Annual Report briefings by the Competition Commission, Competition Tribunal and National Lotteries Board

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
8 November 2006
ANNUAL REPORT BRIEFINGS BY THE COMPETITION COMMISSION, COMPETITION TRIBUNAL AND NATIONAL LOTTERIES BOARD

Chairperson: Mr B Martins (ANC)

Documents:
The Competition Commission presentation
National Lotteries Board – Portfolio Committee Briefing
NLB Annual Report 2006 [available later at www.nlb.org.za]
Competition Tribunal Annual Report 2006
Competition Commission Annual Report [available later at www.compcom.co.za]
The Competition Tribunals Annual Presentation to the Portfolio Committee

SUMMARY
The Competition Tribunal briefed the Committee on the functions and overlap of the Competition Tribunal and the Competition Commission. Both were set up to perform functions of advocacy, policing, prosecution and regulation of mergers. Statistics were presented and it was noted that the Tribunal had prohibited only two out of 101 merger applications, and had imposed conditions for approval on another eleven. An average of 53 merger decisions was made per year. In future there would be greater focus on anti-competitive conduct. The staff complement and dedication was noted.

The Competition Commission outlined the core activities of prosecution of anti-competitive behaviour, merger control and advocacy. Statistics on cases were presented and examples of the Commission’s activities were described, including the penalties imposed. Mergers and acquisition work was resource intensive, accounting for 30% of the Commission’s funds, and there had been a 31% increase in merger notifications in 2005/06. Four out of 394 mergers had been prohibited, and 14 approved on structural, behavioural or employment conditions. The Commission also undertook policy and research, and participated in an international competition network. Certain of its current projects were described. The employment equity statistics were tabled and discussed. It was noted that the Commission experienced high levels of staff turnover through poaching of experienced and trained staff across to the private sector.

Questions posed by members to both the Tribunal and the Commission included the investigation into bank charges, motor vehicle exports, the high turnover of staff, how mergers would benefit small enterprises, and real estate mergers. The institutions were asked about trends and profiling of cases, their public awareness campaigns, skills training and whether they played a proactive or reactive role. Specific questions were posed on SAA’s Mango airline and the steel and tea industries. Further questions related to anticompetitive behavior stemming from foreign direct investment initiatives, and the interrelationship with other groups.

The National Lotteries Board gave the Committee an overview of their work, the Act and the National Lottery Distribution Trust Fund. The staff ratio was described, along with the work of the Board, and the financial statements for both the Board and the Fund were tabled and discussed. The budget for the following two years was tabled. Prof Ram noted that the current cost to disbursement ratio was only 2%, as compared to the United Kingdom’s 10%. Statistics were presented on the activities of the Board, various aspects of the lotteries and the distribution of funds. There were 2 039 beneficiaries in 2006. The licence award process was outlined and the strategic objectives for 2007-9 summarised. Questions by Members related to the provincial spread of revenues, whether the disbursement spread calculated on sales would benefit the poorest of the poor, and the grants criteria. The Board explained the proposed amendment to the Act and Members noted that the Committee must discuss the failure to implement the amendments with the Minister. Further questions related to social lotteries, the surplus reflected, the new license holder, illegal lotteries, the criteria for grants, the nature of the declined applications, and the outsourcing of the internal audit function.

MINUTES
Annual Report Briefing by the Competition Tribunal
Mr David Lewis, Chairperson, Competition Tribunal (CT) stated that although the Competition Tribunal and the Competition Commission were two independent agencies, they worked very closely together fulfilling the functions required by the Act. They were complemented by the Competition Appeal Court.

The Act set up these institutions to perform functions of advocacy, policing, prosecution and regulation of mergers. Although large merger cases which were prevented by the Tribunal had been heavily publicised by the press, the Tribunal in fact had prohibited only two out of 101 merger applications, and had imposed conditions for approval on another eleven. An average of 53 merger decisions was made per year. Statistics of cases considered, complaints, relief and fines imposed were tabled.

