Mexico's competition policy

Busting the cartels

Signs of a crackdown on the oligopolists who rob the poor

A victim of gouging?

MEXICO’S attempts to suppress narcotics gangs have gained worldwide attention but, so far, had limited success. Now its authorities are turning their fire on another sort of drugs cartel. On February 23rd the country’s antitrust regulator said it had uncovered schemes involving six firms to rig the bidding to provide insulin and other supplies to the health service. In an economy dominated by monopolists and oligarchs, the ruling—the regulator’s first big cartel-busting action in its 17-year existence—could prove to be a watershed, even if the companies involved eventually win their appeals.

The alleged cartel’s behaviour seemed quite blatant. In any given tender, every bidder except one would offer prices within a 1.5% range, with the winner offering slightly less. In subsequent purchases of the same product, the pattern would be the same—except that a different firm would make the winning bid, until each one had taken its turn. The government reckons such collusion cost taxpayers over $46m between 2003 and 2006. The companies in question continue to deny wrongdoing, arguing that they were each independently using the health service’s stated maximum price as a reference.

The regulator’s action is a sign that, after years of setbacks, the government may finally be starting to tackle the country’s corporate titans. Mexico’s economy is notoriously concentrated. Its telecommunications, television, cement, banking and brewing industries, among others, are oligopolies or near-monopolies. The central bank reckons this lack of competition costs the country a percentage point of economic growth each year. The poor are particularly hard hit: a recent study by Carlos Urzúa of the Technological Institute of Monterrey found that Mexico’s poorest families devote 7% of their spending to overcharging by firms with market power.

The problem is especially dire in public contracting. Since most government purchases must take place regardless of price—the health service could not stop buying insulin if officials felt it was too expensive—they present a ripe target for unscrupulous firms. The size of most projects excludes all but the largest competitors, making it easier for them to collude. And bureaucrats have little personal incentive to ensure taxpayers are getting the best deal. As a result, says Manuel Molano of the Mexican Institute for Competitiveness, the pharmaceutical firms’ alleged scam “is standard operating procedure in the public sector.”

Mexico’s Federal Competition Commission (CFC) was founded in 1993 to stop such practices. It has had few successes. Most notably, it lost a decade-long court battle to declare Telmex dominant in fixed-line telephones in 2007, even though the firm had over 90% of the market.

But now the tide may be turning in its favour. In 2006 Congress gave it powers to require companies to open their books and to grant immunity to whistle-blowers. Another reform, in 2008, permitted some government agencies to use online auctions, rather than single sealed bids. These tools encouraged the CFC to shift its focus from abuse of market power to collusion. “Cartels are the low-hanging fruit,” says an official at the agency. “It’s easier to prove they exist, easier to get tips, and easier to explain to people that they’re wrong.”

The potential savings are huge. The national health service says that adopting the CFC’s recommendations to consolidate its purchases into a single annual tender, allow foreign bidders and replace sealed bids with auctions has helped cut its costs by $3 billion over three years. This suggests that anticompetitive behaviour was as widespread as suspected, although lower raw-material prices may have contributed to the savings. Serge Brachet of Aklara, the firm that conducts the government’s auctions, says that if it used them whenever practical, in purchases representing 20-30% of the federal budget, the savings could add up to about 1% of GDP.

However, Mexico’s trustbusters lack some of the weapons available to counterparts elsewhere. Unlike most Latin American countries, it does not allow class-action lawsuits. Violators of competition law cannot be tried in the criminal courts. Mexico is the only country to require its competition authority to give notice to targets of its investigations before conducting searches. And its maximum fine of $7m pales in comparison with the international standard of 10% of an offender’s sales—it can be profitable to cheat, even if caught. In April Mexico’s Congress is expected to debate reforms that could correct these deficiencies. Perhaps the biggest challenge will be persuading lawmakers that resisting the country’s most powerful corporate lobbies is politically profitable.