Competition Amendment Bill: Department Briefing

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Trade and Industry

10 June 2008
Chairperson: Mr B Martins (ANC)
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Meeting Summary

The Department of Trade and Industry briefed the Committee on the Competition Amendment Bill. This was not intended to overhaul the Competition Act entirely, but to build on what was already in the act and clarify ambiguous areas, as well as granting some further powers to the Commission. It focused on the five broad areas where gaps had been identified, being the areas of market inquiry, complex monopolies, personal liability of directors, incorporation of the leniency policy into the legislation and concurrent jurisdiction. The problems identified in each area were explained in detail, and the ambit of the provisions was set out. It was stressed that all the interventions were aimed primarily at preventing the uncompetitive behaviour, rather than penalising it once it had occurred, and it was hoped that the leniency provisions coupled with personal liability would be a significant disincentive for decision makers to involve their companies in uncompetitive actions. The Department noted that it had consulted extensively with stakeholders and had taken several comments into consideration in the drafting. It was expecting to receive further input in relation to the wording and the implementation aspects, and would welcome this.

Members questioned the powers of subpoena in market inquiries, reports to the Minister, the apparent contradiction between industrial policy and competitiveness, whether consumers had any redress and whether the Commission could order a lowering of prices, the recent media reports over pension fund issues and whether the Act and Bill covered state owned enterprises and dominant industries. The principle of personal liability for directors, whether this matched global trends, and the amount of the fines were discussed in detail. The need for the Competition Commission to have closer liaison with the National Prosecuting Authority was highlighted. Further questions probed in more depth the issues of leniency, how it was applied, whether there would be full leniency in all cases, and whether it could be abused. Several Members were dissatisfied with the response that consumers should take their claims to court, pointing out that until consumer activism was more firmly entrenched this was unlikely to happen and high costs precluded most of the population from pursuing their rights. The Department agreed that it might be possible for the Competition Commission to impose repayment as part of the conditions of settlement, that something similar to the Criminal Asset Recovery Account could be investigated, and that other options could be considered. Members believed that the fines should be substantial, and the suggestion was made that there should not be a cap.

Meeting report

Competition Amendment Bill (the Bill): Department of Trade and Industry (dti) Briefing
The Chairperson indicated that the aim of the Bill was to enable the Competition Commission (CC) to deal more robustly with its mandate. There had been serious criticism about what the Department wanted to do with the Bill and it had sparked a great deal of interest in the press. At a later stage, when public hearings were held, the stakeholders would hopefully avail themselves of the opportunity to express their views. 

Ms Zodwa Ntuli, Deputy Director General, Department of Trade and Industry, said that the purpose of the Bill was not to overhaul the Competition Act, but to build on what was already in the Act, expanding where necessary, creating more certainty, and clarifying ambiguous areas. The Act was last reviewed in 2000, when the issue of concurrent jurisdiction was debated. In the last years there had been a constant process of checking those issues that were inhibiting the implementation of the Act. The Competition authorities were to be provided with further powers. The Competition Commission was to be given a more proactive role to investigate markets and take measures to ensure market transparency. There was a need to respond also to the industrial policy objectives, such as promotion of competitiveness. The amendments would deal with the identified gaps. There were challenges that the competition authorities faced in dealing with uncompetitive outcomes resulting in artificially high prices; previously the Act had not given the authorities sufficient powers to take up certain matters. It also aimed to strengthen efforts on cartel enforcement, by introducing personal liability on directors who caused their firms to engage in cartel activities, complementing the existing penalties in the Act, and preventing continuance of the conduct. Cartel behaviour was the most serious of the violations.

The Bill sought to address five key areas: market inquiries, complex monopolies (behaviour of parties in a market), personal liability of individuals who caused a company to engage in cartel activity, the formalisation of the corporate leniency policy and concurrent jurisdiction, which would address the inconsistencies between the Competition Act and the Electronic Communications Act (ECA), in dealing with competition in the telecommunications sector. Currently the Competition Act was made subject to the ECA. The Competition Act stated that in cases of concurrent jurisdiction the sector regulator and the CC should enter into a Memorandum of Agreement (MOA), and this amendment was seeking to add that this MOA should state which Act would prevail in the event of dispute.

