Are the 2017 PPPFA Regulations Misaligned? Can Competition Law Assist?

By Mitchell Brooks, AAT guest author

If one looks at the 2011 Preferential Procurement Policy Framework Act (PPPFA) Regulations, the Regulations provide two ratios to be used in determining a tender award. The two point systems are the 90/10 and the 80/20 ratios. The 90/10 ratio indicates that 90 out of 100 points are to be awarded based on the price of the bidder and 10 out of 100 points are to be awarded based on “special goals”[1]. Since the commencement of the 2011 PPPFA Regulations, special goals have primarily been allotted to BEE status levels.

slide_1Turning to the 2017 PPPFA Regulations, in which the above-mentioned ratios have been maintained, regulation 4 provides for pre-qualification criteria for preferential procurement. Interestingly, according to regulation 4(1)(a) of the 2017 Regulations, an organ of state may stipulate a minimum B-BBEE status level for tenderers. Furthermore, regulation 4(2) deems any tender in contravention of pre-qualification criteria unacceptable. In essence, the pool of bidders can be reduced significantly by requiring all bidders to possess as a B-BBEE Contribution level 1 despite primary legislation only allowing B-BBEE to be taken into account at a maximum threshold of 80/20. Therefore, it is hard to understand why the allocation of points to special goals is capped at 20 points whereas there is no maximum level allocated to the minimum pre-qualification criteria. Arguably, pre-qualification criteria in this regard are open to abuse in oligopolistic markets with few suppliers.

If one views this legal framework holistically, it may seem that the points allocation in the PPPFA is capable of being somewhat circumvented. In other words, the importance attached to a tenderer’s B-BBEE status level may be increased immensely if a level 1 or 2 B-BBEE status level is stipulated as a minimum pre-qualification criterion. On the other side of the coin, the significance of price may be undermined, rendering a competitive tendering process ineffective in securing value-for-money. This suggests the 2017 Regulations are misaligned in that the purpose of the 80/20 split is unclear when read with regulation 4.

In an effort to restrain pre-qualification criteria restricting a large pool of bidders, a bidder may ask whether a dominant public entity, for example, a monopolistic entity such as Eskom, would contravene section 8(c) of the Competition Act if the pre-qualification B-BBEE status level is set too high. Does it qualify as an exclusionary act which is likely to affect competition in the particular market? This falls part of a larger looming question, at what point does pre-qualification criteria by dominant parastatals become anticompetitive in terms of the Competition Act and how will Competition Law interact with procurement? Section 217 of the Constitution of South Africa does not provide a clear answer but it does suggest that competition may have an important role to play going forward.

[1] section 2(1)(e) of the Preferential Procurement Policy Framework Act Regulations 2011

[2] Competition Act 89 of 1998

South African Airways (SAA) to pay $80 million in civil damages to competitor Comair for abuse of dominance

-by Michael-James Currie

currie2

A second civil damages award was recently imposed on South Africa’s national airline carrier, SAA, following on from the Competition Tribunal’s finding that SAA had engaged in an abuse of dominance.   The award in favour of Comair, comes after the first ever successful follow-on civil damages claim in South Africa (as a result of competition law violation) which related to Nationwide’s civil claim against SAA.  In the Nationwide matter, the High Court awarded , (in August 2016) damages to Nationwide in the amount of R325 million.   Comair claim for damages was based on the same cause of action as Nationwide’s claim. The High Court, however, awarded damages in favour of Comair of R554 million plus interest bring the total award to over a R1 billion (or about US$ 80 million).

Both damages cases entailed lengthy proceedings as Nationwide (and subsequently Comair) launched complaints, in respect of SAA’s abuse of dominance, to the South African Competition Commission as far back as 2003. Importantly, in terms of South Africa’s legislative framework, a complainant may only institute a civil damages claim based on a breach of the South African Competition Act if there has been an adverse finding either by the Competition Tribunal or the Competition Appeal Court.

The outcome of the High Court case is significant as the combined civil damages (both Nationwide’s and Comair’s) together with the administrative penalties imposed by the Competition Tribunal (in 2006) amounts total liability for SA is in excess of R1.5 billion.

Says John Oxenham, “Although the South African competition regime has been in place for more than 16 years and there have been a number of adverse findings against respondents by the competition authorities, have only been a limited number of civil follow-on damages cases.” This is largely due to the substantial difficulties (or perceived difficulties) a plaintiff faces in trying to quantify the damages, he believes. Follow-on damages claims for breaches of competition legislation are notoriously difficult to prove not only in South Africa but in most jurisdictions.

