Competition Act: briefing

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Trade and Industry

12 October 1999
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TRADE AND INDUSTRY PORTFOLIO COMMITTEE; ECONOMIC AFFAIRS SELECT COMMITTEE: JOINT MEETING
13 October 1999
COMPETITION ACT: BRIEFING

Documents handed out :
Introducing the Competition Act
Competition Tribunal: Presentation

SUMMARY
Members from the Competition Commission and the Competition Tribunal explained the implications, aims and objectives of the Competition Act as well as the shortcomings of the old Act. The primary intention of the Act is to prevent anti-competition practices through regulations and prohibitions.

The Competition Commission deals with merger notification, complaints and exemption from prohibition applications. The Commission refers complaints and large mergers to the Tribunal. The Competition Tribunal deals with appeals of exemptions, intermediate mergers or non-referral decisions as well as the referral of complaints and large mergers.

The only point of contention which emerged from the meeting related to which court would be the court of final instance in respect of competition issues.
Members from the Competition Commission were of the opinion that this court would be the competition appeal court whereas the chairperson stated that, according to the Constitution, the jurisdiction of the Supreme Court of Appeal in Bloemfontein could not be excluded. He indicated that the matter would have to be ironed out.

MINUTES
Mr Alistair Ruiters, head of the Competition Commission, explained the functions and activities of the Competition Commission, the shortcomings of the old Act and why there was a need for new legislation.
Shortcomings of the old Act
The Competition Act replaces the Maintenance and Promotion of Competition Act. Business in general, labour and government agreed that the old compensation law was ineffective. The primary reasons for this was the fact that we have inherited an economy centralised in terms of ownership structures and highly concentrated in terms of product markets. This phenomenon, referred to as monopolisation is frequently abused to the detriment of consumers, potential and actual competitors, small firms and new entrants to the market, and even the public authority. It is a potential threat to the functioning of the market economy itself.

Another shortcoming of the old act is that the Competition Board which was created by the old act to administer the act had no punitive powers and had to rely on the criminal justice system to prosecute and punish transgressions.

Further, the act narrowly delimited the Board's areas of concern - major potentially anti-competitive practices, for example, vertical mergers did not even fall within the ambit of the act. The Board's decisions are subject to ministerial override and the Board was inadequately resourced.

The old act also had a lack of prohibition. Everything was subject to some kind of negotiation or litigation. The Minister of Trade and Industry was actively involved in decision-making. When drafting the new act they look for a way to move away from this and to depoliticise the decision-making process.

Thus, in South Africa's changing economy there was a clear need for a new approach. Government, labour and business met in the NEDLAC process, where they collectively agreed upon certain objectives.

Objectives of the new Act
1. Economic efficiency - Ruiters explained that competition creates economic efficiency
2. Development - He envisaged that the outcome of competition, in addition to economic development, also results in the development of the people.
3. Consumer choice and competitive prices - He said that competition has a direct benefit to the public as it results in lower prices.
4. Employment - He said that labour unions were concerned about mergers adversely affecting the jobs of employees for example by being a pretext for sharing labour.
5. Participation in World Markets - He explained that South African business' participation in the global economy should not depend on size - in other words - the number of mergers or acquisitions a business is involved in. He emphasised that the behaviour and quality was more important than the size of the firm.
6. Equitable participation by SMMEs in the economy - There was a trend in the past that businesses bought out their competition to avoid having to compete with them. The act, as Ruiters put it, "arrested" this practice and makes participation by small businesses easier.
7. Greater spread of ownership: He explained that if large firms were not regulated, there would be a risk of them controlling the market and small firms would not be able to develop.

Instruments of the Act
Chapter 2
This deals with prohibitions on restrictive horizontal and vertical practices and the abuse of dominance. Vertical practices refers to ownership by a single shareholder or groups of shareholders of a producer as well as its key suppliers and customers. Ruiters explained this by using the following example: if someone owns a jam factory as well as a glass factory and uses the glass to package his jam, but at the same time refuses to sell his glass to other jam factories to package their jam, then that is a discriminatory practice.