The Bill also made some corrections. The Bill was now dealing with investigation of mergers which were done without seeking the necessary approval. The Act had a gap by reason of the fact that the investigation process had not included investigations into these issues, so the powers did not cover the summonsing of documents. The Bill was seeking also to include these processes formally, so that the CC could call for information.

Ms Ntuli then elaborated on the problems that had existed. In relation to market inquiries, she noted that the power to conduct market inquiries was part of the general provisions. The CC would submit a report to the Minister, who would in turn submit a report to the NA. Previously there was no provision for action to be taken. The Bill sought to give more powers to deal with the findings. The CC was being given powers to initiate its own enquiry. It would be able also to act on a request by the Minister. The nature of the process was to be explained more fully, in particular stating that there would not have to be a complaint before the inquiry could be held. Appropriate remedies could be imposed, the Commission could refer the matter elsewhere and could still make a report to the Minister, making recommendations either for regulations by this Minister, or make recommendations to another sector authority for regulation. Another request that had been made was to give the CC the power to subpoena documents or individuals. Dti had considered this, but because of the constitutional challenges, had decided that the subpoena powers should not be extended as there was the risk that these could be intrusive. However, it had decided that people could be asked to make sworn statements.

In the area of complex monopolies, Ms Ntuli explained that the new provisions would deal with firms who conducted their business affairs in a coordinated way which restricted prevented or distorted competition. The current Competition Act (the Act) was limited, because it required proof, for instance, of the meeting of minds, which was in most cases very difficult to prove. Other coordinated conduct existed where people would act together and consciously follow each other, but again proof of intent was a problem. There were examples in the milling, banking and fertiliser industry, where the "meeting of minds" could not be proved. It was difficult to say whether people were hiding behind the structure, or whether it was a genuine market phenomenon. The term "complex monopoly" was being defined, and this clearly explained that it was multi-firm conduct, which was coordinated, and which created a negative effect. The requirement to prove contact or an agreement was now being removed. The CC would look at the outcomes, investigate the cause, and refer the matter to a tribunal, which could give an order for the conduct to cease.

In respect of personal liability, Ms Ntuli said that this was a new concept, as the Act had previously dealt with companies only. The Bill would create an offence that was consistent with the Act. A director, or person in authority, would be prohibited from causing a company to engage in the incorrect practices. This was consistent with corporate governance provisions. The disbarring of directors who were involved in cartel arrangements was further to be incorporated into the Companies Bill. Under the current fining provisions, the companies would simply recover the fines paid by raising their prices. It was hoped that this amendment would also stimulate more shareholder activism. This concept had been used in other countries. The offence would be dealt with through the normal courts, not through the Competition Tribunal (CT).

With regard to the provisions for leniency, Ms Ntuli explained that the CC currently encouraged “whistle-blowing” by offering indemnity to the first member of a cartel who reported it to the Commission. It was currently in some cases excusing a company from a complaint if considered appropriate. There would be public criteria. This process did not preclude a person who had suffered damages from pursuing any civil claim against a firm or individual. The Bill was seeking to formalise this.

Ms Ntuli expanded upon the concurrent jurisdiction, saying that this was specifically to address the inconsistencies with the ECA. The Telkom issues were further complicating the provisions. Section 67(9) of the ECA said that the Competition Act was subject to the ECA. The Competition Act dealt with concurrency issues, and this was therefore the appropriate place to deal with this problem. Industry specific legislation may internalise matters, but the Competition Act should be the overriding Act and where there were any inconsistencies, the Competition Act would prevail. A consequential amendment would be made to the ECA, by amending the wording of section 67(9).

Ms Ntuli said that the process of review had been ongoing for some time. It had worked on submissions from the Competition Tribunal, and a number of other stakeholders, who were listed in the presentation. There had been extensive engagement on the principles, and there may be other comments on the drafting. Many of the issues raised since had related to the implementation, not necessarily the principles.

Dr J Maake (ANC) asked, in respect of the market inquiry, how the Commission would deal with matters if it had no power to subpoena.

Mr Mommye Segoame, Deputy Director, Dti, said that the power to make market inquiries related to preliminary investigations, which were intended to shed light on a situation where the issues were not clear. They were sector wide in nature, as opposed to specific investigations which targeted particular firms. Nobody would be cited as a respondent in a market inquiry. Therefore the powers of subpoena would not be applicable. The powers of subpoena were retained for investigations.

