COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 1 OF 21
Competition News, Edition 12, June 2003
IN THIS EDITION
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
OECD Peer Review
Competition Conference 2003
Restructuring the Electricity Supply Industry in SA
Assessing Code-share Markets in Aviation
Foreign Direct Investment (FDI) in Mergers and Acquisitions
Merger Cases
Implications for Commission Investigations
Commission Investigates the Private Healthcare Industry
The Carrot or the Stick? (Enforcement vs. Advocacy)
Contact Details
1
1. OECD Peer Review Finds Competition Authorities
'Impressive and Sophisticated'
For the first time, a global peer review panel has assessed South Africa's competition policy
institutions. In the peer review submitted by the Organisation for Economic Co-operation and
Development (OECD) Global Forum on Competition, its findings stated that "the competition
policy bodies are recognised in South Africa as notably competent and serious.” The
summary paragraph that follows is reviewed by competition authorities from around the world
- representing both developed and developing nations:
"South Africa aspires to a modern competition policy regime, to deal with the well-resourced
sophistication of much of the South African economy. Its new institutions, whose novelty
responds in large part to the post-1994 imperative for fundamental restructuring of
government institutions, have shown a confident capacity to deal with complex structural
issues in deciding dozens of merger cases. A legalistic business and government culture has
challenged these new bodies to prove their competence and tested their jurisdiction. Now
that the merger review process has been established, more attention should be paid to nonmerger matters and probably to advocacy as well. Resources are stretched, and there is a
critical need to improve the depth and strengthen the capacity of the professional staff."
Trade and Industry Minister, Alec Erwin, said he was particularly pleased with the outcome of
the survey. "In line with the objectives of NEPAD, to adopt and indeed surpass international
best practices and subject our institutions to the rigor of ongoing peer reviews, the
assessment by the OECD of our competition authorities against the most entrenched and
mature in the world was highly favourable and well timed." The Minister cited one comment
from the OECD in particular, which he believed accurately described the current arena: "They
(competition authorities) are striving to follow best practices from the experience of other
enforcement agencies around the world, knowing that is the measure being applied to them
by South Africa's legal and business communities."
The survey found that "To a surprising extent, competition policy in South Africa is merger
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 2 OF 21
policy. The decisions to date show that, in terms of substantive economic analysis and
sensitivity to policy context, merger review in South Africa is done at a high level of
sophistication...the range of issues the Tribunal and the Commission have addressed is
impressive, as is the economic sophistication of their approach. The decision-making
independence of the Commission and the Tribunal is well established and the new system of
pre-notification and control produces a stream of public decisions demonstrating quickly how
the law is making a difference."
The authorities are addressing several areas for improvement that were noted in the report.
The shortage of personnel in the Commission's Enforcement and Exemptions division, for
example, has been rectified with only two positions remaining to be filled. The Commission
has also stepped up its advocacy role and has been working with both parastatals and
government departments to help unravel anti-competitive practices, some of which flow from
government policies. The review is positive in that it vindicates the Government's decision to
review competition policy in South Africa and to put in place strong competition authorities.
"This shows - contrary to earlier domestic criticism - that our efforts and practices are in line
with those of competition authorities in the rest of the world," says Adv. Simelane,
Competition Commissioner.
The Commission has already concluded agreements in respect of concurrent jurisdiction with
other regulators and is increasingly focusing on enforcement and exemptions to improve
turnaround time for investigations. It has also spent considerable effort increasing the skillsbase and professionalism of our staff through training. The Commission is confident that its
attentions will continue to extend beyond that of merger review and is committed particularly
to educational and outreach programmes to various stakeholders.
The recommendations for policy options from the OECD are listed below:
1. Complete the agreements with other regulatory bodies providing for concurrent
jurisdiction, to ensure consistent application of competition policy in all sectors.
2. Improve handling and increase priority and resources for non-merger matters.
3. Bolster resources by accepting offers of third-party support.
4. Discourage abuse of the interim relief process.
5. Make more use of formal substantive guidelines.
6. Use economic resources of the Commission more effectively in advocacy settings.
The OECD Peer Review Report - 2003 can be viewed on the Commission's website at
www.compcom.co.za
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 3 OF 21
2. Competition Conference 2003
On the 6th of March the Commission and the Tribunal hosted the third Competition
Authorities Conference at the Hilton Hotel in Sandton. As in the past, the 2003 Conference
drew speakers from around the globe. As specialists in their respective fields they greatly
contributed to the insightful discussions that ensued. The theme of the conference was
"Competition and Development: promoting competition in a protected economy".
Stakeholders invited included practitioners, parastatals, regulators, trade unions, consumer
organisations, SMEs and selected others. One hundred and ninety five people attended the
conference. The speakers comprised international and local speakers, with a wealth of
experience on competition issues. Amongst the speakers was Mr. Michael Wise, an OECD
consultant, who spoke on the importance of peer review and its benefits. He also discussed
the recent South African competition authorities' peer review.
Mr. William Kovacic, the General Counsel of the Federal Trade Commission, USA (FTC) in
his talk entitled "Does Competition Law promote Economic Development?", asserted that
Competition Law does indeed promote economic development for many reasons. Some of
these are listed below.
A competition policy system:
 Can be an effective bridge to economic liberalisation, especially in a country such as
South Africa making the move from heavy state control towards one of less control.
 Can be a barrier to more intrusive regulation by acting as a political shock absorber; for
example preventing the introduction of more intrusive forms of control such as price
fixing.
 Promotes market entry by giving those with good business ideas a chance to test
those ideas in the market.
 Impedes the private exercise of market power through cartels.
 Discourages corruption by upsetting corrupt deals.