The recent Nationwide and Comair judgments, however, may pave the way and provide some important guidance to potential plaintiffs who are contemplating pursuing civil redress against firms which have engaged in anti-competitive conduct (including cartel conduct).

In this regard, the South African National Roads Agency (SANRAL) announced last year that it has also instituted a civil damages claim of approximately R700 million against a number of construction firms who had had been found by the Competition Authorities to have engaged in cartel conduct.  The SANRAL case will be the first damages claim, if successful, by a ‘customer’ against a respondent who has contravened the Competition Act in relation to cartel conduct (and not abuse of dominance as in the SAA case).

saaplaceThe only previous civil damages claim was in the form of a class action instituted by bread distributors and consumers in relation to cartel conduct involving plant bakeries. Although the class was ultimately successful in their certification application, the case provides no further guidance as to the quantification of damages as the respective parties have either settled their case or remain in settlement negotiations.

As the development of civil redress in South Africa develops in relation to cartel conduct, it will be particularly interesting to evaluate what the effect of civil damages may have on the Competition Commission’s Corporate Leniency Policy. The Commission’s leniency policy only offers immunity to a respondent who is “first through the door” from an administrative penalty. It does not extend immunity to a whistle-blower for civil damages or criminal liability. It is well understood that the Corporate Leniency Policy has been one of the Commission’s most effective mechanisms in identifying and successfully prosecuting firms which have engaged in cartel conduct.

In relation to the recent civil damages cases, John Oxenham, a Primerio director, notes that “Parties will have to strike a delicate balance whether to approach the Competition Commission for purposes of obtaining immunity from an administrative penalty, which is no doubt made all the more difficult following the R1.5 billion administrative penalty levied on ArcelorMittal in 2016 (the largest administrative penalty imposed in South Africa to date) will no doubt be of some import given that most of the conduct related to cartel conduct“.

Accordingly, in light of the introduction of criminal liability as of May 2016, the imposition of record administrative penalties, the risk substantial follow-on civil damages and the development of class action litigation, South Africa is now evermore a rather treacherous terrain for firms and their directors.

SOUTH AFRICA: ZUMA’S STATE OF THE NATION ADDRESS MAY BE HINT AT INTRODUCTION OF COMPLEX MONOPOLY PROVISIONS

While the media headlines are largely filled with the disruptions that took place at the State of the Nation Address (SONA) by President Jacob Zuma on 9 February 2017, the President made an important remark which, if true, may have a significant impact on competition law in South Africa, particular in relation to abuse of dominance cases.

In this regard, the President stated that:

During this year, the Department of Economic Development will bring legislation to Cabinet that will seek to amend the Competition Act. It will among others address the need to have a more inclusive economy and to de-concentrate the high levels of ownership and control we see in many sectors. We will then table the legislation for consideration by parliament.

In this way, we seek to open up the economy to new players, give black South Africans opportunities in the economy and indeed help to make the economy more dynamic, competitive and inclusive. This is our vision of radical economic transformation.”

Patel talksNeither the President nor Minister Patel have given any further clarity as to the proposed legislative amendments other than Patel’s remarks early in January 2017 in which he stated that:

The review covers areas such as the efficacy of the administration of the Competition Act, procedural aspects in the investigation and prosecution of offences, matters relating to abuse of dominance, more effective investigations against cartels and the current public interest provisions of the act.

Says John Oxenham, a competition attorney who has closely followed the legislative and policy developments, “despite the broad non-committal remarks by Minister Patel, it is clear that the Minister is zealous in having the ‘complex monopoly’ provisions brought into force to address in order to address, what the Minister perceives to be, significant abuse of dominance in certain concentrated markets.”

In terms of the provisions, as currently drafted, where five or less firms have 75% market share in the same market, a firm could be found to have engaged in prohibited conduct if any two or more of those firms collectively act in a parallel manner which has the effect of lessening competition in the market (i.e. by creating barriers to entry, charging excessive prices or exclusive dealing and “other market characteristics which indicate coordinated behavior”).

white-collar-crimeDespite having been promulgated in 2009, the ‘complex monopoly’ provisions have not yet been brought into effect largely due to the concerns raised as to how these provisions will be enforced, says Primerio Ltd.’s Andreas Stargard: “It is noteworthy that the introduction of criminal liability for directors and persons with management authority who engage in cartel conduct was also promulgated in 2009, but surprised most (including the Competition Authorities) when it was quite unexpectedly brought into force in 2016.”

