Address to Competition Commission Public Sector Consultative Forum by deputy Minister Dr. Rob Davies.

Published: 16 February 2009
Sheraton Hotel, Pretoria 13 February 2009 By Dr. Rob Davies, Deputy Minister of Trade and Industry. Directors General of Government Departments; Commissioner Shan Ramburuth of the Competition Commission; Chief Executive Officers of public entities and State Owned Enterprises here present; Other representatives of state organs; Ladies and Gentlemen, It is a great pleasure to have been invited to speak at this important Consultative Forum. A dialogue between the Competition Authorities, sector regulators and others responsible for policy and regulation in the public sector, is something that has long been identified as necessary in our quest to promote a more competitive economic environment in our country. I have been asked to speak to the theme, “Strengthening the Competition Regime and its link with Industrial Policy”, and I will particularly focus on some of the issues that have informed, and will arise from the most recent amendments to the Competition Act. I suppose that all of us know that we inherited from apartheid and colonialism a highly concentrated and centralized economy. The origins of this date back to the structure of ownership that was established in the mining industry at the end of the nineteenth century, and which became extended throughout the entire economy during the period of colonialism and apartheid. According to the Mouton Commission which reported in 1976, two thirds of the turnover in the manufacturing industry at that time was controlled by a mere 5% of firms. At the end of the apartheid era, the vast bulk of economic activity in this country was dominated and controlled by half a dozen conglomerates. We also inherited from apartheid a system of Competition law and regulation that can only be described as feeble. The 1955 Regulation of Monopolistic Conditions Act, despite its pretentious title, did nothing of the kind. It in fact gave carte blanche to the very rapid process of centralization and conglomerate formation that took place during the 1960s and 1970s. The 1979 Maintenance and Promotion Competition Act, likewise had a negligible impact on the consolidation of conglomerate domination during the late apartheid period. This then was the background against which our democratically elected government set out to introduce a new system of competition regulation, brought into being by the passage in 1998 of the Competition Act. The 1998 Competition Act put in place a framework which seeks to act not against big companies as such, but rather against abusive conduct and practices by companies occupying positions of dominance in industries or sectors. Such abuse can include collusion by dominant companies to limit, restrict or prevent entry into markets by new players, to set prices in ways that are detrimental or unfair either to consumers or customers in downstream industries, or to act in other ways against the broader public interest. Very few practices are banned per se. Most collusive or restricted practices are subject to the test of creating harm or damage to consumers or potential competitors and have to be weighed against other potential benefits to the broader economic well being of the country. In other words, the determination of abuse and harmful anti-competitive conduct is the product of a process of inquiry and investigation. To give effect to this, the 1998 Act created new institutions: the Competition Commission, the Competition Tribunal and the Competition Appeal Court with defined responsibilities to investigate, adjudicate and rule on matters covered by the Act. The Competition authorities were also given the responsibility of merger control, requiring them to inquire into the desirability or otherwise of mergers above defined thresholds and to approve, disapprove or set conditions for such mergers. Despite the new law and despite all the other structural changes that have taken place after 14 years of democracy and the pressures of globalization, ownership patterns in our economy are still characterized by high levels of concentration and centralization. This is the conclusion of three members of the Competition Commission, writing in their individual capacities, in the most recent addition of the journal, “New Agenda”. The same authors conclude and I quote; “… in terms of structure and behaviour, changes have been modest since 1994”. After a relatively slow but steady start, we are now seeing the Competition Authorities becoming much more active, and indeed proactive, in dealing with a host of competition issues. The active promotion of a more competitive economic environment is fundamental to our objectives in both Industrial Policy and the protection of consumers - particularly low income consumers. The persistence of various forms of anti-competitive behaviour are undermining the ability of our economy to grow jobs. Other manifestations are contributing to poverty by raising the prices of goods – including those for basic needs. We need, therefore, in my view, to support and encourage an activist stance by the Competition authorities. We need to do this for a number of reasons. First, an activist stance by the Competition authorities is necessary to enable us to realize some of the important objectives set by our National Industrial Policy Framework. Our Industrial Policy Action Plan has identified as priority sectors for growth, employment and export, a number of downstream economic activities located in various sectors. They include capital goods and metal fabrications industries, the auto industry, downstream chemicals and a number of agro processing sectors. Many of these draw inputs from capital intensive and relatively concentrated upstream