Competition Commission update on Walmart/Massmart Merger; Medical and Construction sector investigations

Meeting report

Chairperson’s introductory remarks
The Chairperson said that the reason the Competition Commission had been asked to appear was to give the Committee an update on the Walmart/Massmart merger agreements, and she noted that the Committee needed to be kept apprised of further developments.

Competition Commission update briefing
Mr Shan Ramburuth, Commissioner, Competition Commission, noted that he and his colleagues had put together a presentation on some of the major issues that the Competition Commission (CC) was currently handling. The Walmart/Massmart matter was now beyond the reach of the CC in the sense that the implementation of the merger conditions was being done in terms of a court ruling. The presentation would also touch on the market enquiry being done on health issues, and the construction fast-track project, which had been reported in the media.

Mr Tembinkosi Bonakele, Deputy Commissioner, Competition Commission, noted that the presentation set out in some depth the background information on Walmart and he would only summarise it. The proposed merger of Walmart/Massmart was notified to the CC in November 2010, and it heard submissions from various stakeholders, including trade unions and small enterprises (SMMEs), represented by the SMME Forum. The main concerns were the impact of the merger on local suppliers, given the size and (in some places elsewhere) the past behaviour of Walmart, as well as the impact upon jobs. There were two critical points raised; firstly, whether there would be retrenchment as Walmart introduced its models, and secondly whether the unions’ current rights would be affected by Walmart taking over Massmart. These were matters of public concern, rather than strictly competition issues.

When the Competition Tribunal (the Tribunal) looked at the matter, it ordered that no retrenchments should be allowed for two years. There had, however, been about 500 retrenchments prior to the merger and the unions claimed that this was in anticipation of the merger. The Tribunal also ordered that those previously retrenched be re-employed and that current labour agreements with the unions must be honoured for three years. A Supplier Development Fund (the Fund) of R100 million was put in place, to address concerns about local suppliers.

An appeal was brought to the Competition Appeal Court (CAC), and the hearings were concluded on 9 October 2012, The CAC handed down its order approving the merger but with conditions attached. Much of what the Tribunal had ordered was confirmed, although with more force, because the CAC ordered that the 503 retrenched workers must be actually reinstated, rather than being re-employed. The Court confirmed the Tribunal’s position on retrenchments and labour agreements. However, the Court found that the Tribunal had not evaluated sufficient evidence to support its quantification for the Supplier Development Fund, on suppliers, and directed that experts be appointed to undertake a study to consider some of the questions around empowerment of suppliers. The Court then increased the contribution to the Fund to R200 million and emphasised that this should be over and above what Walmart would have done itself, as it had already spent around R40 million. There were also some safeguards on governance.

The CC had, since the date of the CAC’s order, merely monitored compliance with the conditions, particularly around the Fund. The advisory board had been appointed, and the main stakeholders were represented on it. The Board actually also played an oversight role. It must produce an annual report on its activities, as well as the internal reports to the CC. The first annual report was due by December 2013.

The circumstances taken into account by the CC in the design and approval of projects were set out. The main focus was on ensuring that there was long-term sustainability of suppliers. They should not be restricted to supplying Walmart/Massmart alone, and there should be a focus on labour-intensive practices. There should be a bias towards, although not exclusive attention to, SMMEs, and ownership from historically disadvantaged individuals (HDIs).

The CC had met with Massmart to assess progress on the setting up of the Fund, and similar reports should be made available to all interested stakeholders. In relation to retrenchments, CC was monitoring the company on an ongoing basis. There had not been any more retrenchments so far, and the CC was following up on the reinstatement. It was trying to resolve any difficulties between the unions and companies, to ensure that there was proper compliance. It was also communicating with the Department of Economic Development (EDD).

Discussion
The Chairperson, and other Members, noted their appreciation for the progress report.

Mr K Mubu (DA) noted the comment that some of the concerns were public interest issues. He asked whether the CC felt that these concerns around jobs and suppliers were well-founded.

Mr N Gcwabaza (ANC) asked if there had yet been any results published from the study.

