Competition Commission legislation implementation challenges

Economic Development

29 November 2016
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Competition Commission said the vision of the Commission was the attainment of a growing and inclusive economy that served all South Africans through the Commission’s three core functions of enforcement, merger regulation and advocacy. The challenges to cartel enforcement were excessive litigation on technical grounds in the form of interlocutory applications and in the form of appeals and reviews and that there was a need to restrict appeal rights. Another challenge was the growing number of investigations and referrals which created capacity constraints and required more resources and demanded new ways of resolving cases. Sections 73A(1) to (4) of the Competition Amendment Act came into effect of 1 May 2016. The Act provided for two processes of enforcement; the civil process directed at the conduct of the firm and prosecuted by the Commission; and the criminal process directed at the conduct of managers and directors and prosecuted by the NPA. In order to have successful prosecution of cartels under the new provisions, the Commission needed to establish co-operation agreements (MoUs) with the NPA and SAPS. These MoU’s would also be able to address factors related to the Commission’s Corporate Leniency Policy (CLP)- an extremely successful tool in the uncovering and prosecution of cartels thus far. The challenges regarding abuse of dominance were in excessive pricing relating to the calculation of economic value. In predatory pricing, the challenges related to the definition of average variable costs and marginal costs. In price discrimination, the key challenge was the requirement of proof that transactions between different purchasers and those who have different scale economies were equivalent. The main challenges in the area of market inquiries related to resources, particularly human resources for market inquiries which were currently outsourced. The challenge to the Commission in the area of mergers and acquisitions was the increase in its workload due to the increase in mergers. The total staff complement of the Commission was 197. Much of the growth in staff numbers has been achieved through the creation of contract positions and a proposal for more permanent posts was being discussed with the Department of Economic Development and Treasury with the Commission’s strategy being to move from outsourcing to the insourcing of personnel because it was cheaper and it developed in house knowledge. Insourcing was also a source of staff motivation.

Members asked how many of the 200 employees were responsible for handling abuse of dominance cases. Had abuse of dominance cases increased? How did South Africa compare regarding workload and resources available? Was South Africa under-resourced? Members said it was important that a partnership be struck with the NPA so that work could be done with less contestation and what could Parliament do to assist in this process. Members asked whether the period of 10 years was OK or whether this was just a starting point and that there would later be more severe amendments. Members asked what the challenges were when dealing with foreign business owners. Could the Act deal with foreigners transgressing the law? Did the NPA have sufficient skills to prosecute cases dealing with the criminalisation of cartels legislation? Would the Commission assist to give them the specialised skills or must they make their own arrangements to get it themselves? Members said Cosatu wanted the Competition Act to be amended to prevent job losses for a ten-year period in the case of mergers. What was the Commission’s views on the ideal length of time? Regarding section 13 of the Act, on the criminalisation of cartel conduct, what effect would the implementation of the provisions have on corporate leniency policy of the Commission. Would this turn the Commission into a toothless watchdog? Members asked what South Africa was looking to protect via the Commission. Was it to protect firms? What were South Africa’s concerns especially around mergers and acquisitions? Members said they were concerned at the number of mergers the commission concluded per year. This was not something exciting, it was very worrisome. Why was there this big appetite for South African companies? Was it because there were loopholes present in not found in other countries, making it easier for them to do business? It was contradictory that South Africa was trying to restructure its economy while at the same time the mergers were perpetuating the existing structures.  

Meeting report

Briefing by Competition Commission
Mr Tembinkosi Bonakele, Commissioner, Competition Commission, said the vision of the Commission was the attainment of a growing and inclusive economy that served all South Africans through the Commission’s three core functions of enforcement, merger regulation and advocacy. 

In cartel enforcement, the Commission targeted price fixing, market allocation and bid-rigging via a dedicated Cartels Division focused on the investigation and prosecution of cartels.

