South Africa: Drought Highlights the Importance of the Basic Foods Sector to the Competition Commission

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By Michael-James Currie

South Africa is in the midst of one of the worst droughts in decades.  The droughts impact stretches far broader than simply grass roots levels. Maize prices have recently reached a record high due to shortage of supply over the past 12 months, which, being a staple food source for the majority of the population..

It comes as no surprise that the drought has sparked interest of  the competition authorities or those wanting to use competition law as a means to promote and protect socio-economic goals.south_africa

The recent matter involving alleged price-fixing and collusion between a number of fertiliser companies (including the H Pistorius and Co. company which has strong family ties to convicted former Para-Olympian champion, Oscar Pistorius – previously reported by AAT) will be heard before the Tribunal in a month’s time.  Despite the matter laying dormant for some time, the Commission appears intent on prosecuting the respondents.  The Commission’s spokesperson stated that the fertiliser sector is viewed as a priority sector, due to the its importance as an input in the agricultural sector.  The case will undoubtedly receive additional media attention due to the heightened focus on the agricultural industry brought about by the drought, as well of course from an atmospheric perspective given the Oscar Pistorius link.

Unrelated to the fertiliser case, the Congress of South African Trade Unions (COSATU) has recently called on the Commission to investigate the maize sector for collusion. This call follows an investigation which was already carried out during 2006-2007 which saw a number of maize milling companies referred to the Tribunal for adjudication. A date for these complaint hearings has not yet been set.  The complaint brought by COSATU, which must be investigated by the Commission, relates to traders who are allegedly “buying and selling maize unlawfully and manipulating the price of maize taking advantage of the shortage of supply of maize as a result of the drought”.  The allegations have, however, been denied by AgriSA who insists that the price of maize has consistently being increasing from 2015 to over 50%.

Competition & the Public Interest

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The public-interest saga continues: South African antitrust & inclusiveness

More on the revised Guidelines for the public-interest assessment in southern African’s largest economy… By AAT guest author Anne Brigot-Laperrousaz.

In December 2015, the South African Competition Commission (the “Commission”) issued revised guidelines for the assessment of public interest provisions in mergers (the “Guidelines”). This document is a further step in a long process aiming at ensuring better efficiency in the Commission’s evaluation of mergers. One of the main rationale is that informed parties will be able to anticipate the documentation and data to be transmitted to the Commission in view of obtaining its approval. Transparency, predictability and clarity, all of them fundamental aspects of legal certainty, shall result in reduction of delays and enhancement of legitimacy of the Commission’s decisions.

In January 2015, the Commission issued a first draft of those Guidelines, open to comment by stakeholders. Several bodies answered positively to this initiative, including law firms (Bowman Gilfilan, Baker & McKenzie, …), companies (Vodacom, Tabacks), international associations (International Bar Association) and policy research centers (UK Center for Competition Policy). The December 2015 Guidelines are the result of this broad enquiry, and the final version open to comments until the 29th January 2016.

Public-interest considerations abroad

Firstly, the international perspective on public interest considerations in the assessment of mergers might offer an interesting insight to the question.

In Europe, at Community level, the EU Merger Regulation (the “EUMR”) prevents the European Commission to assess non-competition considerations in its analysis of the proposed transaction. Indeed, Article 2 EUMR sets out a test based exclusively on the potential “significant impediment to effective competition”, and the available remedies when the merger might result in such an impediment.

Yet Article 21(4) EUMR allows interventions of Member States to protect three determined types of public interests, namely, public security, plurality of the media and prudential rules. Exceptionally, the European Commission may allow a national measure aimed at protecting a different legitimate interest, although this procedure is rarely used. In any case, the measures taken shall be compatible with the general principles and provisions of European Union law.

A major difference between EU and US competition laws is that the former was meant to serve as a tool to achieve a State union, whereas the latter intervened in an already federated region. This feature arguably plays a significant role in the importance attached to further political aims in the elaboration of the competition framework, although this feature did appear at the first stages of the US.

