Competition Commission on its annual performance 2011/12

Economic Development

19 November 2012
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The role of the Competition Commission in eliminating bid-rigging in the construction industry where major government infrastructure projects were involved, and its reluctance to investigate South African Airways over the demise of smaller airline competitors, were the major topics debated when the Commission presented its 2011/12 Annual Report.

The Commission provided details of its “construction fast-track project”, which had been implemented as a priority area because of the planned large government expenditure on infrastructure. Focus had been placed on products such as cement, bricks, steel and bitumen, but it soon became apparent that firms were colluding with each other during the tendering process – something that had evolved over a long period of time. Assuming that there would be enough work for everyone, firms would get together and decide among themselves who would get a particular tender, with the rest indulging in “cover pricing” – putting in much higher bids without any effort to secure the business. As a result, the government was paying far more than if the bids had been truly competitive. With the large number of cases involved, the Commission realised it would take in the region of 20 years to deal with the matter on a case-by-case basis, so it had invited construction firms to disclose bid-rigging conduct in return for lower penalties. They were offered a deal to “come clean”. Applications had been received from 21 firms, including the top five construction companies, which identified that 301 projects had been rigged, including soccer World Cup stadiums and the Gauteng Freeway Improvement Project. The estimated value of all projects and tenders was R29bn, and settlement negotiations had begun. Also implicated were 24 other firms which had not applied for settlement.

The fast-track project, which dealt with enforcement, had three additional significant components aimed at prevention. The Commission had combined with National Treasury to hold training workshops for procurement officials, which were specifically designed to make them aware of bid-rigging, and to enable them to design procurement processes which would help them to look out for signs of this practice. The second element was the inclusion in Treasury’s procurement policy of a Certificate of Independent Purchase Determination (CIPD), which had to be signed by everyone who tendered for a government tender, indicating that they had not colluded with anyone in submitting the tender, and if found in breach of this commitment, they would be liable for prosecution. Also, in collaboration with the Public Administration Leadership and Management Academy (PALAMA), a training institute for civil servants, a course module had been designed, dealing with tender rigging and collusion. This range of interventions had impacted on the way in which tenders were now issued. It was difficult to estimate how much the Commission’s efforts had saved the government, but international studies indicated that costs were lower by 10% to 30% when there was no collusion.

The Commission’s corporate governance was sound, with the entity receiving an unqualified audit opinion, with an emphasis on matter. This related to the appointment of lawyers and advocates, which had not been carried out on the “three quotations” basis. A system had since been put in place to ensure that in future the Commission did not have to appoint its legal counsel on the same basis that it ordered stationery. The financial performance review indicated that total revenue of R181m exceeded expenditure of R178.8m by R2.2m. The highest expenditure item was R101.5m for personnel costs.

Members took issue with the Commission over its stance on the SA Airways/Star Alliance matter, which it had deemed not to be anti-competitive. A number of low-cost airlines had suffered as a result of the SAA bailouts, and yet the Commission did not see the impact this had on these airlines. Why did it not even consider it necessary to investigate this matter? Did the Commission’s strategy provide for the survival of these smaller airlines?

The Commission responded that the argument was that the main reason for 1Time airline “going under” was that its competitor Mango was subsidised by SAA, and the Commission was being criticised for doing nothing about it. In this regard, predatory pricing was a specific concept in the Competition Act, where dominant firms brought down their prices so that other firms could not compete and went out of the market. Making the case that predatory pricing actually existed, required substantial data on input and other costs, and for the Commission to proceed on a case like this, it would have needed to have reasonable grounds for success. One could not just “raid” SAA, as had been suggested. A claim from Comair was currently under consideration. If reasonable grounds emerged, the Commission would investigate, but it could not take big prosecutorial decisions based on sentiment alone. The other big issue revolved around who owned SAA, rather than how it behaved in the market place. However, while the behaviour was within the Commission’s domain, ownership was a political issue, and it was up to those involved to justify their ownership.

A Member commented that the Commission’s mandate was to consider the impact on the consumer. While one had sentiment towards SAA as a national airline, this should be balanced against its pricing. Airport passengers represented the mainstream of the SA economy. Something needed to be done, and one wondered who had to produce the additional information to enable an investigation to take place. One would have expected the Commission to get deeper into the issue itself.

Members also expressed concern that the Commission was initiating fewer investigations itself, and rather following up on customer complaints. The Commission responded that it set its priorities on specific areas were problems existed. It focused on tackling cases which affected poor consumers, such as issues around food, or which affected the cost of doing business, but ultimately it tried to take on cases where it felt it had a reasonable chance of success. A Member commented, however, that while the efforts of the Commission were appreciated, it was important that it give priority to transformation and job creation, by creating opportunities for small and medium enterprises to operate competitively. The Chairperson added that the Commission’s priorities should be in line with the country’s priorities, and this should be taken into account when developing its next strategic plan. Without undermining the good work it was doing, it needed to focus on the needs of the country, with major efforts being directed at transformation.

