/ 20 July 2018

No more yellow cards for cartels

Minister of Economic Development Ebrahim Patel says the new Bill gives the Competition Commission teeth.
"With respect to reference to litigation, this means that the IDC has instituted legal action to recover the R37.5-million as well as the R250-million in accrued interest," says Patel. (David Harrison/M&G)

The government is rolling out a new arsenal to tackle corporate market dominance and cartels.

The Competition Amendment Bill, to be passed this year, will impose penalties of 10% of turnover on those who are found guilty of prohibited conduct for the first time, and up to 25% of group turnover for repeat offenders.

The amendment Bill will also increase the powers of the Competition Commission, particularly when it comes to market inquiries. It will be able to investigate sectors that are suspected of being exclusionary and anticompetitive and will have the power to act.

“I think it is really a signal that we want co-operation from the business community, to send a strong message that we have to do away from prohibited practice,” Economic Development Minister Ebrahim Patel said.

Addressing the media about the amendments on Tuesday, he said South African companies have collectively paid R7-billion in penalties since 2010.

Should the Bill be passed, it will open up the economy for small- and medium-sized businesses and black entrepreneurs, and unlock new investment. Both the government and competition regulators will be able to proactively and effectively tackle the market dominance and anticompetitive behaviour of both private and public businesses.

Patel said the structure of South Africa’s economy had been consistently flagged in several studies as having a high concentration of a few big players compared to similarly developed countries. South Africa’s legacy of apartheid and small economy had contributed to the “unusually high” levels of concentration.

A study by the commission found that, of the 31 sectors that were considered, 70% had dominant firms in some of their defined product markets. The commission analysed 2 150 merger reports for the period spanning from 2009 to 2016.

A firm is considered dominant if it has more than 45% of the market share or market power.

Using the Herfindahl-Hirschman Index, a standard tool to measure market concentration, the commission found high levels of concentration in nine sectors. The communication technologies, energy and financial services sectors were among those identified, each scoring above 2 500, the highest score on the index. This equates to between 52% and 68% in terms of market share.

“Should we care? We believe we should,” said Patel. “Concentrated markets are often associated with higher prices and lower growth. They can stunt innovation and choice. They are associated, in many cases, with higher levels of inequality and in the case of South Africa they can impact on economic inclusion.”

Currently companies that are found guilty of prohibited action are only penalised if it is a second offence.

Patel said this was colloquially referred to as the “yellow card”.

“So it’s like the first time you are caught, it’s just a yellow card, and the second time it’s a red card,” he said.

The amendments will change this and competition authorities will have the discretion to determine an appropriate penalty.

“It [the yellow card] acts as a major deterrent to the competition authorities to prosecute or take up a case because essentially it means, after four years and millions of rands on an investigation, even if you find the company guilty, you can only impose a penalty if they do it again thereafter,” Patel said.

The Bill will also allow for tougher penalties for repeat offenders by increasing the maximum administrative penalty from 10% to 25% of a company’s annual turnover. It will also be tougher because it extends the fine of a subsidiary to a holding company in certain circumstances.

“The circumstance is specifically where the holding company knew about your prohibited practice or ought to have reasonably known about the prohibited practice,” Patel said.

Many amendments have been made to tackle market abuse by dominant companies that negatively affect new entrants and small businesses headed by previously disadvantaged individuals. The key changes made to the Bill deal with excessive pricing, which prohibit a dominant company from charging excessive uncompetitive prices to the detriment of “customers” instead of consumers.

The onus of proving that the price it is charging is not excessive now falls on the company and the commission only has to prove that there is a prima facie case of abuse.

The new legislation will also, for the first time, make provision for the executive to intervene in transactions that involve an acquisition by a foreign company if the deal concerns specified national security interests.

Patel said this was in line with international best practice in countries such as the United States, Canada, Australia and the European Union.

A committee set up by the president will decide whether acquisitions pose a threat to the country’s national security.

The Bill provides a list of factors that could call for a national security review, such as the effect the deal will have on the country’s defence capabilities, if it opens up the country to foreign surveillance or espionage, or if it hinders current or future intelligence or law enforcement operations.

But this has been met with resistance. A report by law firm Herbert Smith Freehills said there was no clear guidance on what standard the committee will have to apply in making its decision to block or impose conditions on foreign investment given that the list of national security interests was “extremely broad”.

“In South Africa today, where the fight against corruption is a priority, it is of concern that a politically appointed committee will wield this power over foreign investment,” said the report.

Labour union federation Cosatu has welcomed the Bill, particularly because it believes the amendments will shatter the concentration in the economy by “the old white boys’ club who are keeping black players out” and promote investment, which will lead to lower prices for consumers.

Tebogo Tshwane is an Adamela Trust financial reporter at the M&G