Two US institutions are today in charge of reviewing the competitive effects of mergers: the Antitrust Division of the US Department of Justice, and the Federal Trade Commission. Those two institutions act as competition regulators, focusing exclusively on the competition aspects of targeted operations. Other public policy interests, related to specific sectors, might be analysed and taken into account under the responsibility of other US agencies, such as the Federal Communication Commission or the Federal Reserve and the Federal Deposit Insurance Corporation. Such agencies therefore act as sector or industry regulators.

To the extent that the South African Competition Act (1998) (the “Act”) gives a particularly important role to public interest criteria in merger controls, the need for transparency and clarity in the Commission’s assessment mergers is all the more crucial.

south_africaZA: The integration of stakeholders’ comments by the Competition Commission

As for the general observations on the January 2015 guidelines, some constants remain in most of the stakeholders’ commentaries.

This is so in particular as regards evidential requirements, that is, the type and nature of information that would generally be required from the merging parties. Although the Guidelines do provide a relatively detailed and insightful perspective on the Commission’s methodology in assessing mergers, it does not appear that they answer this recurrent request, even in the form of non-exhaustive references to specific documents.

Tembinkosi Bonakele, the South African Competition Commissioner, had the following to say on the topic, when interviewed for AAT’s Meet the Enforcers:

It is important that BRICS countries weigh-in on this important debate. There is a divergence of views amongst many antitrust practitioners on the compatibility of antitrust issues with public interest issues, but everyone accepts that there are public interest issues. The conference will deepen and broaden perspectives on the matter. …

 

Tembinkosi-Bonakele-Profile-PicThe South African competition authorities were established as a package of reforms to transform the unequal South African economy to make it economy inclusive and ensuring that those who participate in it are competitive.

Through engagements such as the BRICS conference we’re able to discuss with our BRICS counterparts how to make our economies, which are similar, more efficient, competitive and inclusive.

A second concern regards the issue of “balancing” competition and other public policy interests. The different nature of those matters, implying various qualitative and quantitative methods of assessment, arguably makes this task “inherently arbitrary”. This is even more so in presence of the broad and general principles addressed by the Act, and that the Guidelines arguably ought to determine and circumscribe. In their revised version, although some further precisions on the process and the determining factors of the Commission’s assessment have been added, some grey areas remain. For instance, some commentators have highlighted the fact that as regards the effect of the merger on a particular industrial sector or region, the Commission “may consider any public interest argument in justification of the substantial negative effect arising as a result of the merger on an industrial sector or region” (Guidelines, §7.2.4.2). It is our view that this wording is all too broad and undetermined to provide useful guidance to practitioners, and ensure a transparent and consistent analysis by the Commission. Not to mention that, as noted by the International Bar Association, the Act limits the Commission’s jurisdiction in evaluating public interest matters in merger reviews. This reference to “any public interest” arguably overlooks the Commission’s limited jurisdiction. Unfortunately, this comment does not seem to have been taken into account in the drafting of the revised version.

The same analysis can be made of the use of such concepts as causality, for example, which is not clearly defined. Furthermore, the Guidelines often provide for the possibility to prove that the effect “results or arises from” the merger, together with the requirement of a causal link, undermining the precise and strict legal requirements that are entailed by the notion of causality (see §7.2.2.1). In other instances, the Commission will merely “consider whether the employment effects are in any way linked to the intentions […] of the acquiring group”, which broadens unreasonably the scope of analysis.

Overall, when considering the clarifications that were called for in various submissions from stakeholders, it appears that in most cases, where the comments have been echoed in the revised Guidelines, the drafting committee has hidden the difficulties rather than going further in its analysis.

For instance, several commentators have expressed their surprise at the principle stated in the January 2015 version of the Guidelines, in the section dedicated to the general approach to assessing public interest provisions, that when the Commission found that the public interest effects were neutral, it would balance the negative and positive effects (§6.6). Indeed, the concept lacked clarity, and does not appear in the revised Guidelines.