Mr. Kovacic said that analysis of data indicates that competition law reduces the vulnerability
to cartels, limits the acquisition of private market power and can work to curb public restraints
on rivalry. There is also evidence to suggest that well-designed competition policy promotes
market entry, reduces corruption (especially in public procurement markets), and has
desirable distributional consequences.
Answering the question on how the US economy would have unfolded if it hadn't introduced
competition policy in 1890, he said that a no-ban on cartels would mean that today America
would have had powerful, durable cartels with a profoundly negative impact on new entrants
to the market. Data suggests that without merger control policies there can be no growth. The
conference gave delegates a balanced overview on restructuring, privatisation and
competition considerations.
The presentations made at the conference can be viewed on the Competition
Commissions’ website at www.compcom.co.za under events/conferences.
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 4 OF 21
3. Restructuring the Electricity Supply Industry in SA:
Competition Considerations
The restructuring of Eskom forms part of a broader initiative by government to restructure its
four largest state-owned enterprises: Eskom, Telkom, Transnet and Denel. The electricity
industry plays a crucial role as a driver of economic growth. As such, policies around the
industry should send clear signals to investors and avoid some of the pitfalls witnessed
elsewhere in the recent past. This article gives an overview of the restructuring initiative in the
electricity supply industry (ESI) in South Africa, and some of the policy concerns around the
process.
Restructuring at the generation stage will involve the following:






Establishment of Eskom Generation as a wholly owned subsidiary of Eskom Holdings.
Eskom Generation will retain 70% of the market.
30% will go to private sector through bidding process.
- Private independent power producers will have 20% of the market.
- BEE to be allocated 10% of the market.
Eskom's 24 power stations will be grouped into a few competing clusters.
Generators (IPPs & Eskom Generation) will not be allowed to be involved in
transmission or distribution.
In order to ensure meaningful participation of the private sector in the electricity
market, Eskom might not be allowed to invest in new generation capacity in the
domestic market.
Reform at the transmission level in South Africa will involve setting up an independent stateowned transmission company, Transco. In the long term, Transco may be privately owned.
The rationale behind unbundling transmission from generation is to avoid discrimination and
other anti-competitive behaviour. A transmission owner who is also involved in generation has
an incentive to discriminate against other generators in terms of access to the grid. Such
discrimination can take various forms:





Setting high access prices for competitors.
An outright refusal of access to the grid.
Reserving transmission capacity for its own generation businesses.
Permitting unequal access to crucial technical information.
Cross-subsidising between regulated and unregulated activities where these were
previously jointly operated.
In order to facilitate wholesale competition, the establishment of a multi-market model (MMM)
has been proposed. Here, the various market participants (generators, traders and buyers)
will interact through a variety of mechanisms including bilateral agreements, futures markets,
day-ahead markets and real-time markets. The existing Eskom power pool (EPP) with some
modifications, is considered an appropriate basis for forming the MMM. However, this might
put Eskom's generation clusters at an advantage since they are already familiar with the
functioning of the power pool.
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 5 OF 21
Approximately 360 municipalities, Eskom and about 13 private distributors1 are currently
engaged in the business of distributing electricity in South Africa. Municipalities are required
by law to provide infrastructural services like roads, water and sanitation, health services, and
electricity. Since few municipalities generate their own power, the majority of them purchase
power from Eskom for resale to consumers within their boundaries. Amongst the
municipalities there are a small number of large distributors 2 and a large number of small
distributors. At the moment the sector is facing numerous difficulties that need immediate
attention if the reform process is to succeed. These relate to financial instability, the
inequitable treatment of customers and operational/management inefficiencies.
With regard to distribution, the EDI blue-print report3 recommends the establishment of a
holding company (EDI Holdings), with a 100% ownership by government, to which
municipalities and Eskom distribution will be transferred. These will form six regional
electricity distributors (REDs) who will be responsible for the distribution of electricity to
consumers within their respective boundaries. EDI Holdings will be mandated to consolidate
the fragmented and inefficient distribution industry and to oversee its restructuring.
EDI Holdings will be established for an initial period of six years after which its role will be
reviewed to determine whether it should continue, and if so what role it should fulfil. As a
starting point, large customers (consuming at least 100GWh of electricity per annum at a
single site)4 will be able to purchase power directly from generators of their own choice. In the
short term, smaller customers will remain captive under a particular RED, and hence will
require some form of regulatory protection through control over tariffs and quality of service. 5
Eventually, full retail competition should be possible where all customers, of all sizes, should
be able to choose their supplier.
Labour
South Africa's organised labour position on the restructuring of the electricity industry can be
summarised thus: "If it ain't broke, why fix it?" Eskom is seen as one of the most successful
utilities in the country, offering the best prices consumers can find in the world. There is
excess capacity to last at least another four years. Moreover, most of the poorer sections of
the country are now connected, and government's electrification programme targets continue
to be exceeded. According to organised labour, restructuring will compromise Eskom's
universal service obligations and cross-subsidisation across customers. Furthermore, the
introduction of competitors might trigger price increases in the sector and lead to job losses.
Government, in its policy development around the sector, is addressing the issues of
universal service and cross-subsidies.
Clark, A. 2001.Power sector reforms in South Africa: Plans and progress. www.energypublicbenefits.com
The 12 largest municipalities account for about 75% of total electricity sales by the sector
3 DME. 2001. Reform of the electricity distribution industry in South Africa: Strategy and blueprint. EDI Blueprint Report
4
http://www.ner.org.za/industry/industry_distribution.htm
5 Winkler, H & Mavhungu, J. 2001. Green power, public benefits and electricity industry restructuring. Energy and Development Research
Center, University of Cape Town.