Meeting report

The Chairperson welcomed the Competition Commission delegation, and pointed out that the New Growth Path focussed on important transformation issues. The Portfolio Committee had to consider the Commission’s role in driving change in South Africa, and would be looking at the Annual Report in this light. The intention was not to find fault, but to offer assistance where necessary.

Mr Shan Ramburuth, Commissioner, said the Commission’s mandate was threefold: to prosecute anti-competitive conduct; to prevent future concentration in the economy by controlling mergers: and to actively persuade businesses, through regulation and policy, to act in a pro-competitive manner. Its strategy had been to be selective in the choice of sectors it investigated, giving priority where the Commission felt it had the greatest opportunity of changing anti-competitive behaviour. Highlights of the year under review had been the numerous cases involving the media sector, cases which had been taken to the Constitutional Court to challenge the Commission’s procedures, assessment of its work in specific markets, investigations into the ways in which firms exchanged information to facilitate collusion, and high-profile mergers with significant public interest considerations, such as the Walmart issue.

The number of enforcement cases had been increasing steadily since 2006. In 2011/12, 258 cases had been investigated, of which 84 had been initiated by the Commission, and 156 had resulted from complaints by the public. A further 18 had been carried over from the previous year. Details of significant cases which had been referred to the Competition Tribunal were given, and in all instances, decisions were still pending. Cases generally took a long time to reach a final hearing, particularly when procedural challenges were involved. Appeals were often over procedural issues, seeking clarification of the law, and in some instances, had gone as far as the Constitutional Court.

One of the most important developments had been the number of construction industry cases which had arisen as a result of the introduction of the Commission’s corporate leniency policy (CLP), in terms of which leniency was offered to any party in a cartel that approached the Commission with truthful information which enabled it to prosecute the remaining members of a cartel. This had led to a number of successful prosecutions, and the Commission had gained a good insight into procurement processes. Administrative penalties totalling R548.5m had been imposed, with cement companies Lafarge (R148.7m) and Afrisam (R124.9m) the largest contributors, followed by Engen (R28.8m) and Shell (R26.3m) of the petroleum industry. The penalties were three times higher than the Commission’s expenses for the year, and the balance had been paid into the National Revenue Fund.

Mr Ramburuth provided details of the Commission’s “construction fast-track project”, which had been implemented as a priority area because of the planned large government expenditure on infrastructure. Focus had been placed on products such as cement, bricks, steel and bitumen, but it soon became apparent that firms were colluding with each other during the tendering process – something that had evolved over a long period of time. Assuming that there would be enough work for everyone, firms would get together and decide among themselves who would get a particular tender, with the rest indulging in “cover pricing” – putting in much higher bids without any effort to secure the business. As a result, the government was paying far more than if the bids had been truly competitive. With the large number of cases involved, the Commission realised it would take in the region of 20 years to deal with the matter on a case-by-case basis, so it had invited construction firms to disclose bid-rigging conduct in return for lower penalties. They were offered a deal to “come clean”. Applications had been received from 21 firms, including the top five construction companies, which identified that 301 projects had been rigged, including soccer World Cup stadiums and the Gauteng Freeway Improvement Project. The estimated value of all projects and tenders was R29bn, and settlement negotiations had begun. Also implicated were 24 other firms which had not applied for settlement.

A number of exemption applications had been considered, as the Act did allow certain exceptions where collaboration might be to the benefit of consumers. The application by SAA/Star Alliance had been the only one approved without conditions. Three had been approved with conditions – SA Petroleum Industries Association (SAPIA), the Western Cape Citrus Producers’ Forum (for exports to the U.S.) and SAA/Qantas airlines. Applications by the Health Professional Council and Spring Lights Gas had been rejected.

It was compulsory for companies intending to merge to notify the Commission. During the year, 234 mergers had been approved without conditions, 33 approved with conditions, and eight prohibited. Most conditions related to a moratorium on the number of jobs to be lost as a result of the merger, but also common was a restriction on directors serving on the boards of both companies, as this might lead to collusion.

Stakeholder relations had included five bid-rigging workshops, five submissions and comments on legislations and six presentations to government, universities and business. Communication had involved media releases, newsletters, the Commission’s website and discussion forums. At an international level, training had been provided to other African competition authorities, and there had been participation in several international forums.

Mr Ramburuth reported that the Commission’s corporate governance was sound, with the entity receiving an unqualified audit opinion, with an emphasis on matter. This related to the appointment of lawyers and advocates, which had not been carried out on the “three quotations” basis. A system had since been put in place to ensure that in future the Commission did not have to appoint its legal counsel on the same basis that it ordered stationery.

