Proposed Guidelines for Competition Policy

1.1.1 The need for our first democratic Government to revise fundamentally the inherited competition policy has never been in doubt. As early as 1992, the African National Congress (in its Policy Guidelines for a Democratic South Africa) specified the broad outline of the approach that is today proposed: "The concentration of economic power in the hands of a few conglomerates has been detrimental to balanced economic development in South Africa. The ANC is not opposed to large firms as such. However, the ANC will introduce anti-monopoly, anti-trust and merger policies in accordance with international norms and practices, to curb monopolies and continued domination of the economy by a minority within the white minority and to promote greater efficiency in the private sector."

1.1.2 Since 1994 considerable time has been spent on research and consultations with a wide range of stakeholders. On behalf of the Government the Department of Trade and Industry now presents this broad framework as guidelines for Competition Policy. These will initiate a process toward new legislation.

1.1.3 The overriding goal is to achieve a more effective economy in South Africa and this in turn requires us to better define what is meant by the "public interest" with respect to South Africa's corporate structure and firm behaviour. The public interest is far broader than the sectional interests of firms and their workers within a particular industry. It also stretches beyond the interests of consumers, of emerging black entrepreneurs or of labour and community constituencies more broadly - although each must be satisfied that the end result fairly addresses their concerns. Indeed, the Competition Policy Guidelines combine features that will be attractive to stakeholders who emphasise market discipline just as much as to those who consider the state capable of more direct intervention in markets. Inevitably, however, it will also have features that may displease some more than others.

1.2 Competition Policy Guidelines

1.2.1 The public interest in competition policy is defined through its relationship to Government's broader economic policy (Chapter Two), i.e. relating competition policy to other Government initiatives, and deriving widely acceptable policy objectives.

1.2.2 Within the broad realm of competition policy, competition law has attracted the greatest attention. This relates to the legislative approach towards public and private concentration of economic power and to the conduct emanating from these concentrations. This body of law will be referred to as "Monopolies Law". It forms one component - albeit a crucial one - of overall competition policy. (Existing competition law and its institutions are discussed in Chapter Three.)

1.2.3 Competition policy is but one of the policy fields designed to secure national policy objectives. Others focus on increased efficiency and entrepreneurial activity. Complementarity and consistency between these fields of economic policy is important. Where complementarity is not possible, explicit trade-offs have to be made between the objectives of various policy fields. Thus, we have to consider the interaction between competition policy and policies related to international trade and industrial strategy (Chapter Four), public corporations (Chapter Five), Professions (Chapter Six) and empowerment (Chapter Seven).

1.2.4 In this context, the challenges associated with the new competition policy include new instruments and institutions (Chapter Eight) and improved enforcement (Chapter Nine). The conclusion (Chapter Ten) offers a way forward to the legislative process.

1.3 Defining the public interest

1.3.1 At the outset we have to address some misconceptions about public interest that may have already arisen. The Guidelines are not aimed at the direct or blanket control of the absolute size of enterprises, the prohibition of mergers and acquisitions in concentrated industries, the enforced unbundling or divestiture of vertically-integrated corporate ownership or the existence per se of monopolies, oligopolies and cartels, even though all these aspects are highly relevant for competition policy. In each case, the catalyst to state intervention will have to be a clear violation of the public interest.

1.3.2 The key to an understanding of the public interest in economic policy generally and competition policy more specifically is the combination of competitiveness and development. In the specific constitutional context of South Africa, a legal framework which promotes openness and transparency is required. Competitiveness, in the first place, means that we must optimise production and distribution efficiencies - including appropriate production processes and technological innovation - through effective economic and commercial interactions, including supply and demand, unhindered by anti-competitive conduct. Several features of competitiveness deserve attention.

1.3.2.1 One clear reflection of an economy's competitiveness is how much foreign investment it attracts, since international firms seek to take advantage of local strengths and market opportunities. As has often been remarked - and as is explicitly argued in the 1997 World Investment Report of the United Nations Conference on Trade and Development - market dominance by a few major players is one of the main reasons why foreign investors have avoided South Africa after the end of sanctions.

1.3.2.2 Competitiveness also requires building a more balanced southern African regional economy. Combined with other regional trade and investment policies currently in a planning stage, competition policy can enhance the ability of South Africa to incorporate our southern African neighbours' output into our own, and vice versa.

1.3.2.3 Government recognises the need for South African companies to compete effectively in international markets, a task for which a significant size is sometimes essential. With the dominance of global production and exchange, it is now also important to adjust our conceptions of the geographical scope of markets.

1.3.2.4 Fundamentally, a distinct improvement in competitiveness can have a profound influence on the nature of South Africa's production processes. This again can assist Government in its socio-economic programmes.

1.3.3 In addition to improving competitiveness, competition policy also has to be developmental. This can happen if it complements rather than contradicts other roles of the developmental state. A few examples can be mentioned:

1.3.3.1 Competition policy has to be linked to industrial and trade policy, thereby better synchronising international and domestic goals of macroeconomic management.

1.3.3.2 Competitive markets have to be supplemented in order to address socio-economic backlogs by ensuring access to economic activity by those previously excluded. This has a redistributive effect that increases the size of the economy.

1.3.3.3 It also has to be supplemented with special job-creation efforts, in order to reduce the impact of job losses due to competitive forces.

1.3.3.4 Steps are required to support emerging black entrepreneurs, to ensure that the restructuring of uncompetitive industries does not conflict with the goals of black economic empowerment.

1.3.3.5 Finally, South African consumers have to be informed about the full spectrum of costs and benefits of goods and services under conditions of fair and open competition (i.e. transparency of options and the absence of artificial complementarities) a requirement which flows form the Constitution.

1.3.4 Thus, the Guidelines must embrace both competitiveness and development as central aims. Given South Africa's legacy of uncompetitiveness and socio-economic injustices in local, national and regional markets, this is a momentous challenge.

1.4 Balancing our goals

1.4.1 To address these broad aims, a balanced approach is required. In this context, the alleged dichotomy between reform of the corporate structure and the combating of anti-competitive firm behaviour is false. After all, highly concentrated industries are sometimes the only ones able to achieve minimum economies of scale, which does not necessarily mean an abuse of their market dominance. Likewise, anti-competitive behaviour can prevail in otherwise highly competitive industries, leading to the victimisation of certain classes of customers. Only a combination of government intervention, civil remedies and public-watchdog advocacy will achieve an optimal balance.

1.4.2 Competition policy will have to be located within a wider sphere of economic policy instruments aimed at effective, but facilitatory regulation and supervision of markets. This sphere includes trade and industrial policy, a new interface with public enterprises and a more active approach to economic empowerment. Equally important are the many other supportive policies evolving in different departments and at provincial level, including foreign-exchange liberalisation, the attraction of foreign direct investment, the restructuring of state assets, tax reform, new labour-market policies, the regulation of financial markets, consumer-protection legislation, incentives for research and development, promotion of small business and affirmative action and a revision of company law and corporate governance. As with all features of the South African transition to democracy, these new policies are at the same time constructed with an eye to the objectives of the Reconstruction and Development Programme and the GEAR macroeconomic strategy.

1.4.3 Balance will not be achieved by downplaying one set of policy interventions in favour of another, but rather by ensuring that each set of policy interventions is reconcilable with national policy objectives and instruments, and that the different policy sets re-enforce each other.

1.4.4 The approach outlined here compels Government and its social partners to search for ways of achieving both competitiveness and socio-economic objectives. Given the urgency associated with new global conditions and South Africa's stark socio-economic inequality, our competition policy thus faces unique challenges.

Chapter Two

The Evolution of Competition Policy

2.1 Introduction

South Africa's enormous challenges in achieving internal and international competitiveness, combined with our huge development backlogs, remain the focus of nearly all government policies. Thus policy frameworks such as the Reconstruction and Development Programme and GEAR all helped establish a foundation upon which competition policy builds. Complementary government policies, laws, regulations and other interventions further contributes to this evolution. A few specific pillars that undergird competition policy are briefly outlined in this section, which also contains a summery of the underlying principles if the new competition policy.

2.2 Economic policies

2.2.1 The key social and economic objectives of the South African Government of National Unity, and the instruments to be deployed in their realisation, are outlined in the Reconstruction and Development Programme (RDP). Significant components of the RDP -- particularly as they relate to macro-economic policy -- are refined in the macro-economic strategy , Growth, Employment and Redistribution (GEAR), and in our evolving trade, industrial and labour market policies. The more general objectives of competition policy -- as it is the case with all other policy programmes -- must be sought within these overarching policy frameworks.

