Business Submission on the Competition Amendment Bill, 2017

BUSINESS SUBMISSION ON THE COMPETITION AMENDMENT BILL, 2017

GENERAL COMMENTS

Business acknowledges the impetus to amend the Competition Act, 1998 to strengthen the powers of the Competition Commission. However, certain of the provisions of the Competition Amendment Bill go beyond what business views as adequate and may undermine free market principles, as well as being sub-economic in that a careful and prudent balance should be struck between the operation of the free market and the primary objective of competition law.

In the Background Note preceding the Bill, it is stated that evaluation of concentration requires a skilled and experienced regulator to create an evidence based and considered foundation for interventions, and that the amendments recognise that the competition authorities have these skills and experience. We submit that one of the challenges of competition authorities around the globe is the knowledge and understanding of competition regulators and courts of specific markets, and public interest goals across a wide spectrum of industries. It is therefore submitted that it will be challenging for this to be addressed given the wide ambit of the market inquiry provisions. Further clarity on how this will be given effect is required. Furthermore, huge reliance is placed by the Commission on firms / business to assist the Commission with information on specific markets in mergers and enforcement (complaints), however, a new test is introduced to be applied for adverse effects in market inquiries, where the Commission may make unilateral decisions based on reasonable and practicable actions that will be binding.

The significant focus on and magnification of arguments on concentration borders on treating concentration as a problem per se, a position which has no sound basis in competition economics, law and policy,as concentrated markets could also be characterised by effective competition and welfare benefits. It is trite in economics and competition law that dominance on its own is not a problem and the Bill itself acknowledges that concentration may also be associated with economic benefits. There is therefore limited economics and policy basis for adopting such an approach. The pointed attempt to target concentration directly and remedying it e.g. through market inquiries may not be appropriate.
The summary of the study does not, in fact, identify relevant markets but rather "average market shares" across broad sectors or industries. This is not in any way indicative of actual concentration levels in relevant markets as assessed in competition law and economic terms.
The study relied upon reflects a snapshot at the time each merger was assessed and as such may not reflect trends in concentration levels over time nor current concentration levels. It therefore does not reflect changes in concentration levels prior to and after the mergers. It is these trends that yield useful information regarding whether concentration has remained the same, increased or decreased. Where concentration levels are reducing over time, the rationale for the proposed amendments is less compelling.

Regarding the proposed changes to the market inquiries regime, a reasonable and objective jurisdictional threshold should be present before any such inquiry is triggered.

Business welcomes the deletion of the complex monopoly provisions as these were, in business’ view, unworkable as they may outlaw legitimate parallel conduct of market participants who have no ability to prevent falling foul of these provisions.

With regard to the consideration of mergers, the Bill proposes that when deciding whether a merger can be justified on public interest grounds, the Competition Authorities must consider the effects that the merger will have on the ability of small firms controlled or owned by historically disadvantaged individuals (HDIs) to effectively enter into, participate and expand within the market. However, clarity is required on how the Bill will promote broader public interest factors in merger analysis whilst balancing the primary purpose of competition law policy. Clarity is required on the substantive provisions on the public interest goals, considering that they have far-reaching impact, especially in respect of market inquiries.

With respect to the participation of the Minister in competition instruments and procedures, greater clarity and specifics are required to understand precisely how far this participation would apply. In principle however, the scope of the Minister’s involvement should continue to be limited to making representations on public interest grounds. To do otherwise, is to elevate the Minister to a quasi-competition regulator alongside the Commission.Ministerial intervention should be carefully managed to ensure that Public Interest considerations do not exceed the scope of the Competition Authorities mandate.

Detailed comments on the Bill are provided in the below matrix.

Business, through BUSA, is available to discuss any of the above or forthcoming points further with the Economic Development Department (EDD) and would appreciate an opportunity to consult further once the initial comments from stakeholders are considered and / or addressed in further versions of the Bill.