Yet, some more substantial comments, in that they pointed to more potentially noxious loopholes, have apparently been disregarded. This is the case of the consequences of the finding of negative competition and public policy effects, a situation where the Commission does not seem to consider the possibility to justify and find remedies. It appears that the result would be a forthright prohibition of the transaction, even if other ways could have existed.

More generally, the perspective on the matters at stake seems to be rather hostile. For instance, in cases where negative public interest effects have been identified, the Commission “may consider imposing remedies or prohibiting the merger depending on the substantiality of the public interest effects”. It may be considered that a more relevant criterion might have been the existence and efficiency of potential remedies, rather than the substantiality of the negative effects at stake. Indeed, although the substantial character of the adverse effects might be a suitable criterion to set the standard of analysis, it does not easily justify to disregard possible remedies, which seems to be the result of the present wording.

Similarly, the Guidelines seem to set the existence of a positive competition finding as a threshold to its analysis. It has been advocated that a more suitable logic would be that the starting point is the absence of any prevention or lessening of competition, which would be more in line with both the Act and the role it affords to public policy concerns, and international best practice.

Conclusion

As noted by the International Competition Network, “the legal framework for competition law merger review should focus exclusively on identifying and preventing or remedying anticompetitive mergers. A merger review law should not be used to pursue other goals”.

Since the introduction of public policy issues in merger control is broadly considered to require cautiousness and measure, it is questionable if the revised Guidelines abide by this general principle of predictability and transparency as regards those matters. Although clear efforts have been made, the public policies at stake do not appear to have been sufficiently identified and articulated with what should remain the fundamental purpose of merger control, that is, the competitive effects of the transaction at stake.

That is particularly so in view of the nature of the Commission, which has no particular expertise in the public policy matters that it his charged to assess. As it is the case in other jurisdictions, such as the UK, it may be useful to create the possibility for the Commission to obtain input from other specialised government agencies or department, although through a transparent and public process which would prevent any diversion of the Act and the Commission’s purposes.

Regs & Exemptions: more on the EAC

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

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

Elizabeth Sisenda, LL.M (London) LL.B (CUEA) PGD Law (KSL)

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

EAC: regulations & market conditions

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

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

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

The EAC exemptions

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

Low shares = more permissible conduct

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

R&D and so on

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

Get permission first!

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

Conclusion

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

 

The Big Picture (AAT): East Africa & Antitrust Enforcement

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AAT the big picture

East-Africa & Antitrust: Enforcement of EAC Competition Act

By AAT guest author, Anne Brigot-Laperrousaz.

Introduction: Back in 2006…

The East African Community (the “EAC”) Competition Act of 2006 (the “Act”) was published in the EAC Gazette in September 2007. The Act was taken as a regulatory response to the intensification of competition resulting from the Customs Union entered into in 2005. This was the first of the four-step approach towards strengthening relations between member States, as stated in Article 5(1) of the Treaty Establishing the EAC.

Challenges facing the EAC

As John Oxenham, an Africa practitioner with advisory firm Pr1merio, notes, “10 years have passed since the adoption of the EAC Act, yet it remains unclear when (and if) the EAC will develop a fully functional competition law regime.”

The EAC Competition Authority (the “Authority”) was intended to be set up by July 2015, after confirmation of the member States’ nominees for the posts of commissioners. Unfortunately Rwanda, Uganda and Burundi failed to submit names of nominees for the positions available, and the process has become somewhat idle, leaving questions open as to future developments.

The main challenges facing the EAC identified by the EAC’s Secretariat is firstly, the implementation of national competition regulatory frameworks in all member States; and secondly, the enhancement of public awareness and political will[1].

The first undertaking was the adoption of competition laws and the establishment of competition institutions at a national level, by all member states, on which the sound functioning of the EAC competition structure largely relies.

Apart from Uganda, all EAC member States have enacted a competition act, although with important discrepancies as to their level of implementation at a national level.