2.2.2 The Government's official mandate surrounding competition policy derives from the RDP:

"4.4.6.2 The RDP will introduce strict anti-trust legislation to create a more competitive and dynamic business environment. The central objectives of such legislation are to systematically discourage the system of pyramids where they lead to over-concentration of economic power and interlocking directorships, to abolish numerous anti-competitive practices such as market domination and abuse, and to prevent the exploitation of consumers. Existing state institutions and regulations concerned with competition policy must be reviewed in accordance with the new anti-trust policy. The democratic government should establish a commission to review the structure of control and competition in the economy and develop efficient and democratic solutions. It must review existing policy and institutions with the aim of creating more widely spread control and more effective competition. To that end, it must consider changes in regulation or management in addition to anti-trust measures."

2.2.3 These directives were taken further, and given approval by Cabinet and the Parliament in the White Paper on Reconstruction and Development, in late 1994:

"3.6.7 In the highly-concentrated domestic market, Government will pursue a competition policy designed to reform those market structures that underpin high prices and complacency, and that constitute major entry barriers to small- and medium-scale enterprise.

3.8.1 The South African economy must be opened to greater ownership participation by a greater number of our people. Government will introduce strict anti-trust legislation to create a more competitive and dynamic business environment. The central objectives of such legislation are to systematically discourage the system of pyramids where they lead to over-concentration of economic power and interlocking directorships, to abolish numerous anti-competitive practices such as market domination and abuse, and to prevent the exploitation of consumers. Existing Government institutions and regulations concerned with competition policy will be reviewed in accordance with the new anti-trust policy. Government will establish a commission to review the structure of control and competition in the economy and develop efficient and democratic solutions. To that end, it will consider changes in regulation or management in addition to anti-trust measures.

3.8.2 A credible competition policy is crucial to the proper functioning of the economy. Objectives of this policy are to remove or reduce the distorting effects of excessive economic concentration and corporate conglomeration, collusive practices, and the abuse of economic power by firms in a dominant position. In addition, the policy will ensure that participation of efficient small- and medium-sized enterprises in the economy is not jeopardised by anti-competitive structures and conduct.

3.8.3 Government will also seek to increase the competitive nature of domestic markets and to influence the behaviour of the lead participants in highly-concentrated markets in a socially-desirable manner. Government will identify and eliminate practices that restrict entry of new businesses into certain industries, seek to eliminate illegal practices such as the maintenance of resale prices, collusion between firms in market distribution, and horizontal collusion in respect of supply and tendering. The Competition Board will be relocated to the Department of Trade and Industry."

2.2.4 This framework also included a role for competition policy in supporting the transformation of gender relations, in particular through promotion of small and medium businesses owned by women (section 3.10.3).

2.2.5 Thus, viewed in broader context, Government envisaged the prohibition of anti-competitive practices and the adaptation of corporate structure to meet broader socio-economic objectives. These objectives were amplified in GEAR, which became the Government's macroeconomic strategy in mid 1996:

"1.1 As South Africa moves toward the next century, we seek a competitive, fast-growing economy which creates sufficient jobs for all workseekers; a redistribution of income and opportunities in favour of the poor; a society in which sound health, education and other services are available to all; and an environment in which homes are secure and places of work are productive."

2.2.6 The Guidelines for Competition Policy has drawn these policy positions into a working agenda towards new legislation. The Cabinet have decided to adopt this process rather than establish a Commission since it will enable consultation and should streamline the process.

2.2.7 The overriding objective of all these policies is to achieve sustainable growth and development, thereby ensuring a better life for all the people. This requires a significant increase and an improved distribution of economic activity in the country, reflected in output growth, higher employment, enhanced efficiency and the entry of new entrepreneurs into business activity. Competition policy can and should have significant influence on the achievement of these objectives - particularly levels of efficiency and entrepreneurial activity - , but only if it is pursued in a manner consistent with all the other policies.

2.3 Alignment with other government initiatives

2.3.1 The Department of Trade and Industry's commitment to competitiveness is channelled through diverse actions and initiatives. These include support for productive enterprises as they enter the world market, the enhancement of efficiency and flexibility through specific programmes and development initiatives, and the encouragement of collective bargaining and support measures for labour, so that neither firms nor workers bear an unreasonable burden of the costs of becoming globally-competitive. Likewise, commercial and trading practices are reviewed by the Department in order to remove complex legal and institutional barriers to economic activity, and to protect the rights of consumers, workers, owners and other stakeholders without unduly discriminating against any.

2.3.2 In promoting these initiatives, the Department seeks means of intervention that are characterised by a facilitatory approach, primarily through empowering competitors and consumers to advance their own interests. Competition policy is a good example of this approach. Injured competitors will have the right to bring action against a company engaging in unfair competition, complimented by a cause of action for citizens, or consumers, injured by unfair competition. Remedies should also provide incentives for individual action.

2.3.3 At a more detailed level, the Department has embarked upon several initiatives to enhance "fair trade," i.e. to strengthen fairness, transparency and the rule of law. The Department's power at National level to regulate and supervise areas of the economy that are subject to market failure or have important public sensitivities -- such as business practices, consumer protection, patents and trademarks, usury, intellectual property, gambling and lotteries -- is frequently enhanced by growing commitments and capabilities from our provincial colleagues.

2.3.4 There are several policy areas (in addition to those discussed in successive chapters) where the Department has already embarked upon initiatives aimed at transformation. These include a review of existing securities regulations and institutions with principal oversight of corporate structure; a review of current practices and regulations in the area of corporate governance; and a review of the Harmful Business Practices Act which will bear principal responsibility for protecting consumer interests.

2.4 Fundamental principles underpinning competition policies

We can identify a number of policy pillars upon which a uniquely South African competition policy will rest, and which will direct forthcoming legislation.

2.4.1 Competition policy defines the public interest with respect to both competitiveness and development;

2.4.2 Competitiveness is understood in both domestic and international terms, it must help to make South Africa more competitive by lowering costs along the entire value chain, by assuring neighbouring countries of our intention to limit market dominance within the region, and by assuring foreign investors with an environment to do business unimpeded by closed or distorted markets;

2.4.3 Development means our willingness to address socio-economic backlogs and capacity to correct, over time, existing racial and gender biases in ownership and control throughout the private sector;

2.4.4 Competition policy will be integrated with the overall national policy framework and with the particular objectives of industrial, trade and macro-economic policies;

2.4.5 Monopolies law will prohibit anti-competitive conduct (both explicit and tacit), abuses of dominant market position, as well as mergers and acquisitions which do not serve the public interest, it will also include the possibility of civil remedies for disadvantaged competitors and consumers. Ownership concentrations leading to excessive control over economic activity is also to be addressed;

2.4.6 The law will be administered by an autonomous and professionally run authority, with effective public participation;

2.4.7 The reform of South Africa's corporate structure will proceed through legitimate processes within an environment of policy certainty;

2.4.8 Reforms of the corporate structure through voluntary means such as divestiture, will be encouraged, with particular focus on consumer interests and the empowerment of black entrepreneurs;

2.4.9 Reforms through involuntary divestiture may occur in instances where anti-competitive conduct as clearly defined occurs -- for example, illegal mergers, the abuse of dominant market positions, and excessive restrictive practices;

2.4.10 Additional policy adjustments include the review of securities regulations and institutions associated with corporate structure, corporate governance practices and regulations, the Harmful Business Practices Act and consumer protection regulations, and the competitive interface between public corporations and the private sector.

2.4.11 The competition policy proposed here accepts the logic of free and active competition in markets, the importance of property rights, the need for greater economic efficiency, the objective of ensuring optimal allocation of resources, the principle of transparency, the need for greater international competitiveness, and the facilitation of entry into markets - all within a developmental context that consciously attempts to correct structural imbalances and past economic injustices.

2.4.12 Competition policy seeks to incorporate the interests of consumers, workers, emerging entrepreneurs, and other corporate competitors, and to protect the ability of our large corporations to penetrate international markets, just as we must allow foreign investors to do business in South Africa in the interests of enhancing overall efficiency and growth.

2.4.13 Competition policy has to assume that the resolution of competition law cases be conducted in a procedurally-fair, coherent, expeditious and decisive manner, and that new institutional arrangements for pursuing the policy will entail an appropriate division of labour within the relevant agency and independence.

