Category: competition policy

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competition competition policy political economy public policy

Of cartels and corruption

The Eeufees offramp, the entry point into Tshwane for many cars coming from the direction of Sandton, must be a dreaded one for many executives with an appointment with the competition authorities. The Voortrekker monument looms in the distance. As does UNISA; with a portrait of Madiba gazing in the distance dominating one side of its impressive building. His face is tough and scholarly, defying the “Disneyfication” of his image. And whizzing through this complex terrain, is the Gautrain. If the Voortrekker monument is a creation of the past, and Madiba a symbol of our bridge to the future, the Gautrain is a promise of better times ahead. Yet this great infrastructure project, commissioned by the state with public funds and built by the private sector, became one of many projects that were preyed upon by cartelists in the construction industry.

On a wintry morning – 17 July 2013 – the Tribunal began hearings into a mega-case involving 15 firms that had been engaged in rampant collusion. The settlements before the Tribunal involved 140 projects rigged by these firms. With penalties totalling R1.5bn, this was the biggest settlement ever reached in a single process.

“Corruption, not collusion,” many have said.

Words that ring in my head as I too approach that dreaded off-ramp. Facing that brown and dull hill before the traffic light turns green, you might forget that you are driving on one of the busiest highways in the country and into the capital city.

Pretoria/Tshwane. Corruption/collusion. Much remains contested in this country.

But an old script was shred to bits in July. In that script, the scene is set like this: On one end of the highway, give or take 40 kilometres from Eeufus Road, dwell free market visionaries conducting clean business. But as we drive north, the temperature gets hotter as we approach languid, indifferent and corrupt bureaucracy. Around Christian de Wet, down Nelson Mandela drive, the heart of corruption beckons. For those of us who bounce between these cities, we know that this is absurd.

The idea that any race, sector of society or even industry has a monopoly (no pun intended) on illegal and unethical behaviour is hopelessly outdated.

What happens to an actor who has perfected the old script, who has been venerated by the establishment and can go through the scenes in his sleep? At this late stage, to suggest that he has to see the story afresh and pronounce new sounds, can seem like a hopeless request. And what of the new actor who has been watching the old play from the sidelines, excluded from the casting call, now having to emerge from the shadows?

This story is unfolding.

On that same morning, the Commission concluded various long-standing matters against Telkom, in a settlement worth R1bn. Commenting on the Telkom settlement, Tribunal chairperson Norman Manoim described it as “one of the most sophisticated settlements ever seen.” He also highlighted that settlements are not inferior to outcomes reached through prosecution but that they can often achieve pro-competitive outcomes in a tangible sense. The package of remedies in this settlement, including price reduction and structural commitments, will have an enduring impact on the market. This theme was reiterated by the deputy chair of the Tribunal, Yasmin Carrim at our annual conference in September, who advocated for the greater use of remedies in resolving cases.

In an action-packed year, South Africa was also in the spotlight for its incredible hosting of the International Competition Network’s cartel workshop, attended by many jurisdictions from around the world. The conference kicked off with a thought-provoking welcome address by the Minister of Economic Development, Honourable Ebrahim Patel followed by days of enlightening discussion. The organising team, led by Keitumetse Letebele, received compliments from far and wide.

Mergers and acquisitions such as the Nestle/Pfizer and Independent News transactions have displayed the Commission’s ability to handle complex competition and public interest concerns. Looming transactions such as the international acquisition of the Afgri group and the purchase of land in Gauteng by a Chinese consortium will give the competition authorities further opportunities to develop the law. Another key theme on the competition agenda for 2014 is that of the impact of government policy and actions on the effective functioning of markets. The global community will be grappling with this question at the 2014 International Competition Network conference, where a special session will be held on competition policy towards state-owned enterprises.

In some parts of the world, state-owned enterprises are exempt from competition policy, with damaging consequences for the economy as these SOEs are often responsible for anti-competitive conduct. Our jurisdiction does not suffer from that weakness, and the competition authorities have levied significant fines on entities such as SAA and partially state-owned Telkom. Where we may be lagging behind other countries is on the treatment of state action such as subsidies and other forms of government assistance that might distort the playing field. These types of government actions fall outside the scrutiny of the authorities, save for making recommendations to the rest of government on possible anti-competitive effects. However, this is not to under-estimate the effectiveness of well-crafted recommendations in changing policy.

