Trade & Competition in Africa: Opportunity Beckons

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Trade & Competition in Africa: Opportunity Beckons

By Peter O’Brien

Continuing the original AAT series, ECONAfrica, Peter O’Brien addresses the WTO’s upcoming MC10 conference.

From 15-18 December Nairobi will host the 10th Ministerial Conference (MC10) of the World Trade Organization (WTO). This will be a meeting of many firsts. Till now, no sub-Saharan African country had hosted a Ministerial Conference organised by the WTO. Nairobi will bring into force the Trade Facilitation Agreement (TFA), the first occasion in the now 21 year history of WTO that a new agreement has been signed (all others were established at the inception of WTO). This is the first MC to take place against the backdrop of an agreement in Africa, concluded this year, to work for a continent wide area of free trade. Today more than one quarter (43 countries in total) of all WTO Members (more than 160) are African. Moreover, the  Accession Package for Liberia was agreed in Geneva on 6 October, and it can be expected that it too will join in the course of 2016.

Apart from celebrating the firsts, are there any reasons for business in Africa to pay attention to events in Nairobi? The answer is an emphatic yes:

  • The TFA is the one WTO agreement that promises real advantages on the logistics of trade. Detailed studies have shown that, on average, the sheer movement of goods within Africa accounts for roughly one fifth of all costs. Serious steps to cut those costs, which is what TFA is about, represent a win/win for producers, traders, consumers and indeed the public authorities. Since Africa is the region of the world where intra-trade (transactions among African countries themselves) is by far the lowest, and where most national markets are small, the gains from logistics savings are potentially huge.
  • The TFA will commit WTO Members to help the least developed countries, a group of over 30 States of whom the majority are African. For the first time, there are straight advantages to be obtained without a condition of reciprocity. Funding, technical assistance, streamlining of trade administration, are just some of the things that can be expected. The TFA allows governments and business together to formulate their requests, so this is the chance to utilize an organized offer of support.
  • MC10 will seek to reinforce the whole network of disciplines concerned with non-discrimination and competition that constitute the core of WTO agreements. That progress is very positive for the growth of competitive markets on the continent.
  • The meeting will be attended by numerous international and regional observer organizations from the private sector, as well as by non-governmental organizations (NGOs) whose normal activities are overwhelmingly directed towards improving trade and welfare in African countries. Their presence serves to strengthen the lobby for growth and welfare improvement.

In the world of yesterday, tariffs and quantitative limitations dominated trade negotiations. In tomorrow’s world, the critical subjects are technical barriers to trade (meaning formal legal resolutions that control trade for purposes of national security, public health and so on), voluntary norms and standards (which in practice frequently acquire a market force equivalent to a legal provision), and a host of other regulatory issues that determine who will be best placed in the market.

More or less all African countries, with the partial exception of South Africa, have always been on the receiving end of these instruments. Africa has thus far played a very minor role in shaping “the rules of the international competitive game.” But with the continent now the fastest-growing region in the world economy, with the race for its natural resources continuing (despite the current lows in resource prices), with the ongoing investments (from within the continent and without), and the steady improvements in governance observable in the majority of countries, Africa is well placed to make its voice heard.

Nairobi and the MC10 offer the ideal stage on which the continent can begin its future path as one of the designers of competitive change.

ECONAfrica: African Corporate Debt — Reality, Regulation and Risks

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By Peter O’Brien

In our new AAT series, ECONAfrica, Pr1merio economist Peter O’Brien discusses corporate debt issues on the continent.

Debt debates on Africa nearly always talk about sovereign debt. But in economies which are growing, even if with plenty of ups and downs, firms need to finance expansion. Banks can help, yet this is often not so easy to organize. Another option is to issue corporate bonds (‘CB’). Since rating agencies generally assess clients on a three letter basis (sometimes with a + or – at the end), we will make our 3R assessment of African CB. What’s the reality, what’s the regulatory situation, and what are the risks and rewards?

