It was here that the cartel club discussed details, contained in a Tiger Brands' dossier, of how they would allocate markets and achieve higher prices — for example, how to raise the cost of toaster bread to R4.20 a loaf.
The result: it cost Tiger Brands CEO Nick Dennis his job, but it was shareholders who had to bear the brunt of a R98m fine while consumers were slapped with higher bread prices. Now managers and directors engaged in similar activities could end up behind bars for 10 years or be fined R500000 under the Competition Amendment Act, which comes into force in March next year.
Incidentally, it was the bread cartels' attitude to the fines that infuriated policy makers and led to the harsh new laws. “When the bread cartels, namely Tiger Brands, were fined, bread prices were pushed up shortly afterwards. It was their complete disregard that sparked moral outrage. If they'd played ball, criminalisation wouldn't have been effected,” says competition commission CEO Shan Ramburuth. Cosatu shouted with the loudest voice at the time.
Similar scenes of anticompetitive behaviour are playing out in other industries. In the construction sector, which is under investi- gation, bid-rigging and collusion is rife. For example, in some of the big infrastructure projects, the directors or project managers of construction company A will say to company B: “You bid for Cape Town or Durban and we will bid for Johannesburg”, so they don't have to compete. “The construction companies are a bit like the mafia. The big five are the biggest culprits,” says Ramburuth.
Murray & Roberts, Group Five, Wilson Bayly Holmes-Ovcon, Aveng, Basil Read and Stefanutti Stocks are in the commission's sights. So, too, are companies that contribute to the input costs of construction (like cement, bricks and steel). This anticompetitive behaviour has apparently pushed up the costs of infrastructure projects, including the World Cup stadiums. According to the Labour Research Service, the cost of the stadiums rose from R2,3bn in 2004 to R8,35bn by October 2006, and the latest figure stands at R17,4bn.
“Bid-rigging affects government coffers and cheats taxpayers. It also pushes up the spending bill of infrastructure projects,” explains Ramburuth. A big part of SA's industrial policy is creating jobs. Government's R787bn infrastructure spend, however, unfortunately opens the door for abuse. “International experience has shown that there's a tendency in construction firms to rig bids when there is huge infrastructure spend involved,” says Ramburuth. “We've cast the net wider so companies could end up being fined more than once, depending on the projects being investigated.”
Murray & Roberts denies these allegations, saying: “Though activities that can be construed as collusive behaviour have occurred, they are the independent actions of individuals for personal gain.” It has lodged a complaint with the department of trade & industry (DTI).
Most of the other construction companies won't comment on the accusations, writing them off for now as “speculation”. Aveng CEO Roger Jardine says the market will be kept informed if further issues arise from the investigation.
The construction giants are not alone. Three years ago, the commission identified three other areas of focus: financial services (banking); food; intermediate industrials (all products that go into manufacturing). For example, the banks, which came under competition fire recently for high fees, could face further scrutiny under the new law for complex monopolies.
Says DTI director-general Tshediso Matona: “There are certain markets where you see very co-ordinated behaviour.” He highlights Reserve Bank governor Tito Mboweni's remarks of how the prime lending rates of the big commercial banks — Standard, Absa, Nedbank and First National Bank — always mirror each other.
Banking Council MD Cas Coovadia is “surprised” by the possibility of a fresh probe into the industry's practices. “We co-operated with the commission in its banking inquiry. We are still in that process.”
After the recent crackdown a host of companies have sought leniency (immunity or lower fines) from the commission — with 41 applications coming in the past 18 months. SAA, Tiger Brands, Sasol, ArcelorMittal, Aveng, the Reclamation Group, Adcock Ingram, and milk producers are on the growing list of offenders that have been fined since the commission was launched 10 years ago (see case studies on page 42).
Says Matona: “The damage that antitrust behaviour causes in the economy is incalculable. We will leave no stone unturned to ensure that we eliminate this conduct.”
Competition law is about protecting the consumer and promoting greater access and participation of small entrants into the economy. The lack of contestability of a market blocks foreign investment. “Economies where there's a fair level of market contestability will receive more investment,” says Matona.
Government's bid to break the stranglehold of cartels is in line with an international crackdown. Cartels in SA are the bastard children of the apartheid economy, which was built on close relationships among established players in key sectors — the operations, literally, of the “Old White Boys' Club”.
With state approval, industry associations often agreed on how to regulate their activities. In some sectors, such as cement, the state explicitly sanctioned a cartel so that production volumes were planned collectively. In other sectors, industry bodies were forums for planning a common approach and monitoring members' activities and outputs, including their sales volumes.
In SA, the high levels of concentration in many sectors, together with the tight oligopolies — a small number of large firms that collectively exert control over supply and a market — provided favourable conditions for anticompetitive conduct.
Policy makers are now taking a stand against this behaviour. “SA businesses have been getting away with too much,” says Ramburuth. “Things are worse than I thought. It was only when we started the investigations that we realised how bad things were. SA is steeped in cartels. Most of these guys/ businesses don't know that they've been doing wrong because they've been doing it for so long they think it's normal.”
In 1998, the new Competition Act was promulgated, changing the landscape entirely. The competition commission, which emerged from the act, kicked off with the focus on merger control. Later it shifted to examining prohibited practice. “The first port of call was cartels — they are glamorous to bust and easier to prove,” says Cliffe Dekker Hofmeyr director Chris Charter. Edward Nathan Sonnenberg director Mark Garden adds: “The problem was the behaviour. People had been doing things for 30 years, there was little education to say that these practices were now illegal.”
