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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.
Categories
competition policy economic policy inequality public policy

Competition policy and poverty reduction

Long version of my article published in today’s Business Day

At this year’s OECD Global Forum on Competition held in Paris recently, the main topic of discussion was the relationship between competition policy and poverty reduction. This proved to be a timely discussion, with submissions from over 20 countries and various regional organisations, including South Africa. In its recent report on South Africa’s economy, the OECD also highlighted lack of competition in product markets as a serious impediment to our country’s economic growth prospects.
Discussions of the relationship between competition law and other government policies are viewed with scepticism by those who seek to confine competition law to its most narrow interpretation. Yet, as the South African submission noted, competition policy emerges out of a particular context.
To borrow a phrase from modern political economy, the development and implementation of competition policy can be viewed as an exercise in ‘embedded autonomy’. This describes a relationship between state institutions and society whereby the state is embedded adequately in society so as to be responsive to society’s needs, but also autonomous from narrow private interests. 
This formulation can be applied to the experience of competition authorities, as they seek to contribute to the resolution of society’s most pressing challenges, such as poverty, whilst taking care not to be overladen with policy goals beyond what is achievable in the realm of competition policy. Embedded autonomy also implies that competition authorities construct their enforcement and advocacy agenda in alignment with society’s priorities; doing so in a transparent, rigorous and impartial manner.
Poverty in South Africa continues to be marked by race, gender and geography; with black, female-headed and rural households experiencing the highest rates of poverty and economic vulnerability. The labour market is also not integrating young people effectively, thus increasing rates of youth unemployment. To develop the capabilities required to transcend poverty, access to opportunity is key.
Sustainable poverty reduction depends on generating wage-earning opportunities in the economy. Competition policy, to the extent that it challenges economic exclusion, lack of innovation and lack of rivalry can play an important role in placing the economy on a higher growth and development trajectory.
Lack of competition in product markets for essential goods and services is arguably more harmful for poorer households than for higher income households. Poor households spend a higher proportion of expenditure on essential goods and services.
The stated purpose of the South African competition law encompasses orthodox concerns related to efficiency, prices and choice. The statute also articulates the purpose of the Competition Act as promoting competition in order to realise goals related to employment creation and retention, equitable participation in the economy by small and medium-sized enterprises, a broader and more racially diverse spread of ownership and international competitiveness. 
These elements of the legislation ultimately relate to the government’s economic, development and social policies. Specific provisions dealing with the assessment of mergers and exemptions include public interest considerations related to socio-economic development and international competitiveness.
The Competition Commission’s enforcement and advocacy activities are guided by a Prioritisation Framework, which represents the organisation’s over-arching strategy. This Framework, adopted in 2008, and soon to be updated, directs the Commission to intervene in sectors of the economy that have a significant impact on low income consumers and that determine the enabling environment for business and economic development. The framework is located within the context of the policy focus on labour-absorbing growth to address the high unemployment and poverty levels in South Africa.
Current priority sectors for enforcement and advocacy are namely; food and agro-processing; infrastructure and construction; intermediate industrial products and energy; construction services; and banking.
Proactive measures taken by the Commission in priority sectors include reviewing available information and evidence on potential anti-competitive conduct and screening various markets for signs of potential anti-competitive outcomes. This has assisted the Commission in initiating and in some instances concluding investigations in key consumer and input markets such as poultry, bread, wheat and milling, animal feed, steel, polymers, fertiliser, cement, concrete pipes and bricks. It also resulted in an increase in the number of abuse of dominance investigations.

By focusing its energies on identified priority sectors selected on the basis of criteria that include impact on poor households (and industrial development with implications for employment), the Commission has been able to optimise on its resources whilst also contributing towards poverty reduction.

However, the transition from a highly concentrated economy to a more competitive one creates winners and losers. Entry by new domestic players or multinationals disrupts supply chains and displaces old modes of production. These dynamics may benefit the poor as consumers, through lower prices, but there are instances where, at least in the short term, intensified competition seems to displace the poor.
The competition authorities have dealt with these concerns through conditions limiting employment losses and other remedies, such as the establishment of supplier development mechanisms.
The extent to which the South African competition authorities can interpret their mandate and legislation in favour of poverty reduction remains a matter of contestation. What is clear is that effectiveness of competition policy as an instrument for inclusive, employment-generating growth depends on effective policies in areas such as access to finance, training, research and development to eliminate other constraints to employment creation.

Trudi Makhaya is the Divisional Manager for Advocacy and Stakeholder Relations at the Competition Commission.