GENERAL EXPLANATORY NOTE:

[ ]Words in bold type in square brackets indicate omissions from existing

enactments.

______Words underlined with a solid line indicate insertions in existing enactments.

To amend the Competition Act, 1998, so as to introduce provisions that: clarify and improve the determination of prohibited practices relating to restrictive horizontal practices, abuse of dominance and price discrimination; improve the regulation of mergers; to provide for the promotion of competition and economic transformation through addressing the de-concentration of markets; to protect and to stimulate small businesses and firms owned and controlled by historically disadvantaged persons and their growth; to protect and promote decent employment and employment security; to facilitate the effective participation of the national Executive within proceedings contemplated in the Competition Act, 1998; to empower the Commission to act in accordance with the results of a market inquiry; to amend the process by which the Competition Commission may initiate market inquiries; to empower the Minister to initiate market enquiries; to promote greater efficiency regarding the conduct of market inquiries; to clarify and foster greater efficiency regarding the determination of confidential information and access to confidential information; to promote the administrative efficiency of the Competition Commission and Competition Tribunal; and provide for matters connected therewith.

BE IT ENACTED by the Parliament of the Republic of South Africa, as follows:

Clause / Sub-clause / Business’ Position / Input
Amendment of section 1 of Act 89 of 1998, as amended by section 1 of Act No. 39 of 2000
1 The Competition Act, 1998 (Act 89 of 1998) (hereinafter ‘the Principal Act’) is hereby amended by the —
(a) the substitution in section 1 for the definition of “exclusionary act” of the
following definition—
“exclusionary act” means an act that impedes or prevents a firm from entering into, participating in or expanding within [,] a market;” / Neither the Background Note on the Competition Amendment Bill, 2017 (the BackgroundNote) nor the Memorandum on the Objects of the Competition Amendment Bill, 2017 (theMemorandum) highlights that the amendment is aimed at expanding the ambit of an exclusionary act beyond barriers to entry and expansion to include participation in the market.
What is meant here by this term? For example, if a dominant firm refuses to appoint a particular supplier or contract with a particular third party, could this be regarded as an exclusionary act?
Moreover, if the dominant firm has a policy of, for example, using empowered firms or firms owned or controlled by historically disadvantaged individuals as suppliers, could firms that the dominant firm does not use allege that an exclusionary act has been perpetrated?
For these reasons, clarity should be provided about what this term means – alternatively, it will have to be interpreted by the Commission by way of guidelines, or by the Competition Tribunal (the Tribunal) or Competition Appeal Court. It would be preferable for the Principal Act to contain a clear definition, as the time taken to wait for guidelines or case law on the subject could lead to uncertainty in the economy.
(b) the substitution in section 1 of the definition of “Minister” with the following—
“Minister” means the Minister responsible for the administration of this Act;”
(c) the substitution in section 1 of the definition of “small business” with the
following—
“small business” [has the meaning]means a small enterprise as set out in the National Small Enterprise Act, 1996 (Act No. 102 of 1996);
Amendment of section 4 in Act 89 of 1998, as amended by section 3 of Act 39 of 2000
2 The Principal Act is hereby amended by the substitution of section 4(1)(b)(ii) for the following section —
“(ii) dividing markets by allocating market shares, customers, suppliers, territories or specific types of goods or services; or” / An issue which has vexed businesses in South Africa since the inception of the Act, is the inclusion of the agreement on purchase prices in section 4(1)(b)(i). On an ordinary interpretation of this section, it means that joint purchasing arrangements or “buyers’ clubs” are per se prohibited under the Act. World-wide, it is recognised that these kinds of arrangements are actually pro-competitive and should be encouraged. In Europe, for example, where Article 101 is supplemented by binding guidelines, the guidelines on horizontal arrangements set out an effects-based (or “rule-of-reason”) analysis and specifically recognise that horizontal cooperation agreements, such as joint purchasing arrangements can lead to “substantial economic benefits”[1]. This gap in our law should be recognised and the reference to purchase prices should be removed from section 4(1)(b). and should be encouraged. In Europe, for example, where Article 101 is supplemented by binding guidelines, the guidelines on horizontal arrangements set out an effects-based (or “rule-of-reason”) analysis and specifically recognise that horizontal cooperation agreements, such as joint purchasing arrangements can lead to “substantial economic benefits”[2]. This gap in our law should be recognised and the reference to purchase prices should be removed from section 4(1)(b). On this basis, then, joint purchasing arrangements would fall to be judged under section 4(1)(a) which would still allow non-competitive arrangements to be penalised.
In relation to section 4(1)(a) please also see comment relating to the deletion of section 8(c) below.
Furthermore, business suggests that the drafters should look at amending section 4 of the Act to deal with the characterisation test decisively and to also deal with section 4 (2) the Act, which deals with a presumption of collusion. We are of the view that section 4(2) has been ineffective and has not been successfully utilised by the competition authorities.
Business submits that there are pro-competitive gains that are derived, especially by small business, when it comes to joint procurement when dealing with big entities. It would be beneficial to entities to not be automatically found guilty when it comes to joint purchasing arrangements. As such arrangements, especially when dealing with international markets, can be pro-competitive for the consumers and the South African economy.
Business therefore proposes a deletion of section 4 (2), (3), and (4). Business suggests that a new section 4 (2) dealing with characterisation be added. This section should be clear that where an agreement between competitors is found to exist and the intentions and outcomes of such agreement when properly characterised, are to the benefit of consumers, then such conduct, properly construed, does not fall within the ambit of the prohibitions in section 4(1). The onus to prove that the conduct does not fall within the ambit of section 4(1) should be with the respondents.
This proposed amendment can also deal with concerns regarding the prohibition in relation to the fixing of a purchase price.
On 4(1)(b)(ii), Business has no in-principle objection to the introduction of market shares as an addition to the market division provision. However, in practice it is unclear how market share can be allocated as distinctly understood from the allocation of customers, suppliers, etc. This amendment may therefore be considered redundant.
Amendment of section 8 in Act 89 of 1998
3 The Principal Act is hereby amended by the substitution of the section for the following —
“Abuse of dominance prohibited.
(1) It is prohibited for a dominant firm to —
(a) charge an excessive price [to the detriment of consumers]; /