2.4.14 Finally competition policy seeks to be sufficiently flexible to incorporate existing policies and future modes of market regulation that extend in a coherent manner across the full spectrum of industrial and trade policy, foreign exchange policy, the attraction of foreign direct investment, the restructuring of state assets, tax reform, labour market policy, financial market regulation, consumer protection, research and development incentives, small business and affirmative action programmes, corporate governance instruments, and revised company law. Some of these -- international trade policy, industrial strategy and public corporations, -- are considered in subsequent chapters, following a brief review of deficiencies in the existing legislation.

Chapter Three

The Need for a New Monopolies Law

3.1 Introduction

The South African Government faces profound difficulties in addressing the objectives outlined above, because the legal instruments and institutions associated with competition law (see Appendix One) are ineffective. From the time of the Regulation of Monopolistic Conditions Act, 24 of 1955, the South African Government failed to tackle monopolistic structural conditions and anti-competitive conduct effectively. This was true in both early and recent times. Even more recent attempts to strengthen the Competition Board (in 1986 and 1990) failed to make a discernable difference to either the structure or conduct of large South African firms. This is in part because of flaws in both the content and the logistical implementation associated with the Act.

3.2 Historical background

3.2.1 During the first two decades of the Board of Trade and Industries (the Competition Board's precursor), three quarters of cases brought to the Board were found to entail monopolistic conditions not justifiable in the public interest (groceries, sanitary-ware and hardware, motion pictures, cigarettes and processed tobacco, books, newspaper and periodicals, and employers' association in the building industry, buy-aid associations and resale price maintenance). Some investigations ruled that monopolistic conditions were indeed justified (liquor, pneumatic tyres and pharmaceutical products). The eight that were considered unjustifiable were restrictive trade agreements such as price agreements, fixing of trade discounts, resale price maintenance, exclusive dealing and boycotts of suppliers by dealers. Trade associations were singled out as key agents for establishing and administering anti-competitive conduct. Yet after nearly two decades of work, recommendations to the Minister of Economic Affairs were made on just eight occasions, and there was only one case (resale price maintenance) where the Minister ordered a prohibition of the activity (the rest were negotiated privately). An attitude of laxity developed, with successive Ministers of Industry often ignoring the Board's competition law mandate (the same Board set tariff policy). Amendments to the Act were repeatedly offered so as to enhance the prevention of anti-competitive practices, but were unsuccessful. Complaints that the Board had no power to instigate its own investigations were also ignored.

3.2.2 During the late 1970s, a Commission of Inquiry investigated the 1955 Act and found that oligopoly had intensified dramatically in spite of the Act. In addition to the merger and acquisition wave, reasons for high concentration levels included protectionist barriers, the small size of the local market, the distance between geographical centres, and historical factors associated with the industrialisation process. The Tariffs Board was found to be ineffective, as it had the power only to intervene after a merger or acquisition was complete. As a result, in 1979 the Maintenance and Promotion of Competition Act replaced the earlier statute.

3.2.3 The 1979 Act was amended in 1986 to give the Competition Board further powers, including the ability to act not only against new concentrations of economic power but existing monopolies and oligopolies, the scope to examine financial institutions and agricultural cooperatives and control boards (previously exempted), and the mandate to consider deregulation and privatisation of state-owned enterprises. At the same time, however, the Board was instructed to switch focus from an investigation into interlocking boards of directors and cross-holdings, and instead research links between the financial sector and the conglomerates, a study that had not previously been attempted.

3.2.4 Yet it is now widely acknowledged that there were so many technical flaws with the 1979 Act and its 1986 amendments that competition law has again been judged relatively ineffectual, on both substantive and logistical grounds.

3.3 Substantive problems

3.3.1 There are at least four substantive reasons why a new Monopolies Law must be established. The current Act does not address the extent of concentration of ownership nor market share; there are no provisions for vertical or conglomerate relations; there is little leverage to prevent (or even know in advance) mergers and acquisitions which intensify concentration; and the Act does not contain strong prohibitions of anti-competitive activity. Each issue is considered in turn.

3.3.2 Horizontal concentration: The 1979 Act was weakest when it came to addressing the high levels of horizontal market concentration. The Act contained no provisions against monopolisation per se, except insofar as it affected the "public's interest," as defined by both the Competition Board and the Minister. Divestiture of parts of conglomerates (whether involuntary or voluntary unbundling exercises) was seen only as a penalty, and even then divestiture was extremely difficult to enforce.

3.3.3 Vertical ownership and control: Vertical or conglomerate acquisitions are not addressed in the Act (nor in the definition of acquisitions). In order to address unjustifiable vertical integration, the Board must resort to the definition of "restrictive practice."

3.3.4 Mergers and acquisitions: Addressing mergers and acquisitions is also difficult under the Act. No provision is made for the compulsory prenotification of mergers and acquisitions of substantial proportions. Although it is technically possible to outlaw an acquisition that has been consummated, and clearance is sought for most large acquisitions on a voluntary basis, the unscrambling of a large acquisition would be fraught with practical difficulties.

3.3.5 Anti-competitive conduct: Contrary to the practice in most countries, the 1979 Act itself does not prohibit anti-competitive conduct or structures. Prohibitions are promulgated in the Government Gazette by the Minister acting on a recommendation by the Board. The implementation of rules and decisions governing competition through executive decrees (secondary legislation) -- as well as the processes that necessarily must precede them -- invites challenges on purely technical grounds (in administrative law) which result in protracted proceedings and, in effect, frequently render the substantive merits of a case of secondary importance. The Act's failure to prohibit anti-competitive acts means that although firms may have engaged in forms of anti-competitive conduct and causing substantial harm to competitors and consumers over an extended period of time, they can escape culpability simply by desisting from the particular conduct at any time before a formal investigation is launched by the Board.

3.4 Logistical problems

3.4.1 At the level of enforcement logistics, there are additional technical flaws in the Act viz a duplication of effort between the Competition Board and the Minister of Trade and Industry; the risk of political interference in the Board's activities; a dispersal of jurisdiction to other regulatory authorities; insufficient guidelines relating to state-owned enterprises; and ineffective remedies and penalties. Each is considered separately.

3.4.2 Duplication of proceedings: The inherited competition policy entails the duplication of proceedings, with the danger of generating potential bias. The current procedures allow persons accused of anti-competitive activity to put their case to the Competition Board and then to repeat the process before the Minister once he or she has received the Board's report and recommendation. Such dual presentation of the case, together with the other prescribed formalities, makes decision-making in competition cases a protracted process, even in relatively straightforward cases. This is disadvantageous to businesses which usually prefer the expeditious settlement of disputes and issues. As a result, the procedures of competition law cases lack neutrality. For example, in a given case, should the Minister decide not to accept the Board's recommendation that a particular restrictive practice should be outlawed, the complainant has no right of recourse against the Minister in terms of the Act. This differs from the position of the respondent who has the statutory right to challenge any Ministerial prohibition.

3.4.3 Potential interference in cases: With respect to potential interference by politicians in competition law, problems arise from the potential power exercised by the Minister of Trade and Industry. She or he may direct the Board not to conduct a formal investigation which it may wish to initiate or to terminate investigations that have been commenced. Any recommendation by the Board to the effect that a particular restrictive practice or anti-competitive acquisition should be prohibited can be vetoed by the Minister. The current arrangements politicise decision-making, enable interest groups to lobby the Minister, and can potentially even lead to attempts by other Ministers to forestall investigations by the Board.

3.4.4 Jurisdictional overlap: There are also inherited problems related to dispersed and concurrent jurisdiction. Other Acts confer jurisdiction on bodies other than the Competition Board to deal with competition matters. For example, the South African Telecommunications Regulatory Authority is required to ensure fair competition within the telecommunications industry (in the Telecommunications Act 1996). The Airports Company Act 1993 established a Regulating Committee and empowered it to outlaw restrictive practices (as defined in the Maintenance and Promotion of Competition Act 1979) by the Airports Company Ltd. Neither the Telecommunications Act 1996 nor the Airports Company Act 1993 curtails the competence of the Competition Board to deal with restrictive practices and acquisitions that may occur in the field of telecommunications or airports. In fact the Telecommunications Act 1996 states specifically that section 52 of that Act shall not derogate from the provisions of the Maintenance and Promotion of Competition Act 1979. Yet no provision is made in any of the relevant Acts for the resolution of jurisdictional overlap. This generates the potential for forum shopping and, conceivably, could result in parallel investigations by the respective authorities and even diametrically opposed decisions by them regarding a particular matter. (One example of this is the dispute between Telkom and Internet service providers which has caused some confusion regarding which of the respective authorities should deal with the matter.)