To paraphrase Talib Kweli, ours is a beautiful struggle. It continues in 2014. I look forward to new challenges.
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achievement barriers to entry competition policy entrepreneurship Rhodes Scholarship

Reflections on success: fighting the world’s fight

Part 3/3 of remarks made at UCT Young Women Professionals Dinner

I have touched briefly on the Rhodes Scholarship to Oxford. It continues to be one of the most prestigious scholarships in the world. About a week ago, we were in Oxford celebrating the 110th anniversary of the Rhodes Trust.  Some of you may be aware of the criteria that the Rhodes Trust uses in selecting Rhodes Scholars. I went through that process twice so I have had to think hard about those criteria.

In crafting his will, Rhodes came up with an interesting framework for evaluating potential, and in a way, success. I find myself coming back to his formulation even as I think of my life now.

In his will, Rhodes made it clear that his scholarship was not meant for ‘bookworms’; he wanted all-rounders. The qualities he sought in a potential scholar were: 1) literary and scholastic attainment; 2) fondness and success in manly outdoor sports (I think of this as a symbol for vitality and teamwork), 3) qualities of manhood, truth, courage, devotion to duty, sympathy for and protection of the weak etc. and 4) moral force of character, an instinct to lead and likely to esteem to performance of public duties. In modern and general terms, one can think of these as academic and later professional success, vitality and teamwork, compassion and leadership skills. In approaching any stage of life, I think these are important axes to plot one’s life against.

I implore you to ask yourselves these questions as you conduct your lives: am I achieving as much I can? And am I achieving it through respectable methods, in community with others, and taking care of my health and wellness? Am I taking the honest and courageous path? Am I compassionate? Am I exercising the leadership that is required of me, and also beyond that?
Rhodes Scholars are encouraged to fight the world’s fight. As talented women, I urge you to do the same.

I also implore you to equip yourself psychologically and spiritually for your career. We often approach our careers with a very academic model in our minds. You work hard, you are acknowledged, you get your gold stars and move on to the next level on the hierarchy.  No-one talks about screaming matches in boardrooms, protests and manifestos, failed projects and constant daily struggle to get things done. For example, unless you are an industrial relations major, there is little in a conventional education that can prepare you for the type of discourse and emotion that has seeped into our industrial relations even in professional settings. You have to be resilient whichever side of the placard you find yourself on.

I would now like to address the future entrepreneurs in the room. We are told that feminine qualities are becoming highly valued in the business world, and that this will be the woman’s century. I hope that’s true. But however welcoming the climate, as an innovator, as a risk taker, you will start off as a David amidst Goliaths.  Speaking as a competition practitioner, I will caution that in many industries, you will need to be prepared to blow stuff up, as Cindy Gallop, a phenomenal US-based entrepreneur often says. Blow stuff up. She uses a more colourful word for stuff of course.

Because in South Africa, and in many other emerging markets on the continent and elsewhere, you will quite likely confront many barriers to entry. Never mind gender and race. You will find supply chains tied up by former state monopolies. You will find menacing cartels that either shut you out completely or try to co-opt you, sometimes using the threat of force. You will also find those seeking to acquire your business, not to develop it, but to take out a maverick.

Nine months into 2013, the Competition Commission has scored some crucial successes in its endeavour to achieve the ideal of fair and efficient markets. We concluded a ground-breaking industry-wide settlement in the construction industry, which saw 15 companies come forward to disclose and settle cases related to bid-rigging in that industry. Bid-rigging distorts competition as companies create the illusion of rivalry, whilst dividing contracts amongst themselves behind the scenes. Instead of the best company winning a contract, a sham process has already occurred and the client is none the wiser. Projects that were rigged ranged from World Cup stadia to roads, shopping malls, industrial plants and apartment blocks. This behaviour hurts the government department that is seeking to develop infrastructure for a community or the entrepreneur trying to build a factory.

We also settled a long-running case with Telkom. This was a case of abuse of dominance as Telkom’s behaviour excluded value added network service providers from competing in the market. This R200m settlement, which also came with some pricing and behavioural commitments, followed a R449m penalty imposed on the company last year, for similar behaviour spanning a different time period.

Finally, I would like to remind us all that public service is something worth aspiring to. It’s not all gloom and doom. According to the World Economic Forum (WEF) Global Competitiveness Report of 2013-2014, South Africa is ranked 8 out of 148 countries for the effectiveness of its anti-monopoly policy.