Mr Bonakele responded that when the merger was first mooted, the CC expected that there would be complaints, particularly in view of Walmart's stated model that it would import goods. The question and debate was whether this importing would actually disadvantage the local suppliers. The CAC had accepted that there would be an effect on local suppliers, but also could not establish the full impact, and that was why it had ordered further studies by representatives of government and trade unions and the merged company. No mid ground could be found, although the studies had helped in delineating the issues and understanding how the Walmart model worked, the fact that there would be an impact, although there was no consensus on the extent of the impact. To this extent, therefore, the concerns were well-founded. The CC had not imposed conditions, despite being requested by the trade unions to do so, because it felt that the problems, which it agreed did exist, would be better solved by bargaining at the appropriate level.

Mr Ramburuth added that when the competition authorities did a merger evaluation, they would look at the state of the market prior to and after the merger, and compare the results. This was an important concept, because it must be remembered that the CC could make interventions only on something directly linked to the merger, not something that existed independently of it. For instance, if the logistics supply chain in South Africa was not adequate, supply problems linked to this were not a direct consequence of the merger. The Walmart/Massmart considerations largely revolved around the threat that was likely in the future. There was a fear that if Walmart came into the country, in view of its sophisticated network to procure, local suppliers would not have a chance to sell their products. One option was to keep Walmart out of the country. The second – which was followed – was to allow Walmart to enter, but then to build local suppliers to become more efficient and have a greater competitive ability. The supplier development fund and other conditions were articulated also in response to interventions by government, which were first announced before the Tribunal. He added that it was obviously also in the interests of Walmart to have good local supplies, particularly in respect of perishables, and it was likely that Walmart would in any event, even without the order for the establishment of the Fund, have done something to pursue improvement of local supply. He reiterated that the suppliers were not obliged to supply Walmart only, so now they would be improving for all their customers.

Fund
Mr Mubu referred to a Fund that was mentioned by the Minister of Agriculture in the previous year, and asked for further details.

Mr Gcwabaza asked if the amount of R40 million committed by Massmart was added to the R200 million in terms of the CAC’s order, or whether it was intended for other matters not necessarily linked to empowerment of the domestic suppliers.

Mr Bonakele explained that the R40 million that Walmart itself committed was over and above the R200 million referred to by the CAC. That might have been what the Minster of Agriculture had referred to. This amount had been spent already before the decision of the Court was given.

Mr Gcwabaza noted that one of the purposes of the Fund’s advisory board was mentioned as giving advice to the merged entities. He thought this might be contradictory to the earlier statement that the Fund was supposed to empower local suppliers. He asked for a more detailed explanation on its functions. He drew a corollary with development funding received from foreign donors, where there were concerns that a large chunk of the money in fact went to pay foreign consultants. He was concerned that a dual purpose to this Fund might have a similar result, and not end up by empowering local suppliers.

Ms Trudi Makhaya, Head: Stakeholder Relations, Competition Commission, said that Mr Gcwabaza had raised an interesting point. It was true that often development finance did not have the impact expected. In this case, the merged company had to go beyond what it would normally have done in the course of business, with an emphasis on development of small enterprises and those that were labour intensive. Perhaps the language around the Fund was ambiguous, but this was essentially what was meant by the incentivisation scheme. The monitoring and evaluation teams at the CC were insisting upon sustainability, and something over and above what Walmart would have done for itself. The merged company was being forced to go outside its comfort zone. The advisory board must look at the monitoring and evaluation framework as well as looking at how the company would benefit from additionally developing its suppliers. The money in the Fund was not to be “moved around” but must be put to specific purposes.

The Chairperson said that this also touched upon what was meant by standards. She noted that in addition to the advisory board, the Minister and EDD were involved in the monitoring as well.

Job issues
Mr M Hlengwa (IFP) enquired about the number of job losses, or jobs saved through the decision of the Tribunal and CAC on the merger. He also asked if the CC was satisfied with the progress of the implementation of the CAC ruling, and the time-frames, or whether they may need to be reviewed in light of other developments.

Mr Hlengwa asked for a breakdown also of how many of those employees were employed through labour brokers.

Mr Mubu agreed that there were concerns about employees employed through agencies, not directly. They apparently worked long hours, were under-paid and some could have been unfairly dismissed. He wondered if the CC monitored these kinds of matters.

