R Davies: Competition Commission Public Sector Consultative
Forum

13 February 2009

Directors-General of government departments,
Commissioner Shan Ramburuth of the Competition Commission,
Chief Executive Officers of public entities and state owned enterprises here
present,
Other representatives of state organs,
Ladies and gentlemen,

It is a great pleasure to have been invited to speak at this important
consultative forum. A dialogue between the competition authorities, sector
regulators and others responsible for policy and regulation in the public
sector, is something that has long been identified as necessary in our quest to
promote a more competitive economic environment in our country. I have been
asked to speak to the theme, "Strengthening the competition regime and its link
with Industrial Policy,", and I will particularly focus on some of the issues
that have informed, and will arise from the most recent amendments to the
Competition Act.

I suppose that all of us know that we inherited from apartheid and
colonialism a highly concentrated and centralised economy. The origins of this
date back to the structure of ownership that was established in the mining
industry at the end of the nineteenth century, and which became extended
throughout the entire economy during the period of colonialism and apartheid.
According to the Mouton Commission which reported in 1976, two thirds of the
turnover in the manufacturing industry at that time was controlled by a mere
five percent of firms. At the end of the apartheid era, the vast bulk of
economic activity in this country was dominated and controlled by half a dozen
conglomerates.

We also inherited from apartheid a system of competition law and regulation
that can only be described as feeble. The 1955 Regulation of Monopolistic
Conditions Act, despite its pretentious title, did nothing of the kind. It in
fact gave carte blanche to the very rapid process of centralisation and
conglomerate formation that took place during the 1960s and 1970s. The 1979
Maintenance and Promotion Competition Act, likewise had a negligible impact on
the consolidation of conglomerate domination during the late apartheid
period.

This then was the background against which our democratically elected
government set out to introduce a new system of competition regulation, brought
into being by the passage in 1998 of the Competition Act. The 1998 Competition
Act put in place a framework which seeks to act not against big companies as
such, but rather against abusive conduct and practices by companies occupying
positions of dominance in industries or sectors. Such abuse can include
collusion by dominant companies to limit, restrict or prevent entry into
markets by new players, to set prices in ways that are detrimental or unfair
either to consumers or customers in downstream industries, or to act in other
ways against the broader public interest.

Very few practices are banned per se. Most collusive or restricted practices
are subject to the test of creating harm or damage to consumers or potential
competitors and have to be weighed against other potential benefits to the
broader economic well being of the country. In other words, the determination
of abuse and harmful anti-competitive conduct is the product of a process of
inquiry and investigation. To give effect to this, the 1998 Act created new
institutions: the Competition Commission, the Competition Tribunal and the
Competition Appeal Court with defined responsibilities to investigate,
adjudicate and rule on matters covered by the Act. The competition authorities
were also given the responsibility of merger control, requiring them to inquire
into the desirability or otherwise of mergers above defined thresholds and to
approve, disapprove or set conditions for such mergers.

Despite the new law and despite all the other structural changes that have
taken place after 14 years of democracy and the pressures of globalisation,
ownership patterns in our economy are still characterised by high levels of
concentration and centralisation. This is the conclusion of three members of
the Competition Commission, writing in their individual capacities, in the most
recent addition of the journal, "New Agenda". The same authors conclude and I
quote; "… in terms of structure and behaviour, changes have been modest since
1994."

After a relatively slow but steady start, we are now seeing the competition
authorities becoming much more active, and indeed proactive, in dealing with a
host of competition issues.

The active promotion of a more competitive economic environment is
fundamental to our objectives in both industrial policy and the protection of
consumers - particularly low income consumers. The persistence of various forms
of anti-competitive behaviour is undermining the ability of our economy to grow
jobs. Other manifestations are contributing to poverty by raising the prices of
goods – including those for basic needs. We need, therefore, in my view, to
support and encourage an activist stance by the competition authorities. We
need to do this for a number of reasons.

First, an activist stance by the competition authorities is necessary to
enable us to realise some of the important objectives set by our National
Industrial Policy Framework. Our Industrial Policy Action Plan has identified
as priority sectors for growth, employment and export, a number of downstream
economic activities located in various sectors. They include capital goods and
metal fabrications industries, the auto industry, downstream chemicals and a
number of agro processing sectors. Many of these draw inputs from capital
intensive and relatively concentrated upstream manufacturing sectors, some of
which indeed were the beneficiaries of industrial policy interventions by the
apartheid government in the past. The investigation carried out by the
competition authorities into steel pricing, highlighted the way in which
pricing practices of the dominant steel manufacturer in this country were
having detrimental effects on downstream customers. These include customers in
all the sectors I have mentioned, including agro processing, some sectors which
are significantly affected by the price of steel cans. It has, indeed, been
estimated that some of our industrial customers using certain steel products
suffer as much as a 30 percent price disadvantage compared to their
counterparts in China.