The second aspect of the EAC competition project is the setting up of the regional Competition Authority, which was to be ensured and funded by all members of the EAC, under the supervision of the EAC Secretariat. Although an interim structure has been approved by member States, the final measures appear to be at a deadlock.

As mentioned, the nomination of the commissioners and finalisation of the setting up of the EAC Competition Authority came to a dead-end in July 2015, despite the $701,530 was set aside in the financial budget to ensure the viability of the institution[2]. It is widely considered, however, that this amount is still insufficient to ensure the functionality of the Competition Authority.  Andreas Stargard, also with Pr1merio, points out that “[t]he EAC has been said to be drafting amendments to its thus-far essentially dormant Competition Act to address antitrust concerns in the region.  However, this has not come to fruition and work on developing the EAC’s competition authority into a stable body has been surpassed by its de facto competitor, the COMESA Competition Commission.”

Furthermore, inconsistencies among national competition regimes within the EAC are an important impediment to the installation of a harmonised regional enforcement. Finally, international reviews as well as national doctrine and practice commentaries have highlighted the lack public sensitization and political will to conduct this project.

A further consideration, as pointed out by Wang’ombe Kariuki, Director-General of the Competition Authority of Kenya, is the challenge posed by the existence of the Common Market for Eastern and Southern Africa (“COMESA”).

Conclusion

The implementation of the EAC has not seen much progress since its enactment, despite its important potential and necessity[3]. It therefore remains to be seen how the EAC deals with the various challenges and whether it will ever become a fully functional competition agency.

A quick summation of the status of the national laws of the various EAC members can be seen below. For further and more comprehensive assessments of the various member states competition law regimes please see African Antitrust for more articles dealing with the latest developments.

EAC Member States Status

Tanzania

The Tanzanian Fair Competition Act (the “FCA”) was enacted in 2003, along with the institution of a Commission and Tribunal responsible for its enforcement. The FCA became operational in 2005. Tanzania’s competition regime was analysed within the ambit of an UNCTAD voluntary peer review in 2012[4]. The UNCTAD concluded that Tanzania had overall “put in place a sound legal and institutional framework”, containing “some of the international best practices and standards”.

This report, however, triggered discussions on major potential changes to the FCA, which would impact, in particular, institutional weaknesses and agency effectiveness[5]. One of the most radical changes announced consisted in the introduction of criminal sanctions against shareholders, directors and officers of a firm engaged in cartel conduct[6], although there is no sign that this reform will be adopted.

Kenya

Kenya, following a 2002 OECD report[7] and the European Union competition regulation model, replaced its former legislation with the 2010 Competition Act, which came into force in 2011, and established a Competition Authority and Tribunal. Under the UNCTAD framework, the 2015 assessment of the implementation of the recommendations made during a voluntary peer review conveyed in 2005[8] was generally positive. It was noted, however, that there was an important lack of co-operation between the Competition Authority and sectoral regulators, and that there was a need for clear merger control thresholds[9].

Burundi

Burundi adopted a Competition Act in 2010, which established the Competition Commission as the independent competition regulator. To date, the Act has not yet been implemented, and accordingly no competition agency is in operation[10].

A 2014 study led by the Burundian Consumers Association (Association Burundaise des Consommateurs, “Abuco”) (which was confirmed by the Ministry of Trade representative) pointed to the lack of an operating budget as one of the main obstacles to the pursuit of the project[11].

Rwanda and Uganda

Rwanda enacted its Competition and Consumer Protection Law in 2012, and established the Competition and Consumer Protection Regulatory Body.

As for Uganda, to date no specific legal regime has been put in place in Uganda as regards competition matters, although projects have been submitted to Uganda’s cabinet and Parliament, in particular a Competition Bill issued by the Uganda Law Reform Commission, so far unsuccessfully.