1
2
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 6 OF 21
Municipalities
Municipalities are principally concerned that the restructuring initiative might impact negatively
on their financial viability. Most of them derive a substantial amount of revenue from electricity
sales. Distribution assets, liabilities, staff and systems will have to be transferred to the REDs
as consolidation of the distribution sector takes place. This will dry-up the income stream and
threaten their financial viability. The transfer of assets will also result in weaker credit ratings
for municipalities. In addition, some municipalities use the revenue from electricity sales to
cross-subsidise the provision of other services such as water and sanitation. According to the
recently published Electricity Distribution Industry Restructuring Bill, REDs will be subject to
the multi-jurisdictional ownership of the contributing municipalities. This should allay the
municipalities' fears and concerns.
Eskom
Eskom would prefer to maintain the status quo where it is the only player in the market.
Government differs with Eskom with regard to the timing and method of introducing
competition. Whilst the DME supports immediate restructuring and open competition, followed
by full privatisation, Eskom would prefer to view restructuring and partial privatisation as longterm goals. Eskom also sees itself as a champion of government's social upliftment through
its electrification programme. The mistaken view is that once competition is introduced,
universal service will die a natural death. This is not necessarily the case. Proper and
effective regulation should guard against this. In any event, universal service in the future
would be the mandate of the REDs, not Eskom. The EDI Restructuring Bill should therefore
address the question of compensating Eskom for its distribution assets.
Policy Issues and International Lessons
The proposed market structure will see Eskom retaining no more than 70% of the market,
with IPPs and BEE companies owning the remaining 30%. The industry will be oligopolistic
with one dominant firm and a few small players.
This structure immediately raises some concerns from a competition policy perspective.
Although the current Competition Act does not condemn concentrated market structures per
se, oligopolistic industries are notorious for stifling competition. Common anti-competitive
practices associated with structures where there is one dominant firm include the abuse of a
dominant position, price fixing, market sharing and excessive pricing. Lessons from
international experience indicate that getting the structure of the market right is the first and
most crucial step in restructuring the ESI. According to Binz and Frankena, 6 "If legislators do
not get market structures 'right' as current restructuring plans are being developed, it is
unlikely they will have an opportunity to go back and fix structural problems at a later date."
Eskom will still wield the majority of market power, which will insulate it from the threat of
competition. The 30% private sector participation is certainly not sufficient to provide an
antidote to abuse and does no justice to effective competition. Furthermore, there will be
institutional barriers to entry, preventing further entry by IPPs for a certain period of time. If
restructuring is to be done, it should be done properly; otherwise changing the status quo of
Binz , RJ & Frankena, MW. 1998. Addressing market power. The next step in electric restructuring. Competition Policy Institute. Policy
Paper.
6
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 7 OF 21
the industry will not fully achieve, the desired outcomes.
In order for the entry of new firms to have an impact on the conduct of the incumbent firm it
must be timely, likely and sufficient. It is questionable whether the entry of IPPs, which will
take up 30% of the market, will be timely, considering the current performance of shares in
the energy markets. Add to that the current regulatory and policy uncertainty surrounding the
ESI restructuring process, it must be contemplated that investors will need a little more
persuasion to commit their funds to the industry.
The second lesson from jurisdictions where ESI restructuring has succeeded, e.g. in the UK,
is the presence of two or more equal-sized competitors and a few small players to start with.
Here the market has been opened up gradually. This reinforces the viewpoint that effective
competition at the beginning of the process is paramount.
Thirdly, successful restructuring needs to be undertaken against the background of excess
generation capacity. This is done in order to contain price increases and enhance consumer
welfare. Excess capacity is running out in South Africa. The market system, as envisaged,
may still work, but it may not produce the desired benefits of lower prices for consumers.
Government has indicated that IPPs and not Eskom should install new generation capacity.
Considering the long lead-times needed for such investments, and the lack of interest by
private investors at this stage the only plausible option would be to put the generation of new
capacity up for tender. This would allow Eskom to participate without having to wait for an
emergency request to approach the company as 'supplier of last resort', when there is no
investment forthcoming.
A fourth observation from international experience is the presence of gas as a very close
substitute for electricity. South Africa has begun the exploration for gas in Mozambique and
Namibia. These efforts should be encouraged, as they will strengthen competition. The
viability of gas as an alternative source of energy will depend on its cost advantages relative
to coal.
In Conclusion
The ESI has undergone various reforms worldwide, some more successful than others. The
choice of a restructuring model depends on the specific characteristics of each country.
However, competition at the generation and retail stages is important if consumer welfare is to
be enhanced. Getting the structure of the markets right before introducing competition is also
crucial, as is taking cognisance of the international investment climate. Government should
look at the realities of the industry and employ a cautious approach by developing policies
that are clear and that send proper signals to investors. At the moment, however, the industry
is clouded with many uncertainties.
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 8 OF 21
4. Assessing Code-share Markets in Aviation
Over the past decade, code-sharing has shaped the international airline industry in a manner
similar to the transformation of domestic airline operations into hub-and-spoke networks after
deregulation. Airline code-sharing is a form of co-operation by which an airline sells tickets on
another airline's flight. In essence, code-sharing amounts to an operational merger on the
affected routes1, should they be serving the same routes.
Some economists have alleged that the airline industry is moving from the one extreme of
regulation and ownership, to another extreme of global consolidation - with little or no
exposure to competition in between2. On closer enquiry into the nature of the industry this is
understandable. Large economies of scale and scope prevail, which facilitate the formation of
consolidated but diversified structures such as code-share arrangements3. In addition, in
many countries bilateral agreements, designation rules, and foreign ownership restrictions
prevail, which means that "natural" consolidation (via mergers) in the airline industry is
hindered. Airline alliances, like code-sharing, are the partial and provisional answer to the
need for restructuring4.
