Impact of Privatisation and Broader Reforms on the Competitiveness of the Cement Manufacturing Industry in Pakistan

We investigate the level of competition in the Pakistani cement industry using a data sample spanning more than a quarter of a century, encompassing both the pre- and the post-reform period. The methodological constraints are addressed through the widely used Bresnahan¨CLau ¦Ë, Lerner index (LI), and Boone ¦Â tests alongside traditional competition indices, such as the Herfindahl index, concentration index, and price¨Ccost margins, to test consistent allegations of cartel formation and price and quantity supplied manipulations by the producers¡¯ association. We find that producers have in fact managed to maintain a stable share amongst themselves for a long period in terms of production capacities and assets, leading, in some cases, to excess capacities. The output level has been lower than would have been competitive. The output prices have surpassed the marginal cost consistently over a long period of time, and the industry has operated under conditions that are less than fully competitive. Broadly speaking, we conclude that, contrary to expectations, the level of competition in the industry has deteriorated since the reforms. The policy implication of our study is that a significant component of a future reform agenda should be the establishment and strengthening of regulatory institutions and the avoidance of regulatory capture to keep a consistent check on the working of ex-privatised firms to discourage anticompetitive practices. The nature of an industry such as the cement production industry, in which the environment is conducive to cartel formation, should be considered at the onset of the government¡¯s reform agenda in developing countries in particular, where institutions are relatively weak and less efficient and business lobbies are extremely powerful and politically connected.