Competition Amendment Bill: Department responses to public submissions

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Trade and Industry

04 August 2008
Chairperson: Mr B Martins (ANC)
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Meeting Summary

The Department of Trade and Industry gave a presentation on the submissions received during the public hearings on the Competition Amendment Bill, and gave its response to each of the submissions, broken down across the five main areas of concurrent jurisdiction, complex monopolies, market inquiries, personal liability of individuals causing firms to engage in cartel activity, and incorporation of the leniency policy. It was stated that the Bill was still under discussion at Nedlac, and the report on that would be available on Friday 9 August. The presentation set out those areas in which the Department had agreed that revisions were necessary. Most of the revisions addressed concerns around clarity. The provisions that could be misinterpreted as giving a “trump card” to the Competition Act where there were sector regulators were to be deleted. The text around complex monopolies would be revised to deal with coordinated conduct by firms, but the principles remained. The market inquiries provision would be amended to include powers of subpoena and a legal test. The Bill already allowed for evidence under oath. The scope and time frames would be inserted. In respect of the leniency policy, it was noted that leniency would be extended to individuals, but would not be extended to indemnify a person from civil liability. In relation to personal liability, the Department maintained that this was important for several reasons that included a real deterrent, the fact and that criminal sanctions were appropriate to address the serious conduct. The two separate processes were not perceived to be problematic but the wording in relation to evidence obtained at the Competition Tribunal would be amended to remove references to conclusive evidence. The criminal sanctions were intended to be complementary to existing provisions. The arguments about the negative effect of this upon consent orders were extensively examined. The Department believed that the Bill had been debated extensively and that it was significant and timely and there was no reason to delay it.

Both the Competition Commission and Tribunal were asked to comment.  Further comments and questions addressed the need to get some balance in the personal liability provisions, the duties of directors, the extent of engagement between the Department and the competition authority, the need to strike a balance between increasing competition and concentrated economic power, the problems with the bread cartel, and the market inquiry provisions. They also discussed the leniency policy and its effects, the desirability of introducing criminal sanctions and the need to discuss the reality that most consumers could not afford to make use of their civil remedies.

Meeting report

Competition Amendment Bill (the Bill): Department of Trade and Industry (dti) responses to public submissions 
The Chairperson pointed out that the Committee was still awaiting the submission from New Economic Development and Labour Council (Nedlac).

Ms Zodwa Ntuli, Deputy Director, Department of Trade and industry, summarised that the dti was still in the process of finalising the negotiations with Nedlac, and it was hoped that that report could be with the Committee by Friday. The process had been very constructive, and some of the areas identified may require some revision, which would also address comments raised by other stakeholders. Ms Ntuli noted that the Bill had been drafted in response to the need for a focused review of the existing Competition Law regime. The reasons were the need to strengthen the Act to deal with cartels, to deal effectively with uncompetitive outcomes, to respond to industrial policy decisions, to counteract the current high barriers to entry that were seen as constraints to growth, and to enable the Competition Commission (CC) to play a more proactive role in investigating markets and take measures to ensure market transparency.

It was noted that the Bill focused on the five broad areas of concurrent jurisdiction, complex monopolies, market inquiries, personal liability of individuals causing firms to engage in cartel activity, and incorporation of the leniency policy.

In respect of the concurrent jurisdiction, comments had related to the need to clarify the roles supported by regulators in respect of ex ante and ex post regulation. There were concerns that the powers of the regulators would be removed, and comments on the status and publication of Memoranda of Agreement (MOAs), as well as some concern that the provision in relation to conflicting Ms Ntuli noted that the policy rationale was to try to provide clarity. Ms Ntuli noted that the sector regulators would retain their role. Some sectors were being regulated to balance consumer interests.

Ms Nomfundo Maseti, Director: dti, said that clarity on the roles was necessary to avoid forum shopping and protracted legal challenges. The dti had sought to address the inconsistency between the Competition Act and the Electronic Communication Act (ECA). The dti saw the role of the sector regulator as investigating the market and tagging prices. The competition authority would not set prices, but would have a role at a later stage if there was a problem with price discrimination or excessive prices. The MOAs were intended to provide a framework for cooperation, and this would be further clarified. It was agreed that the clause that had been misinterpreted as giving a: "trump card" to the Competition Act should be deleted, as it did not achieve the intended purpose.

