ZAMBIA COMPETITION COMMISSION

ZAMBIA COMPETITION COMMISSION Allegations of Excessive Pricing of Chlorine Gas on the Zambian market against Chemical & Engineering Supplies Limited A Case Study Thula Kaira Director – Mergers & Acquisitions 15-17 February 2007 CUTS/IGD Competition Policy & Law Implementation Seminar, Pretoria, South Africa

Introduction and relevant background In May 2006, the National Water Supply and Sanitation Council (Nwasco), who are the water utility regulators, wrote to the Commission disclosing that they were in receipt of complaints from Commercial Water Utilities (CWUs) regarding the uncompetitive behaviour and exploitation in the pricing of supply of Chlorine gas in Zambia. Chlorine is used in water purification process by CWUs.

Allegations against NCP and CES It was alleged that: Chemical and Engineering Supplies Limited (CES) was an exclusive agent of National Chemical Products (NCP Chloorkop) South Africa. NCP had refused to deal directly with CWUs in Zambia CES was allegedly excessively pricing Chlorine gas on the Zambian market sold in 0.9-ton gas was allegedly sold at K6 million when the landed cost was K3 million.

Legal Provisions The alleged conduct of excessive pricing would appear to be captured under sections 6(1) and 7(1) of the Competition and Fair Trading Act. Section 6(1) of the Act mandates the Commission … to monitor, control and prohibit acts or behaviour which are likely to adversely affect competition and fair trading in Zambia.

Section 7(1) states that “Any category of agreements, decisions and concerted practices which have as their object the prevention, restriction or distortion of competition to an appreciable extent in Zambia or in any substantial part of it are declared anti-competitive trade practices and are hereby prohibited.”

Assessment Tests Whether there was “Excessive Pricing” Evidence of market dominance against an enterprise deemed to be involved in the alleged conduct; Evidence of abuse of dominant position through excessive pricing; and Effects or likely effects of conduct – i.e. Substantial Lessening of Competition Test.

Excessive Pricing In theUnited Brands Company (UBC) & United Brands Continental BV v. Commission of the European Communities,“excessive price” was held to be: a price that has no reasonable relation to the economic value of a product or service. Generally, prices in a particular market can be regarded as excessive if they allow the dominant firm to sustain profits that are appreciably higher than it could expect to earn in a competitive market. A determination of excessively high selling prices, for example, would take into consideration both operating and capital expenditure, including an allowance for a reasonable rate of return to investors, shareholders and lenders of the business.

The Market Definition The Product Market - The relevant market was defined as the Chlorine gas on the Zambian market (Both hypothetical and actual “SSNIP” Test assumptions). Geographical Market -The geographical market covered the entire country, with a concentration in the Copperbelt, Lusaka and Southern Provinces.

Competitors At the time of the investigations, there were two known suppliers of Chlorine gas on the Zambian market and these were CES and Jetvic Enterprise Limited. The Market Shares were reckoned to be as follows: CES - 70% Lusaka Water & Sewerage Company (LWSC) - 25% Jetvic – 5%

Determination of Dominance Section 2 of the Competition & Fair Trading Act of Zambia equates a dominant position to a monopoly position, both of which are defined as a firm that has at least 50% market share.

Competitor Pricing NB: LWSC is a commercial water utility that was the only one that sourced the gas directly from NCP, while the other utilities had to source through the alleged agent - CES

Submission from Chemical & Engineering Supplies CES contended its price was twice that of LWSC as its price included the following costs: Cylinder costs; Import clearing costs; Import financing costs; Cylinder delivery costs Cylinder collection costs; Customer financing costs; and Depot overhead costs.

PRICE ANALYSIS FOR A 2 YEAR PERIOD The Commission carried out a price trend spanning 2 years in the chlorine gas market that showed: A parallel pricing system between LWSC and CES The prices of CES were about 100% higher than those of LWSC There appeared to be an upward trend in the CES pricing than in the one by LWSC

Persuasive Costs and Price Assumptions In order not to be overwhelmed by extravagant and/or exaggerated costings from the defendant parties, the Commission used the following assumptions in its assessment: Chlorine gas is a hazardous product hence the further the source, the higher cost price in Zambia. Jetvic, as opposed to CES, is assumed to incur higher logistical costs from Pakistan to Zambia. Import duty paid by both supplies on the same quantity of Chlorine gas (900 kg cylinders) is assumed to be the same. The price of K3 million for LWSC was indicative of the landed cost of Chlorine gas in Zambia CES and Jetvic market price is about 100% more than the guiding price from LWSC The LWSC is lower because it does not trade the product in the market but uses it for its own purposes Jetvic is for all intents and purposes a price follower serving a niche market

Evidence of market dominance In the case United Brands Company & United Brands Continental BV v. Commission of the European Communities, the ECJ defined market dominance as: “a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers.”

