Competition Amendment Bill B23-2018: Ministry response to submissions

Economic Development

11 September 2018
Chairperson: Mr B Cele (ANC) (Acting)
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Meeting Summary

The Minister of Economic Development responded to the matters raised during the public hearings on the Competition Amendment Bill. The Bill aims to ensure economic transformation inclusivity by opening the door to small and medium enterprises and black Africans to participate meaningfully in the country’s economic activities thereby enlarging the tax base. He identified in four broad areas:
• Prohibited practices
• Structure of markets
• National security
• Issues in public submissions not in Committee feedback

Members asked if the Minister had given clear thoughts on characterisation at the Nedlac negotiations. Others were concerned why national security imperatives had suddenly become a major concern since December 2017 when this was not the case during pre-publication of the Bill. Doubts were raised that this might have an adverse effect at a time when the President is on an overseas drive to woo large investors into the country.

Meeting report

Mr B Cele (ANC), who was elected as Acting Chairperson for the meeting, welcomed the Minister and his team. The Minister would respond today to matters raised by stakeholders such as law firms representing their clients, big business, lobby groups, trade unions and individuals during the public hearings held on 28-29 August 2018. It is heartening to hear that the various National Economic Development and Labour Council (NEDLAC) constituencies agreed to the contentious issues. As members listen to the Minister, they should consult their notes from the past few weeks and engage with the Minister where in doubt.

Minister’s Response to written and oral submissions
The Minister of Economic Development, Ebrahim Patel, accompanied by the Deputy Minister, Madala Masuku, said the concerns raised by committee members and stakeholders can be classified into four broad areas: Prohibited practices; Structure of markets; National security; Issues in public submissions not in Committee feedback.

Prohibited Practices
Guidelines in section 8(3) and (4): Guidelines may be unconstitutional in respect of section 8(3)(f) and 8(4). They should either be replaced with Regulations, be removed from the Bill or in the case of 8(4) be redrafted (Vodacom and Law Society submissions).

Ministry Response:
1. We have been advised by Departmental lawyers that, as presently drafted, the reference to guidelines in sec8 (3) and 8(4) are not unconstitutional, as they do not bind the courts but are simply required to be into account together with explicit criteria that are set out in the law. We are advised that the State Law Advisor and Parliament’s legal advisors also do not have concerns that the provisions may be unconstitutional
2. Other South African legislation also provide for guidelines that must be taken into account, such as the Labour Relations Act
3. There is international precedent for guidelines: some countries issue guidelines; whilst other issue Regulations and some jurisdictions (such as EU) uses both concepts.
4. When drafting the Bill, we considered two options in respect of sections 4,5,and 8:either to provide the Regulations or to provide for guidelines.

Dr M Cardo (DA) asked during the Nedlac deliberations more explicit thoughts were given to characterisation in section 4 and if so what were the discussions that came up.

The Minister replied that extensive discussions were held on characterisation. Proposals were submitted by the business community that explicit provision be made for characterisation. The understanding of the Economic Development Department (EDD) was that there is already emerging jurisprudence on the matter. There are different points of view in the public debate on the appropriateness of putting characterisation into the statute. Wide consultations have taken place and the Department felt that it would be inappropriate. The Department took advice from legal practitioners and a range views were expressed by the legal fraternity. The Department’s final view was that guidelines might be more appropriate than a formal characterisation requirement in the Act. Mr Patel explained to members of the public who might be unfamiliar on what characterisation means, it is if you have a prohibited act and there are consequence to that prohibited act. The very first thing the court would do in determining whether you are guilty is to characterise your actions and see whether they are consistent with prohibited acts in law. This is a natural process that takes place in judicial considerations. The danger in formalising it is that it creates a formal statutory hurdle that the Commission must cross with a range of unintended consequences.

Mr S Tleane (ANC) suggested that questions should be asked at end of each of the four areas.

The Chairperson agreed.

Excessive price
Issue raised in sections 1 and 8(3): Why has the definition for excessive price been deleted and why do the provisions for excessive price include guidelines?