Ms Ntuli reported that in respect of complex monopolies, comments had been made that the threshold would mean that the majority of markets would be caught, and that the provision tended to target structure of he market rather than behaviour of firms. The creation of a "no fault" offence was heavily criticised. The terminology was criticised as being too vague. It was noted that complex monopolies had been repealed in established international jurisdictions. Further comments related to uncertainty about the remedies and it was widely suggested that this provision should be deleted and instead be dealt with under market inquiries.

Ms Maseti responded that the rationale behind this provision was to deal proactively with uncompetitive outcomes arising from multi-firm conduct, especially in highly concentrated markets. The notion of complex monopolies was prominent in the Policy Document, and it was intended to deal with conduct that was currently not being captured by the provisions of the Competition Act (the Act). This behaviour was particularly prevalent in markets where there were few players, and where activities were being conducted through coordinated efforts, to the detriment of consumers.  She noted that none of the commentators had denied that a problem existed; the difficulties lay in how it should be addressed. The dti had taken the points about the terminology. The text would be revised to deal with coordinated conduct by firms as opposed to structure, and would also be revised in the interests of consistency.

Ms Ntuli noted that the next area for comment was market inquiries. Submissions had complained that there was no legal test or trigger for the market inquiry. Complaints were made that there were no powers to subpoena documents or require production of evidence under oath, and that the scope of the inquiry and the time frame had not been clarified. Another comment had been that there was a need for transparency and the report should be published and the affected parties given an opportunity to comment.

Ms Maseti noted that the Competition Commission (CC) currently had powers to initiate investigations on its own. The market inquiries provision intended to amplify the provisions to make the process more structured, transparent, and to create a process. The market inquiry was still to be exploratory in nature, to find out why the market was not giving the benefit to consumers. In respect of the proposal to include subpoena powers, the dti had not initially done this because this would have required a legal test for initiation of a market inquiry. It wished to avoid doing so as it would be subject to legal challenge, which would complicate the process. However, having discussed the matter further at Nedlac, dti had agreed that the power to subpoena, and therefore the legal test, would be important. Ms Maseti noted that the Bill already allowed for evidence under oath, and the scope and time frames would be incorporated into the terms of reference. dti conceded that publication was also an important point.

Ms Ntuli noted that submissions noted that the Bill had made no reference to the leniency policy, and the scope for excusal on "just and reasonable grounds" was too broad. They noted that this was applicable to firms but not to directors, that the Bill did not extend leniency for civil liability, and that this policy did not take into account the severity of damage suffered by complainants.

Ms Maseti noted that the rationale was to give legal backing to the leniency policy. The comments about the terminology were noted and this would be revised. The leniency would be extended to individuals. However, dti did not believe there was any reason to extend it also to indemnify any person from civil liability as that would affect third parties' right to redress.

Ms Ntuli stated that In relation to personal liability, comments had been made that this would lead to unintended consequences and weaken, rather than strengthen, competition authorities. Stakeholders suggested that the proposals would create a separate stream of jurisprudence because the conduct of individuals would be dealt with in the criminal courts, while the conduct of firms would be dealt with in terms of the Competition Act.  This was a significant departure from the current regime. There were several concerns around the admissibility of the Competition Tribunal's finding in criminal courts, due to different standards of proof, and also concerns around the possible violation of the right to a fair trial, including the presumption of innocence until proven guilty, and introduction of the concept that a director could be criminally liable in cases where he had been negligent.