Minister Patel was no doubt a key driving force behind the introduction of criminal liability and it would, therefore, not be surprising if the complex monopoly provisions are brought into force with equal swiftness in 2017.

Kenya: Competition Amendment Bill to bring about Radical changes to the Act

kenyaThe Competition Authority of Kenya (CAK) has recently announced that a number of proposed amendments to the Competition Act are currently pending before the National Assembly for consideration and approval.

The proposed amendments are generally aimed at increasing sanctions and CAK’s authority to detect and prosecute anti-competitive behaviour as well as to ensure that parties provide the CAK with adequate and correct information to properly assess merger notifications.

  • Anti-competitive conduct

Importantly, the amendments seek to introduce a financial threshold for respondents who are found to have engaged in abuse of dominance practices. Currently, there is no administrative penalty for a abuse of dominance.

The amendments further include an administrative cap of 10% for engaging in cartel conduct.

Interestingly, the amendments also seek to introduce measures to protect suppliers from buying groups. Unlike the South African Competition Act which specifically precludes competitors from entering into an agreement or concerted practice which amounts to the fixing of a purchase price or trading condition, Kenya’s Competition Act does not have a similar express prohibition.

It is also not clear, at this stage, what the anti competitive effect of buying groups is having in Kenya. The CAK has, however, indicated that suppliers are often left short-changed as a result of buying groups not paying the suppliers. Whether this has or may have a foreclosure effect on suppliers is noy yet apparent.

In any event, the proposed solution is likely to be resolved through the development of guidelines rather than an amendment to the Act.

  • Mergers

A clear indication that the CAK is increasing its efforts to ensure that they are not merely a regulatory body which rubber stamps merger approvals is the proposed introduction of penalties for merging parties who submit incorrect information to the CAK during a merger filing.

In addition, in terms of Section 47 of the Competition Act, the CAK may revoke their decision to approve or conditionally approve a merger if the merger approval was granted based on materially incorrect or false information provided during the notification and/or the merger is implemented in contravention of any merger approval related conditions.  In terms of the amendments, the CAK is proposing the introduction of criminal liability for merging parties who implement a merger despite the CAK having revoked the merger.

Merging parties will, therefore, need to ensure that they adequately prepare and submit comprehensive merger filings.

As to the definition of what constitutes a “merger” for purposes of the Competition Act, the proposed amendments seek to clarify that a change of control can take place by the acquisition of assets.

  • Market inquiries

Section 18 of the Act is also to be amended to place an obligation on parties to provide the CAK with information during market inquiries.

We have not yet seen the CAK conduct a full blown market inquiry as has been the case in South Africa. In light, however, of the CAK and the South African Competition Commission’s (SACC) advocacy initiatives (readers wlll recall that the CAK and the SACC recently concluded a Memorandum of Understanding), the CAK may soon launch a market inquiry into priority sectors such as grocery retail and agro-processing.

 

 

Drastic price increase could be sign of collusion or dominance: Dangote in Nigeria

Close-knit trade group and dominant cement manufacturer prove to be (price-)explosive combination

 Our friends at Songhai Advisory, a business intelligence firm covering key parts of Africa, have released a brief market-intel note addressing the 44% price hike of cement in Nigeria, led by the country’s (and indeed soon also the continent’s) dominant manufacturer, the Dangote group.

Any discussion of Nigeria — still Africa’s largest economy measured by GDP — in the competition-law context must begin with the surprising fact that the country’s political leadership still has failed to institute any antitrust regime.  Says Andreas Stargard, an attorney with Africa-focused Pr1merio law group:

“As the continent’s economic leader, Nigeria is a lone beacon of failure to police anti-competitive practices, whereas a multitude of significantly smaller African jurisdictions have had competition laws for years or even decades.  The recent price developments of Nigerian concrete are merely one example of the negative impact on consumers where there are no antitrust rules in effect.  Notably, an industry trade association also appears to be involved here, so from the competition point of view, we are dealing not only with one dominant entity (Dangote) but also an efficient and time-tested mechanism of information-sharing among direct competitors (trade groups).

