Report on competition policy

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1. Introduction

This report reflects the work of the competition policy task team of the National Economic, Development and Labour Council (Nedlac). The report is divided into seven sections. Following this introductory section, 

• section 2 sets out the Nedlac process on competition policy;
• section 3 outlines the agreements on competition policy principles;
• section 4 reflects disagreements between the Nedlac parties on competition policy principles;
• sections 5 and 6 records the reservations of business and labour respectively on government's position as reflected in the draft bill; and
• section 7 concludes the report.

2. The Nedlac process

2.1 The Minister of Trade and Industry tabled government's discussion document "Proposed guidelines for competition policy: a framework for competition, competitiveness and development" at a Trade and Industry Policy Session on 27 November 1997.

2.2. The introduction of new competition policy is part of a general review of the legislative and regulatory environment within which business functions in South Africa. In order to ensure complimentarity with related legislation, the Nedlac parties have agreed that similar processes to the competition policy process will be followed when other elements of policy come under review.

2.3. The objective of the Nedlac process on competition policy was to attempt to reach agreement between business, government and labour on the policy principles which would shape and inform new competition legislation.

2.4. The negotiations in Nedlac were conducted in the competition policy task team, under the auspices of the Trade and Industry Chamber. The process was managed by a committee comprising the lead negotiators from each of the constituencies.

2.5. The task team and the lead negotiators met 16 times, including teleconferences, between November 1996 and May 1998. Meetings were held on the following dates:

27 November 1997 16 January 1998 30 January 1998 05 March 1998 13 March 1998 20 March 1998 01 April 1998 7 April 1998

08 April 1998 15 April 1998 28 April 1998 29 April 1998 04 May 1998 08 May 1998 14 May 1998 20 May 1998

2.6. Each of the constituencies made a number of written submissions during the negotiations (see appendix 1)

2.7 There was extensive debate and discussion in the task team. The terms of reference of the task team required that it examine and attempt to reach agreement on the principles underlying competition policy. At times this required exploring detailed aspects of the proposed legislation and the parties adopted a flexible approach in order to fulfill the task team's mandate. However, in accordance with the task team's mandate, this report only reflects the discussion as it relates to policy principles - both those agreed between the parties as well as those on which agreement has not been achieved. In addition, the report records the reservations of business and labour on aspects of the draft bill.

2.8 A competition bill was drafted in a concurrent process to the Nedlac negotiations. Government negotiators conveyed the outcome of the discussions in the task team to the drafters of the bill. The task team, on 4 May 1998, examined the Draft Competition Bill, which had been submitted to cabinet. The Nedlac partners confirmed areas of agreement and reaffirmed their disagreement with aspects of the government's stance as reflected in the draft bill. Government undertook to incorporate certain comments made by business and labour in the draft bill, and to make a further submission to cabinet.

2.9 This report (the Nedlac report on competition policy) has been mandated by business, government and labour. In accordance with the decision of Nedlac's Management Committee on 4 May 1998, this report was ratified at a meeting of the Trade and Industry Chamber convenors (S. J. Naude for business, A. Hirsch for government and H. Mkhize for labour) on 20 May 1998.

2.10 The task team may continue to meet during the public consultation phase of the policy process to attempt to resolve any outstanding issues and debate further aspects of competition policy which may arise.

3. Agreement on policy principles

Nedlac has agreed to the following principles:

3.1. The objective:

The overriding objective of the proposed new legislation is the promotion of competition in order to:

• promote the efficiency, adaptability and development of the economy;
• expand opportunities for South African participation in world markets while at the same time recognising the role of foreign competition;
• ensure that small and medium enterprises (SMEs) have an equitable opportunity to participate in the economy;
• promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged communities;
• provide consumers with competitive prices and product choices;
• promote employment and the social and economic welfare of all South Africans.

3.2 Prohibited Practices:

Procedures and remedies provided for in the legislation will be triggered by a combination of structural and behavioural factors. The legislation will also make provision for exemptions.

3.2.1 Restrictive Practices:

In specified instances, behaviour, regardless of the size or structure of an offending firm, will trigger remedies in the legislation. A single firm or a combination of firms may transgress the competition legislation by engaging in defined horizontal (relationships between competitors) and vertical (relationships between suppliers, producers and distributers) restrictive practices.

