Challenges in Implementing Competition Act: Insights from Tembinkosi Bonakele

1. CHALLENGES TO THE IMPLEMENTATION OF THE COMPETITION ACT 89 OF 1998, AS AMENDED Tembinkosi Bonakele Commissioner 29 November 2016

2. OVERVIEWOF PRESENTATION • Introduction • Cartels • Abuse of Dominance • Market Inquiries • Mergers & Acquisitions • Resources • Conclusion

3. INTRODUCTION • Commission’s vision 2030: Attainment of growing and inclusive economy that serves all South Africans through: • Use of tools such as merger control and enforcement. • Partnerships and collaboration with key stakeholders. • Goal to be a high performance agency – cohesive well-structured organisation in which people, processes and systems perform optimally.

4. CORE FUNCTIONS

5. CARTELS

6. CARTEL ENFORCEMENT • Cartels is the most active enforcement area and targets the most egregious of contraventions, namely, price fixing, market allocation and bid-rigging. • The Commission has a dedicated Cartels Division which focusses on the investigation and prosecution of cartels. • The Commission has been highly successful in uncovering and prosecuting cartels with a 100% litigation success in 2015/2016.

7. SNAPSHOT OF CARTELS WORKLOAD • Number of investigators in the Cartels Division: 21 • Most of the cases initiated in 2015/16 were in the automotive components sector (over 100 components).

8. CASE STUDY 1: AMSA • AMSA is the largest steel producer in SA with overwhelming dominance. • 4 complaints against AMSA since 2008 involving collusion in the flat steel, long steel and scrap metal markets, and excessive pricing in flat steel. • Settlement of R1.5bn confirmed by the Competition Tribunal on 16 November 2016. Largest penalty imposed on a single firm in the Commission’s 17 years. • Pricing remedy: for five years, agreed to limit its EBIT (earnings before interest and tax) margin to a cap of 10% for flat steel products sold in SA. • Committed to R4.6bn capital expenditure over the next five years. • Behavioural remedy regarding exchange of information with government and other stakeholders to ensure compliance with the Competition Act. • Long road to settlement: AMSA raised several technical challenges including application for access to all the Commission’s investigation documents.

9. CHALLENGES TO CARTEL ENFORCEMENT • Excessive litigation on technical grounds: • Interlocutory applications – these have largely centred around access to the Commission record. Progress has been made with courts in clarifying the matter. • Appeals and reviews – almost all of the decisions of the Tribunal where the Commission is successful against private parties are taken on appeal to the CAC. • There is a need to restrict appeal rights. Also “express” provision on the need for the CAC to defer to the Tribunal on merits. • Growing number of investigations and referrals: • There is a large number of investigations and referrals to the Tribunal, which creates capacity constraints. There are 49 cartel cases in the Tribunal pipeline as of Q2. • This requires more resources and new ways of resolving cases.

10. NEW DEVELOPMENT: CRIMINALISATION OF CARTELS • The Competition Amendment Act was assented to in August 2009 and sections 73A(1) to (4) came into effect of 1 May 2016. • In terms of section 73A(1) a person who is a director of a firm or has management authority within the firm, commits a criminal offence if, while in that position, such person caused the firm to engage in cartel conduct or knowingly acquiesced in the firm engaging in such practices. • Cartel conduct in terms of section 4(1)(b) relates to price fixing, dividing markets and bid-rigging. • A person convicted of an offence may be sentenced to a maximum of 10 years imprisonment or R500 000 fine; or both (section 74). • A person may be prosecuted for a criminal offence in terms of this section only if the relevant firm has acknowledged that it engaged in a prohibited practice in terms of section 4(1)(b); or the Tribunal or the CAC has made a finding that the relevant firm engaged in such a prohibited practice (section 73A(3)).

11. CRIMINALISATION OF CARTELS (continued…) • The Competition Act provides for two processes of enforcement against cartels: • administrative/civil process (investigation and prosecution) directed at the conduct of the firm in terms of section 4(1)(b) - prosecuted by the Commission; and • criminal process (investigation and prosecution) directed at the conduct of managers and directors in terms of section 73A - prosecuted by the NPA. • In order to have successful prosecution of cartels under the new provisions, the Commission needs to have co-operation agreements (MoUs) with the NPA and SAPS. • Such MoU will also be able to address factors related to the Commission’s Corporate Leniency Policy (CLP)- an extremely successful tool in the uncovering an prosecution of cartels thus far.

12. ABUSE OF DOMINANCE

13. ABUSE OF DOMINANCE ENFORCEMENT • Abuse of dominance relates to the unilateral conduct by a dominant firm to either exploit customers or exclude competitors. • An example of exploitive conduct is excessive pricing. • Exclusionary conduct prevents or impedes a firms entry or expansion in a market. Such conduct may include refusals to deal, tying or bundling, predatory pricing and margin squeeze. • The abuse of dominance provisions are set out primarily in section 8 of the Competition Act and price discrimination provisions are in section 9.

