Edition 36 • September 2010 Towards a fair and efficient economy for all.

In this Edition South refers Page 1 - 3 South Africa refers International Air Cargo Cartel Case International Air Cargo

Page 4 - 5 Cartel Case Settlements reached in two fertilizer abuse of dominance cases n 28 July 2010, the Commission referred a Page 6 - 7 case of cartel conduct The Commission concludes its investigation into the Polymers Oin South Africa’s industry international air cargo trade against certain airlines namely, Plc, Page 8 - 9 (Pty) Ltd, Cargo-KLM Power Metal Recyclers settles its scrap metal cartel case Cargo, Cargo, International S.A., , Martinair Cargo and Cargo Page 9 AG (“the airlines”). The case is By: William Kganare Dawn raids notable because of its international dimensions, the importance of the Page 10 - 11 industry for the economy and also Bid-rigging and other cartel conduct because of the insights it provides into by smaller players the determination of cartel penalties in different countries.

Page 11 - 12 Some pick-up in Merger Activity The Commission’s investigation and referral followed an application for immunity by Lufthansa under the Page 12 - 13 Commission’s Corporate Leniency Bedrock and Mondi merger approved Programme. The application was subject to three conditions filed at the beginning of 2006 with the Commission and the complaint was By: Azraa Mohamed Page 14 - 15 subsequently initiated in March 2006. The Commission’s Call for the Voluntary Notification of Small The airlines are all members of the Mergers international cargo, this conduct was International Air Transport Association (IATA), an international trade still continuing in February 2006. The Commission brought the second case Page 15 - 16 association for major passenger and Agency Effectiveness Workshop cargo airlines established over sixty only against Cargolux, Air France, years ago. and KLM which involved price fixing of cargo rates, that is, the rate at which Page 16 - 17 The Commission referred two airlines ship cargo on behalf of their An overview of 2009/10 activities distinct cases against the airlines. respective customers. This conduct The first is that the airlines concluded was still continuing in August 2005. Page 18 - 19 agreements, or engaged in a concerted Impact of cartel activities on business: practice, the effect of either of which The background to the conduct An ethical perspective was to fix the rate of fuel surcharges on goes back to the mid 1990s. During

1 Editorial Note

This edition of Competition News of dominance cases involving fertilizer yet these still reflect low levels reflects the continued growth in products. Sasol was also the subject when a longer time period is taken enforcement work, especially involving of a referral of cartel conduct and into account. The quarter under cartels. As large numbers of firms excessive pricing regarding propylene review also included the contested take advantage of the Commission’s and polypropylene, explained in the Bedrock - Mondi merger analysed Corporate Leniency Policy to come article by Itumeleng Lesofe and Pamela by Alex Constantinou. In addition, clean, the Commission has to Nqojela, while the Commission settled the Commission has highlighted that it is paying greater attention to small investigate and, in recent months, is with Safripol, the other party to the mergers and asking companies to increasingly involved in concluding alleged cartel conduct. And, there was voluntarily notify, especially where settlements. also a settlement with Power Metals there are competition concerns being regarding a non-ferrous scrap metal assessed as part of enforcement Our lead story relates to one of the cartel, reported by Jabulani Ngobeni. biggest global cartel cases in recent investigations. years, involving airlines coordinating Enforcement actions continue Lastly, the articles by Liesl Van Der air cargo rates. South Africa is just against large and small companies. In Rede and Molebogeng Taunyane the quarter the Commission conducted one of many countries prosecuting highlight the issue of agency two raids, in the airline and electric this conduct, and the article by effectiveness under increased William Kganare and Azraa Mohamed wire industries. Small companies have pressures and expectations. This is the highlights some of the penalties that also been under the spotlight for cartel subject of an International Competition have been imposed and settlements conduct, with the referral of conduct in Network working group in which the reached. the sale of bicycles and a settlement Commission is involved, and also a key involving government tendering. part of the Commission’s new strategic Notable settlements were reached plan developed in the past year and Merger activity has begun to pick- in several other cases. As described now going into implementation. by Mervin Dorasamy, the Commission up somewhat after the recession, reached separate settlements with as indicated in the month on month Simon Roberts (Dr) Sasol and Foskor regarding two abuse comparison with the previous year, Editor-in-Chief

1996 there was a substantial increase 1996). A fuel price index, starting It was decided in January 1997, in in the price of jet fuel, so much so that, from 100 as a base value, would view of the importance of an industry for the first time, the airlines decided then be compiled by IATA; agreement, to delay the adoption of to introduce a surcharge on cargo the resolution because of opposition they carried on behalf of customers. In • If the IATA fuel price index to it by some IATA members. IATA January 1997, at a meeting in Geneva, equalled or exceeded 130 for thereafter circulated amongst its IATA proposed a resolution by which a two consecutive weeks, then a members a revised version of the general surcharge mechanism would surcharge would be introduced; resolution which provided for the be introduced. The resolution was exact amounts, in local currency, to • If the IATA fuel price index was proposed to be applicable to all routes be imposed as a surcharge should lower than 110 for two consecutive and sought to introduce a mechanism/ the relevant trigger event occur. For weeks, then a surcharge would formula by which airlines would example, in respect of cargo out of be suspended; decide when and how to charge a South Africa to other African countries, • If the IATA fuel price index surcharge on cargo and determine the a surcharge of 25 cents per kilogram was higher than 150 for two introduction and suspension thereof. was to be levied; and, in respect of consecutive weeks, then IATA This worked as follows: cargo to countries outside of Africa, would convene a special meeting a surcharge of 50 cents per kilogram • IATA would on a weekly basis to discuss a course of action. was to be imposed. monitor the average spot price of jet fuel. This was to be done These events were known by IATA There was another important part to against a postulated base of 100 members as “trigger events”. The the revised resolution: it pertained to (which in turn was an equivalent of surcharge was to be levied, on a per those airlines which, having voted for US$0.535 per gallon, the average kilogram basis, on the weight of cargo the resolution, nevertheless wanted to price of fuel for the month of June as it appears on the waybill. introduce their own surcharge rates.

