Cartel Investigations: Competition Commission briefing

Meeting report

Prosecuting Cartels: Competition Commission (CC) Briefing
Mr L Labuschagne (DA) formally proposed that all the issues that the Committee was briefed on last year should not be mentioned again; he would prefer to deal with current matters in more detail.

The Chairperson noted this remark, but asked the Competition Commission (CC) to proceed.

Mr Shan Ramburuth, Commissioner, Competition Commission, noted that he would concentrate on the more recent cartel cases, but would give a brief context. He noted that there were three institutions involved in regulating competition: the CC was essentially investigator and prosecutor, the Competition Tribunal was court of first instance and appeals lay to the Competition Appeal Court. The CC's mandate was to prosecute anti-competitive business practice, deal with merger control to try to prevent further concentration in the economy, and advocate pro-competitive practices and policies. On the anti-competitive practices, the CC would deal with three categories. Horizontal restrictive practices were relationships between competitive firms that would result in anti-competitive outcomes, such as price fixing and collusive tendering. The vertical restrictive practices related to supplier and customer, with resale price maintenance and exclusive agreement. The third was abuse of dominance by one firm.

The priorities of the CC up to 2005 had been focused towards setting up the institution and developing the law and expertise. The merger control procedures in particular were set up to run efficiently and properly. However, it was then pressurised to change, particularly for it to have a demonstrable impact and deal with why the economy was so concentrated. Further criticisms were levied about access to the economy, and the need for prices to fall, and it was necessary to prioritise for effectiveness under resource constraints.

The external environmental factors impacting upon the CC were summarised, including the Organisation for Economic Cooperation and Development (OECD) Peer Review in 2002, the National Policy Framework (NPF) 2007 and State of the Nation speeches. The internal environment included the need to consolidate experience, retain staff and skills, knowledge management and creating organisational efficiency. Strategic planning included the need to step up enforcement activities, prioritise cases and re-organise structures and resource allocation for greater effectiveness.

Matters would be prioritised according to the experience of the Commission, government policy, and the review of other jurisdictions. Specific criteria included the impact on poor consumers, the costs of intermediate goods into the labour absorbing manufacturing sector, and the impact on the cost of doing business. Priority sectors in 2007 to 2010 were agro-processing, specifically food processing and forestry, intermediate industrial products of chemicals and steel, infrastructure and construction, including bid-rigging and the financial sector, specifically banking. The banking enquiry would be concluded, and a report released, by the middle of the year.

The CC's enforcement powers were quite extensive for an administrative institution. These included investigation and prosecution of anti-competitive behaviour, the power to summons, search and seizure. It could agree to consent orders, which would be ratified by the Competition Tribunal, could recommend fines to the Tribunal, or behavioural and structural remedies, and it had set up a corporate leniency policy. A table was set out of the penalties received, showing that fewer cases were being handled, but with higher penalties.

Mr Ramburuth explained the Corporate Leniency policy, which he felt was successful. This gave indemnity from prosecution to the first party providing information on a cartel. It had been used successfully in the bread, milk and pharmaceutical cases. The policy had recently been tightened to give businesses a greater amount of security as to when they would or would not qualify.

Mr Ramburuth said that cartels were the most egregious transgression of competition principles. They operated in secret, and were an agreement between competitors not to compete. The effect was to increase price or to reduce the output. International studies had found that the average mark-up in consequence of cartel activity was about 15%. The purpose was to maximise profits. Cartels would occur through price fixing, market allocation between parties, and collusive tendering. The busting of cartels would result in lower prices over time to consumers.

Mr Ramburuth noted that he would not give great detail on the three most recent cases, as they had been widely reported in the media. In respect of the bread cartel, CC had received a number of calls from people in the Western Cape noting that the bread companies had sent similar letters, within a short space of time, relating to price increases. The CC had found that Blue Ribbon, Albany and Sasko had uniformly increased the price, fixed discounts to distributors and agreed not to poach distributors. Premier had given information and confessed its own role. Premier’s information led to evidence of national price fixing and agreements in the milling industry. The Western Cape investigation had been concluded in February 2007, and Tiger Brands had settled, paying a penalty of 5.7% on their national bread turnover. The Western Cape case against Pioneer, who contested the case, was referred for trial. The national bread cartel against Pioneer and Foodcorp would be referred shortly. The national milling cartel case was being investigated against 11 respondents. He noted that following this case, the bread price had increased. The explanation was that wheat and transport costs had risen. He noted that in a competitive market, prices could still rise. However, he felt that it was strange that all those announcements had occurred at the same time, and the increases were fairly standard. The CC responded that the companies had been benefiting for a long period from profits over and above the competitive profits, and were therefore starting from a higher base. In addition the bread prices had risen out of proportion to wheat price increases. The CC was still analysing the matter and would publicise its findings in due course.

