Competition Commission & Competition Tribunal Budget & Strategic Plans 2008/09

Meeting report

Competition Commission presentation
Mr Shan Ramburuth (Competition Commissioner) said that the Competition Commission (CC) had begun their strategic planning process at the end of 2006. The process had been very participatory and had included staff, external stakeholders, labour, business and the Department of Trade and Industry.

Mr Ramburuth identified the strategic priorities of the CC:

1) Increase staff morale and motivation as staff turnover was a huge problem. 15% to 20% of staff left the organisation annually. The reason was that staff constituted of recently graduated lawyers and economists who were in the process of testing different jobs and then moving on. The CC was however devising strategies to live with this problem. These included recruiting new people at a pace that kept up with the exit of old staff from the organisation and growing their own people in the CC. They were losing staff to the private sector, other regulators and even international competition authorities. The focus was therefore on salaries and fast recruitment. With regard to the slide on staff morale, Mr Ramburuth said that they had approached the Department to get salaries of CC staff in line with market-related salaries. The Department was reportedly viewing the request favourably. They were also focusing on training and staff development. In this regard their graduate recruitment programme was important. After one year some of these graduates were retained in the organisation while others moved on.

2) Clarify the Commission’s approach and methodology. The CC has developed a framework for prioritising sectors. They had in the previous year focused on their enquiry into banks. This report was being finalised and the report would be released at the end of April. This would be processed based on recommendations to the CC and the Minister. The report would enable the CC to launch a formal enquiry into such matters as ATM fees, cost of transactions and governance of banks’ regulatory systems. It would also allow the CC to persuade National Treasury and the Department of Finance to fix the regulatory framework around banks (and move away from the current self-regulation of banks). Other priority sectors included:
- Infrastructure and construction, including bid-rigging
- Agro-processing, specifically food processing and forestry
- Intermediate industrial products.

3) Align the organisational structure and work processes to strategic priorities.

4) Establish the Commission as a centre of information, knowledge and expertise. It was also necessary to use intelligently the information that they already had at their disposal.

5) Ensuring effective advocacy and communication. Although they were already doing this, this process had to be stepped up. They already gave government departments and other competition bodies advice on competition matters, but were hoping to increase work in this area. They hoped to ensure compliance with the Competition Act by using moral persuasion. The CC aimed to give consumer organisations a greater voice in competition proceedings. This made the CC more sensitive to the needs of consumers. Consumer participation was important at the investigation and hearing stages. The CC aimed to build strategic alliances with government, practitioners, trade unions and other regulators.

Mr Ramburuth said that total expenditure had increased steadily since 2003 and would increase more significantly due to the projects identified in their strategic plan. The largest increase in expenditure would be on fees to lawyers and economist consultants. While most of the cases they were involved in were uncontested, these could become very expensive when cases were contested. Not all cases cost huge amounts but cases like the Telkom case cost R1.5 million. Two such cases could wipe out their entire budget. The problem was that one could not predict how many cases would be contested within a given year. One could also not predict how people would behave, for example if a party would contest various points in different courts (which would increase the cost of the matter). The CC would be channeling more into enforcement, policy and research in future. Funds allocated to corporate services would be increased, as this referred to the cost of running the organisation.

The CC derived their income from fees and department funding. The income referred to filing fees from applications for the approval of mergers. The Department would top up that amount dependant on the CC’s budget submission. It was evident from the graph that the portion paid by the Department would increase over the next few years. This was because merger thresholds (above which transactions would become notifiable), would be raised. Thus, fewer transactions would become notifiable, which would in turn mean that the value of fees to CC would decrease.

It was difficult to predict how much funds would be required during a given financial year, as it depended on how many mergers were contested. Last year they had more mergers than predicted, which meant that they received more fees than anticipated. They have therefore an accumulated surplus which was carried over to the following year.

Competition Tribunal presentation
Mr David Lewis (Chairperson: Competition Tribunal) said that the Competition Tribunal (CT) was unusual as it was an adjudicative body. It was effectively a court. It therefore had no control over their work content or workflow as they had to deal with whatever matter the Competition Commission or other bodies put before them. Their demand was therefore derived from the activities of other organisations.

He referred to the members of the CT, saying that the terms of three of the members were expiring at the end of March. These members had however been reappointed by Cabinet. The members consisted of eight lawyers and three economists. Three members were full time and the rest were employed on a part time basis. It was difficult to get the balance right. Their staff consisted of thirteen people in three areas: corporate services, research and registry.