Ministry Response
1. The current definition has been unhelpful in assisting with a successful finding in cases of excessive price. The record of successful prosecutions is limited. However, the problem of excessive prices charged by dominant firms is clear and present in the market. The World Bank recently estimated that markets above normal profits (excessive prices) are estimated to amount to close to 10% of GDP.
2. The proposed changes provide for the replacement of the current inadequate definition and its replacement with a provision set out in a section 8(3), containing detailed factors that must be applied by the competition authorities and the courts in determining whether a price is excessive.
3. The new section 8(3) provide for a non-exhaustive list of factors which the authorities must consider and draws on local experience and international jurisprudence.

Abuse of Buyer Power
Issue raised in 8(1)(d)(vii) and 9: Has the Minister considered the appropriateness of including trading terms in the provisions for buyer power? Does the definition of dominant firms in sex7 constitute too high a hurdle to cross for the support for SMEs to be realised?

Ministry response
1. A number of submissions noted the importance of including buyer power provisions in the law. Some of the submissions noted that price is not always the issue, but that include non-price related conditions like the length of time it takes for a buyer to pay their suppliers.

2. Based on concerns expressed by public submissions (by small businesses and one economic research agency) and views expressed by Committee members to strengthen the support for small business, we have given consideration to whether the buyer power provisions are best included in 8(1)(d) which provides dominant firms with a number of defenses to justify potential pricing policies that impede the ability of SMEs/HDPs to participate effectively.

Price discrimination
Issue raised in section 9: Why has the test for price discrimination removed the qualification of “substantially” and has the Minister considered the potential negative impacts of doing so?

Ministry response
1. The formulation of the test for price discrimination in the current Act has been interpreted by the courts in a way which means the SMEs have not been able to bring a successful case of price discrimination against dominant firms. The challenge for small business is to show that price discrimination has the effect of substantially presenting or lessening of competition, when any one small firm may have too small a market share for that test to be met.
2. The removal of the test of ‘substantially’ makes it easier to bring a case of price discrimination against a dominant firm.

Issue raised in section 10(2A): Why has a period of one year been applied for the Commission to assess and decide an exemption application and why can’t it be a shorter period? Does the new section 10(10) which provides for Regulations on exemption, open the door to forum shopping by firms seeking and exemption?

Ministry response
1. In respect of the first issue: currently, the Competition Act does not prescribe a maximum period within which an application for an exemption must be considered.

2. Exemption applications are complex and require detailed consideration. When the Commission considers an application for exemption, it must also consider the views of, and impact on, other parties in the market, which takes time.

Issue raised in section 59(1)(a) and (b): Has the Minister given consideration to BUSA’s submission on yellow cards, and why is this not an appropriate solution?

Ministry response
1. In the Bill published for public comment during December 2017, EDD proposed a removal of the so-called yellow card provisions for certain non-specific prohibited practices, so that all prohibited practices would be subject to penalties with the Tribunal and courts deciding the quantum.
2. During the Nedlac process, BUSA submitted that the so-called yellow card should be retained in the Act whilst organised labour proposed both the removal of the yellow card provisions as well as a steep increase in the penalty for a first offense.
3. Following a lengthy engagement on the BUSA proposal, Government developed a balance between the need for penalties to apply to all prohibited acts (that is, the withdrawal of the yellow-card provision) together with provisions that will provide greater clarity (guidelines). In addition, the absence of guidelines on a non-specific prohibited practice can be cited as grounds for mitigation in determining the sanction (new section 9(3)(h).

Mr S Tleane (ANC) remarked that the Ministry is going the extra mile to listen to all views expressed, not only the views from big business but also small business. There is the sense based on the actions of the Ministry that they are prepared to take other measures such developing section 5 so that it rescues legislators from the dilemma of sections 8 and 9; this is appreciated. It would be unwise for the legislation to retain the yellow card provision because the country’s constitutional democracy is centered on the ordinary people. If an ordinary citizen steals a loaf of bread in the local store and is arrested, even if that person is a first offender that person is likely to be sentenced to between 5-10 years in prison. Should people realise that our competition law treats even second offenders with kid gloves. This will not go down well with ordinary people. The yellow card provision therefore must go and the 25% penalty provision is also found in the statutes of other countries. The Ministry has done enough to accommodate all the views expressed. This provides the Committee with enough resources to engage constructively with the Bill during deliberations.