Mr Lewis commented that the functions were defined in the Act to protect competition and public interest, including employment, BEE and similar matters such as conditional approval of mergers that limited the number of retrenchments. He said that until recently there had been too little focus on anti-competitive conduct and that this would be the subject of greater involvement by the Tribunal. He gave as an example the fact that SAA had been fined R45 million following its incentive scheme that travel agents give preference to SAA tickets when giving advice to clients. He noted the dedicated efforts by the three permanent and seven temporary panel members as well as the contributions of the Tribunal staff. He added that staff turnover was remarkably low.

Annual Report Briefing by the Competition Commission
Mr Shan Ramburuth, Commissioner, The Competition Commission (CC), outlined the core activities of prosecution of anti-competitive behaviour, merger control and advocacy. He noted that at present 134 complaints were under investigation, consent agreements had been reached in eight and six were referred. He stated that Mr Lewis had described the functioning of the Tribunal and the Commission and he would therefore give examples of the Commission’s activities. He tabled and described the penalties awarded against motor companies, South African Airways, litigation in the tribunal and settlement agreements. The motor cases had gathered R37.5 million in collective fines, and the settlement agreements had amounted to R55 million. The Mergers and acquisition work was resource intensive, accounting for 30% of the Commission’s funds, and there had been a 31% increase in merger notifications in 2005/06. The average turnaround time was around 30 days. He tabled a breakdown of mergers by sectors and type, and reported that four out of 394 mergers had been prohibited. 14 out of the 394 applications had been approved on conditions, which included Structural conditions, such as divestiture of units operating in the contentious sector, Behavioral conditions, for instance regulating pricing increases to allow other firms to enter the market, and Employment Related Conditions, such as ordering a fund to be set aside for retraining of retrenched workers. The Commission would like to adopt more of an advocacy role.

Mr Ramburuth indicated that the Commission also undertook policy and research, and participated in an international competition network. He set out certain projects and indicated that the Commission was about one third of the way through its inquiry into bank charges and that voluntary submissions were being made. He added that the banking sector had changed owing to easier communication. Businesses such as Pick ‘n Pay also required access to the national payment system. He said that this would probably result in a mix of prosecutions and policy changes (advocacy).

Mr Ramburuth tabled the employment equity statistics, noting that there were 47 African employees out of a total of 80, and 19 were African females. The Commission experienced high levels of staff turnover as the lawyers and economists who predominated in the staff were often poached across to the private sector for higher salaries. The Commission was considering higher salaries and other incentives for these employees so as to retain highly trained staff. He noted some of the mergers proposed in the future, including one between Pick ‘n Pay and Fruit and Veg City.

Discussion
Dr P Rabie (DA) asked the speakers to go into more detail about the conditional approvals of mergers as well as the “South African Consumer Subsidy” of motor vehicle exports. He also asked for more details on bank charges.

Dr M Sefularo (ANC) also asked how far the investigation into bank charges had proceeded.

Mr Ramburuth answered that with regards to the bank charges investigation 200 submissions had been given in to the inquiry, which would be put on the CC website. He said that the Commission was currently just looking at the regulatory environment, and could probably prosecute one or more of the banks.

Mr Ramburuth noted that in regard to motor vehicle exports, South African vehicles were currently being sold more cheaply elsewhere in the world and that this was not benefiting the South African consumer. Benefit to the consumer was a main priority of the CC. In regard to the conditional approval of the transport companies’ merger he explained that conditions were imposed for sale of part of the business to prevent the merged companies dominating the route.

Dr Rabie asked what the progress was of independent bondholders in the banking sector and what changes in legislation would be proposed.

Mr Lewis said that the structural condition of divestiture was the most effective means of ensuring competition after a merger had taken place. Firms would often offer divestiture if they saw that the Committee considering the matter was likely to oppose the merger.