manufacturing sectors, some of which indeed were the beneficiaries of industrial policy interventions by the apartheid government in the past. The investigation carried out by the Competition authorities into steel pricing, highlighted the way in which pricing practices of the dominant steel manufacturer in this country were having detrimental effects on downstream customers. These include customers in all the sectors I have mentioned, including agro processing, some sectors which are significantly affected by the price of steel cans. It has, indeed, been estimated that some of our industrial customers using certain steel products suffer as much as a 30% price disadvantage compared to their counterparts in China. Similar pricing policies by dominant firms in other strategic upstream industries also appear to be having detrimental effects on downstream companies engaged in infrastructure projects or operating in IPAP priority sectors. Advancing our key Industrial Policy objective of promoting labour absorbing, downstream industries therefore requires that we decisively act against collusive practices which prevent our companies from competing effectively against those from other countries where such practices do not prevail. A second reason why we need activist Competition authorities is because we know that there are instances where consumers are disadvantaged by collusive price fixing. The case of bread price fixing investigated and adjudicated on by the Competition authorities, revealed an instance of outrageous preying on the poor by the rich and the powerful. There is a phenomenon, which we are beginning to notice, that when the price of petrol goes up prices of many other things rapidly follow, justified by the need to pass on increased fuel costs to customers. Yet when the price of fuel goes down, we find the prices of all these other commodities come down much more slowly, if at all. The bread price investigation highlighted the existence of collusive pricing practices detrimental to low income people at a time when prices generally were rising. Now that the price of fuel has come down, we need to make sure that there are not collusive pricing practices that prevent low income people from benefiting from falling prices of necessities. A related issue that emerged from the bread price enquiry, was a strong sense of public indignation at a situation in which company directors responsible for decisions resulting in collusive price fixing were not personally subject to any penalty because it was the corporate entity - the company - that was found guilty. The obvious inequity of a situation in which a poor person stealing a loaf of bread could be subject to a criminal penalty, whereas a company director involved in a decision to in effect steal from poor people by unjustly raising the price of bread would not, was the subject of much commentary and critique of our competition law. Both the Industrial Policy and the Consumer issues lay behind the amendments to the Competition Act put forward in the 2008 Competition Amendment Bill. That Bill was sent back by the President for reconsideration of certain matters by Parliament which has reaffirmed its original position. We are hopeful that these procedural matters will be resolved soon and that the 2008 Amendment Bill will become law before long. The 2008 Amendment Bill deals with the following subjects; complex monopolies, market enquiries, personal liability, a leniency policy and the question of concurrent jurisdiction between the Competition authorities and other regulators. With respect to the issue of Complex Monopolies, enquires by the Competition Commission had revealed instances in highly concentrated sectors or industries of parallel conduct leading to anti-competitive outcomes without there necessarily being evidence of overt prior discussion or agreement. Such parallel conduct in situations of complex monopoly could have negative implications no less severe than those arising from overt collusion. The 2008 Bill provides that a complex monopoly can subsist in a market for particular goods and services, if at least 75% of the goods and services in that market are supplied by 5 or fewer firms. If 2 or more firms in that market conduct themselves in a conscious parallel manner or in a coordinated fashion, without there necessarily being an agreement among themselves and the conduct has the effect of substantially preventing or lessening competition in the market, the Competition Commission has the power to conduct an investigation without necessarily having received a complaint. After conducting an investigation, the Commission may apply to the Competition Tribunal for a declaratory order against two or more firms, if any one of them have engaged in complex monopoly conduct and that conduct has resulted in raising entry barriers to that market or excluding firms from that market, or a refusal to supply firms within that market. The Tribunal after conducting the hearing may then make an order reasonably requiring, prohibiting or setting conditions on particular conduct by a firm. The provisions in the Amendment Bill on Market Enquiry provide for the detection and addressing of conditions in the market for particular goods and services or any behaviour within the market that tends to prevent, restrict, or distort competition without necessarily receiving a complaint or referring to the conduct or activities of a particular named firm. A Market Enquiry is an exploratory exercise intended to identify competition deficiencies. It serves as a tool to enable the Commission to play a more active role in investigating markets. The 2008 Bill improves Market Enquiry provisions by allowing the Commission to proactively investigate markets and increase market transparency by enquiring into