3.4.5 Interface between state-owned enterprise and private sector: There is confusion regarding the competitive interface between state-owned enterprises and private sector firms. The Act binds the state and applies to all public enterprises (unless there are statutory provisions to the contrary). The Board can therefore investigate and the Minister can prohibit restrictive practices and acquisitions in which state-owned enterprises are involved. The participation by such enterprises in a wide range of business activities that extend well beyond their core activities is sometimes not welcomed by private sector firms. In particular, firms regard it as unfair competition where such enterprises cross-subsidise those areas of activity where they compete head-on with the private sector, using funds generated from a business activity in which they are a monopoly situation. Another area of concern relates to the interlocking of state-owned enterprise directorates with those of private sector companies that supply or acquire any commodity to or from such state enterprises. Yet there are no clear guidelines on which the Board can rely when dealing with such cases of allegedly unfair competition by state-owned enterprises.

3.4.6 Penalties: Finally, the penalties associated with not complying with rules governing competition remain contentious. Since violation of certain provisions of the Act (or indeed of any related prohibition promulgated by the Minister) is a criminal offence (which must be proved beyond reasonable doubt), the penalties that may be imposed in such cases are a fine, imprisonment or both. Yet reliance on this mechanism to ensure compliance with the provisions of competition law has been unsuccessful. With one minor exception (the payment of extremely low admission of guilt fines by three prominent furniture removal companies for collusive tendering), there have been no prosecutions, let alone convictions, for contravention of Government Notice 801 since 1986. Reasons include the high rate of more serious crimes (murder, rape, armed robbery) and a lack of expertise in competition matters on the part of investigating and prosecuting officers. A further shortcoming is that although a person may obtain an interdict against a competitor who is contravening Notice 801 of 1986, no such remedy is available to the Board in the event it becomes aware that someone may be breaching that notice. Enforcing the rules governing competition and ensuring that wrongdoers do not flout the rules with impunity are crucial facets of any credible competition law.

3.4.7 The problems associated with the inherited competition policy and legislation will be addressed through a new Monopolies Law. Before considering its content, the next three chapters review the relationship of competition policy to other economic policies.

Chapter Four

Competition Policy, International Trade Policy and Industrial Strategy

4.1 The need for policy reinvention

The interaction between competition policy, trade policy and industrial strategy is extremely complex, serving as the source of heated debate in the economic profession and amongst those engaged in policy-making and economic activity. After reviewing these debates, a reconciliation of the competing perspectives is offered.

4.2 Competing perspectives on competition, trade and industrial policy

4.2.1 Several opposing positions have emerged:

4.2.1.1 One position is that the objectives of competition policy are always compromised by industrial strategy interventions that attempt to privilege targeted sectors, classes of enterprise or regions. The logic of this argument would be to downplay industrial strategy in order to minimise distortions in the market. Competition policy, in this view, is thus concerned to offset government intervention -- whether subsidies, policy support, licensing or state ownership -- in commercial decisions and outcomes. Likewise, in this view there would be strong support for a free trade position;

4.2.1.2 Another position is that vigorous application of competition policy will damage the capacity of national firms -- particularly those located in small, open economies -- to compete against international rivals. The logic of this argument is to downplay, in the name of international competitiveness, competition policy interventions in the structure of those markets dominated by private investors and in the decisions emanating from the (private sector) participants in those markets;

4.2.1.3 Along similar lines it is argued that regardless of the size of domestic firms relative to their home markets, the international economy most closely approximates a perfectly competitive market. The logic of this argument holds that trade liberalisation and export promotion are the most effective policy interventions to ensure that domestic firms are subject to competitive pressures effectively downplaying both competition policy and industrial strategy (except, where permissible, support for exporters), in favour of a liberal trade policy.

4.2.2 The implicit standpoint underlying these arguments is the view that the market should be left to its own devices, although there is a different emphasis on each of these arguments. In contrast, the basis of the approach to be adopted in South Africa to enhance the overall level of economic activity along with meeting other objectives such as increased employment, efficiency and entrepreneurship.

4.3 Reconciling policy objectives

4.3.1 While government recognises the potential tension inherent in the interaction between industrial strategy and competition policy, it remains committed to pursuing an active industrial strategy. Thus,

4.3.1.1 wherever possible, direct support will be provided to clusters and other collectivities of firms rather than at individual firms, thus substantially reducing the potential for conflict with the objectives of competition policy;

4.3.1.2 government will actively strive for a ‘level playing field’ but will recognise that, in order to overcome distortions generated by past policy interventions, it will be obliged to support sectors and clusters effectively discriminated against by past policies;

4.3.1.3 it will also actively strive to correct key market failures, in particular those that have compromised our human resource and technological capacities and that have hindered access to capital markets by certain classes of enterprises and sectors. This inevitably entails extra-market interventions.

4.3.2 With respect to potential conflict between competition policy and international competitiveness -- in particular the need to increase non-traditional exports -- our approach is to acknowledge the rigours of international competition and hence to reject a ‘big is bad’ approach. However, competition policy will play a vital role in accelerating exports, for at least two reasons:

4.3.2.1 Dominance in the domestic market may provide the capacity to export, but it may inhibit the will to do so. It is, first and foremost, an intensely competitive domestic market that will encourage local firms to seek profitable opportunities in other markets and that will prepare them for robust international competition;

4.3.2.2 Small firms are, globally, active players in international markets. Our industrial strategy will specifically strive to facilitate the entry of small firms and black owned firms into international markets. We do not envisage this selective support falling foul of a pragmatic competition policy.

4.3.3 We readily recognise important complementarities between trade liberalisation and the overall objectives of competition policy. Certainly immersion in international markets -- either by way of withstanding international competition on the domestic market or by way of competing on export markets -- is a powerful incentive to greater efficiency. However, for several reasons, trade liberalisation is not a substitute for an effective competition policy.

4.3.3.1 There may be cogent reasons for extending a measure of protection to domestic producers. Such reasons amplify the importance of competition policy mechanisms as a means of promoting rivalry between privileged domestic producers.

4.3.3.2 In many product markets and sectors, domestic producers, even in the absence of trade barriers, enjoy local advantages that, effectively, constitute a measure of ‘natural’ protection. Competition policy does not strive to reduce these advantages -- it rather strives to ensure that they are exploited to the full through the promotion of rivalry between domestic producers.

4.3.3.3 In key markets -- for example, the markets for important building materials, many sub sectors in services, and a significant segment of the food chain -- the main goods and services are not internationally traded and rely upon competition policy to secure efficiencies and ease of entry associated with competitive markets.

4.3.3.4 The entry of direct foreign investors into the South African market may intensify competition in domestic markets and for this reason, among others, is to be encouraged. However, these positive consequences of direct foreign investment are blunted if international investors simply merge with large domestic firms. The competition authorities will have to facilitate links between foreign investors and local partners that increase the competitive environment.

4.3.4 The existence of potential tensions and synergies between competition policy, industrial strategy and trade policy is recognised. These will be managed by:

4.3.4.1 the provision of a coherent framework of overall objectives (RDP and GEAR);

4.3.4.2 the systematic development of a coherent industrial strategy, of which trade policy and competition policy constitute the key pillars; and

4.3.4.3 the establishment of an autonomous competition authority, conducting its activities within the framework provided by the national policy objectives and the industrial strategy.

Chapter Five

Competition Policy and the Public Corporations

The interaction between the public and private sectors has become increasingly complex. This is particularly true in the case of corporatised public enterprises and in cost recovery activities of public institutions. It is clear that we do not have a situation where the public and private sectors conduct their activities in separate economic spheres. As a result the question of level playing fields inevitably arises.

5.1 Issues associated with legislated monopoly

5.1.1 A number of different problems arise in considering the relationship between competitive private sector firms and those public enterprises which were legislated as monopoly suppliers.

5.1.2 Where a legislative monopoly is created, its power must not be abused through pricing policy, quality, or failure to extend basic services. In short various types of market behaviour that would be subject to sanction in the private sector will have to be monitored in the public corporations. In addition there should be clearly stated public policy objectives that the enterprise must meet. Both these dimensions have to be dealt with in the regulatory dispensation of the public enterprises.

5.1.3 Where such a legislative monopoly is privatised in whole or in part, its monopolistic position must be addressed. The use of regulatory bodies to deal with this is essential. However, where the State has capitalised the enterprise it can confer considerable benefits to the new enterprise that give it a competitive edge if it then competes with pre-existing private sector enterprises. There will have to be oversight of such processes if a competitive situation is desired. This is particularly the case if the public interest basis for originally holding the enterprise in public hands has changed.