Dr S Rasmeni (ANC) welcomed the Bill. He asked what was currently being done in relation to reports to the Minister on issues relating to policy review; he would have thought that this was in any event a function of the Department's officials. Public servants should be constantly advising policy makers of issues needing to be changed.

Ms Nomfundo Maseti, Director: Competition Policy, Dti, said that the Bill was trying to amplify the procedures. Currently the CC had the power in terms of Section 21 to conduct a market inquiry. However, it was not clear how it would do so. The Minister had no role to play in terms of the decisions on competition matters. This Bill would clarify that the CC could initiate the inquiry. Once it had done so, it would come up with a report (as it did currently), but the Bill now also gave the CC the power to deal with that report. Where there were competition problems resulting from regulatory barriers, or other pieces of legislation, this would then be taken through to the Minister. There were several instances in the health sector, where prices were often fixed. The report to the Minister would now contain proposals for amendment of legislation.
Dr Rasmeni noted that industrial policy tended sometimes to promote issues that may not lie happily alongside the principles of competition, as they might protect the entire industry. He asked how this would be reconciled with the remark that the competitiveness was included as an outcome of the industrial policy.

Ms Maseti agreed that there might be some tension between competition and industrial policy. Competition sought to promote efficiency, and encourage firms to engage in productive strategies to reduce costs. The ultimate objective was to promote competitiveness. That was the same ultimate objective of the industrial policy. Dti recognised that it was operating in a global economy, whose goal was to drive competitiveness. The competition policy was a strong tool to achieve this. The two could exist side by side. Competition policy in the long term was a process to achieve a competitive economy.

Ms Ntuli added that in some respects this Act was not the same as in other countries. The policy in South Africa also encompassed issues of small business development, Black Economic Empowerment (BEE) and the like. Some matters may appear to be in conflict. However, the interface had to be managed so that competition considerations had to be balanced against employment considerations, and that was unique to South Africa. Some of the industrial policy objectives came from the competition legislation. Similar apparent contradictions could be found in the intellectual property rights. If they were to be pursued in the same way as other countries, they might not meet the needs of South Africa.

Ms Maseti used the example of a cartel, fixing the price of flour at manufacturing level. The manufacturer might also have a bread-producing subsidiary. When there was a sale of flour to downstream firms, who were producing bread in competition with the producers, this would increase the costs downstream, would weaken efforts to promote competitiveness, and affect the consumers.

Dr Rasmeni noted that consumers had suffered from uncompetitive behaviour, as the prices remained high, even after the Competition Commission had dealt with matters. There was no social benefit. He asked whether there had been any consideration given to compensation for consumers.

Ms Maseti used the same example of the bread price cartel. The public had expected that once there was a finding by the CT, the price of bread should have fallen. That had not happened. The competition authorities did not regulate prices, and did not have the power to order the companies to drop their prices. The behaviour had occurred over some time, and it would be difficult for any authority to correct the price. The CC was only able to correct the anti-competitive pricing behaviour. There had been a confession made in 2003 that Premier foods could not have afforded to increase the prices even by 15c, but from 2003 onwards they were removing customers from each other. When they realised that, they reorganised themselves not to compete with each other. They had then increased the prices hugely. This showed the challenge of monitoring compliance. The focus was not that the CC should simply impose a fine and say that was the end of the matter. The market failure should have been corrected and monitoring of compliance was necessary. This was allied to the problem of the complex monopolies. They had not necessarily agreed to raise the prices, but had simply followed each other.

Mr Fungai Sibanda, Chief Director, Dti, noted that the current Section 65 allowed consumers to bring an action for a civil claim in the High Court.

Dr Rasmeni asked about the pension fund issues that were reported in the press over the weekend, where it seemed that different administrators were colluding in respect of loans. It was alleged that it was not the role of the Competition Commission to deal with this.

Mr Segoame said that this related to reverse mortgage schemes, where pensioners would be offered loans against their properties. The National Credit Regulator (NCR) had taken up these matters and had investigated them under the Companies Act. The Office for Consumer Protection of Dti had been involved, as had the Financial Services Board. There was a need for coordinated effort by several enforcement agencies.