The Chairperson added that it was also necessary to know how many jobs were created as a result of the merger, particularly since the merged company announced that it would be creating jobs. She commented that in some areas there appeared to be a trend of new stores opening, but being staffed by very few personnel.

Mr Z Ntuli (ANC) asked about the progress in reinstating employees.

Mr Ramburuth started with a general answer that there were huge methodological problems in counting accurately whether the intervention of the CC had directly resulted in a certain number of jobs. This was not something specific to the CC, but had to do with economic factors as well. It might be possible to draw some conclusions five hears down the line, but it was not possible to give a figure with certainty now.

The Chairperson accepted that there were problems, but said that then surely the CC should be working on creating a unit or trying to develop this point further.

Mr Ramburuth agreed and said that one of the projects on which the CC was working at the moment was to bring in methodologies that could do impact analyses. At the moment the CC was only able to do this in small areas. The CC was more concerned with measuring levels of competition than jobs; it assumed that the more entrants to the market, the more jobs created, and the more competition, the more likely it would be that prices for consumers would improve.

Ms Makhaya added that the CC was currently looking at different industries where there was development in the past, resulting in new entrants, breaking down of exclusive arrangements, or new technology, and what impact these developments had had on prices. The CC had focused on the areas where it had managed to eliminate exclusivity arrangements, which had, in some parts of the market, allowed for greater bargaining power. Retail was an industry that had still to be examined.

Mr Hlengwa thought the absence of a precise monitoring mechanism might be a problem.

The Chairperson said that the CC accepted that point. She asked the CC to find a way to check and report back on how the CC’s efforts had impacted on the community development portfolio and job creation, and agreed that the tools that Ms Makhaya had outlined would help in taking work forward.

Mr Bonakele agreed, in relation to questions about labour brokers, that there was a general concern that labour brokering was prevalent in the sector. The CC could look at this, but this question was really within the ambit of other agencies, who were already looking into these issues. The CC was focusing on the relationship between employees and Walmart directly.

Mr Bonakele added that to date, not all staff had been reinstated, and the CC was checking on the reasons and circumstances. He could provide the exact figures later. One of the challenges around that condition was that the company had stated that it had had difficulty in tracking some of the employees who were retrenched in 2009. Another was that some might not be interested in being re-employed. The CC was urging that Walmart/Massmart must put more time and effort into finalising this aspect. There were also cases where there were disputes between unions and company as to what exactly “reinstatement” meant, and whether, for instance, the merged company was within its rights to move an employee to another town, or whether reinstatement meant the exact former position. The CC was working with both the unions and the merged company on that point.

Mr Ntuli understood the difficulties between reinstatement and re-employment, and asked who was monitoring whether reinstatement was happening. He did not think that it was enough for the company to state that it could not trace former employees.

Mr Ramburuth answered that the Mergers and Monitoring Unit at the CC would be responsible for monitoring the compliance with the CAC’s order, including checking on the reinstatements. He added to what Mr Bonakele had said earlier, noting that the reinstatements had to be within reason and where exact positions could not be filled again, then "equivalent positions" must be found. The CC was dealing with both the merged company and the unions to try to get them to agree on what “equivalent positions” meant, which included looking at the quality of employment.

Mr Ntuli asked whether the Board was intended to be temporary or permanent, or was linked to the five year structure.

The Chairperson asked what the effective dates for the three year period were; from the time of the merger, or from the date of the final Court ruling.

Mr Bonakele responded that the effective date of the Order was from 9 October 2012, for a period of three years. The term for the Board was five years from 9 October 2012.

The Chairperson said that she had read, in overseas press, that there was a commitment made by Walmart that it would be importing from USA, and she wondered what impact that would have on the negotiations and ruling around local suppliers.

Ms D Tsotetsi asked to what extent the CC acted to support local suppliers.

