REGIONAL TRAINING WORKSHOP ON COMETITION POLICY AND LAW
15-17 FEBRUARY, 2007
PRETORIA, SOUTH AFRICA
DEALING WITH HORIZONTAL RESTRAINTS
Definition of restraints of trade
The term restraint of trade may be loosely defined as an act/practice by one or
more persons which is intended to or whose effect is likely to eliminate existing
business enterprises and/or prevent potential newcomers into a market. These
restraints may be perpetrated by one enterprise or by two or more enterprises,
which may be vertically or horizontally related, acting concertedly.
Restraints of trade attributable to firms which are horizontally related (i.e.
agreements between producers or between wholesalers or between retailers
dealing in similar kinds of products), are therefore referred to as horizontal
restraints of trade. Vertical agreements are those between enterprises at different
stages of manufacturing and distribution process, for example, between
producers and wholesalers, or between producers, wholesalers and retailers.
Horizontal restraints of trade - that is, concerted actions among entities in actual
or potential competition with one another - have been considered the most
egregious violation of competition laws of many countries. The basic reason for
this is that competition laws postulate a competitive marketplace in which rival
firms compete with respect to prices, products, and services. Any arrangement
which runs counter to this axiomatic conduct among competitive entities is
accordingly suspect
Practices like horizontal price-fixing (whether selling or purchase price, or, other
trading conditions) collusive tendering, Market sharing agreements (customer or
territory allocation), collective boycotts are universally condemned. This is mainly
because efficiency, technological or other gains associated with such
arrangements rarely more than offset jeopardy to competition. Hence, they fall
under perse prohibition in many competition law jurisdictions. Other types of
horizontal cooperative arrangements and joint ventures are always examined on
a case-by-case basis because of the high probabily that such arrangements may
spawn gains that outweigh endangered competition.
Horizontal agreements or arrangements may be oral or written, formal or
informal and may not be intended to be legally binding. Where arrangements are
in writing, there can be no legal controversy on their existence, although there
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might be contest about the meaning. However, enterprises always desist from
entering into written agreements especially in jurisdictions where they are
prohibited. Even in circumstances where they enter into written arrangement,
they always do it in a highly discreet manner and all efforts are put in place to
ensure that such physical evidence are kept where laying hands on them is
extremely difficult.
Because of the difficulty in getting the physical evidence of such agreements,
many competition jurisdictions determine such cases basically on circumstantial
evidence which involves monitoring and analysis of different parameters
SANCTIONS
The principal purpose of sanctions in horizontal restraint, just like in any other
restraint of trade, is deterrence. An effective deterrent should take away the
prospect if gain from anticompetitive arrangements among competitors. The
laws of many countries provide for the possibility of large fines against
enterprises found to have participated in a cartel. Maximum permissible fines
may be expressed either as a specific monetary amount (Australia, Kenya and
Canada) or as a percentage of some measure of turnover (France, European
Union, Hungary, Italy etc), or, both (Finland UK, Sweden etc)
Countries like Canada, Australia, Germany, Japan, among others, impose fines
against officers holding positions in enterprises for their role in the cartel. Fewer
countries provide for criminal sanction of imprisonment for natural persons.
Examples include Canada (5 years), Germany (5 years for collusive tendering),
Ireland (2years) and United States (3 years). In some countries it possible for
victims of cartel activity to recover for their monetary loss, either in the course of
the enforcement proceeding by the competition authority or separately in civil
action. Examples include, Australia, Canada, Germany, Denmark and Finland.
Because of the difficulty in obtaining reliable evidence that can sustain successful
litigation, some competition agencies have resorted to the use of leniency
programs to induce cartel members to confess and volunteer such information
that can implicate co-conspirators. Leniency could mean any reduction in the
penalty compared to what would be sought in the absence of full, voluntary cooperation. The clearest, most complete form of leniency is amnesty.
DEALING WITH HORIZOBNTAL RESTRAINTS IN KENYA
Sections 6,7,11 and 12 of the Restricive Trade Practices, Monopolies and Price
Control Act (Cap. 504 of the laws of Kenya) prohibit both vertical and horizontal
restraints of trade. Examples of horizontal restraints of trade prohibited are pricefixing (by manufacturers/purchasers or trade associations), territory/market
allocation, restriction of output/supply of goods, collusive tendering and collusive
bidding)
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Complaints can be submitted by offended parties, other government agencies or
can be taken cognizance of by the Commission itself. The following are
examples trade restraints case handled by the Commission which are horizontal
in nature;
CASE 1
THE COMMISSIONER OF MONOPOLIES
ASSOCIATION OF KENYA INSURERS (AKI)
AND
PRICES
AND
THE
Introduction
The Association of Kenya Insurers (AKI) is one of the strongest industry
associations in Kenya in terms of financial might and membership. In fact the
association has 100% membership of insurance companies operating in Kenya.
This case addresses two main issues relating to (1) the problem created by a
powerful trade association in the insurance industry in Kenya and (2) the problem
where there is a sector regulator in the particular industry being investigated by
the Competition Authority.