 

The price increase covered the entire Nigerian cement market, according to Songhai and other media reports: cement prices of the members of the Cement Manufacturers Association of Nigeria (CMAN) rose over the course of a month by 44% from US$5 to $7 per 50kg.  Adds Stargard, “any competent antitrust enforcer would look into such a price hike.  Given the absence of competition law enforcement in Nigeria, it is likely that no investigation will take place, and civil suits are highly unlikely, in light of the lack of antitrust laws and the political connections at play here.”  In the words of Songhai’s reporting: “When Dangote decides to push its price up or down, others tend to follow.”  Yet, the researchers also quote a source at Sokoto Cement, one of Dangote’s main rivals, as describing power generation costs and foreign-exchange fluctuations as the actual drivers behind the drastic recent cement price increases.

 

 

SACC Investigates Port Operator for Monopolisation & Excessive Pricing

Abuse of Dominance & Excessive Pricing in South Africa: Transnet under Unvestigation

south_africaBy AAT Senior Contributor, Michael-James Currie.

On 7 July 2016, the South African Competition Commission (SACC) announced that it has initiated an investigation against Transnet SOC Ltd (Transnet), for abusing its dominance by allegedly engaging in excessive pricing in contravention of the in section 8(a) of the Competition Act as well as for engaging in exclusionary practices in contravention of section 8(c) of the Competition Act in relation to the provision of port services.

The SACC investigation is allegedly based on information received indicating that South Africa’s port charges are excessive relative to global standards. A recent port tariff benchmarking report by the regulator determined that Transnet’s terminal handling charges for the period 2015-2016 were 56% above the global average. Transnet maintains that it is “comfortable and confident that its processes are fair, just, and in line with relevant legal requirements.

The SACC also indicated that it had received information indicating that Transnet is allegedly giving preferential treatment to certain customers to the exclusion of others, in the form of preferential berthing windows, capped export capacity, minimum export tonnage requirements and preferential lease agreements.

Patel talksThe SACC, as well as the Minister of Economic Development, Mr Patel, as expressly stated that, as part of the SACC’s policy, it will target firms who may be abusing their dominance in the market.

While most respondents in South Africa’s abuse of dominant cases thus far, have been firms who have previously been state owned and, therefore, as far as the SACC is concerned, obtained their significant market share as a result of previously having received state support.  It is thus noteworthy that Transnet is a ‘State Owned Entity’.

Despite having brought a number of abuse of dominance cases against various respondents, however, the SACC has found prosecuting respondents for abusing their dominance challenging.

In relation to excessive pricing, the SACC has found it particularly challenging to successfully prosecute a firm for a contravening section 8(a) of the Competition Act. This is largely due to the definition of ‘excessive pricing’ which is essentially defined in the Competition Act as “a price for a good or service which bears no reasonable relation to the economic value of the good or service”.

What constitutes an ‘excessive price’ was fully dealt with in the recent Sasol Polymers case in which the South African Competition Appeal Court (CAC) overturned a R500 million rand penalty imposed on Sasol by the Competition Tribunal for excessive pricing.

Although the outcome of the Sasol case before the CAC turn largely on a lack of evidence, the case highlighted the difficulties in determining what the ‘economic value’ of a product is. In this regard, however, and as a general starting point, the CAC indicated that the economic value “is the notional price of the respective “good” or “service” under assumed conditions of long-run competitive equilibrium”.

If the price charged for a product exceeds the ‘economic value’, then the inquiry shifts to the second part of the definition – i.e. whether the price charged is reasonably related to the ‘economic value’. Although the CAC in Sasol indicated that this is a subjective inquiry, the CAC indicated that in instances where the actual price charged is not more than 20% of the economic value, it is unlikely that the price charged will be considered ‘unreasonable’.

John Oxenham and the author co-published a paper on excessive pricing, which was presented at the American Bar Association Fall Forum in 2015, providing a comprehensive evaluation of the Sasol case and the legal landscape of excessive pricing in South Africa.

After the Sasol case, Minister Patel has further expressed his intentions to broaden and strengthen the SACC’s powers to prosecute firms who abuse their dominance.

In this regard, Minister Patel had previously made similar averments in relation to combatting cartel conduct, which ultimately materialized in the Minister bring into effect criminal liability for directors or persons with management authority who have engaged in cartel conduct. The criminal liability provisions were enacted in 2009, but were not brought into effect due to numerous concerns regarding the constitutionality and jurisdictional concerns regarding the enforcement of these provisions. Despite the concerns raised, the criminal liability provisions were nevertheless brought into effect from 1 May 2016 without any amendments having been made.

The significance of the Minister Patel’s decision to implement criminal liability provisions should be particularly concerning to firms to have a substantial market share, as the Minister has also indicated that he intends bring into effect the “complex monopoly” provisions as contained din the Competition Amendment Act.