Dr M Sefularo (ANC) said that the Commission should assist businesses with strengthening their cases and presenting their complaints in a manner that would permit the cases before the High and Appeal Courts to succeed.

Mr Lewis stated that many complaints were not actionable under the Act, and that most had civil law remedies. He described competition as a robust process, which benefited the consumer when the best quality goods and services were offered at the lowest price. This sometimes acted to the detriment of the smaller business.

Dr Sefularo asked the reason for the low staff morale in the Commission. He referred to point 4.2.7 on page 42 of the Annual Report and asked if there was no way to bind employees to contracts after training at the Commission so as to “work off” the costs of training.

Mr Ramburuth said that the CC competed with the private sector for the services of these professionals, and that there was some indication of resentment at the lower CC salaries. This was the reason that higher salaries had been suggested. The Commission did put a lot of emphasis on training and there was a period of employment that was required of the trained employees, but the private sector was more than willing to pay this out in order to obtain the staff.

Mr Lewis said that staff turnover in the Tribunal was quite low, but that in general the exposure of these institutions to the private sector was quite high, so that the high salaries offered by companies attracted many of the trained staff. He added, however, that the private sector was often not as stimulating and some professionals would prefer to join the Tribunal as they felt not only that this would give them more ability to influence events in the economy, but also that a term with a competition institution was a valuable addition to their experience and CV.

Dr Sefularo referred to page 32 of the Annual report and asked for further clarity of the competition between municipalities and Eskom under the declaration of services.

Ms F Mahomed (ANC) asked the speakers to shed light on the 88 companies who had been allowed to merge unconditionally. She asked how the institutions benefited small, medium and micro enterprises (SMMEs) and whether the competition institutions worked with the Consumer Council.

Mr Lewis confirmed that mergers between large companies were those that aggravated the Act and were a cause for concern. The competition institutions were not so concerned about mergers of SMMEs, but the way the institutions protected competition and a fair market benefited SMMEs. He said that the Competition Commission did help SMMEs, and cited the example of the small company that had taken action against Sasol regarding creosote and its differential pricing to large and smaller companies Sasol supplied. The small company had represented itself at the Tribunal but the decision had been overturned on appeal. He said that the legal process was unfortunately litigious and expensive. The Tribunal could deal with public interest cases against companies.

Ms Mahomed asked the speakers to detail the progress of the real estate mergers, as well as monopolies in the steel industry. She added her voice to the concern over bank charges.

Mr Lewis said that real estate had lobbied and was still lobbying to be excluded under the Act, as they argued that real estate mergers had never been a real cause for concern in the competition sense. He said that this sector was starting to look interesting from a market share perspective as more mergers took place. One company, for instance, now owned 20% real estate in the Cape Town CBD.

Mr Lewis said that he would prefer to delay comments about the steel industry as the Tribunal was currently investigating a complex case involving the proposed merger between Harmony gold and Mital Steel.

Prof B Turok (ANC) said that it was commendable to defend the public interest and asked the Commission and the Tribunal to invite Members to public hearings and workshops and to provide them with copies of the relevant documents. He suggested that the Committee should visit the research centre. He wondered if the Commission had any dealings with Bruce Cameron as he seemed to have an interest in the arguments relating to personal finance.

Prof Turok also asked for a profile of market power so that the Committee would be in a better position to shape legislation accordingly, especially in regard to parastatals. He also asked of the commission knew anything about the collusion of airlines against SAA regarding seating arrangements.

Mr Ramburuth said that only at this point, after 6 years in existence, could the Commission look at trends in anti-competitive behavior and that they would look into compiling information of this sort.

Mr Lewis added that the hearings had been very informative and that the research data of the Tribunal could now display some trends. Now that the institutions’ research capacity had increased so would their ability to provide materials on relevant issues.

Ms D Ramodibe (ANC) asked for clarity on the numbers of cases mentioned in the slides. She asked how the Tribunal and Commission would reach out to the public. She asked what the institutions were planning to do about the recent price decreases by SAA.

