The Competition Authority of Kenya (CAK) recently announced that it had entered into a settlement agreement with local beer producer Kenya Breweries Limited (KBL), a subsidiary of UK Diageo’s East African Breweries Ltd (EABL).
The settlement follows from an investigation by the CAK in terms of section 21 of the Competition Act (12 of 2010) wherein the CAK had found that KBL’s distribution agreements with its downstream distributors – which provides for inter alia, territorial exclusivity – is anti-competitive and may lead to the lessening of intra-brand competition.
The settlement was reached in terms of section 38 of the Competition Act and requires that KBL establish an internal compliance policy and review and amend the problematic and restrictive clauses in its agreements with distributors.
Michael-James Currie, an African focused competition lawyer, says that the decision is particularly important for companies which use third parties to execute their distribution strategies as the majority of distribution agreements contain restrictions of some kind (often transported from international distribution agreements) which will need to be assessed against the standards of the Competition Act in Kenya as the CAK is actively focusing on these types of restrictive verticals arrangements.
Abuse of Dominance
Styles Industries (Darling Kenya)
Braids supplier, Styles Industries Ltd (Styles) has been found guilty by the CAK for abuse of dominance in contravention of Section 24 of the Competition Act.
The CAK launched an investigation into Styles on the basis of a complaint received by a competitor in the market, Solpia Kenya, claiming that Styles had abused its dominance by imposing unfair selling prices and conditions on suppliers who sell its products.
The CAK’s investigation found that Styles had abused its dominance by imposing unfair trading conditions on its downstream suppliers which it sought to enforce through threatening its downstream suppliers with account closure, removal of discounts and refusal to supply products.
The CAK is currently in negotiations with the parties and have indicated that its finding could result in Styles paying the complainant an amount in damages and/or a fine Sh10 million. In terms of Section 54(3) of the Competition Act, the relevant individuals within Styles could further face imprisonment for a period of up to 5 years.
The CAK dismissed an abuse of dominance case against cookware manufacturer, Kaluworks Limited (Kaluworks).
The case emanated from a complaint by rival company, Sufuria World (Sufuria) in which it was alleged that Kaluworks had refused to sell to them certain aluminum circles which it required for purposes of manufacturing its aluminum cooking ports. This, Sufuria claimed, amounted to an abuse of dominance in terms of section 23 and 24 of the Competition Act.
The CAK, however, found that the conduct did not amount to abuse of dominance under the Competition Act as Sufuria had other options available to it in that it had the ability to replicate the technologies used by Kaluworks to produce the aluminum circles (as other manufacturers have done) or it could increase its order volumes in order to make it economically feasible for Kaluworks to supply it with the aluminum circles.
This finding was based on the representations made by Kaluworks that:
it primarily produces aluminum circles for in-house production for a variety of its own cookware products intended for local and export markets; and
it could only manufacture the aluminum circles to third parties where such third parties placed an order which met certain minimum quantities that would guarantee optimal scale of production
In supporting its findings, the CAK stated that in assessing the conduct of a dominant firm and whether it amounts to a ‘refusal to deal’, “is necessary to prove indispensability of the facility to the operation of the complainant or other third parties as arbitrary intervention may hurt innovation.”
The CAK has recently announced that it has initiated a ‘regional study’ in the Shipping, Trucking and Haulage industry in Kenya, Uganda, Rwanda and Burundi.
According to the announcement, the objective of the inquiry is to identify and remedy features of the market and trade practices which are anti-competitive and which impedes the national and intra-regional trade which in terms slows the potential growth of the manufacturing sector in Kenya.
The CAK has further announced a market study into the leasing sector which it will be conducting in conjunction with the Financial Sector Deepening (FSD) Kenya.
The objective of the market study is to assess the level of competition in the sector and to identify areas of concern in order to enhance competition in the market by facilitating SME entrants into the market.
John Oxenham, director at African antitrust advisory firm Primerio, says that market inquiries can be used very effectively, however, they are resource intensive and in order to achieve there objectives must be concluded expeditiously. The CAK should be cognizant of the challenges and experiences of the South African Competition Commission (SACC) where the market inquiries are not being concluded timeously.
[The editor wishes to thank Charl van der Merwe for his contribution to this update]
[*Michael-James Currie is a practising competition lawyer based in Johannesburg and a regular contributor to Africanantitrust]
The South African Competition Amendment Act was signed into law by the President on 13 February 2019.
Two of the contentious aspects which were raised during the drafting of the Amendment Bill related to the price discrimination prohibitions and the introduction of express “buyer power” provisions. The key areas of concern relates to the fact that these practices are not ordinarily anti-competitive but quite the opposite – they are generally pro-competitive and more often than not lead to an increase in consumer welfare. Simply put, price discrimination allows firms to charge different customers a price relevant to what those customers are prepared to pay. In other words, it enables firms to ensure that the customer utility is maximized. If firms are obliged (or consider themselves required) to set prices at a uniform price, it is unlikely that the firm will adopt the “lowest price point” at which to sell its products but rather an average or the highest price point. This means that while customers who were prepared to pay more for a product at a certain price point may enjoy some discount, those customers who were only prepared to pay for the product at the lowest price point will either have to cough up more or will not buy the product altogether. Intuitively this results in a decrease in consumer welfare.
From a buyer power perspective, provided the downstream market is competitive, any buyer power exerted upstream will result in lower prices to consumers.
The Minister of the Department of Economic Development has published draft Regulations in relation to Price Discrimination and Buyer Power respectively in an effort to provide greater clarity as to how these provisions ought to be applied.
The Regulations will be particularly relevant to companies who have a market share in excess of 35% – therefore rebuttably presumed to be dominant – as they affect both the upstream and downstream pricing and more importantly, do not require any assessment of anti-competitive or consumer welfare effects. Instead, the provisions introduce a public interest standard against which to assess these practices. The Regulations expressly state that the assessment against the public interest standards does not require a consideration of anti-competitive or consumer welfare effects. In other words, a firm could be found liable to an administrative penalty despite its conduct being pro-competitive or enhancing consumer welfare.