In the US, the competition regime is 120 years old. In Europe, it's 60 years old. “So when cartels develop there, they are the real thing — secretive meetings in airport lounges and smoke-filled rooms. In SA, people have done them for so long they don't realise the behaviour is illegal,” says Charter.
Government acknowledges this. “We are an industrial modern economy, sophisticated and complex,” says Matona. “If you compare us with similar economies, competition law has a long way to go in SA. It's only now coming of age.”
The commission is now moving on to more technical and complicated investigations that attempt to prove abuse of dominance. “This requires a sophisticated level of economic analysis because one needs to go a step beyond proving the conduct exists. One needs to prove that the dominant conduct had a negative effect on competition,” says Charter.
In the case against the supermarkets, there is no allegation of price-fixing and cartel-like behaviour. Rather the commission alleges that the retailers are using their size to distort the market. “This is not easy. The investigation is far more nuanced and subtle from a regulatory point of view. There is nothing wrong with being dominant — as long as you offer the best product at the cheapest price. The problem comes in when you use your size to compete. One needs to gather data, understand the theories of harm, and so on,” says Charter.
This is the next frontier for the competition authorities.
Though the harsher laws are necessary as a deterrent to antitrust behaviour, the threat of unintended consequences looms large. Behind many of the commission's successes is its corporate leniency policy, where companies can seek lower fines or immunity in exchange for disclosing their industries' anticompetitive secrets.
Proving cartel behaviour is not onerous because the commission does not need to prove that the cartel's actions harmed consumers, but merely that the actions took place. In this regard the leniency policy has been effective. “It [corporate leniency] is an important tool in making watertight cases,” says Ramburuth.
The problem is that directors or managers facing jail time might be reluctant to apply for corporate leniency. Though the commission can approve leniency if a company comes clean, the national prosecuting authority (NPA) would have the responsibility of deciding whether to prosecute the individuals implicated.
Technically, the commission could only make recommendations to the NPA. “The criminalisation will have a chilling effect on the number of leniency applications in future,” says Webber Wentzel partner Martin Versfeld. “Without directors' cooperation, it will be difficult to bust cartels, which by their very nature are secretive and difficult to detect.”
What does government make of this? Matona says these concerns are somewhat exaggerated. “What we visualise is that the law enforcement authorities will, in matters of this nature, defer more to the judgment of the competition authorities.” The competition authorities will still have to define how their co-operation with the NPA and the SA Police Service will work. “Leniency is leniency. We cannot enter into an arrangement with the law enforcement agencies that will alter a [leniency decision by the commission],” says Matona.
He believes that the threat of possible imprisonment will increase the number of leniency applications.
Business is up in arms about the perceived unconstitutionality of two provisions — one relating to complex monopolies and the criminalisation aspects. It is likely the first time the NPA invokes the criminality provision, there will be a constitutional challenge. Business Leadership SA CEO Michael Spicer says the question is not “if” but “when” the law will be challenged. His concerns are over the reverse onus placed on directors.
If a company is found guilty, every director is assumed to be guilty and has to go to court to prove their innocence. “We're confident that the provisions will be struck down,” says Spicer.
But government isn't worried about a constitutional challenge. “There is no intention to be unduly gung-ho or militant in a way that might be over the top,” says Matona.
Still, the wider business community is alarmed by government's hardline approach. Business Unity SA (Busa) believes this vigour is more the result of “incompetence, lack of professionalism and ideological zeal than giving proper effect to the purpose and objects of the Competition Act”.
Many firms complain that merger investigations are unnecessarily lengthy due to “obviously irrelevant information being sought, and convoluted theories proposed by the commission”. Busa says this has a “slowing effect on the economy, particularly where international mergers lead to direct foreign investment”.
But until business can prove the new legislation unconstitutional, it will have to adapt. “Companies should have done 10 years ago what Sasol is doing now — a big compliance audit,” says Edward Nathan Sonnenberg's Garden. Sasol has 70 lawyers around the world working on the audit.
Similarly, food manufacturer Foodcorp is taking drastic action after admitting to anticompetitive behaviour in the commission's investigation into bread price fixing. After this experience competition issues have assumed board-level importance. “We have done extensive training of all senior and middle management, sales and marketing teams, changed letters of appointment, had staff sign a code of ethics which makes significant references to the Competition Act,” says CEO Justin Williamson. “The bread investigation was unquestionably the most unpleasant matter I have had to deal with in my business career and we are trying to take every step to ensure it does not happen again.”
Sasol, Foodcorp and Tiger Brands are not the only companies conducting compliance audits. Garden says there has been a flurry of activity in this regard. “I am increasingly seeing an appreciation from clients of competition law. Companies have become more conservative, for instance they are less aggressive in their marketing strategies. This is to the detriment of competition. However, these processes will educate people on what the rules of the game are. Ultimately this will foster competition.”
While popular opinion may be that the commission is less independent than it was and is becoming (along with government) increasingly anti-big business, the structure of the authority may help to prevent too much political interference. “I believe the different layers of the authority — the commission, the tribunal and the appeals court — march to their own drumbeat,” says Garden.
Former competition tribunal chair Dave Lewis's legacy was of fierce independence. His successor, Norman Manoim, is likely to uphold that principle. And the president of the appeal court, Dennis Davis, is as independent as they come. “You just need to look at the decisions of the tribunal that have been overturned by the appeal court to see that there is no rubber stamping of decisions,” says Garden.
While the new energy with which government is attacking companies involved in antitrust behaviour will benefit consumers and the economy, it must tread carefully. If it fails to reach the right balance, it could end up having the opposite effect on the economy.
Source: Financial Mail
Published courtesy of
