Competition body to flex new muscles

Cracking cartels: The Competition Tribunal penalised construction firms for colluding on contracts to build 2010 Fifa World Cup stadiums such as the Cape Town Stadium. (Peter Bauermeister/Bloomberg)

Cracking cartels: The Competition Tribunal penalised construction firms for colluding on contracts to build 2010 Fifa World Cup stadiums such as the Cape Town Stadium. (Peter Bauermeister/Bloomberg)

NEWS ANALYSIS

It is not often lately that a government entity has been in the headlines for the right reason, namely doing its job. But the Competition Commission appears to be bucking the trend, starting 2017 off with a bang by announcing it would prosecute a host of banks for dodgy foreign exchange activity.

The announcement that it was referring the case to the Competition Tribunal after a two-year investigation came shortly after President Jacob Zuma said the state wanted to introduce new amendments to the Competition Act, to enable competition authorities to address areas of concentration in the economy.

The banks matter made headlines, but the commission has referred a number of other anticompetitive cases to the tribunal so far this year – including cartel charges against consumer goods giant Unilever, a price-fixing case in the recruitment industry and collusion by a Japanese firm that transports vehicles from South Africa to other countries around the world.

This apparent zeal has raised eyebrows over whether the commission is facing political pressure to go after the private sector at a time when the failings of government agencies have been under scrutiny.

The referral to the Competition Tribunal of the banks case followed criticism of the major banks for closing the accounts of the controversial politically connected Gupta family and their businesses.

But the commission’s head of communications, Sipho Ngwema, dismissed these misgivings, saying the commission “is an independent body by law” and that “no political pressure has been exerted on it”.

“Any objective observer of the commission and its work will know that these cases have been coming over the last two years or so,” he said.

In many instances there have been well-publicised search-and-seizure operations and leniency applications. Some have been the subject of investigations in other jurisdictions.

All cases have gone through the normal “rigorous internal processes” and “not a single case had been rushed”, he said.

Last year, criminal sanctions were introduced for contravening the Act. With jail time now a real threat, there are expectations that companies are less likely to apply for leniency and co-operate with investigations and will launch more vigorous defences to cases.

But the commission said it “had not observed such a phenomenon as the majority of our cartel cases still involve a leniency applicant”.

The competition authorities have brought in billions of rands for the state in settlement fees on a number of recent high-profile cases. Among these was the deal struck with seven construction firms, which, over and above fines totalling R1.4‑billon, saw a new R1.5‑billion reparation fund created for developmental projects.

In approving recent mergers and acquisitions, the state has worked to promote public interest aspects of these deals such as employment and making space for new entrants.

According to the economic development department, in 2016 some 57 200 jobs were saved because of conditions imposed on these deals.

In the case of the SABMiller-AB InBev merger, the current 6 000 South African employees would be protected from retrenchment for five years and the new beer giant was required to open up competition from craft brewers by granting them access to 10% of fridge space in sponsored taverns.

In line with an apparent step change in the rate of competition-related referrals for prosecution, recent mergers and acquisitions reflect the state’s emphasis on public interest considerations, particularly employment.

Last week, in announcing several decisions, the commission recommended conditions to protect jobs in the case of three mergers in the food goods, industrial bakery supply and steel manufacturing arenas.

The state’s funding transfers to the commission are expected to rise in the coming three years by an average rate of 13.6%, growing from R258‑million in 2017-2018 to just over R305‑million in 2019-2020.

Staff turnover, which has been a problem for the commission in the past, has been reduced to less than 10%, according to its most recent annual report. This is down from a high of more than 22% in 2013-2014.

Concerns about high levels of concentration in some sectors of the economy are longstanding. The difficulty that the commission has had in successfully bringing abuse-of-dominance cases – firms with 45% market share or more – is seen as a particular frustration. Amendments to the law are needed to make this easier, according to experts, and would encourage the growth of new entrants to some of these markets.

Changing the law was the domain of the economic development department, Ngwema said, but added that the commission would participate in the process and intended to make a submission about strengthening the provisions against the abuse of dominance and cartels.