Although the most contentious amendments brought about by the Amendment Act are aimed at dominant entities, it should be noted that the thresholds for being considered dominant in terms of the Competition Act are low. A firm is rebuttably presumed to be dominant if it has a market share (in a specific product or geographical market) between 35%-45% while a firm with a market share in excess of 45% is irrebuttably presumed to be dominant.
This raises the question as to why the price discrimination and buyer power provisions only apply to so-called “dominant entities”. The primary purpose for prescribing dominance thresholds based on market shares is that it serves an important (although contentious) screening process for purposes of determining when a firm is likely to have “market power”. The assumption being that the higher a firm’s market shares the more likely it is that the firm in question has market power. Market power in short refers to the ability of a firm to set prices above a competitive level for a sustained period of time. Consequently, assessing a firms’ “market power” is the crucial for purposes of determining whether a firm’s conduct is anti-competitive or harmful to consumers. Turning to the draft Regulations, however, if anti-competitive effects or consumer welfare are not factors taken into account when assessing the conduct against the price discrimination or buy power provisions from a public interest perspective, then there is no rationale link between “dominant firms” and the prohibited conduct itself.
The lack of economic rationale supporting the objectives of the Act’s amendments together with the Regulations benchmarks results in a legal framework which seems uncertain, subjective and risks dampening pro-competitive conduct. John Oxenham, Director at Primerio says that the Bill, together with the Regulations, has the potential to have a dampening effect on pro-competitive conduct as firms may be overly cautious in their commercial practices as the risk of “getting it wrong” exposes firms to potential administrative penalties and reputational risk.
What follows, however, is a high level summary of the legal framework insofar as it applies to price discrimination and buyer power.
In relation to the price discrimination and buyer power provisions, it is noteworthy that:
the impact on small, medium and HDI owned firms is separate and independent from any assessment as to whether the alleged conduct is anti-competitive or adverse to the consumer welfare;
there is a reverse onus on the dominant entity to demonstrate that its conduct is justifiable once a prima facie case has been made out against the respondent; and
differentiating between customers or suppliers based only on “quantity” of products bought/sold (as the case may be) is essentially prohibited. There are, however, certain permissible grounds which justify differentiation in price or trading terms.
The Bill introduces a dual assessment for price discrimination in terms of which a firm can be found guilty of price discrimination either where its pricing has the effect or substantially lessening competition or where its pricing “impede[s] the ability of small and medium businesses and firms controlled or owned by historically disadvantaged persons to participate effectively.” It has further been made clear by way of the Draft Regulations that under the second assessment, there is no need for a complainant to show any anti-competitive or consumer harm – a complainant only needs to demonstrate a hindrance to being able to participate effectively in the market.
It is also an offence for a firm to avoid or refuse selling goods or services to a purchaser who is a small or medium business or controlled or owned by historically disadvantaged persons in order to circumvent the operation of section 9.
Once a prima facie case has been made out by a complainant, the onus rests on the dominant entity (as the respondent) to demonstrate that its pricing strategy does not impede the ability of small businesses or firms owned by historically disadvantaged persons to participate effectively in the market (and that it has not avoided or refused selling to a particular purchaser).
The Bill expressly precludes a dominant entity relying on “different quantities” alone as a defence if there is a prima facie case of price discrimination which impedes the ability of small, medium or HDI owned firms to “participate effectively” in the market. In other words, the Bill is aimed at protecting businesses who are unable to obtain the same prices as larger customers due only to their limited size.
The draft Regulations published in terms of section 9(4) sets out the relevant factors and benchmarks for determining whether the practice set out in subsection (1)(a)(ii) impedes the ability of a small and medium business or a firm owned or controlled by a historically disadvantaged person, to “participate effectively”.
The Regulations set out further factors which ought to be taken into account when assessing the impact that the price discrimination has customers. There must, however, be a causal connection between the price discrimination and the complainant’s inability to participate effectively in the market. “Participate effectively” is defined as the “ability of or the opportunity for firms to sustain themselves in the market”.
In terms of the Regulations, a dominant firm, in a sector designated by the Minister, is prohibited from imposing unfair prices or trading conditions on “a supplier that is a small and medium business or a firm controlled or owned by historically disadvantaged persons…”. It is also an offence for the dominant firm to refuse or avoid purchasing from such a supplier.
This includes discounts, rebates, commissions, allowances and credit and that firms cannot contract out of the rights contained in this sections.
A price/condition will be unfair if it is inferior relative to other suppliers and there is no reasonable rationale for the difference or where it impedes the ability of a firm to sustainably operate and grow its business. A designated supplier may not be prejudiced based on its size and accordingly volume based differences are not justifiable as a standalone defence.
With regard to ‘trading conditions’, the Regulations sets out various examples of terms which are impermissible vis-à-vis designated suppliers. These include, inter alia, terms which unreasonably transfers risk/costs to the suppliers, is one sided or bares no relation to the objective of the supply agreement and unfair payment terms.
Examples of unfair trading terms include:
Trading without a contract, which imposes uncertainty and risk on the supplier, whilst at the same time denying them standard contractual rights and protections;
Imposing costs or risks onto the supplier that are not spelt out in a clear and unambiguous manner or quantified within the supply contract;
Unilateral changes in the supply terms that are detrimental to the supplier;
Retrospectively changing supply terms of a material nature to the detriment of the supplier;
Excessively long payment terms;
An unreasonable transfer of the buyer’s costs of promotion and marketing onto the supplier; and
Transfer of the buyer’s risks of wastage or shrinkage onto the supplier where it is not due to the supplier’s negligence or fault.
It is unfortunate that the Draft Regulations were published after the Bill itself has already been passed by Parliament. At the time of promulgating the Bill, assurances were given that the Regulations would provide clarity and objectivity in relation to the price discrimination provisions in particular. The Draft Regulations have not addressed the concerns raised by many commentators during the promulgation of the Bill. Instead, the Draft Regulations are now ostensibly being justified on the basis that Parliament has approved the Bill and is, therefore, in keeping with the objectives of the Bill. This “circular logic” is a process flaw in the promulgation process, which has seemingly been capitalized on by the Department of Economic Development.