Similar pricing policies by dominant firms in other strategic upstream
industries also appear to be having detrimental effects on downstream companies
engaged in infrastructure projects or operating in Industrial Policy Action
Plan (IPAP) priority sectors. Advancing our key industrial policy objective of
promoting labour absorbing, downstream industries therefore requires that we
decisively act against collusive practices which prevent our companies from
competing effectively against those from other countries where such practices
do not prevail.

A second reason why we need activist competition authorities is because we
know that there are instances where consumers are disadvantaged by collusive
price fixing. The case of bread price fixing investigated and adjudicated on by
the competition authorities, revealed an instance of outrageous preying on the
poor by the rich and the powerful. There is a phenomenon, which we are
beginning to notice, that when the price of petrol goes up prices of many other
things rapidly follow, justified by the need to pass on increased fuel costs to
customers. Yet when the price of fuel goes down, we find the prices of all
these other commodities come down much more slowly, if at all. The bread price
investigation highlighted the existence of collusive pricing practices
detrimental to low income people at a time when prices generally were rising.
Now that the price of fuel has come down, we need to make sure that there are
not collusive pricing practices that prevent low income people from benefiting
from falling prices of necessities.

A related issue that emerged from the bread price enquiry, was a strong
sense of public indignation at a situation in which company directors
responsible for decisions resulting in collusive price fixing were not
personally subject to any penalty because it was the corporate entity - the
company - that was found guilty. The obvious inequity of a situation in which a
poor person stealing a loaf of bread could be subject to a criminal penalty,
whereas a company director involved in a decision to in effect steal from poor
people by unjustly raising the price of bread would not, was the subject of
much commentary and critique of our competition law.

Both the industrial policy and the consumer issues lay behind the amendments
to the Competition Act put forward in the 2008 Competition Amendment Bill. That
Bill was sent back by the President for reconsideration of certain matters by
Parliament which has reaffirmed its original position. We are hopeful that
these procedural matters will be resolved soon and that the 2008 Amendment Bill
will become law before long.

The 2008 Amendment Bill deals with the following subjects; complex
monopolies, market enquiries, personal liability, a leniency policy and the
question of concurrent jurisdiction between the competition authorities and
other regulators.

With respect to the issue of complex monopolies, enquires by the Competition
Commission had revealed instances in highly concentrated sectors or industries
of parallel conduct leading to anti-competitive outcomes without there
necessarily being evidence of overt prior discussion or agreement. Such
parallel conduct in situations of complex monopoly could have negative
implications no less severe than those arising from overt collusion. The 2008
Bill provides that a complex monopoly can subsist in a market for particular
goods and services, if at least 75 percent of the goods and services in that
market are supplied by five or fewer firms. If two or more firms in that market
conduct themselves in a conscious parallel manner or in a co-ordinated fashion,
without there necessarily being an agreement among themselves and the conduct
has the effect of substantially preventing or lessening competition in the
market, the Competition Commission has the power to conduct an investigation
without necessarily having received a complaint. After conducting an
investigation, the commission may apply to the Competition Tribunal for a
declaratory order against two or more firms, if any one of them have engaged in
complex monopoly conduct and that conduct has resulted in raising entry
barriers to that market or excluding firms from that market, or a refusal to
supply firms within that market. The tribunal after conducting the hearing may
then make an order reasonably requiring, prohibiting or setting conditions on
particular conduct by a firm.

The provisions in the Amendment Bill on Market Enquiry provide for the
detection and addressing of conditions in the market for particular goods and
services or any behaviour within the market that tends to prevent, restrict, or
distort competition without necessarily receiving a complaint or referring to
the conduct or activities of a particular named firm. A market enquiry is an
exploratory exercise intended to identify competition deficiencies. It serves
as a tool to enable the commission to play a more active role in investigating
markets. The 2008 Bill improves market enquiry provisions by allowing the
commission to proactively investigate markets and increase market transparency
by enquiring into issues of impediments to competition, which result in
consumer harm. The Competition Commission may initiate its own market enquiries
or it can respond to a request from the Minister of Trade and Industry. Upon
completing a market enquiry, the commission must publish a report in the
Gazette and submit that report to the minister, with or without any
recommendations, which may include recommendations for new or amended policy,
legislation, regulation or recommendations to other regulatory authorities.