Much like the criminal-liability provisions, the complex-monopoly provisions have also been enacted since 2009, but not brought into effect yet due to various concerns raised as to the how this provision would be enforced.

In terms of the complex monopoly provisions, where five or less firms have 75% market share in the same market, a firm could be found to have engaged in prohibited conduct if any two or more of those firms collectively act in a parallel manner which has the effect of lessening competition in the market (i.e. by creating barriers to entry, charging excessive prices or exclusive dealing and “other market characteristics which indicate coordinated behavior”).

Although the introduction of complex monopoly provisions may appear far off, we would caution firms who operate in a concentrated market that Minister Patel’s efforts to combat abuse of dominance may see result in the expeditious implementation of the complex-monopoly provisions.

Namibia: NaCC issues Guidelines on Restrictive Practices

By Michael-James Currie

In April 2016, the Namibian Competition Commission (NaCC) finalised its guidelines on restrictive practices (Guidelines) in terms of chapter three of the Namibian Competition Act. The Guidelines focus in particular on the investigatory powers and procedures to be utilised by the NaCC during its investigations into restrictive practices.

The Namibian Competition Act contains most of the traditional antitrust prohibitions in relation to restrictive conduct. These include ‘agreements’ or ‘concerted practices’ between firms in a horizontal or vertical relationship which have the “object” or “effect” of substantially lessening competition in the market.

The Competition Act does not, from a plain reading of the language, impose a per se prohibition for ‘hardcore’ cartel conduct. The Guidelines, however, confirm that certain practices such as ‘hardcore cartel conduct’ and ‘minimum resale price maintenance’ will be considered per se to be anticompetitive. It is unclear, however, whether this per se contravention should rather serve as a presumption that the conduct is anti-competitive which may affect the onus of proof, rather, as in the South African context where the Act makes it clear that the effect of hardcore cartel conduct is irrelevant.

Furthermore, there is no express provision which deals with ‘rule of reason’ defences, however, the Guidelines confirm that efficiency or pro-competitive features of the alleged anti-competitive conduct, may outweigh any anti-competitive effect. It should be noted, however, that even if there was no anti-competitive effect, if the objective of the conduct was to engage in an anti-competitive agreement or concerted practice, a respondent may still be liable. Accordingly, conduct must not only be shown not to have an anti-competitive effect, but must also be properly ‘characterised’ as not being anti-competitive, in order to avoid liability.

The Namibian Competition Act also prohibits abuse of dominance conduct. The Act does not contain thresholds or criteria for deterring when a firm would be considered ‘dominant’, however, in term of the Competition Commission’s Rules, a firm:

  • will be considered dominant if it has above a 45% market share;
  • will be presumed dominant if it has between 35-45% market share (unless it can show it does not have market power); or
  • has a market share of less than 35%, but has market power.

Although the abuse of dominant provision is intended to prohibit a broad range of potential anti-competitive conduct, the Act in particular, notes the following conduct which, if a firm is dominant, is restricted:

  • directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
  • limiting or restricting production, market outlets or market access, investment, technical development or technological progress;
  • applying dissimilar conditions to equivalent transactions with other trading parties; and
  • making the conclusion of contracts subject to acceptance by other parties of supplementary conditions which by their nature or according to commercial usage have no connection with the subject-matter of the contracts.”

Importantly, the Namibian Competition Act does not state that the conduct identified above must lead to a substantial-lessening of competition in the market. Furthermore, in terms of the Guidelines, the NaCC not only considers the conduct of and individual firm, but also considers the conduct of a “number of connected undertakings acting collectively” for purposes of considering whether there has been an “abuse of dominance”.

It should be noted that the Namibian Competition Act does cater for exemptions from the application of Chapter 3 (i.e. restrictive practices) and sets out in some detail the requirements and terms upon which an exemption may be granted.

As noted above, however, the most elements contained in the Guidelines relate to the NaCC’s investigatory powers.

In terms of the Namibian Competition Act, the NaCC may initiate a complaint or may elect to investigate a third party complaint.

The NaCC‘s investigatory powers include the power to conduct search and seizure operations. Importantly, the NaCC may take into possession any evidence which, in its opinion, will assist in the investigation. This is so even if such evidence would not be admissible as evidence in a court of law. For purposes of obtaining witness statements, however, a witness has the same rights and privileges as a witness before a court of law.