Business notes the amendment to the section, and we suggest that the enquiry should be two-fold as follows;

whether a price is excessive and if that is found to be so,
whether such price is to the detriment of consumers.

It is unclear from the amendment why this distinct step is sought to be removed.

We suggest that the wording "to the detriment of consumers" proposed to be deleted from section 8(1)(a), be retained. For "to the detriment to consumers" to be inserted into the proposed section 8(2) to read as follows; “(2) If there is a prima facie case of abuse of dominance because the dominant firm charged an excessive price to the detriment of consumers, or required a supplier to sell at an excessively low price, the dominant firm must show that the price was reasonable.

The prohibition of excessive pricing is contentious and many anti-trust jurisdictions, including the United States, do not prohibit it. The reason advanced for this is that it is difficult to establish exactly when a price is an "excessive price" for the purposes of competition regulation and there is significant lack of legal certainty on how to assess excessive pricing or what remedies to impose in cases where excessive pricing is found.
Business submits that there should be limited intervention in pricing behaviour and the extent that excessive pricing is prohibited should be limited to markets with high barriers to entry and where innovation and investment play a minor role and whether there is a detrimental effect to consumers.
Business submits that that excessive pricing behaviour is generally self-correcting because it will attract new entry unless new entry is completely impeded by structural obstacles. It is therefore widely accepted that a price is not excessive unless it reduces customer welfare. The wording "to the detriment of consumers” is an important element in the definition of an excessive price and should not be deleted.
A high price that does not lead to consumer harm is not "excessive" from an anti-trust economic theory perspective. Hypothetically, if a dominant firm increases its prices significantly (from a clearly non-excessive base) but without its customers needing to pass on the increased price to the end consumer (i.e. without the increased pricing leading to consumer harm) this suggests that the dominant's price is still not excessive and is simply the economic value of the product that the market is able to carry. There is simply a shifting of the margin away from the dominant firm's direct customers to the dominant firm. For as long as the dominant firm's customers can absorb the price increases without needing to pass these on to end users, the dominant firm's price cannot be exploitative (and should thus not be prohibited as being "excessive").