In relation to the milk cartel, Mr Ramburuth noted that there were milk producers (farmers) and processors. The processors in different parts of the country and in different combinations, had been colluding around various matters. The matter had been referred to the Tribunal in December 2006 and the hearing was set for September 2008. The producers had fixed prices by coordinating removal of surplus milk, allocated geographic areas and exchanged sensitive information on the procurement prices of raw milk. There were many statements from the Milk Producers Organisation (MPO) suggesting that the high prices were a consequence of the enormous buying power of the supermarkets, who were adding huge margins. The MPO had made a complaint to the Commission on this point. They had not complained about the processors, only the supermarkets. The CC believed this might have been a red herring; it might be true, but there was still evidence of collusion between processors. The CC was proceeding against processors, but was still investigating the issue around supermarkets.

Mr Ramburuth noted that the pharmaceutical cartel had been under investigation for a while and it had made progress in consequence of the corporate leniency programme. The major companies involved - Adcock Ingram and Fresenius, Dismed and Thusanong - had colluded in a tender for intravenous medical solutions. Fresenius had confessed and provided information, and was granted indemnity. Investigations had been completed and were referred to the tribunal on 11 February.

Mr Ramburuth noted that the CC was currently busy with investigations into the construction industry. There had been international experience of bid-rigging in England and Holland, there was concern about high prices of building materials. The CC had scoped areas of concern and was expecting to receive leniency applications as investigations proceeded. Price trends of building materials were much higher than the price of raw commodities. The CC was using this as a research and investigation matter.

In future, the CC would be looking to strengthen the competition authorities. Corporate governance and accountability would have to receive greater focus. Executives were denying knowledge or what was happening in their companies. Different role players should be taking more responsibility, where appropriate. There were limitations to how invasive a competition authority could be, and the Board needed to take decisions wisely. There was a need for wider accountability. Compliance with the Competition Act should be part of directors' responsibilities. There should be debate on whether the fines imposed were appropriate disincentives, as the Commission could only fine up to 10% of the previous year's turnover. A suggestion had been made that the CC ought to be able to fine based on the entire period of the transgression. There was a further issue about compensating the losers of anti-competitive behaviour. The CC could not act on behalf of any complainant. If there was a  finding of anti-competitive conduct, the victim could institute a claim for civil damages, but the CC could not do anything in this regard.

Discussion
Ms F Mahomed (ANC) noted that there had recently been some issues where smaller petro-companies had not been allowed to store liquid fuel. She asked if that had been referred to the CC.

Mr Simon Roberts, Chief Economist, CC, said that there had been some cases lodged, but he was not aware of specific storage issues. However, there were various provisions stipulated for requirements around storage. If there were matters, they could be taken up either through advocacy or through the regulator.

Ms Mahomed asked for more information on the banking sector.

Mr Ramburuth said that the CC had a panel of four independent people to conduct an enquiry. They were currently finalising the report, which was due at the end of April. This would be a report to the Commissioner of the CC, and would be taken forward. The kinds of matters investigated included interchange fees from bank to bank, ATM charges, and governance of the regulation of the banking sector.

Ms Mahomed was concerned about how far the CC did its outreach, noting that many did not know about the Commission.

Mr Ramburuth said that advocacy work had been increased in recent years. There were now reports appearing in the main sections of the media; which was partially due to how the CC was using the media to explain what it was doing. The CC would also meet with industry associations and other organisations.

Ms Mahomed noted the remark that the CC safeguarded poor consumers, but she asked how exactly this was done.

Mr Ramburuth said that in deciding what were important issues, the CC would prioritise issues affecting more, rather than fewer people. For instance, it was unlikely to look at price collusion in the quad bike market, but would look to markets where there were many, and predominantly poorer consumers.

Mr Roberts added that the data shown was publicly available. Although the CC could get other information it could not be presented at this forum. Only Tiger Brands was a listed company, and it was the only one where the margins, based on total assets, for milling and baking could be obtained. Their margin on turnover had gone up from 15% in 2003 to over 40% in 2006, and this was consistent with a picture of substantially growing margins. Staple products were essential, and there was larger market power for the producers, so the impact on consumers was likely to be greater as the size of the anti-competitive mark up was likely to be greater.

Mr L Labuschagne (DA) noted that in a developing country, with smaller markets and less players, it was difficult to control competition. He asked about the construction sector bid-rigging, and asked if political interference was included in the activities.

Mr Ramburuth said that political interference would be taken into account as one of the factors.

Mr Labuschagne took the point about the disproportionate increases in bread and wheat prices.

Mr Labuschagne said, on the appropriateness of disincentives, that companies did not commit crimes, but individuals did. There could be heavy fines of millions absorbed by the companies; but he felt that the individuals involved should be accepting individual responsibility. The company's culture would be determined by individuals. Personal responsibility was presently lacking. Although he would not like to be advocating criminalisation, he suggested that imposing penalties against directors might be appropriate.

Mr Labuschagne said that the question of compensation was very important. He asked whether the fines received should not go to a compensation fund, rather than revenue. He suggested also that perhaps there should be a simplified procedure for lodging claims, as the High Court costs would in many cases exceed the actual loss, particularly in small claims.

Mr Ramburuth said that this was a policy question that lay outside the CC jurisdiction. He stressed that the fines were not intended to be retribution or redistributive justice. They were intended to have a deterrent effect.