 

Footnotes:

[1] A Mutabingwa “Should EAC regulate competition?” (2010), East African Community Secretariat

[2] C Ligami, “EAC to set up authority to push for free, fair trade” (2015), The EastAfrican

[3] O Kiishweko, “Tanzania : Dar Praised for Fair Business Environment” (2015), Tanzania Daily News

[4] UNCTAD “ Voluntary Peer Review on competition policy: United Republic of Tanzania” (2012), UNCTAD/DITC/CLP/2012/1

[5] S Ndikimi, “The future of fair competition in Tanzania” (2013), East African Law Chambers

[6] O Kiishweko, “Tanzania: Fair Competition Act for Review’ (2012), Tanzania Daily News.

[7] OECD Global Forum on Competition, Contribution from Kenya, “ Kenya’s experience of and needs for capacity building/technical assistance in competition law an policy “ (2002), Paper n°CCNM/GF/COMP/WD(2002)7

[8] UNCTAD, “ Voluntary Peer Review on competition policy: Kenya” (2005), UNCTAD/DITC/CLP/2005/6

[9] MM de Fays, “ UNCTAD peer review mechanism for competition law : 10 years of existence – A comparative analysis of the implementation of the Peer Review’s recommendations across several assessed countries” (2015)

[10] Burundi Investment Promotion Authority “Burundi at a Glance – Legal and political structure”, http://www.investburundi.com/en/legal-structure

[11] Africa Time, “Loi sur la concurrence : 4 ans après, elle n’est pas encore appliquée” (Competition Law : 4 years after, it is still not implemented) (2014), http://fr.africatime.com/burundi/articles/loi-sur-la-concurrence-4-ans-apres-elle-nest-pas-encore-appliquee

COMESA acknowledges low merger filing stats

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2015 figures plummet 66% year-over-year

Going from 44 notifications in 2014 to 15 filings last year, the Competition Commission of the COMESA common-market area has seen a dramatic decline in merger filings.

Says Andreas Stargard, a competition lawyer with Africa advisory firm Pr1merio:

“These statistics are akin to the agency’s inaugural year — a slump that can only be explained by one of two likely underlying rationales:

Andreas Stargard, editor
A. Stargard

(1) Potential filers have begun to follow widespread advice from legal counsel that effectively admonishes would-be notifying parties not to do so until COMESA establishes a more robust enforcement and notification regime; or (2) — and this is the CCC’s preferred official explanation — the increased filing thresholds as of March 2015 caused fewer transactions to be caught in the mandatory filing net of the regulator.”

Of further concern, Stargard notes, is that the supporting merger documents made available by the CCC do not reflect the purported official statistics.  This fact is reflected in the MergerMania article published on AAT last August..  “For each and every one of the 15 filings identified by the Commission in its official statement, we should be able to see the underlying SOM [statement of merger] and the concomitant Decision — ideally published contemporaneously with the occurrence of each relevant event,” he says.  “Unfortunately, on the CCC merger site, two merger filings are missing entirely (numbers 9 and 10), and the others are commonly published many months after the public-comment deadline for the transactions has long expired.”

To date, a parsing of the (available) 2015 statistics shows that 3 of 15 cases actually went into Phase Two review, Stargard observes.  “This would generally imply a more serious concern raised by the authority in terms of the effect on competition post-merger.  Here, however, it is quite unclear what the potential threat to competition in, for example, a purely private-equity deal would be.  The official decision (no. 15, from November 2015) fails to even hint at a possible threat — as one would commonly expect from a PE to PE transaction, which usually raises little to no antitrust eyebrows…”

Our updated AAT COMESA MergerMania statistics are therefore as follows (again noting the fact that AAT bases its count on only the official, published and available merger documents, instead of relying on mere press release-based summaries published by the CCC).  We also note that to date, 2016 has seen one “merger inquiry notice,” namely of the Dutch Yara / Zambian Greenbelt fertiliser deal.  The public-comment period for that transaction expires on January 22, 2016.