3.2.2. Horizontal restrictive practices

The legislation will prohibit agreements between firms, decisions of associations of firms or concerted practices by firms, which prevent, restrict or distort competition or if it involves any of the following horizontal restrictive practices:

• directly or indirectly fixing prices or other trading conditions
• restricting output
• restricting technological innovation
• restricting investment
• market sharing
• collusive tendering
• any other practice between parties in a horizontal relationship that substantially lessens competition, unless the parties can prove countervailing technological, efficiency or pro competitive gains

3.2.3. Vertical restrictive practices

The legislation will prohibit:

• the practice of resale price maintenance;
• any other agreement between parties in a vertical relationship that substantially lessens competition, unless a party to the agreement can prove countervailing technological, efficiency or pro-competitive gains.

3.2.4. Where two or more firms share at least one director in common, then an agreement between them is rebuttably presumed to exist.

3.2.5. Abuse of Dominance:

In other instances remedies will be triggered by a combination of structure and behaviour. Dominance will be presumed when a firm's market share exceeds a specified proportion, unless it can show that it does not possess market power. A firm with a market share of less than the specified proportion will be considered dominant if it can be shown to possess market power. The Minister will determine size threshold below which a company cannot be found to be dominant. Where a firm is dominant certain abuses of its dominant position will be prohibited. A dominant firm must not:

• limit output, production or technological development;
• charge an excessive price. [Business agrees to this abuse, subject to the condition that the concept of "excessive price" is clearly defined by agreement];
• refuse to give a competitor access to an essential facility;
• be a party to exclusive dealing arrangements, refusal to supply, tying arrangements, predatory pricing and the buying up of scarce supplies to restrict competition, unless the firm can show a countervailing technological, efficiency or pro-competitive gain.
• any other act that prevents or impedes entry or expansion into a market and where the anti-competitive effects outweigh the pro-competitive effects.

3.2.6. Exemptions

The competition tribunal may, on application, grant a conditional or unconditional exemption for an agreement or category of restrictive horizontal or vertical agreements if the agreement contributes to:

• promoting exports;
• promoting the ability of SMEs and firms owned by members of historically disadvantaged communities to become competitive;
• preventing the decline of an industry.

The granting and withdrawal of exemptions will be a transparent process through the publication of applications and decisions in the Government Gazette.

3.2.7. Mergers

In the case of mergers, contemplated structural change will attract the attention of the competition authorities. The Tribunal must prohibit a merger when it determines that it is likely to substantially prevent or lessen competition. In order to make this determination the Tribunal will be required to undertake a rigorous economic analysis of the relevant market utilising criteria specified in the act. The law will specify a threshold for notification of intended mergers and detailed merger guidelines will be published. Affected employees or their trade unions will be notified of intended mergers in a form to be decided after consultation with the Department of Labour. Merger procedures will provide time limits within which the Tribunal should initiate and complete an enquiry. The Minister will provide a threshold of turnover below which the merger provisions of the act will not apply.

3.3. Institutions and remedies

Infringement of competition rules will not be subject to criminal sanction. Rather, an independent competition authority will be set up to administer the competition act. The competition authority will comprise an investigative division (the "competition inspectorate") and an adjudicative division (the "competition tribunal"). The competition tribunal will have the authority to issue compliance orders and interdicts, to levy fines and to impose structural remedies. The competition tribunal will publish guidelines on all relevant aspects of competition law and not restrict them to mergers. Structural remedies will include the right to prohibit a merger and, under certain circumstances, to order divestiture. Injured parties will have the right to claim damages, the quantum of which will be determined in the civil courts. The competition legislation will provide for criteria with respect to the competency, representivity and diversity of background for members serving on the competition authority.

3.4. The right of appeal:

The new legislation will provide for a right of appeal from the decisions of the competition tribunal to a specially constituted judicial authority, the competition appeal court. The competition tribunal and the competition appeal court will have sole jurisdiction over competition matters and the civil courts will adjudicate claims for damages only after the competition authorities have determined the effects on competition.

3.5. The competition legislation will not apply to collective bargaining within the meaning of section 23 of the Constitution and the Labour Relations Act 66 of 1995, nor to a collective agreement as defined in section 213 of the Labour Relations Act.