Mr Bonakele said he would not speak to the ArcelorMittal South Africa (AMSA) case study as that had been done in a previous briefing, but informed the Committee that the settlement had been confirmed through a tribunal order on 16 November. The challenges to cartel enforcement were excessive litigation on technical grounds in the form of interlocutory applications and in the form of appeals and reviews and that there was a need to restrict appeal rights. Another challenge was the growing number of investigations and referrals which created capacity constraints and required more resources and demanded new ways of resolving cases. Sections 73A(1) to (4) of the Competition Amendment Act came into effect of 1 May 2016. In terms of section 73A(1) a person who is a director of a firm or has management authority within the firm, commits a criminal offence if, while in that position, such person caused the firm to engage in cartel conduct or knowingly acquiesced in the firm engaging in such practices. The Act provided for two processes of enforcement; the civil process directed at the conduct of the firm in terms of section 4(1)(b) and prosecuted by the Commission; and the criminal process directed at the conduct of managers and directors in terms of section 73A and prosecuted by the NPA. In order to have successful prosecution of cartels under the new provisions, the Commission needed to establish co-operation agreements (MoUs) with the NPA and SAPS. These MoU’s would also be able to address factors related to the Commission’s Corporate Leniency Policy (CLP)- an extremely successful tool in the uncovering and prosecution of cartels thus far.

Abuse of dominance related to the unilateral conduct by a dominant firm to either exploit customers or exclude competitors. An example of exploitive conduct was excessive pricing. Exclusionary conduct prevented or impeded a firm’s entry or expansion in a market. Such conduct might include refusals to deal, tying or bundling, predatory pricing and margin squeeze. Because of the high levels of concentrations in the South African economy, enforcement did not break monopolies which was why the Commission focused on advocacy work like outreach and education. The challenges regarding abuse of dominance were in excessive pricing relating to the calculation of economic value. In predatory pricing, the challenges related to the definition of average variable costs and marginal costs. In price discrimination, the key challenge was the requirement of proof that transactions between different purchasers and those who have different scale economies were equivalent.

The Competition Amendment Act introduced market inquiries as a new tool which enabled the Commission to conduct an inquiry into the state of competition in a market without invoking its investigation powers and threatening prosecution. The main challenges in this area related to resources, particularly human resources for market inquiries which were currently outsourced.

Mr Bonakele said the that in assessing a merger the competition authority had to consider the merger’s impact on public interest issues, including employment; the ability of small businesses or firms controlled by historically disadvantaged individuals to become competitive; a particular industrial sector or region; and the ability of national industries to compete in international markets. A total of 37 mergers were approved with conditions in 2015/2016. He looked at the ABInbev/SAB merger as a case study. It was approved on 30 June 2016 subject to extensive conditions. The challenge to the Commission was the increase in its workload due to the increase in mergers. In 2015/16 there were 391 notifications which had grown from 229 in 2010/11 while the Commission’s staff of 20 had remained the same over the period. 

The total staff complement of the Commission was 197. Much of the growth in staff numbers had been achieved through the creation of contract positions and a proposal for more permanent posts was being discussed with EDD and Treasury with the Commission’s strategy being to move from outsourcing to the insourcing of personnel because it was cheaper and it developed in house knowledge. Insourcing was also a source of staff motivation.

Discussion
Mr P Atkinson (DA) referred to the presentation and noted that workload was one of biggest challenges facing the Competition Commission. How many of the 200 employees were responsible for handling abuse of dominance cases? Has abuse of dominance cases increased? How did South Africa compare regarding workload and resources available? Was South Africa under-resourced?

Mr I Pikanini (ANC) said it was important that the Commission have permanent instead of contract jobs, perhaps even a new organogram, because its work was opening new doors.

Mr S Tleane (ANC) said it was important that a partnership be struck with the NPA so that work could be done with less contestation. He asked what Parliament could do to assist in this process. He said the positive to be drawn from the criminalisation of cartels was that those with management authority could now be prosecuted; however this would mean more work and therefore an increase in staff.

Mr M Mbatha (EFF) asked, with reference to the amendments to the Competition Act enacted in May 2016, whether the period of 10 years was okay or whether this was just a starting point and that there would later be more severe amendments. He referred to the construction cartel as a case in point where price fixing had stymied the emergence of black companies in this sector.

Ms D Rantho (ANC) asked what the challenges were when dealing with foreign business owners. Could the Act deal with foreigners transgressing the law? Did the NPA have sufficient skills to prosecute cases dealing with the criminalisation of cartels legislation? Would the Commission assist to give them the specialised skills or must they make their own arrangements to get it themselves?

Dr M Cardo (DA) said Cosatu wanted the Competition Act to be amended to prevent job losses for a ten-year period in the case of mergers. What was the Commission’s views on the ideal length of time? Regarding section 13 of the Act, on the criminalisation of cartel conduct, what effect would the implementation of the provisions have on corporate leniency policy of the Commission. Would this turn the Commission into a toothless watchdog? Minister Patel had indicated there would be changes to the Competition Act to address pricing and the abuse of market dominance and provide guidelines for the corporate leniency policy and internal procedures of the Competition authorities in respect of confidential information and that the details would be released at the end of the year. At what stage were the proposals and when would they be put before the Committee.