Overview

First, a thumbnail sketch (admittedly based on limited evidence) of the stylized facts:

  • So far, all African countries (including the Middle East) account for less than 5% of the value of all CB issued by Emerging Market Economies (EME).
  • Within that, South Africa, Mauritius and Egypt add up to around two thirds, with South Africa alone as one third.
  • Most CB in Africa have maturities no more than 10 years
  • Over half of the bonds are fixed interest
  • Roughly 30% of the CB are considered high yield (another way of saying that investors reckon the risks are substantial)
  • It seems as if there is more or less an even split between CB issued in local currency (hence with local currency coupon rates) and those in foreign currency (nearly all $ or euro)
  • The investors are in the main a group of 50-60 funds
  • In South Africa, as of October 2015, foreign holdings of local CB were 35% of the total
  • In a number of African countries, the leading corporate borrowers are parastatal firms
  • Corporate debt, measured as a percentage of GDP, is far lower in African countries than in most others. While many other places, especially some of the big EME, are vulnerable to macroeconomic damage stemming from corporate debt, Africa (including South Africa, where this percentage has remained remarkably stable) should be fairly safe
Economist corporate debt in South Africa has remained the same as percentage of GDP
Corporate debt in South Africa has remained the same as percentage of GDP (Source: The Economist)

Lessons Learned?

What does this picture tell us? Its principal message is surely that this is an area certain to experience major changes, and quite possibly major expansion (not only in volume but also in the players involved).

Now to regulation, both internal and external. The country that seems to have explicitly made provision for corporate debt, and its restructuring, is South Africa. In Companies Act 71 of 2008, enacted in 2011, there are clauses that set out possibilities for Corporate Debt restructuring.  Since enactment, over 400 companies have applied for these methods of handling the problems, and there are upwards of 80 entities offering specialized advice in the field. This prudent approach no doubt stems in part from the size and significance of corporate borrowing in that country. Elsewhere, legal and regulatory issues seem, on balance, to hold back greater reliance on CB. In part there are accounting and corporate governance standards which local companies may not yet meet. In part, it appears that the disclosure requirements that must be met before recourse to CB can be made may constrain the actions of companies (bank borrowing generally requires less disclosure). On the external side, the Basel 111 stipulations matter, in particular because they limit the possibilities for underpricing of CB (a practice that has been fairly frequent till now).

What is missing in the regulatory environment, however, is any overall examination of what might be done to stimulate the prudent use of CB. If this were to be done, such regulation would need to assess financial, economic and anti-trust issues.

The risks and rewards of the CB approach to corporate funding, and indeed the opportunities to use it, are very different across Africa. From economies such as Kenya and Botswana, where the phenomenon is on the rise, to those of the Maghreb, where political uncertainties in very recent years seem to have stunted what was a promising growth, to many parts of West Africa, where to date there is seemingly little activity in this area, each country has its own environment. However, the ever greater integration in the various regions means that there may well be prospects for making better use of private regional funds and of sovereign funds. Either way, African companies should look forward with optimism to utilizing more local capital. It is the job of regulators to ensure this is done in a sound way financially, and that these markets operate competitively.

 

Exclusive AAT interview: Bonakele on antitrust conferences

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meet the enforcers

In our latest instalment of our Meet the Enforcers series, we speak with South African Competition Commissioner Tembinkosi Bonakele on the topic of hosting a series of academic & practitioner platforms to discuss cases and developments in competition-law enforcement.

This week, the South African Competition Commission and the Competition Tribunal successfully organised the 9th Annual Conference on Competition Law, Economics & Policy (as part of the 4th BRICS International Competition Conference), taking place in Durban, South Africa.

Commissioner Bonakele, the head of the SACC, discussed hosting the conference with AAT’s contributing author, Njeri Mugure, Esq.  According to his biography, Mr. Bonakele has been with the Commission for the past ten years. He briefly left the Commission in March 2013 and came back in October 2013 as Acting Commissioner. He has been in this position until his appointment as the Commissioner. Bonakele has occupied various positions in the Commission’s core divisions. He was appointed Deputy Commissioner in 2008, and prior to that worked as head of mergers, head of compliance and senior legal counsel respectively.