2 In that event, the resolution provided and a compromise proposal. If there airlines allegedly agreed to impose that the relevant airline ought to file its was no protest, then the proposed surcharges in concert with each other, proposed rate with IATA, together with deviation would be allowed. by some pre-determined method, the reasons for the proposed deviation. application of which resulted in the Then IATA would upon receipt of the The resolution, as revised and fixing of prices in breach of section proposed deviation circulate it amongst circulated, was adopted in August 4(1)(b)(i) of the Competition Act. its members, who in turn would within 1997 and was intended to take effect Some of the airlines have indicated 10 days have an opportunity to protest in October 1997. All the carriers voted willingness to settle the matter with the against such proposed increase. The in favour of the resolution as revised Commission and the parties are now protesting party would file its reasons and circulated. By these acts, the engaging in settlement processes.

Recent settlements by For a second count relating to AL ($15.7mn), Cargolux ($119mn), airlines in other jurisdictions passenger travel BA was fined NCA ($45mn) and Asiana ($50mn). $100mn. This case has been settled in a Other jurisdictions number of jurisdictions. We highlight The US therefore imposed a total the example of the USA before penalty of $300mn for both counts. The size of penalties has been smaller briefly discussing some of the other BA made an admission of guilt. in other jurisdictions, reflecting both countries. This penalty took into account the the smaller turnover when only these defendant’s substantial assistance in markets are taken into account, as USA the investigation and prosecution of well as different fining criteria. other cartel members. British Airways In Canada, British Airways was fined Penalties for co-conspirators $4.5mn, $155 thousand, Air The USA determined the penalty to France $4mn, KLM $5mn, Martinair be paid by British Airways as a base Fines imposed on other airlines by the $1mn and Lufthansa $5.3. fine of 20% on the turnover of British US were mainly penalties on cargo Airways cargo sales originating from shipments. however was In Australia, Qantas was charged the the US totalling $488.7mn in the required to pay restitution, and Korean largest fine of $20mn, Air France - relevant year. Multipliers of 1.6 and Airlines was charged $300mn for KLM $6mn, British Airways, Cargolux, 3.2 were then applied to this base fine both cargo and passenger violations. and Martinair each got fines of $5mn. of $97.7mn, resulting in a fine in the Defendants of only cargo allegations range of $156mn - $313mn. The court with penalties include Lufthansa In South Korea, Korean Airlines was decided on $200mn as appropriate, ($85mn), Air France - KLM ($350mn), charged the largest fine of $39mn, that is, above 40% of the turnover, ($60mn), Martinair $16.9 and Lufthansa given that the turnover only included ($42mn), SAS ($52mn), Qantas was charged $9.9. Air France-KLM shipments from the USA and not also ($61mn), ($110mn), was also fined, however the exact those into the USA. LAN Cargo and ABSA ($109mn), EL amount of the fine could not be found. Companies based outside of Korea were issued lower fines, as their actions presumably had a less destructive influence on the Korean market.

Investigations and settlement negotiations are also ongoing in other jurisdictions not mentioned above such as New Zealand, the European Union and Switzerland. The focus of international authorities as well as the magnitude of fines imposed, indicate the impact and the seriousness of the cartel internationally.

3 Settlements reached in two fertilizer abuse of dominance cases

Neither settlement involves a retail prices and the refusal to supply penalty. In the case of Sasol, a certain key products to independent substantial penalty had already been blenders and suppliers. set for the cartel conduct, while in the case of Foskor the change in In these circumstances, the their conduct had been very rapid, Commission contended that Sasol’s and well before the conclusion of the conduct constituted an exclusionary investigation. At the time of writing the abuse of dominance in contravention confirmation hearing for the Foskor of section 8(c) of the alternatively settlement had still to be heard by the section 8(d)(ii) of the Act. The Tribunal. Commission further contended that By: Mervin Dorasamy Sasol’s had charged excessive prices The Commission’s Settlement with for ammonia and ammonium nitrate Sasol derivative products in contravention of he Commission had section 8(a). uncovered cartel conduct On 20 July 2010 the Competition with regard to fertilizer Tribunal confirmed a settlement With regard to Profert’s complaint, products and their key agreement entered into between the covering largely similar ground, the T Competition Commission and Sasol Commission had found that Sasol had components. These were the subject of a leniency application on the Chemical Industries (Sasol). This further engaged in price discrimination part of Foskor and a settlement by settled the two complaints in terms to the detriment of Profert and thus Sasol in 2009 including a penalty of of Section 8 and 9 of the Competition had limited the ability of Profert to approximately R250mn. There were, Act, 1989 known as the Nutri-Flo and compete effectively and/or expand in however, also investigations of abuse Profert complaints. the fertiliser market. of dominance on the part of Sasol and Foskor, each of which controls Included in the agreement is a The undertakings made by Sasol in a key basic input. In Sasol’s case it condition specifically guaranteeing the July 2010 settlement include: is practically the only local producer supply to existing customers and of ammonia, which is the source of a monitoring mechanism to ensure • to sell all Ammonium Nitrate nitrogen in locally made fertilizers. that Sasol provides information to Based Fertilisers to its customers Foskor controls the local production the Commission about its compliance on an Ex-Works basis from the phosphate rock which is the source with undertakings it has made in Premises; of phosphorous, and through this has the agreement. These were both • not to impose any restriction or price setting power over phosphoric strengthened at the request of the obligation upon any customer acid. Tribunal. The conditions will be in force as regards the terms of resale for a minimum of 10 years from the of the abovementioned fertiliser The Commission recently reached date of the divestitures contemplated products; settlements with each of these in the agreement. • not to differentiate in its pricing, parties on the abuse of dominance. other than on standard commercial Both settlements were on the basis The Commission found that Sasol terms such as volume and off- of changes in conduct to yield more had, through a range of practices, take commitments; competitive outcomes, while in Sasol’s prevented independent blenders and • that any discounts and/or case there was also a commitment suppliers, including Nutriflo, from allowances granted shall be to divest of downstream blending effectively competing and expanding transparent and available to all operations to remove the incentive within the downstream fertiliser customers willing and able to to exclude other participants at this market. These practices included the meet such volume and off-take level. pricing structure of wholesale and commitments, while Sasol shall

