Big Picture, BRICS, economics, event, full article, South Africa

“Emerging Antitrust”: One size doesn’t fit all?

Pro rem publicam

At the Concurrences “Antitrust & Developing and Emerging Economies” conference held at NYU Law last Friday — and aptly sub-titled “Coping with nationalism, building inclusive growth” — the audience was treated to a (rather iconoclastic, yet fascinating) keynote speech by Nobel laureate economics professor Joe Stiglitz, which highlighted what would become a theme woven throughout the four panels of the day: One size does not fit all when it comes to competition-law regimes, according to a majority of the speakers; imposing a pure U.S. or EU-derived methodology without regard to local economic and/or political differences is doomed to fail.  However, as we outline further below, there were also countervailing voices…

Nobel Laureate Joseph Stiglitz: “Revisit all of antitrust!”

In the words of Professor Stiglitz, his advice to developing nations was (perhaps to the chagrin of U.S. government representatives, such as the FTC’s international director, Randy Tritell): “don’t copy the US antitrust laws and presumptions!”  Smaller markets in developing countries are even more susceptible to market power by few large firms.  Competition law can be used in developing countries to advance the public interest, as there are fewer “tools in the toolkit” in those nations, and in his view, all available tools should thus be used.  He referred to the WalMart/Massmart transaction in South Africa in this regard, noting the public-interest conditions imposed there.

On the day’s Mega Mergers panel, SACC Commissioner Tembinkosi Bonakele noted how the outcomes of truly global “mega mergers” all having been positive, “there has been no outright prohibition, there really is no problem that’s too big which could not be remedied by the authorities and the parties.”

Andreas Stargard and Commissioner Tembinkosi Bonakele (South Africa)

Observes Andreas Stargard: “Commissioner Bonakele also pointed to the importance of international merger enforcers cooperating on remedies, in order to allow these positive outcomes to be maintained.  Taking up Professor Harry First’s hypothetical of a joint or ‘merged’ antitrust enforcement agency, Mr. Bonakele considered a combined merger authority for the African continent a possibility, especially in light of the many small jurisdictions which individually lack resources to police cross-border M&A activity.”  Mr. Bonakele expressed the concern that “the smaller, national enforcers certainly feel as if they cannot block a mega deal on their own, so they largely defer” to the established agencies, such as the EC and DOJ / FTC.

In response to Frederic Jenny’s critical introduction of the South African Competition Amendment Act, Commissioner Bonakele commented that the current legal regime lacked the ability to tackle concentration as a market feature in itself, whilst the SACC had a comparatively positive track record on unilateral enforcement issues.  Overall, he disagreed with the moderator that most of the Bill’s changes were drastic, stating simply that it would in fact bring South Africa more in line with other international regimes.

As to the ministerial intervention powers, he identified two concerns, namely the use of the agency’s resources as well as the possible risk of abuse by a minister who could employ the new law to pursue ulterior motives against a firm or a sector.

Counterpoint: public interest or politicization?

Prof. Ioannis Lianos characterized the “slightly fuzzy public interest test” as largely a scheme to enhance the bargaining power of the competition agencies that do apply such a test.

Canadian attorney and former enforcer Lawson Hunter pointed out that the trend of growing political interference in the merger approval process has spread globally, not only in developing nations but also in well-established regimes — often under the guise of national security reviews, which are “obscure, opaque in process, fundamentally political, and without any ‘there there’.”  Merger review has “simply become very broad and less doctrinal.”  “I found it interesting that Mr. Hunter recommended that other antitrust agencies should give more frank input into their sister agencies, if and when those stray from the right path,” said Stargard, who focuses his practice on competition matters across the continent.  “Hunter also pointed to the tendency in emerging antitrust jurisdictions to abuse the remedy process in merger control to address economic issues that lie well outside the actual competition concerns that may have been found — an issue we have also come across, sadly.”

Commissioner Bonakele closed the final panel of the day by addressing the recently ratified South African Competition Amendment Bill: he admitted that there were some “radical” provisions in the law, such as the power to break up companies, as well as the existence of a risk of government using the law’s new national security provision in a protectionist manner. He concluded by stating his personal worry that the law had possibly too much ambition, which could be difficult to implement in reality by the SACC.

