Competition Amendment Bill: briefing by Minister and Deputy Minister

NCOP Economic and Business Development

09 October 2018
Chairperson: Mr M Rayi (ANC, Eastern Cape)
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Meeting Summary

The Minister of Economic Development provided an overview of the Competition Amendment Bill to the Select Committee although the Bill was due to be passed by the Portfolio Committee only on 16 October. The Competition Act was enacted twenty years ago in 1998. Over time, certain gaps had been identified. One of the major challenges identified in the South African economy was the high levels of ownership by a handful of foreign and/or domestic companies. One of the objectives of the Bill was to provide competition authorities with the tools to investigate and address high levels of economic concentration. The key changes brought by the Bill dealt with prohibited practices; structure of markets, competition and public interest outcomes; mergers and acquisitions; and institutional improvements. The Minister provided insight about what each amended section dealt with. He concluded that concentration and economic exclusion remained core challenges in SA. This contributed to slower and less dynamic growth, lower employment and greater inequalities as well as socio-political conflict. The Amendment Bill enabled a more effective approach to concentration with a focus on improving outcomes for small and black owned businesses and strengthened the institutions involved in managing competition policy and law.

Members agreed with the Minister that economic exclusion was a core challenge and were pleased about the changes. Members pointed out that Small, Medium and Micro Enterprises (SMMEs) often complained about access to capital. What was the role of the National Empowerment Fund (NEF)? Members said there was dissatisfaction amongst consumers in not seeing any benefit from the penalties imposed on Pioneer Foods. Did the Bill allow for benefits from penalties to filter down to consumers? Members appreciated the provision for block exemptions and that the Minister was able to make regulations. Members observed that much of the developed world’s focus was on technology while Africa’s focus was still on agriculture. How would the Bill ensure that the Googles and Facebooks of the world would be required to develop the South African economy once they entered the South African market? Members were concerned that emerging farmers who supplied supermarkets were dictated to by the supermarkets on what they should be paid. Could the Bill provide protection for emerging farmers? Another concern was that African countries like Malawi were complaining that South African retail chains operating in their countries were killing their local agricultural sector. Had municipalities been consulted on the Bill, given the vital role that municipalities could play? Local economic development was still a challenge and the Department was urged to take the South African Local Government Association (SALGA) on board. Members asked how the Bill would benefit small businesses operating in rural areas. The concern was that small producers might fall victim to price discrimination. How would the small business person understand the provisions of the Bill and the protection that it provided? What was the plan to simplify the Bill for them as it was very technical and difficult for the lay person to understand. How would the Bill's provisions be enforced? Members were concerned about the Bill attempting to regulate the free market system. Would it not impact on investment into SA? The fear was that the Bill might scare off foreign investors as they were accustomed to operating in a certain way.

Minutes

Meeting report

Competition Amendment Bill [B23A-2018]: briefing
Minister of Economic Development, Ebrahim Patel, provided an overview of the Competition Amendment Bill. It was exactly twenty years after the inception of the Competition Act, No 89 of 1998, that the Bill was being introduced. Over the twenty year period certain gaps had been identified. One of the major challenges in the South African economy was concentration, that is, high levels of ownership by a handful of foreign and/or domestic companies. One of the objectives of the Bill was to provide competition authorities with the tools to investigate and address high levels of economic concentration. The key changes brought by the Bill was under four groupings: prohibited practices; structure of markets, competition and public interest outcomes; mergers and acquisitions; and institutional improvements.
 

Focus 1: Prohibited practices
Problem areas were collusion between firms and abuse of dominance by a firm. Sections 4 and 5 provided greater certainty on what was permitted collaboration and prohibited collusion between competitors, customers and suppliers. Section 8 revamped the regime to determine excessive prices and clarified what predatory pricing was. Section 8 also formalised the concept of ‘margin squeeze’ and introduced a buyer power provision to address market power imbalances between dominant customers and smaller suppliers. Section 9 made changes to the price discrimination section affecting Small and Medium Enterprises (SMEs). Section 10 provided for exemptions to introduce greater flexibility. Section 59 strengthened penalties applicable to all prohibited practices. Definitions were tightened to provide greater clarity to firms and the public on what was prohibited practices and introduced SMEs as a new concept.
 

Focus 2: Structure of markets, competition and public interest outcomes
Section 43A spoke to the purpose of a market inquiry. A market inquiry may be held on the state of competition as well as on the levels of concentration and on the structure of the market to determine if there was an adverse affect on competition. Section 43B provided details for initiating and conducting a market inquiry. Sections 43C and 43D spoke to matters to be decided at a market inquiry and what remedies there were. Sections 43E and 43F covered other outcomes of a market inquiry, procedural matters as well as appeals. Section 43G outlined who participated in a market inquiry.
 