Of all strategic alliances in the airline industry, code-sharing is the most common form of
collaboration5. Because of the competitive complexity of code-sharing, any market definition
analysis needs to be thoroughly defined because both supply and demand-side
considerations are at stake.
The supply-side
a) The routes concerned
When defining a relevant market in the airline industry the main consideration is the
applicable route or bundle of routes. Each point-of-origin / point-of-destination (O&D)
pair should constitute a relevant market, and should include the overlap of the direct
and indirect services:
 Between the two applicable airports;
 Between those airports whose respective catchment areas significantly overlap with
the catchment areas of the airports concerned; as well as
 The overlapping services where only one party operates direct flights.
Generally, indirect routes are not good substitutes for direct routes, especially over
short distances. With regard to longer routes, the degree of substitutability would
depend on flight times, frequencies, schedules and travel conditions.
b) Networks
Gurrea, S.D. (2001) Measuring the Competitive Effects of International Airline Code-sharing. Economists Incorporated, Fall 2001.
Economist, "One World, Few Airlines", 26 September 1998.
3 See the argument on economies of scale and scope on page 33: Directorate for Financial, Fiscal and Enterprise Affairs Committee on
Competition Law and Policy (2000) Airline Mergers and Alliances. OECD, Paris.
4 Stragier, J. (2001) Airline Alliances and Mergers - The Emerging Commission Policy. European Air Law Association, Zurich.
5 NZ Institute of Economic Research (2002) Air New Zealand - Singapore Airlines: Ownership Issues. Wellington.
1
2
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 9 OF 21
Airlines with large networks have a strong competitive advantage, especially on routes
connecting their hub airports.
As a result, in a deregulated market, competition
occurs between relatively dominant, regionally based airline networks 6. However, the
phenomenon of "network competition" does not replace the traditional approach to
market definition, i.e., that each city pair constitutes a distinct market. Still, the
consumer insists on a transport service between two points and, despite the evolution
of the supply-side, in the short term airlines are not readily able to market and operate
services between all transoceanic city-pairs without incurring significant additional
costs and risks. The possible impact of network competition on the definition of the
market is even less with respect to local air services7.
The demand-side
a) Airport substitution
The question arises whether flights from two airports belong to the same relevant
market. First, the answer depends on the number of passengers that live in the
catchment area of both airports. If sufficient passengers were present, airlines at both
airports would compete. Secondly, the services offered by the airports would play a
role as frequencies, schedule, connectivity and overall quality of airport service are
important to time-sensitive travellers.
b) Other transport services
The Commission must consider whether other transport services such as car, coach or
train, which in view of their physical and technical characteristics, are functionally
interchangeable with air transport services at a given price. This is especially important
in European countries where high-speed trains over medium distances offer viable
substitution possibilities8.
c) Time-sensitive and non time-sensitive passengers
Time-sensitive and non time-sensitive passengers must be distinguished from each
other, as time constraints could be an important factor in the choice among airlines. In
addition, other factors that influence the time-sensitive passenger's choice are
schedule, frequency, quality of service and overall travel comfort. Generally, the timesensitive passengers require the flexibility to change routes and flight times, and are
therefore willing to pay more.
The Potential Competition Consideration
In developed countries, aviation markets mostly consist of many competing airlines. However,
in many markets (for example African markets) potential competition is the most relevant
consideration. To be regarded as a potential entrant in the airline industry an entrant would
Directorate for Financial, Fiscal and Enterprise Affairs Committee on Competition Law and Policy (2000) Airline Mergers and Alliances.
OECD, Paris.
7 Stragier, J. (2001) Airline Alliances and Mergers. European Air Law Association, Zurich.
8 See British Airways/TAT (II), Case no. VI/M.806.
6
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 10 OF 21
need to show:
 An appropriate business plan;
 The amount of finance available for the business plan proposed;
 The airline experience of senior management;
 The airline's current airport presence;
 Steps towards securing aircraft;
 Steps towards obtaining an air operators certificate and an airline license from the
appropriate authorities;
 Steps towards obtaining access to a computer reservation system;
 Steps toward securing airport facilities (take-off and landing slots at peak times); and
 Steps towards establishing a sales network9, which would include frequent flyer
programme and corporate contracts10.
In addition, major airlines have transformed their route structure from a point-to-point network
to a "hub-and-spoke" network. Possible new entrants would therefore only consider entry if
the new service could be operated from their current hubs. In the process, the potential
entrant would also need to generate sufficient point-to-point and connecting traffic to allow
operation at the minimum efficient scale11. The question may arise whether an external
potential code-sharer is also a potential competitor. This may be the case, but under the
circumstances the alliance, and not the actual potential code-sharer, would be regarded as
the competitor.
Conclusion
When assessing code-share markets, a strict enforcement of antitrust restrictions towards
parallel alliances should be guarded against. Although some theoretical models predict higher
prices from co-operation among rivals on the same routes, empirical evidence has
demonstrated the beneficial effects of code-sharing on connecting flights (new entry creation,
consolidation and improvement of services and yields from economies of scale and scope). It
has failed to provide conclusive evidence supporting the hypothesis that parallel alliances
result in higher fares12.
Correspondence with Russell Phillips, ACCC.
Stragier, J. (2001). Airline Alliances and Mergers - The Emerging Commission Policy. European Air Law Association, Zurich.
11 Stragier, J (2001) Airline Alliances and Mergers - The Emerging Commission Policy. European Air Law Association, Zurich.
12 Gurrea, S.D. (2001) Measuring the Competitive Effects of International Airline Code-sharing. Economists Incorporated, Fall 2001.