4 be entitled to give discounts and/ The Commission’s Settlement with produce phosphoric acid and related or other allowances for reasons Foskor products for Foskor to sell in the local associated with volume and/or market meaning that, by agreement, off-take commitments, and shall The Competition Commission has local buyers who had been able to be entitled to give discounts and/ entered into a consent agreement with choose between Sasol and Foskor, or allowances where customers Foskor in settlement of the phosphoric now only had Foskor to turn to. Sasol have been subject to specification acid excessive pricing complaint based admitted to this collusive arrangement deviation and supply disruption; on Foskor’s downward adjustment of and settled its part with the Commission • ceasing all importation of the local price after being made aware in the agreement confirmed by the ammonia into the Republic of of the Commission’s investigation. Tribunal on 20 May 2009. South Africa within a period of 25 months of confirmation of the The Commission’s investigation Foskor produces phosphate Settlement Agreement other than was triggered by a complaint in 2007 rock and is the main local supplier for its own use and those imports from animal feed producers (AFPs) of phosphoric acid, an important on behalf of third parties that may alleging that Foskor had contravened component in fertiliser and animal be occasioned due to supply the Competition Act, in that: feed products. Foskor exports the and logistic disruptions and plant vast majority of its phosphoric acid. maintenance shutdowns, and • It entered into a toll manufacturing Foskor’s position as the main supplier consequentially adjust its logistics agreement with SASOL. The of phosphoric acid enables it to control infrastructure requirements; latter would produce phosphoric prices locally. Foskor’s price to local • to house the Ammonia Plant acids and related products on buyers included an add-on equivalent and business operations relating behalf Foskor and Foskor would to 75% of the freight costs to export thereto as a business unit market these products. customers (mainly in India). separate from Sasol Nitro and • It was charging an excessive with separately audited books of price for phosphoric acid. As soon as being made aware of account. the anti-competitive implications of With regard to the first, Foskor such pricing in August 2008, Foskor The Tribunal Chair praised the admitted the collusion allegations and removed this component, substantially Commission and Sasol for their filed a leniency application with the reducing prices to local customers. It constructive approach to settling Competition Commission under which has since maintained prices to local the matter and Nutri-Flo and Profert it provided all relevant information customers in line with the prices it for persisting with their complaints regarding its toll production agreement despite the fact that it was against a with Sasol. Under the toll production receives from exports. large supplier of theirs. agreement, Sasol undertook to Under the agreement reached with the Commission, Foskor has committed to refrain from engaging in excessive pricing of phosphoric acid, and specifically not to revert to its previous pricing policies for the sale of phosphoric acid, phosphate rock, as well as MAP and DAP (two fertiliser products which it now sells directly to the retail farming community). It has also undertaken measures to increase transparency in the downstream market for fertiliser products.

As a result of the quick action and cooperation by Foskor and the significant reduction in prices payable by animal feed producers and end consumers, the Commission is not seeking a penalty against the firm.

5 The Commission concludes its investigation into the Polymers industry

s the key input to making plastic products, the pricing of polymer chemicals is Aa large influence on the competitiveness of the plastics sector. And, a competitive plastics industry is a crucial component of sustainable manufacturing growth given the wide range of applications of plastics materials including in the packaging, automotive and domestic sectors. The By: Itumeleng Lesofe By: Pamela Nqojela Industrial Policy Action Plan recognises the importance of addressing polymer pricing. Consistent with this, in October 2007 the Department of Safripol benefits from the agreement, The Commission’s investigation Trade and Industry requested the the main beneficiary is Sasol. Further established that the markets for Competition Commission to conduct the operation of the agreement is such propylene and polypropylene are an investigation into pricing practices that Safripol cannot punish or retaliate highly concentrated, with Sasol being within the chemicals sector with should Sasol infringe the agreement. dominant in both. The polypropylene specific reference to polymers. While market is serviced by Sasol and the initial concerns by the DTI related The agreement was confirmed as Safripol, with large net exports. The to polymer products, the pricing of the order of the Tribunal on 25 August input of propylene is priced by Sasol polymers is also closely related to the 2010. to Safripol in terms of a formula based pricing and supply of monomers, which on the prices of polypropylene, as set are the key inputs or chemical ‘building The investigation and Commission by agreement between Sasol and blocks’ in polymer production. findings of excessive pricing Safripol.

The Commission has completed its The Commission first undertook The Commission found that Sasol investigation and referred charges of a preliminary analysis of a number uses its quasi-monopoly power in excessive pricing case (section 8(a)) of polymer markets (including propylene and polypropylene to price against Sasol for polypropylene and polyethylene, polypropylene and polypropylene at import parity price propylene, and of collusion (section polyvinylchloride) which resulted in the (IPP) levels to local customers in a 4(1)(b)) against Sasol and Safripol in initiation of a full blown investigation market where supply far outstrips relation to polypropylene, to the Tribunal in the polypropylene market. An demand. This pricing at IPP is not for adjudication. Subsequently, the identified area of particular concern related to Sasol’s actual costs in Commission and Safripol concluded was the terms of the propylene any way. The IPP prices include a Consent Agreement in terms of supply agreement between Sasol hypothetical transport costs associated which Safripol admitted that the latter and Safripol (propylene, a monomer, with importing polypropylene added conduct was in contravention of the is the key input into the production to a Free-on-Board (FOB) Act. The firm also agreed to pay an of polymer polypropylene), which price to arrive at the local price, and administrative penalty of R16 474 573, suggested that the alleged abuse of the customer essentially pays as representing 1.5% of its total turnover dominance by Sasol in polypropylene though he imports the product when it derived from the sale of polypropylene described below may have extended is actually produced locally. products. The Commission agreed a to the monomer market. In 2009, low fine in this regard as the supply the Commissioner extended the Moreover, Sasol has expanded its agreement was encouraged by the investigation to look into propylene capacity substantially, based on export Competition Board and, although market. prices which are substantially lower

6 than its domestic prices. This strongly suggests that economic value is at or near the achievable export price. Prices under effective competition would be expected to tend towards export prices achievable.