Horizontal practices refers to the situation where firms in the same type of business join forces with each other through specified agreements, such as price-fixing agreements, market-sharing agreements and collusive tendering. These are all prohibited.

In respect of abuse of dominance Ruiters first defined the concept of dominance. If a company owns more than 45% of the market share then they are considered to be dominant. If it owns between 35% - 45% of the market share then the onus is on that company to prove that it does not have market power. If the company owns less than 35% of the market share then the onus is on the Commission to prove that the company in question has market power.

Chapter 3
This part deals with the control of mergers and acquisitions which constitutes part of the structural remedy in the Act. When a company merger takes place, the so-called 'rule of reason approach' is followed to determine whether there has been a contravention of a prohibition. This approach applies in respect of both horizontal and vertical practices.

If you have contravened the prohibition there are certain defences available to you. Even though you have committed a breach, you may be excused if you can prove that the pro-competitive gains outweigh the anti-competitive effects.

Merger Control
The Competition Commission does not require notification of all mergers. The following thresholds exist : If the combined assets/turnover of the firms are between 0 - 50 million rand then the Commission does not need to be notified. If, however, the combined assets/turnover is between 50 million and 3.5 billion rand then it is termed an intermediate merger.

The Commission then has the discretion to approve or disapprove the merger. (If the combined assets/turnover exceeds 3.5 billion rand then it is a large merger and must be referred to the Tribunal). They must respond within 30 days of the date of notification; if no response is received within that time then the merger may be deemed to be approved.
If the Commission does not approve the merger then the company may apply to the Tribunal for approval.

There is a compulsory requirement regarding notification of the merger to unions of the employees of the merging companies. Any objections by the unions or other affected persons may be lodged. If objections are raised the 30 day period (regarding time for approval) falls away and hearings will have to be held.

The Commission only makes a decision in respect of the initial notification of the merger. Thereafter, all decisions are made by the Tribunal and the Commission only makes recommendations.

The Commission must be notified of the merger within 7 days of the merger agreement.

Upon notification of a merger the following aspects must be considered:
1. Does the Commission have jurisdiction?
2. Does the merger prevent or lessen competition?
3. If yes, are there defences?
4. Are there any public interest considerations?

The role of the Commission:
1. It has an advocacy role.
2. It acts as an awareness-raising institution with regard to the benefits of competition.
3. It investigates alleged contraventions.
4. It grants exemptions.
5. It approves, prohibits or refers mergers.

Structure of the Commission
The Competition Commission has the following divisions:
Mergers and acquisitions division
Enforcement and exemptions division
Compliance division
Policy and research division
Legal services division
Corporate services division

The Commission is committed to both gender and racial equality which is reflected in the staff employed.

Competition Tribunal
Mr. David Lewis, chairperson of the Tribunal, emphasised the independence of that institution and the separation of powers between the various organs created by the Competition Act.

The Act created the Tribunal with an administrative nature. In some instances the proceedings which are followed are the same as in the high court while in other instances the proceedings differ. The Tribunal is one of record, which means that the hearings will be public. They are of an inquisitorial rather than adversarial nature. This means that the adjudicator can direct the proceedings as well as instruct the representatives from both parties and call expert witnesses if necessary. The hearings will be of an informal nature. As with all other hearings in the South African judicial system the principles of natural justice will be adhered to. This means, inter alia, that both sides will be heard.

There must be accessibility to the Tribunal, and it was noted that professionalism and confidentiality are important considerations.

Functions of the Competition Tribunal
They adjudicate complaints of prohibited conduct, for example, restrictive practices and abuse of dominance. They have the power to impose various remedies such as fines, a maximum of 10% of the turnover of the company and they can instruct compliance with orders.

An important provision is that of interim relief. This is a power that the Competition Board did not enjoy. The importance of this provision lies in the fact that transgressions take long to investigate and while the investigation is continuing, damage is being caused. To overcome this problem, interim relief may now be granted.

All decisions of the Tribunal may be referred to the Competition Appeal Court on appeal. According to Mr. Lewis this is the final appeal (except for constitutional issues), since it was a specialist court in respect of competition.