The Kenya Transport Association wrote to the Monopolies and Prices
Commission on 25th January, 2003 and reported that AKI was engaging in cartel
like activities by setting minimum premium rates for various categories of
insurance covers as well as terms and benefits that would apply to all motor
policies issued or renewed from 1st July, 2002. This had resulted in a major
increase in premiums. AKI went ahead to issue threats of disciplinary action
against all non-compliant members.
This practice in the insurance industry caused uproar with insurance brokers and
players in the transport industry protesting. At one time, all matatus (minibuses
used by majority of citizens as public passenger transport in Kenya) threatened
to remove their vehicles from the Kenyan roads. The Association of Kenya
Insurers called a meeting and started negotiating with the Matatu Welfare
Association quietly regarding reduction of the fixed prices.
Investigations
The Commission managed to get a copy of the AKI Motor Rating Schedule dated
4th June 2002, which sets rates, terms and benefits to apply to all motor policies
issued after 1st July 2002. The Commission also obtained a copy of AKI
Resolution 07/2002 whereby it was resolved and agreed that other
supplementary rates would apply with effect from 1 st January 2003. This
contravened the Restrictive Trade Practices, Monopolies and Price Control Act
section 7(1)(b)(i) and (ii). The allegations impinging upon AKI was that:
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1. AKI had been making, directly or indirectly recommendation to their
members, which relates to the prices charged or to be charged by their
members.
On 7th February 2003 the Monopolies and Prices Commission wrote to AKI in
accordance with section 15 of Restrictive Trade Practices, Monopolies and Price
Control Act, Cap 504 of the laws of Kenya, informing them that allegations had
been made and that specific evidence had been presented to substantiate the
allegations. Hence AKI was required to comment on the allegation and indicate
the remedies they proposed to undertake to bring their trade practices into
conformity with the Act within a fortnight.
On 19th February, 2003, AKI replied to the Commission claiming that their actions
were exempted under section 5 of the Insurance Act, that allows the
Commissioner of Insurance to approve tariffs and rates of insurance in respect to
any class or classes of insurance and section 5 of the Restrictive Trade
Practices, Monopolies and Price Control Act, that exempts trade practices that
are associated with government agencies with authority conferred on them by an
Act of parliament. AKI considered both Commissions to be agencies of the
government and as a matter of fact, both fall under the Ministry of Finance. They
claimed that the review of premiums was necessary to protect the consumer and
not the insurance firms and to guarantee sustainable solvency of the companies,
which in turn would enhance the protection of the policyholder who is the
consumer. AKI also provided a letter dated 20th August 2001, in which the
Commissioner of Insurance had requested AKI to come up with premium
guidelines. AKI took advantage of the innocent requests to justify and to practice
price fixing.
The Monopolies and Prices Commission did not agree with AKI that when fixing
prices or when recommending prices their Association was exempt from the
application of Restrictive Trade Practices, Monopolies and Price Control Act.
Therefore on 5th March 2003, the Monopolies and Prices Commission wrote to
AKI inviting them to come, negotiate and sign a satisfactory Consent Agreement
in accordance to section 15(3) of the Act, and the date was set to be 25 th March,
2003. The Commission of Insurance was also invited as a witness.
On 23rd April 2003, a Consent Agreement was signed between the
Commissioner of Monopolies and Price Commission and the Association of
Kenya Insurers in the presence of the Commissioner of Insurance. The Consent
Agreement stipulated the following:
1. That the Association of Kenya Insurers undertakes to withdraw, with
immediate effect, all its present and past decisions on premium rates
which purport to recommend prices chargeable for insurance services by
its members. The Association of Kenya Insurers also undertakes to desist
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from making such decisions and from issuing such premium rates
recommendations in future.
2. That the Association of Kenya Insurers undertakes to observe, with effect
from the date of this Consent Agreement, all the provisions of the
Restrictive Trade Practice, Monopolies and Price Control Act.
3. That the Association of Kenya Insurers will diligently and strictly observe
the terms of this Consent Agreement in order to compensate for the past
effects of the said past decisions.
On 23rd April 2003, Monopolies and Prices Commission caused the Consent
Agreement to be published in the Kenya Gazette in accordance with Section
15(4) of Restrictive Trade Practices, Monopolies and Price Control Act, Cap 504.
In spite of the Consent Agreement, where AKI was required to desist from
recommending the premium rates for all classes of insurance services, the
Commission continued to receive complaints from consumers of mega risks,
suggesting that AKI had only withdrawn premium rate-fixing of motor vehicles.
This action led to the making of an Order by the Minister in accordance to section
16 of Restrictive Trade Practices, Monopolies and Price Control Act, Cap 504, in
the year 2005 on the advise of the Commissioner for Monopolies and Prices.