Number of merger notifications based on CCC-published notices
Number of merger notifications based on CCC-published notices

The full text of the COMESA release follows below:

During the year 2015, the Commission assessed and cleared 15 merger transactions. The transactions involved sectors such as insurance, food additives, water treatment, agro-chemical, banking, telecommunication, non alcohol-ic beverage, publishing, packaging and retail. The Commission handled 12 merger notifications in the year 2013 and 44 merger notifications in the year 2014. The Pie Chart below shows the number of mergers handled by the Commission from inception to date.

COMESA merger statistics (official graphic)

As shown in the pie chart the Commission dealt with more mergers in 2014 as compared to 2013 but this trend has gone down in 2015. This trend may be attributed to the supposition that in 2013, the Commission had just commenced operations and therefore some stakeholders were not immediately aware of its existence and operations. By 2014, most stake-holders had become aware of the Commission and its operations, hence the significant increase in the number of mergers notified. The significant reduction in 2015 can be attributed to the supposition that the merger notification thresholds approved by the Council of Ministers on 26 March 2015 which has resulted in smaller mergers escaping the notification. Before 26 March 2015, the merger notification thresholds were Zero hence all mergers were notifiable regardless of size.

Can antitrust law ensure a competitive Kenyan marketplace?

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Competition law as a tool for promoting consumer welfare & maintaining a competitive market in Kenya 

By contributing author Elizabeth Sisenda, LL.M (London) LL.B (CUEA) PGD Law (KSL)

Elizabeth Sisenda, LL.M (London) LL.B (CUEA) PGD Law (KSL)

The core aim of enforcing competition law revolves around balancing between beneficial market power and market power that is detrimental to consumer welfare. Market power can be defined as the ability of a firm to raise and maintain price above the level that would prevail under competitive market conditions, without being destabilised by consumers switching to other products/services or new competitors entering the same market. Often the actual price is above cost leading to high profits for the firm with market power. In practice, the pursuit of market dominance can be a great incentive for investment, cost efficiency and innovation. Therefore, the acquisition of a dominant position through superior product or customer services, better pricing, innovation, efficiency and investment is not illegal. Only the abuse of dominance is prohibited. Where a firm exercises market power, competition law functions to protect the openness of the market by ensuring that the dominant firm does not impose unfair trading conditions for actual or potential competitors, or abuse its intellectual property rights. It also intervenes to prevent direct harm to consumer welfare through conduct or transactions that limit output or production artificially in order to price-fix.

Merger control is another important function of competition law and policy, that is designed to prevent positions of market power from being established through acquisition, unless there is a strong economic efficiency rationale that will mitigate for the loss of competition between the merging firms. A company should therefore earn market power and not simply buy out competitors.

Thus, an important ideal of competition policy is to promote a contestable market for as long as it promotes consumer welfare, and a feasible market structure for a particular sector of the economy. In a contestable market, the sunken costs required to join the sector are negligible and other entry barriers are so low that the threat of new entrants is sufficient to check the conduct of the incumbent firm with market power. The costs of exiting the market are also negligible.

In relation to competitors, competition law cannot intervene on behalf of a particular firm in the market, without taking into account the broader effects of the conduct in question on competition in the relevant market. A firm would have to show, on the face of it, that its competitors in that market are engaged in concerted or collusive practices. For instance, competitors can tacitly seek to exercise market power through anti-competitive agreements that enable them to concentrate the market. This often results in one or more firms becoming large enough to be in a position to affect the market’s outcomes in a manner that causes consumer welfare or public interest to be compromised.

