Categories
competition industrial inputs mergers and acquisitions regulation

Competition Commission prohibits merger between producers of key mining and industrial input

Excerpts from Competition Commission’s media release:


” On 08 May 2014, the Competition Commission referred a recommendation to the
Competition Tribunal to prohibit the proposed acquisition of Arkema Resins by Ferro
Industrial Products. The Commission found that the proposed merger is likely to
result in a substantial prevention and lessening of competition.
…..
In the mining segment, the merging parties are currently the only suppliers of UPR
and the Commission found that the merger would result in the removal of an
effective competitor, leaving Ferro to enjoy a monopoly position post-merger.
The Commission also found that in other segments, the proposed merger would
result in the merged entity gaining a significant share of the market of approximately
64%, with the closest competitor having approximately 16%. The rest of the market
is accounted for by a small local supplier and some imports.
The Commission found that there are high barriers to entry in the UPR market due to
the high capital outlay required for entry, economies of scale and the existence of
excess capacity. In the mining segment, there are additional barriers to entry in the
form of reputation, technology, technical expertise and technical specifications
required. The excess capacity may also be used as a strategic deterrent for entry
and expansion.
The Commission’s investigation included interviews with customers and competitors
of the merging parties who also raised concerns regarding the proposed transaction.
The Commission considered possible remedies such as divesture of Arkema’s
composite business, but this was not deemed to be viable as the firm’s coatings
business is also located in the same plant, making it impractical to separate them.
The merging parties also proposed a pricing formula applicable for two years. The
Commission is of the view that the pricing formula will not address the
anticompetitive effects arising from the structural changes in the market brought
about by the proposed transaction.”

Categories
competition competition policy entrepreneurship

Competing on merit, not handicaps

Unedited version of my column in yesterday’s Business Report: link to published version

Thinking about how South African companies compete in the marketplace, two conversations come to mind: one with a private equity veteran and another with a business science student. Over a cup of coffee, I remind Antony Ball of a talk that he gave a few years ago at Deloitte Consulting where he lamented the lack of competition in South African industry. He describes some of the behaviour that he saw in his career as a ‘small mining town culture’; where the prevailing impulse is to undermine one’s competitor, cut off their supply lines, tie up customers, and generally make it difficult for them to function. Competition becomes about how to handicap the competitor in tactics that do not add much value, not how to improve one’s own offering to serve the customer better.

Soon after hearing Antony Ball’s speech, I joined the Competition Commission. The case load of the competition authorities is a dispiriting catalogue of the many ways in which South African businesses shun merit-based competition. Some companies simply refuse to compete at all and form cartels. The bread and construction cases are well-known examples. Other companies seek to gain market share by engaging in behaviour that robs rivals of the opportunity to compete on a level playing field and ultimately deny customers the benefits of competition. Notable prosecutions for abuse of dominance include those against Telkom and South African Airways.

South African analysts pay disproportionate attention to labour market rigidities relative to those in product markets. It is often international institutions, like the OECD and the IMF, that consistently point to the high cost base that results from concentrated markets lacking competitive dynamism. This is not an issue of business versus government. Financing business, including start-ups, in such an environment, becomes a very risky proposition. It’s not only consumers that suffer, but investors too, who have to draw their returns from a limited pool of companies in a stagnant economy.

This brings me to the business science student. She asks me to set aside my ‘enforcement’ hat for a moment and don my ‘MBA’ hat. Do I ever encounter instances where I am moved to admire the strategic brilliance of a company’s conduct despite its illegality, she asks.

It is not a surprising question given how we are socialised to think of the business sphere as an amoral space where ‘anything goes’. But my answer is no.

The quiet life of the monopolist stunts the business mind. Breakthrough innovation is rare, but in an environment permeated by what is termed ‘handicap’ competition in the anti-trust literature, it’s almost impossible. To give an example, if the best response that managers in an airline business can conjure up to counter new entrants is to induce travel agents not to sell rivals’ tickets, what can we expect from them when the internet takes over as a sales channel? Certainly not brilliance; unused as such executives are to real competition.