Focus 3: Mergers and acquisitions
Section 12A(1) clarified the role of competition and public interest matters in a merger. This was outlined in the Walmart Judgement. Section 12A(2) clarified the factors that were relevant to determining the competition effects of a proposed merger. Section 12A(3) added an additional public interest criterion to the law. Section 18A provided for a national security provision during mergers in sensitive sectors where a foreign acquiring firm was involved. Currently there was no provision in South African law that enabled the National Executive to consider national security in a merger involving a foreign acquiring firm. Many legal systems elsewhere in the world provided for national security reviews of investments by foreign acquiring firms, Amongst the list of countries was USA, Canada and China. The Bill provided for a national security veto line with constitutional responsibility of the National Executive for national security (Section 198 of the constitution). Part of what was being proposed in the Bill was that the President must appoint a Committee of Ministers and other suitable public officials to determine if a merger by a foreign firm could be justified on national security grounds.
 

Focus 4: Institutional improvements
Section 21 clarified the responsibilities of the Competition Commission. Section 21A gave the Commission the powers to conduct impact studies. Section 22 provided for a policy to delegate authority to the Commissioner. Sections 19 and 23 provided for designation of a Deputy Commissioner to chair a market inquiry. Section 25 provided for suitable staff of the Commission to appear in a court of law. Section 49E allowed the Commission to develop a leniency policy. Section 26 made allowances for acting members of the Competition Tribunal and for additional capacity. Section 17 provided and clarified the right to appeal merger decisions of the Tribunal for the Commission and the Minister. Sections 44 and 45 provided for streamlined processes to determine confidential information and clarify the right of access for Ministers or other regulatory authorities. Sections 62 and 63 clarified the jurisdiction of the Constitutional Court over appeals from the Competition Appeal Court. Section 74 made allowances for administrative fines to be increased.
 

Minister Patel in conclusion stated that concentration and economic exclusion remained core challenges in SA. This contributed to slower and less dynamic growth, lower employment and greater inequalities as well as socio-political conflict. The proposed amendments enabled a more effective approach to concentration with a focus on improving outcomes for small and black owned businesses and strengthened the institutions involved in managing competition policy and law.
 
Discussion
The Chairperson stated that Members should ask only clarity-seeking questions as it was the Committee’s first impressions of the Bill. Deliberations could take place. He was pleased that the Minister had spoken about the rationale for the Bill and how the proposed changes were grouped.

Mr E Makue (ANC, Gauteng) agreed that economic exclusion was a core challenge and was pleased that the Bill would boost Small and Medium Enterprises (SMEs). What was the role of the National Empowerment Fund (NEF)? He noted that many Small, Medium and Micro Enterprises (SMMEs) complained about access to capital. On penalties (Slide 45) he said that there was a great deal of dissatisfaction amongst consumers that they had not benefitted from penalties that had been imposed on Pioneer Foods in 2010. Did the Bill now allow for benefit of penalties to filter down to consumers? He appreciated provision being made for block exemptions and the Minister being able to pass regulations (Slide 41). He observed that the superpowers of the world concentrated on technology whilst Africa’s focus was on agriculture. Would the Bill ensure that the Googles and Facebooks of the world would be required to develop the South African economy once they entered the South African market. What could be done to ensure that revenue was not lost? He was concerned about emerging farmers who supplied supermarkets being dictated to by the supermarkets on what the farmers should be paid. Could the Bill make provision for the protection of such farmers? He raised concern about African countries like Malawi complaining about South African retail stores operating in their countries who were killing their local agricultural sector. Municipalities had a pivotal role to play and he asked if municipalities had been consulted on the Bill. The presentation had made mention of Members of Executive Councils (MECs).

Minister Patel responded that the Bill did not deal with access to capital. To maximise the impact of the Bill a wider policy toolbox was needed. He compared fixing SA’s economy with that of fixing a house. The Bill was only one tool in the toolbox to be used. Other tools needed to fix the house were a hammer and pliers etc. A concerted effort was need throughout government. Government accepted the fact that greater funding was needed for small business. Funding was provided by institutions or agencies such as the NEF, the Small Enterprise Development Agency (SEDA) and the Industrial Development Corporation (IDC). Agencies were however afraid that small businesses might not get enough orders for the goods that they were proposing. The Bill protected these businesses against price discrimination. This was another way of assisting small businesses other than funding. Agencies that assisted small businesses did so by giving out brochures which referred businesses to their websites for guidance. In SA small businesses did not necessarily have access to the internet. The problem was that there was no longer the human touch. Everything had become mechanical. The mindset of officials needed to change. For example, if government granted cell phone licences to only two or three companies then there would be a high degree of concentration. Government needed to do things in combination. The National Assembly and the National Council of Provinces (NCOP) needed to urge agencies to work better together so that government integrates its services.