9
10
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 11 OF 21
5. Foreign Direct Investment (FDI) in Mergers and Acquisitions
Competition policy and its contribution to the economy in terms of FDIs
The South African competition policy has a major role to play in the development of the South
African economy. Apart from looking at the effect that a merger will have on a particular
market or sector, the Act also considers certain public interest issues to be of importance.
These include employment, development of SMMEs, international competitiveness, black
economic empowerment and foreign direct investment (FDI). By guarding against
anticompetitive behaviour and ensuring that barriers to entry are minimised, the Competition
Act no 89 of 1998 induces foreign companies to penetrate and invest in the country's
economy. This is evident from the number of foreign companies that have entered the
country's markets in terms of mergers and acquisitions. Though competition policy seems to
be contributing to the development of the country's economy, as mentioned above, it is
important to note certain complicating factors associated with the FDI data as captured in the
Commission's database. Certain deals or mergers might be incorrectly captured as involving
FDI, for at least three reasons:
 First, where the acquisition is by a local subsidiary of a foreign parent, the transaction
is not always recorded as FDI, whereas strictly speaking it probably should be. There
may be no immediate inflow of forex if the local subsidiary does the acquiring, but that
overlooks the fact that the implication of the acquisition is that those funds are not
available as remittances to the foreign parent.
 Second, some transactions have complex payment arrangements: the acquiring firm
may agree to assume the target firm's obligations, in return for its shares. In some
cases, these obligations and other such arrangements might not have been explicitly
valued and included as FDI.
 Third, some transactions relate to acquiring a firm's worldwide interests, and the stated
purchase price as captured relates to the value of the whole group, of which the SA
subsidiary might only be a small part.
The table and pie graph below show the number of mergers involving foreign companies in
various sectors of the economy. It is clear that the manufacturing sector has had the most
transactions involving FDI.
Mergers & Acquisitions cases with Foreign Direct Investment
(April 2000-December 2002)
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 12 OF 21
Merger Cases and Foreign Direct Investments (FDIs)
(April 2000- December 2002)
From a sample of 769 cases filed with the Commission between April 2000 and December
2002, 109 (14%) involved foreign companies buying assets or investing in the country. 55
(50.5%) of the total cases were within the Manufacturing Sector; 14 (12,8%) were within the
Wholesale Sector; 10 (9,2%) in Retail Trade; 6 (5,5%) within Financial Services; 4 (3,7%) in
Transport, and Mining accounted for 4 (3,7%). Business Activities filed 10 cases, accounting
for 9,2% of the total cases and the Information Technology sector filed 2 cases, contributing
1,8% of the total number of cases filed. Other sectors, encompassing Telecommunications,
Electricity, Gas and Water, Construction and Real Estate accounted for 3,7% of the total FDI
cases handled by the Commission.
The above statistics reflect the relevance and contribution of competition policy in evaluating
the effect of FDI in mergers in the South African economy. By ensuring that markets are less
concentrated and not dominated by a few large firms, the policy provides an incentive for
foreign companies to invest, which ultimately benefits the country. With FDI supported by
numerous grants and incentives directed by the dti, the government hopes to benefit the
South African economy by attracting the right type of FDI.
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 13 OF 21
6. Merger Cases
Commission recommends unconditional approval for Tiger Brands-Enterprise Foods
merger
The Commission has referred a large merger between Tiger Brands Ltd. and Enterprise
Foods (Pty) Ltd. to the Competition Tribunal, recommending that the proposed merger be
approved unconditionally.
Tiger Brands already holds a 50% shareholding in Enterprise Foods (Pty) Ltd. The transaction
will allow Tiger Brands to acquire the remaining issued ordinary share capital of Enterprise
Foods from Foodcorp (Pty) Ltd. Foodcorp told the Commission that it is seeking to exit its
non-core business ventures.
The Commission found that there was no relevant product market overlap between the
parties. The Tiger Brands Group is involved in a diverse range of businesses and branded
consumer products. Enterprise Foods (Pty) Ltd. manufactures chilled processed meat and
canned meat products. However, the Commission was of the view that the change from joint
to sole control does strengthen the vertical integration (up or down the supply chain) between
Tiger Brands, Enterprise and SPAR, which is a subsidiary of Tiger Brands.
Nevertheless, the Commission believes that this will not give rise to customer and competitor
foreclosure - the kind of anti-competitive behaviour that may result from vertical mergers,
which can limit consumer choice or competitors' ability to distribute products or services and
will therefore not negatively affect the competitive landscape.
There were also no significant public interest issues.
Commission recommends unconditional approval of Kulungile Metals and Abkins
Steel merger
The Commission has referred a large merger between Kulungile Metals (Pty) Ltd. (Kulungile)
and Abkins Steel Corporation (Pty) Ltd. (ASC) and Abkins Steel Services (Pty) Ltd. (Steel
Services) to the Competition Tribunal, recommending that the proposed merger be approved
unconditionally. Kulungile proposes to acquire the steel merchandising businesses of the
target firms.
Kulungile consists of two divisions namely Baldwins Steel, which trades in carbon steel
products and Stalcor, which trades in stainless steel and aluminium products. ASC and Steel
Services on the other hand only deal in carbon steel products.
The proposed transaction was initially filed as an intermediate merger because the ABSA
Group jointly controls both the ultimate parent companies of the target, and the acquiring
firms. The merger was subsequently re-filed as a large merger, necessitating referral to the
Tribunal.
The Commission had identified a product overlap in five markets. Whereas the identified
markets are concentrated, the change in concentration levels are not substantial and
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 14 OF 21
customers and competitors of the primary acquiring firm have indicated that they have no
objection to the proposed transaction. Furthermore, no significant public interest concerns
arise from the merger.
The Commission believes the proposed transaction will not substantially prevent or lessen
competition in any of the identified markets, and have recommended to the Tribunal that the
transaction be unconditionally approved.