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CCC workshop participants
AAT exclusive, agriculture, cartels, COMESA, East Africa, event, Extra-judicial Factors, full article, Kenya, Media, mergers, monopsony, Nigeria, Uganda

COMESA competition workshops underway (#CCCworkshop)

Events focus on media & business community’s understanding of competition rules and practical workload of CCC

Media

For two days this week, COMESA will hold its 5th annual “Regional Sensitization Workshop for Business Reporters“, focussed on provisions and application of the COMESA competition regulations and trade developments within the 19-country common market.

Over 30 journalists from close to a dozen countries are expected to participate in the event, held in Narobi, Kenya, from Monday – Tuesday.

AfricanAntitrust.com will cover all pertinent news emerging from the conference.  We will update this post as the conference progresses.

Speakers include a crème de la crème of East African government antitrust enforcement, including the CCC’s own Willard Mwemba (head of M&A), the CCC’s Director Dr. George Lipimile, and the Director and CEO of the Competition Authority of Kenya, Francis Wang’ombe Kariuki.  Topics will include news on the rather well-developed area of of mergerenforcement, regional integration & competition policy, as well as the concept of antitrust enforcement by the CCC as to restrictive business practices, an area that has been thus far less developed by the Commission in terms of visibility and actual enforcement, especially when compared to M&A.  We previously quoted Director Lipimile’s statement at a 2014 conference that, since the CCC’s commencement of operations “in January, 2013, the most active provisions of the Regulations have been the merger control provisions.”

Andreas Stargard, a competition practitioner, notes:

“We have been impressed with the Commission’s progress to-date, but remain surprised that no cartel cases have emerged from the CCC’s activities.  We believe that the CCC has sufficient capacity and experience now, in its sixth year of existence, to pursue both collusion and unilateral-conduct competition cases.

Personally, I remain cautiously optimistic that the CCC will, going forward, take up the full spectrum of antitrust enforcement activities — beyond pure merger review — including monopolisation/abuse of dominance cases, as well as the inevitable cartel investigations and prosecutions that must follow.”

The media conference will conclude tomorrow evening, June 26th.

Business Community

COMESA Competition Commission logoThe second event, also held in Nairobi, will shift its focus both in terms of attendees and messaging: It is the CCC’s first-ever competition-law sensitization workshop for the Business Community, to take place on Wednesday.  It is, arguably, even more topical than the former, given that the target audience of this workshop are the corporate actors at whom the competition legislation is aimed — invited are not only practicing attorneys, but also Managing Directors, CEOs, company secretaries, and board members of corporations.  It is this audience that, in essence, conducts the type of Mergers & Acquisitions and (in some instances) restrictive, anti-competitive business conduct that falls under the jurisdiction of Messrs. Lipimile, Mwemba, and Kariuki as well as their other domestic African counterparts in the region.

The inter-regional trade component will also be emphasized; as the CCC’s materials note, “we are at a historical moment in time where the Tripartite and Continental Free Trade Area agreements are underway. The objective of these agreements is to realize a single market. Competition law plays a vital role in the realization of this objective, therefore its imperative that journalists have an understanding of how competition law contributes to the Agenda.”

#LiveUpdates from the #CCCworkshop

Kenya perspective

Boniface Kamiti, the CAK representative replacing Mr. Kariuki at the event, noted that Africa in general and including the COMESA region “has a weak competition culture amongst businesses — which is why cartels are continuing in Africa, and the level of M&A is not at the level one would expect.”  This is why media “reporting on competition advocacy is very important, to articulate the benefits of competition policy and how enforcement activities further its goals, so the COMESA countries may be able to compete with other countries, including even the EU members, at a high level.”

He also highlighted — although without further explanation — the “interplay between the COMESA competition laws and those of the member countries; most people are not aware of that!”  This comment is of particular interest in light of the prior jurisdictional tension that had existed between national agencies and the CCC in the past regarding where and when to file M&A deals.  These “teething issues are now fully resolved”, according to Dr. Lipimile, and there are neither de iure nor any de facto merger notification requirements in individual COMESA member states other than the “one-stop shop” CCC filing (which has, according to Mr. Mwemba, reduced parties’ M&A transaction costs by 66%).