Dr Rasmeni asked if a written response on this matter could be sent to the Committee. He agreed that there should be a coordinated way of dealing with it.

Mr L Labuschagne (DA) asked where State Owned Enterprises fitted into the situation. There was a monopoly in the beer industry by SA Breweries (SAB) and he asked how this was to be dealt with.

Ms Maseti said that the State Owned Enterprises were not exempted.

Ms Maseti pointed out that dominance was not illegal, as this did not necessarily hurt anyone. However, the abuse of that dominance would be illegal. If SAB was involved in anti-competitive practices, it would be investigated by the Competition authorities. There had previously been an investigation against SAB that had been referred to the Tribunal, and she understood that there was currently negotiation around a consent order.

Dr P Rabie (DA) asked about the new provisions imposing personal liability on directors, enquiring whether this was in line with the laws governing multi-national companies, and whether other countries had been taken as a benchmark. He wondered what would happen to a director in one country who was found to have abused his position, and if he could be prosecuted or debarred also in another country.

Ms Maseti responded that other jurisdictions did have criminal sanctions, especially on cartel activities, mainly in the USA and Canada at present. There were trends now in the UK, Ireland and other European countries to criminalise the activities. Germany had introduced personal liability and Australia would shortly do so. Dti felt that it was important for South Africa also to strengthen its enforcement, and considered that the personal liability, and the threat of a jail sentence, would encourage individuals to disclose their involvement in cartel activities.

Dr Maake referred to the current difficulties in proving collusion. He noted that the CC could obtain undertakings to cease the uncompetitive practices, and asked how it would currently be proving collusion.

Ms Maseti said that the new provisions on complex monopolies sought to deal with conduct that could not be dealt with under abuse of dominance. The current standard required under sections 4 and 8 was not altogether appropriate. Taking matters to the CT would not necessarily get the solution. Conduct may not be illegal, but might nonetheless restrict competition. It was desirable to get undertakings to stop conduct which was lessening competition. An example could be import parity prices. There might not be an actual agreement, but the importing firms might fix prices unrelated to the value of the actual import. They could simply follow the dominant firm, and this would result in the few companies in the sector still charging the same prices. It was desirable that the CC be allowed to intervene.

Dr Maake asked about the penalties for those found guilty. If the maximum penalty was 10%, then he would not think it sufficient. He believed that discretion should be given to the Tribunal, with no cap on the maximum fine.

The Chairperson agreed that the sanctions should be so considerable that the shareholders would be forced into action and to raise their objections.

Ms Maseti said that the Act currently provided for 10% as the maximum fine. She said that this was based on overseas figures. She pointed out that personal fines, as well as jail sentences, were seeking to impose such severe penalties that they would be deterrent. Any increase of the fines to the companies, without dealing with the individuals, would not address the behaviour of the individuals, who may simply move to other companies. It was undesirable to cripple a firm to an extent that it would exit from the market.

Mr Segoame added that the real issue was not the fine. The Dti was seeking rather to deter the incorrect behaviour. In the history of the Tribunal there had never been imposition of the maximum fine. The 10% had been arrived at through enquiring what was likely to hit hard at the pockets of the company. The dti had recognised that perhaps the fining system had not been adequate - hence the proposal that personal liability be used to complement the sanctions against the firm. He stressed that firms acted through individuals, and the latter would tend to think twice about participating in this activity again.

Mr S Njikelana (ANC) asked what level of authority and personal liability would be dealt with. He pointed out that even a junior manager could have benefited from the activities.

Ms Maseti said that the personal liability was, in terms of the bill, confined to Section 4(1)(b) of the Act, relating to cartel activities. The Dti's experience was that the senior executives would normally claim that they were not aware that lower level employees had been involved in price-fixing. They would also claim that the person causing the activity had no level of authority. The Courts would look at whether the person having the pricing authority was aware of the behaviour or whether certain mandates, such as “agree on a lower price” had been delegated. It would not necessarily be limited to directors. She said that it was very difficult to uncover cartels, as they were becoming more creative.

Ms D Ramodibe (ANC) supported stronger sanctions. She pointed out that the consumers had been cheated by monopolies, and she, like Dr Rasmeni, also enquired if anything was refunded to consumers.