The parties' rationale for the proposed transaction is that the growth prospects of the target
firms are dependent on their stock availability. The transaction is aimed at increasing the
stock breadth and depth of Kulungile to provide clients with a desired "one-stop shopping"
facility. Kulungile believes this will enable it to compete more effectively with its main
competitors.
Unconditional merger approval recommended for Daun-Kolosus transaction
The Commission has referred the large merger between Daun Et Cie AG and Kolosus
Holdings Ltd., recommending approval with no conditions.
The merging parties are active in the animal hide and skins industries. The majority of hides
in the country are directed to the automotive industry (leather car seats). Both parties are
major players in the procurement and sale of processed leather ("wet-blues") used in the
manufacturing of car seats.
Daun will be acquiring control of Kolosus. While the structure of the industry did not, in the
end, raise significant competition concerns from this acquisition, the transaction did require
that horizontal, vertical and public interest issues be assessed.
The merged entity will become the dominant player in the procurement of rawhides and the
sale of automotive wet-blues. However, local demand for wet-blues exceeds supply by a wide
margin because of the Motor Industry Development Programme established by the
Department of Trade and Industry to reward manufacturers for using local content. As a result
of the local demand, suppliers set prices at import parity levels. Therefore, the Commission
believes the merger would not cause the parties to obtain market power they don't already
have. (Import parity pricing reflects a price level that cannot be increased without causing
buyers to import rather than procure locally.)
The Commission concluded that because the majority of skins bought in South Africa are
exported, the merger would not harm the consumer.
The Commission and the Competition Tribunal have considered various mergers that raised
issues of vertical integration. The possible concerns raised by vertical mergers include:



Raising rival costs by means of either input or customer foreclosure;
Ability to promote co-ordinated conduct between competitors;
Ability of a vertically integrated firm to evade price regulation.
In this transaction, vertical integration relates mainly to input foreclosure (or the ability to put
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 15 OF 21
competitors out of business) in the automotive tanning market. Because imports are an
alternative to local wet-blues, however, the risk of input foreclosure is negated.
The merger will most likely lead to some retrenchments, however it is the Commission's view
that those job losses (approximately 150) envisaged by the parties are not unreasonable. The
Commission decided that the proposed loss of employment does not justify prohibiting the
transaction. However, some of the affected trade unions (SAFATU and SACTWU) have
signalled that they would like to address the Competition Tribunal more fully on this point
during the Tribunal hearing.
Imposition of penalties shows how breaches of Competition Act have consequences
Imposition of penalties shows how breaches of Competition Act have consequences.
The Commission welcomed the Competition Tribunal's rulings in finding both Dorbyl and
Edcon guilty of contravening the compulsory Competition Act merger notification
requirements.
The Commission hopes that the guilty verdicts send a message to businesses that breaches
of the Act will not be tolerated. The Commission sought to impose administrative penalties on
Edcon and Dorbyl because they proceeded to implement mergers without the prior approval
of the Commission as required by the Act. The maximum penalty allowed by the Act is 10% of
a firm's turnover.
In the Edcon matter, the Tribunal agreed with the Commission's submission that the
acquisition of RAG's debtor's book was the acquisition of an asset, giving Edcon control of
part of that business, and therefore amounting to a merger about which the Commission
should have been notified. However, the Tribunal found that Edcon's failure to notify was a
procedural rather than substantive violation of the Act, and set the penalty at R250 000.
Edcon could have been fined up to R85 552 610.
In the Dorbyl merger matter, the Tribunal issued a symbolic penalty to the amount of R1.00
because while Dorbyl was in breach of the law, their non-compliance was the result of a bona
fide mistake. When Dorbyl realised that they had made a mistake they requested an advisory
opinion on the notification from the Commission's Compliance Division and they subsequently
notified the Commission of the merger, which was later approved.
The Commission was however not satisfied with the low fines. In its view, the Tribunal's
decisions leave the door open for firms to weigh up the financial benefits of implementing
transactions prior to notification as it appears that late filing with the Commission will not
attract adequate penalties.
In terms of the Competition Act, the Commission cannot appeal the Tribunal's decisions, but it
has vowed to continue vigorously prosecuting parties that implement merger transactions
without notifying.
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 16 OF 21
Coca-Cola / Appletiser merger approved unconditionally
The Commission evaluated the acquisition by The Coca-Cola Company of the Just Juice
trademarks, intellectual property rights and formulae from SABMiller Finance B.V. as well as
the Valpré trademarks, intellectual property rights and formulae from Appletiser South Africa
(Proprietary) Limited.
The Commission received a number of complaints from industry participants.
The complaints were:




That The Coca-Cola Company would acquire market power in the bottled water
market;
That the acquisition would increase barriers to entry and limit expansion opportunities
for other players;
That the transaction would have portfolio effects that would enable The Coca Cola
Company to unduly strengthen its position in the so-called "new age" beverage market
and;
That the transaction would increase the ability of industry participants to co-ordinate
activity in the bottled water market.
The Commission found that the transaction would not substantially prevent or lessen
competition in the bottled water or fruit juice markets in South Africa. The Coca-Cola
Company will, post merger, not be able to act independently from its customers and
competitors in the bottled water and fruit juice markets. The Commission is of the view that
the bottled water market is characterised by low barriers to entry. Either new entry into the
market or the expansion of the activities of present players will counter any move by The
Coca-Cola Company to increase prices above competitive levels. Furthermore, The CocaCola Company is a relatively small player in the fruit juice market where it faces significant
competition from other players.