Regardless, it is unlikely that their will be a materiel amendments to the draft Regulations and therefore the new landscape in relation to price discrimination and buyer power enforcement is likely to become effective imminently – raising unique but important challenges from a compliance perspective.
[Michael-James Currie is a competition lawyer practicing across multiple African jurisdictions]
Kenya has in some respects become the leading African authority in the regulation of buyer power in December 2016 when it adopted specific legislative provisions on buyer power through its competition law framework.
The CAK has long viewed buyer power as a concern as in its view, unequal bargaining power, particularly in the retail sector has had serious anti-competitive effects in the market, leading to the foreclosure of suppliers, particularly in the retail sector.
The Competition Authority of Kenya (CAK) formally initiated a market inquiry into the branded retail sector, with one of its key objectives being the bargaining power between retails and their suppliers. See the ATT exclusive here
Ostensibly in light of the identified concerns, the CAK assisted in developing a new industry code (which is being proposed in terms of the Kenya Trade Development Bill). In terms of the industry code, retailers are prohibited inter alia from:
Making late payments to suppliers;
Forcing suppliers to contribute to marketing costs;
Forcing suppliers to pay for shrinkage;
Unilaterally terminating commercial agreements (without reasonable notice and on good cause);
Imposing unfair risk/liability on suppliers.
“The purpose of the code of practice is to encourage self-regulation and harmonise retailers’ and suppliers’ ways of engagement and in so doing, also apply international best practice applicable to the Kenyan situation,” says Kenya Trade Principal Secretary Chris Kiptoo
The industry code also establishes a Retail Trade Dispute Settlement Committee, who will act as an industry ombudsman to settle disputes arising out of the code.
The CAK also formed a specific ‘Buyer Power Unit’ within the CAK to oversee market conduct and to enforce compliance with the buyer power provisions of the Kenya Competition Act which attracts a sanction of imprisonment for a period not exceeding 5 years and/or a fine of Sh10million. Previously, the CAK had limited powers to intervene in commercial dealings between retailers and suppliers. Ruth Mosoti, director of Primerio Kenya says with the code, together with the provisions of the Competition Act, “we are bound to see an increase in enforcement action by the CAK given that the legal framework is in place as well as the fact that the ‘Buyer Power’ department is fully operational”.
Further south, the South African Department of Economic Development has published draft guidelines on buyer power, in terms of the South African Competition Amendment Bill. The Bill and Draft Guidelines, prohibits a dominant firm from imposing unfair prices or trading conditions on “a supplier that is a small and medium business or a firm controlled or owned by historically disadvantaged persons…”. It is similarly an offence for the dominant firm to refuse to or avoid purchasing from such a supplier.
According to Andreas Stargard, also at Primerio, these latest developments are in line with the broader public interest initiatives which are increasingly prevalent in African competition enforcement. African competition authorities have identified competition enforcement as a key to driving growth in African economies through the protection and inclusion of local and small businesses.
The role of public interest in competition law enforcement has made competition compliance in these jurisdictions particularly complex as quantifying socio-economic effects is a particularly subjective exercise, says John Oxenham.
On 21 January 2019, the South African Competition Tribunal (Tribunal), ruled in favour of the South African Competition Commission (SACC) who prosecuted Computicket (Pty) Ltd. (Computicket) for abuse of dominance in contravention of the Competition Act.
The Tribunal ruled that Computicket had abused its dominance, in contravention of section 8(d)(i) of the Competition Act (which prohibits dominant entities from inducing customer or suppliers not to deal with competitors) by engaging in exclusionary conduct and fined the company R20 million (approximately US$1.44 million), payable within 60 days.
In terms of section 8(d)(i) of the Competition Act, exclusionary conduct is prohibited unless the dominant firm can show that the anti-competitive effect of the exclusionary conduct is outweighed by technological, efficiency or other pro-competitive gains.
The SACC referred the complaint to the Tribunal in April 2010 after its investigation found that Computicket had entered into long term exclusive agreements with customers for the period 2005 to 2010 (immediately after being acquired by a large South African retailer, Shoprite), thereby excluding new entrants from entering the market. At the hearing of the matter, the SACC produced evidence that Computicket entered into these agreements shortly after being acquired and that employees vigorously enforced the exclusive agreements, particularly when new entrants sought to enter the market.
Computicket denied the allegations, arguing that its long term exclusive contracts had no anti-competitive effects as it was offering a superior service and the exclusive contracts were necessary to safeguard against reputational risks.
The Tribunal rejected the argument on the basis that:
Computicket had a near monopoly in the market;
there was limited market entry during the relevant period which coincided with the introduction of the longer term exclusivity contracts; and
no other theory was put forward as to why entry into the market was so limited and ineffectual.
The Tribunal, however, limited the period of the conduct to that period for which the SACC managed to produce conclusive evidence of anti-competitive effects.
The Tribunal found that while some of the anti-competitive effects were inconclusive, the evidence suggesting that the foreclosure of the market to competition during the period (coupled with the cumulative effect of the other inconclusive theories) is sufficient to prove an anti-competitive effect on a balance of probabilities.
According to John Oxenham, director at Primerio, the Tribunal’s decision followed largely on the same principles which were set out in the South African Airways case some years earlier. In terms of principles set out in SAA, the SACC was required to prove that the conduct of a dominate firm constitutes an exclusionary act as defined in section 8(1)(d) and, if so, that the exclusionary act has an anti-competitive effect. In other words, whether the conduct resulted in harm to consumer welfare or was “substantial or significant” in that it led to the foreclosing of market rivals. It is then for the respondent to justify its conduct based on a rule of reason analysis.
Competition lawyer, Michael-James Currie says that although there have been a limited number of abuse of dominance cases in South Africa which have successfully been prosecuted, companies with high market shares should take particular cognizance of the Tribunal’s decision. Tackling abuse of dominance cases is very much on the SACC’s radar and the Competition Amendment Bill (expected to be introduced in early 2019) will assist the SACC in prosecuting abuse of dominance cases by introducing thresholds divorced of competition or consumer welfare standards and placing a reverse onus on respondents to justify its conduct (particularly in relation to the excessive pricing, price discrimination and buyer power prohibitions).
