Competition Act: workshop with Competition Commission

Economic Development

13 February 2018
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

With a Competition Amendment Bill on the cards for Parliament, the Committee Researcher gave a background to the Competition Act. Competition legislation originated in the US and Canada in the 1890s to limit the political and market power of trusts. Trusts and cartels increased prices and forced small businesses out of the market. Oligopoly and monopoly led to market dominance and the power to change prices. Perfect competition maintained reasonable prices and product choices and generated employment. Governments intervened in various ways to protect the competitive process. In South Africa the aim was to develop the economy, to broaden participation, and to develop SMMEs. There were complex monopolies and oligopolies in SA, with challenges of excessive litigation on technical grounds.

The Competition Commission explained that it was one of three bodies that regulated competition, along with the Competition Tribunal and the Competition Appeal Court. The Commission investigated complaints; assessed mergers and undertook market enquiries and advocacy. The enforcement mandate of the Commission became operative when laws related to cartels and abuse of dominance were broken. It could be proactive about mergers and acquisitions and intervene. A market enquiry was a general probe into competition in a given market. The objectives of the Competition Act of 1998, as amended, were informed by high levels of concentration of ownership and control; restrictions on participation, and the fertile ground for cartels and the abuse of dominance. The purpose of the Act was to develop the economy; to ensure competitive prices and product choices; to provide equitable opportunities for SMMEs, and to promote a greater spread of ownership, especially among the historically disadvantaged.

The discussion dealt with the aim of competition polices; litigation on technical grounds; “collusion” versus fraud and corruption; corporate leniency; market dominance by foreign firms; cases lost at the Competition Appeal Court; the Commission input into amendments to the Act; monitoring of compliance with merger conditions; market enquiry; foreign firms and excessive pricing; referrals to the Constitutional Court, and collaboration with other regulatory bodies.

Meeting report

Introduction by Chairperson
The Chairperson announced that amendments to the Competition Act would not be considered today. The object of the meeting was for the Committee to familiarise itself with the Act. It was a voluminous Act and if it was not interpreted right there could be problems. The Act dealt with the transformation of the economy by guarding against formation of cartels, which made economic activity hard for emerging and some existing firms. Competition legislation had to be of benefit to SADC countries. Of the Southern African Customs Union (SACU) countries, only Lesotho did not have competition legislation. Cartels were managed in other SACU countries and SADC member states. Competition policy was important for a country in terms of job creation, reduction of poverty, and equal participation. In the absence of it, poverty and inequality would continue, and job creation would suffer. Cartels could be a barrier to growth, not only in SA, but also on the rest of the continent. The objectives of the Act had to be looked at with an open mind. The Committee had to use the rest of the year to wrap up its work for the Fifth Term and to prepare a handover report. There would have to be a review of what was done and what was not done.

She welcomed a new committee member, Ms K Hlonyana of the EFF, who would take the place of Mr Mbata. In spite of differences elsewhere, the different parties could agree to disagree in meetings.

The Committee Researcher would start proceedings with a focus on the role of the legislature, the executive and civil society. The Competition Commission would focus on the law itself. The Parliamentary Legal Office had been asked to present, but it turned out that there were only four legal advisers who dealt with competition law, and two of them had resigned. The Office had asked for more time. Time would be granted until the first week in March, when the Office would advise them on amendments to the Competition Act.

Background to Competition Act: briefing by Committee Researcher
Committee Researcher, Ms Nwabisa Mbelekane, said that competition legislation originated in the US and Canada in the 1890s to limit the market and political power of trusts. Trusts and cartels increased prices and forced small business out of the market. Oligopoly existed when a few firms were able to change prices because they dominated a market. Monopoly existed where a single firm could set up barriers to entry, and had the power to change prices and make huge profits. Perfect competition led to efficiency in allocation of resources, and maintaining standards. It maintained reasonable prices and generated employment. Government could intervene to protect the competitive process. Different countries had different approaches to regulate competition. In SA, the aim was also to develop the economy, to broaden participation, and to develop SMMEs. In 1994, five firms still owned 84% of the JSE. The 1998 Competition Act was amended in 1999, 2000, 2001 and 2009. There were complex monopolies and oligopolies in SA, with challenges of excessive litigation on technical grounds. The Competition Commission had to consider 400 mergers in one year. Some cases, for instance against SASOL, were overturned by the Competition Appeal Court.