Mr Lewis said that the institutions mainly reached the public through the extensive media coverage that their line of work afforded. He said that the institutions were not often mentioned in the consumer media as South African consumers were poorly organised.

Mr S Rasmeni (ANC) said that the institutions should ensure that the skills training given to the seasonal workers, which could form part of the “employment related conditions” of a merger, should be in skills that were currently needed in the market place.

Mr Lewis replied that in the Ashton Canners case the agreed fund for retraining of these workers was R2 million and that this amount had been made available to the unions to retrain as they saw fit. There would be a follow up on this matter.

Mr Rasmeni asked if the vertical merging meant that bigger companies were “swallowing” smaller ones, and questioned whether Mango would knock out other competition..

Mr Ramburuth replied that SAA had approached the Commission before the launch of Mango to make sure that the Commission was happy with the launch. The Commission’s main concern had been the possible cross-subsidization, which would actually be subsidized by taxpayers. SAA had agreed not to engage in this and had been told to comply with these and other regulations under the settlement agreements. He said that the Commission, of its own accord, was not able to  just “do something” about the launch as there was no evidence that the Act had been breached.

Mr S Rameni questioned the domination of the tea industry and said that certain BEE companies that had looked into entering this market could not compete.

Mr Ramburuth said that unfortunately he knew little of the tea industry.

Mr Lewis commented that the obstacles to the tea industry were probably in packaging, as there were very dominant players in this industry.

Mr S Njikelana (ANC) said that the Committee would benefit from a more thorough knowledge of the institutions’ work. He questioned the strategic approach to the banking sector. He raised the question of the institutions’ balance between a proactive and reactive stance towards problems in the economy.

Mr Lewis said that the agencies were both proactive and reactive but as they were forced under the Act to follow up on all complaints, their focus tended to be reactive.

Mr Njikelana asked whether the Tribunal and the Commission had filled their quota of disabled people.

Mr Ramburuth said that three of the 80 staff were disabled and that the Commission did take employment equity very seriously.

Mr Njikelana also asked how the Commission dealt with anticompetitive behavior stemming from foreign direct investment (FDI) initiatives. He asked if there was cross-pollination between the institutions and the Council of Trade and Industry (COTI) group.

Mr Lewis responded that FDI initiatives were treated the same as domestic investment initiatives and their authority was somewhat of an “extraterritorial jurisdiction”. The institutions were able to prohibit international mergers that would have a large impact on South African trade, even if the companies did not have a large commercial presence in the country. An example was the recent imposing of conditions on a pharmaceutical merger.

Mr Ramburuth added that the Tribunal was very involved in COTI but that sometimes they were grouped with agencies with whom they had very little in common, such as the Gambling Board, although they could work more effectively with agencies with whom their work overlapped to a greater extent.

Mr Njikelana asked about the research strategy.

Mr Ramburuth said that after six years of experience the Commission would have maximum impact with well-designed strategies.
 
Mr Sefularo questioned the institutions’ stance in regard to cooperatives.

Mr Ramburuth said that the institutions’ stance with regard to agricultural cooperatives was that these were traditionally structured cooperatives that were “transforming” their public nature to small companies while keeping the benefits of cooperatives. He said that there was at present a food enquiry as to pricing as well as an investigation into the mergers of these groups.

Briefing on Annual Report by the National Lotteries Board
Prof Vevek Ram, CEO, National Lotteries Board (NLB) opened the presentation by giving an overview of the Board, the National Lotteries Act, and the functions and objectives of the NLB. The Board was to advise the Minister on the issue of licences, percentages to be allocated to good causes and the efficacy of legislation. It was also to protect the players, administer the trust fund and monitor and regulate other licences. He described the structure of the Board and gave a breakdown of its staff. He said that 82% of staff were black and 70% female. He presented the financial statements for the NLB as well as the National Lottery Distribution Trust Fund (NLDTF),  which was audited independently, and which did not have any assets or employees.