The Chairperson said that there would be an opportunity to meet with the Minister and Mr Cardo could ask his last question directly. She asked what South Africa was looking to protect via the Commission. Was it to protect firms? What were South Africa’s concerns especially around mergers and acquisitions? Companies in highly capitalistic countries would swallow, not merge, with smaller companies in another country. Hence her concern at the number of mergers the Commission concluded per year. This was not something exciting, it was very worrisome. Why was there this big appetite for South African companies? Was it because there were loopholes present not found in other countries, making it easier for them to do business? It was contradictory that South Africa was trying to restructure its economy while at the same time the mergers were perpetuating the existing structures. 

Mr Bonakele replied that the number of investigators had remained constant at 21. The number of cases were 200 so the workload was high. The Commission wanted to place some of the investigators in a group because some of their cases were distractions as there was currently no screening of cases. It wanted to increase the number of investigators to 30 and to optimise the use of resources through the screening and allocation of cases.

Mr Bonakele said an international benchmark was complex as South Africa had a small agency which made it difficult to compare. South Korea was closest to South Africa for comparison but they had a staff of 2 000 and they regulated aggressively. In Russia, every region had a Competition Authority and a huge head office. Australia had a complicated structure with a staff of 600. Competition Commissions all had different mandates. The Commission had proposed a staff structure of 300 people. It had completed an organogram and motivation including a decrease in outsourcing and an increase in in-house staff. This needed to be approved by government.

Mr Bonakele said the jury was still out on what would stop people from fixing prices. It would take time to uproot the construction cartel. As part of the solution one had to ensure that there was a diversity of people in business and industry. The same people were sitting on many boards of companies and therefore the country would not change. One did not find females or blacks in the cartels. A World Bank report had shown the web of interactions of people on boards of companies and the concentrations were shocking. This could not be solved only through the criminalisation of cartel conduct, there had to be a greater diversification of people operating in the economy.

Mr Bonakele said he was concerned about the impact on enforcement of the criminalisation of cartel conduct legislation because it wanted to carry on using incentives as a tool and it did not want this to come to an end. A whistle-blower would still get some immunity. The challenge was inter-agency communication and a need for a MoU so that it would be clear to business people that legislation would be enforced. The other agencies the Commission would have to interact with were big and sometimes had different priorities. There were still some legal impediments and while it was not impossible, it would be hard.

In reply to Ms Rantho, he said there were not a lot of cases involving foreigners; however the challenge was the inability to follow through. The Commission was working hard to sign a MoU with other authorities. There was no system to force witnesses to come to South Africa to give testimony and this was going to be hard to fix. It was trying to get the instruments of cooperation in place to get this matter sorted out. Cases also depended on the interest taken by a country especially where there was a self interest component. He had had discussions regarding Somali and Pakistani business models and that this enquiry would assist.

Mr Bonakele said the Commission’s proposal was that the same team should be working on all criminalisation of cartel conduct cases. The Commission needed people with prosecution experience like those that worked at the NPA. It needed Senior Counsel with experience and the team should be housed under one entity. The question was which entity that should be.

Regarding the question on Cosatu’s concerns over job losses, he said that the issue of employment/job losses when dealing with mergers and acquisitions was taken very seriously. It was not easy as there were complex issues. Sometimes the unions wanted to allow mergers to save industries and jobs. Sometimes the answers were not as easy as in cases where workers would demand that they be retrenched so that they could access their benefits and then they could be rehired by the new company. This would be in cases where the workers might feel that the new owners did not really know the business. The legislation was predominantly used to soften the blow of retrenchments. Proposals to improve the system would be looked at.

Mr Bonakele said that when mergers were being considered, the Commission went back to what the purpose of the merger was. There were positives which flowed from doing mergers quickly because it transferred assets to those in the economy that could use it more productively, which in turn would impact on growth and job creation within a reasonable time. Foreign direct investors were looking to see if the Commission could make predictable regulation. Foreign investors, such as ABInbev which acquired SABMiller, viewed South Africa as an entry point into Africa. It could as easily have entered via Nigeria. They wanted to enter Africa not South Africa only.

The meeting was adjourned.


 

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