5.1.4 Other areas of difficulty arise where public institutions are able to act as both regulators of an activity and providers of that activity. This should be avoided or carefully prescribed.

5.1.5 Where a public enterprise is able to provide a product or a service into the market in competition with private suppliers then it has to be recognised that depending on its own method of financing, its basis for costing could be different. This must be explicitly acknowledged and dealt with otherwise the competitive position will be affected.

5.1.6 It is therefore necessary to avoid using the government’s licensing authority to create monopolies or to allow detrimental market practices. However, the State will have to retain this authority in pursuit of key public objectives -- for example health and safety and the provision of key public goods. The issuing of government licenses and the conduct of the licensees will be monitored by public authorities guided by transparent regulation.

5.1.7 State owned enterprises should be subject to the scrutiny and jurisdiction of the competition authorities, while explicitly recognising that key state ownership positions are designed to correct the failure of the market in the provisioning of public goods and credit to low income communities and citizens. To achieve this balance it is essential that there is absolute clarity of mandate for all public enterprises and institutions.

5.1.8 At present there is no overall approach to these issues as they are dealt with to greater or lesser extent in the individual pieces of legislation for each public enterprises. It is accordingly proposed that a thorough review of the situation is undertaken and the necessary legislative changes prepared.

Chapter Six

Competition Policy and the Professions

6.1 Professions

6.1.1 The position of the professions is a matter that must be addressed in a way that balances standards against market restrictive practices.

6.1.2 Whereas certain anti-competitive practices involving the professions could be justified on public interest grounds, a number of practices exist which, but for the fact that they are authorised in legislation would in the normal course of events elicit the attention of the competition authorities.

6.1.3 Those practices which are generally accepted as being in the public interest relate to (a) the competencies required to perform those tasks which are adjudged to be the domain of the professionals in question, and (b) purely ethical matters. A number of Government Departments are responsible for the administration of Acts of Parliament, or subservient legislation, governing the professions. In the process a large number of professional councils have been established to regulate the various professional groups. In particular, the Departments of Health (in respect of the health care professions), Justice (in respect of the legal profession) and Public Works (the various building industry professions) administer the affairs of the bulk of the professional groups in the country.

6.1.4 It is suggested that the responsible Government Departments should be made aware of this competition policy dimension and should actively cooperate in order to ensure that the policy approach to the professions is consistently applied and that the principles of competition within professional groups be promoted without compromising those aspects which clearly are of overriding concern for the public interest.

6.1.5 The position of the professions is a matter that will once again have to be addressed in a way that juxtaposes public interest considerations against market restrictive practices.

Chapter Seven

Competition Policy and Empowerment

The basis for a policy of empowerment resides in the discriminatory practices of the past. This took the form of dispossession, legal prohibition on trading, access to skill and unequal educational provision. Section 9(2) of the Constitution provides that:

Equality includes the full and equal enjoyment of all rights and freedoms. To promote the achievement of equality, legislative and other measures designed to protect or advance persons or categories of persons disadvantaged by unfair discrimination, may be taken.

7.1 Empowerment policy

7.1.1 The Constitutional mandate referred to above requires the establishment of a proactive programme to redress the legacy of discrimination. Accordingly, steps have already been taken in the area of government procurement to assist formerly disadvantaged contractors. Further steps will be taken to allow greater ownership participation by black persons in the economy -- in particular in the manufacturing sector. Such measures do act in favour of certain economic actors and thereby do impact on the competitive situation. It is therefore essential that these measures are fully transparent in their formulation and implementation.

7.1.2 It is also the case that competition policy can assist the objectives of empowerment policy. Excessive concentrations of power can be broken up and in the process empowerment can be strengthened; in terms of the Constitution these measures can only be taken when it can be shown that they are designed to meet the constitutional objectives contained in Section 9(2).

Chapter Eight

Instruments and Institutions

8.1 Introduction

8.1.1 The main targets of the regulatory approach and institutions associated with competition policy are efficiency and the distributional consequences of significant concentrations of economic power. There are several reasons for this. Failure to prevent these concentrations or to regulate their conduct is potentially manifest in pricing behaviour prejudicial to consumers. The impact upon ‘dynamic efficiency’ -- manifest in low levels of innovation and in barriers to new entry especially on the part of SMMEs -- is also potentially negative. Regulators have also been concerned to curb an excessive concentration of social power that potentially arises from control of an essential product.

8.2 Areas of and approach to regulation

8.2.1 Attempts to limit concentrations of economic power and/or to regulate conduct arising from such concentrations have given rise to the following areas of regulation of commercial structure and conduct collectively subsumed under the heading ‘competition policy’:

8.2.1.1 market structure

8.2.1.2 restrictive trading practices

8.2.1.3 abuses of economic power and dominance

8.2.1.4 consumer protection

8.2.1.5 ownership concentration

8.2.1.6 corporate governance

8.2.2 Some of these problems have been addressed through the mechanisms of monopolies law. A recent survey of monopolies law across the world found that the greatest commonality among the various jurisdictions was in the area of conduct regulations, namely regulation directed at restrictive practices and abuse of dominant position and economic power. Restraints on output, exclusive practices designed to inhibit or preclude the ability of actual or potential suppliers to compete in the market for a product, predatory pricing, restraints on entry, tying agreements, retail price maintenance, price fixing and conscious parallelism can all be dealt with by an administrative forum which is capable of developing a certain, coherent and predictable set of principles governing competition.

8.2.3 Government proposes that South African monopolies law be directed at restrictive practices and abuse of dominance. However, in addition to specifying the direction that monopolies law should take, it is essential that we design and establish effective agencies for monitoring, investigating, adjudicating and correcting anti-competitive conduct. At present there is no clear and coherent body of monopolies law. The absence of such a body of law and lack of institutional support permits widespread violation of existing regulation; the law inadequate as it is, is honoured more in the breach than in the compliance. It leaves victims of anti-competitive practices without effective protection or redress. And it creates uncertainty for investors.

8.2.4 Government is obviously cognisant of the link between structure and conduct. While anti-competitive conduct does not necessarily flow from given structural arrangements, it is generally the latter -- particular structures -- that enables inappropriate conduct. Hence it is our view that, while the monopolies law authorities will direct themselves principally at anti-competitive conduct, they (or a parallel authority charged with oversight of structural arrangements) will retain the power to institute or to trigger structural remedies, both preemptively (to prevent anti-competitive mergers and acquisitions) and with respect to compelling disinvestment or exit from particular markets.

8.2.5 Structural policies dealing with mergers, take-overs, asset transfers and insider trading are all interrelated with existing bodies of law, namely the Companies Act and applicable stock exchange regulations, reflecting the need for change from the present inadequate framework. The Company Law Standing Committee has had a proposal put to it that a separate Securities Act be drafted (which would include aspects of the existing Companies Act) to deal solely with matters of corporate structure. At present there is a Securities Regulation Code on Take-overs and Mergers which emanated from the City Code issued by the London Panel on Take-overs and Mergers, although unlike its UK equivalent it has the force of law. It deals essentially with voluntary and mandatory offers to all holders of the relevant securities.

8.2.6 The excessive concentration of ownership and, therefore, control of economic activity will be addressed in the context of the above mechanisms.

8.3 Institutional issues

8.3.1 The government’s view is that monopolies law should be effected by a competent, professional agency with powers to investigate and to respond rapidly and robustly to anti-competitive conduct. The decisions of the tribunal envisaged will be subject to judicial review, but it is Government's intention to take enforcement of competition law out of the hands of the criminal courts and to avoid the prospect of lengthy, complex and costly litigation. The possibility of politically-inspired intervention will also be removed by eliminating the exercise of ministerial discretion in the enforcement of competition law and by a more precise definition of both the mandate of the policy structure and its relationship to the Minister and government policy. As already elaborated, our political choices will be exercised in the mandate extended to our industrial strategists and, from there, to our competition authorities.

8.3.2 South Africa does not yet have an overall legal framework which can safeguard affected shareholders but also deal more comprehensively with conglomeration and creations of excessive economic power via mergers, acquisitions and take-overs. At present these matters are partly dealt with by means of the Companies Act, the Securities Code and the Competition Board in terms of competition legislation. But this clearly duplicates work, creates uncertainty and fails to effectively target regulation. A Securities Act which would fuse all the structural issues of conglomeration and implement regulatory policies to supervise mergers and deter uncompetitive structures can be similarly drafted. As noted, the concerns of the monopolies law authorities, through primarily charged with governing conduct, necessitate the possibility of structural remedies. Accordingly, the monopolies law authorities must either be given the capacity to take structural remedies or an institutional and regulatory bridge must be built between the competition law authorities and those responsible for oversight of structural arrangement.