(b) refuse to give a competitor access to an essential facility when it is economically feasible to do so; / Neither the Bill nor the Act define “economically feasible”. This term is too vague and could lead to unintended consequences, including ongoing litigation.
[(c) engage in an exclusionary act, other than an act listed in paragraph (d), if the anti-competitive effect of that act outweighs its technological, efficiency or other pro-competitive, gain; or] / A major change proposed by the draft Bill is the removal of the distinction between per se and non per se infringements of the Act. This is given effect to through the proposed amendments to section 59. At present, a per se infringement exposes a firm to a penalty for first a time infringement, whilst a non per se infringement gives a firm a “safe harbour” in that, if it has been found to infringe the Act under sections 4(1)(a), 5(1), 8(c) or 9, it is only a repeat infringement of the Act on the same grounds that will lead to the imposition of a penalty.
In the Gazette, it is suggested that the abolition of this “yellow card” dispensation is aimed at enhancing enforcement of the Act and to ensure greater compliance with it by firms. It is suggested that the “yellow card” dispensation was an appropriate penalty framework at the time of the Act’s commencement but, given the greater certainty that has now been developed, it is appropriate to withdraw the “yellow card” at this time.
In business’ view, this analysis of the “yellow card” situation is not correct. There are very few cases on the proper interpretation of section 4(1)(a), 5(1), 8(c) or 9. These sections were specifically designed to give the Competition Tribunal (Tribunal) and the Competition Appeal Court the opportunity to develop categories of prohibitions over time and through the development of the case law. At present, there is no “greater certainty” in the interpretation of these provisions, and it is submitted that the withdrawal of the “yellow card” dispensation is not appropriate.
There are a number of factors in this regard. The world economy and technologies are rapidly changing over time and one cannot prescribe for every situation in legislation. One must allow for flexibility in the introduction of new situations that will allow for fair treatment of parties.
Related to this is the potential chilling effect on innovation. Whilst dominant firms might come with their own sets of problems, in many respects they are highly innovative. The withdrawal of the “yellow card” dispensation and the effective removal of section 8(c) will blunt the innovative qualities of such firms.
The same point applies in relation to section 4(1)(a). The Act, rightly, targets the traditional hard-core cartel offences. At the same time, mutual collaboration between firms is often highly beneficial for the economy, particularly in a developing country such as South Africa, which has limited resources. By withdrawing the “yellow card” dispensation under section 4(1)(a), business is concerned that this will have a serious chilling effect on the establishment of pro-competitive joint venture arrangements and positive collaboration between firms. A focus of the draft Bill is the enhancement of small businesses. It is important that the Act allow for positive and pro-competitive collaboration with and between such small businesses.
Business reiterates that Section 8(c) in its current form provides for a useful “catch all” to capture factual situations which are not specified under the Act. The effect of the deletion is that this “catch all” falls away and is replaced by the introduction of the word “including” in section 8(d). This proposed removal shifts the balance of power entirely in the Commission’s favour, as there is now no exclusionary conduct that the Commission bears the onus of proving. Instead,dominant firms are required always to prove that any potentially exclusionary conduct was reasonable. As the proposed amendment stands, the Commission merely has to allege exclusionary conduct, and a dominant firm is required to adduce evidence to justify such conduct. It would be more equitable and in line with the principles of natural justice for section 8(c) to remain in the Principal Act, such that if a dominant firm engaged in conduct not captured in section 8(d), the Commission would bear the onus of proving such conduct.