision was made public, there was widespread condemnation among the population against the cartel, which helped streamline substantial reforms to strengthen the Chilean competition law. It still remains to be seen whether the Competition Superintendence’s efforts will succeed but I believe sugar consumers expect that this institution will not give up so easily.

* Co-editor, Developing World Antitrust