On the issue of restrictive trade practices (RTP), the CAK reminded participants that trade associations often serve to facilitate RTP such as price-fixing cartels, which are subject to (historically not yet imposed, nor likely to be) criminal sanctions in Kenya. It also observed that (1) manufacturers’ resale price maintenance (RPM) would almost always be prosecuted under the Kenyan Competition Act, and that (2) since a 2016 legislative amendment, monopsony conduct (abuse of buyer power) is also subject to the Act’s prohibitions.

Concluding, the CAK’s Barnabas Andiva spoke of its “fruitful” collaboration with the CCC on ongoing RTP matters, noting the existing inter-agency Cooperation Agreement. Added Mr. Mwemba, “we have approximately 19 pending RTP cases.”

CCC leadership perspective:  Nudging Uganda and Nigeria towards competition enforcement

CCC_Director

George Lipimile, CEO, COMESA Competition Commission

Dr. Lipimile took up Mr. Kamiti’s “weak African competition culture” point, noting the peculiar regional issue that “between poverty and development lies competition” to enhance consumer welfare.

He took the audience through a brief history of antitrust laws globally, and encouraged journalists to explain the practical benefits of “creating competitive markets” for the population of the COMESA region at large.

He called on Uganda and Nigeria to — finally — enact a competition law.  (AAT has independently reported on Uganda and also the EAC’s emphasis on its member nations having operational antitrust regimes.  We observe that Uganda does have a draft Competition Bill pending for review; a fellow Ugandan journalist at the conference mentioned that there has been some, undefined, progress made on advancing it in the Ugandan legislature.)  Dangote — the vast Nigerian cement conglomerate (see our prior article here) — and Lafarge played exemplary roles in Lipimile’s discourse, in which he commented that “they do not need protecting, they are large”, instead “we need more players” to compete.

Importantly, Dr. Lipimile emphasized that protectionism is anti-competitive, that “competition law must not discriminate,” and that its goal of ensuring competitive market behaviour must not be confused with the objectives of other laws that are more specifically geared to developing certain societal groups or bestow benefits on disadvantaged populations, as these are not the objectives of competition legislation.

The CCC also called on the press to play a more active role in the actual investigation of anti-competitive behaviour, by reporting on bid rigging, unreported M&A activity, suspected cartels (e.g., based on unexplained, joint price hikes in an industry), and the like.  These types of media reports may indeed prompt CCC investigations, Lipimile said.  Current “market partitioning” investigations mentioned by him include Coca Cola, SABMiller, and Unilever.

He concluded with the — intriguing, yet extremely challenging, in our view — idea of expanding and replicating the COMESA competition model on a full-fledged African scale, possibly involving the African Union as a vehicle.

CCC workshop participants

2018 CCC workshop participants

COMESA Trade perspective

The organisation’s Director of Trade & Commerce, Francis Mangeni, presented the ‘competition-counterpart’ perspective on trade, using the timely example of Kenyan sugar imports, the cartel-like structure supporting them, and the resulting artificially high prices, noting the politically-influenced protectionist importation limitations imposed in Kenya.

Dr. Mangeni opined that the CCC “can and should scale up its operations vigorously” to address all competition-related impediments to free trade in the area.

CCC Mergers

Director of M&A, Mr. Mwemba, updated the conference on the agency’s merger-review developments. He pointed to the agency’s best-of-breed electronic merger filing mechanism (reducing party costs), and the importance of the CCC’s staying abreast of all new antitrust economics tools as well as commercial technologies in order to be able to evaluate new markets and their competitiveness (e.g., online payments).

As Mr. Mwemba rightly pointed out, most transactions “do not raise competition concerns” and those that do can be and often are resolved via constructive discussions and, in some cases, undertakings by the affected companies. In addition, the CCC follows international best practices such as engaging in pre-merger notification talks with the parties, as well as follow-ups with stakeholders in the affected jurisdictions.

Key Statistics

Year-to-date (2018), the 24 notified mergers account for approximately $18 billion in COMESA turnover alone. Leading M&A sectors are banking, finance, energy, construction, and agriculture.

In terms of geographic origination, Kenya, Zambia, and Mauritius are the leading source nations of deal-making parties, with Zimbabwe and Uganda closely following and rounding out the Top-5 country list.