Mr S Njikelana (ANC) commented, in regard to compensation, that government had been consistently raising the need to increase access to justice. He stressed that this area needed more creative solutions.
 
Mr Ramburuth said that the issue of whether the CC should be criminalising conduct had been considered. That would take the law out of the administrative field into the criminal field. There were different ways to do so; either a total criminalisation, or personal liability. He did not believe it would be wise to impose criminal sanctions. For criminal matters, the standard of proof was beyond a reasonable doubt, whereas in a civil or administrative matter proof was judged on a balance of probabilities. He suggested that although there might be more powers if conduct was to be criminalised, the effect might be that the CC won fewer cases. Already it was difficult to be quick and efficient in dealing with matters. However, he did think that there were other stakeholders and structures in business or society that should start playing their part and taking responsibility. Suggestions had been made that shareholders consider taking legal action against the executives of firms involved in anti-competitive practices. Shareholders would lose money if executives acted unethically and should be able to sue them. The CC would like to see pressure being put on the system from this quarter.

Mr S Njikelana (ANC) thought it would have been useful to have this presentation some weeks earlier. He noted that the input had been useful. He noted that the Polokwane Conference had given a clear emphasis that the proactive stance of the Competition Commission should be recognised. There had been a call for increased resourcing to it.

Mr Njikelana asked if there had been any information about the communication and telecommunications, and the paper, wood and pulp sectors. He said he would share with the Commission some matters that he had heard.

Mr Simon Roberts said that these had not been mentioned during the presentation because of the way in which the CC approached matters. There was a set of criteria to be applied to any case. Any case not in the four main sectors would still be evaluated in the same way. There were a number of different issues in the ICT sector. It did not need to be identified as a priority sector, and the complaints were being dealt with. Identifying a sector meant that the CC would be researching that area in particular. It did not imply that other sectors would be ignored. ICT also had issues around the regulatory frameworks. In terms of paper, wood and pulp, he said that these were covered, but in different areas. Wood was linked to forestry. Paper and pulp fell within intermediate industrial products. Industrial products was a wide category; and it was a sector where anti-competitive effects would impact on labour absorbing sectors downstream. Examples had been seen already in the steel industry.

Mr Njikelana asked why the number of cases had dropped as he would have thought the work would have increased.

Mr Ramburuth said that one investigation might involve a number of different cases against a number of manufacturers - such as the motor vehicle matter, which had involved nine manufacturers. Fines, relative to number of cases, had increased over time. Perhaps the numbers of individual cases had not decreased so much.

Mr Njikelana said that this presentation highlighted, once again, the need for ethical company behaviour.

Ms Mahomed wished to compliment the CC on its good work. However, she would like it to measure itself against international standards and would like to ask the CC to send a report on how its work directly affected the lives of those in the second economy. Although it was a difficult question, she believed that their mandate demanded this. Cartels also hindered new entrepreneurs. She would like to see what the MP's role in terms of their constituency offices would be. She cited that she had a complaint from a black woman who had begun a new enterprise in aluminium doors, had received quotations, but could compete with monopolies and conglomerates. There was a problem on constituents in the second economy gaining access to the markets.

Mr Roberts said that CC accepted that the ability of people to enter and grow in the markets was also an underlying factor in competition. It was necessary to consider whether competition and markets were both free and fair. The second economy issues could be found on the consumer, entrepreneurship and labour side. The CC would like to hear about obstacles that people faced. The Act did require certain parameters. He noted that a fertilizer matter was being brought against SASOL, around price discrimination. A second case would be heard in a different area by another fertilizer supplier. Differential pricing was quite normal as larger volumes would often attract discounts. It was quite difficult to weigh up the issues. The forthcoming cases would be important for the Tribunal to evaluate, and it would be talking to these issues.

Mr Njikelana said that when the CC was to present on its strategic plan, he would like to hear how it planned to respond to the demand for change and improve the effectiveness of the Commission.

Mr Njikelana also asked whether public hearings could be investigated, so that the Committee could hear from consumers.

Mr Njikelana wondered if it would be useful to establish a consumer movement. If the poor could strengthen the hand of the Commission, that would help. There were other organisations, but there would be no harm in considering this approach.

Mr Ramburuth said that this was an important point. There was complementary action between the CC and other sectors. Consumer protection, the Companies Act and corporate governance were all complementary to the work of the CC. The CC was often asked to solve problems that were not within its legal mandate, and was finding the need to have complementary practices.

Mr Njikelana noted that some cartels were trans-national companies. He would like to hear whether the CC was active at the global level and what it planned to do about global cartels.

Mr Thulani Kunene, Acting Deputy Commissioner, CC, said that there had been an international peer review in 2002. The CC had already started to work with other authorities late last year, because of the international matters, and had conducted a dawn raid simultaneously with other authorities. That work would be increasing.

Mr Ramburuth noted that there were representatives of Pioneer Foods in the meeting and asked if he would be permitted to ask them a question.

The Chairperson ruled that it would not be appropriate. This was not a public hearing. He suggested that perhaps the questions should be asked after the meeting.

The meeting was adjourned.