The CT was very exposed to the public and their staff members were often lost to the private and public sectors. Very often legal representatives appearing before the Tribunal earned more than the CT members themselves. The CT therefore had to find ways to make working there an attractive option. They offered good experience to young lawyers who were aware that working for them as researchers would look good on their curriculum vitae. It was unfortunate that these people were then lost to the private sector.

Mr Lewis said that huge amounts of time went into dealing with matters even if they were uncontested mergers. Even though there were only eight complaints by the Commission these still took up huge amounts of time. The ratio of hearing days to working days was very high, especially if one considered the amounts of written work, reading and preparation that had to be done.

It was difficult for them to plan strategically because the CT could not decide to target a certain sector of the economy, as they had to hear any case which was put before them.

The CT had to work in accordance with strict time frames as set out in the Act. Their decisions were already of a high calibre and were referred to in international courts. All their decisions were placed on their website, which was widely used.

Much of the CT’s good corporate image was due to the transparency with which they conducted their work. They had a code of ethics in terms of which they were required to declare their interests so as to prevent a situation where there were potential conflicts of interests.

Mr Lewis referred to their slide on “Financial Management” and said that they derived their income from filing fees (33,6%) as well as funding via the Department of Trade and Industry (54,7%). Because of the proposed changes to the threshold they were expecting to receive less for filing fees and would in the next few years rely more heavily on the Departmental funding. This would continue until the situation corrected itself in the following period.

They were not a prosecuting body like the CC was, but still had to maintain large amounts in their budget for potential litigation. This was if the CT became a party to litigation, there would be serious consequences if they did not provide for it in their budget.

The CT had spent 83,9% of their budget. They could not predict the amount of fees they would earn each year because of the fact that they were a reactive organisation. Their expenditure on salaries of part timers depended on the number of cases heard and the number of days a case took to complete.

Recently the CT had heard a number of interesting cases, for example the Mittal Steel case, which focused on the excessive steel prices. On the matter of excessive fines imposed on companies acting in contravention of the Act, Mr Lewis said that these figures were miniscule compared to the profits derived from the contravening activity. The hearings on the bread companies had evoked much interest from the public, especially consumers and unions. There were now similar cases before them involving the milk, scrap metal and cigarette industries.

Discussion
Mr L Labuschagne (DA) referred to the CC’s statement that they aimed to build strategic alliances. He pointed out that they had not mentioned building alliances with business. He asked why this was the case.

Mr Ramburuth answered that the CC were not averse to building alliances with business umbrella bodies such as industry associations. The problem was that these industry associations, while carrying out their functions in this capacity, often also doubled up as cartels. However the CC attempted to obtain buy-in at the level of the industry associations.

Mr Labuschagne asked if the CT could provide the Committee with the curricula vitae of its members.

Mr S Rasmeni (ANC) felt that the call for the curricula vitae of the CT members was unnecessary, as this was a sensitive issue.

The Chair said that this was not a sensitive issue and this was in fact public knowledge to which members of the public should have access.

Mr Lewis said that they were happy to provide the curricula vitae to the Committee. These were already on their website and in their Annual Report.

Mr Labuschagne asked if the appeals of CT decisions were heard by the Appellate Division. He asked if the CT was represented by counsel in these proceedings.

Mr Lewis replied that they were not represented in appeals to the Competition Appeal Court. Sometimes however friends of the court would be asked to defend the decisions of the CT.

Ms M Ntuli (ANC) referred to the CC graduate training programme and asked if there was no way to keep these people in the organisation after the programme had been completed. If this was not done, the Department would be paying for training while other companies would reap the benefits.

Mr Ramburuth responded that the CC had introduced the programme in the spirit of the skills development legislation. They aimed to assist recent graduates by giving them experience. The CC was however unable to absorb all of them. One could however consider that these graduates were not lost to the entire country, but would proceed to contribute to other organisations.

Ms Ntuli referred to the CT investigation into the banking sector. She asked what would happen after the completion of the investigation, as it was likely that banks would continue conducting business as usual.

Mr Thulani Kunene (Acting Deputy Commissioner: CC) responded that the CC had put together an external panel that was conducting this investigation. They would identify competition issues and make recommendations to the CC. The report was due at the end of the month. If it emerged from these investigations that collusion was occurring, there would probably be recommendations that the CC address banking governance and it was likely that this would necessitate changes to the relevant legislation.