8.3.3 In addition to the review of monopolies law and securities regulations, a coherent, comprehensive competition policy requires review of the entire body of Company Law in order to meet the objectives of efficient and equitable corporate governance. The King Committee did not establish a clear model of the nature of the company, and it therefore remains for Government to establish to what degree the company exists solely in the private domain of the shareholder and to what degree it is the proper subject of wider public interest. As the answer to this question becomes clearer, a more coherent policy for corporate governance can be developed and hence the role of regulation can be more easily defined and justified. Accordingly this will permit a clearer policy regarding the continued and indeed increasing use of pyramid structures. And it will also inform Government as to what extent company law should show equal concern to a wider community of stakeholders: local communities, employees, customers and suppliers, in addition to shareholders.

8.3.4 It is also Government's intention to address aspects of competition policy that most affect consumers under the Harmful Business Practices Act 71/88. At present this Act deals with business practices other than restrictive practices which fall under the Maintenance & Promotion of Competition Act 96/79. A Business Practice Committee effectively manages the Act. It would appear that if Competition legislation deals with the areas of conduct mentioned above, this Act could be recasts to deal with all consumer matters, to be supervised by an appropriate tribunal to which the consumer would have direct access; that is the Business Practice Committee would deal with relationships with consumers and the general public and the Competition Board with competitors and suppliers.

Chapter Nine

Enforcement

9.1 Introduction

9.1.1 There are aspects of competition policy enforcement that are still being established, mainly associated with the degree to which institutional responsibility is centralised.

9.2 Institutional improvement

9.2.1 The agency dealing with competition will be strengthened considerably. Government is still establishing whether the three functions -- policy advice on competition, adjudication on law and enforcement, and the investigative function -- should be placed in one body or whether the first should be separated from the latter two. Careful consideration will be given to the question of the funding of such agency for it is essential that the agency is adequately resourced.

9.2.2 In the process of improving our enforcement institutions, Government will establish a dedicated national inspectorate that deals with the many areas of monitoring and enforcement that fall within the ambit of the Department. In this way we can improve the efficiency of the operation and ensure a mobility of personnel that will reduce corruption.

Chapter Ten

Conclusion

10.1 Introduction

10.1.1 In conjunction with other policies and initiatives pursued by Government, the expected benefits of competition policy include greater competitiveness and more sustainable, equitable development.

10.1.2 Competitiveness requires that South Africa overcome a variety of conditions that have reduced our international comparative advantage dramatically. Indeed over the past four years, international surveys have ranked South Africa amongst the three or four least competitive of the major trading nations. In preliminary industry cluster studies conducted for the Department of Trade and Industry (by the Monitor Company), it was found that "many of our industries exist only because of protection and subsidies." Protective tariffs and most export subsidies are being lifted, in part because of Department policy that South African industries should be exposed to global competition and in part because international trading requirements set by the World Trade Organisation increasingly require cuts in protection and export subsidies. Yet the difficulty that many of our main industries have in competing internationally requires a multipronged approach, involving both competition policy and additional incentives. To address lack of competitiveness, incentive schemes have been developed by the Department, by the Industrial Development Corporation and by other institutions such as the Khula Enterprise Finance Limited. The major objectives of the incentive schemes are: to encourage exports; to enhance competitiveness of industries in the face of increased international competition; to encourage foreign investment; and to encourage development of SMMEs. The contents of the different incentives vary, but include below-market interest rates or assistance in access to finance; tax holidays; grants; services such as trade missions; technical assistance; rebates and credits related to tariff barriers; and accelerated depreciation for firms expanding or establishing new plants. It is vital that a broader economic transformation occur to ensure that South Africa's competitiveness is not reduced to the efficacy of a package of Government schemes. Competition policy can assist competitiveness by identifying those aspects that harm consumer welfare, add unnecessary costs, entail anti-competitive practices, or distort the economy.

10.1.3 From the standpoint of development, there are a variety of characteristics associated with the legacy of corporate concentration, misapplication of financial resources and economic distortions that have underdeveloped the majority of our citizens, but that can gradually be rectified in part through competition policy. Having emerged from one of the world's most brutal and unjust economic and political systems, South Africa's democratic Government has committed itself wholeheartedly to development, and in the process to eradicating poverty and improving the quality of life of the majority. Today, the wealthiest 2,4 million of South Africans account for over 40% of all consumption, while the poorest 21 million account for under 10%. Unemployment in South Africa is extremely high, and has been worsening for many years. The vast majority of South Africans, particularly the unemployed, lack the educational qualifications or skill levels required to compete for the occupations that will be most in demand in coming years. And there is limited or non-existent access to basic infrastructure, services, education, primary health care and socio-economic opportunities for the majority of people (especially Africans and rural residents). Women, children, the elderly and disabled South Africans bear the main burden. It is therefore critical that all government policies -- including competition policy -- are aligned so as to reduce the uneven development, inequality and absolute poverty which is so prevalent in South Africa. And it is crucial that as Government considers which competition policy cases should be taken up, those that have the greatest development impact are prioritised.

10.2 Summary of competition policy initiatives

10.2.1 In summary, Government proposes:

10.2.1.1 a competition policy integrated with our overall national policy objectives and the particular objectives of our industrial and macro-economic policies;

10.2.1.2 a reformed and much strengthened monopolies law directed at anti-competitive conduct under the direction of a competent, professional and powerful administrative authority;

10.2.1.3 a strengthening of divestiture measures;

10.2.1.4 a review of existing securities regulations and institutions with principal oversight of corporate structure;

10.2.1.5 a review of current practices and regulations in the area of corporate governance;

10.2.1.6 a review of the Harmful Business Practices Act which will bear principal responsibility for protecting consumer interests; and

10.2.1.7 a review of the competitive interface between public corporations and the private sector.

10.2.2 In this way the various forms of anti-competitive behaviour could be addressed by the appropriate, carefully targeted law underpinned by trained and specialist agencies.

10.2.3 It remains, then, to offer a way forward for a dialogue on these Competition Policy Guidelines that will lay the basis for drafting a Monopolies Bill.

10.3 The way forward

10.3.1 Nedlac is a crucial site for consultation, amendment and approval of policy. Achieving consensus remains an important goal. The Nedlac process will greatly assist the drafting of new legislation. As with other legislation the sovereignty of legislation will remain. To further enhance consultation a series of consultative presentations and workshops will be held during the first quarter of 1998. Assuming that there are no insurmountable obstacles, draft legislation will be prepared by the end of the first quarter.

10.3.2 The fact that this competition policy represents only an initial public statement of Government's intentions should be seen as an invitation by all stakeholders to become involved. The policy proposed in this document was derived from various inputs received as well as intensive consultation with the current Competition Board. The document produced by the current Competition Board was again scrutinised by a team of people who included representation from the Standing Advisory Committee on Company Law, Board on Tariffs and Trade, etc, and amended by Department of Trade and Industry officials.

10.3.3 That this competition policy will ultimately be altered is certain. Because of the dynamics of the market, practical experience and constant additions to our pool of decisions, knowledge and research on the subject, competition policy and law are regularly reinterpreted, reviewed and amended. For example, the Australian Trade Practices Act 1974 underwent substantial changes in 1995, while in the United Kingdom a comprehensive reform of competition law is postulated in terms of a new draft Bill published in August 1997. There are numerous other examples, including South Africa, where several amendments to the 1955 and 1979 Acts were passed into law.

10.3.4 Government's attempts to address competitiveness and development through competition policy represents a major step in what has been an evolutionary process lasting more than four decades. The South African Government and our society as a whole are prepared to take such steps in the spirit of transforming the inherited state and economy. Judged by internationally accepted competition law principles and practices, the transformation of South African policy should not present any problems to those who believe that a competitive business environment promotes efficiency and serves the public good. It should also inspire all stakeholders to become involved, to help define the public interest, to ensure the economy becomes more competitive and to promote development. This competition policy is first and foremost an invitation to all South Africans to participate in this process.

