Public-Interest Considerations in Competition Policy Take Center Stage… Once Again

By Michael Currie

An increasing trend in South Africa’s competition regulatory environment is the emphasis that the competition authorities and policy makers are placing on what is known as public-interest provisions. While we have authored a number of articles that have been published on African Antitrust highlighting our concern and disapproval of an overly-zealous reliance on public interest provisions, especially in the framework of merger control, the Competition Authorities have become increasingly bold in shaping there policies around public interest and industrial policy agendas.

In this article, we discuss the Vodacom/Neotel merger as well as COSATU’s response to the announcement that market inquiry will be conducted in the grocery retail sector, as these two developments personify the influence that Minister Patel has over the SACC’s policy and the very clear industrial policy agenda’s that Patel is using the SACC to promote.

In the past number of years in South Africa, public interest considerations have been no more prevalent than in merger control. While, to date, there has not been a merger prohibited based purely on public interest grounds, there have been a number of mergers which, despite no finding having been made that such a merger will lessen competition, have been approved subject to significantly onerous conditions, based on public-interest grounds.

The Law

The South African Competition Act, 89 of 1998 (“Competition Act”) requires that the competition authorities consider the impact of a merger on certain public interest grounds, which are expressly listed in Section 12A of the Competition Act.

We have, on African Antitrust,[1] consistently stressed the inappropriateness of imposing burdensome conditions on mergers relating to public interest considerations, and raised the legitimate concerns that the South African Competition Authorities are increasingly being utilised as a mechanism by which to promote the government’s industrial policies.

Furthermore, conditions have been imposed on mergers without any substantial assessment done on balancing potential short term losses with long term gains.

Be that as it may, the conditions that have most commonly been imposed on mergers, based on public interest grounds, relates to employment. The impact of a merger on employment is one of the express public interest considerations that is contained in Section 12A.

What is deeply concerning, however, that as we will discuss below, the SACC has recently broadened the scope of public interest considerations to extend well past those grounds listed in Section 12A, effectively ensuring that when it comes to evaluating a merger on public interest grounds, the SACC is effectively, unrestricted.

Vodacom

Vodacom is South Africa’s largest mobile service provider and merging with Neotel would allow Vodacom to fast-track its rollout of a fixed line network.  The merger still needs to be approved by the South African Competition Tribunal (“SACT”).

On 30 June 2015, the SACC made recommendations to the SACT to approve the merger between Vodacom and Neotel, subject to stringent conditions.

The conditions recommended to be imposed on this merger will certainly ring alarm bells for all entities (especially large businesses which have a BEE shareholding) who are considering undertaking a merger in South Africa.

The SACC, who is of the view that the merger will substantially lessen competition in the market, has recommended that the following conditions to be imposed on the merger:

• There be no retrenchments of Neotel employees;
• That Vodacom invest R10 billion (approximately $1 billion) into data, connectivity and fixed line infrastructure; and
• That Vodacom’s Black Economic Empowerment (“BEE”) shareholding is increased by R1.9 billion (the value of Neotel) multiplied by 19%.

The SACC’s recommendation that Vodacom’s BEE shareholding has to increase to a certain value is considerably worrisome, as it is very difficult, in our view, to justify the imposition of such a condition, in terms of the law or in terms of any social policy objective.

As noted above, the competition authorities are obliged, in terms of the Competition Act, to consider the impact that a merger may have on a number of public interest grounds. In terms of the Competition Act, the SACC and SACT, when evaluating a merger, must consider the impact that the merger will have on:

• “A particular industry sector or region;
• Employment;
• The ability of small businesses, or firms controlled or owned by historically disadvantaged persons, to become competitive; and
• The ability of national industries to compete in international markets.”[2]

Simply put, there is in our view, no justifiable legal basis, upon which to impose a condition relating to the BEE shareholding as proposed by the SACC in this merger.

A Disconcerting Trend Away from Law & Economics

Regardless of whether the merging parties accept the SACC’s recommended conditions, the competition authorities are increasingly using conditions imposed in previous mergers, as precedent to justify and become increasingly ambitious when considering conditions to be imposed on any prospective transaction. Thus, even if the conditions imposed in this particular merger are not overly-burdensome on the parties themselves, it is most likely that the conditions, should they be approved by the SACT, will set new precedent for any future transactions.

The competition authorities are inadvertently creating a ‘threshold’ of conditions. This is evident by the way in which the Commission seems to default to a recommendation of a two-to-three year moratorium on retrenchments, whenever there is a concern arising or pressure placed on the SACC relating to retrenchments.