14. SNAPSHOT OF E&E WORKLOAD • Number of investigators in E&E divisions: 21 • Increase in complaints received from previous year • Most complaints in food and beverages, followed by retail/wholesale and construction sectors

15. CHALLENGES TO ABUSE OF DOMINANCE ENFORCEMENT • Section 8(a) - Excessive pricing: • Challenges relating to the calculation of economic value. • The Tribunal’s decision against Sasol for excessive pricing was overturned by the CAC. • Section 8(d)(iv) Predatory pricing: • Challenges relating to the definition of average variable costs and marginal costs. • Move away from strict definition - more appropriate measure is average total costs and average avoidable costs. • Section 9(1) Price discrimination: • Provisions against price discrimination are aimed at protecting small businesses • Key challenge is the requirement of proof that transactions between different purchasers and who have different scale economies are equivalent. • The Commission is currently discussing proposals to address all of the above challenges with the EDD.

16. MARKET INQUIRIES

17. MARKET INQUIRIES • The Competition Amendment Act introduced market inquiries as a new tool which enables the Commission to conduct an inquiry into the state of competition in a market without invoking its investigation powers and threatening prosecution • These new powers have only recently been implemented in the Private Healthcare, LPG and Grocery Retail sectors. • From a legal point of view there are no challenges that have been identified thus far except for minor challenges which relate to the treatment of confidential information. • The main challenges in this area relates to resources, particularly human resources for market inquiries. As of now these human resources are currently outsourced. • Number of analysts/legal counsel: 18

18. MERGERS & ACQUISITIONS

19. MERGERS REGULATION • All mergers meeting certain prescribed thresholds must be notified to the Commission • The Commission may prohibit mergers, or approve mergers with or without conditions • The Commission decides on intermediate and small mergers. With respect to large mergers, the Commission makes a recommendation to the Tribunal. • In assessing a merger the competition authority must also consider the impact on public interest issues including employment, the ability of small businesses or firms controlled by historically disadvantaged individuals to become competitive, a particular industrial sector or region and the ability of national industries to compete in international markets. • A total of 37 mergers were approved with conditions in 2015/2016. These include behavioural remedies to address competition concerns, structural remedies to address market distortions and remedies to address public interest concerns. • Net impact on employment from mergers in 2015/16:+6 875 (8274 saved - 1399 lost)

20. SNAPSHOT OF M&A WORKLOAD • Number of employees in M&A division: 20

21. NUMBER OF MERGERS NOTIFIED

22. CASE STUDY 2: AB INBEV/SAB MERGER • Approved on 30 June 2016 subject to extensive conditions. • Minister participates in terms of the Competition Act: substantive consultations between AB InBev, EDD, DTI and DAFF. • Several conditions addressing competition and public interest issues (consideration of impact of merger on small beer producers, owner drivers, local production & BBEEE). • Competition remedies include divestment of the Distell stake, supply of apple juice concentrate to rivals, a ring-fencing structure to prevent information exchange between Coca-Cola and Pepsi, the continuation of tin metal crowns supply for 5 years, granting access (10% of fridge space) to small beer producers in perpetuity and no inducements. • Investment fund: R1 billion additional investment utilised for the development of SA’s agricultural outputs for barley, hops and maize to promote entry and growth of emerging and black farmers in SA; enterprise development through incubator facility which will provide suppliers with training to develop various skills. • Employment: No retrenchments as a result of merger in perpetuity, certain executives could be retrenched, offer employment to knock-off affected employees

23. CHALLENGES TO REGULATING MERGERS • The Commission considers approx. 400 mergers in a year. • The number of mergers notified have been steadily increasing over time. This has an impact of on its resources. • The Commission is doing well with respect to its work on mergers: We are seeing our employees more frequently providing expert advice and parties abandoning mergers that the Commission deems as problematic.

24. RESOURCES

25. RESOURCES • Total staff complement is currently circa. 200. • Much of the growth in staff numbers has been achieved through the creation of contract positions and a proposal for a permanent structure is being discussed with EDD and Treasury. • Strategy to move from outsourcing to insourcing.

26. CONCLUSION • The investigation and litigation load of the Commission is on the increase in respect of mergers, abuse of dominance and cartels. • The increasing number of cartel investigations and referrals creates capacity constraints. • The criminalisation provisions have introduced a new era in cartel enforcement. • Effective partnership between the Commission, NPA and SAPS is important for successful implementation of the amendments. • Implementation of the market inquiries provision is progressing well with no major challenges encountered. • More resources are required for the Commission to be able to effectively execute its mandate in terms of the Competition Act and in terms of its strategy.

27. THANK YOUTel number: +27 (012) 394-3200 / 3320Fax number: +27 (012) 394 0166E-mail Address: ccsa@compcom.co.za