4. Disagreements on policy principles

The following disagreements were recorded:

4.1. Mergers: Public interest review

  4.1.1. Government has proposed that the Minister may, upon application by any party, review the decision of the competition authority on mergers, on the following public interest grounds:

• the effect of the merger on a particular industrial sector or region;
• the effect of the merger on employment;
• the effect of the merger on the ability of small businesses or firms owned by historically disadvantaged persons to become competitive;
• the ability of national industries to compete in international markets.

4.1.2. Business is opposed to this proposal on the basis that it would politicise decision-making and compromise good governance, particularly since transactions may involve large sums of money, and no appeal beyond the Minister is contemplated. In business's view, an undesirable dichotomy of principle and institution would result.

4.1.3. Labour supports government's proposal for a 'public interest review', with the following proviso's:

• that the Minister must be empowered to initiate the process of a public interest review for reasons consistent with government's industrial and developmental policies;
• that the review must explicitly aim at avoiding and minimizing job loss (requiring amendment to 4.1.1.(b) above);
• that effective mechanisms must be put in place to inform workers and/or their trade unions:
  • when they may initiate a public interest review, and
  • how they are to participate in any such review. (Government agrees with this aspect.)

4.2. Divestiture provisions

 4.2.1. Government has proposed that the tribunal be entitled to order divestiture when a prohibited practice by a dominant firm cannot otherwise be remedied or where a firm repeats a conduct previously found to be a prohibited practice.

4.2.2. Labour has expressed reservations about both the extent to which government proposals will deal with inherited concentrations as well as the particular limitations placed on forced divestiture.

Labour has proposed that the objectives of the legislation should include "Regulating and eroding concentrations of corporate power".

In terms of remedies, labour has proposed that:

• the authorities should be empowered to intervene and remedy an undesirable structure when this can be shown to be in the public interest.
• an abuse of dominance can be established on the basis of the negative effects of particular structures, not only as a result of their behaviour

Labour has proposed that the forced divestiture provisions be strengthened, so that in the event of abuse of dominance, divestiture remedies are applied unless it is a firm's first offence and there is another appropriate remedy provided for under the Act.

4.2.3. Business agreed that divestiture was a proper remedy for abuse of dominance where it was a persistent abuse and no other adequate remedy was available. Business does not accept that an order by the tribunal to stop the abuse would be inadequate in the case of a first offender. Business believes that it is essential that both requirements be met before the divestiture remedy can be applied.

5. Business reservations

5.1. Greater certainty

(a) Excessive price

Business's view is that charging an "excessive price" is an abuse of dominance which has important consequences and that a clear definition of this concept is essential to create certainty.

 (b) Where a defence to certain prohibited practices is available

Business agrees that the built-in defence, in the provisions prohibiting horizontal practices, vertical practices and some abuses of dominance, is fully justified where a party to the agreement can prove that any technological, efficiency or other pro-competitive gain resulting from it outweighs the anti-competitive effect.

Business has argued, however, that problems may arise when a firm which believes its business fits that description, cannot with confidence invest and expand its business in the uncertain hope that it will have a defence if attacked in terms of the legislation. Business has argued for greater certainty.

Business believes that the letter of comfort provided for in the proposed guidelines might suffice, although it in fact has no legal effect as the exemption would have.

5.2. Interlocking shareholding: presumption

Government has proposed that, as in the case of interlocking directorships, a rebuttable presumption should arise that an agreement has been entered into where there is a substantial shareholding between firms in the agreement exists. Business agrees that the rebuttable presumption of a collusive agreement where competing companies have one or more common directors makes legal and practical sense. However, business argues that a mere substantive shareholding of one company in another justifies no such presumption. Business's view is that where two or more companies are effectively an economic unit (e.g. the one is the wholly-owned subsidiary of the other), the application of competition rules is affected (see "Group relations' below).

5.3. Vertical practices

Business has pointed out that while exclusive dealing obligations and restrictions relating to the resale of goods may restrict competition, they may also bring economic benefits and, indeed, form an essential part of the distribution process. This has led the European Union (EU) to numerous individual and block exemptions introduced in the interest of legal certainty. The result in the EU is a complex mosaic of what is, and what is not, permitted in the distribution sector, in which each kind of agreement must be considered separately. Business has argued that this area be considered carefully to avoid undesirable disruption and complexity.