It is well noted that timing is of critical importance when it comes to the success of a implementing a merger. The fact that the SACC has quite brazenly taken upon itself, the duty to foster and advance the government’s socio-economic and industrial policies no doubt leads to greater uncertainty as to the nature of the conditions that may be imposed on a proposed merger.

In this regard it is worth noting that the SACC has published draft guidelines (currently for public comment) on the Assessment of Public Interest Provisions on Mergers (the “Guidelines”). While the Guidelines are still in draft form, like most of the SACC’s guidelines published to date, it allow for a significant degree of discretion on the part of the SACC.

The Guidelines were an attempt to provide greater clarity and certainty when it comes to assessing the impact that a merger may have on the public interest grounds listed in Section 12A of the Competition Act, however, the Guidelines do not provide guidance with respect to assessing the impact that a merger may have on grounds not listed in Section 12A.

Hence, despite the Guidelines seeking to add clarity and certainty to the issue, the SACC’s expansion of public-interest grounds has for all practical purposes brought us back to square one.

Another Market Inquiry: Grocery/Retail

As mentioned above, public-interest considerations have now been used as the catalyst to drive other competition objectives; most notably, the recently announced market inquiry into the grocery retail sector.

It has been our suspicion from the outset that the market inquiry into the retail sector is driven by an underlying desire to promote Patel’s industrial policies, rather than address any or understand the structure of the market to ensure more competitive market is advanced.

The response by one of South Africa’s largest trade unions, COSATU, has publicly proclaimed its support for the market inquiry, and the reasons advanced in support of the inquiry, very much confirms our suspicions.

In an article published on their website, COSATU has expressed a number of reasons why they support the inquiry. Unsurprisingly, few of the reasons put forward relate to a desire to better understand the functioning of the market from a competition perspective. Much like Mr Patel, the Minister of Economic Development, COSATU has viewed the market inquiry from a socio-economic paradigm as opposed to a competition one.

While the grocery retail market share is largely attributed to the four biggest retailers in the South Africa, the broad ambit of the inquiry coupled with Patel’s comments made in Parliament in which he stated that the retail sector was a great entry point for black South Africans should leave little doubt in any objective observer’s mind that the market inquiry into the grocery sector is steeped in promoting governments industrial policies through the channels of competition regulation.

It should also come as no surprise that Patel was previously a labour activist and previously headed the Southern African Clothing and Textile Workers Union (SACTWU).

COSATU has expressed its support for the market inquiry, largely because COSATU is of the view that the market inquiry will address a number of socio-economic concerns. The following statement made by COSATU clearly illustrates as much:

“It should also be noted that the grocery retail sector is characterized by precarious and atypical employment. Most workers in the sector do not enjoy their basic labour-related socio-economic rights. Negative practices such as labour broking, outsourcing, casualisation and low-pay are prevalent in the sector. COSATU strongly believes that this inquiry is essential for addressing the above-mentioned socio-economic trends.”[3]

The preamble to the Competition Act recognises that Apartheid created a certain concentration of market shares and that South Africa needs a greater spread of ownership. In no way, however, can competition law be used as policy to address, replace and undermine legislation and institutions designed specifically to address identified concerns. In other words, the claim made by COSATU that the market inquiry will address negative labour practices, shows a fundamental flaw in understanding the purpose and nature of competition law and policy.

South Africa has extensive labour legislation and a number of institutions that have been established to deal with negative labour practices.

Placing the responsibility of protecting our labour workforce beyond the scope of the Competition Act, would undermine the efforts of the legislature as well as the institutions entrusted in promoting and enforcing fair labour practices.

Furthermore, even if the market inquiry does in one way or another lead to a greater number of smaller independent retailers, it is difficult to foresee how this will benefit labour conditions. Large retailers’ employees generally belong to trade unions who can act as a voice on their behalf. Employees of small retailers have far less bargaining power.

While it may be that COSATU, as a trade union, need not be too concerned with competition issues as such, trade unions in general have played have had an increasingly significant influence on competition law policy.

It is imperative that an institution such as the SACC remain independent and impartial, yet the SACC’s willingness to align itself with the policies Patel is championing for undoubtedly risks the independence, proper functioning and impartiality of the SACC — a risk the SACC must ensure it protects itself against.

[1] See here, here, and here.

[2] Section 12A(3) of the Competition Act, 89 of 1998.

[3] http://www.cosatu.org.za/show.php?ID=10618#sthash.XLWeNExH.dpuf