Instead, local ex-works polypropylene prices at IPP levels are substantially higher than export ex-works prices to China, the largest destination for exported polypropylene from South Africa. Further, local ex-works prices are significantly higher than Hong Kong prices which are derived from a South Korean price. The latter is a large net exporting region like South Africa, and therefore an appropriate benchmark for comparison. In addition, there are strict anti-arbitrage provisions instituted by Sasol to ensure that In effect, the pricing of polypropylene horizontal relationship if it involves product destined for export markets and propylene locally is consistent directly or indirectly fixing a purchase is not resold into the local market to with a situation indicative of relative or selling price or any other trading undermine excessive local pricing. local scarcity, making imports condition. The Commission found that necessary at the margin, when in fact the supply agreement between Sasol The Commission found, using a there is abundant supply, presumably and Safripol and its operation amounts range of benchmarks, that the local reflecting the relatively low cost, to the direct or indirect fixing of the polypropylene prices are excessive competitive local manufacture. If the selling price of polypropylene with in comparison. These benchmarks exported product was available to respect to which Sasol and Safripol included local prices in comparison to local buyers, it would exert downward are in a horizontal relationship. actual export and indifference prices, pressure on local prices. This as well as local prices in comparison suggests that the much higher local In addition to the communication to international prices in a net surplus price of propylene and polypropylene of polypropylene prices, the supply region. The Commission found that the is substantially above economic value. agreement incentivises Sasol and pricing of propylene, in which Sasol This certainly concurs with the Appeal Safripol to follow each other’s price is essentially the only supplier, was Court’s suggestion in the Harmony – increases, since the increase of price excessive based on comparisons with Mittal case that in instances where a by one of them, through the operation an imputed price of propylene derived dominant producer is able to embark of the formula, raises the price of from more competitive polypropylene on expansions of capacity based propylene to the other, thereby prices. solely on export sales, the export reducing the margin of the firm that achievable price would be at or above does not follow the price increase. Sasol uses the polypropylene prices economic value. The agreement also involved Safripol (which, in the Commission’s view, paying higher prices for increased are already excessive) as a basis for Collusion volumes of propylene along with calculating its propylene prices. This absolute volume constraints. This in turn results in the propylene prices The Commission also investigated undermined incentives to discount. being excessive. The Commission collusion allegations against Sasol and Firms discounting would aim to achieve also compared the current propylene Safripol, particularly with respect to a larger local market share, but if they prices to imputed propylene prices the operation of the propylene supply are constrained in they simply lower using more competitive PP prices in agreement and the communication margins on existing sales. Ultimately, the existing price formula, and cost of polypropylene prices. The South the formula incentivises both Sasol benchmarks, and found the local African Competition Act prohibits and Safripol to charge the highest prices to be excessive. agreements between firms in a prices, the ceiling of which is IPP.

7 Power Metal Recyclers settles its scrap metal cartel case

SAM, NSM, LO Rall Scrap Dealers with PMR. For the purposes of PMR’s CC, Universal Recycling (Pty) settlement this article will only deal Ltd (Universal) and Fine Trading with the Commission’s findings with CC alleging that these entities regard to the August 2007 initiation had engaged in conduct aimed at because PMR was only involved in controlling the price of scrap metal sold price fixing in respect of non ferrous at auctions by ensuring that bidders scrap metal. co-ordinate their bids and the auction process by ensuring that scrap metal Upon concluding its investigations is sold to certain agreed bidders. with regard to the non-ferrous scrap cartel, the Commission found that in By: Jabulani Ngobeni In July 2007, the Commission 2003 PMR and its competitors Reclam, conducted “dawn raids” at the Abbedac, AMR, SAM and Universal premises of Reclam in JHB, PE and who are suppliers and processors of n 14 July 2010, the Durban. Thereafter the Commission non-ferrous scrap in the inland area Competition Tribunal received information that Reclam, agreed to establish a superyard in approved a settlement Abeddac Metals (Pty) Ltd (Abeddac), the inland area. In order to establish agreement entered into Amalgamated Scrap Metals Recycling a superyard PMR and its competitors O CC (AMR), PMR, SAM and Universal formed a joint venture (Greystone). between the Competition Commission and Power Metal Recyclers (PMR) were engaged in price fixing and The sole business of Greystone was over the latter’s participation in the collusive tendering in respect of the buying, selling, transporting and non-ferrous scrap cartel. various types of non-ferrous scrap processing of non-ferrous scrap, metal. Soon thereafter (August including stainless steel and chrome This investigation was sparked by 2007) Commission initiated another steel scrap. After the formation of information submitted by the merging complaint against these respondents. Greystone but before a superyard was parties in the proposed merger It is this complaint that forms part of established, a selling committee was involving the New Reclamation Group the consent agreement entered into appointed by the board of Greystone, (Reclam) and SA Metal and Machinery (SAM). The proposed merger was later abandoned after the Commission blocked it.

Soon after the merging parties filed a notice of abandonment the Commissioner initiated a complaint against Reclam, SAM, National Scrap Metal (NSM) and Cape Town Iron and Steel (Cisco) based on allegations of exclusive dealing, price fixing, the fixing of trading conditions and market allocation in relation to ferrous and non-ferrous scrap metal. On the basis of further information submitted by Reclam to the Commission, the Commission expanded the above complaint to include allegations of collusive tendering against Reclam,

8 whose responsibility was inter alia the members continued to discuss pay an administrative penalty in the to determine the prices at which the buying levels on an informal basis until amount of R12 773 587.55, being 5% various classes of non-ferrous scrap at least 29 May 2007. of PMR’s total annual turnover for the would from time to time be sold. The year ended February 2006. selling committee arrangement was Settlement discussions with referred to as the “Joburg non-ferrous PMR commenced soon after the PMR has undertaken to refrain agreement”. Commission’s investigation was from engaging in price fixing and completed. On 17 June 2010, the it has also agreed co-operate with The Commission’s investigation also Commission and PMR concluded a the Commission in subsequent revealed that before the establishment consent agreement. prosecutions of parties to the of the superyard there were numerous agreements and arrangements which discussions, including discussions In terms of the consent agreement are the subject of the Commissions about the prices at which non-ferrous PMR admits that it has contravened investigations in the scrap metal cartel. scrap should be sourced. Although the section 4(1) (b) (i) of the Competition The Commission’s investigation in all shareholders of Greystone dissolved Act in that it agreed with its competitors of the above investigations is complete it in June 2004 the Commission found to fix prices in relation to certain non and the Commission has referred the that after the termination of Greystone, ferrous scrap metals. PMR agreed to complaint to the Tribunal. Dawn raids

In order to successfully conduct tendering. This was done subsequent such an operation the Commission to a complaint initiated by the assembles teams made up of Commissioner on 16th March 2010 Commission staff, IT specialists against Aberdare Cables (Pty) Ltd, and police officers to assist in the Alvern Cables (Pty) Ltd, South Ocean identification and seizing of documents Electric Wire Company (Pty) Ltd and relevant to its investigation. Tulisa Cables (Pty) Ltd.