The personal liability provision in the 2008 Amendment Bill introduces for
the first time a criminal sanction against individuals within companies found
guilty of causing a firm to engage in price fixing, output restriction, market
allocation or collusive tendering. This provision is intended to respond to the
outcry against impunity by individuals in companies found to be involved in
collusive price fixing. This provision is intended to provide an effective
deterrent against cartel activities as well. Specifically the Amendment Bill
provides that a person commits an offence if, while being a director of a firm
or engaged or purporting to be engaged by a firm in a position of management
authority, he or she causes the firm to engage in a prohibited practice or
knowingly acquiesced in the firm being involved in such a prohibited practice.
An individual may then face up to 10 years imprisonment, or pay a fine of R500
000 or both. This severe penalty is intended to serve as a signal that harmful
anti-competitive activities will not be tolerated, and those who are involved
will be severely punished.

This provision however, needs to be read together with the Corporate
Leniency Policy. This is a tool to detect cartel activity through encouraging
individuals involved to come forward and disclose information to the
Competition Commission in return for promises of leniency. The Bill provides
for the Competition Commission to certify, with or without conditions, that a
particular respondent or individual is deserving of leniency in the
circumstances and the commission may then refer its complaint to the tribunal
with a rider that an individual has been identified as deserving of
leniency.

The final major issue that the 2008 Amendment Bill deals with, is a matter
no doubt of importance for today's consultation, the issue of Concurrent
Jurisdiction. This has been a rather thorny matter ever since the passage of
the original Competition Act in 1998. The 1998 Act provided for the exemption
of a sector from the purview of the competition authorities if that sector were
subject to regulation by sector regulators. The clear intention here was that
the sector regulators would also deal with the matters of competition. In the
famous raisin court case, however, the court ruled that because there was a
sector regulator dealing with matters of standards and quality assurance, the
competition authorities had no jurisdiction in that sector. This led to an
amendment of the Competition Act to provide that the competition authorities
could trump sector regulators on matters of competition with the exception of
those operating in the financial sector. This regime has now been recognised as
having turned the pendulum too far in the other direction, and the 2008
Amendment Bill seeks to improve the interface between the competition
authorities and sector regulators by demarcating distinct responsibilities and
providing a framework for co-operation. The Bill thus seeks to clarify the
respective roles of competition authorities and other regulatory authorities.
It provides for "other regulatory authorities" to exercise primary authority to
establish conditions within the industry over which they have regulatory power,
while giving the competition authorities primary authority to detect and
investigate alleged prohibited practices under competition law as well as
exercise powers of merger control. The Bill further provides for the details of
the exercise of concurrent jurisdiction to be defined by way of an agreement
between the regulatory authority and the competition authorities. The
implications of this are that the Competition Act prevails over all other
legislation affecting competition matters, but that there is now a more
effective, practical way in which the competition authorities will relate to
sector regulators.

I am sure that unpacking and discussing this aspect of the new Competition
Amendment Bill will be a major subject of discussion at this consultation. Let
me just say from the ministry's side that we are committed to supporting the
competition authorities in playing a more active and engaged role in combating
collusive and anti-competitive behaviour. From an Industrial Policy standpoint,
as I have already indicated, such behaviour threatens to impede the development
of downstream more labour intensive industrial activities that we are seeking
to prioritise. At worst it can place such sectors at an extreme competitive
disadvantage compared to foreign competitors. In such circumstances, local
producers will be unable to compete with imports let alone establish a presence
as exporters. At the same time we have seen consumers, and particularly low
income consumers, significantly disadvantaged by collusive conduct on the part
of large and supposedly reputable companies.

We can as a country no longer afford to tolerate such practices. We will not
hesitate as a government to take any further steps that may be needed in the
course of time, to amend and strengthen our Competition legislation.

I hope that this particular consultation will contribute to creating a
co-operative relationship between the competition authorities and sector
regulators. I wish all participants a fruitful and informative engagement
during the course of today.

I thank you for your attention.

Issued by: Department of Trade and Industry
13 February 2009
Source: Department of Trade and Industry (http://www.thedti.gov.za)