With respect to The Coca-Cola Company's distribution network, and the competitive
advantage that it derives from it, the Commission is of the view that an efficient system
accompanied by low barriers to entry in the relevant market is to the advantage of consumers
in South Africa. The transaction will also not affect the distribution channels of the acquired
products as, post merger, the status quo will be maintained. Furthermore, the transaction
does not raise significant public interest concerns.
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 17 OF 21
7. Precedent on the Interpretation and Application of the Competition Act:
Implications for Commission investigations
The Competition Act is very new when compared to competition law within the United States
or European Union. Precedent on the Competition Act in South Africa is therefore still being
established, which in turn leads to longer periods of time required to finalise investigations.
Over the last six months however, various courts have addressed and interpreted a number
of provisions of the Act, and have given guidance to the Commission on their interpretation
and application to the investigations. This article provides a brief overview of some of these
precedents. It focuses on those that have had an impact on the manner in which the
Commission conducts its investigations.
Multiple Extensions of the Period of Investigations
The question as to whether the Commission is entitled to extend an investigation more than
once was the subject, inter alia, of a matter before the Competition Tribunal.
Sappi Fine Papers (Pty) Ltd. filed an exception application with the Tribunal in which it argued
that the complaint had lapsed before referral to the Tribunal, and that the Commission was
not entitled to multiple extensions from the complainant. The Tribunal ruled that there is
nothing in the express wording of the text of Section 50 of the Act to preclude multiple
extensions of an investigation. In order to be valid however, the extensions must have been
granted before the expiry of the previous period. There is no suggestion that the chain of
extensions in this case had been interrupted by a period for which a prior consent had not
been granted.
The Commission's Role and Constitutional Responsibilities
In the matter of Menzi Simelane and Seven-Eleven the Commission's role and constitutional
responsibilities were dealt with in detail.
Seven-Eleven's complaints were the following:
1. The referral by the Commission constituted an administrative decision affecting SevenEleven's rights, and as such is subject to review.
2. The Commission acted on a "hotch-potch" of complaints without investigating whether
there was substance to them.
3. The Commission must observe the audi alteram partem rule and failed to do so.
4. The persons making the decisions were biased and motivated by malice.
5. Further, they were moved by an ulterior purpose.
With regard to point 1 above, Seven-Eleven was of the view that the Commission's functions
were determinative, rather than investigative only. The Supreme Court of Appeal of South
Africa concluded that the functions of the Commission were of a preliminary investigative
nature (like the police services), and therefore not subject to constitutional challenge in
respect of a right to a hearing. In the main, the Supreme
Court of Appeal held that:
COMPETITION NEWS, EDITION 12, JUNE 2003
-
-
PAGE 18 OF 21
The Commission did not, in general, have to apply rules of natural justice, as its
findings were of a preliminary investigative nature. The Tribunal would have to apply
rules of natural justice, as its findings were determinative/adjudicative;
The functions of the Commission would be subject to review only in cases of ill-faith,
oppression, vexation or the like.
The major impact of this decision is that it defined and circumscribed the role of the
Commission. It found that the Commission's powers are only investigative, and therefore do
not affect the parties in any final or determinative way. In cases that are referred to the
Tribunal, the Tribunal has the final say. In cases that are not referred, the Complainant may
take the case to the Tribunal itself, if it disagrees with the Commission's decision. Hence the
Commission does not have the same extensive responsibilities to hear the parties as e.g.
judicial bodies. This means that the Commission can speed up its investigations and not be
hamstrung, as in the past, with challenges relating to administrative fairness and parties
insisting constantly during the investigation to be heard on every investigative step and
decision, thus delaying the finalisation of investigations.
Search and Seizure Powers of CCSA
In the matter of Pretoria Portland Cement vs. Menzi Simelane & Others, the Commissioner
was taken to the Supreme Court of Appeals (SCA) by Pretoria Portland Cement for the
manner in which a search and seizure warrant was executed. The SCA stated that the
Commission had abused the execution of its warrant by calling the media at the time, which
was not part of the order granted by the Court, and that it amounted to an infringement of the
right to privacy. Also, the SCA stated that the warrant was imprecise and overbroad, and that
a warrant should be tailored for the occasion, and not simply taken from stock. Parties also
have a right to look at the warrant and the affidavit used to obtain the warrant. In accordance
with the audi alteram partem the Commission has the obligation to inform parties of the case
it has to meet. An unlawful execution will not, by itself, inevitably taint a warrant that is itself
regular. However, it appears that mainly for the reason of failing to honour the Constitution
(right to fair hearing and privacy etc.), the process was set aside.
Investigative Scope of the Commission
In the matter of the National Association of Pharmaceutical Wholesalers & Others, the
Competition Appeal Court (CAC) determined that the Commission was not limited to
investigating only those allegations that have been identified by the Complainant in the
Complaint Referral. The CAC decision appears to allow investigators to go beyond the mere
contents of the CC1, once the investigator has satisfied himself or herself as to the nature of
the complaint. This proposition finds authority in the CAC obiter dicta "The complainant need
not identify the complainant with reference to the sections of the Act".
One implication of this decision is that should it be discovered through investigation that the
respondent has possibly contravened a section of the Act not referred to by the complainant
in its initial filing with the Commission (i.e. in the CC1 form), there is nothing stopping the
Commission from further investigating, and possibly bringing a case against the respondent to
the Competition Tribunal.
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 19 OF 21
8. Commission Investigates the Private Healthcare Industry
The Commission instituted an investigation against the Board of Healthcare Funders (BHF),
the South African Medical Association (SAMA) and the Hospital Association of South Africa
(HASA).
These associations are comprised of members that sometimes compete with each other.
They then set and publish tariffs to be paid for healthcare services provided for by their
members. This is related to price fixing, which is prohibited in the Competition Act. The
Commission is concerned that the conduct of these associations may amount to a
contravention of the Competition Act of 1998 (the Act). The Commission's investigation into
this sector is continuing.