5.4. Exemptions from prohibited practices

It was agreed that the Tribunal has the discretion to grant exemptions on three clearly specified grounds. Business believes that a fourth more flexible ground for exemption is necessary where the Tribunal wishes to grant relief, in its discretion, in unforeseen circumstances. Business has proposed that this be possible where the agreement contributes to "the ultimate benefit of consumers".

5.5. Group relations

Business has expressed reservations at the manner in which the draft bill deals with company group relations. Business has argued that group companies are often in effect an economic unit; and that there are sound reasons - in terms of organisation, financing and participation in equity by management and workers - for locating certain activities in a separate company. Even subsidiaries which are not wholly owned will often form one economic unit with the holding company.

Business has pointed to the following examples where there is a substantial shareholding between companies that remain, in effect, a single economic unit:

• a company and its subsidiary manufacture and sell into the same market;
• two subsidiaries of the same holding company have largely the same directors and charge the same price for the same goods;
• a holding company manufactures, but holds five wholly owned subsidiaries for distribution of the goods in five regions.

Business has proposed that the treatment of relations between companies that are members of a group be carefully considered and discussed.

6. Labour reservations

6.1. Procedural

Labour raised the concern that the RDP's commitment to a "commission" to review "the structure of control and competition in the economy" had not been carried through as a basis for informing the principles guiding competition policy.

6.2. Employment impact

In general, labour has expressed reservations on the extent, and manner, in which the objective of minimising and avoiding job loss has been incorporated. Specifically, labour has proposed that:

the objectives of competition policy should explicitly refer to the need to minimise and avoid job losses; and

the competition tribunal take into account the employment consequences in its 'rigorous economic analysis' of the impact of mergers, and in the granting of exemptions.

6.3. Restrictive practices

Labour wishes to consider expanding the list of countervailing gains which can serve as a basis in judging non-specified restrictive practices. This also applies to the countervailing gains test in judging abuses of dominance.

Labour has proposed that consideration should be given to extending the lists of prohibited horizontal practices and inserting a list of prohibited vertical practices as follows:

6.3.1. Prohibited horizontal restrictive practices:

• Conscious parallelism (e.g. with application to prices such as interest rates)
• Conscious exchange of information.

6.3.2. Prohibited vertical restrictive practices:

• Exclusive dealing
• Refusal to deal
• Territorial restraints
• Price discrimination
• Premium offers
• Tying arrangements
• Full line forcing
• Fixing distributor price
• Transfer pricing

7. Conclusion

 7.1. This report completes consideration of competition policy in Nedlac, and the report is hereby submitted to the Minister of Trade and Industry and the Minister of Labour in terms of section 8 of the Nedlac Act, No. 35 of 1994.

7.2. It is acknowledged that the Nedlac parties may continue to advocate their views in the public consultation and parliamentary processes which will precede the promulgation of the bill, except that parties should not oppose principle agreements in this report. The task team will continue to meet during these processes to resolve any disagreements between the parties.

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Appendix 1: List of documents submitted during the Nedlac negotiations on Competition Policy

1. Government submissions

1.1. Proposed guidelines for competition policy: a framework for competition, competitiveness and development, 27 November 1998

1.2. Response to issues raised at the Nedlac meeting dated 20/03/98, 27 March 1998

1.3. First draft of document detailing areas of agreement and disagreement, 1 April 1998

1.4. Government submission to Nedlac meeting 7 April 1998

2. Business submissions

 2.1. A new competition law for South Africa - the views of business, 4 March 1998

2.2. Response of business to some issues raised at the Nedlac negotiations of 20 March 1998

2.3. Comment by business on DTI's draft Competition Bill, 6 May 1998

2.4. Input into draft Nedlac agreement on competition policy - matters not agreed by business, 12 May 1998

2.5. Business Reservations, Cape Town, 14 May 1998.

3. Labour submissions

3.1. Labour response to government's "Proposed guidelines for competition policy: a framework for competition, competitiveness and development", 5 March 1998

3.2. Labour's submission to Nedlac Task team meeting of 7 April 1998

3.3. Labour's initial response to draft competition bill, 6 May 1998

3.4. Labour's reservations for Nedlac Report on competition policy.