issues of impediments to competition, which result in consumer harm. The Competition Commission may initiate its own Market Enquiries or it can respond to a request from the Minister of Trade and Industry. Upon completing a Market Enquiry, the Commission must publish a report in the Gazette and submit that report to the Minister, with or without any recommendations, which may include recommendations for new or amended policy, legislation, regulation or recommendations to other regulatory authorities. The Personal Liability provision in the 2008 Amendment Bill introduces for the first time a criminal sanction against individuals within companies found guilty of causing a firm to engage in price fixing, output restriction, market allocation or collusive tendering. This provision is intended to respond to the outcry against impunity by individuals in companies found to be involved in collusive price fixing. This provision is intended to provide an effective deterrent against cartel activities as well. Specifically the Amendment Bill provides that a person commits an offense if, while being a director of a firm or engaged or purporting to be engaged by a firm in a position of management authority, he or she causes the firm to engage in a prohibited practice or knowingly acquiesced in the firm being involved in such a prohibited practice. An individual may then face up to 10 years imprisonment, or pay a fine of R500 000 or both. This severe penalty is intended to serve as a signal that harmful anti-competitive activities will not be tolerated, and those who are involved will be severely punished. This provision however, needs to be read together with the Corporate Leniency Policy. This is a tool to detect cartel activity through encouraging individuals involved to come forward and disclose information to the Competition Commission in return for promises of leniency. The Bill provides for the Competition Commission to certify, with or without conditions, that a particular respondent or individual is deserving of leniency in the circumstances and the Commission may then refer its complaint to the Tribunal with a rider that an individual has been identified as deserving of leniency. The final major issue that the 2008 Amendment Bill deals with, is a matter no doubt of importance for today’s consultation, the issue of Concurrent Jurisdiction. This has been a rather thorny matter ever since the passage of the original Competition Act in 1998. The 1998 Act provided for the exemption of a sector from the purview of the Competition Authorities if that sector were subject to regulation by sector regulators. The clear intention here was that the sector regulators would also deal with the matters of competition. In the famous raisin court case, however, the court ruled that because there was a sector regulator dealing with matters of standards and quality assurance, the Competition authorities had no jurisdiction in that sector. This led to an amendment of the Competition Act to provide that the Competition authorities could trump sector regulators on matters of competition with the exception of those operating in the financial sector. This regime has now been recognized as having turned the pendulum too far in the other direction, and the 2008 Amendment Bill seeks to improve the interface between the Competition Authorities and sector regulators by demarcating distinct responsibilities and providing a framework for cooperation. The Bill thus seeks to clarify the respective roles of Competition authorities and other regulatory authorities. It provides for “other regulatory authorities” to exercise primary authority to establish conditions within the industry over which they have regulatory power, while giving the Competition authorities primary authority to detect and investigate alleged prohibited practices under Competition law as well as exercise powers of merger control. The Bill further provides for the details of the exercise of concurrent jurisdiction to be defined by way of an agreement between the regulatory authority and the Competition authorities. The implications of this are that the Competition Act prevails over all other legislation affecting competition matters, but that there is now a more effective, practical way in which the Competition Authorities will relate to sector regulators. I am sure that unpacking and discussing this aspect of the new Competition Amendment Bill will be a major subject of discussion at this consultation. Let me just say from the Ministry’s side that we are committed to supporting the Competition authorities in playing a more active and engaged role in combating collusive and anti-competitive behaviour. From an Industrial Policy standpoint, as I have already indicated, such behaviour threatens to impede the development of downstream more labour intensive industrial activities that we are seeking to prioritize. At worst it can place such sectors at an extreme competitive disadvantage compared to foreign competitors. In such circumstances, local producers will be unable to compete with imports let alone establish a presence as exporters. At the same time we have seen consumers, and particularly low income consumers, significantly disadvantaged by collusive conduct on the part of large and supposedly reputable companies. We can as a country no longer afford to tolerate such practices. We will not hesitate as a government to take any further steps that may be needed in the course of time, to amend and strengthen our Competition legislation. I hope that this particular consultation will contribute to creating a cooperative relationship between the Competition Authorities and sector regulators. I wish all participants a fruitful and informative engagement during the course of today. I thank you for your attention.