The total number of deals reviewed by the CCC since 2013 amounts to 175 with a total transaction value of US $92 billion, accounting for approximately $73.7 billion in COMESA market revenues alone. (The filing fees derived by the Commission have totaled $27.9 million, of which half is shared with the affected member states.)

All notified deals have received approval thus far. Over 90% of transactions were approved unconditionally. In 15 merger cases, the CCC decided to impose conditions on the approval.

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AAT exclusive, East Africa, exclusivity, fees, full article, Kenya, notification, Price fixing, public-interest, trade associations

Restriction on parallel imports gets red-lighted by CAK

Enforcement Update: Kenya Exemption Applications

The Competition Authority of Kenya (“CAK”) recently issued a press release on its two decisions to reject exemptions applications under sections 25 and 26 of the Kenyan Competition Act 12 of 2010. The CAK rejected applications by WOW beverages (a leading distributor in the alcoholic beverages industry) and the Institute of Certified Public Secretaries (a professional body, hereafter “ICPS”).

WOW beverages filed an exemption application to the CAK, which would have allowed it to secure contracts with seven international suppliers to import and distribute exclusively 214 premium wine and spirit brands in Kenya. WOW beverages argued that the proposed exclusive contracts were necessary to protect its investment and would protect consumers from defective products, and guarantee accountability in the event that such products enter the Kenyan market. The CAK rejected this argument stating: “The Authority [CAK] is of the opinion that parallel imports, through legal channels, are likely to bring more benefits to Kenyan consumers, including the enhancement of intra-brand competition which often leads to lower prices.

The CAK’s decision on the application brought by ICPS (which was one of the first professional bodies to attempt to obtain an exemption to set fee guidelines) made it clear that there was no evidence to suggest that fixing prices for auditing services will improve the profession or prevent its decline and, instead, it is likely to eliminate the incentive to offer quality services. Interestingly, the CAK went a step further to state that “price fixing by professional associations extinguish[es] competition with no plausible public benefits” and went on to warn other professions that “the decision to reject the institute’s exemption application sends a strong message to professional bodies that fee guidelines decrease competition, reduce innovation and efficiencies, and limit customer choices”.  This likely follows from the recent increase in exemption applications brought by other professional bodies in Kenya such as the Institute of Certified Public Accountants of Kenya and the Law Society of Kenya (which has a remuneration order). The CAK’s decisions on these applications are likely to be published in short order.

With increased awareness of competition law in Kenya, more entities are applying to the CAK for exemptions primarily to ensure that they are not found to be engaging in anticompetitive conduct, where the penalty can be up to 10% of the turnover of the entity.

According to practicing Kenyan antitrust lawyer, Ruth Mosoti, the CAK has powers to allow an entity to engage in what would ordinarily be considered anticompetitive conduct.  The Act provides a framework on how such applications are to be determined “but, most importantly, the benefits must outweigh the competition concerns and meet the public-interest requirement.  The competition authority also appears to put great emphasis on espousing international best practices.  It is therefore important when one is making such an application to ensure that the same is backed by international best practices.”

Andreas Stargard, Ms. Mosoti’s colleague at Primerio Ltd., echoes her sentiments.  He notes that the CAK follows in the well-tread footsteps of other international competition enforcers, which have dealt with antitrust exemption applications for decades: “Similar to the European Commission in its past rulings on meritless Article 101(3) exemption requests, the CAK has diligently applied common-sense competition principles in these two recent cases.”  Stargard advises that other companies or trade groups wishing to seek reprieve from the Kenyan Act should consider certain key factors first before approaching the CAK:

First, ask yourself whether the proposed conduct for which you seek an exemption contributes to improving something other than your own bottom line (such as innovation that benefits others, or efficiency or a reduction in emissions, etc.), and consider whether consumers at large receive share of the resulting benefits.

In addition, just as with traditional joint-venture analysis, be prepared to articulate how the proposed agreement or restriction is absolutely indispensable to obtaining these benefits and accomplishing the stated economic goal.

Finally, seek competent legal advice from experts, who will be able to provide a professional evaluation whether or not the agreement you seek to exempt is likely to qualify under the criteria of sections 25 and 26 of the Act — or whether the CAK will rule against it, finding that an exclusivity clause or or restriction you seek will more likely than not eliminate competition.