The Chairperson commented that the main goal of cartels was not to help, but to restrict and to dominate. The briefing showed how countries developed their own competition policies.

Mr S Tleane (ANC) remarked that the briefing confirmed what was agreed upon in the literature - that perfect competition was an idealistic concept, mostly used for analytical and comparative studies. It was not to be found in real developed economies. The Act leveled the playing fields, but perfect competition could not exist in real terms.

Ms A Mfulo (ANC) asked what was to be achieved through competition policies. She referred to the statements about market structure on page 7 and asked what was desired in the policy and how it could be made binding on everybody. She referred to page 25 that stated that litigation on technical grounds was on the increase, and asked if policy had the teeth to deal with appeals and reviews. The term “collusion” was used in reference to big companies, as if it was not the same as fraud or corruption.

The Chairperson commented that the purpose of the Act was to promote and maintain competition, for efficiency, adaptability and development of the economy. Consumers had to be provided with competitive prices and product choices. It had to promote employment and advance welfare. It had to advance opportunities for SA participation in world markets. There had to be equal opportunities for SMMEs, and a greater scope of ownership to include the historically disadvantaged. The Competition Commission would indicate how the policy and the Act was crafted to deal with South African challenges.

Ms Mbelekane replied that competition policy had to be aimed at market efficiency and redress, and to change the structure of the economy. There was still a high concentration of a few companies which owned a large portion of the market share. It was the legacy of the past. The Competition Act aimed at achieving such objectives, but cartels still posed the challenge of market concentration. In 1994, five companies owned the majority of shares on the JSE. Forward movement required freedom of market entry. The Competition Act and the Commission had developed more teeth. In the early phases of competition legislation, only 18 cases were heard over a period of twenty years. In the post 1999 era, the Competition Commission prosecuted cartels. It had to make sure that wealth was evenly distributed and not highly concentrated. The Competition Commission needed greater powers. In the case against SASOL for abuse of dominance, the Competition Appeal Court overturned the decision on technical grounds. The Commission was effective, but more could be done to protect SMMEs and to effect redistribution.

The Chairperson commented that in competition law, the keyword with regard to cartels was corporate leniency. The Competition Commission worked with enforcement and penalties. It was taken for granted that the meaning of competition law was understood but it was, however, a specialised field. For MPs to oversee the competition authority, the law had to be understood, as well as the entity that was overseen. A cartel was an association of manufacturers, and its aim was to maintain high prices and to restrict competition. Large firms came to SA with a clear plan of which markets they were going to take advantage of. They capitalised on perceived weaknesses, and saw opportunities that local firms were not aware of. In the absence of rules and regulations, it could be impossible to detect uncompetitive behaviour. The political point of view had to be understood. In SA the focus was on protecting the vulnerable while opening up the economy. The few were not to be allowed to dominate the market. SA neighbours also had to be protected. SA had a strong economy and its neighbours relied on it. If there were weaknesses and vulnerabilities, neighbouring states could be affected. Members of Parliament had to understand what was being dealt with. There had to be education to enable Members to meet the challenge. Members had to learn to focus on solutions from the practitioners who implemented the Act. Challenges had to be turned into opportunities. When the economy and markets were understood, alternatives could be perceived.

Mr Tleane reiterated that the Researcher had to be thanked for providing Members with the basic information.

The Chairperson remarked that competition matters would be dealt with on an ongoing basis until there was a clear grasp. The Competition Commission had to educate the Committee. It was involved in a process with the Department to amend the Act. All were aware of the challenges. The Committee was waiting for the Competition Amendment Bill, which was currently before the public. The researcher had enlightened the Committee on the origins of Competition law in SA and elsewhere. It had to be understood why competition law was so important for every market.