Mr Rasmeni added that banks were still involved in cartel activities and asked what the CC was doing about this. He asked if they were to be part of the Financial Sector Coalition Conference and if so, what role they would be playing.

Mr Ramburuth said that the CC had been invited to participate and that he would be addressing the Conference.

Ms Ntuli referred to the fact that property was becoming increasingly expensive. She said that the price differences between houses in townships, rural and urban areas were unfair.

Ms Ntuli referred to the Tiger Brands company that was fined for violating competition laws. She said that since paying the penalty, the company had simply started to recover this amount from the consumers by increasing the price of bread. She asked how the CC would deal with this.

Mr Ramburuth replied that this was not a straightforward issue, since it was not illegal to raise prices. The Competition authorities did not set prices, but removed the behaviour by businesses which distorted and manipulated prices. Once this happened, prices ought to settle at a competitive place. The sequence of events which had emerged since the imposition of the penalty on bread companies was indeed unfortunate. The Commission had communicated with the bread companies that had said that it was regrettable but they had to raise the bread prices so soon after the imposition of the fine. They had outlined the reasons for the increase as being the increase in the prices of wheat and transportation costs. The CC had analysed this in detail and had publicly stated that they were not convinced of these reasons. There was now the situation where the already high price of bread was being increased by different companies by the same amount at the same time. Mr Ramburuth believed that the shareholders bore most of the cost of the fine and it was therefore important to call on them to hold their management accountable.

Mr Kunene added that the CC had intervened to ensure a competitive environment. This however did not mean that that there would be no price increases, as prices reflected the prevailing market conditions.

Mr Lewis said that even if the fines were passed on to consumers by some companies, the CT would want the situation where other companies would see this as an opportunity to keep their price steady, thereby increasing their portion of the market. While food prices all over the world were increasing, the fact that the CC was of the opinion that the bread price was increasing by the same amount at the same time should be setting off alarm bells with them. There should ideally be different prices for different brands, but consumers accepted this as they were used to paying a single price for items and services due to past regulation by government and co-operatives. It was necessary for consumers to institute class action suits to fight cartel activities (although this was not possible in the case of bread). This would also be addressed by the fact that shareholders would be paying for these fines. Shareholders were already indicating their unhappiness at having to bear the loss resulting from the fine.

Mr D Dlali (ANC) referred to agro-processing as a priority sector of the CC and said that it appeared as if these companies were simply passing the cost of their penalties to the consumers. How could the CC ensure that this money was ploughed back where it was meant to be.

Mr Dlali pointed out that the cost of milk, cement, steel and fertiliser were becoming excessive. Red meat was also no longer affordable to all.

Mr Kunene replied that the CC had teams who were tracking the price trends in the cement and steel industries. They were conducting investigations where it was found to be necessary.

Ms Ntuli asked how the CT would prevent the situation where they trained staff, who then simply left to work for other organisations.

Mr Lewis replied that they were not able to retain staff by offering salaries which were competitive with the private sector. Instead they offered a stimulating environment in which to work. They offered employees training and enabled them to attend conferences both nationally and internationally.

Mr Dlali referred to the Strategic Priorities of the CC and asked how they aimed to establish the CC as a centre of information, knowledge and expertise when they were unable to retain their staff.

Mr Ramburuth agreed that it would be difficult to establish the CC as a knowledge centre if there was a high staff turnover. The CC therefore focused on knowledge management systems, which would enable new staff to access information and get up to speed as quickly as possible. This would also serve to preservethe  institutional memory of the organisation.

Mr Dlali referred to the CC’s review of Human Resources (HR) policies in an attempt to increase staff morale. He asked which loopholes had been identified that had necessitated this review.

Mr Kunene responded that the CC had re-looked at its HR policies because their strategic planning priorities redefined the way in which they did their work. They were therefore not filling gaps, but merely aligning their Human Resources requirements to their policies.

Mr Dlali referred to the CC’s aim to give a voice to civil society. He asked how this was possible when the consumers did not know about the organisation (except when high profile cases were involved). Consumers should be able to approach the organisation to lodge complaints involving competition issues.