On March 31, 2010 the Commission All of these companies produce both raided the offices of South African high voltage cables for industrial use Airways (SAA), Mango Airlines and low and medium voltage cables By: Molebogeng Taunyane (Mango) and the Airlines Association for households, which are mostly of Southern Africa (AASA). This search sold to power supply authorities, was prompted by the Commission’s municipalities, construction companies suspicion that SAA and Mango might n the last quarter, the Commission and railway and transport authorities. conducted two search and seizure have withheld information crucial to operations, in the airline and its investigation into collusion by the airlines around the soccer world cup. During the searches the Commission electric cable industries. I seized documents and electronic Again on May 06, 2010 premises of data, which are currently being Such an operation is provided for four electrical cables manufacturers analysed together with information in the Competition Act. In terms of and suppliers based in Gauteng or evidence gathered to determine section 48 of the Competition Act, were searched by teams from the whether a contravention of the the Commission is authorised to Commission on suspicion of price Competition Act has taken place in enter and search premises and seize fixing, market allocation and collusive these matters. documents which have a bearing on an investigation. Also, Section 46 (2) (b) of the Act authorises a judge or magistrate to issue the Commission with a warrant allowing them and accompanying police officers to enter and search such premises.

9 Bid-rigging and other cartel conduct by smaller players

ith all the Competition such construction and industrial complaint from the National Treasury C o m m i s s i o n ’ s products, a common misconception in March 2009, and following further investigations into is often that the Commission elects investigations it was discovered that Wcartel activity by to exclusively focus on and expose Anix and Zedek had discussions large companies in major industries, cartel activities involving these large on pricing relating to their tender industries. Although cartel activities submissions for a State tender for the in large industries do attract more supply and delivery of animal feed to attention owing to the fact that they the State. have a greater affect on the economy, the Commission does not turn a blind Shortly after being served with the eye to the same activities occurring in referral papers, the representatives smaller industries. of Anix and Zedek approached the Commission with the view of settling the The Commission has found that matter, indicating that they would not small industries are also prone to be putting up a defense or an answer participating in cartel activities as there to the Commission’s referral. They indicated that they had no defence exists a perception that they may go to the Commission’s allegations and By: Sipho Mtombeni unnoticed. It is for this reason that the admitted that their conduct had been Commission does not simply overlook in contravention of section 4(1)(b)(iii) these anti-competitive practices and of the Act in that they had discussed also that the aim and purpose of with each other their respective bids the Commission is to promote and and prices in respect of the tender in maintain competition in the economy, question. The settlements with Anix regardless of the size of the industry. and Zedek, whereby they agreed to refrain from engaging in further A prime example of the Commission’s collusive tendering and became liable intervention in cartel activities in the for an administrative penalty of R20 smaller industries can be found in its 000 and R40 000 respectively, were investigation of the Cycling industry. confirmed as orders of the Tribunal on Although this investigation was met by 07 July 2010. mixed reactions by the industry, the By: Samantha Niemann Commission continued to investigate The National Treasury had made allegations of price fixing by cycling submissions to the Tribunal, through retailers and wholesalers and, having the Commission, indicating that finalized its investigation, this matter Treasury would consider applying now stands before the Tribunal for remedies available to it in dealing with determination. the parties as a means of curtailing bid rigging in public tender procurement A further example highlighting the with one of the alternatives being to Commission’s intervention in the cartel blacklist the parties from public tender activities of not only small industries, procurement in future tenders or but also with regard to small firms, cancel the tender. can be found in the cases of collusive tendering on the part of Anix Trading Shortly thereafter, on 21 July 2010 739 CC (Anix) and Zedek Trading National Treasury issued a circular and By: Sbusiso Madonsela 799 CC (Zedek) respectively. In these a Practice Note in terms of section 76 matters the Commission received a of the Public Finance Management Act

10 to all Accounting Officers, instructing competitors in submitting the bid. The any firm, and has several other cases the public sector procurement CIBD provides public institutions with under investigation involving smaller mechanisms to use the Certificate of additional remedies in dealing with firms. However, the Commission has in Independent Bid Determination (CIBD) bid rigging be it against small or big many cases adopted a form advocacy in their procurement processes. companies involved in public tender with smaller firms, keeping in mind its Through the CIBD, parties submitting procurement. purpose of promoting and maintaining tender to that public institution will competition. The Commission does be required to certify that their bid The above cases illustrate the also on a continuous basis engage has been independently determined Commission’s position with regard to with small and medium enterprises and that there has not been any these matters. The Commission will on an educational basis in order to collaboration with any of their act upon contraventions of the Act, by promote compliance with the Act.

Some pick-up in Merger Activity

question often asked to the period between April to August for Commission is whether the 2009 was 15 as compared to the merger notifications has average for the same period during Aincreased or decreased 2010 was 19. The table below over time, as a measure of economic provides a month to month activity. As a comparative to 2009 trend comparing 2009 and 2010 the merger notifications during notifications for the same period. the last few months appears to These comparatives are like increase and stabilize. The average for like considering the merger number of merger notifications thresholds were amended as at April made to the Commission during the 2009. By: Maarten van Hoven

As stated in the Commission’s 2010 revised service standards (published March 2010) most advanced and high performance regulatory agencies have service standards which facilitate both internal productivity and external service delivery expectations.