Dr Cardo said he believes the Competition Commission is frustrated in being able to win excessive pricing cases but these cases are hard to win around the world. Will the Bill not conflict the situation by deleting the definition by introducing a long list of factors that the authorities must consider. Surely this will not aid enforcement? Did EDD consider simply using the original wording from the original Act and add the test? EDD’s response mainly focused on the justification for deleting excessive pricing but there are other concerns in section 8(3) raised in the Bowmans submission. The Minister’s views would be good to know on this. Section 8(2) for instance shifts the evidentiary burden onto dominant firms when the Competition Commission has made a prima facie case of abuse of dominance. What then will constitute a prima facie case? What is a reasonable price? On past state support, what is the rationale for introducing that? On the buyer power provision, this is considered to be a major problem in our economy and this is littered through the Act. Surely this could be dealt with in section 4 and 5. Is there not a danger that we are simply legislating for the articulate here? Will this provision not result in pressure on consumer pricing? The idea floated by Genesis Analytics on utilising a code of conduct is of interest. Is EDD willing to entertain that submission? On price discrimination on reduction and threshold; he agrees with the Genesis Analytics proposal on page 26 to amend section 9(1) and to incorporate the threshold to SMEs. There seems a willingness to do so in the response document. The concerns are about the reverse onus provisions; will it not discourage dominant firms from doing business with SMEs? Would the scrapping of this provision be considered as suggested in the Genesis Analytics submission?

The Minister thanked Mr Tleane for his comments and said that the Competition Act balances many interests such as workers, consumers and producers and looks at getting effective and balanced national outcomes. These effective outcomes must lead to an inclusive economy.

On Dr Cardo’s questions on excessive pricing, Minister Patel replied that it is not the Competition Commission that is frustrated for not winning cases but society at large because we are unable to address the scourge of excessive pricing. In interactions with communities, small businesses, workplaces and the like, this issue is regularly raised. When we meet with international agencies such as the World Bank, OECD and even rating agencies, they constantly raise the challenge of the cost structure in the economy and always call for structural reform. This Act is an example of structural reform because we seek to change the structure of markets and how those structures inhibit faster growth, more inclusive growth and job creation. All South Africans need to contribute towards how to deal with excessive pricing. The Minister underlined that the key provision on excessive pricing applies only to dominant firms. Past state support does not refer only to the period of apartheid which was characterised by enormous subsidies on capital costs, which enabled companies to be set up. The owners of capital were subsidised by the state leading to prices being lower because business owners then did not take risks and put up the capital needed to have a return. On whether past state support is still relevant presently, it may or not be depending on the facts of the matter. So section 8(3)(e) does not oblige the courts to say that it will always be relevant but rather entitles the courts to take it into account to the extent that it is relevant. This is the critical feature that EDD spent a lot of time in crafting the right language. EDD believes it has succeeded in finding those balances.

On the shift in evidentiary burden envisaged in section 8(2), the prima facie case of abuse of dominance lies with the Commission and the courts will determine if this has been established - so it will depend on the facts of the matter.

The Minister referred to the question on whether a buyer power provision results in upward pressure on prices. In any instance seeking to constrain buyer power, it is conceptually possible that could have a price raising effect. This has to be balanced against two considerations. Firstly, dominant firms often capture the benefit of dominant power (that is, they get very low prices compared to small players) but fail to pass it on to consumers and essentially increase its level of profit. A company that is a dominant firm does not always have competitive pressures and it captures returns for itself and shareholders. Where this ends is small businesses end up subsidising the large shareholders. So we have to seek to find traction in the economy for small business, especially protection against abuse of market power otherwise the economy will be characterised by dominant firms. That state of affairs will not unlock the economy’s potential or stabilise the political economy. Consumer welfare should not be underestimated in competition law and policy. Our law is very interesting because in its Preamble, it is different from other competition legislation around the world. It makes it clear that the purpose of competition law is not only about consumer welfare but that the economy must be open to greater ownership by a greater number of South Africans. Also an efficient and competitive economic environment, balancing the interest of workers, owners and consumers and focused on development will benefit all South Africans. What needs to be done with buyer power is to recognise that the economy is not sufficiently expanding the productive sectors of the economy.