The AAT-exclusive interview follows:

Tembinkosi-Bonakele-Profile-Pic

AfricanAntitrust.com: South Africa has been participating in the BRICS International Competition Conference (“BRICS ICC”) since 2011, a year after she officially became a member of BRICS. This November the country will host the 4th of this biennial meeting in Durban. What are your goals for this year’s conference?

Tembinkosi Bonakele:

The theme for the BRICS International Competition Conference 2015 is “Competition and Inclusive”. This theme will enable the conference to explore the relationship between competition and growth, competition and employment, competition and inequality and competition and poverty. As with the previous conferences, the aim of the conference is to strengthen cooperation amongst BRICS countries in the area of competition regulation by creating a platform for sharing experiences. We also aim to use the conference to discuss a proposed Memorandum of Understanding between BRICS competition agencies. Finally, the conference is also a platform for both developed and developing countries to discuss competition policy and enforcement issues.

AfricanAntitrust.com: Speaking of Durban, some might have expected for the 9th Annual Competition Law, Economics and Policy Conference (“Annual Competition Conference”) and/or the BRICS ICC to be held in Pretoria, the capital city of South Africa.  Could you tell us why you chose to hold the two conferences in Durban?

Tembinkosi Bonakele:

We wanted a venue that would provide world class facilities for the conference as well as enjoyment for the delegates, and Durban ticks both boxes. The Kwazulu-Natal province, where Durban is situated, is home to rich natural resources, including Africa’s Big Five game and beautiful mountainous landscapes.

Durban itself is a diverse African city providing cultural diversity as well as a natural paradise known for its beautiful coastline beaches and subtropical climate. The City is also host to the largest and busiest harbor in Africa. The Inkosi Albert Luthuli International Convention Centre (Durban ICC), where the two conferences will be held, is the largest indoor conference facility in Africa.

The Commission has previously partnered with the KwaZulu-Natal Provincial Government, eThekwini (Durban) Municipality and the University KwaZulu-Natal on various activities.

AfricanAntitrust.com: In addition to hosting the Annual and the BRICS competition conferences, the South African Competition Commission (“the Commission”) along with Cresse and the University of Kwazulu-Natal will hold a joint workshop exploring areas such as collusions and cartels, unilateral and coordinated effects in mergers, the economics of exclusionary conducts, and use of economic evidence, among others. What do you hope this workshop will achieve?

Tembinkosi Bonakele:

The economic understanding of competition policy is constantly evolving. In the last two decades economists have developed new theories of harm and traditional views have changed significantly. The workshop will bring top quality instruction on the economics of competition to agency officials in South Africa and more broadly Africa, competition practitioners, academics and policy makers. I hope that everyone attending the workshop will walk away having learned something new about the economics of competition.

AfricanAntitrust.com: Speaking of the this year’s events, planning the joint workshop, the Annual Competition Conference and the BRICS ICC was a great undertaking, could you tell us why you decided to have the three events back to back and what audience each event is tailored to suit?

Tembinkosi Bonakele:

With the BRICS conference coming into South Africa was a great opportunity as so many people were interested to come. So many opinion makers, academics and practitioners were going to be in the country, so we organized all these events to take advantage of their presence, and the response was very positive. We also thought logistically it makes sense to have our annual conference organized back to back with BRICS, so we don’t get conference fatigued. In the end, all the events flow into each other.

The Joint Workshop is a technical training and knowledge sharing platform, looking at the latest thinking on various aspects of competition enforcement.

The conference is an annual academic platform to discuss cases and developments in competition law enforcement.

AfricanAntitrust.com: Turning to the BRICS International Competition Conference, in what way has this year’s agenda been informed by the previous three conferences? What impact do you think the previous conferences have had on antitrust discourse in BRICS and non-BRICS countries?

Tembinkosi Bonakele:

The previous conferences, hosted by the Federal Antimonopoly Services of Russia in 2009, the State Administration for Industry and Commerce of the People’s Republic of China in 2011 and Competition Commission of India in 2013, created a solid platform on which we can deepen our relations in the fi­eld of competition regulation.