CASE 2
COMMISSIONER AND CYBER CAFE OPERATORS ASSOCIATION OF
KENYA
Introduction
When the first generation of Internet Service Providers (ISPs) entered the
Kenyan market in the mid 90’s, their facilities were reserved for the elite who
could afford the exorbitant user fees. However, with the expansion and
liberalization of the sector, more service providers entered the market thus
drastically reducing the margins previously enjoyed by the operators. In a bid to
rescue themselves from the inevitable reduced margins, the cyber cafe
proprietors decided to form a price fixing cartel under their umbrella organization
called Cyber Cafe Operators Association of Kenya. The other reasons cited for
the formation of the Cyber Operators Association was the lack of regulation by
the sector regulator, Communication Commission of Kenya (CCK).
They decided to raise the prices by about 300% which was reported in one of the
daily newspapers. The action also drew strong condemnation from a consumer
welfare body, the Consumer Information Network (CIN), who having taken
cognizance of the matter in the press, wrote to Monopolies and Prices
Commission. CIN was of the view that the cyber operators wanted to take
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advantage of the increasing internet users who had no access to computers or
who had no alternative mode of communication such as the telephone. The
consumer body stated that Information and Communication Technology (ICT)
had become an increasingly critical tool in information transfer and it would be
unjustifiable for the operators to drastically increase the user fees without proper
reasons.
The Commission took up the case on behalf of millions of actual and potential
consumers of internet services who would be affected by the decision of the
cyber cafe operators to jointly increase internet access charges by 300%. As in
the previous case, the practices of this Association violates the Restrictive Trade
Practices, Monopolies and Price Control Act, section 7, which outlaws concerted
practices of traders who engage in fixing prices charged or to be
recommendation of prices and other terms of trade by trade associations.
Investigations
The first step in the investigations of this case was to try and locate offices of the
association and its officials. As soon as that was established, a letter was
dispatched to them highlighting the illegality of their intended trade practice. They
were required to comment on the allegations made in the press and by CIN.
They were also required to submit, from the State Law Office (Registrar’s Office),
a list of their membership, and their Articles of Association together with minutes
of the meeting that endorsed the increment of user fees for purposes of verifying
the press report. Further investigations revealed that the Cyber Cafe Association
had not been officially registered.
The operators however denied engaging in the indicated malpractice and blamed
the press for quoting them out of context. They said their meetings only
discussed ways of enhancing their services to the consumers within the
parameters of the Law and with this they sought to have a meeting with the
Commissioner of Monopolies and Prices to explain the reasons for their
existence and activities.
Later on, in a memorandum sent to CCK by the operators, a copy of which was
availed to the Commission, the association tried to justify the increment of user
fees. They claimed that user fees had tremendously dropped from a high of thirty
(30) shillings to a low of fifty (50) cents per minute. According to the operators,
this had been prompted by large cyber cafe operators who wanted to drive
potential entrants and small-scale cyber operators from doing the same
business. The operators further intimated that some of the cafes charging
‘unusually’ low user fees had very low speed computers contrary to what they
had advised their members to install. This meant that the consumers were
spending a longer time before accessing the internet and so ended up paying
more for less. So fixing user fees would in a way serve the consumers interest by
protecting them from such unscrupulous businessmen as they awaited the
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intervention of the sector regulator. The three (3) shilling fee was deemed to be
ideal as it would not only stem price wars amongst the operators but be also
adequate to cover all operation overheads of the cyber cafe operators. The
Monopolies and Prices Commission and CCK dismissed this argument.
Conclusion
CCK informed the Cyber Cafe Operators Association that their trade practice did
not only violate the Restrictive Trade Practices, Monopolies and Price Control
Act, but also the Kenya Communication Act that prohibits business conduct that
is anti competitive. It further ordered all cyber operators to register with them for
a one- time fee of one thousand (1000) shillings. Though these directives were
communicated to the Association it was apparent from the market that some
operators had already hiked their fees to 3 shillings.
In the end, the market achieved stability and the user fees at some outlets went
down to one (1) shilling per minute just as it had been the case prior to the 300%
increase. The decline in user fee was also attributed to the fact that the
Association had not been registered and not all operators were members at the
time. The Monopolies and Prices Commission continued to monitor the market.
Group Case Work
This is a case of a presumed cartel among the major players in the petroleum
industry. The complaints have been triggered by: (1) the supposedly high prices
of the petroleum products in Kenya, (2) similarity in the pump prices of different
oil companies and, (3) the simultaneous upward changes in such prices almost
by the same margin.
This tendency caused concern with in Kenya’s Competition agency and a lot of
outcry in the country. It was even discussed in parliament where they strongly
condemned the existence of cartel by the multinationals in Kenya.
Note: 1. The petroleum market in Kenya is largely oligopolistic despite the
incorporation of numerous small independent oil companies. The major oil
companies (Total, Shell/ BP, Caltex, Mobil & Kenol/Kobil) control 85.3% of the
market share for petroleum products as of September 2005.
2.Kenya imports 100% of all its petroleum products requirements
Assuming you are the case officer, how would you go about investigating and
analysing the allegation?
(Benson O. Nyagol - Monopolies and Prices Commission –Kenya)
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