Mr Njikelana asked, in relation to complex monopolies, whether people would also be able to pursue civil claims. He had heard that the paper industry was restricting supply, which then affected book prices.

Ms Ntuli noted that the current Act did allow for civil claims. That area had not really been used in practice; perhaps through lack of knowledge on the part of consumers. There was need to encourage non government organisations (NGOs) to take up class actions or encourage consumers to lodge claims. It would be important for competition authorities to raise awareness. In the airline industry, Nationwide had launched a civil claim against South African Airways, but so far not many consumer groupings had done so. This also spoke to the issues of resources, as the authorities would need to be adequately resourced to encourage consumer awareness.  Shareholders should also be more active. Company law did deal with what shareholders could do if directors had acted contrary to their duties.

Mr Njikelana asked for further information on the leniency policy, saying that this was an area needing more debate, as it still carried risks that the behaviour would continue. He asked whether the focus of leniency would be on the company or the individual.

Mr Sibanda said that currently this applied to firms. The power to prosecute individuals rested with the National Prosecuting Authority (NPA) and the Competition Commission would have to work in hand with the NPA, which would have to use its discretion in matters. 

Mr Njikelana noted that the Competition Law Commission of the Law Society of the Northern Province had been quoted as a stakeholder, and he asked whether the other law societies had participated.

Mr Njikelana noted that the Mail and Guardian had criticised the amendments.

The Chairperson noted that the stakeholders consulted had included the Competition Commission and the Competition Tribunal. Both had reported to this Committee, and the Commission had raised the fact that their current dispensation would allow them to use the first cartel member to come forward as a "whistle-blower" but they had raised some reservations about the criminal aspects. He wondered whether the proposals by the dti would be assisting the CC in doing their work.

Mr Segoame confirmed that there had been some concerns around the leniency. He illustrated that there could be four firms in a cartel. One firm could blow the whistle at any time. That leniency programme would have the effect of destabilising the cartel. It had worked successfully in unpacking cartel behaviour. Under the current situation there was no threat to personal freedom. Now, with the introduction of personal liability, it was hoped that the directors of the firm would think twice about getting involved. Where they were already involved, there would be further incentives to now blow the whistle and get indemnity for themselves. The provision on criminal sanctions would thus strengthen the leniency programme.

Ms Ntuli said that the two matters would sit comfortably with each other. She felt that there was a need to speak practically about what had happened since the introduction of the leniency policy. The main aim was not so much to get companies to come forward, but to stop them from entering the cartel in the first place, because of the threat of instability and whistle-blowing. Putting the fines or penalties at a high scale would make them think twice about engaging in the conduct. It was not always that a whistle blower would be given complete exemption. In some investigations, companies had not come forward entirely voluntarily, but only when investigations had reached a stage that they realised that the CC knew of their involvement. Some leniency had been shown to those coming forward in all the cartels uncovered so far. The leniency policy was a tool but was not an end in itself. It must be applied with the other provisions in the Act. A concern was raised that when the Commission excused a firm from prosecution, it may go against the leniency principle if it did not also excuse the directors. In Tiger Brands matter, the Commission had charged the directors with perjury. When there was evidence of a cartel, the CC would refer the matter to the Competition Tribunal. If the Commission decided not to prosecute, then NPA might not pick up the case. With greater cooperation between the competition authorities and the National Director of Public Prosecutions there could be more authority The Competition Authorities could not grant immunity on matters over which they had no jurisdiction, and could not exempt anyone from prosecution as it had no jurisdiction in this matter.  **

Dr Rasmeni felt that the CC's role must be examined. The fines had the positive effect of increasing the country's budget. However, the poor were getting poorer because the prices set by the cartels were still in existence. He did not think that their intervention could thus be said to be for the benefit of the country. This Bill could offer the opportunity to deal with developmental issues that were not being addressed by the current Act, particularly to intervene in market failure and address distorted prices. Perhaps the Minister should be allowed to appoint a price regulator. Whilst he recognised that the consumers had the option to go to the High Court, this was not a cost-effective option, and until such time as there was strong consumer activism he did not think that this would happen.