On penalties, he explained that the bread cartel penalties of 2010 had various elements. It included an R250m fine that was payable to the NEF. There was also a R250m fine to be used to promote small business in the food and agricultural sector. Additionally Pioneer Foods had to set aside R160m to be used to subsidise the price of bread to bring down the price for the consumer. On what benefits there were for the consumer, he said that that consumer could take a company to court. SA however did not wish to follow the USA route of class action court cases. SA took the route of identifying a problem and then stamping it out.

On block exemptions and technology,  Minister Patel noted that the World Trade Organisation (WTO) had engaged in discussions on technology. There was huge growth in information and communication technology but the problem was that ICT use was very concentrated. Technology was being used in fisheries and agriculture. It assisted in getting high crop yields. SA should not be on the consumption side of things only but it should innovate and develop. More needed to be spent on research and development. Government needed to look at how to boost research and development funding in the economy. A Digital Economy Commission was being set up. New technologies were being introduced by young entrepreneurs. SA needed to have its own ecosystem. The IDC was focussed on the Fourth Industrial Revolution in order to develop smart technologies. He was convinced that the headquarters of major international companies would remain in their home countries such as USA, UK, China and Germany. SA needed to ensure that innovation funds had to be spent in SA. Foreign companies were welcome to buy out local businesses but they needed to maintain partnerships with universities.

On supermarkets taking advantage of small farmer suppliers, he said that the Bill provided some assistance in certain areas. It could be on market inquiries in the future. If there was price discrimination by a big company, there could be grounds to investigate. There could also be instances of excessive pricing where malls wished to keep out small players from renting space.

Minister Patel stated that the Bill only regulated companies in the South African economy. The Department of Trade and Industry (DTI) had a code of conduct that South African companies operating abroad had to abide to. The legislation dealt with actions within the South African economy. The Economic Development Department (EDD) was greatly involved in work on the Walmart buy-out of Makro, Game et al. He noted that consultations had specifically been focussed on the business community, organised labour and other relevant stakeholders. On discussions with MECs, he replied that the Department had provided enough information to provinces.

Mr L Magwebu (DA, Eastern Cape) asked how the Bill would benefit small business operating in rural areas, especially in the enforcement of the Bill. He was concerned that the gogo producing school uniforms might experience price discrimination. People like the gogo might not understand the provisions of the Bill. Gogos out there were creating employment which was in line with the objective of the Bill. How would the EDD simplify the Bill to make it more practical for the ordinary person to understand? What was its plan? The Bill was very technical and difficult for the ordinary person to understand.

Minister Patel pointed out that success was not only about getting the law right but also about communicating it to the broader public whom it affected. How would it be done? The first step was that the Bill made provision for regulations that would make things clearer. The second step was about the Competition Commission having to look at the impact on small businesses. The third step was that small firms had to be invited to be part of the market in a market inquiry. Representation had to be balanced. The fourth step was about having a simple draft of the Bill to be provided to small businesses. It could be in the form of a booklet. The booklet could be published in indigenous languages with illustrations. It was something that the EDD had to look at as soon as possible.

Mr W Faber (DA, Northern Cape) was concerned about the Bill attempting to regulate the free market system. Would it not impact upon investment into SA? He noted that government usually gave guidelines. Businesses abroad usually have their own way of operating and could have second thoughts about investing in SA.

Minister Patel responded that the EDD had considered the risks of scaring off foreign investors. The EDD consequently tried to find a balance. He said that foreign investors had raised the matter of market concentration. The South African market was in a manner of speaking "all sewn up". There was a need to open up the market to get foreign investment. Another matter that foreign investors considered was policy certainty. There had to be policy certainty. The use of regulations to clarify provisions would provide some degree of certainty. Foreign investors with large companies could make use of the more flexible provisions on exemptions. It provided them with legal remedies that were not previously there. The Bill did deal with mergers and acquisitions in relation national security. This provided foreign investors with clarity on where they stood. The regime for SA was similar to those adopted in countries like the USA, Canada, China, India and the European Union. There was international precedent. Foreign investors were informed that transformation was something to be taken into consideration. The EDD did its utmost to balance national security with foreign investment.

Deputy Minister of Economic Development, Madala Masuku, stated that the Bill spoke to where the Minister could address the interests of the vulnerable. Things had been tightened up in law.

The Chairperson said that the Portfolio Committee on Economic Development was finalising the Bill the following week. When the actual Bill came to the Committee, advertisements would be placed calling for submissions. Dates on public hearings could still be decided.

Mr Makue said that local economic development was still a challenge. The EDD should consider taking the South African Local Government Association (SALGA) on board and brief them. Perhaps SALGA could speak to the impact that the Bill would have. SALGA had representation in the NCOP.    

The meeting was adjourned.

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