For more on recent exemption application see our related articles, exclusively at AAT: Seeking Exemptions From Resale Price Maintenance Rules and Airlines Seek Antitrust Exemption: Kq-Cak Application Pending

 

 

 

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AAT exclusive, Big Picture, dominance, draft, economics, fines, full article, legislation, leniency, market study, mergers, Patel, predatory pricing, Protectionism, public-interest, South Africa

The New South African Competition Amendment Bill – What it Means for Business

By Michael-James Currie currie2

Background

On 1 December 2017, the Minister of Economic Development (under whose auspices the South African competition authorities fall), Ebrahim Patel, published draft amendments to the South African Competition Act [PDF], 89 of 1998 (Act) for public comment.

The proposed amendments (Amendments) to the Act, which principally aim to address concentration in the market, go well beyond pure competition issues and bestow a significant public-interest mandate on the competition authorities.

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”.

south_africaPatel’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).

Minister Patel speaks

Minister Patel speaks

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.

Abuse-of-Dominance Provisions

Excessive pricing

  • 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”.

Predatory Pricing

  • 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”.

Price Discrimination

  • 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.

Merger-Control Provisions

  • 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”.

Market Inquiries

  • 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.

Additional Amendments

  • 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.”
Andreas Stargard

Andreas Stargard

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.

John Oxenham

John Oxenham

As John Oxenham and Patrick Smith have 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 at editor@africanantitrust.com]

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AAT exclusive, civil action, class actions, event, full article, legislation

Book release exclusive: “Class Action Litigation in South Africa”

As foreshadowed over the past 4 years, since the inception of this blog, the topic of class action litigation (aka collective action) has gained momentum in Africa’s southern-most jurisdiction.

For our readers’ consideration, we invite you to purchase our editor John Oxenham‘s new authoritative (and first of its kind) book, entitled “Class Action Litigation in South Africa”.  If interested, please use the form below or e-mail us (editor@africanantitrust.com) for ordering information from JUTA Law publishers.

If you are in Johannesburg, S.A., on Wednesday, 2 August 2017, we would also be delighted if you could attend the book launch event — please be sure to R.S.V.P. to bdev@primerio.international if you plan to do so, however, as it is a private guest-list event only and requires your name for access to the venue.

We are most excited about the volume, which is the first of its kind and deals with a novel area of the law.  It contains chapters written by current and former firm members, including Andreas Stargard, Njeri Mugure, and of course the editor, John Oxenham.

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AAT exclusive, BRICS, full article, Media, South Africa

Administrative Penalties & Behavioural Remedies – Two Sides of the Same Coin?

By AAT Senior Contributor, Michael-James Currie.

In the wake of the dust settling around the recent settlement agreement reached between ArcelorMittal (AMSA) and the South African Competition Commission (SACC), it may be an opportune time to consider the appropriateness of behavioural penalties levied in respect of firms engaging in cartel conduct or abuse of dominance practices.

AAT Header squareIn terms of the AMSA settlement agreement, AMSA admitted to contravening the cartel provisions contained in the Competition Act and agreed to pay a R1.5 billion (in instalments of no less than R300 million per annum for five years) administrative penalty. In addition to the administrative penalty, AMSA also agreed to invest approximately R4,6 Million into the South African economy for the next 5 years (provided the prevailing economic conditions render such investment feasible) by way of CAPEX obligations.

Furthermore, a pricing remedy was imposed on AMSA in terms of which AMSA undertook not to generate earnings before interest and tax of more than 10% for the next five years (which could be amended on good cause shown, but was capped, in any event, at 15%).

The nature of the settlement terms as agreed to by AMSA is not, however, a novel feature in settlements before the South African Competition Authorities. In 2010, the Competition Commission settled its investigation in relation to Pioneer Foods’ activities in the maize and wheat milling, baking, poultry and eggs industries (the settlement came after the Competition Tribunal had already imposed a R197 million administrative penalty against Pioneer in respect of its participation in a bread cartel).

In terms of the settlement agreement, Pioneer undertook to:

  • pay R250 million as an administrative penalty to National Revenue Fund;
  • pay R250 million to create an Agro-processing Competitiveness Fund to be administered by the Industrial Development Corporation (IDC);
  • increase its capital expenditure by R150 million over and above its currently approved capital expenditure (capex) budget; and
  • cooperate with the Competition Commission in the ongoing investigations and prosecutions of the cases that are the subject of this settlement; and stopping anti-competitive conduct and implementing a competition compliance programme.