Under these circumstances, competition law intervenes and investigates to ensure that there is no unwarranted concentration of economic power in a particular market through collusive agreements between competitors. Unwarranted concentrations of economic power exist where there is cross-directorship or sharing of a senior employee or executive between two distinct firms providing substantially similar goods or services, and whose combined market share is more than 40%. Competition legislation regulates this conduct because it often results in board decisions being made that could lead to collusion among the firms involved, such as price fixing and dividing markets, thereby lessening competition.

kenya

For instance, in Kenya, the cement sector has been under investigation for unwarranted concentrations of economic power. Although there are a number of cement-producing companies in the market, the dominant multinational firm – Lafarge Limited, has a 58.6% stake in the leading producer, Bamburi Cement Limited and a 42% shareholding in another leading company, East African Portland Cement Limited. Market concentration concerns have arisen because Bamburi Cement Limited, which has a market share of 39%, has had cross-directorship with the 3rd largest producer in the market – East African Portland Cement Limited to an extent that may dampen competition. Kenya’s cement prices have been the second highest out of six eastern and southern African countries including South Africa, Zambia and Tanzania between 2000-2014 according to a sector report. In 2014, the Kenyan government recommended that Lafarge dilute its shareholding in East African Portland Cement Limited. However, it was not conclusive whether price fixing was going on.

On the other hand, Kenya’s cement sector may experience increased competition from imports as a result of the East African Community (EAC) reducing the common external tariff (CET) on cement from 35% to 25% through an EAC gazette notice of February 2015. Cement has also been removed from the list of sensitive products that require protection until domestic industries can compete according to the same gazette notice. Although local cement producers are protesting the move, consumers stand to gain, as the liberalized market will lead to lower prices of the commodity, and possibly have a positive impact on the construction industry.

Two new COMESA competition commissioners seated

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COMESA grows to 11-member Commission

Numerous in personnel, yet still displaying a dearth of actual case-law development even in merely the one area in which the COMESA Competition Commission has been active — mergers — the agency recently appointed two new (indeed, additional, as the number grew from 9 to 11) Commissioners for the standard term of three years.

Competition practitioner John Oxenham, a director at Africa consultancy Pr1merio, identified them as Trudon Nzembela Kalala from the Democratic Republic of the Congo, and Kowlessur Deshmuk, Executive Director of the Competition Commission of Mauritius.  Oxenham notes that neither country enjoyed representation between the April announcement of 4 new commissioners and December 8 (see also April 15 AAT story on the agency’s prior appointments).

COMESA's 18th Summit in Ethiopia

Name Member State
Ali Mohammed Afkada Djibouti
Trudon Nzembela Kalala DRC
Amira Abdel Ghaffar Egypt
Merkebu Zeleke Sime Ethiopia
Francis Kariuki Kenya
Matthews Chikankheni Malawi
Kowlessur Deshmuk Mauritius
Georges Emmanuel Jude Tirant Seychelles
Thabisile Langa Swaziland
Patrick Okilangole Uganda
Chilufya Sampa Zambia

Christmas Eve Exemption: Petroleum industry seeks pass from antitrust provisions

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south_africaStrategic Timing of Exemption Application?

Flying somewhat under the radar during the Christmas and year-end holiday season (but not under AAT’s radar), the South African Petroleum Industry Association (made up of BP, Shell, Chevron and other oil heavyweights) have sought a five-year renewal of their currently temporary holdover exemption from certain competition laws, which will expire in June 2016.  The application was made on Christmas Eve 2015 under section 10(6)(a) of the Competition Act.  SAPIA has not posted any news item or press release about its application on its web site to date.

SAPIA is seeking permission to allow its members to “cooperate and co-ordinate” on common industry logistics issues, as Andreas Stargard, a director with African competition-law and anti-corruption advisors Pr1merio notes.

“These include areas such as Single Buoy Mooring, port facilities, shipping, mooring, and interestingly also distribution as well as less well-defined ‘production and manufacturing plant shutdowns.'”

As Stargard observes, from an antitrust perspective, this could be of significant interest: production limitations would necessarily decrease available supply and thereby have the potential to drive up price, he notes.  Under the terms of SAPIA’s application, the plant shutdowns are both scheduled and unscheduled and supposedly relate to upgrades and safety measures only, according to the application.  In practice, however, such an exemption could give possibly provide the oil industry with carte blanche on competition issues and market manipulation.