Mr Ramburuth said that in general, the CC would be looking to sustainability, as it would be unfortunate if the local suppliers were only able to operate for as long as the Fund was in place. However, in answer to the Chairperson, he noted that the CC was not collecting information about procurement by Walmart from elsewhere in the world, as compared to its procurement in South Africa, since the CC was only monitoring its compliance to conditions placed on the merger by the South African courts. In answer to Ms Tsotetsi, he noted that the CC did not have copious amounts of data in general, nor could it actively support all local suppliers. It was concerned, in this instance, with monitoring and getting regular reports on the implementation of the CAC’s order. The advisory board, with representatives from government, business, and unions, would guide the progress. The CC would receive reports after those had already been considered by the advisory board. He reiterated that the CC was emphasizing that any supplier development must lead to sustainability, beyond the life of the Fund. He reminded the Members that the supplier development meant not only that they should be supported to improve supplies to Walmart locally, but also to supply other businesses, and perhaps Walmart in other countries – for instance, with wine exports to the USA.

In relation to the media articles referred to by the Chairperson, Mr Ramburuth said that it seemed that legislators in the USA were taking similar steps to try to protect their own local industries. Despite its ideological positions, the USA seemed to adopt a protectionist stance. In the long term, the commitment by Walmart might have an impact, depending on how its was implemented, but it must be remembered that no matter what Walmart’s commitment in the USA, the political circumstances there could never override the CAC’s ruling that it must comply with in South Africa.

Mr Bonakele added that the findings around supplier possibilities had been shared with the Department of Economic Development (EDD). There were also concerns around food imports, such as canned food, but he pointed out that this was not applicable to Walmart alone; most of the food available presently in other retail outlets in South Africa was in fact imported, although it might be packaged or sold by local suppliers. The CC had been asked to comment, by the EDD, on the accord that EDD was preparing to encourage all supermarkets to buy locally.

The Chairperson reiterated that the Minister and EDD were also involved in the whole issue, and she appreciated the work of the CC to ensuring that outcomes on the merger conditions were beneficial to South Africa.

Market enquiry into private healthcare sector
Ms Makhaya noted that the following sections of the CC’s document examined some other projects of the CC. The first related to private healthcare. She reminded Members that the CC was empowered to investigate whether there was proper competition in South Africa, and the CC was now empowered to institute its own investigations, where there had not been an official complaint, but in sectors where there were concerns about problems or trends. In the private healthcare sector there were concerns about pricing, and concerns about the state of competition. Anecdotal evidence was suggested that South Africa, despite having a relatively poor population, had one of the highest figures for MRI scanning. There were also reports that pricing in certain provider groups has increased, and concerns about specialisation benefits, as well as about the trends in increasing contributions to private insurance by the public. She pointed out that although South Africa had a public healthcare system, healthcare, for a certain proportion of the population, consumed much of the households’ resources.

Healthcare was a unique industry, with certain characteristics, such as that patients did not have the same power as other sectors. They were generally unable to bargain with their doctors about treatment, and the power of the information that doctors held led to unbalanced transactions. Patients would rely on their GP to give advice as to whether they needed to seek specialist medical care. In the industry, relationships were not functioning properly, and the costs were huge.

She noted that this was further affected by the history of the sector. Prior to 1994, healthcare costs were regulated. Over time, arrangements developed, whereby those in the industry would decide that certain tariffs should apply, but without regulatory oversight. The CC had been alerted to the "collective bargaining" practices between hospitals, and when that practice stopped it was anticipated that some other pricing mechanism must emerge in the sector, rather than private cartels. For a while, there were various attempts to determine pricing, and to try to ensure that the prices charged were appropriate to the real costs, but at the moment there was no set mechanism over pricing (see slides for further details)

The CC also noted quite a number of mergers. In this sector, unlike other countries such as India, there were no innovations to offer high care procedures at a lower cost. There were concerns about entry to the market, consolidation and lack of innovation. The CC’s market investigation was therefore aimed at displaying a bigger picture of private healthcare, and the relationships at play across the value chain, including those between specialists and providers which were complex. The CC was also concerned about the complaints that medical aids and pharmaceuticals were too expensive. For a number of reasons, therefore, the CC felt that the key problems had to be examined.

Ms Makhaya said that the CC had tried to narrow down the scope of its investigations to certain sub-sectors, and had decided to concentrate on the provider and specialist sides. Its market enquiry would assess the market to reach an understanding of how providers determined their prices, what they contributed to costs, and the real cause of the high pricing. The understanding of the process would lead on to an identification of the problems, where there might be gaps in regulations, and recommendations by the CC around affordability, innovation, and access.