10.3.5 To these ends, the way forward would include a series of actions with proposed time frames.

The Way Forward from Competition Policy Guidelines to a Monopolies Bill

Action	Timeframe
Present policy document at Nedlac	Nedlac to provide comments within 3 months
Start preparing draft Monopolies Bill	The team of drafters in DTI will commence with the drafting of the bill as soon as document is presented to Nedlac. The drafting will thus be a parallel process to the Nedlac consideration process. The drafters will thus have to be informed about the various policy amendments and specific phrasing suggested in Nedlac.
Publication of the bill	The bill is to be published at the beginning of March 1998 for a period of 12 weeks
Public consultation process	During the period of publication, a series of workshops will be held across the country
Consideration of all comments received	To be finalised within one month from last day of publication period (by end of June 1998)
Finalise Bill	By end of July 1998
Prepare cabinet memorandum and memorandum of objects and final Bill for submission to the DG and the Minister	By end of July 1998
Submission of above to Cabinet for principle approval	Between July and August 1998
Hand Bill over to State Law Advisors for legal and technical preparation and certification	Between August and September 1998
Publication and tabling of bill in Parliament	By end of September 1998
Considered by the select and portfolio committees of National Assembly and National Council of Provinces (route 75), this would include the public hearings	Between September and October 1998
Second reading debates in both houses	By end of October 1998
Act passed in Parliament	By end of October 1998
Implementation of the Act	By end of November 1998
Set up proposed institutional frameworks	Not later than December 1998

Appendix One

Existing Legislation

1.1 Introduction

1.1.1 The rules governing competition have both a private (common) law and a public law dimension. The principal thrust of the common law is to protect what may be defined as a person's "right to attract custom." As a general rule, the effective exploitation of the right to attract custom requires a distinctive product, trade name, trademark, etc. It sometimes happens that the pursuit of the right to attract custom by one person could wrongfully impinge upon another's right to attract custom.

1.1.2 There are various manifestations of such wrongful conduct, including passing off, the acquisition and use of a competitor's trade secrets, the undue influencing of a competitor's clients, disparaging a competitor's products or spreading falsehoods about his person, business or products, competition in breach of a statutory duty, and boycott actions. In cases of this kind, the remedial action is before the ordinary civil courts of the country where the recovery of damages is in accordance with the principles of aquilian liability.

1.1.3 In the public law domain, the Maintenance and Promotion of Competition Act of 1979 (the "Act") is the governing statute. Although South Africa has had legislation dealing with restrictive business practices for a long time, it was only when the Act came into force on January 1, 1980 that a more comprehensive competition law regime was established. This review deals solely with the salient features of that dispensation. However, it must be recognised that a particular set of facts could give rise to actions under either the common law or in terms of the Act.

1.2 Exclusions

1.2.1 The Act expressly does not limit the rights acquired under intellectual (industrial) property statutes (trademarks, designs, plant breeders, patents, and copyright), provided that such rights are not used to enhance or maintain the price of commodities. Furthermore, the Act cannot be construed to prevent organisations of employees from protecting the interests of their members by entering into agreements or arrangements with employers in respect of matters covered by the applicable law governing labour relations. Subject to the qualifications mentioned below, the Act applies to all sectors of the economy.

1.2.2 Some statutes or other enactments contain provisions which are at variance with the provisions and underlying philosophy of the Act. In terms of the accepted canons of statute interpretation, they will, as a general rule, take precedence over the Act and may accordingly, either expressly or by necessary implication, exclude the Act's operation in certain sectors or in respect of certain activities.

1.3 Competition Board

1.3.1 The Act established the Competition Board (the "Board") as an autonomous statutory body with an investigative and advisory competence relating to matters regulated by the Act. It comprises a maximum of fourteen members who are either appointed by the Ministers of Trade and Industry, Finance, and Agriculture, or the nominee of the Governor of the Reserve Bank, or serve in an ex officio capacity. The chairman of the Board is a full-time member. At present, all the other members serve on a part-time basis. The Board is assisted in the performance of its functions by career civil servants who are collectively termed the Directorate: Investigations of the Competition Board.

1.3.2 The Board is empowered to undertake investigations into restrictive practices, acquisitions, and monopoly situations and, following the completion of such investigations, to make recommendations to the Minister of Trade and Industry (the "Minister") on what action, if any, he should take to remedy the situation. It must be emphasised that the Act does not specifically prohibit restrictive practices, acquisition or monopoly situations. However, in the appropriate circumstances, they could be prohibited by the Minister acting on a recommendation by the Board.

1.4 Restrictive practices

1.4.1 A restrictive practice as defined in the Act means:

(a) any agreement, arrangement or understanding, whether legally enforceable or not, between two or more persons; or

(b) any business practice or method of trading, including any method of fixing prices, whether by the supplier of any commodity or otherwise; or

(d) any situation arising out of the activities of any person or class or group of persons, which restricts competition directly or indirectly by having or being likely to have the effect of -

(i) restricting the production or distribution of any commodity; or

(ii) limiting the facilities available for the production or distribution of any commodity; or

(iii) enhancing or maintaining the price of any other consideration for any commodity; or

(iv) preventing the production or distribution of any of any commodity by the most efficient and economical means; or

(vi) preventing or retarding the development or introduction of technical improvements or the expansion of existing markets or the opening up of new markets; or

(vii) preventing or retarding the adjustment of any profession or branch of trade or industry to changing circumstances.

1.4.2 "Commodity" encompasses both goods and services.

1.4.3 Definition The definition of a restrictive practice may conveniently be divided into cause and effect components. It is only if the act, omission or situation mentioned in (a) to (d) restricts competition directly or indirectly by having one of the effects mentioned in (i) to (vii) that one has to do with a restrictive practice. "Restrict competition" is not a concept that is defined in the Act. Making a judgment in respect thereof requires identifying the relevant market as an important first step in that process.

1.4.4 Markets exist in two main dimensions, namely products (goods and services) and geographical area. Cognizance is also taken of the relevant functional market. This relates to the "level" at which a firm operates in the life cycle of a product, for example, the production, distribution (wholesale) or retail level. Furthermore, in demarcating the relevant product market, substitute products are also taken into account.

1.4.5 Competition is a process which manifests itself as independent rivalry between enterprises on a market in respect of all the dimensions of the price-product-service package offered to customers and consumers. If as a result of a particular transaction the market is obviously less conducive to inter-enterprise rivalry, or if the ability of one or more enterprises to compete effectively is significantly impaired, or if the barriers to entry become more onerous, it will be accepted that competition will be restricted.

1.4.6 In common with the practice in other jurisdictions certain pernicious forms of anti-competitive behaviour have been identified and outlawed. More particularly, following an investigation by the Board, Government Notice 801 of May 2, 1986 was promulgated by the Minister. It prohibits resale price maintenance, price fixing, market sharing, horizontal collusion on conditions of supply, and collusive tendering. The prohibition does not apply in respect of any agreement, arrangement, understanding, business practice or method of trading:

(1) between or among:

(a) a holding company and its wholly-owned subsidiary, or between companies which are wholly-owned subsidiaries of the same holding company;

(b) close corporations which have only the same person or persons as members;

(c) companies of which all the shares are held by the same person or close corporation, or between such close corporation and such companies; or

(d) persons in relation to goods which are exported to any country outside of the Southern African Customs Union; or

(2) authorized by the provisions of any law.

1.4.7 The Act allows the Minister, acting on a recommendation of the Board, in a particular case, to grant an exemption form one or more of the prohibitions set out in Government Notice 801. Parties seeking an exemption must convince the Board that an exemption is warranted. The greater the extent of the relevant market affected by the unlawful conduct in question and the more numerous the specific forms of such conduct for which exemption is sought, the more convincing the evidence and arguments on which the applicants seek to rely should be. Subjective and unsubstantiated opinions or speculation will not suffice to discharge the onus which rests with the applicants.

1.4.8 Although not restricted in respect of the factors it may take into account in assessing the merits of an application for exemption, the Board would usually be more inclined to do so where the conduct under scrutiny would: (a) result in an appreciable quantifiable economic benefit for consumers over an extended period of time, or (b) enhance competition in the relevant market, for example, where small firms can demonstrate that an exemption would enable them to compete more effectively with other large firms.

1.4.9 All complaints of restrictive practices other than those falling within the ambit of Government Notice 801 are dealt with on a case-by-case basis. In assessing the merits of such complaints, the Board follows what may be regarded as a rule of reason approach, which essentially entails forming a judgement about the competitive significance of the restraint. Factors which are taken into account in this process include the market power of the parties concerned, the extent of interbrand competition on the market, the extent of foreclosure resulting from the practice, the impact thereof on competitors, and any business justification arguments for the practice that may be advanced. Practices by firms having market power which have in the past been found to restrict competition include refusal to deal, discriminatory pricing policies, exclusive dealing, tying arrangements, boycott actions, and onerous restraint of trade clauses.

