Not “entrepreneurial” behaviour
Once the commission had finished naming the employees involved it was clear that the pricing patterns were not down to “entrepreneurial” behaviour on the part of low-level sales staff who may have been chasing incentive bonuses.
According to the referral, written by the Competition Commission's principal legal analyst in the enforcement & exemptions division, Avishkar Kalicharan, the cartel was operated by senior people within the companies involved. In Premier Foods' case this extended to the company's then MD, Fanus Bothma, says the report.
In all, 14 Tiger Brands, 13 Premier Foods, 11 Pioneer Foods, four Foodcorp and two Godrich Milling executives were involved in an active and ongoing process of price setting and market manipulation, says the commission.
However, two of the key operators, Tiger Brands and Premier Milling, will face no penalties. This is in return for spilling the beans on their competitors' actions in the market.
Though the commission usually grants immunity to the first company to apply for corporate leniency, in this case Premier Milling, Tiger was granted immunity from prosecution as a result of the consent agreement the parties entered into in 2007. “Tiger confessed its role in the bread cartel — and paid a fine in that regard — and in the wheat cartel and co operated fully with the investigation,” says competition commissioner Shan Ramburuth.
The other alleged members of the cartel — Pioneer Foods, Foodcorp and Godrich Milling — face the prospect of being fined 10% of 2009 turnover.
“There are not many jurisdictions in the world where the ringleaders can apply for leniency,” says the head of Webber Wentzel's competition law department, Martin Versfeld
The detailed referral, which is essentially the competition commission's case against the five companies, was handed to the companies concerned two weeks ago. They have 20 days in which to respond. They could accept the commission's arguments and negotiate a settlement or they could reject them and contest the allegations — as Pioneer Foods did with the bread case.
Unsurprisingly, the executives concerned are loath to comment. “We have had some talks with the commission,” says Pioneer Foods CEO Andre Hanekom. “And we will continue to talk to them. But it is not easy for me to comment further. This is a litigation environment and we don't want to prejudice ourselves by saying the wrong thing.”
Foodcorp CEO Justin Williamson indicates that the company is unlikely to challenge the commission's allegations. “We had done our own internal investigations, but the commission has highlighted some issues that we were not aware of.”
The milling investigation is the next step in a process that began in the Western Cape in 2006 when a shopkeeper, Imraan Ismail Mukaddam, complained to the commission about the existence of a bread cartel.
A cartel was found to exist and those involved were fined. But the bread and wheat industries are highly intertwined — for example 40% of the flour milled at Foodcorp's Ruto Mills is used in the production of its own brand of bread, Sunbake. When Premier confessed to its involvement in the bread cartel, it revealed the existence of the national wheat milling cartel.
According to the referral the companies concerned fixed the price of flour and maize meal products, co-ordinated dates for the price increases, allocated customers among themselves and discussed attendees at previous meetings who had not stuck to agreed pricing structures.
What action has been taken against employees implicated by the commission is not clear. Tiger Brands and Premier Foods had not returned calls at the time of going to press. Pioneer's Hanekom says that disciplinary action will be taken. Foodcorp's Williamson has suspended the company's head of milling, Okkie Strydom “We have done a lot of work since 2008. If anyone in this company has involved themselves in this behaviour since then they will be fired and we will sue them in their personal capacity,” he says.
This case is important, says Ramburuth, “because it is further demonstration of the fact that pricing at the consumer level is a function of an entire value chain — the bread producers, the flour producers and the grain storage people too. In addition our probe into the supermarkets is ongoing”.
Observers will also be watching to see what penalties are levied.
Legally, the commission is entitled to fine a company up to 10% of its total turnover in a particular year. Until now the tribunal has used the turnover of the specific business — the “line of injury” — responsible for engaging in the unlawful behaviour. However, in the case against Pioneer Foods the commission has taken the tribunal's decision on appeal, arguing for a fine based instead on the turnover of the whole group.
“Fines need to be an effective deterrent,” says Ramburuth, “therefore they must be set at the highest level of the corporate structure, because that is where the responsibility [lies].”
However, there is a concern about the level of penalty that will serve as a disincentive and a penalty that is so substantial that it affects the company's ability to compete and may even harm consumers, says Versfeld.
“These cases [Pioneer and the wheat cartel] may provide some nonbinding guidelines around the tribunal's likely approach in future,” he says.
One unintended consequence of the investigation is that Premier, Pioneer, Pride Milling (a maize miller) and Godrich Flour Mills have all resigned from the National Chamber of Milling.
“They are under pressure and want to avoid being in contact with their opposition at all costs,” says the executive director at the Chamber of Milling, Jannie de Villiers Without their data the chamber will not be able to supply accurate information to the various bodies that collect such statistics — government, for one.
“The commission is concerned that this information exchange could harm competition. But what will happen is that bigger companies will buy the data elsewhere, and smaller companies will operate in the dark,” says De Villiers.
This case will make plain to any executive operating at the “sharp end” of business just what the cost of continuing with “business as usual” might be.
For some of the companies concerned, Pioneer Foods for instance, this is not the end — the commission is continuing with its investigation into maize milling.
Source: Financial Mail
For more than two decades, I-Net Bridge has been one of South Africa’s preferred electronic providers of innovative solutions, data of the highest calibre, reliable platforms and excellent supporting systems. Our products include workstations, web applications and data feeds packaged with in-depth news and powerful analytical tools empowering clients to make meaningful decisions.
We pride ourselves on our wide variety of in-house skills, encompassing multiple platforms and applications. These skills enable us to not only function as a first class facility, but also design, implement and support all our client needs at a level that confirms I-Net Bridge a leader in its field.
Go to: http://www.inet.co.za