Competition Commission briefing on competition authorities and the Competition Act
Mr Tembinkosi Bonakele, Competition Commissioner, explained that the Competition Commission was one of three bodies established to regulate competition in the market, along with the Competition Tribunal and the Competition Appeal Court. The Commission investigated complaints; assessed mergers, and undertook market enquiries and advocacy. The Commission enacted its enforcement role when laws related to cartel formation and abuse of dominance were broken. In that sense it was reactive, as it could not act against economic entities that were already dominant. It could be proactive about mergers and acquisitions, as the Minister could intervene. Market enquiries entailed a general probe into the state of competition in a market. The objectives of the Competition Act were informed by high levels of concentration of ownership and control; restrictions on full and free participation, and a fertile ground for cartels and the abuse of dominance. The purpose of the Act was to promote the development of the economy; to provide consumers with competitive prices and product choices; to ensure SMMEs an equitable opportunity; to promote a greater spread of ownership; and to expand opportunities for South African participation in world markets.

The Chairperson thanked the presenter for a clear and precise presentation. She appreciated the specific focus on important cases. It had to be known what the competition authorities were doing.

Mr Tleane agreed that the presentation was very clear. He referred to cases lost at the level of the Competition Appeal Court. The Commission had handled major cases that were in the public interest. He asked what the criteria were for cases not to be taken up by the Constitutional Court. The opportunity for companies to appeal to the Competition Appeal Court could conflict with public interest.

Dr J Cardo (DA) asked how much input the Commission had into the amendments to the Act, especially with reference to the new powers granted to the Commissioner in terms of market enquiry.

Ms Mfulo referred to the statement that retrenched employees could be employed as suppliers to the company that retrenched them. She asked who monitored that process. It could become a just a talk shop. She asked if dominance in healthcare and retail supermarkets was still being investigated.

The Chairperson referred to excessive pricing by foreign firms that were dominant in the SA market. The growth of such companies depended on the currency in the country of origin. Imported goods were valued in terms of the currency it had been bought with. When it was brought to SA, the pricing was the equivalent in terms of the local currency. Goods would be expensive if the currency in the country of origin was stronger than the South African currency. She asked the Commissioner about his perception of that. Unless goods were acquired with a value that was affordable locally, services and goods would be more expensive. Cars imported from elsewhere were expensive. Even though cars were partly manufactured locally, parts still had to be imported, at the value of the euro, the dollar or the pound and then converted to SA currency. She asked how fair that was to the local market. The SA consumer default index showed that the rate of defaulting was growing. She asked about causal factors. Car sales were increasing, and did boost the economy, but at the expense of consumers.

Commissioner Bonakele adhered to the suggestion by the Chairperson that he did not have to respond to the question by Dr Cardo about the input of the Commission into amendments. He responded about appeals to the Constitutional Court. The Commission would look at a variety of factors, including the reasoning of the Competition Appeal Court, and the importance or novelty of the matter, or whether matters were still unsettled. However, there seemed to be a lack of appetite on the part of the Constitutional Court to decide on economic questions. It did not show enthusiasm to hear cases. Cases had been referred by the Commission that the Constitutional Court elected not to hear. It was usually justified by the statement that the Commission did not have a good prospect of success. There was the SAB case involving distribution and excessive pricing that the Constitutional Court had the opportunity to hear, but declined. He noted another two cases that were referred to the Constitutional Court. One was where the Competition Appeal Court had reduced a fine, and the Commission could not agree to that. There was a case where a party refused to provide notification of a merger, that was escalated to the Constitutional Court. The Commission started off from a low base. In the past the Constitutional Court had shown a lack of appetite, but it was surprising since currently more interesting cases were brought before them. The problem was that the Constitutional Court could decline in a single sentence, by merely saying that the Commission had no prospect of success.