Currie says that over and above the administrative penalty, companies found to have contravened section 8 of the Act are potentially at risk from a civil liability perspective. In this regard, both Currie and Oxenham point to the SAA case which resulted in Comair and Nationwide successfully claiming damages in the first follow-on damages case in South Africa for abuse of dominance conduct.
It appears that Computicket will take the Tribunal’s decision on appeal to the Competition Appeal Court.
On 9 November 2018, the High Court in Namibia declared a dawn raid conducted by the Namibian Competition Commission (NaCC) in September 2016 to be unlawful. The NaCC raided the premises of PUMA Energy on the basis of alleged abuse of dominance conduct in relation to the sale of aviation fuel at two airports in Namibia.
PUMA Energy challenged the validity of the search warrant and successfully argued that there was no basis for granting the search warrant. Consequently, the NaCC is obliged to return all documents seized during the raid to PUMA Energies.
In June 2018, the South African Competition Commission also lost a High Court challenge where the validity of a search warrant was at issue. The Pietermaritzburg High Court set aside the search warrant on the basis that the SACC failed to demonstrate that there was a bona fide “reasonable belief” that a prohibited act had been engaged in by the respondents in that case.
Competition lawyer, Michael-James Currie says that the use of search and seizure operations as an enforcement tool is being increasingly used across a number of African jurisdictions. Dawn raids have recently been conducted in Egypt, Kenya and Zambia in addition to Namibia and South Africa.
Currie says while dawn raids have been used effectively by well-established antitrust agencies, search and seizure operations are particularly burdensome on the targets and should only be used in those instances were no other less intrusive investigative tools are available. If competition authorities’ powers are not kept in check there is a material risk that search and seizure powers may be used as “fishing expeditions”.
Primerio director, John Oxenham, points out that the evidentiary threshold required in order to obtain a search warrant is relatively low. It is, therefore, concerning if enforcement agencies subject respondent parties to such an intrusive and resource intensive investigative tool without satisfying the requirements for obtaining a search warrant.
Despite these recent challenges to search warrants, Andreas Stargard, also a partner at Primerio, corroborates Oxenham and Currie’s view that the South African and Namibian competition agencies will continue utilising dawn raids as an investigative tool and in light of the increasingly robust enforcement activities, particularly by the younger competition agencies, companies should ensure that they are well prepared to handle a dawn raid should they be subjected to such an investigation.
The Competition Commission (Commission) has referred SA Airlink, a privately owned regional feeder airline, to the Competition Tribunal (Tribunal) for prosecution on charges of excessive and predatory pricing in relation to a specified domestic route in South Africa (Johannesburg-Mthatha). The Commission was prompted to investigate the matter after receiving complaints lodged by Khwezi Tiya‚ Fly Blue Crane and the OR Tambo District Chamber of Business between 2015 and 2017.
The Commission found SA Airlink to be dominant in the market for the provision of flights on the Johannesburg-Mthatha route and further found that SA Airlink contravened the Competition Act by abusing this dominance from September 2012 to August 2016 by charging excessive prices on the route to the detriment of consumers in contravention of Section 8(a) of the Competition Act no 89 of 1998 (“the Competition Act”). The Competition Act defines an “excessive price” as a price for a good or service “which bears no reasonable relation to the economic value of that good or service and is higher than the value referred to in 8(a)”.
An additional requirement which the Commission will need to demonstrate in order to succeed with an excessive pricing complaint is that the “excessive pricing” was to the detriment of consumers. In this regard the Commission found that consumers would have saved between R89 million and R108 million had SA Airlink not priced excessively on this route. Furthermore, lower prices would also have resulted in more passengers traveling by air on the route‚ possibly contributing to the local economy of Mthatha.
The Commission also found SA Airlink to have engaged in predatory pricing to exclude a competitor from the market in contravention of section 8(c) and Section 8(d)(iv) of the Competition Act. In this regard, the Commission alleges that prior to Fly Blue Crane entering the market, SA Airlink had charged excessive prices. When Fly Blue Crane entered the route, SA Airlink allegedly reduced its prices below its average variable costs and average avoidable costs for some of its flights and then subsequently, after Fly Blue Crane stooped flying the relevant route, SA Airlink reverted to their alleged excessive prices.
The Commission went further to say that the effect of the predation is also likely to deter future competition on this route from other airlines which would also be to the detriment of consumers.
The Competition Act provides for an administrative penalty of up to 10% of SA Airlink’s annual turnover for contravention of Section 8. The Commission stated that “it will seek the maximum administrative penalty before the Tribunal”.
In addition‚ the Commission has asked the Tribunal “to determine other appropriate remedies in order to correct the conduct“.
Michael-James Currie, a competition lawyer, notes that “in addition to the potential administrative liability, should SA Airlink be found by the Tribunal to have abused its dominance, SA Airlink may also face civil damages claims similar to those which Nationwide and Commair successfully instituted against South African Airways (SAA) following the Tribunal’s decision that SAA had engaged in abuse of dominance conduct”.
John Oxenham, a director of Primerio and editor of the recently published book “Class Action Litigation in South Africa”, states that “this case may potentially also result in class action litigation if the Commission is correct in its quantification of the harm caused to consumers”.
The Competition Commission’s case against Airlink comes at an interesting juncture in light of the recently published Competition Amendment Bill. Andreas Stargard, also a director at Primerio notes that the underlying motivation for the proposed amendments to the abuse of dominance provisions is to assist the Commission in prosecuting dominant firms (by placing the onus on a dominant firm to demonstrate that its conduct is pro-competitive). The case against Airlink, however, will be decided in terms of the current regime as the Amendment Bill has not yet been brought into effect.
For further information and insight into excessive pricing and predatory pricing cases in South Africa, AAT has previously published papers on the Competition Appeal Court’s decision in Sasol (the seminal excessive pricing case in South Africa) and the Media 24 cases (the first successfully prosecuted case based on a predation theory of harm).