Ms Ntuli stressed that the introduction of the threat to personal liability was intended to provide effective deterrents. It was noted that it was too early to determine whether administrative fines were an effective deterrent. The criminal sanctioning would bring about two separate processes. Any matter dealing with the individual would be referred to the National Prosecuting Authority, as the Bill sought only to criminalise individual action. The action against firms would continue at Tribunal level. The intention was not to open up the Competition Tribunal's finding again. The evidence obtained from the lower standard of proof could not be accepted as conclusive evidence in the criminal court, and there would still be the right to interrogate and question that evidence. The dti would, therefore, revise the wording to remove any references to conclusive evidence, and would still allow the two processes to run concurrently but separately. Dti had also sought legal opinion through Nedlac and may revise the Bill further in line with the recommendations. She noted that the comments suggested that the introduction of personal liability was being taken because the current arrangements did not work. Clearly these arrangements did work; dti recognised that but was merely wanting to complement them.

Further comments had been made that the introduction of the personal liability policy would have a detrimental effect on the consent order, as it would serve as a disincentive for firms to enter into consent orders, as Directors would be loath to conclude consent orders. Consent orders should not be allowed to indemnify or be used as a plea bargain.

Ms Ntuli said that the dti did not intend to impact negatively on the consent orders. A firm would also decide to settle to try to avoid protracted litigation, to avoid costs, and to avoid the reputational risk of litigation. These were seen as the primary reasons why firms would seek to settle. Dti did not agree that the introduction of these provisions would necessarily deter negotiations. Not all consent orders included admission of guilt. The consent orders would not necessarily absolve anyone from prosecution and the CC had been consistent so far in dealing with these.

Ms Ntuli noted that linked comments were made on the impact of the consent orders on the leniency policy, because the CC would not have the power to grant leniency to an individual director. It was also suggested that this proposal undermined the CC's ability to investigate cartels. She responded that the success of the leniency policy had been largely due to the fact that it potentially destabilised cartels. Dti believed that the leniency policy and criminal sanctions were complementary, and could work well together. The leniency policy was a tool for detection. Dti understood that there could be circumstances where the public would want to pursue a prosecution despite the leniency granted by the CC, but this was unlikely to happen. The argument that criminal sanctions impacted negatively on efficiency of the leniency policy was not supported by evidence, but the perceived negative impact could be remedied by extending leniency to individuals under the Bill. Most cases of confessions were not sparked by voluntary initiative by a firm, but rather resulted directly from the fact that the CC had taken action and firms were aware that they were firmly hooked. 

Finally, Ms Ntuli addressed the concern by the CC that this was not an urgent matter and that more consultation was needed. She said that there had not been fundamental objections to the principles, and most of the concerns could be addressed through revision of the Bill. The Bill had been extensively discussed and debated at Nedlac, and in addition the dti had engaged extensively with key stakeholders. All proposals were aimed at advancing government's initiatives on promotion of economic growth and competition, and the Bill responded to current anti-competitive practices that were undermining the social well being of citizens. For these reasons it was seen as significant and timely.  

Discussion
The Chairperson noted that consultations had been held with the Competition Commission. He asked the Commission if it wished to make any comment.

Mr Shane Ramburuth, Commissioner, Competition Commission, said that he had not prepared a response but would like to use the opportunity to comment. He said that the Department had captured well, in its presentation, what had been said by stakeholders. It was a bit difficult to comment in the abstract because the detail of the wording was important. He would like to comment on the practicalities of the Bill, in addition to the constitutional points, which had been well taken.

Mr Ramburuth said it was necessary to adopt a more strategic and in-principle approach, rather than adopting a lower common denominator approach.

He noted that in relation to the complex monopolies, it was still not clear what kinds of cases the CC would be able to pursue under the complex monopoly provisions that it could not already pursue under Section 4 of the existing Act. If the remedy for complex monopolies was lower than the existing remedies under cartels then it would make a great difference, as respondents would not doubt challenge the basis of the case.

The dti had said that the issues were canvassed with the CC. In fact it had been agreed that there were certain situations where it was difficult to pinpoint what exactly the behaviour was that was producing anti-competitive outcomes. The CC, however, had proposed the solution of a market inquiry, as had been pursued in the banking sector. The CC appealed again for greater powers to do a market inquiry in a transparent and constitutionally correct way, in a public fashion, to show what was behind the complex monopoly. The existing enforcement provisions of the Act were probably sufficient once that had been done. Currently the CC was not finding the need for a complex monopoly provision.