The Guidelines also confirm that the NaCC is not entitled to peruse or seize “legally privileged” documents unless privilege is waived. Interestingly, the Guidelines do not appear to protect communication between in-house legal and the firm and refers to legally privileged communication as that between “lawyer and client” only.

Search and seizure operations must be conducted in terms of a valid search warrant.

The Guidelines also contains further guidance on various topics and caters for a number of procedural aspects which must be adhered to (as well as the prescribed forms which should be utilised in certain circumstances) in relation to, inter alia the following:

  • initiating complaint;
  • applying for an exemption;
  • requesting an advisory opinion;
  • handling and the use of ‘confidential information’;

The Guidelines is no doubt a stern indication that the NaCC is preparing to heighten its intensity in terms of investigating and prosecuting restrictive practices. Since inception, the NaCC has dealt with over 450 merger cases, but has only handled approximately 40 restrictive practice complaints.

Furthermore, and in line with the NaCC’s newly adopted 5 year ‘Strategic Plan (2015-2020), the NaCC is growing in confidence and competence and firms should be aware that the NaCC will look to utilise the dawn raids provisions when necessary.

Predatory Pricing & the Competition Act: a False-Positive?

We have previously, on African Antitrust, reported on South Africa’s first predatory pricing case in the Media 24 matter. In light, however, of the recent cases on exclusionary conduct — particularly predatory pricing, which has received significant attention from competition law agencies across a number of jurisdictions of late (see, for instance, the Paris Court of Appeals’ dismissal of the predatory pricing and exclusionary conduct allegations made against Google by an online maps rival.  The Indian Competition Commission has also launched an investigation into alleged predatory pricing in the taxi industry, and the European Commission has launched investigations into predatory pricing in the potato-chips / crisps industry) — a more substantive evaluation of predatory pricing in South Africa is called for. The following article on predatory pricing, in light of the Media 24 case, neatly sets out and evaluates the landscape of predatory pricing in South Africa.

 

Predatory Pricing & the South African Competition Act: a False-Positive?

By Michael J. Currie

Intro & Summary

“From an antitrust perspective, predatory pricing is a particularly difficult problem with which to deal. If we are to prevent anticompetitive monopolization, it is a strategy that must not be permitted. The paradox, however, is that such a pricing strategy is virtually indistinguishable from the very sort of aggressive competitive pricing we wish to encourage.”

D L Kaserman and J W Mayo, ‘Government and Business: The Economics of Antitrust and Regulation’ (1995) Fort Worth, TX: Dryden Press at 128

In September 2015, the Competition Tribunal (“Tribunal”), for the first time in South Africa’s sixteen-year history of competition-law enforcement found, in the Media 24 case that the respondent had engaged in predatory pricing in contravention of the South African Competition Act, 89 of 1998 (“Act”).

The Media 24 case, despite being dragged out for nearly six years, was set to be the leading jurisprudence on the laws pertain to predatory pricing, and in particular, how Section 8(d)(iv) of the Act would be interpreted and applied by the Tribunal. The finding by the Tribunal was, however, based on Section 8(c) of the Act, which is a broader ‘catch-all’ provision, and left some important questions as to the interpretation of Section 8(d)(iv) unanswered. Most notably, whether or not Section 8(d)(iv) permits complainants to utilise cost measurement standards other than Average Variable Costs (“AVC”) or Marginal Costs (“MC”) to prove that a dominant firm has engaged in predatory pricing in contravention of the provision.

Having said that, however, the Media 24 case provides some insight as to the precise relationship between Sections 8(d)(iv) and 8(c) of the Act as they relate to predatory pricing, and may have offered, by way of certain obiter remarks, an indication as to how the Tribunal may interpret and apply Section 8(d)(iv) of the Act in the future.

Continue reading the full article, an AAT exclusive, in PDF format:

Predatory Pricing and the South African Competition Act: a False-Positive?

South Africa – excessive pricing: the end of the road or more to come?

south_africa

By AAT Editor, John Oxenham and Senior Contributor, Michael-James Currie.

During November 2015, the Constitutional Court of South Africa dismissed an application by the South African Competition Commission to appeal the competition Appeal Court’s (CAC) decision that Sasol Chemical Industries (SCI) had not charged excessive prices in contravention of the Competition Act’s abuse of dominance provisions. The CAC reaffirmed its decision in Mittal, which has been the leading authority on excessive pricing in South Africa.