Dr Cardo asked if the Minister will consider stipulating a time frame as is done by the European Union (EU) which put a ten year time frame on past state support.

The Minister replied that consideration will be given to the suggestion. However, the way the Bill is crafted at the moment gives huge flexibility to both the Competition Tribunal and the Competition Appeal Court by stating that the courts must take into account all relevant factors.

Mr Tleane reminded Members that today is for the Minister to respond to the submissions made by stakeholders. There is still enough time for Members to ask questions after the Committee had gone through the Bill clause by clause.

• Structure of Markets
Issues raised in section 43: Why has the applicable test for competition in market inquiries been chosen? Why is it appropriate to have to lower the threshold for market inquiries than for other kinds of competitive abuses in the Act (adverse effect on competition (AEC) versus substantial lessening of competition (SLC)?

Ministry response
1. The proposed Bill outlines an “adverse effects on competition” test which it defines in section 43A(2) as being established when “any feature, or combination of features, of a market for goods or services impedes, restricts or distorts competition in that market”.
2. The abuse of dominance provisions in the Act codifies prohibited acts that will have sanction applied for past conduct, with penalties calculated on the past turnover of the firm concerned whilst the market inquiries are not concerned with prohibited conduct per se but with outcomes that have a negative effect on competition, and its remedies are essentially forward looking.
3. In light thereof, as a policy judgement call, the Executive decided that the threshold that should apply for a market inquiry to be held should be less onerous than for most prohibited acts.

Dr Cardo said his predominant concern is in the rationale for the Minister being able to initiate an inquiry. Why should a member of the executive have this power? Should it not be in the natural domain of the competition authorities? Does this change not run the risk of future Ministers using the Competition Commission as a research arm? In terms of the current Act, market inquiries are informal and cooperative processes that encourage a degree of openness and transparency. Will not the Competition Commission’s new extensive powers to impose drastic remedies create a much more adversarial closed process in which there is a level of defensiveness on the side of those answering to the inquiry? On regulatory jurisdiction brought up by cell phone companies around ICASA and the Competition Commission, who takes precedence? Could the Minister shed some light on how that will work in a real life scenario in terms of the Act? Is there not a danger of the Competition Commission becoming a jack of all trades, market regulator by virtue of its new powers? Does the Commission have the expertise to impose a wide array of market specific remedies now that oversight is required of the Tribunal?

The Minister replied that in the current Bill there is provision for the Minister to request that the Commission considers the reconvening of a market inquiry. The executive is accountable publicly for the exercise of public power through the electoral process. SA have regular elections where one or the other party wins a majority and that party constitutes a government that is led by the executive who effectively takes the responsibility to ensure that the policies that the electorate endorsed are implemented. When there are high levels of public disquiet about economic concentration, there are three routes to go: 1. Do nothing about it. 2. Do something by taking a policy decision such as prohibiting any firm from owning more than a certain percentage of the asset base of an industry or to account for a certain percentage of turnover which is not an approach that EDD supports. 3. The executive could say it wants to have all the facts about this industry out in the open because it is of public interest, and if the facts show an adverse effect on competition, do something about it. The facts evaluation should not be undertaken by the executive; it should be done by the regulator. Actions to be taken should not be decided by the executive either but the regulator as well. This is the essence of a democratic model of governance that we subscribe to.

On the question as to whether a future Minister could use the Competition Commission as his research arm; this amounts to planting dangerous ideas in the minds of future Ministers. There is a provision for impact studies and it is within the discretion of the Commission for considering impact studies and it would be an expensive process for a Minister to use a market inquiry simply as a research process. What the experience of market inquiry has shown is that there is no power because the best they can do is to make recommendations.