Mr Rasmeni said that communication only occurred with big businesses. He asked how far the CC and CT went to communicate with the rank and file citizens. He also asked if they had a relationship with Community Development Workers.

Mr Ramburuth replied that the profile of the CC was increasing and that they were moving from the business pages to the main section of newspapers. They had interacted with media, individual organisations and associations. As these changes were occurring, people were making more requests to the organisation. In addition, the CC was also proactively targeting those associations that they had identified as needing this intervention. They were interested in obtaining the participation of civil society organisations in the investigative and hearing stages of the process. 

Mr Dlali asked why the CT’s personnel costs were so high compared to other budget items.

Mr Lewis replied that this made sense as their staff was their only real asset. They did not have items such as machinery or cars in their budget.

Mr Dlali noted that the CT had underspent on their budget by 83%. He asked how they expected the Committee to approve additional funds if they were unable to spend their money.
             
Mr Lewis explained that they had to ask for more than they foresaw they would use in order to make provision for potential litigation. He was very concerned that a single large case could in fact wipe out even existing reserves.

Mr Rasmeni referred to mergers and acquisitions between companies and asked if these practices were good for the economy or not. He asked what drove these processes.

Mr Ramburuth replied that mergers were bad if they led to higher levels of concentration of particular types of companies delivering the same service/product and thereby lessening competition. Mergers were good if they increased the efficiency of a particular industry.

Mr Lewis added that mergers were bad when they lessened competition. They were good if they were part of a natural process of restructuring.

Mr Rasmeni referred to bid-rigging and said that this was particularly prevalent in the public sector. He asked to what extent the CC was acting to curb malpractice in the public service.

Mr Kunene replied that the CC had conducted workshops on bid-rigging and had invited public sector participants (especially state owned enterprises) as well. They had provided information on how to recognise bid-rigging and how to set out bid requests so as to minimise the possibility of this practice occurring.

Mr Ramburuth added that the CC was not an anti-corruption body, but worked with the Public Services Commission. Parliamentary Committees too had an important role to play. It was easy to collude against government as they were paying for the services/products from taxpayers’ money. This should be examined by those exercising oversight over local government expenditure in particular.

Mr Rasmeni noted that Mr Lewis also served on the board of the Industrial Development Corporation (IDC). He asked if this did not divert his attention from the work of the CT, especially as the Tribunal was faced with huge workloads.

Mr Lewis replied that he was a non-executive member of the IDC. This had only been relevant to the work of the CT as far as potential conflicts of interest were concerned. If these did occur he simply declared the interest or where appropriate, recused himself from the case at hand. It however did not present a problem in terms of time.

Mr Dlali referred to the fact that the terms of three CT members had expired. He asked if the extension had been automatic or if they advertised the positions to allow others to apply.

Mr Lewis responded that the Department had recommended their reappointment to the Minister. They only advertised if a bulk re-appointment was being done. This was largely because of the type of work they were doing, as it took a long time to learn. It was therefore important to hold onto existing expertise.

A committee member noted that not only private companies were overpricing their goods and services. State owned enterprises like Telkom and Eskom were running riot with their tariffs.

Mr Lewis replied that regulators had the authority over maximum pricing. There was nothing preventing them from charging less than this maximum amount. It was not clear whether they would charge less in order to be competitive or if they would charge the maximum amount allowed.

Mr Dlali said that the use of consultants was a huge problem in government, as officials simply used consultants to avoid doing the work.

Mr Ramburuth agreed that consultants should not do the work of the staff, but assured the Committee that they were not referring to the appointment of ‘HR consultants’, but to legal and economic experts. They were case-related consultants. For example, they might need an expert in the steel industry to write a report on an area in that particular industry.

Mr Dlali asked what the presenters thought of introducing some form of price control.

Mr Lewis replied that they did not generally favour price control. Instead they wanted to see a situation where the markets were sufficiently competitive to ensure that prices would settle at a point which consumers could bear. Sometimes however price control might be necessary but this would not be the role of a competition authority.

Mr Ramburuth said that they were opposed to all forms of collusion. However it could be argued that it was better to have government set prices than private individuals. Although the CC opposed price control, it could be acceptable in exceptional circumstances.

The Chair concluded the meeting by saying that the Committee would call on the CC and CT if they required additional information. Even though they would have liked the opportunity to interact further, one had to bear in mind that these interactions were ongoing. The Committee would also be available to provide assistance to these organisations where possible.