Furthermore, and more recently, the consent agreement with edible fats producer Sime Darby Hudson Knight (“Sime Darby”), is a further example of a consent order which included financial undertakings in addition to paying an administrative penalty.

In terms of this consent agreement, Sime Darby undertook to invest and establish a warehouse for the distribution of its products into territories which it had previously not distributed its products into, due to the market allocation agreement which formed the basis of the complaint. Sime Darby also committed to contributing to funding the entry of a BEE distributor.

What is evident from the above three examples is that over and above the administrative penalty which may be imposed on a respondent, the financial impact of the additional behavioural and public interest related conditions may substantially exceed the administrative penalty itself.

It is, therefore, an important factor for respondents who find themselves in settlement negotiations with the Competition Commission to consider alternative terms of settling a matter as opposed to merely focussing on the administrative penalty itself.

From an agency’s perspective, the costs associated with behavioural conditions must be carefully weighed up as they also tend to require ongoing, and occasionally extensive oversight by the authorities. Furthermore, it is important to ensure that behavioural remedies are not abused, both by the authorities and by respondents.

south_africaWhile settlement negotiations are inherently flexible, it is important that agencies ensure an objective and a transparent methodology in the manner in which they approach the quantification of a settlement agreement. This has certainty been strived for by the Competition Commission when it elected to publish Guidelines on the Determination of the Calculation of Administrative Penalties (Guidelines). The objectives of the Guidelines, may however, be undermined in light of the broader behavioural and public interest related conditions imposed in recent cases.

A clear and objective point of departure would be favourable for both the agency itself and the relevant respondent in being able to conclude settlement negotiation expeditiously.

A further important consideration, which is particularly highlighted in the AMSA settlement agreement, is whether the remedies provide for an adequate deterrent factor and/or address the relevant harm.

Importantly, in the AMSA matter, AMSA’s R4.6 million CAPEX expenditure investment was as a result of a complaint into alleged abuse of dominance. In terms of the settlement agreement, AMSA did not admit liability for having engaged in abuse of dominance practices.

In light of the fact that the Competition Commission generally requires an admission of liability before concluding a consent order, it is not clear to us, at this stage, why the Commission elected not to demand an admission of liability in relation to the abuse of dominance complaint.

It may be that the Commission did not wish to spend the significant resources in prosecuting an abuse of dominance case, or that the Commission took the view that any abuse of dominance finding would likely only be in respect of the general prohibition against exclusionary conduct, as per Section 8(c) of the Competition Act, which carries no administrative liability for a first time offence.

Accordingly, it may have been a strategic weighing up of the ‘costs versus likely penalty’ which shaped the Commission’s strategic decision.

Whether or not such a strategic decision is justified is not a particular focus of this article. What we do wish to highlight, however, is that absent an admission of liability, a third party who seeks to pursue follow-on damages will be precluded from bringing a civil damages claim against AMSA. This was confirmed by the Supreme Court of Appeal in the Premier Foods matter in 2015.

The Media 24 Case

Shifting our train of thought to another issue, although not unrelated, is the question as to what exactly constitutes an administrative penalty?

The question was raised, although ultimately not decided by the Competition Tribunal in the recent Media 24 predatory pricing case.

After having been found guilty by the Competition Tribunal, in 2015, for contravening section 8(c) of the Competition Act (for engaging in ‘predatory pricing’), a separate hearing was held to determine the appropriate sanction. As mentioned above, an administrative penalty is not permissible for a first time offence of section 8(c) of the Act.

At the hearing the Competition Commission had proposed, as one of its remedies that Media 24 undertake to establish a R10 million development fund to fund a new entrant into the market.

Media 24 objected to the proposed remedy and raised the argument that the remedy proposed by the Commission would effectively be an administrative penalty, which is not a permissible sanction in terms of the Competition Act.

The Competition Tribunal elected to evaluate the remedy from a practical perspective, finding that the proposed remedy would not be suitable or effective, but deliberately kept open the legal question as to whether or not a remedy which requires any financial commitment from the respondent would effectively amount to an administrative penalty.

