Competition Commission: Progress report

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Trade and Industry

12 June 2001
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Meeting report

TRADE & INDUSTRY PORTFOLIO COMMITTEE, ECONOMIC AFFAIRS SELECT COMMITTEE, TRANSPORT PORTFOLIO COMMITTEE; COMMUNICATIONS PORTFOLIO COMMITTEE; JOINT MEETING
13 June 2001
COMPETITION COMMISSION: PROGRESS REPORT
 


Chairpersons: Dr R Davies and Mr J Cronin

Documents handed out

Competition Commission: Meeting Our Objectives

Competition Commission website:
www.compcom.co.za

SUMMARY
The head of the Competition Commission reported on a range of issues including merger, exemptions and investigation statistics. He spoke about a number of competition cases that the Commission has dealt with, for example the South African Breweries and Independent Healthcare Distributors matters. The Nedcor-Stanbic litigation cost the Commission half its litigation budget. This budget has consequently had to be increased.

MINUTES
Adv. Menzi Simelane highlighted aspects from the presentation Competition Commission: Meeting Our Objectives

Background
• Commission started operating on 1 September 1999.
• The Act has been amended twice.
• Second Amendment came into effect in February 2001. It raises thresholds from R5 million for the target firm and R50 million for the combined firms respectively. This has decreased the mergers filed with the Commission by at least 60 per cent. This has also caused the Commissions jurisdiction to be concurrent with other regulators.

Objectives of the Act and Commission’s Activities
In outlining the objectives he noted that advisory opinions are provided to parties interested in merging if they want to know if a proposed merger is contrary to the legislation. This is provided at a fee of R2 500. However the lawyers of the companies sometimes use these advisory opinions and charge exorbitant fees.

Mergers
The table presented mergers that have been filed with the Commission between 1999 to 2001 and a total of 1,7% have been prohibited. Transitional mergers are those that relate to the time before the Act was passed. Large mergers are those where the companies involved have a turnover or assets worth over R3.5 billion. Small mergers are those that relate to the small companies.

He denounced a report that appeared in the Financial Mail about two weeks ago in which it was reported that he is not in favor of mergers and that he tends to prohibit mergers. He retorted that this was factually incorrect, misleading and slanderous. The statistics were clear as to the number of mergers that the Commission has prohibited and this was even below the international standards. In the US between 2.5 and 3 per cent of mergers received by the Federal Trade Commission and the Department of Justice are prohibited. South Africa prohibits fewer mergers compared with other international countries. There was no reason for anybody to complain about the South African Competition Commission regime as it was less cumbersome and most accommodating.

Types of Mergers
• Horizontal mergers – mergers that are between parties that are competitors.
• Vertical mergers – those mergers where a manufacturer ties up its activities with a retailer.
• Conglomerate mergers – where a huge company buys in almost every area of the economy.
• Management Buy – outs – where the management of a company decides to buy shares of the controlling shareholders. This changes ownership to pass to the bidder.
• Horizontal/vertical mix
• Acquisition by a foreign firm
• Failing firm argument – this is where parties raise an argument that a competitor is failing in its business and they decide to buy it over.
• Anticipated job losses – where a bidder acquires a target in order to prevent anticipated job losses.

Mergers per sector
This table identified mergers per sector lodged with the Commission.
Investigations
This table reflects the percentage of cases in merger activities or transactions that the Commission has investigated. He mentioned a case relating to abuse of dominance that the Commission has recently finalized regarding Ster Kinekor. Some of the cases, especially those related to collusion have been referred to the Tribunal for prosecution.

The following table showed the percentage of investigations per sector that the Commission is currently. This was followed by a table showing the percentage of investigations resolved per sector.

Exemptions
In the last year, the Commission has received nine applications. Sasol is one of the major companies dealing with liquid fuels that applied to be exempt from the provisions of the Competition Act. However, the Commission’s view is that they should not be exempt. They could approach the Minister and request to be designated as a corporation that is exempt from the provisions of the Act.

A large number of shipping lines have also applied for exemption but the Commission does not see any reason why they should be exempt, consequently they are reviewing their applications. The reason that most of these companies have been turned down is that all of the exemption applications relate to horizontal practices. It is believed that they are competing parties who make the applications purely to collude.

Efficiency – Cost per Output
This table showed the efficiency of the cost of evaluating mergers, investigations, exemptions evaluations and advisory opinions.

Efficiency – Turnaround Time
This table showed the average time within which the Commission finalizes mergers, complaints, exemptions and advisory opinions.

Ownership Concentration
This table showed the percentage of ownership control by companies in sample sectors, e.g. Anglo American is involved in 21 sectors and has a 35 per cent ownership ratio in those sectors.

Mergers and Employment
This slide explained how mergers had affected employment. Mr Simelane stressed that the Commission has never had to turn down any merger because of employment issues. In 125 cases evaluated, only a net loss of 197 jobs occurred.

There are cases that have been referred to the Tribunal. However, they are causing a problem as they are beginning to affect the Commission’s litigation budget. In the first year the Commission had a litigation budget of R1.5 million. Nedcor-Stanbic litigation has cost the Commission about R700 000, which is half the budget. The budget has consequently been increased to R3 million.