South Africa has focused the conference on the relationship between growth and inclusivity. Furthermore, this year’s conference aims to institutionalize BRICS cooperation on competition matters, and move it beyond conferences. There is a proposed Memorandum and Understanding, as well as a joint research initiative.

AfricanAntitrust.com: There’s been a lot of debate surrounding public interest factors in merger review. What do you hope to achieve by including the topic to this year’s conference agenda?

Tembinkosi Bonakele:

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 accept that there are public interest issues. The conference will deepen and broaden perspectives on the matter.

AfricanAntitrust.com: How do these engagements such as the BRICS conference and competition law enforcement in general benefit the ordinary South African?

Tembinkosi Bonakele:

The 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.

The Commission has, in the past 16 years investigated and dismantled cartels from different sectors including construction, bread – a staple food for many South Africans, and cement. In the cement cartel, for instance, the Commission conducted a study post the cartel and discovered that we have saved consumers about R6 billion.

AfricanAntitrust.com: Mr. Bonakele, are there other topics you would have liked to address or comments you would like to add?

Tembinkosi Bonakele:

We see BRICS as an important and strategic platform where we advance arguments about the relationships between competition and other policy instruments that are very relevant in our developing countries.

As a collective, BRICS competition authorities are able to provide leadership in the international antitrust community on what it means to create and enforce competition law and policy in developing economies which come with their own particular challenges and opportunities. These perspectives will serve to enrich the global knowledge base in competition enforcement.

AfricanAntitrust.com: Thank you for taking the time to speak with me, Commissioner!

The interview was conducted by Ms. Mugure for AfricanAntitrust.com on 8 November 2015.

south_africa

Landmark bilateral competition agreement takes effect

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namibiasouth_africa

South Africa and Namibia sign landmark memorandum of understanding

On 11 November 2015, the Competition Commission of South Africa and theNamibian Competition Commission signed an historic memorandum of understanding (MoU) on cooperation on competition matters both in terms of policy and enforcement.

Andreas Stargard, a director with African competition-law and anti-corruption advisors Pr1merio, points out, that collaboration of the two relatively mature agencies is not new per se:

Having cooperated in prior years on multiple merger investigations (see, e.g., the Wal*Mart / Massmart transaction), the time had come for a formalised agreement in principle between these two key southern-African jurisdictions.  Antitrust practitioners in the region should anticipate a hopefully streamlined process across national borders, especially in terms of merger reviews & clearance, as well as quite likely conduct investigations in the cartel or dominance areas.

Says the SACC’s press release:

“We thank the Namibian Competition Commission for their cooperation. I’m grateful we’re able to formalise our relations. Our laws tend to be similar which makes cooperation easier,” said South African Competition Commissioner Tembinkosi Bonakele.

Namibian Competition Commission Chief Executive Officer, Mr Mihe Gaomab said that the signing of the MoU is a historic moment for them, and that this will improve cooperation between the authorities, especially on multi-jurisdiction projects, such as mergers.

Protecting competition vs. competitors: Calls for an EAC competition regime

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Protecting competition vs. competitors: Calls for an EAC competition regime

In an opinion piece by Elizabeth Sisenda, a competition lawyer at the Centre for International Trade, Economics and Environment, the author calls for region-wide adoption, implementation, and enforcement of competition law, for the greater good of local business in the East African Community.  While generally in favour of increased competition-law recognition in Africa, we at AAT believe that there may be a protectionist undertone in the editorial, however:

Ms. Sisenda notably writes, “The EU has been negotiating a bilateral agreement with the EAC … Local firms stand to lose to foreign firms with greater capacity under the agreement in agriculture, retail, horticulture, fisheries, textile and clothing, dairy, and meat — if adequate safeguards are not established under the agreement.  This brings to light the need to enhance a competitive regional economy within the EAC through the implementation of a regional competition law regime to protect consumers and small enterprises from unfair business practices.

As antitrust attorneys will be quick to point out, pure competition law does not invariably act to protect small companies against so-called “unfair” competition by larger (or foreign) entities.  Granted, certain abuses of dominance or — of course — cartelist conduct is prohibited by proper antitrust legislation.  However, the mere arrival of a more powerful competitor in a local economy does not amount to “unfair competition” per se.  If a larger company can source its products and inputs at a lower cost than a local, established entity (say, Wal Mart compared to a ‘mom-and-pop’ corner store), this may hurt the incumbent but is not necessarily unlawful.