Ms Makhaya summarised the purpose and objectives of the enquiry (see attached presentation), as well as the methodology, which was similar to the banking enquiry that the CC had conducted in 2008. This included consultation with stakeholders, and an inquisitorial public hearing process, a review of secondary material and the CC requesting information. All this would be done in an open consultative forum, which aimed to get good quality of information. The market enquiry should take 18 to 24 months.

Discussion
The Chairperson commented  that the market enquiry was welcome and was long overdue, because the health system in general was under pressure. She wondered if there had been studies done already, and what their status was. If not, then she wondered how the CC could ensure that it received as wide a range of information as it needed.

Mr Ramburuth indicated that the “secondary material” would include prior studies.

Mr Gcwabaza proposed that, in addition to what had been outlined, the CC should also look into the way in which funds were allocated for various areas. For instance, very little was allocated to “common sicknesses” by medical aid funds, so that a member of that medical aid might find that his funds had been exhausted at an early stage in the year, whilst the largest proportion was set aside by the medical aid to cover quite rare and unlikely occurrences. Linked to that concern was that the contributions made that were allocated to rare diseases were not carried forward, year to year, so many amounts were effectively being “hidden” from members of the scheme.

Ms Makhaya answered that the CC would look into how funds paid by members of schemes were allocated. She understood the concerns, but said that at the same time, people did want to ensure that the “high ticket” eventualities were covered. The quality of the packages being offered by medical aid schemes must be examined.

Mr Mubu agreed that the enquiry was timely. The Minister of Health was on record as expressing concerns about public healthcare. He wondered if the CC would get sufficient cooperation from the players in the sector, particularly in regard to the income and profits, to enable good conclusions to be drawn, and wondered if there were alternative ways to get the information.

Ms Makhaya said that the methodology being followed had already been tested by the CC in its enquiry into the banking sector. Technical teams had phrased the questionnaires to focus on the key problems and solicit the necessary technical information that was needed to conduct the review.

Mr Ramburuth added that it was true that the level of cooperation would affect the level of information. This project had been started some time ago. The industry was well aware of the enquiry, and the Minister of Health had recently been asked to deliver a keynote address at a recent competition conference, and was fully supportive of the enquiry. He pointed out that when the CC had conducted the enquiry into the banking sector, it had been constrained by the fact that at the time, it had no power under the Competition Act to subpoena documents or evidence in a market enquiry, as distinct from the powers that it had during a specific investigation into a complaint. Everything was therefore done on a voluntary disclosure basis. Although the Act had since been amended to grant the CC those powers, there was still something of a problem because the relevant changes had not yet been brought into operation. 

The Chairperson noted this point, and said that Parliament had passed the Act and it was therefore effectively out of its reach. The CC and EDD must pursue the question of bringing the Act fully into operation on an effective date.

The Chairperson asked when the results of the market enquiry were likely to be published, if the enquiry would span 24 months.

Mr Bonakele said that it would be difficult to release reports on one aspect before others, as all the matters were interlinked.

The Chairperson commented that whilst she fully understood the consultative process, and the fact that the CC would have to have full investigations, she still had some concerns about the timeframes.

Mr Mubu asked what would be done with the information and whether it would have an impact on the current situation.

Mr Ramburuth said that the outcome of the enquiry was to provide meaningful information and make recommendations to the CC and Department of Health on whether, and how, the sector could be regulated, and the role of competition and regulation.

Construction Fast Track Settlement Project update
Mr Ramburuth reported that the construction and infrastructure sector was a priority sector in South Africa. Over the years, a number of investigations had been done by the CC and it had received numerous applications for corporate leniency, which he explained as an initiative whereby, in exchange for information, a company that had been involved in anti-competitive behaviour, would receive a lesser penalty. The CC, having done investigations, had concluded that big-rigging was widespread in the sector. Similar challenges had been experienced in several other countries. Drawing on the experiences and practices of Britain and Holland, the CC had therefore decided that, rather than undertaking comprehensive investigations that would take considerable time and resources, it would rather develop a past-track settlement process. It was primarily designed to incentivise firms to disclose information. Since several firms who had been conspiring would be required to disclose separately, it would ensure as comprehensive a disclosure as possible, strengthening evidence against those who failed to disclose, and thereby reducing the time needed on independent investigations by the CC. Those who disclosed their involvement would be offered better financial settlement terms for their transgressions. In addition, this kind of process would hopefully lead to the total annihilation of the cartels, as cartel relationships were built on trust between the companies.

