The Exemption Regime under the East African Community’s competition regulations

Continuing in our series about the burgeoning East African Community and its nascent antitrust regime, AAT contributing author Elizabeth Sisenda is highlighting the exemption regime of the populous (146 million inhabitants) and increasingly wealthy ($150 billion GDP) region.  (For more background on the EAC regime, start here.)

Emerging markets or developing economies only recently adopted competition law and policy as an exclusive legal and economic tool for regulating markets. In previous years, restrictive trade practices were mostly handled under government price control departments or monopolies commissions. Most of the competition legislation and regulations in developing economies were promulgated within the last decade.

EAC: regulations & market conditions

The EAC, in particular, enacted its competition legislation in 2006 and has been setting up the mechanisms for its enforcement to-date through capacity building and mobilizing resources. In 2010, the EAC subsequently enacted competition regulations to assist in implementing the Act. One of the main challenges that has been encountered in the EAC with regards to the implementation of competition law and policy has been the unique economic and market structure of the member states.

The majority of the EAC member states are economies that are transitioning from state-regulation to liberalization. Consequently, several key sectors of these economies are still under quasi-governmental regulation by independent agencies established by the legislature, or explicitly protected by executive policy or subsidiary legislation.

As a result of the progressive liberalization of EAC economies, private entities have been building capacity to supply sectors of the economy where the government once had a monopolistic stake. These private firms, both local and multinational, have faced several challenges in meeting market requirements in terms of capacity. Consequently, the governments of these economies have sometimes adopted a protectionist approach for key sectors of their economies in the public interest. As much as this has often contributed to the substantial lessening of competition in the affected sectors to the detriment of consumers, these regulatory measures have been upheld by the respective governments on the grounds of national interest. The EAC, however, has been very cautious in its provisions for exemptions within the common market that could contribute to the substantial lessening of competition.

The EAC exemptions

Section 6 (3) of the EAC Competition Act provides that the Competition Authority may exempt a category of concerted practices by firms or parties, provided the concerted practice is limited to objectives which lead to an improvement of production or distribution, and whose beneficial effects, in the opinion of the Authority, outweigh its negative effects on competition. However, any exemptions granted by the Authority under this sub-section shall be applicable only if the combined market share of the parties involved in the concerted practice does not exceed 20% of the relevant market, and the agreement relating to the concerted practice does not contain any restrictive trade practice expressly prohibited under the Act. Thus, it may be contended that this exemption does not contribute to the substantial lessening of competition because it only applies to small or medium firms without any hint of market power, having a maximum market share of 10% each. Furthermore, the net effect of the concerted practice is beneficial to consumer welfare by improving access to goods or services. It also gives leeway for small producers to produce more efficiently, thus improving market conditions.

Low shares = more permissible conduct

The Authority under section 6 (1) further allows competitors whose combined market share does not exceed 10% of the relevant market to apply quantitative restraints on investment or input, output or sales, and engage in concerted practices that restrict the movement of goods within the common market. However, such conduct is expressly forbidden by the Act in the case of firms with larger market share. It may be contended that this particular provision is aimed at enabling small and medium enterprises to have a strategic opportunity to operate in an otherwise large and well-exploited market. It also does not limit competition because the firms in question have very little market share. Instead this exemption aims at protecting the competitiveness of the market by ensuring that smaller firms are not driven out of the market by larger, more efficient firms.

R&D and so on

Under section 6 (2) of the Act, the Authority also exempts 3 categories of conduct, namely: joint research and development, specialization of production or distribution and standardization of products or services, by firms whose combined market share does not exceed 20% of the relevant market. This exemption requires that the agreement relating to these categories of concerted practices should not contain any of the expressly prohibited anti-competitive practices under the Act. The Authority may contend that this exemption promotes consumer welfare by enabling smaller firms to collaborate in improving the quality of products or services in the relevant market through standardization and specialization efforts. It also enables smaller firms to participate in innovation through a collaborative effort. Most firms with this extent of combined market share would lack the resources or capacity on their own to engage in these activities that promote consumer welfare and efficiency in the relevant market.

Get permission first!

According to section 7 of the Act, any firm or person must first apply to the Authority, in accordance with the Regulations, for clearance to engage in any concerted practice. The Authority shall thereafter communicate its decision to the applicant within 45 days of receipt of the application. However, if the Authority does not communicate its decision in the specified duration, then the permission for the concerted practice shall be deemed to have been granted. Under the same section, it is an offence, punishable by a fine of not more than $10 000, to omit to seek the permission of the Authority to engage in a concerted practice. The Regulations under section 16 further provide that the undertaking seeking an exemption must pay the prescribed fees, and provide a detailed statement setting out the reasons why the concerted practice should be permitted for consideration to the Authority.

Conclusion

The EAC exemptions are therefore permitted in the common market to exercise a form of economic regulation for the purpose of ensuring that small and medium enterprises can effectively compete in a liberalized market without being driven out by firms with larger market share. In this way, the public interest is promoted to ensure that national or regional interests such as employment, allocative efficiency, specialization agreements and international competitiveness of domestic firms are taken into account. Applying exemptions does not necessarily imply the weakening of competition law enforcement. National economic policy considerations such as the maintenance and promotion of exports, changing productive capacity to stop decline in a particular industry, or maintaining stability in a particular industry are some of the policy considerations that motivate the application of exemptions. However, exemptions must be applied with caution because their application in one sector can perpetuate or induce distortions that can affect economic efficiency.