The financial performance review indicated that total revenue of R181m exceeded expenditure of R178.8m by R2.2m. The highest expenditure item was R101.5m for personnel costs.

Discussion
Mr M Hlengwa (IFP) asked the Commission to give details of the impact of its interventions on tenders for infrastructure by the construction industry. He wanted to know the average turnaround time for cases before the Commission.

Mr Ramburuth said the fast-track project, which dealt with enforcement, had three additional significant components aimed at prevention. The Commission had combined with National Treasury to hold training workshops for procurement officials, which were specifically designed to make them aware of bid-rigging, and to enable them to design procurement processes which would help them to look out for signs of this practice. The second element was the inclusion in Treasury’s procurement policy of a Certificate of Independent Purchase Determination (CIPD), which had to be signed by everyone who tendered for a government tender, indicating that they had not colluded with anyone in submitting the tender, and if found in breach of this commitment, they would be liable for prosecution. Also, in collaboration with the Public Administration Leadership and Management Academy (PALAMA), a training institute for civil servants, a course module had been designed, dealing with tender rigging and collusion. This range of interventions had impacted on the way in which tenders were now issued. It was difficult to estimate how much the Commission’s efforts had saved the government, but international studies indicated that costs were lower by 10% to 30% when there was no collusion.

Mr Hlengwa, supported by the Chairperson, suggested that it would be beneficial to conduct a local study to assess exactly how effective the Commission’s efforts had been.

Mr X Mabasa (ANC) asked whether the Commission confined itself to instances of possible collusion solely to within South Africa, or whether its influence extended to southern Africa, and even internationally.

Mr Ramburuth said South African law allowed the Commission to investigate collusion anywhere in the world, where it might have an impact on the South African economy.

Mr Mabasa expressed appreciation for the Commission’s training efforts, and inquired to what extent it interacted with tertiary institutions to influence their curricula for skills development.

Mr Ramburuth said the Commission had annual conferences with these institutions and collaborated on training matters, apart from its involvement with PALAMA.

Mr H Hoosen (ID) referred to the enforcement cases, and noted that the increased number of complaints received from the public indicated that the Commission’s work was being recognised. However, he was concerned that the number of investigations initiated by the Commission had dropped, and wanted to know if this meant it was relying on complaints from the public.

Mr Ramburuth responded that the Commission considered who was complaining about what, and then “filled in the gaps”. When research indicated there was a market where problems existed, even if there were no public complaints, then the Commission would initiate action. The Commission’s first concern was for complaints emanating from the public, and the fact that its own initiatives had declined did not mean it was not doing its job.

Mr Hoosen disagreed. The Commission knew what was going on in the markets, and did not operate “in a vacuum”. It was not a satisfactory situation for the Commission not to be actively pursuing its own investigations.

Mr S Ngonyama (COPE) suggested there needed to be a balance. Active participation by the community should be encouraged, in the interests of good governance, and one could not rely solely on the Commission. There was a need to educate society on order to combat anti-competitive activities.

Mr Ramburuth pointed out that very few complaints had been initiated by the Commission during its early years, but because of its prioritisation strategy, which focused on a few very important sectors, this situation had changed. There was a close correlation between the problems identified by the public, and the issues prioritised by the Commission. The Commission needed to be guided by the public as to where the real problems were.

The Chairperson said the Committee needed clarification on the actual reasons for the highs and lows of
investigative activity, based on factual information, and this was agreed to.

Mr Hoosen asked how the Commission had dealt with its problem in procuring legal services.

Mr Ramburuth said a deviation from the strict rules of the Public Finance Management Act (PFMA) had been needed. As chief financial officer, he could now sign off a specially prepared memo which satisfied audit requirements. This was linked to a database of legal service providers, which was regularly updated.

Mr Hoosen asked why the Health Professionals’ exemption application, which involved managing professional fees and could have resulted in lower medical costs, had been rejected, while the regulation of fees in the pharmaceutical sector had been allowed? He took issue with the Commission over its stance on the SA Airways/Star Alliance issue, which it had deemed not to be anti-competitive. A number of low-cost airlines had suffered as a result of the SAA bailouts, and yet the Commission did not see the impact this had on these airlines. Why did it not even consider it necessary to investigate this matter?

Mr Ngonyama also referred to the exemption granted to SAA/Star Alliance, and asked whether this condoned collusion was having an impact on smaller airlines, like 1Time, and forcing them out of the market. Did the Commission’s strategy provide for the survival of these smaller airlines?