South Africa’s competitiveness was ranked 53 overall. Commissioner Shan Ramburuth has remarked that this is an acknowledgement of the enforcement record of the competition authorities.

The Global Competition Review (GCR) 12th annual survey of the world’s competition authorities rates the Commission at three stars, in the same league as Switzerland, Norway, Ireland and Russia amongst other countries. Our institutions need talented individuals to take them forward.

We cannot claim that we have rid the economy of anti-competitive behaviour. But I would like to think that the work of the competition authorities, modest as it might be in the face of the challenge, has opened up fields for you to cultivate.
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achievement competition policy

Reflections on success: my journey

Part 2/3 of remarks made at UCT Young Women Professionals Dinner

I’ll say a little bit about myself and the path I have walked to so far. I was born and raised in Hammanskraal, just north of Pretoria. Most people experience Hammanskraal as a filling station off the N1 towards Polokwane. If you get off the N1, drive a few kilometres past the largely moth-balled industrial park, you will reach a small village called Leboneng.

In Leboneng, I learnt many lessons about success. Most of its residents were uprooted, violently, by the apartheid state from places such as Lady Selbourne close to the city of Pretoria.  Growing up, I could feel the despair in the air. But there was also a fantastic spirit of ambition and perseverance that was instilled by the dispossessed in their children.  Not in an oppressive Willie Loman way, but in hopeful and loving manner.

In those days, the most memorable and anticipated parties were graduation parties or those celebrating other markers of academic success. Then people used to march down the streets in academic regalia. I can recall two women who won scholarships for graduate study in the US. That made a huge impression on me as a young girl. There were lots of teachers and nurses around, working in the community. There were two MBAs that everyone was baffled about because here were two graduates who worked in industrial settings. My mother also went back to university in the eighties.

That atmosphere decoupled privilege and academic success in my mind.  Part of what keeps us back, as women, or as individuals with high potential from ordinary or under-privileged backgrounds, are the associations we make between success and superfluous variables like gender or wealth.  This can lead to people writing themselves off from paths that may be difficult but nonetheless available to them, given their abilities. I have seen this dynamic playing out with the Rhodes scholarship to Oxford. I have come across prospective applicants who write themselves off because they assume that they do not have the right background, didn’t go to the right primary school or didn’t contribute to a certain kind of NGO.

The flip side of this is a growing tendency within our national discourse to celebrate rather small victories and to set low standards for ourselves. In the 90s, when I was in school, and this still happens to some extent today, every ‘black first’ was celebrated. Of course the first black South African nuclear physicist is something to talk about but not long ago I read about someone whose claim to fame was being the first black person to study a certain type of project management speciality abroad. In male-dominated environments, women can sometimes become complacent and congratulate themselves for just showing up and for being the only woman at the table.

We think our rags to success stories are more exceptional or impressive than they really are. I was shocked to discover that Margaret Thatcher grew up using an outside toilet and without hot running water in the house. I had the same feeling the first time I travelled overseas. It was to the Philippines and I had never encountered such visible and brutal poverty. Through experiences such as these, I’ve had to re-evaluate my background and to realise that I cannot be too delighted with myself for being an Oxford graduate or a high ranking professional. These are things we should learn to expect of ourselves and other talented individuals around us. In spite of his many amusing Bush-ims, George W nailed it when he talked about the soft bigotry of low expectations.

In my studies and career, I think I have followed an organic path, led by curiosity and opportunity. In my 20s I obtained graduate degrees and then began work at a mining house. My first job was quite an education. Based at head office, I visited the mines and came face to face with hardened men who seemed to glare at us, corporate women, when we took tours underground. I came to learn about the challenges of labour-sending areas as we used to call them, and also of the reality of loneliness and dislocation that miners still faced in their host communities. This was soon after the passage of the mining charter. Working on the company’s beneficiation initiatives, it became increasingly clear that there was a significant divergence between government’s aspirations and what industry considered commercially feasible and within its core competence. That is a very difficult to issue to deal with, in a country with difficult government-business relations. Even more difficult when one is just starting out and your superiors are also treading on uncertain terrain.

Throughout my career, especially in my twenties, I have not had much mentorship but that is an outcome of both demand and supply. I wasn’t offered much mentoring. Yet I also didn’t seek it out and it is not a relationship that comes naturally to me. Friendship across generations works better for me, though I have no doubt that there is a lot to gain from the structure that mentoring brings. It is only recently that I have worked with a coach. That relationship has been a source of strength and clarity for me.