Second Non-Merger Investigation Opened by COMESA Enforcer
Coca-Cola’s Africa operations — recently sold in a majority shareholder exit in late 2016 by Anheuser-Busch InBev (which owned 54.5%) — were due for a major overhaul of the company’s long-term strategic plan to grow its market presence across Africa. Yet, it is now under investigation for restrictive trade practices by the COMESA Competition Commission (“CCC”).
This is a first, of sorts: After the CCC’s original non-merger investigation into exclusive marketing practices of broadcasting rights and sponsorship agreements in relation to football tournaments (AAT reported here) ended — or hasn’t ended — with something of a thud (nothing having been reported by way of conclusion thereof), we and the world’s largest soft drink manufacturer are bracing ourselves for the outcome, if any, of the latest COMESA salvo delivered by the CCC to prove its worth to its Board. (We surmise so as this latest, second-ever, non-merger investigation may have been prompted at least in part by the fact that the CCC’s budget was recently slashed by the regional body, and that the Commission wishes to reestablish itself in the eyes of the COMESA directorate as a worthwhile agency to fund and to bolster).
The COMESA “restrictive practices” investigation into Coca-Cola’s distribution agreements may come on the heels of its (announced, yet likely neither begun nor concluded) market enquiry into the grocery retail sector, similar to comparable market-wide investigations undertaken in Kenya and South Africa; moreover, the South African Competition Commission has likewise undertaken past investigations into restrictive vertical distribution practices engaged in by Coca-Cola in South Africa.
Actual or would-be soft drink competitors may have also brought claims of foreclosure to the CCC’s attention — likely alleging resale price maintenance, as well as possibly lack of access to key distributors due to Coca-Cola’s exclusive or quasi-exclusive contracts and the like. According to the official COMESA Notice, the agency is investigating allegations against The Coca-Cola Company’s African subsidiary (Coca-Cola Africa (Proprietary) Limited) in relation to its distribution agreements with downstream entities in Ethiopia and Comoros, both of which are COMESA member states, albeit historically rather inactive when it comes to competition-law enforcement.
According to the antitrust-specialist publication Global Competition Review, the CCC has stated that Coca-Cola’s alleged restrictive conduct worked as planned only rarely in practice. Yet, the agency’s spokesperson noted that the risk of anti-competitive effects remained real: “Coca-Cola is dominant in these countries, it is important that they do not abuse that dominance through distribution agreements which frustrate competition in the relevant markets”, the spokesperson said, according to GCR‘s reporting. The magazine also quoted Pr1merio antitrust lawyer Andreas Stargard as saying that the CCC can issue injunctions and impose fines of up to 10% of Coca-Cola’s turnover in the common market for the year prior to the conduct.
Stargard tells AAT further that “[a]ny agreement contravening Article 16 of the COMESA Regulations is automatically void. In addition, while the CCC is breaking new ground here (as it has not yet successfully brought any non-merger investigation to conclusion to date), the applicable Regulations foresee not only injunctive relief (cease-and-desist orders and conduct-based injunctions forcing the party to ‘take whatever action the Commission deems necessary to remove and/or diminish the effect of the illegal conduct’) but also fines, as cited above. However, no such fine has yet been imposed in any anti-competitive conduct investigation by the CCC.”
He continues: “Under the COMESA Competition Regulations, the agency normally has an initial ‘consultative’ time period of 30-45 days to evaluate whether or not to launch a full-fledged investigation. This period may include meetings with the concerned party or parties, any complainant, or other stakeholders. Thereafter, if the Commission votes to open an investigation, the latter must be concluded within 180 days from the date of receipt of the request for the investigation, if it was brought by a complainant. Here, the official Notice provides that an investigation was in fact opened, meaning the clock has begun ticking.”
Interested stakeholders have until February 28, 2018 to issue comments.
In this regard, Minister Patel has remarked that the old, i.e., current, Act “was focused mainly on the conduct of market participants rather than the structure of markets, and while this was part of industrial policy, there was room for competition legislation as well”.
Patel’s influence in advancing his industrial-policy objectives through the utilisation of the public-interest provisions in merger control are well documented. AAT contributors have written about the increasing trend by the competition authorities in merger control to impose public-interest conditions that go well beyond merger specificity – often justified on the basis of the Act’s preamble which, inter alia, seeks to promote a more inclusive economy. The following extracts from the introduction to the Amendments indicate a similar, if not more expansive, role for public interest considerations in competition law enforcement:
“…the explicit reference to these structural and transformative objectives in the Act clearly indicates that the legislature intended that competition policy should be broadly framed, embracing both traditional competition issues, as well as these explicit transformative public interest goals”.
The draft Bill focuses on creating and enhancing the substantive provisions of the Act aimed at addressing two key structural challenges in the South African economy: concentration and the racially-skewed spread of ownership of firms in the economy.
The role of public interest provisions in merger control have often been criticised, predominantly on the basis that once the agencies move away from competition issues and merger specificity and seek conditions that go beyond that which is strictly necessary to remedy any potential negative effects, one moves away from an objective standard by which to assess mergers. This leads to a negative impact on costs, timing and certainty – essential factors for potential investors considering entering or expanding into a market.
As John Oxenham, director of Pr1merio states, “from a policy perspective it is apparent that consumer-welfare tests have been frustrated by uncertainty”. In this regard, the South African authorities initially adopted a position in terms of which competition law played a primary role, with public-interest considerations taking second place. Largely owing to Minister Patel’s intervention, the agencies have recently taken a more direct approach to public-interest considerations and have effectively elevated the role of public-interest considerations to the same level as pure competition matters – particularly in relation to merger control (although we have seen a similar influence of public-interest considerations in, inter alia, market inquiries and more recently in the publishing of industry Codes of Conduct, e.g., in the automotive aftermarkets industry).
The current amendments, however, risk elevating public-interest provisions above those of competition issues. The broad remedies and powers which the competition agencies may impose absent any evidence of anti-competitive behaviour are indicative of the competition agencies moving into an entirely new ‘world of enforcement’ in what could very likely be a significant ‘over-correction’ on the part of Minister Patel, at the cost of certainty and the likely deleterious impact on investment.