11 The Commission Service standards able to meet these standards. The service standards. The Commission in summary are set down below: table below is a summary of the will continue to strive to meet these Commission’s ability to meet these standards. Category 2010 Service Standard

Phase 1 20 (non complex)

Phase 2 45 (complex)

Phase 3 60 (very complex)

Since the publication of these standards the Commission has been Bedrock and Mondi merger approved subject to three conditions

n 21 April 2010, the addressing concerns raised by the Competition Commission Commission and third parties. prohibited the proposed Oacquisition by Bedrock Bedrock is a mine support company Mining Support (Pty) Ltd of the Letaba, which uses hardwood timber sourced Numbi and De Kaap plantations (the from its suppliers to produce timber- target firms) of the Business North based underground support packs Unit owned by Mondi Limited. The and elongates for deep level gold and Commission prohibited the proposed platinum mines. Bedrock is also active transaction chiefly on the grounds inter alia, in timber and mine yard that potential coordinated effects management and value added services By: Alex Constantinou were likely to arise in the market, in through chemical treatment, logistics particular from the sale of the Numbi and underground technical services. plantation by Mondi to Bedrock. The The target firms are forest plantations Competition Tribunal subsequently producing mainly hardwood in the revealed overwhelming evidence to approved the transaction with three Mpumalanga and Limpopo regions. the contrary, indicating instead that conditions involving two commercial The transaction therefore represented steel roof bolts and timber-based supply contracts in addition to an backward vertical integration in the stand up supports constituted distinctly expert determination clause designed timber industry. separate markets given the different to eliminate information exchange applicability, durability, yielding factors between the two rivals, Bedrock and In terms of the downstream market and relevant product and installation Reatile. This arose after the merger was the parties sought to include other price. This had the effect of reducing taken on appeal to the Tribunal by the mining support products such as steel the number of major competitors in merging parties and subsequently the roof bolts as competing with timber- the downstream market to only two Commission, the merging parties and based stand up support products. The being Bedrock and Reatile. The third parties concluded negotiations Commission’s investigation however, upstream market was agreed as the

12 production and supply of hardwood Reatile would not have access to the upstream and downstream market timber. mining timber from Numbi given that were considered high, products sold Bedrock has sufficient capacity and by Bedrock and Reatile are similar. The Commission’s investigation incentive to absorb the entire mining Thus a likely degree of homogeneity focused on two main areas: input timber resource in Numbi. In light of exists between rival products and, foreclosure and coordinated effects. this concern, a commercial supply by way of a punishment mechanism, agreement was reached between Bedrock could reduce the quantity Input foreclosure Reatile and Bedrock to the satisfaction or quality supplied to Reatile given of the Commission and the Tribunal that Bedrock would control Reatile’s In assessing input foreclosure which became one of the conditions of source of timber in Numbi. concerns three separate geographic the merger. regions were considered namely, the The Commission’s main concern, Limpopo, Mpumalanga North and The other input foreclosure concern informed by third parties as well as Mpumalanga South/North regions. The was raised by Tshifhire Timbers (Pty) other evidence, was that there are only Commission found that possible input Ltd (“Shefeera”), a small BEE company two main players in the downstream foreclosure concerns were unlikely as not in direct competition with Bedrock market, namely Bedrock and Reatile. there are various alternative sources in the mine support market, but also The downstream market thus faces of hardwood for which the mining competing for the same hardwood characteristics of a duopoly market support companies may compete. for its own purposes. Their concern structure with fringe competition from Despite this finding, concerns were stemmed from the fact that they relied other smaller players. Therefore raised by two third parties. heavily on hardwood from Letaba as a direct result of the acquisition, located in Limpopo and that alternative particularly the Numbi plantation The concern raised by Reatile sources were either competitors to (owing to the supply contract Reatile Timrite (Pty) Ltd (“Reatile”), a direct Shefeera, tied up with other customers has in place), two rivals in a horizontal competitor to Bedrock, was chiefly or too far away to viably to source from. relationship in a highly concentrated in respect of the Numbi plantation In light of this concern, a commercial market would have been allowed in Mpumalanga North located in the supply agreement was reached to discuss annually the price for a Hazyview and White River area. Some between Shefeera and Bedrock to critical input for their operations. The of Reatile’s major sawmill operations the satisfaction of the Commission Commission was of the view that are located within a 40km radius of and the Tribunal which also become a this would have created a platform the Numbi forests in this area and condition of the merger. for information exchange in terms of as such the transport costs are more volume and price and as such facilitate economically viable than sourcing Coordinated effects a market structure more conducive to from other areas further away. Their coordination among rivals. concerns originate from the fact that With respect to potential coordinated Reatile has a supply agreement with effects, some of the factors contributing Mondi prior to the merger and that post to the Commission’s original concern To this end an agreement was merger, at the expiry of the contract, included the fact that barriers to entry in reached between the Commission and merging parties to impose a third condition by way of an independent expert facilitating the price negotiations rather than Bedrock and Reatile directly discussing them. In terms of the condition, the expert will not disclose pricing information to each of the rival parties. The Tribunal accepted this agreement as an additional condition of the merger. The Tribunal ultimately approved the merger subject to the Pictures from New Concept Mining, used with permission. aforesaid three conditions.

13 The Commission’s Call for the Voluntary Notification of Small Mergers

n March 2009, the Minister of • the activities of both the acquiring Trade and Industry issued a and target firms; notice in the Government Gazette, • any horizontal or vertical overlaps Iin terms of which the monetary in activities; thresholds for the categorization of • estimated market shares; intermediate and large mergers were • identification of competitors; and revised. These amended merger • any other information which the notification thresholds came into effect parties may deem necessary. on 01 April 2009. Notwithstanding the fact that the The classification of mergers as proposed small merger is occurring By: Nazeera Ramroop small, intermediate or large determines in a market unrelated to that in which whether or not an obligation rests upon the alleged collusive activity occurred, the merging parties to notify a merger in order to conduct a meaningful to the Competition Commission, in transaction meets the following assessment of the proposed order to receive approval prior to criteria: transaction and its competitive effect implementation of a transaction. thereof, the Commission requires that the merging parties make a brief • at the time of entering into the submission on the pointers highlighted Notwithstanding this, in terms of transaction any of the firms, above. section 13 (3) of the Competition or firms within their group, are Act the Commission may call upon subject to an investigation by the The Commission undertakes to parties to a small merger, to notify the Commission in terms of Chapter respond and advice the parties whether Commission thereof within six months 2 of the Act; or or not they are obliged to notify their from implementation of that merger, if • at the time of entering into the small merger to the Commission within after having regard to the provisions transaction any of the firms, 10 business days from receipt of the in section 12A, the Commission is of or firms within their group, letter setting out the requisite details the view that the proposed merger are respondents to pending as published in the guideline.2 shall substantially prevent or lessen proceedings referred by the competition, or cannot be justified on Commission to the Competition Since implementation of the public interest grounds. Tribunal in terms of Chapter 2 of Guideline in April 2009, the Commission the Act.1 has received thirty-two (32) voluntary The revision of the merger thresholds, small merger notifications by way of together with the economic downturn, Parties to small mergers who meet letter. After analysis of the content has resulted in more potentially the above criteria are adviced to of the letter, industry available problematic small mergers escaping voluntarily inform the Commission, information and information privy Commission scrutiny. Under the old by way of a letter, of their intention to to the Commission as a result of its thresholds, these small mergers would enter into the transaction. previous investigations into the parties have been classified as intermediate and their markets, in five (5) instances in nature and therefore subject to This letter should identify the the Commission took the view that the analysis by the Commission. following: proposed transaction may result in a substantial prevention or lessening In order to address this concern, the • the merging parties; of competition. The Commission then Commission has issued a Guideline • the turnover and asset value called on parties to formally notify the on Small Merger Notification, which figures which render the transaction. advices parties to a small merger to transaction a small merger; voluntarily inform the Commission • the nature of the proposed Merging parties have also, at their of the proposed transaction, if such transaction; own initiative notified the Commission