Dr Maake referred to the Tiger Brands matter. He was concerned that, even after having been fined, Tiger Brands had increased prices. He had suggested that the maximum penalty be removed. He would prefer that the Commission be permitted to research the actual harm, as well as research comparisons between what would have been the reasonable price and what had been charged. He felt that there was a contradiction because this company was in fact still receiving, through the higher prices, the "proceeds of their crime".

Mr Segoame agreed that this was a serious and concerning matter. The issue was around monitoring compliance with the law. Once an order had been made, there was a need for constant monitoring and compliance. When the Tribunal made an order, it was to the effect that in the future, this practice should not be followed. Nothing was done about the damage caused in the past. This was certainly something for dti to think about. There had been the feeling that the Competition Authority should not be turned into a price regulator, but this issue would be looked at again. This was linked to the removal of a maximum fine, and the determination of a correct price. Dti would revert to the Committee on these issues.

Ms Ntuli said that this was the reason for inserting the Complex Monopoly provision. Once a cartel had been broken, the complex monopoly clause would give the power to intervene, and the Tribunal could then direct people to behave in a proper manner. These provisions should be seen as an extension of the provisions in Section 2.

Dr Maake noted that although there had been reference to health pricing, this Committee had not received anything from the Minister to this effect. He suggested that this be followed up.

Ms Maseti said that this matter was under consideration and had been discussed with the Department of Health who had agreed to amend the regulations to take out the anti-competitive clauses.

Ms Ramodibe again raised the issue of compensation to communities affected by price fixing. She noted that individuals would have to approach the Court. She pointed out that the Commission itself was permitted, in terms of section 49(9) to pay compensation if it caused damage to companies in the process of investigations. She felt that it was completely nonsensical that no damages for the consumers were provided for in the Act. Consumers should not be required to wait for the formation of consumer groups. There was no protection to those who needed it most.

Mr Njikelana agreed that this was a cause for concern.

Mr Segoame stated that there had been a proposal that the fines imposed should be used to remedy the damage done in the communities. The fines currently went to the fiscus, with no direct link between the damage and the fine. That was a possible line for consideration. He pointed out, in relation to section 49, that this was related to very specific circumstances.

Ms Maseti said that this was indeed a clause that was not working. She agreed that the Dti needed to address how there could be real redress to consumers.

Ms Ntuli said that dti realised that there were still gaps. In the Consumer Protection Bill there had been conscious insertion of provisions to support and develop entities that would take up cases on behalf of consumers. The Tribunal did not have the power to award damages, and therefore it would not be possible to insert clauses about such awards into the legislation. However, the implementation could address these issues. There were other possibilities, including the fact that in consent orders, the Commission could try to negotiate an award to affected persons. The Commission should try to invoke that more actively, as this was the time that the Commission had its greatest leverage over companies. There were some other possibilities also that would be examined.

Mr Njikelana commented that the addressing of competition within a capitalist culture was difficult. He asked whether there was any possibility of the leniency programme being abused. He also pointed out that there must be a balance between deterrence and the punishment, and it would be useful to hear how this was currently being dealt with. The debate around the level of fines was linked to this.

Mr Segoame said that the leniency programme was not granted as a matter of course and there were conditions attached to it. The leniency could also be withdrawn if the information was not adequate or the Commission had been misled.

With regard to the balance between deterrence and punishment, he said that the probability of being caught, and the cost of being caught must be taken into account. By introducing the personal liability, the cost of being caught was increased. The probability of being caught was dealt with through the leniency programme, as the fact that leniency was a possibility increased the probability of the cartel being broken. The target was to deter firms from engaging in this behaviour.

Ms Maseti added that the immunity programme was a tool for detection. The criminal sanction was a tool for deterrence. Through implementation the two could work well together. There were situations where those applying for leniency would only give some of the information, leaving another member of the cartel to apply for leniency for another period. The leniency would not necessarily mean total immunity; there was the possibility of a lesser fine being imposed. There was a need to maintain flexibility.

The Chairperson noted that a number of complex issues had been raised. He pointed out that there was a Criminal Asset Recovery Account in the justice system, and it might be possible to create something similar to protect consumers. He noted that there would be a call for public hearings and the Committee would receive input on the Bill. The Committee would also continue to engage with the Department as submissions were received.

The meeting was adjourned.


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