The proposed Amendments, which we unpack below, seem to elevate industrial policies above competition related objectives thereby introducing a significant amount of discretion on behalf of the agencies. Importantly, the Amendments are a clear departure from the general internationally accepted view that that ‘being big isn’t bad’, but competition law is rather about how you conduct yourself in the market place.
The Proposed Amendments
The Amendments identify five key objectives namely:
(i) The provisions of the Competition Act relating to prohibited practices and mergers must be strengthened.
(ii) Special attention must be given to the impact of anti-competitive conduct on small businesses and firms owned by historically disadvantaged persons.
(iii) The provisions relating to market inquiries must be strengthened so that their remedial actions effectively address market features and conduct that prevents, restricts or distorts competition in the relevant markets.
(iv) It is necessary to promote the alignment of competition-related processes and decisions with other public policies, programmes and interests.
(v) The administrative efficacy of the competition regulatory authorities and their processes must be enhanced.
At the outset, it may be worth noting that the Amendments now cater for the imposition of an administrative penalty for all contraventions of the Act (previously, only cartel conduct, resale price maintenance and certain abuse of dominance conduct attracted an administrative penalty for a first-time offence).
Secondly, the Amendments envisage that an administrative penalty may be imposed on any firm which forms part of a single economic entity (in an effort to preclude firms from setting up corporate structures to avoid liability).
We summarise below the key proposed Amendments to the Competition Act.
The evidentiary onus will now be on the respondent to counter the Competition Commission’s (Commission) prima facie case of excessive pricing against it.
The removal of the current requirement that an “excessive price” must be shown to be to the “detriment of consumers” in order to sustain a complaint.
An obligation on the Commission to publish guidelines to determine what constitutes an “excessive price”.
The introduction of a standard which benchmarks against the respondents own “cost benchmarking” as opposed to the utilisation of more objective standards tests.
The benchmarking now includes reference to “average avoidable costs” or “long run average incremental costs” (previously the Act’s only tests were marginal costs and average variable costs).
General Exclusionary Conduct
The current general exclusionary conduct provision, Section 8(c), will be replaced by an open list of commonly accepted forms of exclusionary conduct as identified in Section 8(d).
The definition of exclusionary conduct will include not only “barriers to entry and expansion within a market, but also to participation in a market”.
The additional forms of abusive conduct will be added to Section 8(d):
“prevent unreasonable conditions unrelated to the object of a contract being placed on the seller of goods or services”;
Section 8(1)(d)(vii) is inserted to include the practice of engaging in a margin squeeze as a possible abuse of dominance;
Section (1)(d)(viii) is introduced to protect suppliers to dominant firms from being required, through the abuse of dominance, to sell their goods or services at excessively low prices. This addresses the problem of monopsonies, namely when a customer enjoys significant buyer power over its suppliers”.
The Amendment will look to expand Section 9 of the Act to prohibit price discrimination by a dominant firm against its suppliers.
An onus of proof has been shifted on to the respondent to demonstrate that any price discrimination does not result in a substantial lessening of competition.
Introduction of certain mandatory disclosures relating, in particular, to that of cross-shareholding or directorship between the merging parties and other third parties.
Introduction of provisions which essentially allow the competition authorities to treat a number of smaller transactions (which fell below the merger thresholds), which took place within three years, as a single merger on the date of the latest transaction.
Introduction of additional public-interest grounds which must be taken into account when assessing the effects of a merger. These relate to “ownership, control and the support of small businesses and firms owned or controlled by historically disadvantaged persons”.
Granting the Commission powers to make orders or impose remedies (including forced divestiture recommendations which must be approved by the Tribunal) following the conclusion of a market inquiry (previously the Commission was only empowered to make recommendations to Parliament).
The introduction of a new competition test for market inquiries, namely whether any feature or combination of features in a market that prevents, restricts or distorts competition in that market constitutes an “adverse effect” (a significant departure from the traditional “substantial lessening of competition” test).
Focussed market inquiries are envisaged to replace the “Complex Monopoly” provisions which were promulgated in 2009 but not yet brought into effect.
Empowering the Commission to grant leniency to any firm.
This is a departure from the current leniency policy, under which the Commission is only permitted to grant leniency to the ‘first through the door’.
What does this all mean going forward?
The above proposed amendments are not exhaustive. In addition to above, it is apparent that Minister Patel envisages utilising the competition agencies and Act as a “one-stop-shop” in order to address not only competition issues but facilitate increased transformation within the industry and to promote a number of additional socio-economic objectives (i.e., to bring industrial policies within the remit of the competition agencies).
In a move which would may undermine the independence and impartiality of the competition agencies, the Amendment also intends providing the responsible “Minister with more effective means of participating in competition-related inquiries, investigations and adjudicative processes”.
“The amendments also strengthen the available interventions that will be undertaken to redress the specific challenges posed by concentration and untransformed ownership”.
Competition-law observers interviewed by AAT point out that the principle of separation of powers is a fundamental cornerstone of the South African constitutional democracy and is paramount in ensuring that there is an appropriate ‘checks and balances’ system in place. It is for this reason that the judiciary (which in this context includes the competition agencies) must remain independent, impartial and act without fear or favour (as mandated in terms of the Act).
The increased interventionist role which the executive is envisaged to play, by way of the Amendments, in the context of competition law enforcement raises particular concerns in this regard. Furthermore, the increased role of public-interest considerations effectively confers on the competition agencies the responsibility of determining the relevant ambit, scope and enforcement of socio-economic objectives. These are broad, subjective and may be vastly different depending on whether one is assessing these non-competition objectives in the short or long term.
Any uncertainty regarding the relevant factors which the competition authorities ought to take into account or whose views the authorities will be prepared to afford the most weight too, risks trust being lost in the objectivity and impartiality of the enforcement agencies. This will have a direct negative impact on the Government’s objective in selling South Africa as an investor friendly environment.