The question is rather vexing and may require clarification in due course.

Assuming that the proposed remedy in the Media 24 case would indeed amount to an administrative penalty, the question would naturally arise whether a CAPEX undertaking, as was the case in the AMSA matter discussed above, would also be considered a form of an administrative penalty. If so, then due consideration should be had as to whether the aggregation of the ‘stated administrative penalty’ (i.e. the R1.5 billion in AMSA’s case) together with the behavioural remedies imposed in AMSA (a minimum of R4.6 billion), should be calculated for purposes of determining whether the statutory cap of 10% of a firm’s turnover has been exceeded.

Alternatively, if the Competition tribunal ultimately decides that the proposed remedy in Media 24 is not an administrative penalty as contemplated in terms of the Competition Act, then effectively, we may see an entire new paradigm in the manner in which firms are sanctioned for contravening the Competition Act. For instance, those provisions of the Competition Act which do not cater for an administrative penalty for a first time offence (i.e., certain vertical, horizontal and abuse of dominance practices), may in any event result in respondents paying substantial ‘penalties’ for contravening these provisions.

Furthermore, respondents may not be afforded the protection which the statutory cap places on administrative penalties. As noted above, a firm may be subjected to an administrative penalty which does not exceed 10% of its annual turnover, but the net effect of the respondent’s financial liability may indeed exceed the cap.

While we do not pronounce our views on this issue, suffice it to say that firms engaging with the Competition Authorities with a view of concluding a settlement agreement are entering into a ‘new world’ and there are a number of options, avenues and risks associated in ultimately negotiating a settlement.

Accordingly, the issues raised above may be particularly useful in the manner in which firms embark on their settlement strategies.

 

 

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Big Picture, consumer protection, ECONAfrica, full article, Kenya, Morocco, politics, public-interest, South Africa

Antitrust in the Digital Economy: Fighting Inequality?

AAT the big picture

HOW CAN COMPETITION LAW ENFORCEMENT IN THE DIGITAL ECONOMY HELP IN THE FIGHT AGAINST POVERTY?

By DWA co-founder and visiting AAT author, Amine Mansour* (re-published courtesy of Developing World Antitrust’s editors)

When talking about competition law and poverty alleviation, we may intuitively think about markets involving essential needs. The rise of new sectors may however prompt competition authorities to turn their attention away from these markets. One of those emerging sectors is the digital economy sector. This triggers the question of whether the latter should be a top priority in competition authorities’ agenda. The answer remains unclear and depends mainly on the potential value added to consumers in general and the poor in particular[1].

Should competition authorities in developing countries focus on digital markets?

Obviously, access to computer and technology is not a source of poverty stricto sensu. In the absence of basic needs, strategies focusing on digital sectors may prove meaningless. In practice, the last thing people living in extreme poverty will think about is gaining digital skills. Their immediate needs are embodied in markets offering goods and services which are basic necessities. The approach put forward by several Competition authorities in developing countries corroborates this view. For instance, in South Africa, digital markets are not seen as a top priority. Instead, the South African competition authority focuses on food and agro-processing, infrastructure and construction, banking and intermediate industrial products.

There are however compelling arguments to be made against such position. Most importantly, although access to technology and computers is not a source of poverty, such an access can be a solution to the poverty problem. In fact, closing the digital gap by providing digital skills and making access to technology and Internet easier can help the low income population when acting either as entrepreneurs or consumers. In both cases competition law can play a decisive role.

The low income population acting as consumers

First, when acting as consumers, people with low income can enjoy the benefits of new technology-based entrant. Thanks to lower costs of operation, lower barriers to entry and (almost) infinite buyers, these new operators have changed the competitive landscape by aggressively competing against traditional companies. These features have helped them not only extending existing products and services to low-income consumers but also making new ones available for them. Better yet, in some cases increased competition coming from technology-based companies motivates traditional business forms to adapt their offer to low-income consumers so as to face this new competition and remedy shrinking revenues. Perhaps, the most noteworthy aspect of all these evolutions, is that these new entrants have, in some instances, been able to challenge incumbents’ position by driving prices downward to levels unattainable by traditional companies without scarifying their profitability.

