Edible oil manufacturer Bidco plant in Thika. File
Consumers of sugar and edible oils are buying them above the market price as manufacturers and distributors rake in huge profits from price fixing.
The Monopolies and Price Commission, charged with promoting fair competition in the economy, has called for in-depth investigations into activities of the manufacturers and their distributors for “possible cartel activities.”
“Edible oil firms may be colluding to fix prices thus denying consumers the benefits of liberalisation,” says Mr Wang’ombe Kariuki, the acting commissioner on the team’s 2009 annual report.
“At the wholesale level there is limited competition both in the edible oils and sugar sector as indicated by price analysis,” he added.
The twin industries generate annual sales in excess of Sh60 billion, according to Kenya National Bureau of Statistics estimates.
This is the first admission by Treasury of the rising incidence of unfair business practices in corporate Kenya, giving clout to the movers of the price control Bill, which seeks to control prices of basic goods such as cooking oil, sugar, maize flour, rice and Kerosene.
It comes at a time when the cost of sugar and cooking oil has nearly doubled over the past three years on what manufacturers attribute to increased cost of doing business with the commission adding price fixing to the price equation.
The price of a 2-kg packet of sugar has risen from Sh140 in 2006 to Sh200, while that of edible oil products has increased 50 per cent over the same period.
The verdict of the anti-competition watchdog is also a blow to the image of edible oil makers—Bidco Oil, Kapa Oil and Pwani Oil—and sugar millers Mumias, Sony and Chemelil at a time when they are emerging as blue chip firms in corporate Kenya.
Legal experts reckon that the commissions lack of legal clout to punish firms found guilty of price manipulation and the lighter sentences are not likely to deter the culprits.
The current Restrictive Practices Act provides for a range of penalties including a maximum fine of Sh200, 000 or a jail term of up to three years for offending companies, a light sentence for companies whose annual turnovers are in excess of Sh10 billion and pales in comparison to international practice where firms such as software giant Intel was fined Sh127 billion or four per cent of its annual sales for restrictive business practice.
“Enactment of a new competition law should be expedited to effectively address challenges that come with the adoption of free market policies like collusion to fix prices, charging of excessive prices and abuse of market dominance,” said Mr Kariuki.
Treasury has sponsored a bill in parliament in April for the creation of an independent competition authority, but debate on the bill has not gone beyond the introduction read.
However, the local sugar and edible oil manufacturers firms have strongly defended their business practices, arguing that the commissions report failed to appreciate the depth of their businesses.
“Its impossible to collude. There is overcapacity in the market and everyone is fighting to grab market share,” said Vimal Shah the managing director of Bidco Oil.
He said that talk of price fixing could have been fed by the fact that the players seem to keep prices of their products close to each other.
“Our sector is tight and if one player sets a low price everyone follows,” added Mr Shah.
But the Monopolies and Price Commission reckons that the market structure of the twin commodities including production and supply chain has offered perfect ground for collusion to fix and charge excessive prices.
Mr Kariuki says that the limited number of wholesalers and manufacturers of sugar and edible oil has reduced competition in the twin industry and offered room for sharing of market information on pricing and production.
For instance, Bidco oil whose flagships include Elianto, Golden Fry, Chipsy and Kimbo has only seven closely knit distributors spread across the country despite the firm controlling about 40 per cent of the local edible oil market.
The same lean distributorship plays out at Pwani oil makers of Frymate, Fresh fri and Mpishi poa as well as at Kapa Oil whose products includes Captain cook, Rina and Soja.
Sources at the commission said there were barriers to acquiring the distributorship deals, which are dominated by friends and relatives.
The entry of new players into the edible oil market to counter the near monopoly held by Unilever, formerly the East African Industries; in the 1990s seem not to have enhanced competition in the market place, suggest the monopolies commission.
In 2002, Bidco Oil acquired Unilever’s then market beater Kimbo.
There are about 35 cooking oil refiners but the market has remained the domain of the three players—Bidco Oil, Kapa Oil and Pwani Oil—who continue to unveil products, making it one of the few sectors that has defied Kenya’s under performing economy to turn up tidy profits.
Consumption and production of edible oils has doubled since 2003 on increased household numbers and is expected to continue rising in line with the population.
Retailers say they have no benefited from the surge in prices of the two commodities over the last three years—a pointer that the gains are being absorbed by the manufactures.
“It does not mean that our margins have risen with increase in prices, most often than not they have dropped,” said Mr Francis Msawili, the general manager of Naivas supermarkets.
The export market for oils has also become a lucrative business with the value of exports nearly doubling from Sh2.5 billion in 2004 to Sh4.8 billion in 2008.
The situation is the same in the sugar sector where the distributorship of the commodity is controlled by few individuals.
The sugar distributors have been accused of fixing prices and hoarding the commodity to create an artificial shortage.
The anti-competitive watchdog notes that the remedy for the market imbalance in the sugar sector lies in placing the firms under private hands.
Sugar manufacturers have preferred to keep tabs of market leader Mumias sugar to offer direction on pricing.
“The government should speed up the privatisation of local sugar companies in order make them competitive,” says Mr Kariuki.
The twin sectors are the first in recent years to cross hairs on the anti-competition watch dog but it has placed the alcohol sector on its radar.
This follows complaints that East Africa Breweries Limited (EABL) has been using its dominance in the market place to squeeze rivals out of the market.
New entrant Keroche has been complaining that EABL was hindering the promotion of its beer products by threatening and bribing bar operators not to deal in Keroche’s products.
Though Keroche said in earlier interview with the Business Daily that they had abandoned the case, the commission notes matter is under investigation.
“A supplementary study should be carried out in the production, patenting and marketing of barley in order to understand and address the problem of market foreclosure,” says the commission.
More recently, regulators around the world have been getting tougher on pursuing unfair business practices and levying punitive fines in an effort to clamp down on the vice.
The amount of maximum antitrust firms has increased from Sh33.6 billion to Sh127 billion, dished to Intel in May for issuing discounts to computer manufacturers to pressure them to buy chips from it rather than its rivals.
In Kenya, the prices Commission is also zeroing in on trade malpractices by being proactive through launching investigations instead of relying on complaints.
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