Calls for “African” competition enforcement must be careful not to commingle the notions of protectionism of domestic incumbents with actual competition-law enforcement.

UPDATE: Ms. Sisenda, the author of the original article, wishes to clarify that by “adequate safeguard” her intention was not protectionism but ensuring that dominant firms do not undertake anti-competitive practices such as price-fixing, raising barriers to entry or other illicit conduct.  She is clear in disavowing any notion of protectionism that AAT might have perceived, noting that “By using the term ‘unfair business practices,’ I did not impute any regulatory measures to prop local entities and lock out foreign firms. I simply meant abuse of dominance by more capable foreign firms such as predatory pricing.”

Andreas Stargard, a partner at Africa advisory practice Pr1merio, agrees with Miss Sisenda on two key points, however.  Says Stargard:

The author correctly notes that “there is still a quest for protectionism by the governments of some of the EAC member states.”  Truly anti-competitive practices must be curbed, whereas the inefficient protection of smaller incumbent domestic companies versus more efficient new entrants must not be encouraged.  In the words of one influential court, over 53 years ago, good antitrust laws are designed to protect “competition, not competitors”…

Moreover, Ms. Sisenda rightly points to the great need within the EAC (and elsewhere in Africa) for “capacity-building at the national and regional level in support of the … competition regime, which might involve training personnel on competition law and policy and its enforcement.”  Workshops and publications such as AfricanAntitrust.com aid greatly in these efforts, including raising awareness of the need for proper competition-law enforcement, what it can do and also what it cannot accomplish on its own.

The EAC Competition Authority has an interim organisational structure & budget and is expected to start being operational next year.

PS: we note that Ms. Sisenda also raised, in our follow-up conversation with her, some notable questions that we invite our readers or future contributing authors (maybe Ms. Sisenda herself?) to address:

  • In your view, are there any parameters to antitrust such as exemptions granted under legislation for the purpose of promoting economic efficiency (be it allocative or productive) that are justified?
  • Is there a place for economic regulation in antitrust?

Continue reading “Protecting competition vs. competitors: Calls for an EAC competition regime” →

Zambia: Competition Authority Conducts Dawn Raids in the Maize Milling Industry

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zambia

ZNBC reported on 30 October 2015 that the Zambian Competition and Consumer Protection Commission (CCPC) conducted dawn raids on three milling companies, namely National Milling Corporation, Superior Milling Company and Simba Milling Company, as well as the Miller’s Association of Zambia.[1]

The Raid follows the CCPC’s investigation into the alleged fixing of maize and flour prices in contravention of the Competition and Consumer Protection Act, 24 of 2010 (Act).

Importantly, in terms of the Act, a person who engaged in price fixing (as well as other traditional types of cartel conduct such as market allocation and collusive tendering) may be subjected not only to a fine, but imprisonment to a maximum of five years. Furthermore, price fixing is prohibited per se, consequently there is no rule of reason or justification defence available to a respondent who has been found to have directly or indirectly fixed prices.[2]

The raids carried out in the milling industry are the first to be conducted by the CCPC since 2013, when raids were carried out in relation to the fertilizer industry.[3]

We have previously reported on African Antitrust that the South African competition authorities have, since mid 2014, carried out an unprecedented number of dawn raids on a variety of industries. Furthermore, that the flour and maize milling industry has also been under scrutiny by the South African authorities.

John Oxenham, a founding director of Pr1merio African advisors, notes that “it is evident that a number of African competition agencies have identified the food industry, especially in so far as it affects lower LSM groups as a priority sector.”

This has led to a number of competition agencies, as previously reported on AAT, to announce that they will be conducting market inquiries into the grocery retail sector. Included amongst these agencies are the competition authorities of South Africa, Botswana and COMESA, the latter which will conduct a market inquiry into the industry across all member states.

It remains to be seen whether the CCPC, who is empowered to conduct market inquiries in terms of the Act, will follow suit.