In doing so the CAC confirmed that the first step in an excessive pricing case is to determine the economic value of the product. This is an objective test and must be determined in consideration of a notionally long run competitive environment.

Once the economic value has been determined, it is then necessary to establish whether the price was reasonably related to the economic value.

While this is a subjective test, the CAC confirmed the origin of a firm’s dominance and ‘degree of dominance’ is not particularly relevant. The CAC went even further and held that it is unlikely that a price will be deemed “unreasonably related” to the economic value if the price is not greater than 20% of the economic value.

For a comprehensive examination of the SCI case and what it means for excessive pricing cases in South Africa, please see the authors’ paper on Excessive Pricing.

In light of the Constitutional Court’s dismissal of the leave to appeal and coupled with Minister of Economic Development Ebrahim Patel’s recently stated desire to use the Competition Act to promote industrial policies goals, South Africa’s antitrust legislation may be amended in order to assist the Competition Commission in prosecuting abuse of dominance cases, in particular, excessive pricing.

First predatory pricing case before the Competition Tribunal

Media24 excludes GNN, Tribunal finds

By Julie Tirtiaux

A year ago, we at AAT reported on the intervention by competitors in the merger between Media24 and Paarl Media.  Today, we want to highlight a “one-year-later” feature about that same company, which has now been found liable of predatory exclusion of its rivals by the South African Competition Tribunal (the “Tribunal”).  The Tribunal found on 8 September 2015 that Media24 had engaged in exclusionary conduct due to predation by removing a rival community newspaper publication, Gold Net News (“GNN”), out of the market. [1]

Two routes explored by the South African Competition Commission’s (“SACC”) to sanction Media24’s predation conduct

In 2009, GNN exited the newspaper community market. Within 10 months of the exit of GNN, Media24 closed down one of its titles, Forum. From then until today, Vista which is another title owned by Media24, is the only title to survive in the Welkom market.

According to the SACC:

  • If Vista is the only local paper operating in the Welkom market, it is because Forum was used as a predatory vehicle to exclude its competitor, GNN.
  • The strategy consisted in pricing Forum’s advertising rates below market cost despite repeated loss making and failure to perform to budget forecasts.
  • Media24 operated Forum as a fighting brand, meaning that Media24 sacrificially maintained Forum in the market to exclude its competitor.

For the SACC the reduction of choice of community newspapers during the period January 2004 to April 2009 can only be explained by Media24’s predatory pricing conduct. In order to condemn this conduct as predation, the SACC relied on two provisions of the Competition Act 89 of 1998 (the “Act”) which respectively lead to different sanctions.

  • First and ideally, the SACC alleged that Media24 should be sanctioned for its predatory behaviour in terms of section 8(d)(iv) of the Act, which is the explicit predation provision and enables the Tribunal to impose a fine for a first offence.
  • Second, should the predation not be captured by the express predation provision of section 8(d)(iv), Media24 should at least be found responsible for engaging in general exclusionary conduct, prohibited by section 8(c) of the Act which only gives the Tribunal the power to impose remedies. No fine is available for a first contravention. Only a repeated offence may be subject to an administrative penalty.

Following the Commission’s investigation after the allegations brought by Hans Steyl, who ran GNN from 1999 until its eventual closure in 2009, the Commission referred the case to the Tribunal in 2011.

The denial of predation conduct by Media24

Media24 (whose slogan is, somewhat ironically perhaps: “Touching lives through the power of media“) denied any casual link between the fates of the Forum and the GNN’s papers. Forum was not used as a predatory vehicle to exclude GNN. Media24 attributed the closure of Forum to the 2008 recession, on-going downsizing in Media24 as a whole, and to the problem of publishing two newspapers, Forum and Vista, in the Welkom area. It further argued that GNN had exited because it was not viable.

The difficulty to prove a direct predatory pricing conduct

For the first time in the sixteen years in which the new Competition Act has been in operation[2], the Tribunal assessed a predatory pricing case.

Predatory pricing means that prices charged by a dominant firm are not market related but below what would be expect to be a market price. Predatory pricing is only a transient pleasure for consumers as once competitors are eliminated or new entrants are deterred from entering, then the low price honeymoon is over and the predator can impose high prices to recoup the losses sustained in the period of predation.