Mr Ramburuth said the argument was that the main reason for 1Time airline “going under” was that its competitor Mango was subsidised by SAA, and the Commission was being criticised for doing nothing about it. In this regard, predatory pricing was a specific concept in the Competition Act, where dominant firms brought down their prices so that other firms could not compete and went out of the market. Making the case that predatory pricing actually existed, required substantial data on input and other costs, and for the Commission to proceed on a case like this, it would have needed to have reasonable grounds for success. One could not just “raid” SAA, as had been suggested. A claim from Comair was currently under consideration. If reasonable grounds emerged, the Commission would investigate, but it could not take big prosecutorial decisions based on sentiment alone. The other big issue revolved around who owned SAA, rather than how it behaved in the market place. However, while the behaviour was within the Commission’s domain, ownership was a political issue, and it was up to those involved to justify their ownership.

Mr Ngonyama commented that the Commission’s mandate was to consider the impact on the consumer. While one had sentiment towards SAA as a national airline, this should be balanced against its pricing. Airport passengers represented the mainstream of the SA economy. Something needed to be done, and he wondered who had to produce the additional information to enable an investigation to take place. He would have expected the Commission to get deeper into the issue itself.

Mr Hoosen added he felt the Commission had a responsibility to investigate, and that they could not say there were no grounds for an investigation.

The Chairperson said that as there was no time for further discussion on the issue, it should be deferred to a “social dialogue” so that a balanced view could be obtained. This was agreed.

Mr K Mubu (DA) asked for clarification on reports that there were staff problems, and that one member of staff was challenging his dismissal in court.

Mr Ramburuth said a letter had been sent to the Director General by a staff member, with complaints about the behaviour of the Commissioner. A report had been drawn up following an initial investigation by the Economic Development Department (EDD), and the Commissioner had responded about two months ago. There had been no further developments since then.

Mr Ngonyama wanted to know why administrative penalties had dropped to R548m, from R794m the previous year. The Committee needed to learn more about the details of the corporate leniency policy, to see whether it would be a long-term deterrent, and whether there was an effective monitoring system in place which would result in bid-rigging being totally obliterated. The estimated R29bn of infrastructure projects and tenders – was this the value of the rigged bids? Had any arrests been made in connection with rigged bids associated with the World Cup stadiums?

Mr Ramburuth said the reason for the drop in administration penalties was that the R794m figure had bee4n inflated by the R500m penalty imposed on Pioneer Foods. More firms had been fined in the following year, but the level of the penalties had been lower. The R29bn figure had been the initial assumption of the total value of planned infrastructural work. No arrests had been made, as the Commission’s activities were based on civil law, where fines were imposed.
 
Mr Z Ntuli (ANC) asked what lessons had been learnt from the Walmart/Massmart merger and SAA/Star Alliance issues with regard to the conditions imposed, public interest matters and predatory pricing. Could the two be compared? He wanted to know if the number of jobs created or saved through the Commission’s interventions, could be quantified.

Mr Ramburuth responded that, by their very nature, mergers tended to result in job losses, as duplicated positions were eliminated. The Commission’s task was to limit job losses, and in collaboration with the unions, to ensure that the workers involved were fairly treated.

The Chairperson said she was struggling to understand the reason for the difference in the number of cases investigated or carried forward from one year to the next. Why was the number of public complaints so high in the 2009/10 period – was this the effect of World Cup soccer fever, or issues around the construction industry? She supported the view that the Commission should be the main initiator of investigations, rather than relying on public complaints, but the trend had been downwards since 2009.

In her opinion, the Highveld Steel/Arcelor Mittal collusion issue should have been settled by now, and she wanted to know if the delays were due to insufficient personnel, or the need for more thorough work on the matter. What was the turnaround time in cases involving the Commission and the Competition Tribunal?

Mr Ramburuth said different types of steel were involved – long steel and flat steel – and this meant that more than one case was involved, and this was delaying resolution of the issue. Procedural challenges often delayed consideration of the merits of a case. Turnaround times could be as long as four or five years.

The Chairperson asked on what basis the Commission established its investigation priorities.

Mr Ramburuth said the Commission focused on tackling cases which affected poor consumers, such as issues around food, or which affected the cost of doing business, but ultimately it tried to take on cases where it felt it had a reasonable chance of success.

Mr Ngonyama said that while the efforts of the Commission were appreciated, it was important that it give priority to transformation and job creation, by creating opportunities for small and medium enterprises to operate competitively.

The Chairperson added that the Commission’s priorities should be in line with the country’s priorities, and this should be taken into account when developing its next strategic plan. Without undermining the good work it was doing, it needed to focus on the needs of the country, with major efforts being directed at transformation.

The delegation from the Competition Tribunal, which had been scheduled to present its Annual Report to the Committee, agreed to a proposal from the Chairperson that owing to time constraints, the presentation be deferred to January. This was agreed.

The meeting was adjourned.

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