In addition, as Primerio attorney and competition counsel Andreas Stargard notes, the “future role played by the SACC’s market inquiries” is arguably open to significant abuse, as “the Competition Commission has broad discretion to impose robust remedies, even absent any evidence of a substantial lessening of competition.”
Mr. Stargard notes that the draft Amendment Bill, in its own words in section 43D (clause 21) “places a duty on the Commission to remedy structural features identified as having an adverse effect on competition in a market, including the use of divestiture orders. It also requires the Commission to record its reasons for the identified remedy. … These amendments empower the Commission to tailor new remedies demanded by the findings of the market inquiry. These remedies can be creative and flexible, constrained only by the requirements that they address the adverse effect on competition established by the market inquiry, and are reasonable and practicable.”
Although the Amendments recognise that concentration in of itself is not in all circumstances to be construed as an a priori negative, the lack of a clear and objective set of criteria together with the lower threshold (i.e., “adverse effect”) which must be met before the competition authorities may impose far-reaching remedies, coupled with the interventionist role which the executive may play (particularly in relation to market inquiries), may have a number of deterrent effects on both competition and investment.
Mr. Stargard notes in this regard that the “approach taken by the new draft legislation may in fact stifle innovation, growth, and an appetite for commercial expansion, thereby counteracting the express goals listed in its preamble: Firms that are currently sitting at a market share of around 30% for instance may not be incentivised to obtain any greater accretive share for fear of being construed as holding a dominant market position, once the 35% threshold is crossed“.
The objectives to facilitate a spread of ownership is not a novel objective of the post-Apartheid government and a number of pieces of legislation and policies have been introduced in order to facilitate the entry of small previously disadvantaged players into the market through agencies generally better equipped to deal with this. These policies, in general, have arguably not led to the government’s envisaged benefits. There may be a number of reasons for this, but the new Amendments do not seek to address the previous failures or identify why various other initiatives and pieces of legislation such as the Black Economic Empowerment (BEE) legislation has not worked (to the extent envisaged by Government). Furthermore, the Tribunal summed up this potential conflict neatly in the following extract in the Distillers case:
“Thus the public interest asserted pulls us in opposing directions. Where there are other appropriate legislative instruments to redress the public interest, we must be cognisant of them in determining what is left for us to do before we can consider whether the residual public interest, that is that part of the public interest not susceptible to or better able to be dealt with under another law, is substantial.”
Perhaps directing the substantial amount of tax payers’ money away from a certain dominant state-owned Airline – which has been plagued with maladministration – and rather use those funds to invest in small businesses will be a better solution to grow the economy and spread ownership to previously disadvantaged groups than potentially prejudicing dominant firms which are in fact efficient.
Furthermore, ordering divestitures requires that there be a suitable third party who could effectively take up the divested business and impose a competitive constraint on the dominant entity. It seems inevitable that based on the proposed Amendments the competition authorities will be placed in the invidious position of considering a divestiture to an entity which may not yet have proven any successful track record. The Amendments do not provide guidance for this and although the competition authorities have the necessary skills and resources to assess whether conduct has an anti-competitive effect on the market, it is less clear whether the authorities have the necessary skills to properly identify a suitable third party acquirer of a divested business.
In addition and importantly, promoting competition within the market achieves public interest objectives. Likewise, anything which undermines competition in the market will have a negative impact on the public interest considerations.
As John Oxenham and Patrick Smithhave argued elsewhere, “competition drives a more efficient allocation of resources, resulting in lower prices and better quality products for customers. Lower prices typically result in an expansion of output. Output expansion, combined with the effect of lower prices in respect of one good or service frees up resources to be spent in other areas of the economy. The result is likely to be higher output and, most importantly for emerging economies, employment”.
While it is true that ordinarily, a decrease in concentration and market power should result in an increase in employment we have not seen a comprehensive assessment of the negative costs associated with pursuing public interest objectives. Any weakening of a pure competition test must imply some costs in terms of lost efficiency, or less competitive outcome, which is justified based on a party’s perspective of a particular public interest factor. That loss in efficiency and less competitive outcome is very likely to have negative consequences for consumers, growth, and employment. Accordingly, the pursuit of “public-interest factors” might have some component of a loss to the public interest itself. We have not seen that loss in efficiency (and resultant harm to the public interest, as comprehensively understood) meaningfully acknowledged in the proposed Amendments.
A further risk to the broad and open ended role which public interest considerations are likely to play in competition law matters should the Amendments be passed is a significant risk of interventionism by third parties (in particular, competitors, Trade Unions and Government) who may look to utilise the Act to simply to harass competitors rather than pursue legitimate pro-competition objectives. The competition authorities will need to be extra mindful of the delays, costs and uncertainty which opportunistic intervention may lead to.
Although there are certain aspects of the Amendments which are welcomed, such as limiting the timeline of market inquiries, from a policy perspective the Amendments appear to go far beyond consumer protection issues in an effort to address certain socio-economic disparities in the South African economy, and may, in fact very likely hinder the development of the economy.
Based on the objectives which underpin the Amendments, it appears as if the Department of Economic Development is focused on dividing the existing ‘economic pie’ rather than on growing it for the benefit of all South Africans.
From a competition law enforcement perspective, however, firms conducting business in South Africa are likely to see a significant shake-up should the Amendments be brought into effect as a number of markets have been identified as highly concentrated (including, Communication Energy, Financial Services, Food and agro-processing, Infrastructure and construction, Intermediate industrial products, Mining, Pharmaceuticals and Transport).
[To contact any of the contributors to this article, or should you require any further information regarding the Amendment Bill, you are welcome to contact the AAT editors email@example.com]
The Namibian Competition Commission (NaCC) recently referred Namib Mills to the Windhoek High Court for the imposition of a N$ 51 million (approx. USD 3.5 million) administrative penalty following the NaCC’s finding that Namib Mills has abused its dominance in the market by contractually requiring 54 bakeries to exclusively procure flour from Namib Mills.
