Dr. M.A. Ramady
Publication Date: 
Mon, 2007-09-10 03:00

Consumers in the Kingdom were heartened by the news of the formal establishment of a Consumer Protection Association on the instructions of Custodian of the Two Holy Mosques King Abdullah.

The aim of the association is to protect consumers from fraud and counterfeit goods, something that the Ministry of Commerce has been trying to combat for many years and with added urgency since the Kingdom’s accession to the WTO in 2005.

The above is commendable, but the time has now come to look more closely at establishing a powerful anti-competitive agency, with powers to impose hefty fines for price fixing and anti-competitive collusion.

This will have implications for the way national companies do business in the future.

For such a body to succeed, no corporation, however mighty or a household name, will escape scrutiny, investigation and possible fine. One cannot be bigger a household name than British Airways, and yet BA was fined a staggering 270 billion sterling (SR2.1 billion) in a dual action by both UK and US competition authorities in August 2007, after admitting price fixing on fuel surcharges on its long haul flights.

The UK fine of 121.5 million sterling was the biggest imposed by the UK’s Office of Fair Trading for infringements of competition laws, and seemed to demonstrate renewed vigor in the pursuit of anti-competitive corporate behavior. And what was the crime to justify such a huge penalty?

BA admitted that, between August 2004 and January 2006, it had colluded with Virgin Atlantic over the “surcharges” they would both add to ticket prices in response to rising oil prices. Over the period in question, these extra surcharges raised from 5 sterling to 60 sterling a ticket on long haul flights. How was BA caught out?

It would seem that Virgin Atlantic took fright and blew the whistle on BA and admitted to the office of Fair Trading the price collusion that had taken place. Virgin escaped any fine after being granted immunity under the OFT’s leniency policy for whistle blowers.

The OFT investigation claimed that on at least six occasions, they discussed or informed each other about proposed surcharges price changes instead of setting them up independently of each other, when they were legitimately entitled to do so in the face of rising oil prices. What Virgin Atlantic seemed to have absolved its conscience by ratting out on BA, some see it as a cynical move by Virgin to have lured their arch-rival BA into an illegal deal and then blow the whistle and land BA with the massive fine, giving Virgin what might be politely called, a “competitive advantage”.

But it is not only British airlines that have been found guilty of unfair competitive practices.

The US Department of Justice has been vigorously investigating other airlines and has taken action against Korea Airlines for its part in a conspiracy to fix air cargo prices, which, in conjunction with BA, saw shipment costs increase from 4 cents per kilogram to a high of 72 cents per kilogram.

Why all the fuss about anti-trust and anti-competitive behavior then? Isn’t this the “natural” way of business dealing, whereby corporations do not wish to upset rivals and ensure that everyone is happy?

Maybe board directors are satisfied with increased profit margins, but when unprotected consumers and other businesses end up picking the tab for illegal price collusion, then the economy becomes distorted through inefficient price allocation and social welfare diminishes.

Spotting obvious fraud in shoddy goods and counterfeit products is one thing, but spotting price collusion by respectable corporations is another.

In the Gulf and the Kingdom, commendable efforts have been made in the former area to protect consumers, but a more invigorated framework is yet to be established in the latter.

Gulf corporates have now progressed beyond their infancy establishment phase, with domestic protection having been paramount.

In the age of competitive forces, they must now stand on their feet, and even the manner by which they advertise their products and services can often be misleading and uncompetitive.

Competition regulators had recently forced some 13 airlines to change their adverts and websites so that travelers are given the total cost of flights, including all charges, from the start of transactions. Passengers often only discover the full cost of their flights only when they come to the last part of their booking.

With airline competition coming to Middle East skies, similar action is also required in the region. It is not only in the airline business that investigations of uncompetitive practices take place, as US investigators also widened their investigations into BP’s commodity trading activities.

The company had been under scrutiny over oil trading activities going back to 2002, but in a ruling with the Securities and Exchange Commission, BP revealed that the investigation would now look back to 1999.

In the final analysis, one has to trust that company management and board of directors’ act in an ethical manner, without the need for external oversight and constant snooping investigations or whistle-blowers.

In the Middle East, with the predominance of family businesses and interlinked alliances through marriage or other social factors, the issue of whistle-blowers from owners is a remote possibility, unless a disgruntled employee decides to act and report to the regulators.

In Virgin Atlantic’s case, to give them credit, it was the senior managers who took the matter to the regulators after finding out that lower level management had colluded with BA in price fixing. They were fired.

In the real world, however, greed is too powerful a magnet for most to resist, and having powerful regulatory bodies willing and able to investigate and fine errant behavior is a must.

(Dr. Mohamed Ramady is visiting associate professor, Finance and Economics, King Fahd University of Petroleum and Minerals).

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