In terms of section 8(d)(iv) of the Act, to find an express predation contravention, the Commission is required to prove that Media24 priced below “its marginal or average variable cost” (“AVC”) (our emphasis)[3]. The Commission argued that this wording is broad enough to include pricing below average avoidable cost (“AAC”)[4]. This is the cost the firm could have avoided by not engaging in the predatory strategy.[5]

To find exclusionary conduct and thus a contravention of section 8(c) based on predation[6], the Commission would not necessarily need to establish that the dominant firm’s pricing is below any specific cost standard.  All that is required is that the conduct (in this case, low pricing) has an anti-competitive exclusionary effect.

In the Media24 case, the Tribunal has effectively established a new test for predatory pricing which does not meet the test under section 8(d)(iv).  It said that if Media24 is found to have priced below its average total cost (“ATC”)[7] accompanied by additional evidence of intention and recoupment of the loss of profits sustained during the predation period, then a contravention of section 8(c) has taken place.

As ATC include more costs than AAC and AVC of marginal cost, it makes a finding of predation more likely.  The AAC test is thus more stringent than the ATC test.  This follows the logic of the consequences of each section.  As a contravention of section 8(d)(iv) of the Act leads to a fine while a contravention of section 8(c) of the Act only leads to a remedy, it is more difficult to fill the requirements of the specific predation section – section 8(d)(iv).

Consequently, a central issue in this case was to determine Media24’s costs, and compare them to the prices charged during the relevant period.  This is no simple matter.

The Tribunal’s findings trigger questions about how section 8 of the Act on abuse of dominance is structured

Following lengthy discussions about what constitute avoidable costs, the Tribunal held that opportunity costs[8] and re-deployment costs cannot be factored into the calculation of Forum’s AAC. Accordingly, the Tribunal found that Media24 did not contravene the express predation section 8(d)(iv) of the Act.

Interestingly, the Tribunal did however found that Media24 contravened the general exclusionary section 8(c) of the Act. Indeed, after establishing that Media24 was a dominant firm in the market for community newspapers[9], the Tribunal found the evidence of predatory intent which resulted from statements and the implementation of a plan that was predatory in nature. Moreover, the Tribunal held that the pricing of Forum was below ATC.

As a result, it was found that GNN’s exit of the market affected both advertisers and readers. While advertisers paid higher prices as they lost an alternative outlet, readers lost the choice of an alternative newspaper.

Accordingly, the Tribunal concluded that Media24 engaged in exclusionary practice because of predation but didn’t find a contravention of the express predation section of the Competition Act.

The implication of this finding is that Media24 is not liable for a fine. The only power left to the Tribunal is the imposition of another form of remedy. Only if Media24 does the same thing again, will it be subjected to a potential administrative penalty under section 8(c).

Such a finding triggers two interrogations about how section 8 of the Act deals with abuse of dominance.[10]

  • Firstly, how can deterrence be guaranteed when the only consequence of a predatory exclusion conduct, in certain circumstances, is a remedy without a monetary fine? This case leaves food for thought as to the necessity to empower the Tribunal to impose a fine for a first offence when a general exclusionary conduct is found.
  • Secondly, if the required test to prove a contravention of the explicit predation section is too stringent and almost impossible, not only a predatory conduct will never lead to a fine but more generally the utility of this section should be seriously considered.
Footnotes

[1] See the Tribunal’s decision: http://www.comptrib.co.za/assets/Uploads/Reasons-for-Decision-Media24-Section-8-Case-Signature-Documentfinal.pdf

[2] See the Tribunal’s press release: http://www.comptrib.co.za/publications/press-releases/media24-press-release/

[3] A variable cost being a cost that varies with changes in output. The AVC is defined as the sum of all variables costs divided by output.

[4] The important difference with AVC is that AAC include an element of fixed costs.

[5] AAC has become a widely accepted cost standard for the assessment of predatory pricing. This acceptance is evident both from its inclusion in the EU‘s Guidelines, the recent International Competition Network Guidelines, and a Department of Justice Report.

[6] See Nationwide Airlines (Pty) Ltd v SAA (Pty) Ltd and others [1999-2000] CPLR 230 (CT), page 10. The Tribunal stated that a predatory pricing could lead to a finding in terms of section 8(c).

[7] ATC includes fixed, variable and sunk costs (sunk costs being costs that have already been incurred and thus cannot be recovered).

[8] An opportunity cost is a cost of an alternative that must be forgone in order to pursue a certain action.

[9] Media24 would have had a market share of approximately 75%.

[10] On this topic, see the articles of Neil Mackenzie, “Are South Africa’s Predatory Pricing Rules Suitable?” and “Rethinking Exclusionary Abuse in South Africa”.