Competition Law and Economic Regulation in Southern Africa

Addressing Market Power In Southern Africa

Anthea Paelo, Genna Robb, Simon Roberts, Witness Simbanegavi, Nicholas J. Sitko, Imraan Valodia, Thando Vilakazi, Tatenda Zengeni, Isaac Tausha, Jonathan Klaaren, Jonathan Klaaren, Simon Roberts, Imraan Valodia, Simon Roberts, Imraan Valodia, Jonathan Klaaren, Simon Roberts, Imraan Valodia

• Publisher: Wits University Press
• Year: 2017
• ISBN:
  9781776141685
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Shaping markets through competition and economic regulation is at the heart of addressing the development challenges facing countries in southern Africa. The contributors to Competition Law and Economic Regulation: Addressing Market Power in southern Africa critically assess the efficacy of the competition and economic regulation frameworks, including the impact of a number of the regional competition authorities in a range of sectors throughout southern Africa. Featuring academics as well as practitioners in the field, the book addresses issues common to southern African countries, where markets are small and concentrated, with particularly high barriers to entry, and where the resources to enforce legislation against anti-competitive conduct are limited. What is needed, the contributors argue, is an understanding of competition and regional integration as part of an inclusive growth agenda for Africa. By examining competition and regulation in a single framework, and viewing this within the southern African experience, this volume adds new perspectives to the global competition literature. It is an essential reference tool and will be of great interest to policymakers and regulators, as well as the rapidly growing ecosystem of legal practitioners and economists engaged in the field.

Part One

Cartel law enforcement

1

Penalties and settlements for South African cartels: An economic review

Tapera Muzata, Simon Roberts and Thando Vilakazi

Introduction

The South African competition authorities have developed a fairly extensive track record in penalising cartels. While the Competition Act (No. 89 of 1998) came into force in September 1999, in practice cartels really started being uncovered only after the Competition Commission of South Africa's (CCSA) adoption of a corporate leniency programme in 2004 and the programme's amendment in 2008 (Lavoie, 2010; Makhaya, Mkwananzi and Roberts, 2012). Since then there have been a large number of cases (see also World Bank and ACF, 2016), and the experience provides interesting insight into the challenges faced in making decisions regarding the appropriate penalties. In 2011 and 2012, the Competition Tribunal and the Competition Appeal Court (CAC) made a series of decisions around the issues and relevant principles for determining penalties for collusion. And, from 2012 to 2014, the CCSA undertook an extensive ‘fast-track settlement’ process for collusion by construction companies involving lower penalties in exchange for an ‘all-in’ settlement of bid-rigging conduct (Roberts, 2014). With criminal sanctions for collusive conduct coming into force in 2016, it is also a good point to assess the penalties under the administrative regime up until that point.

The Corporate Leniency Policy's (CLP) notable success in uncovering cartel conduct in South Africa has highlighted both the importance of high-powered incentives for colluding firms to break ranks and come forward, as well as the ongoing extent of collusive activity. The latter suggests that the combined effect of the penalties and the probability of getting caught were previously too low to achieve the necessary deterrent effect. In chapter 2 of this volume, Ratshidaho Maphwanya addresses leniency and other factors underlying the durability of cartels.

We consider the decisions of the Tribunal and CAC through the lens of economic principles and the implications for evolving standards for penalties, and set out how cartel penalties can be understood in terms of the basic economic theory relating to deterrence and incentives. We then review how the CCSA has approached penalties, which have mainly been in the form of settlements. Settlement implies a lower penalty in exchange for cooperation and early resolution. Our review includes a brief discussion of the construction settlements. We then critically assess the record on determining penalties in settlements and contested cases, taking into account evidence on the size of cartel mark-ups in South African cases. The concluding section reflects on the evolution that has taken place and the guidelines issued by the CCSA in 2015.

Overview of Tribunal and CAC decisions

The first penalty was imposed by the Tribunal for anticompetitive conduct on the part of Federal Mogul.¹ This was followed by South African Airways² (SAA), where the Tribunal set out its approach to applying the factors under section 59(3) of the Act for determining financial penalties together with the weightings for each factor. Parties thereafter commonly referred to the ‘SAA tests’ when presenting arguments in the determination of penalties, even though the Tribunal noted the need to draw distinctions between various types of contravention in terms of the factors under section 59(3). In particular, 59(3) indicates that the nature, duration, gravity and extent of conduct are relevant considerations, implying that different types of conduct can be distinguished for the purpose of penalty.

It seems obvious that prohibited resale price maintenance (as in Federal Mogul), failure to notify a merger, cartel conduct and various abuses of dominance (as in SAA) are all different in nature and therefore a single ‘ruler’ for determining penalties need not apply for all. Reinforcing this observation is the fact that the Act does not provide for financial penalties for some contraventions, even where an effect has to be proven, such as in sections 4(1)(a) and 8(c). In other words, notwithstanding anticompetitive effects, a form of safe haven from financial penalties is provided for the catch-all categories of conduct not separately defined but where the conduct is found to be harmful. By comparison, the 4(1)(b) prohibitions on horizontal restrictive practices, where a financial penalty is applicable – price fixing, market division or collusive tendering – are per se prohibitions without the requirement to demonstrate harm. They are simply presumed to be harmful.

