SACC Investigates Port Operator for Monopolisation & Excessive Pricing

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

south_africaBy AAT Senior Contributor, Michael-James Currie.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ArcelorMittal, Telkom, now Sasol? “Excessive pricing” case going to trial in South Africa

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Settling the South African Competition Commission’s case against alleged collusion in the polypropylene market [for no less than R111 million] back in 2010 was not to be the end of Sasol‘s long antitrust journey in the polymers world.

The S.A. Competition Tribunal is hearing the excessive-pricing portion (which was not settled) of the Commission‘s claims against the refining & steel giant this month.  The relevant legal underpinning of the case is the provision against excessive pricing by a dominant firm.  Precedent has declared prices excessive that “bear no reasonable relation to the economic value of the good or service” at issue.  Pheeew.  Facts.  Economics.  Nice.  Looks like a coming battle of the experts to me…

By comparison, in the U.S., antitrust law of course does not forbid “excessive pricing.”  While setting and reaping apparently high prices may be indicative of monopoly power, such acts are not in themselves anti-competitive or illegal in the States.  In Verizon v. Trinko, the U.S. Supreme Court held famously that:

The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period—is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic growth.

Interestingly, there is a notable history of failures in the area of ‘excessive pricing’ complaints in South Africa, as well, despite the statutory legitimisation of the cause of action.  In the prior ArcelorMittal and Telkom cases, the Commission and/or Tribunal lost in the end, either at trial or on appeal to the Competition Appeal Court.  That Court had found, in the ArcelorMittal case, that the antitrust watchdogs could not use the ‘excessive pricing’ provision of the statute to combat perceived anti-competitiveness in the “market structure rather than price level.”

We will, of course, report on the ongoing trial and ultimate outcome of this high-profile case, as it unfolds.