He answered Ms Mfulo that the Commission monitored compliance with merger conditions. Capacity was created in the form of a team that dealt with monitoring compliance. However, it was hard to exert a strong influence when dealing with unwilling companies. There would be a condition, for instance, that when a company closed one factory, workers had to be provided with jobs in another factory. Workers would claim that the company refused to do so, but it would turn out that there were practical difficulties. Sometimes the conditions failed to talk to the real situation at hand. The conditions might require that there be re-employment, but the company would argue that workers could not be traced. It helped when unions were involved. If there was no compliance with merger conditions, all the Commission could do was to undo the merger, which was akin to impose a death sentence for a crime that did not merit that. Other mechanisms to enforce compliance had to be looked at. Criminal charges against executives could be considered, but an international transaction could not be undone.

Commissioner Bonakele replied that the market enquiry on healthcare would be concluded by August 2018. The report on the retail sector would be provided before the end of the financial year. Government had called for an enquiry into data services: 12 months were granted, but it would take longer. There had to be an enquiry into public transport, but it was a hugely complex enquiry. There were a variety of complaints. Taxis were saying that they could not compete with buses, as buses were subsidised by the State. There were also complaints against Uber. There were discrepancies in subsidies for public transport. When the subsidy for Gautrain was compared to subsidies for the rest, there was discrepancy. The situation was complex. Taxis, buses, and rail were looked at, but the real complaints were about the interface between the different modes. There were subsidy discrepancies.

He replied to the Chairperson about foreign firms and excessive pricing. SA could not regulate in terms of yes or no to foreign direct investment. There was no law to prevent anyone from entering the market. There was an Arab country that wanted to buy in at the Waterfront. There was no law to stop that, if the owner wanted to sell. The Commission could only look at it in terms of competition. If a national champion like SAB was acquired by a foreign firm, people expected the Commission to block that, but it could not. Some countries regulated foreign direct investment (FDI), such as the US. The US had a committee that looked at FDI from a national security point of view. The US had stopped the acquisition of US companies by China. Europe was traditionally not inclined to block it, but it was changing as it had become a trade issue in Europe. Playing fields had to be levelled as large Eastern countries invested elsewhere. There had to be political decisions if FDI had to be regulated more tightly. Competition issues intersected with industrial policy. In the auto sector, South Africans were paying more for cars, as there was a closed market and it was difficult to import. The local market was protected. It was a big political question. The subsidy in the previous year was R8 billion. Car prices were related to subsidy. It was a complex policy question. Australia had chosen to remove subsidies. A cost-benefit analysis was made and it was decided to develop the local industry. Decisions had to be made about trade policy. The local chicken market could be protected by raising tariffs, or it could be opened up to be flooded by Brazilian and US chicken. Only short term decisions could be taken. The question was whether South Africans could compete. The country could only protect itself for a certain period until it was forced by the US, if the local poultry sector was not competitive. There was no policy without a negative consequence.

The Chairperson referred to collaboration with other regulatory bodies so it would be easier to protect the interests of South Africans. There was the lack of a shared objective. Some entities guarded their mandates in a solo fashion. Economic regulatory bodies had to sit down together to consider what each could do to deal with challenges in a uniform manner. Developing economies had to protect themselves, as they were being played by dominant economies. African countries were being played off against each other. Currencies had to be looked at in terms of competition. South Africans had to discuss such matters.

Commissioner Bonakele responded on whether there had to be executive interference or not. It was important that in clarifying the law, it was not to depend on who was the Minister. The efficacy of laws had to be evaluated. Parliament had chosen to intervene through the Executive on DFI. There was no overarching law. The Commission had an advisory role in relation to other regulatory bodies. There was the example of school uniforms, where the Minister of Basic Education decided against opening up. When it came to regulating a sector, the only option was to try to persuade. Some Directors General would take a year to finally decide to meet on an matter, whereas others responded immediately.

The Chairperson commented that Mr Bonakele seemed to be asking for a body that could have a global perspective. Competition was an interesting and intriguing area. She thanked Mr Bonakele for always being there when called to account. There was a cordial relationship between the Commission and the Portfolio Committee. There was to be interaction geared towards continual education and empowerment of Members.

The Chairperson informed the Committee that an application for oversight in the Western Cape was before the House Chair but there had as yet been no response. If there was a response, the Committee could leave on the following day and return by the Thursday. There had to be oversight of the tourism sector.

The Chairperson adjourned the meeting.

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