1 Guideline on small merger notification, General Notice 386 of 2009 published on 17 April 2009. 2 Merger and Acquisitions Division Service Standards 2010. 14 poultry

of small merger transactions by way been assisted by the public in the mergers and transactions wherein of a complete filing. These filings were alerting of possible anti-competitive notification ismandatory. The Guideline, particular to the Banking Industry, the transactions. With this information in together with the Commissions own Poultry Industry, the Pharmaceutical hand, the Commission has called upon tracking and monitoring and the Industry, the fishing industry as well as parties to make written submissions assistance of the public (competitors acquisitions made by larger corporate briefly describing the small merger and customers alike) has facilitated of smaller independent traders in a acquisitions that they have entered in the identification of small mergers market. into and implemented. which may require notification. Given the sometimes problematic impacts The Commission has remained The Commission’s Guideline on small that small mergers present, the vigilant in tracking and monitoring merger notifications has empowered Commission encourages that all parties merger activity in the economy, and the Commission to close the gap with relevant information to make in addition to its own monitoring, has between potentially problematic small submissions to the Commission. Agency Effectiveness Workshop

he ICN held an Agency that focus specifically on Human Effectiveness Workshop for Resources and Knowledge Agency heads, hosted by Management. The broad themes for Tthe Office of Fair Trading, in the workshop were agency culture/ from 11- 13 July 2010. organisational identity and people, and within this framework a number The work group for Agency of key considerations concerning Effectiveness is a reflection of the the strategic approach to Human ICN’s increasing focus on agency Resources and Knowledge were performance issues, in addition to the examined. Through plenary and established and ongoing focus on the breakaway sessions, representatives By: Liesl van der Rede content of Agency work. from agencies of varying locations, size and years since establishment This workshop formed part of the shared experiences and challenges process to generate a manual for facing competition agencies around essential elements of an agency’s ICN member agencies to provide the globe. organisational identity which enable guidance and share practices based the agency to be effective; attracting on real Agency experience. The The topics focused on included: and retaining new talent, career Agency Effectiveness Working Group Current challenges faced by development and skills building; how undertook to produce guidance competition agencies; establishing and to capture and disseminate learning; chapters over the next 1-2 years implementing principles and values; staff secondment / movements of

15 people between competition agencies; versus confidentiality, information a priority on the strategic agenda. leadership and succession planning. overload, retaining tacit knowledge, Including Human Resources and formal versus informal sharing Knowledge Management objectives In the current global economic and managing content versus in the Commission’s Strategic climate, the Human Resources and management information. For Plan ensures both receive ongoing Knowledge Management challenges the Competition Commission attention and action from both facing all competition agencies are here in South Africa, effectively the Management and Executive remarkably similar and not entirely managing these issues is Committees. unexpected.

Common challenges in the strategic management of people include budgetary constraints for compensation, restrictions on recruitment, competing with private sector organisations, career path management for technical specialists, succession planning and obtaining and retaining appropriate skills and talent.

For knowledge management, there are challenges of transparency An overview of 2009/10 activities

he 2009/10 year was than R487 million in administrative another year of penalties through consent orders. The increased caseload on most significant one settlement was Tthe enforcement side with Sasol – which agreed to pay R250 although mergers declined sharply million for taking part in the fertiliser due to the global recession. cartel. This is the highest settlement At the same time, the Commission agreed upon to date between the continued to be active in areas Commission and a respondent. such as advocacy and international antitrust bodies. Another significant outcome was when the Tribunal found in the Cases By: Molebogeng Taunyane Commission’s favour concluding the bread cartel case. It found that In terms of casework in the Pioneer Foods had indeed colluded 2009/2010 year, the Commission of competition law and are using the with fellow bakeries to fix the selling continued to be inundated with opportunity afforded to them by the price of bread and to allocate markets applications for corporate leniency. CLP process to voluntarily comply with amongst themselves. The Tribunal Over the 12 months to March 2010 a the law. It also indicates the pervasive then imposed a penalty of R195 staggering 79 CLP applications were nature of cartel conduct in the South million, being 10% of Pioneer Foods received. The trend continued with a African economy. further 23 being received in the quarter baking division’s turnover for 2006, April to June 2010. Infrastructure and Only five consent and settlements rather than its group turnover. The construction sector constitute the were concluded in the year Commission is appealing this decision highest number. This indicates that under review. This resulted in the as it does not believe that the criteria firms are becoming increasingly aware Commission levying a total of more applied by the Tribunal to determine

16 the penalty are appropriate to deter Strategic planning and for impact; increased stakeholder cartel behaviour. management engagement; and building a high performance competition authority. In total the Commission had 289 The 2009/10 year saw the In order to achieve these goals cases under investigation - with 172 Commission work on a new three- the Commission recognises that complaints from the general public, year strategic plan to kick off from it needs strong leadership within 31 initiated by the Commissioner and April 2010. This occurred against the the organisation. Middle Managers 86 complaints carried over from the backdrop of significant successes, were identified as key to assisting previous year. Only two exemption especially in priority sectors and cartel with the management of the applications were filed during this enforcement. The new plan aims organisation. This resulted in middle period. Of the 31 cases initiated, 20 to enable the Commission to meet managers attending a Management were in the Commission’s priority the challenges of increased Development Programme, which sectors while 11 of the investigations expectations and case-loads aims to empower them to share in the were spread across sectors such through working towards three management responsibilities of the as media, transport, packaging key goals: improved prioritisation organisation. and property. Furthermore, 26 of these investigations involved cartel behaviour.