“The lack of dynamism in the structure of South Africa’s economy is striking,” said Simon Roberts, professor at the University of Johannesburg’s Centre for Competition, Regulation and Economic Development.

Roberts, who used to work for the commission, said there are legitimate questions being asked about inequality, 23 years into democracy, and the ownership and control of the economy.

He was sceptical about concerns raised over the timing of the banks case, arguing that the investigation followed global investigations into bank collusion and named only two of South Africa’s “big four” banks.

“I don’t think that it can be argued that the commission is being unduly influenced by those attacking the banks,” he said.

At the same time, he said, there was “a huge problem” regarding competition in the banking sector and the barriers to entry for competitors.

In a recent working paper published by Redi3x3 – a research project on employment, income distribution and inclusive growth – Roberts outlined some of the weaknesses of the Act, particularly relating to the abuse of dominance.

Abuse-of-dominance provisions are covered in sections eight and nine of the Act.

Section eight deals with prohibited practices by a dominant firm and includes excessive pricing or exclusionary acts such as inducing a supplier or customer not to deal with a competitor.

Section nine deals with prohibiting price discrimination by dominant firms that has the effect of “substantially preventing or lessening competition”. There are no penalties for a first offence under this section.

In both these cases, however, dominant firms are given the opportunity to provide mitigating grounds for their activities, with appeals and protections weighted in favour of respondents, Roberts said.

For instance, under section eight, a firm is not deemed to have committed an exclusionary act if it can show that there are technological, efficiency or other pro-competitive gains that outweigh the anticompetitive effects of its behaviour.

Roberts said in the paper that South Africa differs from most other countries in specifying “discrete contraventions rather than having one overarching provision proscribing abuse of dominance”.

In an analysis of the number of abuse-of-dominance cases referred by the commission to the Competition Tribunal, Roberts points out that 21 were referred between 1999 and 2016 – an average of 1.2 a year.

Roberts noted that the tribunal has found that anticompetitive effects must be demonstrated and, what’s more, must be “significant and capable of quantification”.

“The decision to require effects to be quantified means economic analysis becomes central to the case,” he said.

This is in a context where the dominant firm “has the information and resources to marshal its arguments for efficiencies, while smaller rivals who are potential competitors will struggle to quantify their effects on competition if they have been blocked from being effective rivals and so, in effect, have to speculate about the possible impact of their rivalry”.

The tests for abuse of dominance under the Act imply a choice not to value the competitive process in its own right, argued Roberts.

Among the amendments he suggests is changing the current tests under the Act to adopt wording along the lines of harm to competition for abuse of dominance.

Key factors for assessing abuse of dominance could be set out, as is the case with merger considerations, to ensure that “the overall impact of multifaceted conduct can be taken into account”.

These could include the “structural characteristics of the market, including barriers to entry” and the “impact on small and medium enterprises that are actually or potential effective competitors”.

Powers to impose and monitor remedies including divestiture could be increased, added Roberts. 


Fears that changes to Act may serve state

Last year, new appointments to the Competition Tribunal included former chief state law adviser Enver Daniels, who was made deputy chair of the tribunal.

This was unexpected, given Daniels’ lack of competition experience.

The office of the chief state law adviser is tasked with providing legal advice and legislative drafting services to the state.

During Daniels’ tenure, the office came under criticism for providing the state with advice that landed it in legal predicaments and for problematic drafting of bills.

Last year the public service commission raised complaints that legal opinions provided to government “are not always genuine and impartial” and that advice on legislation is seen as “pro-executive”.

Appointments to the tribunal are made by the president, on the recommendation of Economic Development Minister Ebrahim Patel.

It will also be up to Patel’s department to propose the amendments to the Competition Act that would give the state more power to “de-concentrate the high levels of ownership and control” seen in many sectors.

There is concern that the amendments will seek remedies that go beyond the current ones outlined in the case of mergers or abuse cases, and that these would reflect state policy positions, rather than be grounded in competition law.

The economic development department did not respond to questions.


The Competition Commission, led by Tembinkosi Bonakele, has raked in billions of rands for the state in several recent major cases. (Waldo Swiegers/Bloomberg)

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