The CC had launched the process in 2011. It had received settlement applications from 21 firms, including the “big five” companies. These applications revealed 133 rigged projects in the public and private sector, and covered a range of major infrastructure projects such as stadiums, dams, mines, and shopping centres.

The fast track settlement would run concurrently with the corporate leniency process. Firms were also implicated in some practices that they had not disclosed themselves. The bulk of the work had been completed by the CC and it was presently formulating consent agreements with all the declared projects These would, once completed, be referred to the Competition Tribunal and made into consent orders. In respect of those projects that were not declared, those involved ran the risk of prosecution.

Mr Ramburuth summarised that the whole project had to be managed carefully and closely, with complete transparency and clarity, so that those who chose to participate knew of the rules, how the initiative would work, and that they would have to comply fully with all the rules. There was considerable technical detail required on the calculation of the penalties, and some of the factors considered when determining those penalties were summarised (see attached presentation). He concluded that the project was showing considerable success to date, and more detailed briefings would be furnished to the Committee as it proceeded further.

Discussion
The Chairperson appreciated the preliminary briefing. She said it was possible there could be more than 133 cases. The investigation was particularly important not only because of the huge projects embarked upon in South Africa, but the fact that many extended also to other African states. Whilst she realised that similar problems may well exist in other countries, where strong competition authorities were not in place, it was nonetheless necessary to cap these kinds of anti-competitive practices so that the impact locally and elsewhere was minimised. These big-rigging incidents had happened over a long time.

The Chairperson reminded Members that this Committee had previously asked questions on the corporate leniency and how it incentivised companies to report on each other, and that it had previously been shown to be effective. In future, it would be appreciated if the CC could employ the services of pricing specialists, so that when the settlement applications were received, with indications of the pricing arrangements, it would be able to check them back against its own information.

The Chairperson noted that other countries with similar experiences were cited, but she wondered if any comparative examples were available from Brazil, who had a sophisticated infrastructure programme. She commented that the aim was obviously not to replicate all processes, but draw on examples that had been successfully applied elsewhere to save time.

Ms Tsotetsi asked about the time frames for reporting, and for an explanation on the fast tracking of the process.

Mr Ntuli enquired why there was a reference to both public and private projects, and asked how the private sector would collude.

Mr Ramburuth said that in practice, large projects in both the public and private sectors could be put out to tender, and bid-rigging had been noted in both private and public sector projects. He added that whilst the Competition Commission was often criticised for hindering business or showing a bias against businesses, this project in fact emphasised that businesses who were paying for the projects were benefiting from the efforts of the CC.

Mr Ramburuth said that he fully appreciated that there were always concerns around the time frames and he himself was particularly anxious to try to minimise them as far as possible. However, the reality was that competition authorities’ work was long-term, because the changes that its work would cause in complex markets and economies could not happen overnight. It was wise for the CC to concentrate on meaningful long term projects rather than achieving shorter term but perhaps not lasting results. He also added that it was necessary for the CC, to avoid criticism and legal challenges, to act properly, fully, and in accordance with time frames stipulated in legislation. Whilst the CC tried as far as possible to achieve what it could in the shortest time possible, matters might take longer than initially expected. He accepted that sometimes the pressure on the CC to do something faster was positive, and the Chairperson’s several comments about the time frames were valid, particularly the point that the longer the cartels existed before being stopped, the more damage that was done. However, at the end of the day, the work of the CC was destabilising cartels even before they were “officially” denounced. As soon as the corporate leniency programme was announced, that would start to break the trust relationships between the members of the cartel, even if it had no immediate legal effect.

Mr Ramburuth stressed that one of the important checks and balances in place already was the fact that several sources of information about collusion and pricing would be apparent, and could be compared against each other.

Mr Ramburuth said the point about learning from other agencies was well taken. Brazil, and other countries, were actually looking to South Africa and its experiences, and there were many authorities who were keenly watching how this particular project unfolded.

The meeting was adjourned.