[1] http://www.znbc.co.zm/?p=24472 (accessed 03-11-2015).

[2] See section 9 of the Act.

[3] http://www.polity.org.za/article/competition-and-consumer-protection-commission-gears-up-to-fight-cartels-in-zambia-2013-07-23 (accessed 03-11-2015).

Dawn Raids in ZA: Liquefied Petroleum Gas offices searched by Competition Commission

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Five LPG firms raided

As the South African Competition Commission announced today, it raided the offices of Liquefied Petroleum Gas suppliers today, 14 October 2015, seizing documents and other evidence from African Oxygen Limited, Oryx Oil South Africa (Pty) Ltd, EasiGas (Pty) Ltd and the Liquefied Petroleum Gas Safety Association of Southern Africa (LPG Association) in Gauteng and KayaGas (Pty) Ltd as well as Totalgaz Southern Africa (Pty) Ltd in the Western Cape.

According to the Commission’s press release, “[t]he five firms are competitors in the market for the supply of Liquefied Petroleum Gas (LPG) and gas cylinders. The LPG Association is an association of firms which are active at various levels of the LPG sector. The Commission has an ongoing market inquiry into the broad LPG sector. This dawn raid operation forms part of the Commission’s investigation into alleged fixing of the price or deposit fee for gas cylinders, and is unrelated to the ongoing market inquiry. The Commission is conducting the dawn raid operation with due regard to the rights of the firms and all affected persons. During the search the Commission will seize documents and electronic data, which will be analysed together with other information gathered to determine whether a contravention of the Competition Act has taken place. In terms of section 48 of the Competition Act, the Commission is authorised to enter and search premises and seize documents which have a bearing on an investigation. The Commission duly obtained warrants authorising it to search the offices of the firms at the High Courts of South Africa, namely: Gauteng Division in Pretoria and Western Cape Division in Cape Town. Commissioner Tembinkosi Bonakele said, “The Commission believes that the information that will be obtained from today’s operation will enable the Commission to determine whether or not the firms have indeed engaged in collusive conduct. However, as part of any investigation, we also wish to urge anyone, be it business or individuals with further information to come forward and assist the Commission in concluding this investigation.”

Important opinion piece by South African Competition Commissioner

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south_africa

The South African Competition Commissioner, Tembinkosi Bonakele, has authored a very important opinion piece in the country’s leading business news publication (http://www.bdlive.co.za/opinion/2015/10/12/sa-needs-to-empower-economic-and-policy-experts).  In the piece, Bonakele laments a number of issues in particular the lack of policy direction within the state and the lack of recognition for experienced in house (state) experts.

Bonakele’s views are well made and echo some concerns raised previously by AAT.  It will be interesting to observe the developments in this regard, particularly, given the statements made by the ruling party apropos the role it envisages for the competition authorities.

First predatory pricing case before the Competition Tribunal

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Media24 excludes GNN, Tribunal finds

By Julie Tirtiaux

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

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

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

According to the SACC:

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

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

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

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

The denial of predation conduct by Media24

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

The difficulty to prove a direct predatory pricing conduct

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

South African Commission conducts dawn raids into recruitment agencies

Posted on by Editor

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The South African Competition Commission (SACC) has conducted a search and seizure (dawn raid) operation at the premises of Human Communications (Pty) Ltd, Kone Staffing Solutions (Pty) Ltd and JobVest (Pty) Ltd.

The firms are recruitment agencies specialising in recruitment advertising services who place job advertisements in media platforms on behalf of clients. The agencies also receive and process responses to the job advertisements on behalf of their clients, which are mainly government departments, agencies and municipalities.

The SACC has indicated that the dawn raid operation forms part of the SACC’s investigation into alleged collusive conduct in the market for the provision of recruitment advertising services.

The SACC alleges that the firms collude when bidding for tenders by discussing responses to requests for quotations and decide on the price at which each would tender for its services.  Finally, the SACC alleged that the agencies agree on how to rotate advertising work amongst them.

The alleged conduct is prohibited by the South African  Competition Act as it amounts to price fixing, market division and collusive tendering.