National Security
Issues raised; Approach to section 18A: Virtually all submissions acknowledged the right of the state to exercise discretion on mergers involving national public interest issues. The IBA and a few submissions proposed various changes to the wording of the current section 18A

Issue raised in section 18A(4): The IBA proposed that “Certain of the proposed factors relevant to the determination of a list of national security interests be revised or removed in order to ensure that the factors are more expressly linked to matters of national security”.

Ministry response
1. The list of factors in S 18A(4) should be broadly framed as they constitute the legislative guidance to the President, who must, on the basis of the legislative guidance, publish a list of national security interests. Should the legislature narrow the list unduly, the President’s exercise of executive responsibility for national security may be fatally undermined.
2. These factors mirror those available in some countries and in fact are more constraining that what is applicable in a number of other jurisdictions. In the United States for example, aside from a list of national security interests, the authorities may also take into account “other factors as the President or the Committee may determine to be appropriate, generally or in connection with specific review or investigation”. In UK, national security is included in the general category of public interest considerations in a merger, over which the executive has veto-rights.

Dr Cardo was concerned about the new section 18A. Could the Minister explain the rationale behind the inclusion of national security considerations? Why has it become such a major concern since December and publication of the original draft Bill? In any of the large mergers that has taken place in SA in the last five years, have national security concerns been a feature? Is there not a danger of national security considerations have an adverse effect on large transactions when we are trying desperately to lure investment into the country and the President is going abroad on an investment drive? Why in fact is national security being dealt with in competition law? Why not create a standalone statute to deal with this matter? The list of national security interests the President has to gazette has to be clear because any vagueness could deter investors. In Australia, an assessment of national interest and security only takes place if the foreign investor has the intention to acquire 50% or more of the firm. Would you consider something similar here? Would the Minister consider tightening up the definition of 'foreign acquiring firm'?

The Minister replied national security in law said that the argument six months ago would have being thinking whether it was appropriate. The public submissions made have been in favour of EDD dealing with this matter. Even the IBA submissions have acknowledged the acceptance that it is a legitimate national imperative and should be embedded in law. On what law would be the appropriate; the consensus is that it be competition or investment law, that the state should have some veto over mergers over foreign acquiring firms. There are advantages to standalone law and that of competition legislation. For standalone law, the pros are that it can go beyond mergers such as when a foreign firm is acquiring a business overlooking a national key point, in that case it falls outside the scope of competition. Competition law has a more limiting frame than a general law. The pro of putting it in competition law is that to the extent that it deals with mergers, it connects two processes. Parliament has to in future consider a broader law, at the initiation of the executive, dealing with national security and the economy as has been done by some countries.

EDD gave some thought of what the Bill should comprise of and the judgment made at the time was to focus on areas indentified in the Bill but come back to national security issues later. In the Nedlac process, argument was made for a broader public interest and for executive veto based on public interest if merger for instance could lead to massive job losses. It is of major concern because it important that it be dealt with and EDD also feels it will have no effect on investments in SA because most large transactions will have no national security implications.

Mr P Atkinson (DA) said he recalled the discussions around submissions on external parties; is there going to be any form of appeals if the President overturns any something based on national security? Will reasons be given if a merger is not approved? Or can the President rely on merely saying that it is threat to economic and social stability?

The Minister replied that the construct put forward is the separation of powers between the President and the Committee referred to in 18A. The legislature has the powers to set the test which is national security so the veto does not apply to public interest as a whole. In the UK the test applies to the whole of public interest but here the proposal is for the legislature to narrow it down to national security. Secondly, Parliament sets a series of instances of national security considerations that apply. The President is required to apply his mind and publish the list of industries that would constitute national security considerations. Secondly the President constitutes the Committee which must be drawn from Parliament and public officials and also sets up the rules the Committee must follow. The Committee then has decision making powers.

Ms C Matsimbi (ANC) asked what the views from the Commission and the Tribunal are on the proposed definition of average avoidable costs. On national security, how will the conditions put on foreign firms be monitored?

Mr Tembinkosi Bonakele, Competition Commissioner, answered that the Commission has made submissions to the Ministry on this and agrees that the matter has to be clarified with a new definition when looking at average avoidable cost. Though technical, it is better removing any ambiguity.