Dominance Cont’d Further, in the case, Queensland Wire Industries Proprietary Limited v. The Broken Hill Proprietary Company Limited and another (1989), Market power was defined as “ the ability of a firm to raise prices above the supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product.” From the submission by commercial water utilities regarding the source of Chlorine gas on the Zambian market, CES was a major supplier of Chlorine gas on the Zambian market, with 70% of the market.

Instances of Abuse of Dominance By NCP of South Africa Alleged Refusal to deal directly with other Commercial Water Utilities (CWUs) in Zambia except for LWSC Alleged appointment of an exclusive agent in Zambia to procure and supply chlorine gas Insistence that Zambian CWUs wishing to buy directly from NCP would have to invest in their own 900kg gas cylinders at a price as high as K22 million (i.e US$5,000) each By CES Alleged overcharging/excessive pricing Refusal to rent out gas cylinders to CWUs

Substantial Lessening of Competition (SLC) Market Concentration Effectively, the market is controlled by CES, with at least 70% market share in a market concentration ratio (CR3) of 100% Only CES and Jetvic supply the market while LWSC buys for its own consumption. Jetvic is more an opportunistic than established or reliable sustainable supplier, thus leaving the market leadership in both supply and price terms to CES

SLC Cont’d Barriers to Entry The only barrier to entry for new entrants to the market for supply of Chlorine gas is the exclusive arrangement between NCP Chloorkop. Perhaps in the absence of this exclusivity the other barrier is the alleged refusal to deal directly with commercial water utilities by NCP.

SLC Cont’d Import Competition There is no company that produces Chlorine gas on commercial basis in Zambia. The product is imported from NCP in South Africa – reckoned to be the only company that produces Chlorine gas on commercial basis. Other import sources are far flung areas in Germany, Pakistan and India

SLC Cont’d Substitutability Chlorine that is used for treating water comes into two different forms namely: gaseous and powdered forms. Chlorine gas is the most widely used for water treatment as it is considered to be economical. Powdered Chlorine or “HTH” as it commonly known is sparingly used in Zambia for water treatment as it is said to be too expensive as compared to Chlorine gas. Practically, HTH has not been an alternative in Zambia as a SSNIP on the gas is not likely to cause the CWUs to switch to HTH

SLC Cont’d Countervailing Power In the absence of an alternative supplier, the CWUs did not have the negotiating power to influence the distribution strategies and the pricing of NCP and CES The lack of the negotiating power adversely affected the competition process

Conclusions Prima facie, there was indicative evidence of abuse of dominant position through excessive pricing of Chlorine gas by CES on the relevant market. The absence of an economical substitute to chlorine gas entails that CES effectively controls at least 70% of the chlorine gas The exclusive agency between NCP and CES had the effect of substantially lessening competition in the relevant product market for chlorine gas in Zambia

Subsequent Events NCP and CES refuted the allegations that they had any written Exclusive Dealing Agreement but admitted that they had “a Gentleman’s Agreement” They maintained that the CWUs were free to source directly from NCP Pricing was said to be beyond the control of CES as the various logistical and tax components affected the end price NCP submitted that they had not refused to deal directly with CWUs

Commission Decision The Commission nullified the effecting in Zambia of any formal or informal Exclusive Agreement between NCP and CES as this was the source of market power, dominance and abuse through excessive pricing by CES The CWUs engaged in direct discussions with NCP to source the chlorine gas directly. The Commission resolved not to sue the parties since they had complied with the “Cease & Desist” order

THANK YOU Zambia Competition Commission 4th Floor, Main Post Office Cairo Road P O Box 34919 Lusaka Zambia Tel: +260-1-222787/775 Fax: +260-1-222789 Email: zcomp@zamtel.zm Website: www.zcc.com.zm

ZAMBIA COMPETITION COMMISSION