The NLB balance sheet as at 31 March 2006 indicated a balance between total assets and current liabilities of R155 million. The total revenue of the NLB amounted to R20.6 million, and the expenditure to R20.8 million. The deficit in operations was made up by finance income. There was a large figure under intangible assets that referred to expensive software that had been installed to regulate the issuing of grants. He noted that R147 million had been paid over by the licensees and used for distributions. The NLDTF balance sheet showed total assets and liabilities of R3.6 billion and an operating surplus of R321 million. Income had been made up of revenue, penalties and other income. The budget for the following two years was tabled. Prof Ram noted that the current cost to disbursement ratio was only 2%, as compared to the United Kingdom’s 10% and the NLB was looking to expand this to 4% or 5% to improve efficiency.

Prof Ram listed and described the regulating activities of the Board, the statistics relating to winners, rollovers, highest prize, numbers of ticket sales and contribution to the NLDTF. He broke down the ticket sales per province. He mentioned how the NLB would regulate other lotteries, including promotional competitions and society lotteries. He then gave an indication of the NLDTF Distribution, showing that disbursements from this Fund went to charities, arts, sports and miscellaneous categories. He noted that the total number of beneficiaries in 2006 was 2 039. Some grants were committed but not yet paid, often due to the time taken in the process of guaranteeing a grant as the adjudicators, who were independently chosen by the Minister, worked on a part time basis. He described the focus of the beneficiaries, and the licence award process. He stated that the license had been awarded to Gidani (Pty) Ltd Finally he summarised the strategic objectives for 2007-9 as converting to the new operator, increasing sales and contributions to the NLDTF, improved license compliance and distribution, termination of illegal lotteries and improved publicity.

Discussion
Dr Sefularo questioned the provincial spread of revenues and asked whether the disbursement spread calculated according to sales would benefit the poorest of the poor. He asked what the grants criteria was, and if the grant given to the Blue Bulls was a good cause.

Prof Ram said that the Blue Bulls had applied for a grant to bring rugby to the poor communities and engage in sport upliftment programmes. They had been granted R200 000 for each of five communities. He said that the project had worked well,  that some of the young talent had been recruited by the Blue Bulls, and that site visits had been made to ensure that the money was well spent.

Dr Sefularo commented that poor people would find it difficult to apply for grants as they did not know how to apply or write out a business plan.

Prof Ram stated that the Department of Trade and Industry (dti) had been asked to draw up an amendment to the Act so that individuals could apply for grants and so that the NLB could be more lenient in their requirements of groups seeking grants for charity, as opposed to the current position where three years of audited financial statements would need to be supplied. Since the amendment had not been forthcoming there was little the NLB could do. He noted that the application rejection rate was very high. He said that help centres had been set up to help the poor to fill in these forms and that since the NLB could see that these were working they would be duplicated in rural areas. He also added that the NLB would embark on an overall public relations effort, which would include a road show and the help centres, and hopefully would also meet traditional leaders to help the rural communities. However, the amendment would have to be passed before it could effect substantial changes.

Dr Rabie asked if the Social lottery was a non-governmental body and whether 31 March 2007 was the deadline for applications to run the National Lottery.

Prof Ram replied that social lotteries were similar to the type run by the Red Cross or other charities where raffle tickets were sold. The NLB  required the draw to be public and also required that an audit of the outcome be taken to ensure that the lottery would be fair and above board.

Dr Rabie asked what method was used to pay recipients of grants, and whether instalments were ever applied. Dr Rabie asked why certain “moneys left over” were reflected in the financial statements and, if  payments to charities and the like were monitored,  what benchmark or model was used to do this.

Prof Ram explained that allocations were greater than payments for this term, as the distribution agency’s term had expired last November. Dti had extended the appointments but when this extended term expired there were six months during which no agencies had been available, resulting in the lack of granted applicants. He noted that none of the grants already approved had been discontinued.