Judge Dennis Davis, the Judge President of the Competition Appeal Court, listed the five basic tests for predatory pricing such as marginal costs, average variable costs, and average total costs. Nobody anywhere thinks that average total costs is good enough. The economist that advised the Minister to incorporate average variable costs as the definition was right. The reason being that the question to ask is what cost yardstick gets you to the point where you can infer that this is a deliberate attempt to push a competing firm out of business because you are bigger? That is why average variable cost is needed though what we do want are elements of avoidable cost that are not avoidable.

Issues In Public Submissions Not In The Committee Feedback
Issues raised in section 1: On Average Avoidable Cost, some submissions have raised that the definition for average avoidable cost may be interpreted as including unrecoverable sunk costs which is not appropriate.

Ministry response
1. The standard interpretation of AAC is that it should not include unrecoverable costs as these cannot be avoided if production is stopped
2. Whilst the courts are likely to find the proper meaning of the definition in the Bill corresponds with this standard definition, for the avoidance of doubt, the Ministry proposes an amendment to the proposed definition to address this and more clearly provide for the concept to also refer to an average, as is intended.

Mr Tleane believed the Committee is now dealing with semantics and at the end of this process, did the Minister think the end product of this Bill will add value to the majority of South Africans? Does the Minister think that this likely to happen? The Committee must not lose sight of the real issues at stake here, which is to make a difference and improve the living conditions of the ordinary people of this country. Will our competition law become more accommodating to those who never had the opportunity previously to participate in our economy?

The Minister replied that he was confident that if the package of changes put forward is approved by Parliament, it would surely make a material and significant difference to the lives of South Africans. This is because this Bill has a specific and focused attention on small and medium enterprises and on bringing black South Africans into the greater economy. It means that no dominant firm can conduct itself in such a way as to eliminate an entire class of small businesses from participating in the greater economy. It gives the competition authority a legally sound basis to deal with economic concentration.

Institutional Capacity - Building and Resources
Issues raised: What is required to provide the necessary capacity for the Commission and Tribunal as a result of the provisions of the Bill and what are the cost implications?

Ministry response
1. Certain provisions of the Bill will require additional capacity (financial resources, staffing and access to to-level expertise). This however does not apply to all provisions.
2. Changes in section 8 and 9 will have two very different effects on resource requirements.
- On the one hand the shift in burden of proof to dominant firms (after a prima facie case has been made), should relieve the Commission of costs it would currently have to carry and decrease resource requirements.
- On the other hand, should also be balanced against the additional financial resources (through penalties imposed) that successful prosecution of cases will bring to the fiscus. Accordingly, it will not be possible to estimate the actual costs with any precision.

Dr Cardo said that there are currently 126 cartel cases under investigation and the majority of them involve very small firms. In the absence of characterisation and given the changes to section 8(9); what does the Bill mean to the Competition Commission’s cartel division, particularly for budget and human resources? Can we expect an expansion of the cartel division within the Competition Commission because of this law?

Mr Bonakele replied that the statistic of 126 is correct but that number varies from time to time because the Commission receives complaints every day. What is controversial is that majority of those investigations involve large firms. In most cases involving small firms, there is a special settlement arrangement for the small firms. It is not that they get off scot free but because of the cost implications of litigation, two spaza shops fixing prices is not the same as two large retailers doing something similar. However all cartels are a problem in the economy.

Judge Davis remarked that the thrust of this Bill is to ensure that Act contributes to economic transformation. There is great debate in competition law the world over on where do you draw the line and how far do you go using industrial policy rather than competition law. The Minister has rightly reminded him that the Preamble has always proclaimed economic transformation. This Bill should be embraced by all because it will bring change to the previously disadvantaged people in SA.

Mr Madala Masuku, Deputy Minister, in summation, said that the Minister has represented the Department well in today’s proceedings. Everyone should see this Bill as legislation that is against anti-competitive behaviour and dominance which is bad for the economy. It is a Bill to deal with the defaulters and gatekeepers in the competition environment. This Bill will defend the rules of doing business in the country.

The meeting was adjourned.


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