1.5 Acquisitions

1.5.1 The Board has jurisdiction to scrutinise all takeovers and mergers in terms of which the holder of a controlling interest in any business acquires such an interest in any other business operating in the same relevant market, or in any asset of the latter business, provided the acquisition of such a controlling interest restricts competition to an appreciable extent.

1.5.2 Various factors are taken into account in determining whether competition in the relevant market has been, or is likely to be, appreciably restricted, including:

(a) the actual and potential level of import competition in the market;

(b) barriers to entry;

(d) the degree of countervailing power in the market;

(e) the likelihood that significant and substantially higher prices or profit margins would result;

(f) the extent to which substitute products are, or are likely to be, available;

(g) the dynamic characteristics of the market, including growth, innovation, and product differentiation;

(h) whether competitive parity among rival firms in the market would be unduly distorted; and

(i) the nature and extent of vertical integration in the market.

1.5.3 The degree of concentration in a market serves as a useful preliminary screening device in assessing whether a takeover or merger is likely to have an adverse effect on competition. For example, a combined post-acquisition market share of under 10 percent will not give rise to any concerns, and it will accordingly not be necessary to assess the impact of any of the other above-mentioned factors on the transaction. On the other hand, high market shares will not necessarily be determinative of the issue, in which case, the above-mentioned factors come into play.

1.5.4 Parties involved in a merger or acquisition may of their own volition, and shall when required by the Board to do so, provide the Board with the necessary information relating to the transaction in accordance with the Guidelines on Acquisitions of Control to enable it to make a meaningful appraisal of the transaction. Mergers or acquisitions can be cleared unconditionally or condoned subject to compliance with the conditions that may be imposed.

1.6 Monopoly situation

1.6.1 "Monopoly situation" means a situation where any person, or two or more persons with a substantial economic connection, control in the Republic or any part thereof, wholly or to a large extent, the class of business in which he, she or they are engaged in respect of any commodity. "Class of business" is not defined in the Act, but the Supreme Court, in a non-antitrust context, has held in regard to the sale of goods that there are different classes of business according to the difference in character of the goods sold and the varying manners in which business is conducted.

1.6.2 If one utilizes this dictum in the interpretation of the definition of "monopoly situation," it is arguable that "class of business" is a more tightly delineated market than the traditional "relevant market."

1.6.3 A number of factors, any one of which, when taken separately, need not necessarily be determinative, have a bearing on whether a person controls a class of business, including

(a) the market share, technical knowledge, and access to raw material and capital resources of the person whose situation is being assesses;

(b) the comparative strength of that person's competitors, if any, in the relevant class of business and the ease with which new competitors could enter such a business; and

(c) the extent to which that person is constrained by the suppliers or acquires of goods or services in the relevant class of business.

1.6.4 Before it can be accepted that two or more persons control a class of business which none of the parties is able to do when acting unilaterally, it must be shown that there is a substantial economic connection between them. This is a question of fact to be assessed on a case-by-case basis. The relationship between a holding company and its subsidiaries, or between a controlling company and the companies it controls, points inexorably to such a connection. And so too, arguably, does a cross holding of shares of significant proportions coupled with interlocking directorates.

1.7 Public Interest

The Act implicitly creates a rebuttable presumption that restrictive practices and acquisitions that restrict competition to an appreciable extent are against the public interest. On the other hand, unless the facts indicate otherwise, monopoly situations per se are not presumed to be against the public interest.

1.7.1 The position is that parties involved in restrictive practices or mergers and acquisitions could utilize the public interest factor as an escape mechanism justifying their actions. "Public interest" is an open-ended concept. The efficacy and credibility of competition law would be seriously undermined if unsubstantiated claims of alleged public interest benefits were routinely allowed to prevail over evidence that a particular transaction restricted competition on the relevant market.

1.7.2 For this reason it is necessary for parties seeking condonation of a transaction having anti-competitive effects to produce cogent evidence that will satisfy the Board that the transaction can be justified on public interest grounds.

1.7.3 The assessment process entails the identification, weighting, and balancing of the detrimental (anti-competitive) and beneficial implications of the transaction. This most frequently occurs in the case of mergers and acquisitions. Improved utilisation of capacity and resources, the promotion of research and development, minimising the loss of employment opportunities, the rescuing of a failing company, enhancing the international competitiveness of domestic enterprises, and improvements in the country's balance of payment position are the public interest benefits cited most often by parties seeking clearance for a transaction.

1.8 Procedural aspects

1.8.1 Investigations are undertaken by the Board on its own initiative or in response to a complaint. The Minister can direct the Board to launch or terminate an investigation, but this rarely happens. Complaints are initially assessed on a preliminary basis in order to establish whether a formal investigation is warranted. A formal investigation requires official notification in the Gazette and is an essential procedural prerequisite for the remedial or preventative actions for which the Act provides that may subsequently be deemed necessary.

1.8.2 Interested parties are afforded 30 days from the date of publication of the notice in the Gazette to make written submissions to the Board. These could subsequently be supplemented by oral evidence. The Board is also empowered to summon and to interrogate any person who is able to furnish information on the subject of the investigation and may require such a person to produce to the Board any book, document or other object in his or her possession that may have a bearing on the matter.

1.8.3 There is no legal obligation on firms to give prior notice to the Board of an envisaged merger or acquisition. However, since a merger or acquisition that was not notified could subsequently be declared unlawful, most major firms will usually seek clearance from the Board before proceeding with the transaction. Applications for the condonation of a transaction are dealt with on an ex parte basis. Where clearance is given in such cases the Board will always reserve the right to reassess the transaction or to launch a formal investigation should it receive or uncover additional information necessitating such a course of action.

1.8.4 Once notification of a formal investigation has been published and before the Board's report on the matter is submitted to him, the Minister may, on the recommendation of the Board, prescribe by notice in the Gazette, for such period as may be specified in the notice, such action as in the opinion of the Minister needs to be taken to stay or prevent any restrictive practice which exists or may come into existence or any acquisition being made or proposed, as the case may be.

1.8.5 At any time after publication of a notice of an investigation, the Board may negotiate with the appropriate person(s) with a view to making an arrangement which, in the opinion of the Board, will ensure the discontinuance of the restrictive practice, acquisition or monopoly situation which is the subject of the investigation, or will remove the anti-competitive features thereof. All such arrangements must be approved by the Minister and be published in the Gazette.

1.8.6 Following the completion of an investigation the Board submits a report to the Minister in which it findings and recommendations are set out. All reports may be published by the Minister in the Gazette or be made known by him in any other manner. They must also be tabled in Parliament.

1.9 Remedies

1.9.1 The Minister has fairly extensive powers to deal with restrictive practices, acquisitions, and monopoly situations. More specifically, the Minister may declare the particular restrictive practice, acquisition or monopoly situation unlawful by notice in Gazette and require the person who is involved in the restrictive practice or monopoly situation, or who is a party to the acquisition, to take such action as the Minister may deem appropriate to remedy the situation. The dissolution of a body corporate or unincorporated, the termination of the membership of a member of a body corporate, and the suspension or termination of the voting rights attached to any shares are some of the measures the Minister may prescribe. In exercising his discretion in this regard, the Minister will adhere to the principle of proportionality. This entails that the measures announced by the Minister to counter anti-competitive transactions or situations must be effective without being excessive in the circumstances.

1.10 Appeals

1.10.1 There is a right of appeal by any person affected by a notice published by the Minister to counter anti-competitive conduct, transactions or situations. The appeal lies to a special court constituted for that exclusive purpose. The members of the special court consist of a judge of the Supreme Court, who is the president of the court, and two other appropriately qualified members appointed by the country's president.

1.10.2 The appeal takes the form of a de nova reappraisal of the relevant issue, following which the special court may confirm or set aside the Minister's notice to which the appeal relates or amend it in such a manner as it may deem equitable. The decision of the special court is not subject to appeal to or review by any court of law.

1.11 Enforcement

1.11.1 Contravention of certain provisions of the Act and of Government Notice 801 of May 2, 1986 and other notices issued pursuant to the Act is an offence. Prosecutions in respect thereof are accordingly instituted and conducted before the criminal courts. A person convicted of a contravention of Government Notice 801 could be imprisoned for a period not exceeding five years or be required to pay a fine not exceeding R100 000.