In order to assuage concerns, the SAPIA members agree, in return for the exemption, that:

Competing participants in exempt agreements and practices may not share competitively sensitive information, except for the purposes described in the exemption application.

SAPIA and its members may not share information relating to setting of margins, imposition of levies and or approval of tariffs, unless required to do so by the DOE or NERSA.

The employees of any operating party who receive such information shall ensure that the information is held, maintained and used separately, confidentially and on need- to-know basis only.

The full text of the request for exemption is located here.  Interested parties and the public have 20 business days to comment on the application.

First set of Merger Assessment Guidelines made available by CFTC

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Malawi Releases 2015 ‘Merger Assessment Guidelines’

By Michael J. Currie

A number of African jurisdictions have recently published guidelines relating to merger control (which we have reported here on Africanantitrust). During 2015, Malawi’s Competition and Fair Trading Commission (“CFTC”, whose web site appears to be down at the time of publication (http://www.cftc.mw), followed suit and published Merger Assessment Guidelines in 2015 (“Guidelines”) in order to provide some guidance as to how the CFTC will evaluate mergers in terms of the Competition and Fair Trading Act (“Act”).

malawi

Most significantly, the Guidelines have not catered for mandatorily notifiable merger thresholds which is unfortunate as most competition agencies as well as advocacy groups have recognised that financial thresholds is an important requirement to ensure that merger control regimes are not overly burdensome on merging parties.

Furthermore, the COMESA Competition Commission, to which Malawi is a member, published merger notification thresholds in 2015 in line with international best practice. It would be encouraged that the CFTC considers likewise publishing thresholds.

Other than the absence of any thresholds, the Guidelines contain substantively similar content to most merger control guidelines insofar as they set out the broad and general approach that the CFTC will take when evaluating a merger. We have, however, identified the following interesting aspects which emerge from the Guidelines which our readers may want to take note of:

  • The CFTC is entitled to issue a “letter of comfort” to merging parties. A letter of comfort is not formal approval, but allows the merging parties to engage conduct their activities as if approval has been obtained. Therefore, once a letter of comfort has been obtained, the parties may implement the merger. In terms of the Guidelines, a letter of comfort will only be issued once the CTFC is satisfied that any should their investigation reveal any potential competition law concerns, that those concerns will be able to be sufficiently addressed by merger related conditions. It is not clear whether a letter of comfort will be issued before the merger has been made public and therefore it is also unclear what the role of an intervening third party will be once a letter of comfort has been issued.
  • The merger filing fee is 0.05% of the combined turnover or assets of the enterprises’ turnover. The Guidelines do not specify that the turnover must be derived from, in, or into Malawi, although it is likely that this is indeed what was intended.
  • The Act and Guidelines make provision for what is becoming a common feature of developing countries competition laws, namely the introduction of so-called “public interest” provisions in merger control. The Guidelines, however, indicate that the CFTC does not consider these public interest provisions in quite as robust manner as the authorities do other countries including, inter alia, South Africa, Namibia, Zambia and Swaziland. In terms of the Guidelines, any public interest advantages or disadvantages is just one of the factors that the CFTC will consider, together with the traditional merger control factors. It is thus unlikely that a pro-competitive merger would be blocked purely on public interest grounds although this is notionally possible.
  • The Guidelines set out the following factors, combined with figures that are likely to be utilised when evaluating market concentration, which if exceeded, may increase the likelihood of the merger leading to a substantial lessening of competition:
  1. Market Shares: 40% for horizontal mergers and 30% for non-horizontal mergers;
  2. Number of firms in the market;
  3. Concentration Ratios: CR3- 65%; or
  4. The Herfindahl-Hirschman Index (“HHI”): HHI between 1000-2000 with delta 259; or HHI above 200 with delta 150. For non-horizontal mergers a merger is unlikely to raise competition concerns if the HHI is below 2000 post-merger.

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

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

 

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

By Michael J. Currie

Intro & Summary

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

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

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

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

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

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

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