Corruption Charges pg. 0
Yusuf Mansur
“The naiveté of the accusation should lead to results embarrassing to all” It seems that in the zeal to prove a moot point, certain people were seen worthy to be thrown to the guillotine, loaded with quickly constructed corruption charges. One interesting example was of the hastily conceived case that under a certain administration, the Jordan Phosphate Mines Company was selling rock phosphate at prices that were lower than those of the market, particularly a comparator such as Morocco. The naiveté of the accusation should lead to results embarrassing to all, since a cursory investigation shows how unsubtle and mediocre some institutions have become. From a theoretical and practical perspective, the world market for phosphate is collusive: firms actually communicate with each other to agree on prices and territories or markets. Prices, product quality, quantity and combinations are thus said to be set in a collusive manner.
pg. 1
In such a market, firms have to agree with each other on prices and regions, or be punished (driven out of a market completely) by a dominant firm (a large, wellestablished, low-cost producer), which in this case would be Morocco, the largest exporter of phosphate in the world. Furthermore, in the phosphate market, most firms are government owned and do not follow the rules of profit maximisation; instead, they may price according to other, nonprofit maximisation criteria, such as cash flow, long-term profits, market share, political affiliation, etc. The dominant firm in the phosphate market is Office Cherifien des Phosphates of Morocco, the largest exporter of phosphate in the world. OCP sets prices and has the ability to punish intruders into its established regions and markets by lowering prices of phosphate rock, DAP (diammonium phosphate) or phosphoric acid, or by cutting off buyers from large supplies that small sellers cannot compete for or supply. Therefore, the issue of pricing, especially for Jordan, a relatively small exporter, does not follow the rules of supply and demand, hence simple price comparisons do not apply.
pg. 2
Even if one, despite the distortions that exist, were to attempt an analysis of the efficacy of the prices of JPMC, the analysis is not straightforward. At the outset, firms do not publish their prices and quantities as per contract and client. Most firms simply publish revenues. Moreover, to make exact price comparisons precise and objective, one would have to take into account: quantities, as prices change according to the volume of sale; type of delivery, cost, insurance and freight vs. free on board pricing (which are two different pricing modes); quality of rock phosphate (the greater the purity of the rock phosphate the less quantity required to produce phosphoric acid and hence the higher the price per tonne of rock phosphate); the product mixes, which relate to the supplying power of the firm (seller) to provide a multitude of phosphate/fertiliser relevant products in the quantities that the buyer desires (the greater the diversity the more hold the seller has on the buyer); cross subsidies, a firm may lower the price of one product (say, rock phosphate, phosphoric acid or DAP) in order to sell another at a higher price; size of the firm relative to the dominant firm, which enables a firm that departs from the dominant firm to withstand retaliation from the dominant exporter; ability to continue to
pg. 3
produce high volumes in the future, since a one-time contract is not a guarantee of continued supply (a large buyer may refuse to buy from the firm if it cannot sustain such quantities in the future); market and regional volatilities, which affect current and future demand trends; contractual periods of companies and spot vs. future pricing, as some firms use spot pricing while others rely on future contracts (moreover, some firms, given that they have few clients, use long term or annual contracts subject to various review periods); company needs for cash flows to enable expansion/replacement of outdated machines or opening of new mines; government policies/fiscal needs in the seller and buyer markets, whereby in most cases, the government’s fiscal position dictates whether the firms price high or low; power of the buyer (if the firm sells only to one buyer, it is usually unable to increase prices since the monopsonist (only one buyer) can squeeze down any price hikes and prevent them; and other factors dictated by the nonhomogeneity of the market and the economies of scale and scope present therein.
pg. 4
Furthermore, some may claim that they can conduct a price analysis by referring to indices, which is like stating that you can tell the price of tomatoes in Shmeisani or Wihdat by looking at the consumer price index. Price indices are for looking at trends and very rough comparisons, not precise estimates. What I mean to say is, precisely: If one wants to accuse people, one should at least study the charges well. The damage that is being done to the Jordanian economy is huge.
pg. 5