For many people "competition policy" is a complicated and remote concept, best left to
lawyers and economists. Many think it doesn't affect the person on the street, but it does.
Competition means value, lower prices and, most importantly, choice for consumers. It also
means competitiveness for South African industries, including the private health care sector.
The process for negotiating tariffs for private healthcare looks much like this: BHF (an
association of private hospitals) sets and publishes recommended tariffs according to which
medical schemes are prepared to reimburse a service provider in the event that a medical aid
member consults a doctor or is hospitalised.
On the other hand SAMA recommends tariffs or fees according to which doctors in private
practice may charge a consumer for medical services. This implies that individual doctors,
who would under ordinary circumstances compete for customers on the basis of fees, may be
encouraged to align their fees with those recommended by SAMA.
HASA also recommends tariffs according to which private hospitals may charge a consumer
or a medical scheme for hospital services rendered to a member. Furthermore, these
institutions may bargain as a collective in an attempt to get better deals from each other.
The effect of recommending tariffs and fees may result in the lessening of price competition,
as may negotiating as a collective. Ideally, as in any service industry, each doctor should
independently decide what fee to charge for their services, and each medical scheme should
individually decide how much it is prepared to pay for services received by its members.
Competition is a simple and efficient means of guaranteeing consumers services of excellent
quality at lower prices, because the best deal for consumers only emerges as a result of a
contest between service providers.
The system of recommending tariffs may have the effect that all or a substantial number of
service providers in a given market charge relatively the same price. In such a scenario the
consumer has no choice, being unable to choose a service provider on the grounds of lower
price because, speaking relatively, everybody is charging the same amount.
The Commission has a responsibility to ensure wider consumer choice, technological
innovation and effective price competition; thereby contributing to both consumer welfare and
the competitiveness of industry in general. This is achieved by ensuring that companies
compete rather than collude, that big companies do not abuse their market power and that
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 20 OF 21
efficiencies are passed on to final consumers. The Act entrusts the Commission with the
responsibility of promoting and maintaining competition in South Africa and in prohibiting anticompetitive practices.
The Commission has the power to prohibit agreements that fix a purchase or a selling price
and may impose fines on the offending firms. The Commission itself may initiate
investigations into the behaviour of certain companies or into specific market sectors when it
suspects possible restrictions of competition. Complaints from competitors or customers of
the companies involved or of consumer groups can play a role in bringing such competition
problems to the attention of the Commission.
9. The Carrot or the Stick?
Enforcement vs. Advocacy
In discouraging anti-competitive behaviour in the economy the Commission needs to
constantly decide which of the two tools at its disposal to use: the carrot (advocacy) or the
stick (enforcement).
The choice of which tool to use is somewhat determined according to the structural
entrenchment of activities, which either contravene the Competition Act of 1998 directly or
result in anti-competitive business practices.
In the public sector in particular, the Commission believes that anti-competitive practices
which are as a result of government decisions or policy, are often best unravelled with
advocacy.
An example of advocacy by the Commission is in the transport sector. Provincial authorities
require that a specific reflective material be used in the number plates for motor cars. Only
one company in South Africa currently has a patent to manufacture this material and therefore
has a monopoly with respect to its supply. The Commission is investigating whether the
patent for this material is expired and how difficult it would be for other businesses to enter
the market as competitors, or to obtain licenses if the patent is still in force. Alternatively, the
Commission may recommend that the requirement be scrapped in order to remove the anticompetitive effect it has.
The Commission can also make submissions to government departments when laws are
being drafted, or make presentations to portfolio committees later in the process, should it
determine that a law or regulation permits anti-competitive behaviour.
In the private sector the Commission can encourage compliance with the Act in advance of a
merger or an acquisition by offering a non-binding advisory opinion as to whether the
corporate activity is notifiable.
The advisory opinion differs from the American approach, where the authorities are happy to
ask a company to unbundle its acquisition after the fact, if it is found to have anti-competitive
effects.
Furthermore, when investigating the effects of a merger or acquisition that has been notified,
COMPETITION NEWS, EDITION 12, JUNE 2003
PAGE 21 OF 21
rather than prevent the activity, the Commission can recommend approval with conditions.
These conditions can be either structural or behavioural, but would promote competition and
allow the bulk of the transaction to occur.
Enforcement (the stick) is the Commission's tool of choice where there has been a clear
contravention of the Act. The Commission will conduct an investigation of the contravention
with a view to referring and prosecuting.
In only three instances has the Commission recommended that a business be fined for failing
to notify the Commission of a merger (either the size of the merger fell within the threshold for
notification, or the transaction led to a change of control).
As a law enforcement authority, the Commission's mandate is to help ensure economic
transformation in South Africa. Encouraging competitive behaviour will not only benefit
consumers, but allows small businesses to grow and compete, as well as affording historically
disadvantaged South Africans a foothold in the economy and an experience of real
empowerment.
10. Where to get hold of us
Visit the Competition Commission online at www.compcom.co.za for more information about
the Commission and the Act, as well as rules and amendments to the Act. You may also
forward enquiries, comments and letters to:
THE EDITOR
Compliance Division
Private Bag X23
Lynnwood Ridge
0040
E-mail: CCSA@compcom.co.za
Tel: (012) 482 9000
Fax: (012) 482 9003
Competition News is issued quarterly and if you would like to receive future copies, please
forward your particulars to enable us to add your details to the distribution list.
© Please note that the information contained in this document represents the views of the authors and does not necessarily constitute the
policy or the views of the Competition Commission. Any unauthorised reproduction thereof will constitute copyright infringement. Persons
interested in this information should not base their decisions thereon without obtaining prior professional advice.