On the issue of personal liability, the CC noted that the constitutional problems with the earlier draft would necessitate two separate streams of action. However, the implications of that must be understood. It was necessary that the NPA and the criminal justice system be completely primed and ready, and understand exactly what its role would be. Practical considerations must be understood. This also opened up the CC to different decisions coming out of the two streams. For instance, a competition authority may fine the firm on the balance of probabilities, but once a different standard of proof was applied, there might not be a criminal transgression proven. That ran the risk of discrediting one or other (or both) organs of state if different answers were given to the same problem.

Mr Ramburuth still felt that it was necessary to discuss in greater detail how exactly the personal liability provisions would impact on the consent orders. He had heard the dti's response, but believed that the detail would only emerge in the orders. He thought that this needed further discussion.

Ms Yasmine Carrim, Member, Competition Tribunal, added that the Competition Tribunal (CT) did not differ from the dti on the principle. The reason, however, for creation of the specialist agencies was to deal with matters in a special way, rather than keeping them under the general criminal aspects. When speaking of personal liability, no consideration was being given to whether the “liability” implied imposition of a jail sentence, or civil damages. The fact of a cartel would still have to be proved beyond a reasonable doubt, and that produced the situation of two outcomes. This was again taking away the specialist agency functions. It did not mean that the personal liability could not apply.

She suggested that a good sanction for directors could be (because criminal offences were often pinned on those lower down in the management) that liability be automatically pinned on directors, who were the largest beneficiaries of cartel activities. The CT had recommended a provision in the Companies Bill that an organ of State could bring civil procedures against a director where he had been convicted of an offence or given a civil penalty under another Act like the Competition Act. The penalties would include removal, or declaring the director delinquent, and would affect his future prospects of sitting on another board. This was considered more appropriate. The sanctions ought to be at the level where they would really deter cartel activity and force directors to actually ask what was going on. The CT would want the legislation to work, and would not like to be caught up in situations where two outcomes were being played up by companies.

In respect of the concurrent jurisdiction she was pleased that the Department had found a way to resolve this. This seemed to address the problems raised by National Energy Regulator and around the ECA.

Dr P Rabie (DA) said the Committee should note the difference between criminal and civil liability. He believed it was important to retain the powers of the Competition Commission. He asked whether the current provisions allowed for directors to be held accountable for any anti-competitive decisions and behaviour. He did not think that it was possible to hold directors of a huge company with hundreds of employees responsible, pointing out that lower levels of management could be presenting directors with doctored financial statements. He thought that there must be a degree of discretion and that the matter must be looked at seriously. He felt, however, that the remarks of Ms Carrim were important and that a sense of balance must be retained.

Ms Ntuli responded that for directors to say that they did not know what was going on would undermine the directors' duties. Ignorance of the law was not an excuse if no conscious effort had been made to obtain knowledge. This was a practical issue. Directors had duties and must take positive steps to comply.

Prof B Turok (ANC) said that there was a need to reassert the fact that all agreed with the objectives of controlling cartels and monopolies and addressing the lack of competitive behaviour. He noted that this briefing today was provisional, as there was still work to be done. He noted that the dti had done significant work and been sensitive to the points made. He wondered if there had been a working meeting with the CC, to discuss the Bill clause by clause as he would have thought that an intense engagement was necessary.

Mr Fungai Sibanda, Chief Director, dti, noted that the policy decision had been taken some time ago, and at that time the Competition Commission had been consulted. However, it was then agreed that the review would be limited to four or five main areas, which were now forming the subject of the Bill. Those included challenges around complex monopolies, inherited monopolies, personal liability, concurrent jurisdiction, the leniency policy and so forth. There was agreement on the broad areas. The amendments did not deal with anything outside of those areas. In previous cases, the CT itself had called for imposition of personal liability and so the dti believed that this was an area that must be dealt with. It was originally intended that the Policy Document should first get Cabinet approval, before drafting commenced, but this did not transpire, and it was  then agreed with the Minister that the drafting of the Bill would commence in December last year, with the agreement of the CC, and that both documents be submitted to Cabinet together. When dti began to draft the amendments, there were some difficulties and differences of opinion that became apparent. However, the dti had understood that since there had been agreement in policy on matters such as criminal jurisdiction and complex monopolies then this should be in the legislation.