Dr Rabie asked if the new lottery license holder would pay over more to the Fund than the previous one.

Prof Ram said the NLB did monitor the alignment of the expenditure with the business plan given and that the new license holder had more advanced technology as well as a cost basis low enough to section off R300 million more per year to the fund.

Ms Ramodibe asked what the criteria of the allocation per province was and if NLB could provide a breakdown as to what kind of charities were being funded by province. She asked where the illegal lotteries were.

Mr Ram replied that almost two thirds of requests for grants came from Gauteng-based charities. He referred again to the amendment of the Act mentioned before and reiterated that many of the rural requests did not meet the Act’s requirements. He clarified that illegal lotteries were competitions such as the “sms” competitions and could also include the cars that were offered by shopping centres, which, although structured as lotteries, were not licensed.

Mr Rasmeni asked about the appointment of new agencies once terms had expired.

Prof Ram answered that he could not comment on the appointment of new agencies as the Minister appointed them.

Mr Rasmeni asked whether the miscellaneous disbursements were classified according to the reconstruction and development (RDP) criteria or otherwise.

Prof Ram explained that the RDP criteria no longer applied following its disbandment some years ago. The category of miscellaneous would include healthcare donations and the funding of the Southern African Large Telescope.

Mr Rasmeni indicated that there had been complaints that ticket holders had not been given results at the outlets, and cited  Ottery in Cape Town and certain places in Gauteng as examples.

Prof Ram noted that the kiosks were required to publish results on a large poster and that failure to do so was a contravention of the contract, which would be looked into..

Ms N Khunou (ANC) said that after Parliament adjourned the members would like to go back to their constituencies and help people to apply for charity grants from the fund. She believed that poor people should not be punished by not receiving grants just because they could not afford to play lotto. She asked the nature of the declined application for grants as well as the exempted applicants, whom she accused of being “white charities”.

Prof Ram said that the NLB funded projects and not agencies and that their aim was to fund not only BEE charities but also those that gave the best service to the poor, such as the well founded and well run Red Cross societies.

Mr D Olifant (ANC) said that he disagreed with the finding that First National Bank’s competition was an illegal lottery, which was shut down, as it was a good cause that prompted people to save.

Prof Ram said that the NLB had to enforce the Act, and that the FNB structure was that of a lottery. Although he agreed that its motive in encouraging people to save money was good, he pointed out that although structured as a lottery, the profit had in fact been passed on to FNB shareholders.

Mr Olifant asked how ACVV got so much money from the Fund.

Prof Ram said that could not comment on the ACVV as the adjudication agencies dealt with this.

Mr Njikelana and Mr Rabie asked the reason why the NLB had not had an audit function for a portion of the year.

Prof Ram said that when the NLB had moved it had been guaranteed to share an internal audit centre, but that this service centre had not materialized. The internal audit function was therefore  outsourced to a private company as their own internal audit section would not have been independent since the NLB was such a small organisation that these employees would have been involved in other areas of the business too. Their private auditors had commented that there was nothing untoward in employing an outsourced agency.

Mr Njikelana asked about the NLB’s internal gambling policy and about their gambling information.

Prof Ram said that the Gambling policy should be required from the Gambling Board as they strictly dealt with those issues.

Mr Rasmeni asked if only organisations could apply for funding, or if NLB could accept applications from HIV/AIDS infected individuals. He asked if rural dwellers not linked to organisations could also apply.

Prof Ram said that as the Act now stood only a juristic person may apply for a grant but that the proposed amendment would allow individuals to apply as well.

Ms Ramodibe asked NLB to comment on their criteria for applications and said that it was urgent for the fund to assist previously disadvantaged individuals.

Prof Ram said that NLB had met with the Department of Social Development but that the wording of the Act was still limiting the Fund in its activities.

The Chair concluded that the Committee would speak to the Minister about the concerns of the NLB and the necessity for the amendment at their next meeting with the Minister.

The meeting was adjourned.