Notified mergers plunged to 190 over this period compared to 415 mergers in the previous year. Most of these mergers were intermediate (136), with 44 large mergers and 10 small mergers.

International relationships

The Commission has also increased its involvement with Competition Authorities in the African continent. During this year the Commission participated in the Joint Food Project together with the Egyptian and Zambian competition authorities – to examine anti-competitive practices in food products. The Commission is also engaged in building capacity in some of these institutions. During this period the Commission hosted delegates from the Gambian Competition Commission and also the Botswana Competition Authority.

Furthermore, it continues to participate in international organisations such as the International Competition Network, Organisation for Economic Cooperation and Development, Southern and Eastern Africa Competition Forum and SADC.

17 Impact of cartel activities on business: An ethical perspective

he bread cartel matter that was exposed by a whistleblower from the TWestern Cape has raised wide-ranging questions about the ethics of business, and the relationship with competition law compliance.

Cartels are often equated with theft by firms from consumers. However, the Competition Act does not use the By: Zibuyile Jafta By: Andile Mangisa word cartel. Rather, the Act prohibits an agreement between competitors in a horizontal relationship from: directly or indirectly fixing a purchase or selling promote it”.3 Most ethics literature in interests of its stakeholders. As such, price or any other tradition condition; considering ethics as a philosophical business ethics attempts to address dividing markets by allocating enquiry, uses the terms “ethics” the ethical impact of economic activity customers, suppliers, territories, or and “morals” interchangeably. Most and the economic impact of being specific types of goods or services; or writers in this field refer to ethics as it ethical. engage in collusive tendering. reflects beliefs about right and wrong conduct or questions of moral right, Some believe that ethical behaviour Cartels denote groups of business wrong, duty and obligation and moral hinders one’s success. However, that people who engage in outright anti- responsibility.4 is not the case. In his book ‘Business competitive fixing of markets in this Ethics’, Deon Roussouw argues that way, to the detriment of consumers. It Business ethics applies these ideas business should make ethical sense, further reflects the fact that this activity in concentrating on moral standards but ethics can also make business is particularly likely to happen in as they apply to systems and sense.7 Roussouw further asserts that mature industries with well established organisations through which modern the greatest challenge faced by Africa networks in trade associations and societies produce and distribute goods is that the current neglect of ethical similar organisations.1 and services, and to people who work values in business turns into beliefs within these organisations.5 Weiss about the ways business should be Defining Business Ethics, and (1987:7) cites Laura Nash (1990:5) as done. Such beliefs, which function Ethics in Business pointing out that business ethics “… as myths that legitimize and sustain is not a separate moral standard, but unethical business practice, can Ethics are defined as “relating the study of how the business context play a powerful role in reinforcing an to morals”, “a set of principles of poses its unique problems for the moral unethical behaviour. This is directly morals”, and as “rules of conduct”.2 person who acts as an agent of this relevant to understanding cartel Charles Powers and Davis Vogel (in system”. It considers the implications behaviour, where such conduct Chryssides and Kaler, 1992:53) define of economic activity on the interests of appears to have become a norm, a ethics as “concerned with clarifying all who are affected by such activity belief about how business should be what constitutes human welfare and and seek to ensure that business done. This is now explored in the case the kind of conduct necessary to does not detrimentally impact on the of the bread cartel.

1 Signfrid, N., Wrangel, C., Levinsohn, M. & Olsson, G.: European Cartels report (2000). Sweden: Lund University. 2 The Concise Oxford Dictionary. 3 Chryssides, G.D. & Kaler, J.H. (1993). An Introduction to Business Ethics. London: Chapman & Hall. 4 Beauchamp, T.L. & Bowie, N.E. (1983). Ethical Theory and Business. New Jersey: Prentice-Hall Inc Shaw, W.H. & Barry, V. (1995). Moral Issues in Business. (6th Ed), Belmont, California: Wadsworth. 5 Velasquez, M.G. (1998). Business Ethics: Concepts and Cases. New Jersey: Prentice Hall. 6 Weiss, J.W. (1998). Business Ethics: A Stakeholder and Issues Management Approach. Forth Worth: The Dryden Press. 7 Rossouw, D. (2004). Business Ethics. Cape Town: Oxford University Press. 18 Ethical ramifications of the bread From the perspective of a legal about the consequences of unethical cartel activity to the bakery person, a judicial body and a regulator business practices (cartel activities), industry in the business sector, this raises to regulate and enforce compliance some questions. Is the bottom line with competition law to ensure an Rossouw argues that the myth ethical, legal and in compliance with ethical, fair and efficient economy in articulating that ‘Nice guys come the Competition Act? It is not the South Africa. second’, proclaims that it is impossible profit seeking itself, but the processes to be ethical and successful in followed in this pursuit which is at A common ethical sense is business, where ethics and business issue. Profits earned through effort that businesses would like to be are seen as opposites. Another myth, and hard work contribute to the greater perceived as ethical, as part of which could be a slogan for cartels, is good and accord with the principles of a good corporate reputation and ‘if you can’t beat them, join them’. business ethics. Increasing the bottom good corporate governance. Ethical line by subverting this is properly conduct represents an investment Almost all the big bakeries in the condemned under the Competition in the company’s reputation whilst bread cartel joined hands to avoid Act. unethical conduct represents a coming off second best in active reputational risk to the company. competitive rivalry. It became a fact The awareness of the Act thus does In this context, cartel conduct that bread cartel members were driven lead to companies such as those in is properly condemned, and by unethical business interests, of the bread cartel risking their reputation firms ought to remember that a maximising ‘the bottom line’ ostensibly and investor confidence. It is therefore good reputation is built over for shareholders, at the expense of the responsibility of the Competition years but can be destroyed firms other stakeholders. Commission to sensitize stakeholders overnight. NOTES ______

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