Handicap competition involves improving the relative position of a company through under-handed means, without meaningful contribution to the economy. Competition on the merits, is in theory, what is being taught in business schools. This is the kind of striving that concentrates the mind on how to improve performance through providing better goods and services, lower prices or innovation.

Exclusionary and exploitative business practices will never be as good as those that seek to win on merit. Managers focus on their ‘territories’ and on policing cartels as opposed to becoming future-oriented. Diversity and transformation suffer because insiders have something to hide. It becomes difficult to integrate women into a ‘boy’s club’ that fixes prices on fishing trips on the Zambezi.

Yet it seems that introspection is taking place in some South African boardrooms. The financial and reputational costs of engaging in practices that break the law weigh heavily on the minds of business leaders. The question is whether this is enough to root out a mind-set of handicap competition.

Trudi Makhaya, a former management consultant and executive at the Competition Commission, writes in her personal capacity.

Categories
competition competition policy private healthcare

Commission appoints healthcare inquiry panel

Competition Commission media release:

The Competition Commission has appointed retired Chief Justice Sandile Ngcobo; Professor Sharon Fonn; Dr Ntuthuko Bhengu; Dr Lungiswa Nkonki and Mr Cornelis (Cees) van Gent as chairman and panellists respectively, to lead the market inquiry into the private healthcare sector in South Africa. The five-member panel will preside over the market inquiry, oversee public hearings, review submissions, draft the inquiry report and produce its final recommendations.
The panel will be supported by a team of investigators comprising of the Commission’s economists and lawyers and expert consultants. The team will be led by the Inquiry Director, Ms Tamara Paremoer.

The inquiry will probe the private healthcare sector holistically to determine the factors that restrict, prevent or distort competition and underlie increases in private healthcare prices and expenditure in South Africa. The panel will gather evidence and insights into private healthcare through public hearings, reviews of secondary material, information requests, consultations and summons, as required. The market inquiry will be completed by 30 November 2015.

The panel will issue administrative guidelines for the health inquiry in due course. The administrative guidelines will set out the administrative timeline for the inquiry and will guide participants on the format and method for submitting information to the market inquiry. They will also set out the rules of proceedings for public hearings.

“This is undoubtedly the best panel we could come up with. It has the right balance of skills, varied and distinguished experiences as well as impeccable integrity. In short we have the right panel for this important task for the nation and we look forward to its recommendations.” said Acting Commissioner Tembinkosi Bonakele.

For detailed bios: http://www.compcom.co.za/healthcare-enquiry/
Categories
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.
Categories
barriers to entry competition competition policy

Developments in competition policy – construction & other matters

Zandile Mavuso of Engineering News has published an article on various development in competition policy, including the ongoing ‘construction fast track process’ aimed at resolving cartel conduct in this industry, the Competition Commission’s strategy development process and international relations. Some extracts from the article and a video interview:

Makhaya states that competition law plays an important role in stimulating economic growth, development and employment creation.

“Competition law is crucial in supporting other policies set by government, as the law has the ability to transform different sectors by instilling the rules that promote fair competition. By advocating for competition and investigating anticompetitive conduct in different sectors, we will be able to promote economic growth,” she adds.

The commission is looking forward to its next strategic planning phase, when it will engage with stakeholders on work completed by the commission and find ways in which to improve. The commission also hopes that the planning phase will foster the identification of other sectors that require scrutiny in terms of competition law, in addition to the current priority areas.

The commission states that anti- competitive conduct is an international problem, which has caused welfare deficits in many countries. Therefore, the commission is actively involved in the African Competition Forum, an informal association of competition agencies across the continent, which it hopes will assist the countries to develop ways to eliminate anti-competitive conduct.

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