However, the chairperson indicated that in terms of the Constitution the jurisdiction of the Supreme Court of Appeal in Bloemfontein could not simply be excluded. He noted that Chief Justice Ishmail Mohamed regarded this court as the court of final instance. He further indicated to Mr. Lewis that this was a matter that would have to be ironed out.

Questions and answers
Mr H Bekker (IFP) asked whether you could not create a competitive environment by reducing tariffs?
Mr Ruiters answered that this was one important consideration but not the only one. He explained this by using the example of a major softdrink or beer company. Even if tariffs were at a zero level no other company would want to come into this softdrink company's market since it already has the monopoly.

Ms Taljaard (DP) asked what the extent of coordination and interaction was with other competition structures such as the DG 4 (European Commission that deals with competition law) when it comes to issues that are cross-national with regard to jurisdiction. She asked what the linkages were?
Mr Ruiters answered that the Competition Act does allow the institutions to engage in international cooperation and to establish agreements with other competition authorities. He said that the institutions have had people interacting with DG 4, the Department of Justice and the Federal Trade Commission. There was no formalising of agreements around investigations. However, there has been an agreement signed with Australia's Competition Commission with regard to technical assistance. Also, an agreement existed with the USA to obtain assistance. There was no assistance from the EU, however, the recently signed EU agreement had a competition provision in it which allows them to engage in investigations on a joint basis or for South Africa's Commission to ask the EU Commission to investigate a company in Europe which is engaging in an anti-competitive practice in Europe which has an effect on our market in South Africa.

Ms Taljaard's second question was whether the Commission had been approached by the Equity Alliance in terms of apron services and what were the most recent developments in this regard.
Mr Ruiters said that the agreement reached in the airline industry with Swiss Air had certain residual clauses which allowed them to obtain the air chefs or the catering department and the apron services. He added that should this acquisition by Swiss Air occur it has to be reported to the Commission who would then investigate this acquisition.

Mr Rasmeni (ANC) noted that the institutions were all in Pretoria and wanted to know if there would be other provincial offices.
Mr Ruiters explained that the Commission was in fact not static in Pretoria.
He said that there was a responsibility in the Commission to educate unions about their notification and merger requirements. They were in the process of appointing a consumer liaison group where companies engage in anti-competition practices. They have appointed bodies such as Business South Africa to educate small businesses. Mr Ruiters noted that the Commission was aware of people's need to know about the Act. Accordingly, they would be hosting workshops in provinces with unions and labour groups.

Mr Rasmeni asked in which circumstances an exemption would be granted.
Mr Ruiters replied that you would have to apply for one. Firstly, the applicant would have to declare that he was doing something wrong. Secondly, he would have to justify the wrong act on the basis of one of four reasons :
- Export goods ( You can fix prices for the export market).
- If it is a declining sector (If, through collusion between companies they are going to arrest the decline in that sector, then collusion will be allowed)
- To promote small business.
- You can apply for an exemption to the minister of that industry if there is a need to stabilise that industry.

Mr L Zita (ANC) asked what was the ideal competitive environment.
Mr Ruiters replied that this was difficult to determine. One would have to look at the product and the market. You would have to engage in a thorough investigation to see whether there was competition in the market.
He noted, however, that the purpose of the Act was not to determine the level of competition but rather to engage in anti-competition practices.

Prof B Turok (ANC) was concerned about the size of the staff (he thought that 60 people were too many) , the budget and research capacity.
Mr Ruiters replied that they had a budget of 45 million rand. This also covered the functions of the appeal court including the payment of judges and all administrative expenses. He noted that the taxpayer was not responsible for any of their expenses and that it was the users of the Competition Commission who paid for the services they received. Such payment came, inter alia, from the monies from notification and merger fees.

Mr Moloketsi commented that he had heard nothing about the empowerment of the disadvantaged.
Mr Ruiters refuted this claim by demonstrating how the Act focused on the upliftment of the disadvantaged by not focusing only on economic efficiency but also considering extraneous matters such as protecting small business from dominant monopolies.

At this point the chairperson closed the meeting, commenting that this would not be the final opportunity to discuss the Competition Act.
 

 

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