In terms of the contractual arrangements, Namib Mills loaned capital to the bakeries for, inter alia, purchasing baking equipment. The tying provisions in the contractual arrangements at the heart of the dispute essentially preclude the respective bakeries from acquiring flour from any flour supplier other than Namib Mills for a period of 5 years. Any breach of this provision enables Namib Mills from calling for the immediate repayment of the loan amount in full (including repossessing the baking equipment if required).
The NaCC has alleged that this contractual restriction precludes other flour suppliers from entering into the market due to Namib Mills’ high market share.
The penalty which the NaCC has requested the High Court impose translates to approximately 2.6% of Namib Mill’s turnover for the previous financial year.
The case is unlikely to be finalised this year. It will, however, be a landmark judgment in relation to the assessment of the abuse of dominance provisions in terms of the Namibian Competition Act (Act).
Andreas Stargard, an antitrust attorneywith Primerio Ltd. points out that, to date, there has been a “dearth of precedent in Namibia relating to the manner in which the provisions of section 24 of the Act should be interpreted and specifically what thresholds and criteria the authorities should consider in determining whether a dominant firm has in fact ‘abused’ its dominance or monopolised any relevant market.” He notes that the company is in fact the largest grain processor in Namibia, with a reported market share of well above 60%, a fact that will “almost certainly play a determinative role in the ultimate decision in the matter. Foreclosure of rivals, which is clearly the main theory of harm here, requires a degree of market power that the NaCC appears to have found exists in this market, and a two-thirds share is generally accepted in antitrust law as sufficient to establish a risk of foreclosure, when taken together with anti-competitive acts, such as those alleged by the Commission here.”
Unlike its South African counterpart, the Namibian Competition Act does not clearly permit for a rule of reason defence for abuse of dominance conduct (unless specifically excluded, the South African Competition Act does permit for a rule of reason defence). In other words, it is not clear to what extent a complainant must demonstrate actual anti-competitive effects (i.e. foreclosure or consumer welfare effects) and whether pro-competitive, technology or other efficiency arguments are taken into consideration. Furthermore, as John Oxenham, director of Primerio points out, “it is also not clear who bears the onus and what level of proof is required to make a successful showing of an anti-competitive effect”.
Section 24 of the Act expressly prohibits dominants firms from:
“directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; or
“limiting or restricting production, market outlets or market access, investment, technical development or technological progress”
Without a clear framework in place, the abuse of dominance provisions could be extremely far reaching. For instance, a dominant firm would clearly need to, from time to time, place certain restrictions on third parties, particularly if the dominant firm has invested or assumed a certain amount of risk on behalf of that third party. Ensuring that a firm is able to safeguard and recoup its investment is inherently pro-competitive as this ensure continuous investment which brings with it innovation, better quality and ultimately lower prices for consumers.
In terms of the broad wording of the Act, however, a key challenge which the authorities face is assessing where one draws the line between exclusionary conduct which is justified by rule of reason arguments and at what point such exclusionary practices constitutes an abuse.
As a general observation, Andreas Stargard notes that “abuse of dominance cases are particularly challenging from an evidentiary point of view and typically require robust economic evidence when grappling with the various theories of harm and rule of reason justifications”.
Accordingly, a further difficulty which both Namib Mills and the NaCC face is that to the extent the High Court permits evidence to be led demonstrating the pro versus anti-competitive effects of the alleged conduct, the High Court may not be best placed to assess the evidence.
Regardless, the outcome of this case will be likely have far reaching consequences for firms who may be considered to be dominant in the Namibian market.
[Michael-James Currie is a practicing competition lawyer assisting clients with competition related matters in a number of African jurisdictions. Should you wish to contact Michael-James or any of the AAT contributors, kindly contact us at firstname.lastname@example.org and the AAT team will put you in touch with the relevant individuals]
The South African Competition Commission (SACC) recently announced that it would withdraw its complaint of abuse of dominance levelled against two of the four pharmaceutical companies who had allegedly engaged in excessive pricing in relation to certain cancer medications in South Africa.
The companies who were implicated in the SACC’s investigation were Roche and Genentech, Pfizer, Equity and Aspen.
The SACC indicated that it had withdrawn its complaint in respect of Aspen and Equity as the relevant products only generated a small portion of revenue in South Africa or in the case of Equity, the relevant product is not registered in South Africa and was only imported once into South Africa from Germany (which was the basis for the high price charged in South Africa). The complaint against Roche and Pfizer will, according to the SACC, continue.
In the same week, the SACC announced that it has launched an abuse of dominance investigation against Vodacom for engaging in exclusionary conduct. This investigation by the SACC is somewhat puzzling as it appears from the SACC’s media release that the reason why Vodacom is being investigated is on the basis that Vodacom had won a tender issued by the National Treasury to become the sole provider of mobile telecommunication services to the government.
The SACC alleges that previously, government departments could purchase mobile telecommunication services from any mobile network operator, but following the award of the tender to Vodacom, other departments, including state owned entities and municipalities, will be incentivised to adopt new contracts with Vodacom. In other words, Vodacom would either be precluding government departments or inducing them not to deal with Vodacom’s competitors in contravention of Section 8 of the Competition Act.
In order to sustain an exclusionary conduct complaint, it must be demonstrated that the alleged conduct was in fact anti-competitive and cannot be outweighed by any pro-competitive or other efficiency justifications.
Importantly, the SACC has not indicated that the actual tender process in any way distorted a competitive bid being submitted by Vodacom.
Accordingly, by being awarded the tender, particularly a public tender issued by the National Treasury, one would have anticipated that this would be indicative that Vodacom’s bid was the most competitive offering – why else sign the agreement in the first place. It could hardly be the case that the National Treasury was ‘forced’ into accepting Vodacom’s terms and if there was an irregularity with the tender process, then why lodge a complaint with the Competition Authorities. This would be a public procurement issue.
Accordingly, the message which seems to be imparted from the SACC’s decision to investigate Vodacom is that dominant firms should be particularly cautious about tendering for a particular bid – they may just win.
Although the investigation has only recently been announced by the SACC, Vodacom’s share price dropped 8% following news of the investigation. Regardless, of whether the complaint levelled against Vodacom has any merit, Vodacom is already paying a reputational price which in today’s day and age, can be significantly costly.