There had indeed been several meetings with the CC. It was not so much the extent of the consultation that was important, but what had been achieved. The dti believed that it was high time that individuals must be held accountable. It was one thing to bust a cartel, but another thing to put an end to it. For instance, although the bread cartel was broken, the price of bread immediately rose. The CC had argued that the introduction of criminal sanction might deter the leniency agreements, but the dti disagreed and believed that the fear of criminal sanction would not only deter the engagement in such activity, but also create an incentive for directors to come forward and report. Dti agreed that the leniency policy would deter cartels, but felt that increasing the probability of being caught would destabilise the cartel as effectively. If a person's personal freedom was being threatened, there was a real incentive on that person to blow the whistle. The process had been applied elsewhere; for instance with insider trading. This was a serious offence deserving of criminal sanction.

Prof Turok said that from an economics point of view, large powerful firms with a conglomerate of skills were also important - such as Iscor and Gencor. The previous day an economist from South East Asia had stressed the importance of concentration for economic power. Whilst he agreed that far more competition was necessary, the concentration for economic power was also needed.

Mr Sibanda noted that it was quite correct that an economy such as the South African one would have to contend with high levels of concentration. That could result from a number of different causes; regulatory requirements, scale of economy, capital investment or others. However, the dti was trying to address what would happen when a competitor entered the market. Such a player could compete, coordinate but not compete, or be a market leader or market follower. In highly competitive markets, there was behaviour that bordered on collusion, although there was no actual agreement. The interdependence that limited competition was of concern to the dti. This could lead to high prices, high entry barriers or closing of ranks. The dti was addressing this through the complex monopoly provisions. The restrictive practices provisions could apply, and so could abuse of dominance proceedings. However, there was still behaviour that did not fall into these categories, but was currently falling through the cracks. Dti introduced the complex monopoly provision specifically for this. It was not intended to deal with structure, but with behaviour that was coordinating, yet not quite reaching the stage of collusion. The CC had not managed to deal with this.

Ms Maseti added that an example might be the bread cartel. Prices had not gone down, so the parties had actually retained sufficient power to increase prices. Prior to the cartel being in existence, none of the players could have managed to increase prices again, as in a truly competitive market an increase in prices without justification would lead to loss of business. In some cases a person might follow another’s prices, choosing to follow rather than compete, but it was not certain whether this was having an effect on the market, or whether it was really an independent action. The existence of a penalty had not had an effect on the prices. Sometimes players were conscious that any action they may take would be followed by the other players. That action would then snowball. Other jurisdictions had looked at it, but may have also asked (as did the United Kingdom) for additional factors to be proved. In the European Union (EU) cases of collective dominance could be considered. Firms would also take the view that there was no reason why they should not also derive benefit by doing what the next firm was doing. Developing countries must deal with all areas of development. There was no reason necessarily to follow the example of other countries. She pointed out that although the complex monopoly provisions no longer applied in other countries, they had proven useful for a time.

Ms Maseti said that she wanted to put Ms Carrim's comments into context. There was a need to decide whether to leave the CT with an exclusive role to deal with these matters. Firms colluding on prices were in fact also increasing the costs to downstream firms. The bread cartel, being also a flour cartel, was very exploitative to consumers. The harm to consumers should affect a decision on principle whether the conduct was deserving of criminal sanction. Illegal tender activity was robbing government, and it was unlikely that anyone would disagree that bid rigging was fraud, and therefore deserving of a criminal sanction. Currently the firms were paying huge fines, but no changes were apparent, so the sanctions were not effective enough. It the ultimate goal was not only to have an administrative but also a criminal enforcement, then this would complement and was acceptable in principle. United Kingdom had introduced criminal liability in 2006. Leniency was not new and had concerned the UK as well. UK had held the view that all organs of state could work closely together and coordinate their activities. Fifteen individuals had been criminally charged and convicted there in 2008. The argument that leniency would be affected was artificial, as this had never been shown. Similar trends were apparent in Australia, Ireland and Germany. All said that the key element was morality and the appropriateness of criminal sanction. Administrative fines were likely to be paid by the firms and that would not be an effective deterrent, especially since the firms were likely either to take out insurance to cover this, or simply cover it in the internal costs. No existing roles were being tampered with.