Discussion
Mr Zita (ANC) asked what have been the implications of the Oppenheimer/De Beers transaction for competition purposes in the country. He asked if there was any structure that addresses delisting and what have been the implications regarding the financial outflows of the country.

Adv. Simelane replied that the Commission does not get involved in issues around capital outflow and hence he was not qualified to comment on the De Beers transaction. The Reserve Bank would look at that type of issue.

Mr Rasmeni (ANC) asked about the job losses reflected in the last slide and how was this related to the Commission’s objectives to promote employment and advance social and economic welfare of South Africa as stated in the Competition Act.

Adv. Simelane replied that of 125 cases evaluated, 197 jobs were lost and 77 per cent of these jobs came from firms where the firms had a combined market share of 60 - 100 per cent. The effect of this is that in a sector where there are firms dominating to this extent, the chances are that there will be more job losses if the firms want to merge.
He said that he did not think that this damages the object of the Act to promote employment and advance social and economic welfare of South Africa. The Commission still does meet these objectives as laid down in the Act. There are a number of cases where the Commission has prevented job losses. The Commission consults with trade unions on a wider scale and has not approved a transaction where the unions have requested that it be turned down as it poses a job loss threat.

Ms F George (ANC) asked how the competition policy would affect pharmaceutical companies. Secondly, what would be the position of South African Breweries in terms of the new Liquor Act, since this company controls the manufacturing, wholesale and retail industry.

Adv Simelane replied that thirteen pharmaceutical manufacturers have a company known as IHD (Independent Healthcare Distributors). This is a company through which they distribute their products. This company however has a provision that different wholesalers can negotiate with the manufacturers independently but the terms and conditions of trade have to be negotiated with IHD. Therefore everything gets done at IHD level. The real competition issue is that IHD is owned by this consortium of companies and almost all of them have shares in IHD. The Commission believes that there are competitors that are colluding at IHD level to set the conditions of trade. The Act provides that parties in a horizontal relationship cannot fix prices or terms and conditions of trade. The Commission believes that there is a violation hence its referral of the matter to the Tribunal. The Commission has asked for a remedy of a fine of up to ten per cent of all colluding parties and that IHD be taken away from the firms in some form. The companies have taken the Commission on review on grounds that it does not have cause of action but the Commission is confident that it will be successful in the matter.

With regard to the Liquor Act, SAB controls an estimated 98 per cent of clear beer market in South Africa. The Commission is also currently investigating the company which was initiated last year. There is another matter involving Rembrandt, KWV and SAB in which these companies agreed that none should encroach upon each other’s markets. They apportioned products among themselves: SAB would deal with clear beer, KWV wines and Rembrandt was given spirits. There is no competition in the beer market because there is an agreement to separate the market. This is the reason for the prosecution of the matter against SAB. SAB has since raised a defence that even though the agreement is written down it never got to a stage where it could be implemented because there are board minutes to the effect that the agreement be discontinued since the coming into effect of the Act. The Commission does not believe that this is efficient.

Mr D Locke (ANC) asked for a way forward on the Ster Kinekor investigation. He had submitted in the budget debate that there is a clear violation of section 83 of the Act as Ster Kinekor forces a person to purchase other goods unrelated to their service of showing movies. He said that they "force" a person to buy refreshments only from them. A person cannot watch a movie if his/her refreshments are purchased outside the cinema. The objectives of the Act in section 2 show that the focus should be around consumer protection and not only mergers and acquisition. One of the campaigns that might be contemplated is a public information campaign to inform consumers about the provisions of sections 8 and 9 dealing with the abuse of dominance by businesses / price discrimination by dominant firms so that the public can be more aware of practices that are prohibited.

Adv Simelane replied that his staff had visited Ster Kinekor with refreshments purchased elsewhere and were not confronted. Ster Kinekor does not have a policy that prohibits patrons from bringing food into their complexes. Whether or not people were allowed to bring food into the complex was largely dependent on the management board of each complex.
With regard to consumer protection, Simelane replied that the Competition Commission does not have a mandate to deal with these issues thus far and that this lay within the scope of the Department of Trade and Industry.

Mr Fenyane (ANC) followed up saying that on buying a house, a purchaser is not given an option to choose the insurance policy of his choice to cover the bond over the property. The banks choose the policy. He said that the banks should be investigated regarding consumer protection.

Adv Simelane replied that this was slightly a consumer issue in the sense that a consumer could decline to take a bond with a particular bank and register it with another bank elsewhere.

Mr Fenyane asked for comments on the two objectives of the Act which are:
- to ensure that SMEs have an equitable opportunity to participate in the economy
- to promote the spread of ownership to the historically disadvantaged.

Mr Simelane replied that the report on SMEs and ownership will be featured in the Commission’s Annual Report that will be published. The Report will feature the areas where the Commission has intervened in these areas.

Mr Slabbert (IFP) complained that the prices at airport duty free shops are higher than compared to ordinary shops.

Adv. Simelane replied that perhaps these shops are not duty free because of the costliness of the articles that are sold. He mentioned that the Commission has dealt with such a complaint. The issue is that these shops are targeting the higher end of the market, that is, international tourists. They do not target ordinary people which is why the prices are very high. Locals could easily obtain the same articles elsewhere. Therefore there are not any competition issues because the articles that they sell could be obtained at lower prices elsewhere.

The meeting was adjourned.

 

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