Joining the Competition Commission, in my early thirties, was an unconventional move for someone coming from my background. Though I have traditional economics training at master’s level, I also hold an MBA and I was set on a path of management consulting, likely to be followed by entrepreneurial activity. But a few years ago I missed hard core economic analysis. In listening to that yearning, I stepped outside what had become a comfort zone. I moved from a global consultancy to join a government agency. I switched from working in Johannesburg, where I have spent most of time since I was 12, to working in Pretoria, a city with a surprisingly different culture.

Yet in taking that risk, I have been fortunate to do work that fills me a sense of purpose. I have also learnt a lot about how this economy functions, beyond what I would be exposed to when working towards profit. Competition policy is fact-based, detailed work that gets to the guts of a market. In interacting with other competition authorities globally, I have been able to gain a unique vantage point into how other markets work and also the global economy. There are also few other jobs where you are cross-examined by senior advocates on your economic analysis or are summoned before Parliament to explain your work. The media is also a constant presence.


It is an amazing experience but it has only been possible for me because I resisted that ‘Sandton black diamond corporate-climber box’ that the world had in mind for me. It is important, as you think about your future careers, to think of ways to gain experience that you would not ordinarily receive if you follow a familiar script.
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barriers to entry competition policy public policy

Innovation, not monopolisation, should be the measure of CEOs

So what is the art of managing a monopoly? John Cassidy hints at an answer in a post published in the New Yorker, where he appraises Steve Ballmer’s tenure as the CEO of Microsoft. The article strikes an uncomfortable tone in discussing the incentives that a monopolist faces but it ultimately comes down on the side of competition with an acknowledgement that the US competition authorities were correct in pursuing Microsoft for its anti-competitive practises. Had its actions in the market gone unchallenged, most analysts agree that the Internet economy would not be what it is today. Cassidy goes as far as to argue that Google would not exist had the US government not challenged Microsoft’s attempt to monopolise the internet browser market, a monopoly that it would have extended all the way to internet search.
During an interview on Power Perspectives, Lawrence Tlhabane asked me if, in essence, abuse of dominance is not what business is also about (I am paraphrasing him). The case of Microsoft reminds us that competition law (anti-trust as our American counterparts call it) has an important role in ensuring the dynamism of markets. A new entrant can shake an industry up through innovation, but there gets to a point that it becomes a bumbling bureaucracy that is concerned more about avoiding cannibalisation rather than trying new things (as Matt Yglesias argues here). This is how many economies lose their way.This also makes the case for judicious competition policy enforcement that does not discourage robust competition from dominant companies, but that sanctions those strategies that seek to stifle competition.
What’s disturbing about the tone of Cassidy’s post is that it takes it for granted that Ballmer should have been judged by how well he entrenched Microsoft’s monopoly. In Ballmer’s view there are two types of tech competitors, those who are trying to win the lottery and those who have won. His level of aspiration for those who have won the lottery is pretty low as it’s all about defending a position and not seeking new areas of growth.

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competition policy economic policy political economy public policy

Our robust competition law system

Below I reproduce the English (and unedited) version of my half of last Sunday’s Debaatin Rapport (Afrikaans version here: http://www.rapport.co.za/Weekliks/Nuus/Ons-tribunaal-is-banaal-20130817). As the name suggests, this segment of Rapport is structured like a debate and the other side was represented by Leon Louw of the Free Market Foundation, who presented a piece that was quite similar to the misleading article he penned in last week’s Business Day which sought to discredit the competition authorities.

In today’s Business Day, Leon Louw admits to cutting some corners and appears to be correcting his earlier views:
“CORRECTION: In last week’s column, I decried the erosion of the rule of law, especially the separation of powers, the transfer of judicial functions from independent courts to the executive branch of government. An eminent senior counsel and competition law expert scolded me for getting it wrong on two counts. The Competition Tribunal tends to do a better job of weighing evidence and applying the law objectively than the courts, he said, and the Competition Commission does not make rulings and settlements but refers its recommendations to the tribunal for final determinations. I bow to his superior knowledge. However, temporary vices of judicial officers with tenure and virtues of transient nonprofessional incumbents in quasi-courts are no excuse for ditching the rule of law. It calls for restoring judicial excellence and functions.
In the interests of brevity I cut some corners. Technically, for instance, pseudo-courts might implement aspects of due process as opposed to precisely “zero”, and all must operate constitutionally. The point is that they lack essential characteristics of properly functioning courts, and what the constitution requires is often hypothetical in the executive branch of government.”

