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Subtlety over brute force

Dec 03 2017 13:01
Dewald Van Rensburg

New Competition Act drastically changes the enforcement landscape and focuses on concentration of ownership.

Crusaders against white monopoly capital will be disappointed with the long-awaited amendments to the Competition Act.

A potentially revolutionary proposal to prohibit economic concentration for the sake of prohibiting economic concentration has been firmly rejected in favour of a far more complex overhaul of the law.

This would have triggered, or at least permitted, wide-ranging government intervention into the ownership of dominant firms in countless economic sectors.

At a media launch of the bill on Friday, Economic Development Minister Ebrahim Patel said: “Inside government, there were two possible roads we could follow. One road was to have a stand-alone statute with thresholds that trigger deconcentration. So somewhere it would say that, if you get above 40% market share, there should be a compulsory deconcentration. That was one option.”

Instead, the bill does not contain any “condemnation of concentration per se”, said Michelle le Roux, chair of the expert panel that advised Patel on the amendment. “It has to be concentration and some other economic effect.”

Le Roux last month said at a public speaking engagement that she and her panel had tried to make the amendment “future-proof” against abuse by the state.

There were concerns among experts that the bill would be a potent weapon in the wrong hands, with one well-regarded expert in competition law telling City Press earlier this year: “Imagine if [Mineral Resources Minister Mosebenzi] Zwane was in control of it.”

This is a reference to Zwane’s bizarre crusade against South African banks last year under the guise of a non-existent interministerial committee.

The new bill has been crafted in response to President Jacob Zuma’s call in his state of the nation address this year for the competition authorities to become empowered to tackle concentration of ownership in the economy.

On Friday, Patel was at great pains to emphasise that his department had rejected the route some have called for – to somehow make economic concentration itself an offence that government can intervene on.

Even if the “trigger” threshold for intervening in sectors was higher than 40%, research from the Competition Commission shows that this would have meant incredibly widespread intervention in almost
all sectors.

According to a standard international measure of market share concentration, the Herfindahl-Hirschman index, practically every sector of South Africa’s economy should be considered “highly concentrated”.

The commission’s chief economist, Liberty Mncube, this year revealed research based on the commission’s merger cases showing that it had already identified 294 dominant firms in various markets.

A dominant firm has 45% market share or more.

An explanatory document released with the bill on Friday says that there is “no international precedent in either competition law or economics for outlawing concentration or ownership profiles without reference to the anticompetitive effects of abuse of dominance”.

Sometimes big is actually better, said Patel.

He suggested that it would make no economic sense to blanketly oppose large firms in South Africa’s context.

Instead, the existence of national champions that expand abroad more or less necessitates a degree of dominance at home, he argued.

Sometimes you need economies of scale, he said.

“In a small market like South Africa, an efficient operator will often have to be dominant. In the public debate, it is easy for a cardboard caricature to be created ... what government has done is recognise that there are potential benefits and potential costs to concentration.

“As we have seen in recent times, exclusion fuels resentment and provides the base for economic populism. If you prohibit concentration, that does not necessarily mean you get new entrants. It could mean you just import the product,” he said.

What does it do?

The new amendment drastically changes the competition enforcement landscape. It elevates the market inquiry to the “chief mechanism” for tackling the structural problems of the economy.

It also lowers the bar for starting an inquiry, meaning there could be a profusion of these processes.

The new amendment will make concentration a valid reason for launching a market inquiry, where it will have to be established that the concentration actually has adverse economic effects that could be stopped by intervention.

“The Competition Act looks at behaviour. Now it also looks at structure,” said Patel.

“The inquiry can find a concentrated market with no adverse effects or it can find one with adverse effects. Then it can make recommendations or it can make interventions that are in the powers of the Competition Commission already.”

These decisions can be appealed as well.

To date, there have been five inquiries announced, but only one, into liquefied petroleum gas, has been completed. The healthcare inquiry has dragged on for four years already.

The amendments, however, create a rule that the inquiries have to be completed in 18 months and also makes all sorts of rules to streamline the process.

Abuse of power

It has been infamously difficult to successfully prosecute cases that revolve around abuse of dominance, which often degenerate into esoteric economic debates, where the prosecutions had to develop a “theory of harm” based on the hypothetical absence of the dominant firm.

The amendment adds many of these theories of harm into the act and spells out in greater detail what the abuse of economic power looks like – and what behaviours are actually prohibited in terms of pricing and exclusionary contracts.

No bigger stick

There was a proposal to raise the maximum penalty for cartel conduct up to 15% of turnover instead of the current 10%, Patel said.

However, the amendment sticks with 10%.

On the other hand, the amendment removes the so-called yellow card, where a first offence does not carry the full penalty.

At the same time, the amendment creates a “single entity” rule that allows penalties to be imposed on a group of companies instead of just the implicated one.

This is to avoid the evasion of fines by opportunistically structuring companies so that small entities inside it break competition law and limit the risk to the larger group.

Other amendments

The act creates a mechanism for stopping “creeping concentration”, where companies acquire competitors slowly. It also allows the Competition Commission to consider a series of acquisitions over three years as one transaction.

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