Internationally, several considerations applying to cartel conduct are now widely recognised (Connor, 2001; Motta, 2008; Werden, 2009; Wils, 2006). First, there are good grounds for a presumption that the conduct is harmful. Second, it is impossible to determine the size of the anticompetitive harm to consumers and to the economy, without extensive data analysis and generally after a substantial time has passed following the end of the cartel. Even then, such estimates are likely to be within a wide range, depending on the assumptions made. The analysis of harm may be required for damages claims that are brought by customers after cartel findings by competition authorities. The assessments are also an important area of academic inquiry, generally a substantial period after the conduct. Third, the harm includes non-price factors such as collusion undermining the beneficial effects of competition in spurring better service and quality. Fourth, the primary importance of penalties is for deterrence and hence they ought to be self-evidently greater than the expected gain to a firm considering a cartel. Fifth, the deterrence effect must take into account that the probability of the cartel being uncovered is much less than one.

The Pioneer Foods decision in the bread cartel case was the first penalty imposed by the Tribunal in a contested cartel case.³ Pioneer contested its participation in a cartel (specifically, cartel arrangements nationally and in the Western Cape) despite being implicated by the other major producers. Premier Foods was granted conditional leniency, and Tiger Brands and Foodcorp reached settlements of R99 million (5.7% of bread turnover) and R45 million (6.7% of bread turnover), respectively. Pioneer also argued that such arrangements as there were had no effect on the bread price. The Tribunal found that there had been collusive conduct in 2006 in the Western Cape, and across the country from 1999 to 2006. Penalties of R46 million were imposed (9.5% of bread turnover in the Western Cape) and of R150 million (10% of bread turnover nationally, excluding the Western Cape).

Section 59(2) of the Act stipulates that an administrative penalty may not exceed 10% of the firm's turnover in, and its exports from, the Republic in the preceding financial year. In determining Pioneer's penalties, the Tribunal found that the ‘maximum’ penalty percentage of 10% (confusingly termed the ‘threshold’ by the Tribunal) was appropriate for the national cartel, with a small discount for the Western Cape where the conduct was shorter in duration. However, the Tribunal limited the turnover on which the percentages were applied to the ‘infringing line of business’.⁴ The Tribunal's reasoning was that the penalty should go beyond 10% of this turnover only if there was evidence that the anticompetitive conduct in one product market was extended or ‘leveraged’ into other markets.

In appealing the Tribunal decision, the CCSA argued that it confused determining the penalty, which under the Act is not in any way restricted to, or based on, fractions of 10% of the turnover of the infringing line of business (also termed the ‘affected turnover’, as in the Tribunal's decision in Aveng & others),⁵ and the precautionary cap on the penalty which is explicitly set at 10% of total turnover including exports from the Republic.⁶ A cartel mark-up (the additional profit margin from the collusive conduct) can easily be more than 10% in a single year, meaning it was impossible, with cartels typically existing for many years, for a penalty capped at 10% of the turnover of the particular line of business for a single year to be an adequate deterrent. For meaningful deterrence, the size of the penalties needs to be considered relative to the likely gains being made rather than merely making observations that penalties appear ‘large’ in rand terms.⁷ The appeal was withdrawn pursuant to the settlement reached between the CCSA and Pioneer on the wheat flour and maize meal cartels.

The Tribunal acknowledged the importance of deterrence in its determination of the penalties in the next cartel case, Southern Pipeline Contractors (SPC), regarding cast concrete pipes and culverts.⁸ This cartel, which had run for more than 30 years, was uncovered in 2007 following the leniency application of Rocla (a subsidiary of Murray & Roberts). The Tribunal set out an approach which followed international practice, including that of the European Commission (EC), which takes deterrence as the starting point. This approach uses the turnover of the products cartelised but contemplates a starting percentage higher than 10% and multiplies by the number of years of the conduct, taking both mitigating and aggravating factors into account. The 10% measure is only applied as the cap on the total penalty arrived at (as per section 59(2)), as a proportion of the total turnover of the firm and not only the infringing line of business.

The CAC, while agreeing with the emphasis on deterrence, found in SPC that the harm in terms of the mark-up from the cartel conduct needed to be assessed.⁹ The CAC reduced the penalty for SPC to one-half of that determined by the Tribunal. In the penalty computation the CAC took only one year into account, although it is not clear why, as the CAC recognised the cartel had continued over many years. The CAC's reasons for reducing the fine on SPC included that the conduct had been limited to a specific product line and that there was no evidence of increases in profit margins, including reference to the fact that when costs had increased SPC had not passed on the full increase.¹⁰ These reasons proved flawed. After the cartel ended, companies entered other product and geogra...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Tables, figures and boxes
• Acknowledgements
• Acronyms and abbreviations
• Introduction: The development of competition and regulation in southern Africa
• Part One: Cartel law enforcement
• Part Two: Issues in competition and regulation
• Part Three: Competition and regulation in reshaping African markets
• Part Four: Conclusion
• Contributors
• Index