The piece I submitted to Rapport:
Towards a fair and efficient economy for all

Debated at NEDLAC by representatives of labour, business and government; and thereafter passed by Parliament, the Competition Act of 1998 ushered in transformative competition law and policy in South Africa. The resultant system is an outcome of robust contestation and reflects the aspiration for consumers to have access to competitive prices and product choice within the context of an employment-generating, inclusive and internationally competitive economy.

It is a well-known international phenomenon to have specialist agencies and courts to investigate and adjudicate on competition matters, as can be seen in the membership of the International Competition Network, which brings together over 100 agencies across the globe, many of whom are independent and specialist agencies. Legal and economic expertise need to be combined in multi-disciplinary institutions for effective implementation of competition law. The South African institutions meet this important requirement.

The Competition Act creates a system with layers of oversight and safeguards. It provides for the creation of three institutions, the Competition Commission as an investigative body, the Competition Tribunal as an adjudicative body and the Competition Appeal Court which serves as the appellate body. The appeal court is a special division of the High Court and is served by judges. Decisions of the Competition Commission can be appealed or reviewed by the Competition Tribunal and decisions of the Competition Tribunal can be appealed or reviewed by the Competition Appeal Court and in certain appropriate circumstances, a further appeal lies to the Supreme Court of Appeal and the Constitutional Court.  Thus the competition adjudication system allows for checks and balances; guarantees due process, procedural fairness, the right to face and cross-examine accusers and also the right of appeal on merits to an independent tribunal and appellate courts.

It is important to distinguish between a settlement process and contested proceedings.  A settlement process, as in the recent case of collusion involving construction companies, is an outcome of negotiation and agreement between the commission and the implicated companies.  Even so, the tribunal has oversight powers and will hold a public hearing and interrogate the key elements of that settlement for appropriateness.  Contested proceedings in the Competition Tribunal mirror ordinary court proceedings with concomitant rights to lead and rebut evidence.  
            
Our economy remains bedevilled by cartels and other forms of anti-competitive conduct. Organisations such as the International Monetary Fund and OECD have in recent times pointed to lack of competition in product markets as one of the reasons for the economy’s lacklustre productivity and unemployment challenge.

When firms engage in ‘hard core’ cartel behaviour and collude to fix prices, allocate markets or rig tenders, they maintain the illusion of competition. Consumers think that they are benefiting from the positive effects of competition whereas in reality they are dealing with firms acting in concert to keep prices high and markets stagnant.

The competition authorities have investigated and prosecuted cartels in diverse industries. These include steel, concrete products, the milling and baking value chain (including the fixing of the price of bread), plastic pipes, airlines, and construction. In the recent settlement process with construction firms, 300 rigged projects were uncovered. Though there has been focus on World Cup stadia, these represent only 7 projects, whereas the behaviour affected roads, non-profit institutions, industrial plants and other instances that defy attempts at justification or rationalisation.

Most competition regimes reserve the harshest penalties for cartels given the blatant way in which they undermine the efficient functioning of markets. In a case study analysing market developments after the dismantling of a decades-long cartel in concrete products, the commission’s economists found evidence of lower prices, expansion by former cartelists and new entry. Cartels restrict output, raise prices and stifle industries, robbing us of much-needed economic growth.

Our competition law also recognises that there may be agreements between competitors that do not constitute ‘hard core’ cartel behaviour as described above and that may be justifiable on economic grounds. For this class of behaviour, which is to be prosecuted under section 4(1) (a) of the competition act, the key test is to determine whether this behaviour can be justifiable on the basis of efficiency, technological or other pro-competitive gain. The legislation also provides for firms to apply for exemption from certain aspects of the act, on the basis of a defined list of justifications. Thus our law is alive to commercial realities that may justify relationships between competitors whilst also imposing appropriate sanction on ‘hard core’ cartel behaviour that holds no benefit for consumers.

Customers purchasing goods and services in a modern economy have the legitimate expectation that the prices and other terms of trade that they face are the outcome of open and competitive markets. In its Senwes ruling, the Constitutional Court endorsed the transformative role that competition policy plays in an economy characterised by inequality and exclusion.

Trudi Makhaya is the Deputy Competition Commissioner.