COMPETITION COMMISSION OF PAKISTAN

TRADING CORPORATION OF PAKISTAN

TENDERS FOR IMPORT OF SUGAR
This Preliminary Enquiry Report has been prepared by Noman A. Farooqi and Syed
Umair 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 Trading
Corporation 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 to
all 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-ordination
Committee (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 playing
field 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 in
February 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 suppliers
and origins to offer.

4. The Competition Commission of Pakistan (the 'Commission') took suo moto

notice 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 or
Section 4 the Ordinance is taking place.

5. In the meanwhile, the Commission received a letter from Mr. Jawad Tariq dated 3
February 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 therefore
negatively 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 conditions
include 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 further
information 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 the
submission 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 is
the 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 sector
trade house i.e. exports of agriculture & consumer goods and import of essential
commodities under specific directives of the Government. Being a company
registered under the Companies Ordinance 1984, TCP is a undertaking according to
the 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 current
season. 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 terms
of 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, 2009
to January 20, 1010 (the ‘TCP Tenders’), for procurement of sugar totalling
500,000/- tons, the details are as follows:

Sr. Tender Ref# Quantity Date of Date of Date of

No. Publication Submission 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 13-02-2010
03. 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 information
provided 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 be
potentially of concern:

Clause 2: Commodity:

a. White Sugar.
1. Requirements for white sugar as prescribed by Pakistan Standard
& Quality Control Authority (PSQCA).

Requirements
S. No. Characteristics Specification Methods of Test
White Sugar
1. Polarization Min 99.7o s ICUMSA GS2/3-1
Moisture (loss on drying 3 hours at
2. 0.08 ICUMSA GS2/1/3-15
105o C) % Max
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 GS2/3-25
9. 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 each
bag should be 50 Kgs net. The bags should be as per specification given
below: -

S. Method of
Characteristics Requirements Tolerance
No test

Dimension in mm (inch)
965 (38) -25*
Outside length PS:ISO 22198-
1.
2008
Outside width 559 (22) -10*

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 PS: ISO 3801-
2. Mass per sq. meter (gm) 95 -5%*
2002
PS: ISO 3801-
3. Mass per bag (gm) 105 -5%*
2002
Density/dm (inch)
43(11) PS: ISO 7211/2-
4. (Minimum) Ends XXX
2002
Picks 43(11)
PS: ISO 7211/5-
5. Denier of tapc (Minimum) 920 XXX
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 be
dropped 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). Bids
received 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 sellers
option (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 five
hundred (2500) MT at Karachi Port or Bin Qasim Port per weather
working day (PWWD) of 24 consecutive hours based on minimum
number 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 to
non 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 Section
3(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 a
geographic market.

14. A product market consists of all the products that are regarded by the
consumer 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 be
differentiated 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 value
added sugar products. These consumers of refined sugar cannot substitute unrefined
sugars 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 into
Pakistan 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 into
Pakistan. 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 engages

in 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 undertaking’s actions exclude other undertakings from participating in the
relevant market. Similarly actions on part of a dominant undertaking which put some

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

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

(i) Conditions in clauses 2, 6 & 10 along with the fact that the tender documents
known 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 to
submission 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 120
while the more common international standards are 45,100 and 150. This
action, 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 the
tender may exclude a broad class of suppliers;

(d) The specifications of bags demanded are not in line with the
international 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 tender
especially on a short notice;

(e) It would be extremely difficult for many foreign companies to submit

their 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 conformity
with 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 tender
document 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 sugars
contract, 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 large
ship, 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 tons
Handymax = 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 required
shipment 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 time
period.

(e) It therefore appears that, prima facie, the conditions of the tender seem
to 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 and
premature. In such circumstances the haste and manner in which the
tenders are being called appears, prima facie, to be suspicious.

RECOMMENDATIONS

19. In light of the discourse above, it is likely that the present structure and
manner 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 to
emerge 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 therefore
would not be in public interest.

21. A complete Enquiry Report cannot be submitted without taking into

consideration 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 to
minimize 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, to
direct 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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