Ms Ntuli added that the CT did not have the power to order damages. Therefore civil action could be taken by a complainant. It was interesting that, despite having a civil standard of proof on the balance of probabilities, the Tribunal was not given the power to impose damages. This seemed to recognise that an agency should not necessarily have the power of a Court. The decision to refer matters to a separate framework for criminal prosecution was therefore in line with the principle. The readiness of the NPA was a matter that would need to be discussed, but it was not unmanageable. The NPA must plan for implementation, and there might be teething problems but these could be resolved. The implications of separate decisions were not unique to this situation: a matter might attract both a criminal charge and a civil action. The mere fact of different outcomes was not necessarily undesirable.

Dr S Rasmeni (ANC) asked questions of clarity around the market inquiries.

Ms Ntuli clarified that the role of conducting market inquiries was intended to cover an exploratory inquiry as to why matters were not working. Once that had been done, there were currently no provisions that could be invoked to do anything further about the conduct uncovered. The dti believed that the existing Act catered enough for complex monopolies. Secondly the costs of inquiries were high. Dti would not like to subject complex monopolies to market inquiry investigations. It would like to give the CC the right to intervene directly without having to go through the market inquiry. There was a need, in the view of dti, to separate out the two provisions. It had considered the CC’s comments, but still did not think that it would be appropriate to combine the two.

Dr Rasmeni also asked who the complainants would be who were consulted in terms of the leniency policy.

Ms Ntuli said that this came from the concern raised by Mr Ishmael Mukkadam. The CC was not empowered to consider the question of damages to any individual, nor was the individual given the opportunity to comment. The dti believed that it would be appropriate for the CC to consult with the complainants, partly to elicit further information and to assure the complainant that he was taken seriously.

Dr Rasmeni said, in relation to the leniency policy, that this legislation was not unique in dealing with problems within a firm, some of which might be referred to the criminal justice system. He pointed out that the mere referral elsewhere would not automatically remove powers from the regulatory body. The fact of two outcomes would not, in his view, necessarily undermine the existence of the regulatory body. He cited that the Mine Inspectorate might conduct a hearing and enquiry into a mine accident, and penalise the owners of the mine. However, the criminal prosecution would not necessarily succeed. He also agreed, however, that the dti should discuss matters in depth with the Competition Commission, as they were the implementing body.

Dr Rasmeni agreed that the matter must be dealt with sooner rather than later because of the negative aspects of anti-competitive practices in the marketplace..

Ms Ntuli commented in general that the approaches taken by the dti to a large extent reflected the comments made at all times by the CC. Workings of the cartels had come to the CT and the Tribunal had called for criminalisation. In November 2007, after the Tigerbrands case, an interesting article was written, which she would convey to the Committee. This had suggested that the only effective deterrent in competition law would be criminalisation. The Chairperson of the CT shared this view, but noted that the present Act did not allow for this. He had further said that the legislators should consider the necessity for criminal sanctions. Dti was therefore taking the cue from what the CT had said, and from public comment, and was aiming to deal more effectively with problems that had been identified in the country.

Ms Ntuli also said that the scheme for making separate criminal referrals was not far-fetched.

Prof Turok assured the Department that most of the Committee would not hesitate to advocate criminal liability wherever it was appropriate, particularly in the business field.

Dr Rasmeni commented that the Committee had previously raised the issue of compensation for those who had suffered. Government was sometimes being viewed as pro-capitalist, at the expense of the poor, and as not doing enough to benefit the consumers who had suffered. The answer that such people must make civil claims was legally correct, but the realities were that they could not afford to make use of their remedies. This was still a matter that the Department and the CC must look into.

The Chairperson asked for that to be borne in mind and raised again at a later stage.

The meeting was adjourned. 

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