A shining example of all this dynamic is the possibility for low-income consumers to engage, thanks to some mobile companies, in financial transaction without the need to pass through the traditional stationary banking infrastructure. For instance, in Kenya, M-PESA a mobile money transfer service that has over 22 million subscribers[2] and around 40,000 agents (around 2600 Commercial bank branches)[3] changed the life of million of citizens. The service enables clients to deposit cash into their M-PESA accounts, send or transfer money to any other mobile phone user, withdraw cash and complete other financial transactions. A farmer in a remote area in Kenya can send or receive money by simply using his mobile phone. In this way, M-PESA can act as a substitute to personal bank accounts. This experience shows how the digital economy helps overcoming the prohibitive costs of reaching low-income customers and thus raising living standards.

On that basis, we can easily imagine the counter-argument incumbent companies might put forward. In this regard, unfair competition and the need for regulation to preserve policy objectives are often in the forefront. However, there is a great risk that these arguments are simply used to restrict market entry and impede competition from those new players.

In fact, this kind of arguments do not always reflect market reality. For example, in some remote geographic areas, traditional companies and the new ones based on the digital/internet space do not even compete directly against each other. Accordingly, regulation intended to protect policy goals has no role to play given that the affected consumers are out of the reach of the traditional business. In the M-PESA example, it may be possible to argue that any operator engaging in financial transactions should observe the regulatory restrictions that apply to the banking sector in order to ensure that policy objectives such as the stability of the banking system or the protection of consumer savings are preserved. However, applying such a reasoning will leave a large part of consumers with no alternative given the absence of a banking infrastructure in remote areas. The unfair competition and regulation arguments may only hold in cases where consumers are offered alternatives capable of providing an equivalent service.

This shows the need to proceed cautiously by favoring an evidence-based approach to the ex-post use of the regulation argument by incumbent operators. This is however only one of different facets of the interaction between the competitive impact of companies based on the internet-space, the regulatory framework and the repercussions for people with low income[4].

The low income population acting as entrepreneurs

Second, the focus on digital markets as way to alleviate poverty is further justified when low-income people act as entrepreneurs. In fact, digital markets are distinguished from basic good markets in that they may act as an empowering instrument that encourages entrepreneurship.

More precisely, the digitalization of the economy results in an improved access to market information which in turn may benefit entrepreneurs especially the poor whether they intervene in the same market or in a different one. Practice is replete with cases where, for instance, a downstream firm heavily relies for its production/operation on services or products offered by an upstream company operating in a digital market. Similarly, in a traditional and somewhat caricatural way, a small-scale farmer may use VOIP calls to obtain market information or directly contact buyers suppressing the need for a middleman.

However, we can well imagine the disastrous consequences for these small-scale farmers or the downstream firm if mobile operators decide to block access to internet telephony services such as Skype or WhatsApp based on cheap phone calls using VOIP (this is what actually happened in Morocco). In such a case, the digitalization of the economy has clearly contributed to greatly lowering the costs of communication and distribution. However, low income entrepreneurs are prevented from benefiting of these low costs, which are a key input to be able to compete in the market.

The major difficulty here lies in the fact that, when low income people act as entrepreneurs, it is likely that they organize their activities in small structures. This result in relationships and structures favorable to the emergence of exploitative abuses. Keeping digital markets clear from obstructing anticompetitive practices is thus indispensable to ensure that small existing or potential competitors are not prevented from competing. This might not be easily achieved given that competition authorities’ focus is sometimes more on high profile cases.

*Co-editor, Developing World Antitrust

[1] Intervention may also be justified by the institutional significance argument. This significance lies in the fact that those markets are growing ones and challenging the common ways of both doing business and applying competition rules which in turn make it crucial for authorities to intervene by drawing the lines that ensure the right conditions for those market to grow and develop.

[2] http://www.safaricom.co.ke/about-us/about-safaricom

[3] http://www.safaricom.co.ke/personal/m-pesa/get-started-with-m-pesa/m-pesa-agents

[4] For instance, it possible to think of the same problem from an ex-ante point of view highlighting incumbent firms’ efforts to block any re-examination of the regulatory standards that apply to the concerned sector (no relaxation of the quantitative and qualitative restrictions). This aspect has more to do with the advocacy function of competition authorities.

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